What’s dragging down the 99%?

My response to a question over at Thoughts from Kansas/Oakland: “What would you suggest are the causes of [the hardships faced by the 99%]?

Well, LJJ [read LJJ’s comment here] already offered a couple examples upthread: Do you suppose that the owners of a battery factory are in the top 1%? Would you suppose that they are being further enriched by neglecting safety standards? Do you think this causes hardship for some in the 99%?

What about the bank worker who is required to do more work for less pay (specifically lack of overtime)? Who gets the hardship and who gets the benefit?

Someone made a lot of money off of sub-prime mortgages. I’m pretty sure most of them weren’t 99-percenters. But a lot of 99-percenters delayed their retirements — and thereby made it harder for kids to find jobs — because their retirement accounts tanked.

You know more about this than I do, presumably, if you’re teaching business (my own expertise is completely unrelated), but I have a suspicion if you honestly ask yourself what effect the corporations and their lobbyists have on the well-being of the average person in this country, you’ll see a lot of room for improvement.

I agree that the mere fact that someone makes a lot of money doesn’t mean that I’m any worse off — and I may even be better off if some of her spending comes my way. But I think we sometimes need to ask where that money’s coming from, and sometimes it is indeed coming out of your pocket, and my pocket, and especially out of the pockets of people who have a tougher lot than you or I.

When CEOs get big bonuses for laying people off and increasing the workload on the remaining workers, that money is coming from the people who are now unemployed and from the people who are working more for the same amount of money.

When corporations ship production overseas, the money they save doesn’t appear out of thin air — it’s taken from the people who lost their jobs.

Again, profit is not bad per se, and yes, improvements in efficiency are good, and yes, people in other countries deserve jobs too, and so on, and so on.

But do you really not see cases (indeed many cases) where the very same mechanism that produces wealth for the richest also increases the burdens on those less fortunate?

It seems to me that very fact that the wealthiest are getting much more wealthy, while the lower 99% are holding steady or getting worse off indicates quite clearly that this is happening pretty consistently.

And it’s hardly surprising, is it? With wealth comes the ability to make more wealth. When times have been tough for me, if I could borrow at all it was at an astronomical interest rate. When times are good, I get offers for dirt-cheap loans everywhere I turn.

If I buy my groceries with my platinum business credit card, I get a 3%-5% kick-back. Where does that money come from? Well, the grocery store pays the bank even more than that, so the bank makes money off of my using the card. Of course, the grocery store has to jack up the prices to cover that.

So now the bank makes money, and the store and I come close to breaking even (or maybe even come out ahead?), and who pays? Well, the guy who doesn’t have the credit score to get a kick-back credit card, because he has to pay the same grocery prices that I do.

The system is set up to make it look like free money. I get the money back from my card “for free.” The card issuer makes a killing (most banks have done pretty well lately, haven’t they?), because some clever business person figured out that they could jack up the fees they charge stores without anyone really complaining.

But that money isn’t really free. It’s costing my neighbor who buys his food with cash and can’t get credit.

And this is just one example. Multiply it by the hundreds or thousands of clever schemes that the rich and powerful have dreamed up, and it’s not surprising that the welfare of the general population is suffering while the richest are getting richer. In a way, how could it be otherwise?

So yes, I’m inclined to side with the occupy movement on this. I think we need some legislative action to help level the playing field to some degree.

I don’t have details. You can ask Josh for those.

[UPDATE: The Onion offers further details: All Of Area Man’s Hard Work Finally Pays Off For Employer.]

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12 responses to “What’s dragging down the 99%?

  1. I should have also mentioned a more obvious case: speculators driving up the costs of goods.

    Yes, stocks can provide an important service of facilitating the flow of money to where it can best be used and stabilizing prices, but too often we have clever traders extracting money from the market without providing any actual benefit. That money comes from the general population in the form of higher prices.

    The money that rich oil speculators are making jacks up the price at the gas pumps for working-class folks, for example.

