Reports from the Economic Front

a blog by Marty Hart-Landsberg

EPI Data Library On State Of Working America

The Economic Policy Institute (EPI) has just published an on-line data library on “The State of Working America.”  Lots of good information and easy to use.

As EPI explains:

Data on wages is reported by decile, sex, race, and education, and will be updated annually.

Employment data is updated monthly and includes the unemployment rate, the long-term unemployment rate, the underemployment rate, the labor force participation rate, and the employment-to-population ratio—with previously not publicly accessible demographic data.

The Data Library also contains EPI’s unique wage gap analyses—such as the black-white wage gap and the college wage premium.

The data goes back to the 1970s and will help you answer labor force questions, ask new ones, and find solutions to the most pressing issues of our time: stagnant wages, and income and wealth inequality.

The following, on the black-white wage gap, is an example of what you can find on the site:

epi-data

As you can see, inflation-adjusted white median hourly wages have slowly but steadily grown over the last few years, although they still remain below their 2009 level.  The same is not true for black median wages.  As a consequence, the black-white median hourly wage gap has been growing.

The Fading Magic Of The Market

Poorer than their Parents?  That was the question McKinsey & Company posed and attempted to answer in their July 2016 report titled: Poorer Than Their parents? Flat or Falling Incomes in Advanced Economies.

Here is the report’s key takeaway, which is illustrated in the figure below:

Our research shows that in 2014, between 65 and 70 percent of households in 25 advanced economies were in income segments whose real market incomes—from wages and capital—were flat or below where they had been in 2005.  This does not mean that individual households’ wages necessarily went down but that households earned the same as or less than similar households had earned in 2005 on average.  In the preceding years, between 1993 and 2005, this flat or falling phenomenon was rare, with less than 2 percent of households not advancing.  In absolute numbers, while fewer than ten million people were affected in the 1993-2005 period, that figure exploded to between 540 million and 580 million people in 2005-14.chart-1

More specifically, McKinsey & Company researchers divided households in six advanced capitalist countries (France, Italy, the Netherlands, Sweden, the United Kingdom, and the United States) into various income segments based on their rank in their respective national income distributions.  They then examined changes in the various income segments over the two periods noted above.  Finally, they “scaled up the findings to include 19 other advanced economies with similar growth rates and income distribution patterns, for a total of 25 countries with a combined population of about 800 million that account for just over 50 percent of global GDP.”

The following figure illustrates market income dynamics over the 2005-14 period in the six above mentioned advanced capitalist countries. For example, 81 percent of the US population were in groups with flat or falling market income.

six-target-countries

The next figure provides a more detailed look at these market income dynamics.

market-income-six-target-countries

McKinsey & Company researchers also looked at disposable income trends, which required them to incorporate taxes and transfer payments.  As seen in the first figure of this post, government intervention meant that the percentage of households experiencing flat or declining disposable income was considerably less than the percentage experiencing flat or declining market incomes, 20-25 percent versus 65-70 percent.

The researchers attempted to explain these trends by analyzing “the patterns of median market and median disposable incomes for two periods: 1993 to 2005 and 2005 to 2014.  We focus on income changes of the median income household because middle-income households are representative of the overall flat or falling income trend in most countries, with the singular exception of Sweden.”

They highlighted five factors: aggregate demand factors, demographic factors, labor market factors, capital income factors, and tax and transfer factors.  As we can see from the second figure above, labor market changes hammered median market income in the United States, the United Kingdom, and the Netherlands.  And as we can also see, tax reductions and transfer payments helped to offset declines in median market disposable income in those three countries. In the case of the United States, while median market income fell by 3 percent over the period, median disposable income grew by 2 percent.

What is the answer to the question posed by McKinsey & Company?  Most likely large numbers of people will indeed be poorer than their parents.  Why?  Aggregate demand continues to stagnate as does investment and productivity.  Employment growth remains weak while precariousness of employment continues to grow.  Finally, the elite embrace of austerity works against the likelihood of new progressive government social interventions.  Without significant change in the political economies of the major capitalist countries, the next 14 years are going to be painful for billions of people.

Opposing US Militarism In South Korea

The militaristic nature of the Obama administration pivot to Asia is fully on display in South Korea.  While rarely discussed in the United States media, the South Korean government recently agreed to let the US military station a Terminal High Altitude Area Defense (THAAD) battery in the South Korean city of Seongju.  The decision has been strongly criticized by the governments of China and Russia, and fiercely resisted by the people of Seongju.

