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Economy
Systemic Dysfunction

DEMOS Policy Blog ... High Profits, Low Wages, and the Growth of Inequality

Burgess COMMENTARY
This is a comment that I wrote after reading the post, and several other posts on the DEMOS blogs

Dear Colleagues

One of the big problems of modern society and democracy is the huge flow of misinformation, much of it originating with the k-12 education system, compounded at the college level and then fed by very superficial story telling by the mainstream media and compounded again by a range of thinstream special interest media outlets.

Take economics, for example. Mainstream economics starts with the basic model for a successful economy that was first described by Adam Smith in his famous book Wealth of Nations published in 1776. The agricultural revolution, the industrial revolution and the information revolution are all post Adam Smith. Now productivity is maybe a million times better than in the days of Adam Smith, yet the model for the laissez faire money profit capitalist market economy is pretty much the same. Where the world was a chronic shortage economy, today the problem is surplus and how to employ labor when they are really not needed any more for production. Human labor in production will go the way of the horse in transportation!

If Adam Smith was writing today he would be asking why the market works to concentrate wealth rather than to have it distributed more equitably to those that work in the economy rather than those that simply work (game) the economy. He would be asking why the allocation of resources ignores the billions at the bottom of the pyramid (BOP) who have needs that are unsatisfied by the system. More important he would probably be proposing some practical ways to improve the system so that everyone is part of an equitable economy.

The norm in the modern economy is for resources to go where they will make money profit not where they will do the most good. This is the core failure of the Adam Smith money profit economy. Valueadd should be just as central as profit.

I am an accountant, and a believer in the amazing power of double entry money profit accountancy to plan, record and report profit. The system is over 400 years old, and like the Adam Smith economic model, it is time for it to get updated. I argue that the update that is needed is that the system should account not only for money profit, but also for what I call 'social valuadd'. A business needs to account not only for the money flows and the profit it creates, but also the 'value' flows and the social impact of its economic activities.

The norm for reporting should not only be the business ... but there should also be a similar type of value accounting for the community. The performance data ... money and value ... for an economic activity in a place should roll up into an operating organization and also up to the community. This a fundamental change in the architecture of financial and social reporting about economic activities.

It has been decades since the weakness of GDP as a measure of economic performance was recognized ... but it is still a very prominent metric. I believe this is because GDP growth makes it easier for business profit to increase and for fiscal foolishness to be covered up. With a combined system of money profit and social valuadd ... truevaluemetrics ... the goal can be improved quality of life rather than merely getting more stuff that will be wasted while the planet gets depleted. With truevaluemetrics it becomes possible to measure state, progress and performance in a coherent integrated manner.

Metrics do not change anything directly ... but smart metrics will enable better incentives so that there can be good outcomes that respect the aspirations of all stakeholders and not just the investor and executive stakeholder.

The technology to implement truevaluemetrics ... or something like ... is available. Many initiatives to improve metrics and encourage corporate responsiveness to social impact exist. So far, as much as I can see, these initiatives have not been accepted and integrated into the core reporting system of business. When they are, a whole lot will change.

Peter Burgess
@truevaluemetric
November 19, 2012 | Peter Burgess


Peter Burgess

High Profits, Low Wages, and the Growth of Inequality

Despite near-record levels of economic inequality, many politicians and pundits still don't think this widening chasm is much of a problem in a country supposedly dedicated to egalitarian ideals.

Inequality, the logic goes, is a natural result of different degrees of work and creativity. Some people strive harder and have better ideas, as well as take more risks, and giving them outsized rewards is a good thing, since it encourages others to emulate this behavior and makes us all wealthier in the end.

Related to this, low-wage jobs aren't anything to worry about either, since people who put in the effort can climb upward to better jobs and, also, low wages allow business owners to hire more people and generate more growth so that, again, we all win.

The only problem with this story, of course, is that it's persistently contradicted by the actual facts about inequality today. In truth, inequality in America tracks more closely with a classic Marxist analysis whereby the owners of capital exploit a surplus of labor to keep wages low and generate high profits for themselves -- depriving workers of a fair share of the value they are creating for companies. Yes, there are smart entreprenuers taking big risks in America, but the more dominant face of the economy is well-established corporations run by professional managers who keep finding new ways to drive labor costs down and profits up.

Consider a new study out today by the National Employment Law Project (NELP), which shows that most low-wage workers aren't employed at struggling start-ups or local businesses trying to expand. Instead, says NELP, the majority of such workers are employed by large corporations. And the reason these workers make chump change is not because such corporations are battling to maintain their razor thin profit margins in tough times. Rather, these companies are making plenty of money -- more in many cases then before the recession. According to NELP, of the top 50 low-wage employers in America: 92 percent were profitable last year; 63 percent are earning higher profits now than before the recession; and 73 percent have higher cash holdings now than before the recession.

By and large, these are great times for the nation's top low-wage employers -- which include Wal-Mart, McDonalds, Target, and Wendy's. And great times, too, for the CEOs of these companies, who earn an average of $9.4 million a year.

The big losers are the people who are actually creating most of the value of these companies -- i.e., the workers who make the sales, prepare the food, stock the shelves, and so on. Many of these people are paid under $10 an hour, which is not enough to live on -- and certainly not enough to save for retirement on or buy health insurance, which is not offered to most low-wage workers.

Even as the shareholders and executives of the top low-wage employers get richer than ever, many of their employees are living in poverty or just above poverty. And make no mistake, the plight of these workers affects all of us, since their shortfalls in income are often made up by government programs like the EITC, food stamps, and SCHIP.

It's no exaggeration to say that the business model of America's low-wage employers depends on a generous government safety net, since without that net many of their workers would not be able to survive. So all of us are subsidizing the wealthy owners and executives of Wal-Mart, McDonalds, and Target. Alas, few of us seem to realize this.

All of us are hurt, too, by the way that the low-wage model drags down economic growth. If you give a low-wage worker higher wages, they immediately pump that money back into the economy through more spending. But if you give a CEO another few million dollars in compensation, he'll most likely just plow that money into his stock portfolio or other savings vehicles, which doesn't do much for the economy since capital is cheap right now and customers are scarce.

If we want an economy with robust consumer demand, workers need to a bigger slice of the pie. Business leaders once understood that elementary fact.

Groups like NELP are right to spotlight the gross exploitation of American workers and the grinding hardship this produces in millions of households. But we should never forget about the other high costs of inequality.

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