    Also, it’s worth mentioning that attempts to cut the deficit by slashing services rather than getting rid of tax cuts increases hardships on the 99% and benefits (or at least doesn’t inconvenience) the 1%.

  2. Hi physicalist,

    Well, you’ve written an awful lot here; more than I have time to respond to all at once. So I’ll have to respond piece-meal, as I have time. I hope that’s not inconvenient for you.

    Let me say up front that I’m pro-market, but that doesn’t mean I’m pro-business, or pro-corporate. I think a lot of people mix those up, and it’s a mistake to do so.

    In this comment I’ll just respond to the safety standards example.

    Some jobs are less pleasant to perform than others. This might be because of dangers to one’s health (e.g., construction work or commercial fishing), the difficult nature of the work (e.g., manual farm labor) or just something unpleasant about the work itself (e.g., working in sewers). In a free labor market, wages are set by an interaction of workers willingness to supply labor at given wages, and employers’ willingness to hire at those same wages.

    It shouldn’t be surprising that for unpleasant jobs, workers aren’t willing to supply their labor unless they receive a premium over what they could earn at an otherwise comparable, but more pleasant job. Economists call that premium a “compensating differential.”

    Now, let’s say that there’s a business where there is some safety hazard born by the employees (maybe they’re breathing in chemicals that increase the risk of cancer). And suppose that due to this safety hazard the owner faces a compensating differential of $100 per employee per day. Now suppose that there is a technology available (maybe a respirator) that will eliminate the safety hazard, but it will cost $50 per employee per day. Then the employer could approach the employees with the following deal: The employer incurs the cost of the technology, and the employees take a $75 per day pay cut.

    This deal leaves both sides better off. The employer cuts his net payroll by $25 per worker per day. The employees get working conditions that they value at $100 per day, but only have to pay $75 per day.

    In short, wherever there are safety hazards at a business, and the cost of abating those safety hazards is less than the compensating differential, there are strong incentives for voluntary negotiation to address the issue. And where the cost of abatement exceeds the compensating differential, employees would prefer to keep their higher pay than to have the safety hazard removed.

    There might be areas where this breaks down. For instance, if the employer knows about a safety hazard that the employees are not aware of, then he doesn’t have to pay them a compensating differential. In that case, no deal will be struck, b/c the employer can’t lower his payroll by introducing the abating technology. Or there might be regulatory issues that require certain technologies to be employed even though their cost exceeds the compensating differential. In that case, the employer might find it more profitable to ignore the regulation and risk getting fined. (Maybe that’s what’s going on in the batter factory.)

    I’ll close with my own anecdotal evidence. In college I worked on construction sites for the company my dad was employed by. We built skyscrapers and large buildings. I can tell you that on those job sites, management was much more concerned with safety conditions than labor was. We (the laborers) were constantly being reminded to take things slow, and do them safely. And we were regularly taking risks that we knew management wouldn’t approve of, because we didn’t like the inconvenience of going through all the safety procedures. That’s just one person’s story, of course. But I suspect it happens in other contexts as well.

  3. Hi AMW. Thanks for the reply. Feel free to respond when it’s convenient, and I’ll do the same. I have real writing I’m supposed to be doing, so please don’t be offended if I’m away for a while.

    Quick reply: Yes, I see the basic economics of compensating for risk, unpleasant conditions, etc.

    But notice that in your example you have the employer increasing the safety of the employee, and bearing some of the cost for doing so. In LJJ’s real-world example, the employer decreased the safety of the employee, the employee was not compensated for the increase in risk, and the employer’s income was increased — not decreased.

    Now, you might say that the employee should just quit his job and find another one if he’s dissatisfied with the compensation he’s getting, but in the real world that often doesn’t work out too well. Is the employee going to be able to find another job with current unemployment levels? Even if he can, is he going to have to take a pay-cut because his experience and expertise won’t apply?

    In the real world, we often end up with a race to the bottom if we don’t have regulations preventing it. This is why we have laws about workplace safety, minimum wage, compensation for overtime, and so on. In the real world, employees could not secure these items for themselves simply by choosing some other job.