The US and South Korean governments claim that the battery is needed to help defend South Korea from a possible North Korean missile attack.  However, it is far more likely that this decision is part of a broader US effort to strengthen its regional missile defense system and first-strike capacity against China and Russia.

As the Korea analyst Gregory Elich explains, this system is not designed to counter any likely North Korean threat:

The missiles in a THAAD battery are designed to counter incoming ballistic missiles at an altitude ranging from 40 to 150 kilometers. Given North Korea’s proximity, few, if any, missiles fired by the North would attain such a height, given that the point of a high altitude ballistic missile is to maximize distance. Even so, were the North to fire a high altitude ballistic missile from its farthest point, aimed at the concentration of U.S. forces in Pyeongtaek, it would require nearly three and a half minutes for THAAD to detect and counter-launch. In that period, the incoming missile would have already fallen below an altitude of 40 kilometers, rendering THAAD useless. In a conflict with the South, though, North Korea would rely on its long-range artillery, cruise missiles, and short-range ballistic missiles, flying at an altitude well below THAAD’s range.

It is also far from certain that the system even works reliably despite Department of Defense approved test results.  As Elich points out, “the tests failed to replicate real-world scenarios, so claims made about THAAD’s effectiveness are unproven.”

So, what is the gain for the US in securing South Korean government willingness to host the system?  The THAAD battery also comes with a powerful radar system that has two different modes of operation.  The first, the terminal mode, is designed to detect incoming missiles and direct counter-missiles.  The second, the forward-based mode, is designed to cover a much wider area and is connected to the US-based missile defense system.  “[I]n forward-mode a radar at Seongju would be capable of covering much of eastern China, as well as missiles fired from further afield as they fly within its detection range.”  In other words, used in forward-mode, the THAAD radar system would greatly enhance the US military’s ability to track and destroy Chinese and Russian missiles, an ability that would significantly contribute to US first-strike capabilities by compromising Chinese or Russian capacities to launch a counter-strike.

Thus, the effort to establish a THAAD battery in South Korea is best understood as a part of the broader US effort to ring China and Russia with missiles and radar systems.  The Global Network Against Weapons and Nuclear Power in Space has declared October 1-8 “Keep Space for Peace Week.”  In concert with that effort they published the following poster which highlights the aggressive nature of US policy.

ksfpw16

The Obama administration is well aware that South Koreans do not want to be dragged into a US confrontation with China or Russia and so it appears likely that the US and South Korean governments conspired to win popular support for the battery by encouraging South Koreans to believe that its sole purpose was to reduce the likelihood of a North Korea missile attack.  However, things haven’t worked out as the two governments hoped.

Growing numbers of South Koreans are actively organizing in opposition to the battery.  The resistance in Seongju grew so strong that the government was forced to announce that it would consider an alternative location.  But the residents of Seongju, joined by a wider social movement, are demanding that the government renounce its willingness to host the battery.

Seongjuprotests

The resistance has been spirited and creative as highlighted in this report from the blog Zoom in Korea:

The online “We the People” petition against THAAD deployment surpassed its goal of 100,000 signatures on August 10. The Seongju residents gathered for their 29th nightly candlelight vigil that evening were beaming with joy. The emcee shouted, “What day is today?” and the residents shouted back in unison, “The day we reached 100,000!” According to the White House petition website, any petition that garners 100,000 signatures in 30 days triggers an official response from the White House within 60 days of the date that the goal is reached.

To be sure, waging an online petition campaign in Seongju was no easy task. Most residents don’t have computers nor read English. The petition requires an email verification step, but most didn’t have email accounts. College students set up booths at the nightly candlelight vigils and patiently helped older residents through the process, starting with opening an email account.

The residents made clear that they are not appealing for sympathy from the White House. The petition campaign was a process of organizing the entire country beyond Seongju to demand that the United States rescind its THAAD decision and exert pressure on the White House.

“Until when do we hold the rain ceremony?” asked Lee Jae-dong, the chair of the Seongju branch of the Korean Peasants League and the emcee of the nightly candlelight vigils.  “Until it rains!” replied the crowd. “Until when do we fight THAAD deployment?” he asked. “Until it’s rescinded!” replied Seongju residents in unison.

In August, a Veterans for Peace delegation traveled to South Korea to meet with Koreans resisting the deployment and to learn more about how best to build solidarity.  Two members of the delegation were denied entry into the country by South Korean authorities.

