Les Récessions: Ouvriers, Propriétaires

Is everybody really like jet planes, islands, and tigers on a gold leash? Or are only some people? And should we care?

I write this as the NASDAQ shattered four thousand points for the first time since Destiny’s Child’s “Say My Name” was inching into its third week a number-one single (Lorde, the most popular Kiwi since Wilson Whineray, was four years old). Many people, including me, have made more money during this recession than we had anticipated. Others have struggled in a difficult job market (particularly the so-called Millennials), perilous austerity discussions, and a poisonous re-regionalistion of Europe and Asia.

Why has there been this societal bifurcation during this recession? And did it occur in prior recessions?

A simplification of this, pointed out on an economic panel on which I recently sat, is that people who depend primarily on the performance of investments (and particularly equity in companies limited by shares) for income have done well, while people who depend primarily on their wages have not seen the same prosperity during this recession. Many have seen their wages, in real terms, decline.

Some will point out that the law has long recognised the distinction between these two groups. For instance, the United States Internal Revenue Code has distinguished between investment income and salaried wages for over a century. The recognition of a difference in England runs all the way back to the Victorian era, either the Assessed Taxes Act of 1840 or 1851 depending upon whether you consider the “men interested in land” in the 1840 Act to include investors and speculators, which it almost certainly did (a real estate bubble in England built from 1834 through the early 1850’s).

But the point is not that there are two groups. Rather, it is that the fortunes of the two groups are distinct, yet intertwined. The same things that tend to help the equity investor group (predictably and persistently low interest rates, the dismissal of unnecessary or redundant workers, a paring back of employee benefits, etc.) tend to negatively impact those who depend upon wages rather than investment returns for their livelihoods.

There are also more subtle effects: If I own a factory and have access to cheap credit (low interest rates), I might make investments during a recession in anticipation of future volume like replacing twenty workers with two robots. We see in the literature some evidence of an empirical shift up the substitution curve during recessions, away from labour and in favour of capital. The depreciation rules and accountancy guidelines in the UK and US also contribute to this bias, as I cannot as easily correct for wages as I can for the purchase of capital goods, which means given the choice I am incentivised to make capital improvements while reducing the number of workers on my payroll.

This may explain part of the class friction during this particular recession, that not only are those living on month-to-month wages doing so poorly, but that those who own the companies that employ these people are not seen as “feeling their pain” (to use the now-infamous Reagan-era phrase). But this shouldn’t, then, be unique to this recession. And it isn’t.

If we look at prior recessions, particularly deep recessions, we see similar divisions in recessions that did not result from inflation-trimming policies. If we think back through U.S. history, I would suggest the mid-1980’s inflation crisis and the Volcker-era 1970’s recession fall into this unusual category of recessions that could have been avoided by (but instead were caused or worsened by) central bank policies. But setting these aside, almost all significant U.S. recessions have this trend within them, and class warfare themes in the following major election.

We see this in the weak market of 1951-52 which deepened into a formal recession in 1953 and led to a series of popular policies to appease the working class, including the Veterans’ Readjustment Act of 1952 (a hurriedly-assembled attempt to update the very-popular G.I. Bill). The VRA of 1952 made some concessions to the ruling class (most notably removing unemployment benefits from the G.I. Bill, which many thought were too generous in the wake of WWII).

We see class warfare politics in the recession of the early 1960’s and early Kennedy Administration policies. Following the brutal recession of 1958, which had been punishing across the social spectrum, many upper-class Americans were frightened and heavily in cash, having sold stocks and bonds during 1959 at somewhat-recovered values. Those who invested around the time of Kennedy’s election saw sustained and hearty gains through the 1960’s while the fortunes of the wage-earning classes (who generally did not own shares) were improved from the late 1950’s, though barely.

The early 1980’s recession, which coincided with the tail end of the oil crisis, saw every political trick in the book used to attempt to defuse an ambient climate of class warfare. From trickle-down economics to free-trade arguments, American support for neoliberal policies seemed unanimous and inevitable. But the politics of the working class were far different and few believed (perhaps even fewer believe in retrospect) that these policies were really meant to protect anyone other than the owners of major firms.

In the early 2000’s, the growth of mutual funds and the diversification of employee benefits plans meant more people were shareholders during the 1990’s recession than any prior recession. However, weak consumer sentiment through the Clinton years finally made its impact felt and the contrast between so-called dot-com millionaires and the average American was on display, thanks to cable news and a growing internet/blogging culture. Perhaps most interesting of all, the Starbucks barista who had bought SBUX shares often did not self-identify as an owner of the company, meaning what many thought would be the “democratisation” represented by mutual funds and employee stock purchase plans never came, or at least never soaked into the psychology of the working class.

Today, we see a recession environment much like that of the 2000’s, but worse. The unemployment numbers remain sluggish and the Fed has essentially “turned the dial to eleven” in terms of rates. The perception among most Americans – correctly – is that those who are enjoying a wonderful environment of stock market performance are doing it at the expense of or (perhaps worse?) completely independent from the experience of those who depend upon wages for their incomes.

So the answer to the question of the day is: Yes, there is a class of people who are truly enjoying success during this recession. And, as I heard one such person say very politically-incorrectly at a recent meeting, “That man in the unemployment line is yesterday’s inefficiency.” Perhaps true in the factory where he once worked. But there are inefficiencies on both a micro and macro level from having people unemployed, underemployed, or discouraged. And simply because we, the fortunate ones, pay for those inefficiencies in a more convoluted way doesn’t mean we should embrace or encourage or aggravate those costs.