Inequality

[The Minsky Moment]

I want to know what Yi says.

The same thing but using much fewer words.

[The Minsky Moment]

The increasingly large role of computers in business and society seems to really get rolling around 1982 might that be connected?

Computer use in business was well under way in the 60s and 70s.  That is where one would expect to see the most immediate productivity impact.
The widespread use of computers for leisure and personal communication didn't really hit its stride until the AOL/Netscape era, which somewhat postdates our phenomenon.  And the explanatory linkage between the two is hard to see.

[crazy canuck]

I'd expect that it's connected to the phenomenal rise in executive compensation and changes in the stock market and financial world that shifts focus on quarterly earnings and stock value over all else.

Basically, increased productivity gains went to feed the demands of Wall Street which, combined changes in regulation, meant that there was no excess capital to compete for workers - it all went to share prices. The survival and strengthening of a company was further removed from production basics; the gains there were dwarfed by the gains realized from riding the market correctly so all excess resources rationally went there?

... I don't know... something like that?

If all the money went to share prices then the companies would be awash in capital with which companies could compete on wages.  All that money didnt go to executive salary or dividends, although some did.

Also, the "it all went to" invites the question where did all that money come from?  The profits realized by the companies who had the productivity gains?  If so then your thesis would have to be that there was a vast amount of stock repurchasing going on with all that new found wealth.  And while some of that did take place to some extent such activity did not reduce corporate capital to the point that those corporations could not afford to pay higher wages.  Rather the reverse.

But I think you are on to something when you imply the need to maximize shareholder value.  Which kind of brings back to the Guardian article and the question you asked JR - which JR still needs to answer...

[crazy canuck]

Computer use in business was well under way in the 60s and 70s.

Maybe, but back then computer use was highly inefficient - punch cards used to program etc and even then they were used by a small minority.  It was not until the 80s that they started to be used widely by business.

V may be on to something.

[Admiral Yi]

If that were so, then divergence should have been constantly incresing since the Industrial Revolution, which clear is not so.  That is the Marx thesis.

Another way to think about it is to apply to the facts re divergence in my first post.  In the theory is true, then it most be true that investment in worker human capital, physical capital and technological efficiencies must have been far greater in the period after around 1980 (when divergence occurred) then the period rom 1947-1982.  Indeed, since no divergence occurred in 1947-1982, one would expect to see stagnation in investment in human and physical capital and technology.  But that is not a very plausible claim to put it lightly.  That time period saw probably the two most efficiency-driving inventions of the century: containerization and the Green Revolution.  It also saw the GI Bill and huge increases in the proportion of workers receiving higher education.  In terms of physical capital investment, it is roughly equal throughout both periods.

I've only read this far; sorry if I'm repeating.

The big change your missing is globalization.  The supply of labor is determined globally, not domestically.

[The Minsky Moment]

PART III

The question is what happened in the late 70s and early 80s and continued on later that was categorically different from what came before and can plausibly be connected to a significant effect on the economy.  The biggest one I can think of was identified by DG and Jacob: the transformation of the financial sector through de-regulation and innovation and an accompanying explosion in the creation, retention and trading of financial assets, both old and new.  Back in the early 70s, the financial sector was categorically different than today.  Interest on bank deposits was controlled and regulated, as was broker commissions.  Purchasing securities meant going through a full-service brokerage and paying hefty commissions.  The high yield debt market was a despised backwater.  Securitization was in its infancy.  The banking business was heavily regulated and segmented by product, by charter type and by geography.  Commodity futures were traded in relatively small volumes on a trading floor in Chicago.  Options trading was small potatoes.

The world in 1975 or so looked pretty much like the financial world that existed 25 years earlier.  But 25 years late it was unreognizable.  In terms of new and more complex financial products, unprecendented de-regulation, and staggering increases in trading activity.  New categories of instruments become trillion dollar markets.  Trading in futures, options and foreign exchange increased by multiples in the hundreds.  The regulatory changes and increases in trading activity in innovation started in the late 70s, gathered steam in the 80s and really took off in the noughties, and haven't looked back other than a brief hiccup in 01 and a bigger one in 08-09.  It fits our timeline quite nicely, if one gives a couple years for the initial efforts to impact the broader economy.

The trickier part is coming up with the explanatory theory that ties this to the divergence.  Not sure if i have a ckear answer but I'll take a crack my next opportunity.

[The Minsky Moment]

The big change your missing is globalization. 

What makes the late 70s/early 80s the key turning point of globalization?
Why wouldn't impacts be felt in the prior period which saw extensive waves of trade liberalization, grwoth in cross-border investment and labor movement,  the creation of a new international monetary system and international development banks ,and the development of the physical and legal infrastructure for international commerce?

