Data from the Bureau of Labor Statistics makes it clear that–unlike the three decades preceding it–the 30 years following the election of Ronald Reagan have seen the growth rate of worker compensation fall far short of the increase in worker productivity.

This trend is illustrated in the following graph, posted by Kash Mansori at the Angry Bear blog, based on data from the U.S. Bureau of Labor Statistics.

Mansori notes “how much the two series have diverged since the early 1980s,” pointing out that “output per hour of work in 2010 was 87% higher than in 1980, while real hourly compensation was only 38% higher.”

Digging a bit deeper into the data, Mansori notes that “the vast majority of the gap between productivity and hourly compensation comes from the 1980s and 2000s, while during the 1990s workers shared in productivity gains nearly as fully as they did in the 1960s.”  He closes his post by asking “what was it about the 1980s and 2000s that made it so difficult for workers to reap the fruits of their more productive labor?”

Economist Thomas Palley attempts to answer Mansori’s question in his book “From Financial Crisis to Stagnation: The Destruction of Shared Prosperity and the Role of Economics”.

In a presentation on the topic of his book, Palley laid out his basic thesis:

From 1945 to 1975, the US had a virtuous circle growth model, the logic of which was as follows. Productivity growth drove higher wages; higher wages fuelled demand growth; demand growth ensured full employment; full employment spurred investment, which in turn caused productivity growth. This economic model held in one form or another globally – in North America, Europe, Latin America, and Japan.

After 1980 the virtuous circle growth model was abandoned in favor of the neoliberal growth model. The key features of the new model were abandonment of commitment to full employment and adoption of policies that helped corporations sever the link between wages and productivity growth. The new model weakened the position of workers and strengthened the position of corporations.

The model can be understood in terms of a policy box that fenced workers via a policy mix promoting small government, labor market flexibility (i.e, anti-union policies), corporate globalization, and abandonment of full employment. Moreover, with the help of the IMF and World Bank the neoliberal model was implemented on a global basis, in North and South, which multiplied its impact.

The new model gradually undermined the US economy’s income and demand generating structure, but the growing demand gap was filled by borrowing and asset price inflation. Such a process was always bound to hit the wall as there are limits to debt and limits to how high asset prices can go. However, the process went on far longer than expected, which made the collapse far deeper when it eventually happened. It also means escaping the aftermath is far more difficult as the economy is burdened by debt and destroyed credit-worthiness.

In an interview posted on the Naked Capitalism web site, Palley elaborates a bit more on the neoliberal growth model:

The political triumph of Ronald Reagan enshrined a new economic paradigm that abandoned full employment and severed the link between wages and productivity growth.

The new paradigm was fundamentally flawed. One flaw was that it relied on debt and asset price inflation to fuel growth instead of wages. A second flaw was the model of globalization which created an economic gash in the form of leakage of spending on imports (the trade deficit), leakage of investment spending offshore, and leakage of manufacturing jobs offshore. These twin flaws created a growing demand gap.

That is where finance enters the picture as its role was to fill the demand gap. Financial deregulation, regulatory forbearance, financial innovation, financial mania, and plain vanilla financial fraud kept the economy going by making ever more credit available, However, as the economy cannibalized itself by undercutting income distribution and accumulating debt, it needed ever larger speculative bubbles to grow. The house price bubble was simply the last and biggest bubble and was effectively the only way around the stagnation that would otherwise have developed in 2001.

The house price bubble delayed the onset of stagnation but at a cost. When it burst it created a financial crisis because of the scale of financial excess. Moreover, it also makes it harder to escape stagnation now because of the scale of debt burdens and the extent of destruction of credit-worthiness.

Australian economist Steve Keen was among the first economists to recognize the  looming financial crisis and to identify the role that this excessive private debt played in causing it.

In the 3 minute video below, Keen argues that the most effective way to deal with the massive debt overhang still plaguing the world is to  to “abolish debt that should never have been created in the first place.”  In this view:

If we continue honoring debt that was dishonorably extended, we face an incredibly long period of slowly reducing it down in the grinding ways we allow, which are fundamentally through bankruptcy.

For those interested in Keen’s work, I suggest you visit his web site, which has lots of information and video lectures.  You might also check out his newly revised and expanded book, entitled “Debunking Economics: The Naked Emperor Dethroned?“.

One of the things that struck me when I began reading and listening to Keen is how blind mainstream economics was to the growing debt bubble and the massive risks it posed (and how ahead-of-the-curve was Keen, along with a few others, virtually none of them members of the currently dominant economic mainstream).

To get a feel for this yourself, I’d recommend the first three segments of the interview above, which can be found here, here and here.  Though they have their “wonky” moments, they’re all in the 2-4 minute range, so can be reviewed pretty quickly.

Among other things, you’ll hear Keen briefly explain how he came to realize that neoclassical economics was a “naked emperor” about to be dethroned; that our economy, having relied on unprecedented levels of debt and asset inflation to drive demand in the face of wage stagnation, was headed for a massive crisis, and that this reality had eluded virtually all mainstream economists until the crisis had pushed our economy to the edge of the abyss.

As Keen lucidly explains, this emperor’s “dethroning” is well-deserved and was too-long delayed.