We need to do our part in this struggle and not just out of sympathy for Koreans.  The THAAD deployment, if successful, can only heighten tensions in the Asia-Pacific region and strengthen those forces in the US that seek to further militarize our own foreign and domestic policies.

The Public School Teacher Pay Gap

People routinely nod agreement when they hear someone say “our youth are our future.”  The implication is that the care and education of our youth should be one of our nation’s highest priorities.  Odd, then, that there appears to be hostility towards many of those charged with educating them, our public school teachers.

One possible reason for this hostility is the widespread view, encouraged by the mass media, that public school teachers, especially unionized ones, are vastly overpaid.  This view may be widespread but it is also wrong.  Here are two key findings from a recent Economic Policy Institute study:

  • public school teacher inflation-adjusted weekly earnings have been falling since the mid-1990s.
  • the public school teacher wage gap—the gap between what teachers make in weekly wages compared with similarly educated and experienced workers—has grown since the mid-1990s, reaching -17 percent in 2015.

The figure below shows wage trends for three groups of full-time workers (age 18-64): all workers, college graduates (not including public school teachers), and public school teachers (elementary, middle, and secondary teachers).  The average weekly wage (inflation adjusted) for all workers increased from $891 to $1,034 over the period 1996 to 2015.  Over the same period, the average weekly wage for college graduates (excluding public school teachers) rose from $1,292 to $1,416.  In contrast, the average weekly wage for public school teachers fell $30 per week, $1,122 to $1,092.  As the study’s authors conclude: “In 2015 the teacher wage disadvantage compared with other college graduates was 22.8 percent, or $323 per week—substantially higher than the 13.1 percent disadvantage in 1996.”

wage trends

Significantly, as the following figure reveals, in no state are teachers paid more than other college graduates.

state comparisons

Of course, both college graduates and public school teachers include people of different ages, races/ethnicities, gender, marital status, and educational levels, who also live in different geographic regions.  Therefore, the authors of the study used Current Population Survey data to make regression-adjusted estimates of relative teacher earnings that held these various characteristics constant. They found, as illustrated below, that the adjusted teacher wage gap grew from ‑5.5 percent to ‑17.0 percent over the period 1979 to 2015.  In other words, teachers are, as of 2015, making 17 percent less than non-teachers with similar characteristics.  The figure also shows that this gap differs greatly by gender and that female teachers have suffered a greater deterioration over the period than male teachers, although male teachers continue to suffer the greatest overall wage gap.

wage gap

Not surprisingly, unionization does help, but only to narrow, not overcome, the wage gap. The next figure shows that “teachers not covered by collective bargaining faced a larger wage penalty than teachers who benefit from collective bargaining. Teachers without collective bargaining had a teacher wage penalty 7.0 percentage points greater than teachers with collective bargaining, on average, from 1996 through 2015. Both groups of teachers, however, faced a substantial and growing teacher wage penalty over the last two decades.”

unionization

Finally, the authors, using different data, broadened their study to include benefits.  In many cases, public school teachers traded, either by necessity or desire, wage gains for improvements in health care and retirement benefits.  Although public school teachers do enjoy, on average, better benefit packages than other comparable professionals, the basic conclusion of the study remains the same when considering overall compensation levels.  While the compensation gap between public school teachers and similar professionals is narrower than the wage gap, as the next figure illustrates, a gap still remains and continues to grow wider.

compensation

In sum, public school teachers are significantly underpaid relative to other college educated workers with similar skills and background.  This makes no sense.  If we truly believe our youth are our future than we should want to attract and retain the best people possible to teach them.  One doesn’t do that by underpaying.

 

Yes on Oregon Measure 97

Straight Talk About Measure 97

If we want Oregon to prosper we need to dramatically improve our state’s badly underfunded public schools, health care system, and senior services.  Here are some of the consequences of current funding levels: Oregon ranks 38th in school funding, has the 3rd largest class sizes, and has the 4th lowest graduation rate in the country.  Growing numbers of working people are unable to afford health care or financially survive a medical emergency; Oregon ranks 39th in the country for public health funding.  The number of seniors being forced to leave their homes because of a lack of social services also continues to grow.

