Is what’s good for workers also good for shareholders? The fate of the US economy and stock market rests upon this question.
“It’s time to grow the economy from the bottom up,” says President Joe Biden. On top of the recent stimulus package, he’s proposing stronger trades union rights; increased tax credits for the low paid; a higher minimum wage; and the creation of lower-skilled jobs to improve infrastructure and to fight climate change financed by higher taxes on the well-off.
To investors used to decades of pro-rich policies, this seems scary. But it need not be so bad. Economists such as Marc Lavoie at the University of Ottawa and Engelbert Stockhammer at Kingston University have shown that worker-friendly measures – what economists call wage-led growth – like these can actually boost profit rates. Because workers tend to spend more of their income than billionaires, transferring cash to them can boost demand. Better still, the assurance of high demand can encourage companies to invest more. And the prospect of rising wages should incentivise them to invest in labour-saving technologies – things that can boost productivity.
The profit rate, remember, is equal to the share of profits in GDP, multiplied by the ratio of GDP to the capital stock. If the latter rises enough, it can raise the profit rate even if profit margins are squeezed. It's possible therefore that policies that seem hostile to owners of capital can actually help them. As John Kay wrote in his lovely book, Obliquity, objectives are sometimes best achieved by aiming for something else.
History shows that this has happened. In the 1950s and 1960s the US had full employment policies, strong unions and high taxes on the rich; the top rate of income tax was over 90 per cent in the 1950s. And equities did well, with the S&P 500 delivering a real total return of 9.1 per cent per year between 1952 and 1972, which is even better than it has done in the last 20 years.
And as those policies ended in the 1980s, profit rates actually fell – in part because, as Özlem Onaran and Giorgos Galanis have shown, lower wage shares lead to lower growth.
None of this, however, guarantees that wage-led growth will work today. One danger is that investment depends upon animal spirits. And the end of pro-rich policies might weaken these, if only because such a big policy shift creates uncertainty; bosses’ perceptions of the right climate for investment have changed since the 1950s, and perceptions determine reality. Also, poorer households are more heavily indebted now than they were then – which means they might use some of their higher incomes to pay off debt and so demand won’t rise much. There’s also the danger that higher inflation – or just fears thereof – will lead the Fed to raise interest rates or Mr Biden to reverse his fiscal largesse. Servaas Storm at Delft University of Technology says wage-led growth requires loose macroeconomic policies. And these are not assured over the long run.
There’s another difference between now and the 50s. Back then there was a backlog of new technologies that firms could implement to raise productivity. It’s less obvious that there is today.
We must, therefore, be sceptical of whether wage-led growth can work. The issue is not that Mr Biden has lurched to the left or is bashing the rich. It is that the environment which made pro-worker policies work also for capital owners in the 50s might no longer exist.