    I too worked in construction for a while, and I too saw that the contractor was far more concerned with safety and following regulations than were the carpenters. And this was only partly due to worries about paying workman’s comp. But I think this just illustrates that workers are often not fully informed and rational about their own self interest.

  4. Physicalist,

    This is a reply to your comment immediately above. Below I’ll post a response about the bank employee.

    You state:

    But notice that in your example you have the employer increasing the safety of the employee, and bearing some of the cost for doing so. In LJJ’s real-world example, the employer decreased the safety of the employee, the employee was not compensated for the increase in risk, and the employer’s income was increased — not decreased.

    First, I can’t speak directly to LJJ’s example, b/c I don’t know all of the details faced by the firm in question or the employees. One possibility is that the safety rules in question are the result of regulation, not bargaining between management in labor. If that’s the case, and if the cost of implementing those rules exceeded the compensating differential, then the firm may have chosen to disregard the regulations, because it’s cheaper to do so.

    The reasoning I gave above, however, leads me to believe that employers refusing to implement efficient safety rules is not a systematic problem in the economy at large. By “efficient,” I mean that the cost of implementing those rules is less than what employees would be willing to take as a deduction in wages in exchange for the safer conditions. If they’re not willing to make that trade-off themselves, then the safety rules shouldn’t go into effect anyway.

    • Well, the important point is that often the rich extract more from the non-rich, and there’s very little fair-and-rational-exchange-of-goods involved; we don’t need to get bogged down in the details of this particular example. But I gather from the reference to OSHA that the rules in question are indeed regulatory.

      So, yes, I’m assuming that the firm is endangering the health of the workers precisely because it is cheaper for them to do so than it would be for them build the plant up to standards. This makes the case one of the “areas where [the relevance of compensating differential] breaks down” as you said above.

      But that’s precisely the point.

      There are mechanisms at work in our current economy that enrich the most wealthy and that increase the hardships of the working class. Pointing out that it is perfectly possible to have a market in which the transactions help out both parties is completely beside the point. The complaints of the occupy movement (as I see it) are that things are not currently set up such that the exchanges between the 1% and the 99% are fair.

      I expect that the vast majority (there will always be exceptions) of the occupy movement will say that they’re not opposed to capitalism, or the market, as such. What they’re objecting to are unfair practices: Taking advantage of workers because the workers can’t afford to quit. Extracting money without adding any value in exchange. Using one’s wealth to manipulate the political system in a way that favors those who are already rich. And so on.

      I’m not sure that you disagree with any of this; perhaps we’re on the same side regarding most matters of substance.

      We both agree that some people get rich by selling things of value and that in this process both the buyer and the seller are better off. (I happen to think that my smart phone has improved my life considerably, and I don’t begrudge the wealth of those who developed and sold it.) And I take it we both agree that some people get rich without providing anything of value (you mention theft, fraud, and rich investment bankers who got bailed out).

      Perhaps we disagree about just how large the second class is. I’m inclined to think that a non-negligible amount of the wealth accumulated by the 1% was not gained through fair compensation for value added and indeed was siphoned off (to use WOW’s term) from the those who are less wealthy and less powerful. I’m not claiming that this is true of all of the wealth of all of the super-rich, but I do think it is a real problem.

      Do you disagree? If not, then it seems to me that in substance, you’re on the side of the we-are-the-99% movement.

      If you do disagree, then I assume you think that the anecdotes offered by LJJ and others are the exception and not the rule. Our difference of opinion would then be about the quantity and severity of un-compensated shift of money from the 99% to the 1%. I don’t have any data to offer to decide the issue, but it seems to me that the financial trends of the last decade or two paint a pretty clear picture of the wealthy exploiting the working class. Also, the number of people supporting the 99% movement is telling — as the sign says, “You know it’s bad when librarians start marching.”