The primary reason our state doesn’t have the funds it needs is that corporations operating in Oregon have quietly but steadily found ways to stop paying state income taxes.  As the Oregon Center for Public Policy pointed out in a recent study, “In the 1973-75 budget period, corporations paid 18.5 percent of all Oregon income taxes. Today they pay just 6.7 percent, a decline of nearly two-thirds. Absent any significant policy change, corporations are projected to pay just 4.6 percent of all Oregon income taxes by the mid 2020s.”  A study funded by The Council On State Taxation, a business lobbying group, found Oregon tied with Connecticut for the lowest “total effective business tax rate” in the country.

There is no point in beating around the bushes.  The only reasonable way to generate the tax revenue we need to fund critical state programs is by forcing corporations to pay more in taxes. If we don’t, as bad as things are now, they will get worse.  The state Chief Financial Officer, George Naughton, reports that the state of Oregon is facing a $1.4 billion gap between projected revenue and what it needs to maintain existing service levels.  State officials are talking possible 7 percent cuts across state programs.

There is an answer: Pass Measure 97 in November.

The virtues of Measure 97

Measure 97 will tax few corporations and the heaviest burden will fall on large out of state corporations.  Measure 97 makes one change to the existing Oregon tax code: it raises the corporate minimum tax on Oregon sales over $25 million for the largest C-corporations selling in the state.

Currently, the state minimum tax for C-corporations with sales of 25 to 50 million is $30,000 and tops out at $100,000 for C-corporations with sales above $100 million.  Measure 97 would impose a new tax rate of 2.5% on sales above the $25 million threshold.  The Oregon Legislative Revenue Office (LRO) offers the following example: “a C-corporation with Oregon sales of $50 million would pay a corporate minimum tax of $30,001 for the first $25 million in sales (the current tax) plus 2.5% on the second $25 million ($625,000) for a total minimum tax of $655,001.”

Oregon has some 400,000 businesses, 30,000 of which are classified as C-corporations.  According to the LRO, only 1051 of these corporations have more than $25 million in state sales and would be required to pay the higher minimum tax; that is approximately one-quarter of one percent of all businesses and 3 percent of all C-corporations selling in the state.  The real burden of the tax will fall on even fewer firms: the LRO estimates that the top 50 C-corporations would likely be responsible for more than 50 percent of the resulting increase in tax revenue.  And most of the money raised by the tax, more than 80 percent, will come from companies headquartered outside the state.

Measure 97 is an effective tax that will raise significant funds.  Measure 97 raises the minimum tax on large C-corporation sales, not profits.  By taxing sales rather than profits firms will not be able to fudge accounts and escape their responsibilities.  And Measure 97 taxes large C-corporations on their sales in Oregon.  Because the tax is on where the sales take place rather than where the goods are produced, firms cannot escape the tax by shifting production outside the state.  As for revenue, the LRO estimates that the tax would raise some $6 billion each biennium, which would boost the state budget by more than 15 percent; we are talking real money.

Measure 97 also makes clear where the money is to be spent.  The measure says that the funds generated by the tax are to be used to “provide additional funding for: public early childhood and kindergarten through twelfth grade education; health care; and services for senior citizens.” While it is true that the legislature will have the final say, passage of the measure will send a clear signal of our priorities to our elected leaders.

Misleading controversies over Measure 97’s effectiveness

The Oregon Legislative Revenue Office studied the likely impact of Measure 97 on the Oregon economy.  Some who oppose the measure have drawn on parts of its report to buttress their opposition.  Unfortunately, most of their objections to Measure 97 have been based on a misunderstanding of both the LRO’s methodology and the report’s conclusions.

Let’s be clear on what the report does say:

First, the report finds that Measure 97 will raise more than $6 billion in each of the next two budget cycles and that the new tax will ensure a more stable funding base for the state going forward.

Second, the report also shows that there is little reason to fear tax pyramiding.  Tax pyramiding is a common consequence of what are called gross receipt taxes, which are taxes that are levied on all business transactions.  As goods and services are sold from one business to another the tax tends to pyramid, growing larger and larger.  Measure 97 is not a typical gross receipts tax.  First, it is not levied on all business transactions.  As we saw above, only 1000 firms will likely pay the tax.  Competition within the economy will make it difficult for these firms to pass on the cost of the tax and other firms that may purchase their products will not be responsible for paying an additional tax.  Second, the LRO report shows that the tax will fall heaviest on large firms that are engaged in “final” rather than “intermediate sales,” for example, retail sales.  Thus, there is no evidence to support fears that Measure 97 will result in significant tax pyramiding and escalating tax rates.