[Admiral Yi]

What makes the late 70s/early 80s the key turning point of globalization?
Why wouldn't impacts be felt in the prior period which saw extensive waves of trade liberalization, grwoth in cross-border investment and labor movement,  the creation of a new international monetary system and international development banks ,and the development of the physical and legal infrastructure for international commerce?

As you yourself say, the earliest GATT rounds dealt only with trade liberalization.  The one necessary precondition for globalization was liberalization of capital markets.  And I may be wrong, but I think that particular round of GATT coincides more or less with the opening of China, and both coincide more or less with the time frame you're focusing on.

[DGuller]

Do reliable productivity and wage statistics exist for other countries?  My first instinct would be to look at the trends in other countries, look for equivalent transformations or lack of them are are hypothesized to cause this decoupling pattern, and see if that relationship holds.  Of course, there are multiple dangers with that approach, the main one being that other countries may have their own unique things going on that we might be at best vaguely aware of.

[MadImmortalMan]

Ending Bretton Woods made it possible to have growth not shackled to gold? Maybe that's a bit early, but 82ish is really the first recovery since then.

[alfred russel]

This is anecdotal, and thus probably a weak way to enter this thread, but a few years ago I had a chance to tour the state of the art containerboard plant in the US (containerboard is basically reinforced paper products).

This plant was producing something like 7 tons of containerboard a day. The facility was the size of several football fields, and had trainloads of raw materials coming in regularly. It was a 24 x 7 operation. What was so striking is they had roughly 50 people at the facility, and half of those were finance, accounting, procurement, etc. in a side building. On the floor at any one time were usually just 3-4 people. Everything was automated--the non administrative people working were mostly engineers watching monitors off the floor.

Unionization at this plant was irrelevant--blue collar workers basically were completely replaced by automation: engineers and IT professionals.   

This is a part of the manufacturing industry that is difficult to outsource. If blue collar workers are getting pushed out in this industry as well, it may show why they are falling behind right now, but that isn't really the question of the thread, which is why is 1% pulling away from 99%, not why are the 20% or so pulling away from everyone else (even if they are, at a slower pace).

I think some of the answer is in this plant as well. The paper products industry has historically had many plants in the country owned my many companies. Highly efficient plants like the one I visited mean we need less plants. Even sharper than the reduction in the number of plants is the reduction in the number of companies. I'll touch on this in the next post.

[alfred russel]

JR and others think about the changes in finance from a top down point of view: starting with the regulatory and trade environment. But I think a lot of the drivers are technological.

First, it is much easier to run a high volume facility. Take my example of a containerboard plant with 7 tons of product each day. This would be a very difficult plant to manage 40ears ago. I wouldn't want to imagine sourcing the raw materials and then managing the delivery of final products without a modern onsite IT solution (such as SAP). I'm not saying that it wasn't done, but the challenge would impact the cost benefit analysis. Today, these issues are almost fully automated and can be managed by a handful of professionals. Higher volume facilities promote consolidation.

Second, financial systems have been revolutionized. Take two companies that have a very straightforward business--Coca-Cola and Pepsi. You can get a Coke and Pepsi in almost any country on earth. Both have recently altered their business model by directly running many bottling operations. Can you imagine accounting for global businesses like this without a global accounting system that automates key calculations? You could locally account for the operations in each country, but imagine then having to consolidate them--with all accounts converted from foreign to US currency? Getting the numbers right seems almost impossible, but then to analyze the data to be useful for management reporting? Yes there were computers 40 years ago, but I think the changes since then have uniquely in history removed many of the barriers to creating large and complex financial entities.

All of this is relevant because larger, yet still nimble, organizations can give a lot of money to top executives without materially affecting the bottom line. You may be outraged that Coke is paying an executive $50 million a year (I'm making that number up), but if the company is worth $150 billion such a number doesn't matter.

[crazy canuck]

Do reliable productivity and wage statistics exist for other countries?  My first instinct would be to look at the trends in other countries, look for equivalent transformations or lack of them are are hypothesized to cause this decoupling pattern, and see if that relationship holds.  Of course, there are multiple dangers with that approach, the main one being that other countries may have their own unique things going on that we might be at best vaguely aware of.

Yeah, I was wondering the same thing.

[The Brain]

Do reliable productivity and wage statistics exist for other countries? 

No. Only in America.

[Syt]

For reunified Germany (not quite the same as it uses wage share instead of average income):



Blue: Productivity per work hour.
Red: Wage Share based on GDP
Green: GDP
2000 = 100