February 12, 2014


The U.S. Needs a New Social Contract : We must close the gap between productivity and compensation. (WILLIAM A. GALSTON, Feb. 11, 2014, WSJ)

Summarizing a large body of research, a 2012 report for the Organization for Economic Cooperation and Development (with 34 member countries) attributes this development to three principal factors: the worsening position of low-education workers, changes in technology, and the globalization of production, competition and capital flows. The OECD was unable to find a strong correlation between the strength of collective bargaining in specific countries and labor's share of their output, and the report suggests that globalization broadly reduced workers' negotiating power, regardless of collective-bargaining arrangements.

When compensation fails to keep pace with productivity, workers' purchasing power becomes less able to sustain economic growth. Since 1990, two trends masked the difficulty: rising household debt relative to income, and growth in overseas markets as developing and former communist-bloc countries entered the global economy. But U.S. household debt reached unsustainable levels by 2007, and the boom in developing countries--especially China, India, Brazil, South Africa and Turkey--appears to have peaked. As both Europe and the U.S. are discovering, the domestic market still matters, and weak gains in household income are bound to retard economic growth.

What can we do? A serious long-term infrastructure program would boost employment and wages as well as economic efficiency. A crash program to reduce our appalling high-school dropout rate while creating high-quality technical training would improve the prospects for workers without college degrees. A renewed commitment to basic research would help create new products and industries down the road.

But the facts push me to a more radical conclusion: We cannot expect robust, sustainable economic growth unless we can figure out how average households can participate in the fruits of that growth, as they did in the postwar period. We need nothing less than a new norm--a revised social contract--that links compensation to productivity. And because we cannot return to the conditions that once sustained that link, we need new policies to bring it about.

Neither political party has come close to proposing anything of the sort, and the American people know it.

...replacing taxes on income and investm,ent with consumption taxes and defined benefit social programs with defioned contribution, funded by taxes when necessary.

Posted by at February 12, 2014 7:25 PM

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