Third, the report also concludes that the gains from greater and more stable funding of vital services come with minimal negative economic consequences.  The LRO study does find, as critics of Measure 97 point out, that the Oregon economy with Measure 97 in place will grow more slowly and create fewer jobs over the next five years than if the measure were not passed.  However, the negative impact of the tax is quite small.  For example, the LRO model predicts that there will be 20,000 fewer jobs in Oregon if Measure 97 is passed, but this is out of a projected labor force of some 2.7 million.  In reality we are talking about rounding errors.  This is highlighted by the results of a study of the effects of Measure 97 by the Northwest Economic Research Center (NERC) at Portland State University.  The NERC, using a similar methodology, concluded that adoption of the measure would generate a small overall gain in employment.

Most importantly, critics of Measure 97 do not appear to understand the LRO’s methodology and the biases that shape its conclusions.  The LRO did not use a forecasting model to assess the economic consequences of Measure 97.  In other words, the LRO never actually tried to predict what would happen to the Oregon economy if we passed or didn’t pass Measure 97.  For example, it did not try to model the consequences of slashing state budgets if the measure does not pass; it did not take the looming budget deficit into account at all.

Rather the LRO used an idealized model of the 2012 Oregon economy that operates in its own time and space, with firms that keep no profit (since all earnings are distributed to their owners) and full employment.  The authors of the study introduced the tax, made assumptions about firm responses, and used their model to simulate their created economy’s return to a new equilibrium state over a five year period.

While this model has its uses when comparing two different tax proposals, it is not very helpful for modeling the actual economic consequences of Measure 97.  In fact, its structure is such that its predicted results overestimate the costs and underestimate the benefits of the measure.  One serious flaw in the model is its assumption that businesses have no retained profits.  This means that firms will automatically seek to pass the entire tax along to consumers, leading to higher prices and declines in real income.

However, there are many reasons to think that this outcome is unlikely.  First, competitive pressures will, in many cases, make it difficult for large firms to raise their prices.  After all, only some firms in each industry will be required to pay the new tax.  Second, studies have shown, including a recent one jointly authored by the Oregon Consumer League and Our Oregon, that large firms tend to have national pricing strategies.  In other words, these firms charge the same prices for the same products in every state in which they operate.  The study also found no relationship between state tax policies and the cost of living in each state.  Thus, it is likely that large multi-state firms operating in Oregon will simply absorb much of the new tax, accepting slightly lower profits, rather than try to pass it on to consumers through higher prices.

When you hear opponents of Measure 97 confidently predict that its passage will lead to higher prices and real income losses for consumers because businesses will simply pass on the cost of the tax to consumers, take a minute to investigate who is bankrolling the opposition to the measure.  Among the leading contributors to the no campaign are companies like Comcast, Standard Insurance, Procter and Gamble, Weyerhaeuser, Walmart, Well Fargo, and US Bank.  Would they be pouring tens of thousands of dollars each into the campaign if they didn’t fear that the tax will cost them profits?

Another serious flaw in that the model is that it does not try to capture any of the broader social benefits that would accrue to the state and its citizens from passage of Measure 97.  For example, the model does not account for the fact that a better educated and healthier population will likely attract new businesses and employment opportunities.  Or that well-funded social services would enable more people to work, boosting their incomes, or help families better weather hard times and plan and save for the future.   If the LRO had adjusted its model to compensate for these flaws, there is no doubt that its assessment of the effects of Measure 97 would have been far more positive.

In sum, most Oregonians know that many people are hurting.  And we are facing a huge budget deficit that will, if nothing is done, require more cuts to education and critical social services, leading to more suffering.  Measure 97 is a game changer.  Yes, this measure will force a large tax increase on some of the country’s biggest corporations.  But the reason that we need such a large increase is that these corporations have essentially been using our public services for close to nothing.  Until 2010 the state minimum tax was $10.  Even now, many corporations find ways to completely avoid paying even the minimum tax.  Measure 97 will put an end to that.  It will go a long way to creating an Oregon that works for the great majority.

Falling Profit Margins Signal Recession Ahead

Business cycles are intrinsic to the way capitalism operates; they are the outcome of contradictions generated by the private pursuit of profit.  In fact, it is the movement in profits that drives the cycle, with a sustained downward movement in the profit margin signaling growing dangers of a recession.

