The Golden Age of Productivity ended in the US in 1973. Republicans took control of the Senate in 1980. Republicans won the House in 1994. Before the end of the Golden Age of Productivity, this was unthinkable. When the Golden Age ended in 1973, there were immediate declines in wages for some groups of blue collar workers. There was a fall in employment to population ratios. This type of economy and labor market has persisted since then.
A useful review of the Golden Age is by Marc Levinson, “End of a Golden Age.“
The measured rate of total factor productivity growth since 1973 is between .5 and 1 percent. There are recent sub-periods when some measures show zero growth. When TFP grows below 1 percent, the Democrats may tend to lose is a possible rule of thumb to consider. When TFP is not growing, then wages don’t grow. In additional, the guarantees made by government and the center left parties start being unsupported by the economy. The result is that people turn to the center right or business party to get things moving again.
The Reagan Revolution came about because of the Golden Age of Productivity coming to an end and it showing up in wage stagnation for some groups, and some state and local governments losing their ability to maintain prosperity in their locality.
Gorbachev tried to implement perestroika and glasnost to deal with a similar situation in Russia. His reforms couldn’t work fast enough to save the situation for the regime. So the communist party lost. This was part of a global trend of the parties on the left losing.
To fund activist government and maintain the guarantees made by government, total factor productivity has to grow above 1 percent. Center left parties need to maintain a minimum growth rate of TFP of 1 percent or 1 percent plus.
Wages depend on the product of total factor productivity and some measure of capital per worker. Meanwhile the rental rate of capital goes like a product of TFP and some measure of workers per unit of capital. Since 1973, the stock market has gone up. Wages have not. So there has been an excess of labor supply inflows. The two effects, low TFP growth and labor inflows have kept wages down even while the stock market went up.
Modern economics uses forward recursive equations, especially for price variables like wages. Future inflows of workers reduce wages today is how modern economic models of variables like wages are structured. So in addition to past flows increasing labor supply, what is used to divide in getting wages, future expected inflows also immediately reduce wages in the current period. One benefit of this structure is that if future inflows of workers are permanently halted, then this term drops to zero and may even change sign and push wages up immediately.
If the labor inflows have low total factor productivity, the combination is even worse. Wages go down, employment to population ratios stagnate or go down, and government budgets shrink and the guarantees have to be reduced. The result is the center left party loses elections to the center right party.
The post 1973 era has been one where strong libertarian market ideologies replace center left ideologies of guarantees and spreading the wealth. Nonetheless, some level of guarantees are part of what people want. They don’t want to be subject to the whims of a labor market that can at any moment make them unskilled by a technological change that lets their job be done by less skilled workers using new technology. Particularly, if a substantial part of the benefits of that change go into corporate profits and not worker pay.
Democrats have to accept the basic math of the labor market as expressed in the standard equations of economic growth theory in every intermediate and advanced textbook in economics. The Cobb Douglas production function is the basic math of economics. It is in every mathematical economics textbook, right and left. It is the same at Brandeis and Chicago. Democrat mathematical economists all use this math in their publications and work.
The key to Democrats winning elections is for TFP to grow above 1 percent per year and to stop all inflows of workers on a permanent basis. The latter would then immediately show up in higher rates of wage growth and higher employment to population ratios. This would then help budgets of state and local governments. It would then make the guarantees seemed solid to the public. That would translate into Democratic victories.
When the economy stagnates and it feels hopeless, people don’t believe in the guarantees and promises made by center left parties. They can’t deliver on promises the economy can’t back up. So the platform of center left parties rings hollow. This is a big loss, because this is what people really want to be true. But when they are convinced it can’t be true, that it is just wishful thinking, then they vote for the business party.
Democrats are now in a position where the key factors of electability are working against them. I talked to Greg Mankiw who is an expert on TFP after a recent Brookings seminar. His view was TFP would grow 1/2 of one percent per year. But he said with a big margin either way. This is consistent with data for recent subperiods. The inflows of workers are depressing wages and employment to population ratios, especially of men. That shows up in many bad behaviors.