      • Quick response:

        1. I think people spending their wealth in order to get the rules written in their favor is a big problem. And I think here we agree. (If the movement were “Occupy K Street” I might just be willing to march.) But I think this is precisely why writing more rules is a good solution.
        2. I think that cases like LJJ’s tend to be the exception rather than the rule.
        3. I think that a lot of folks in the OWS movement see economic activity as pie-splitting phenomena, while I see it primarily as pie-baking phenomena.

      • 1. Well, I’d say K Street is indeed a key focus of OWS. A bit more on this here.

        2. Perhaps. As I said, I think we have at least some indication that it is becoming the rule. What’s probably more important, though is the question of whether the actions of the financial industry that got us into the current economic mess were abuses or not. If you agree that they were, then it seems you have to agree that such abuse is widespread.

        3. I don’t think the majority of OWS folks are opposed to “economic activity” as such. What they’re opposed to are abuses that *do* take away their pie and give it to the 1%.

    • Oh, and on this: “If they’re not willing to make that trade-off themselves, then the safety rules shouldn’t go into effect anyway.

      Here I disagree. When people need money they’re willing to do all sorts of things that we as a society should prevent. Would you be willing to do away with child labor laws? Would you allow people to sell their organs on the open market?

      You and I were both pointing out that construction workers are often cavalier about their own safety. They’ll defeat a safety mechanism on a nail gun to save themselves ten minutes extra work; they’d sure as heck be willing to work in more dangerous conditions for more money.

      But this is obviously no reason to do away with safety rules. On the contrary, it’s a reason to have the rules in place and enforce them, so the workers stay safe despite their indifference to risk.

      Look, if someone really needs a job to support a family, he or she will often do whatever is required. It is often a fantasy to suppose that the person is free to simply go take some other job that is less risky. In these cases, what incentive does an employer have to spend money to make things safe? And it’s totally unrealistic to suppose that the employee in that situation can shell out money to reduce his or her risk. So if the decision is made simply on the principles of power and enhancing one’s bottom line, safety’s going to go out the window (along with reasonable work hours, and so on).

      So if we care about the well-being of our fellow human beings, we’ll enact laws that prevent the rich and powerful from abusing the less powerful. Which is why we have laws that say that work places need to be safe, overtime work needs to be compensated, and so on. The laws are necessary precisely because the disadvantaged wouldn’t be able to refuse to “make that trade-off” as you put it.

      • Quick Responses:

        1. I would absolutely allow people to sell their own organs, and I find it borderline horrifying that it’s against the law.
        2. I would probably favor legalizing child labor as well, but here I would see more room for outside oversight.
        3. You seem to advocate protecting people from their own shortcomings. I think that is a pretty dangerous road to go down, and it’s precisely at that point that I break with both the Left and the Right. I would no more protect a man from his indifference to risk than I would protect him from his appetite for pornography, despite my moral objection to both.

      • Well, I think it makes sense to agree to disagree on this topic. I doubt either of us is going to convince the other, and as far as I can see it’s tangential to the main question of financial justice and the 99% movement.

  5. Just to try to highlight what I take to be the the important issues that haven’t really been responded to yet:

    1. In general, when unemployment is high, employers can get away with demanding more from their employees without compensation, because the worker cannot afford to quit. I see this as a flaw of an overly free market that requires legislation to protect workers (e.g., requiring a minimum wage, overtime pay, safe working conditions, and so on).

    As a matter of fact (I contend) in the past couple decades, workers’ compensation has been reduced. Companies hire more temps without benefits. Workers have been laid off. People are required to work longer hours without overtime, etc.

    As a matter of fact, the money that is no longer going to these workers by-and-large goes to the top 1%, who own stock, who are CEOs, and so on.

    2. While markets and financial institutions do play an important role in our society (which deserves to be paid for), they too often extract money from the system without providing anything of value in exchange. The wealth gained by speculators often translates to higher prices for everyone else — and society is burdened, not helped, by the speculators activities. The financial meltdown of recent years is a paradigm example of people gaming the system to extract money to their advantage and our detriment.

  6. Pingback: What does OWS want? « Physicalism

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