And, it is a sustained downward movement in the profit margin that is leading business forecasters to raise warnings of a coming recession.  A case in point: a June 2016 J.P. Morgan special report titled Profit Stall Threatens Global Expansion states:

One metric for gauging the stage of the business cycle is the level of the profit margin. In this regard, the timing does not look encouraging. The US experience is instructive in this regard. The rolling over of the profit margin has led every US post-World War II recession by one to three years. Indeed, it is partly for this reason that our medium-term recession-probability models show the odds of a recession within the next three years running near 90%.

Recessions mean hardship, especially for working people.  Unfortunately, because most Americans have benefited little from the current expansion, few will have the financial resources necessary to moderate the social costs that come with any downturn.

Business Cycle Theory

Some definitions are needed to show why profit margins are key to gauging the state of the business cycle.  Profits are the difference between a firm’s total revenue from selling products and its total cost from producing them.  The profit margin is the firm’s profit per dollar of sales or revenue; it is calculated by dividing total profits by total revenue.

If we think about the corporate sector as a whole, we can define total corporate profits as the product of corporate total revenue (or sales) multiplied by the average corporate profit margin (or earnings per dollar of sales).  Total revenue is a function of the level of demand in the economy.  The profit margin is heavily dependent on changes in the cost of production (most importantly changes in productivity, which include the intensity of work, and wages).  Not surprisingly, both demand and business production costs, and thus total revenue and the profit margin change over time, sometimes moving in the same direction and sometimes not.

Coming out of a recession, corporations tend to enjoy rapidly increasing demand for their products and, for them, still pleasingly low costs of production thanks to their recession-era leverage over workers.  This translates into rapidly increasing profits and expectations of continued profitability.  This, in turn, encourages more hiring and investment in new plant and equipment, which helps to strengthen demand and further the expansion.

However, at some point in the expansion, costs of production begin to rise from their recession period lows, causing a fall in the profit rate.  For example, productivity begins to slow as firms press older equipment into use and workers take advantage of the improving labor market to slow the pace of work.  And, as unemployment falls over the course of the expansion, workers are also able to press for and win real wage gains.  With costs of production growing faster than product prices, the profit rate begins to decline.

For a time, the growth in sales more than compensates for lower profit margins and total profits continue to rise, but only for a time.  Eventually steadily declining profit margins will overwhelm slowing growth in sales and produce lower profits.  And when that happens, corporations lose enthusiasm for the expansion.  They cut back on production and investment, the effects of which ripple through the economy, leading to recession.

The Data

The following figure from the J.P. Morgan study shows movements in productivity and the profit margin with each point representing a two year average to smooth out trends.  The grey stripes denote periods of recession.  As noted above, the profit margin turns down one to three years before the start of a recession.  The recession, in turn, helps to create the conditions for a new upward movement in the profit rate.

us profit margin

As J.P. Morgan analysts explain:

Indeed, for the US, the turn down in the profit cycle weighs heavily in our estimate of rising recession risks.  The deeper historical experience of the US better highlights the linkage between productivity and corporate profitability. The latest downshift in US productivity suggests the disappointing profit outturns of late likely will not stabilize absent a pickup in productivity growth to an above-1% annualized pace, all else equal. While some acceleration is embedded in our forecast, recent experience suggests the risks are skewed to the downside.

As we can see, in the case of the current expansion, the profit margin is not just falling, it has now moved into negative territory.  Thus, although profits remain high [see figure below], the current decline into negative territory means that profits are now actually falling.  If past trends hold, it is only a matter of time before corporate responses push the US economy into recession.

profit share

When discussing the business cycle it is also important to add that we are not describing a regular pattern of ups and downs around an unchanging rate of growth.  Corporate responses to the conditions they face influence the pattern of future cycles.  For example, if corporations decide to respond to growing worker gains during an expansionary period by shifting production overseas, future recessions will likely be more painful and expansions weaker in terms of job creation and wages.  If fear of corporate flight leads governments to slash corporate taxes, public finances will suffer and so will support for needed investments in physical infrastructure and social services, again boosting profits but at the expense of the longer term health of the economy and its majority population.  This dynamic helps to explain the growing tendency towards long term stagnation coupled with minimal wage gains even during expansions.