If the labor market does well, rising wages and high employment to population ratios especially for men, then the tail of dysfunctional men at the bottom drops to very low levels. This is because probability distributions bottom tail at an absolute point will drop to close to zero as the mean goes up. This is the basis of socialism. The rising mean allows a distribution to all and the bottom tail on an absolute level goes down towards zero.
When the mean is not rising, socialism is put on hold. There is also a tendency with these numbers for TFP and even wages to rise at one percent or more to handle frictions and change which can harm specific people or groups.
So if the mean is not rising, some group is being harmed more than the others. This is basic arithmetic. If the mean has zero growth, then someone is getting positive growth and someone getting negative growth. That someone getting negative growth is what destroys socialism. It can’t be fixed except by getting the mean to grow. Because an average of zero will have some negatives comes from the math of averages.
Center left parties need the average to rise so they can limit how many people are getting negatives they can’t deal with. That is the arithmetic of the center left. So center left parties live or die on whether the average is trending up.
Since the end of the Golden Age of Productivity in 1973, the average has had slow growth. The labor inflows, many of them of low TFP workers have then pushed down the labor market to one of its worst 50 year periods by some measures for several centuries. Center left parties can’t survive when the labor market has its worst 50 year period in centuries.
What can center left parties do? First they need to avoid new burdens on productivity. They have to lighten up the load. Second, they have to continue in selected forms of market regulation. This includes antitrust and limiting the exploitation of the situation by large financial institutions. So excess interest charged to workers or the middle class or various fees that pop up and grow excessively.
Center left parties have to make sure the education system is working. This means each person gets the education they are capable of getting. This is key to both raising the average, but also the survival of each person while things continue to be bad.
This is another reason that Democrats are in trouble. While the labor market is bad in some measures like employment to population ratio and wages and possibly could get much worse, people want survival skills for themselves individually when they come out of school. So if the average is not going up, they personally need to have the skills to be in the positive group and not the negative group while the average growth is zero or close to zero.
People want realism in bad times or in risky times. So they want a realistic school system that delivers what education each person is able to absorb. During tough times, if they don’t get this, then they revolt at the ballot box.
Until Democrats get TFP growing at a safe 1 percent plus and stop labor market inflows that keep the capital to labor ratio low and the forward term in wages acting to depress wages not lift them, they will have a difficult time getting elected. We may be seeing another shift against Democrats. This is part of the trend since the Golden Age of Productivity ended in 1973 and labor market inflows persistently kept the capital to labor ratio low, which was bad for workers, but the labor to capital ratio high which was good for the stock market.
The stock market, however, can’t go it alone forever. In particular, if total factor productivity does not grow, the stock market can’t grow beyond a certain point. If TFP trended down, the stock market would have to eventually trend down as well. This has to be considered possible.
There has been a build up of the percentage of school systems that are in trouble. Title one schools are ones that need additional public support for lunches as an example. These are approximately 50 percent of public schools in the US. Every county around New York City, the global financial center, has over 50 percent title one schools. That includes Westchester County, Fairfield County, Bergen County and in fact every county in New York State, New Jersey and Connecticut. Thus our corporate headquarters and financial market center is unable to generate enough local income to keep the percentage of title one schools down.
The public knows that things are not right with the schools all over. So they fear there is the chance of losing what they have. When they stop believing that the center left party can deliver on its promises, they stop voting for it. That is the current situation. Democrats are in for tough times until they accept the basic arithmetic of the Cobb Douglas production function. This is in every mathematical text book written by top liberal economists. So Democrats have to accept it and build it into their platforms. Otherwise, we are looking at a century of the center right party dismantling the guarantees built up by the Democrats over the past century.
The best thing going for Democrats is people want them to succeed. People want the guarantees. They just want them to be delivered on in reality, not just promises and make believe. That is why Democrats have to make their policies conform to the Cobb Douglas production function. That means TFP growing by one percent plus and no more inflows of workers.