J.P. Morgan analysts are not just pessimistic about the US.  They also estimate that profit margins are falling throughout the world, as illustrated in the figure below.

global profit margins

Thus:

If the US experience is any guide, recession risks are elevated broadly. Globally, profit margins peaked near the end of 2013, and declines have occurred across nearly all countries with the exception of Taiwan, Korea, and South Africa [figure above]. Margins have been stable in the Euro area, Japan, and China. By comparison to the huge declines in some countries, the margin compression in the US appears relatively modest. Not surprisingly, Brazil—already in its worst recession since the Great Depression—has seen the most significant margin compression. A similar message is seen for Russia. But for those economies still in expansion, the fall in margin is the most concerning for Poland, the UK, the Czech Republic, Thailand, Australia, Turkey, and India, in order of largest margin declines.

The takeaway: we have plenty to worry about.

Brexit and Grexit

With all the talk of Brexit it is easy to forget about Greece and the terrible cost that county continues to pay for its Eurozone membership.  [For more on the Greek crisis and political responses to it see my article The Pitfalls and Possibilities of Socialist Transformation: The Case of Greece.]  Unfortunately, the UK vote to leave the European Union has done nothing to encourage EU leaders to modify their view that the economically weaker European country governments must continue to impose austerity on their respective populations.

Matthew C Klein, in a Financial Times blog post, illustrates what EU-imposed austerity has meant for Greece.  As he comments, “The collapse of the Greek economy is almost without precedent.”

As we see in the figure below, real household consumption has fallen 27 percent since its peak.  Consumption only fell by 6 percent during the period of the global financial crisis.

Greece-real-HH-consumption-590x290

As a result of mass unemployment, wage cuts, and tax increases, Greek disposable household income has fallen even more.  The collapse in consumption was “moderated” only by massive dissaving.  From 2006 to 2009 the personal savings rate averaged 6 percent.  In 2015, Klein reports, it was -6 percent.

Since mid-2011, Greek households have suffered a €19 billion decline in savings.  This includes, as shown in the next figure, a decline of €36 billion in household deposits and cash, including deposits in non-Greek banks and foreign currency.  One has to wonder how many Greeks have already run out of savings.

Greece-HH-deposits-by-type-590x303


Greek spending on housing and consumer durables, what Klein calls household investment, has fallen from about one-fifth of disposable income in 2007 to just 2 percent in 2015.  This spending is too low to offset depreciation. “After accounting for wear and tear, Greek household spending on housing, cars, etc is now running at a rate of -5 per cent of household incomes.”

Greece-HH-net-investment-rate-590x303
Greek business has also been disinvesting.  And until recently so was the government.  “The combined effect [of household, business and government disinvestment] is Greece’s capital stock has been shrinking by about 6 to 7 per cent of output since 2012.”

Greece-disinvestment1-590x301

According to Sharmini Peries, the executive producer of The Real News Network:

With the Brexit vote clinched by those who voted to leave the E.U., the possibility of a Grexit has reemerged in the minds of some. Greece has far more reason to leave the E.U. than the U.K. In a recent survey done by Pew Research, E.U.’s favorability has dropped by double digits in the continent. In Greece more than any other E.U. country, 71 percent of those who took part in the survey said that they had unfavorable views of the E.U.–far higher than the U.K. Further, more than 90 percent disapprove the way in which the E.U. has handled economic issues and the migrant crisis, where the Greeks bear the brunt of that burden.

So, how has the EU responded to the UK vote and Greece’s continuing economic unraveling?

In the words of Dimitri Lascaris, who Peries interviewed for perspective on the impact of Brexit on Grexit:

Well, I think the Greeks would be wildly supportive of anything that results in a relaxation of the austerity policies. As we’ve seen, however, the electorate of the Greek will has virtually no impact on policymaking in the E.U. That was demonstrated in rather brutal fashion in July of last year after over 60 percent of Greeks rejected a less severe austerity program than was ultimately imposed on them.

So it’s interesting, it’s very instructive to look at how the E.U. elite has reacted to the Brexit vote, in particular in the context of Portugal, because Portugal late last year elected a government, a socialist minority government, that appears to have some level of support from leftist parties and the Greens, enough to maintain power for the time being. And initially that party said that they were going to roll back the severe austerity that had been imposed on Portugal. And Portugal is widely viewed as being the country that is most at risk after Greece in the eurozone because of the debt and austerity and the rest of it.

So what happened with the last 48 hours, well after the E.U. elite in the IMF had time to digest the results in Britain? The IMF issued a statement urging the Portuguese government to redouble its commitment to austerity. And Wolfgang Wolfgang Schäuble, the finance minister of Germany, caused quite an uproar when he told the press in the last couple of days that if Portugal didn’t stick by the austerity dictates of the current bailout, it would be forced to come hat-in-hand to the E.U. to beg for yet another bailout. And that caused quite a bit of outrage in Portugal.

So at this stage there’s absolutely no indication, as far as I can see, that the E.U. elite has learned any lessons from the Greek referendum in July of last year or the Brexit vote, both of which were certainly, at least to some degree–this isn’t the whole story, I think, but to some degree they were an expression of discontent with the economic policies of the E.U. and with the fundamentally antidemocratic character of the E.U. So at this stage there’s little reason to believe that the E.U. elite is going to draw the lessons that ought to be drawn from these two votes.

Of course, it is also possible that the EU elite have correctly understood the political moment.  After all, imposed austerity policies have enabled them to shift much of the costs of the recent crisis and ongoing economic stagnation onto working people in Europe’s so-called periphery and blunt potential political challenges to existing European relations of power.  Human suffering doesn’t appear to figure prominently in their calculations.

Support For Taxing The Rich Growing

For years now the wealthy and their media have hammered on the need for lower taxes on their income, arguing that this would encourage investment, job creation, and growth.  The tax burden on the wealthy has indeed been lowered in one way or the other, but only the wealthy have benefited.  In particular, our public sector and the activities it supports—public infrastructure, education, health care and human services, etc.—have suffered.

Apparently, people are starting to draw the right lesson from this experience.  As the Washington Post reports:

The results from the Public Religion Research Institute and the Brookings Institution [survey] show that 54 percent of Republicans support increasing taxes on those with incomes over $250,000 a year, an increase of 18 percentage points since the last presidential election in 2012. Among Americans as a whole, 69 percent support an increase.

While the change in opinion was greatest for Republicans, as the figure below shows the survey also found increased support for greater taxes on the rich among both Democrats and Independents.  The fact that this support began spiking early in the year suggests that the change is tied to the election process, although it is unclear whether the campaigns are driving the growing support for higher taxes on the wealthy or people are just taking advantage of the process to express their desire for change.

tax increase

Regardless of cause, this is a hopeful development for progressive movement building.

The IMF’s Skewed Forecasts

The IMF, eager to defend the status quo, has consistently and incorrectly predicted recovery for the post-Great Recession world economy.

The figure below highlights the overly optimistic forecasting bias of recent IMF growth projections.  For example, the green line represents the September 2011 IMF forecast for future world GDP growth.  In each case illustrated, the IMF forecast is for a significant boost in future world GDP growth. And in each case not only did that boost not materialize, growth actually declined.

imf_growth

Sadly, it does not appear that this dismal forecasting record has led the IMF to engage in any meaningful reconsideration of their modeling assumptions.

The 1% Disproportionately Benefit From US Expansions

A new study of the distribution of income by the Economic Policy Institute (EPI) highlights the enormous sway the top one percent of families (defined as tax paying units, either single adult or married couple) has over the US economy.  The authors found:

Between 2009 and 2013, the top 1 percent captured 85.1 percent of total income growth in the United States. Over this period, the average income of the top 1 percent grew 17.4 percent, about 25 times as much as the average income of the bottom 99 percent, which grew 0.7 percent.

In 24 states the top 1 percent captured at least half of all income growth between 2009 and 2013.

In 15 of those states the top 1 percent captured all income growth between 2009 and 2013. Those states were Connecticut, Florida, Georgia, Louisiana, Maryland, Mississippi, Missouri, Nevada, New Jersey, New York, North Carolina, South Carolina, Virginia, Washington, and Wyoming.

In the other nine states, the top 1 percent captured between 50.0 and 94.4 percent of all income growth. Those states were Arizona, California, Illinois, Kansas, Massachusetts, Michigan, Oregon, Pennsylvania, and Texas.

This development, where the top 1 percent captures almost all of the income gains during a period of economic expansion, has now become business as usual.  As the figure below shows, the top 1 percent has increased its share of income, expansion by expansion, starting in the late 1970s.

top income capture

Not a pretty picture—recessions bring losses to the great majority of working people and expansions bring gains only to those at the top.

Clearly, we need significant structural changes to achieve an economy that works for the majority.  Just as clearly, there is a powerful minority that has every reason to use its considerable power to block those changes.  Among other things, they actively use their wealth to influence candidate selection and elections and, by extension, our national and state economic policies.

campaigns

And, perhaps even more importantly, they use their control over media to try and convince us that the existing system is a fair and just one.