Reports from the Economic Front

a blog by Marty Hart-Landsberg

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.

Third World Countries Lose Ground

Globalization advocates celebrated the 2003-08 period, pointing to the rapid rate of growth of many third world countries as proof of capitalism’s superiority as an engine of development.  Overlooked in the celebration was that fact that growth and development are not the same thing, and in most countries the benefits of growth were only enjoyed by a small minority.  Also overlooked was the fact that this growth was achieved at the cost of ever increasing damage to the health of our planet.  Finally, these cheerleaders also minimized the unbalanced, unstable, and unsustainable nature of the growth process; some seven years after the end of the Great Recession most countries continue to struggle with stagnation, with working people disproportionately suffering the social consequences.

The following figures, taken from the World Bank’s latest annual Global Economic Prospects report, highlight the severity of the post-crisis growth slowdown.

Figures 1 and 2 illustrate the extent of the growth slowdown.   Emerging Market and Developing Economy (EMDE) commodity exporters have suffered the worst declines.  In terms of region, EMDEs in Europe and Central Asia and Latin America and the Caribbean recorded the lowest rates of growth.  Sub Saharan African countries experienced one of the sharpest declines in growth relative to the 2003-08 period.

Figure 1: Gowth By Group

Growth by group

 

Figure 2: Regional Growth EMDEs (weighted average)

regional growth weighted

This ratcheting down of EMDE growth rates means a significant setback in progress towards achieving advanced economy levels as shown in Figure 3 A and B.

Figure 3: Catch-Up of EMDE Income To Advanced Economies

catch up

The Financial Times discusses the significance of this development:

That downgrade [in world growth] came alongside a new analysis showing that for the first time since the turn of the century a majority of emerging and developing economies were no longer closing the income gap with the US and other rich countries.

Last year just 47 per cent of 114 developing economies tracked by the bank were catching up with US per capita gross domestic product, below 50 per cent for the first time since 2000 and down from 83 per cent of that same sample in 2007 as the global financial crisis took hold.

That, the bank’s economists warned, would have a meaningful impact on the future people in those countries could expect.

“Whereas, pre-crisis, the average [emerging market] could expect to reach advanced country income levels within a generation, the low growth of recent years has extended this catch-up period by several decades,” they wrote.

Leading International Monetary Fund officials have warned in recent months that the so-called process of “economic convergence” had slowed to two-thirds of its pre-crisis rate. But the warning from the bank paints an even starker picture.

In the five years before the 2008 financial crisis, emerging markets could expect to take an average of 42.3 years to catch up with US per capita GDP, according to the bank’s analysis.

But over the past three years, as major emerging economies such as Brazil, Russia and South Africa have slowed or fallen into recession, the slower average growth means the number of years it would take to catch up with the US has grown to 67.7 years.

For frontier markets, those more fragile economies further down the development scale, such as Nigeria, the catch-up period more than doubled from 43.1 years to 109.7 years.

And, it is important to add, even these projections are likely optimistic.  The IMF and World Bank have repeatedly overestimated future rates of growth and tend to downplay the possibilities of yet another global crisis.

Corporations On The Move

While the fate of the Transpacific Partnership agreement remains uncertain, one thing is clear: Vietnam’s embrace of the agreement has singled transnational corporations that the country is open for business.  And with labor militancy growing in the Asian region, especially in China, South Korea, Indonesia, and Thailand, transnational corporations appear eager to shift operations to that country.

An article in the South Korean newspaper, the Hankyoreh, highlighted the findings of a recent report by the Korea Trade-Investment Promotion Agency (KOTRA) titled: “Changes in the International Trade Environment and Global Production Bases.”

The report looked at 31 cases involving 27 major transnational corporations that had either invested in China, Vietnam, Indonesia, Thailand, Malaysia, or Mexico in the preceding two years or had announced plans to do so.  According to the Hankyoreh, the report found that:

15 of the companies – accounting for nearly half of the cases – had either relocated their production bases to Vietnam or were planning to. With just one company planning to exit Vietnam, the data mean a net influx of 14 companies.

Meanwhile, signs pointed to a production base exodus from the “world’s factory” in China, with a negative net influx of eight companies (three entries, eleven departures).

The most commonly cited reason for relocating was to take advantage of trade agreements, which was mentioned in 23 cases. Changes in the business environment were cited in 12 cases.  Among business environment changes, the most frequently mentioned was “to cut personnel costs,” which was cited in nine cases.

Such moves put new pressures on Asian governments to intensify their respective efforts to slash wages, weaken labor protections, and cut taxes.  Whether they can succeed is another matter.

For example, working conditions are already terrible in many Chinese export factories—see here for a recent report on living and working conditions at a factory outside Shanghai where workers assembled Apple products.

Moreover, strikes and workplace actions are on the rise as Chinese workers grow increasingly militant in the face of worsening economic conditions.  In fact, the China Labor Bulletin reported a doubling of strikes in 2015 compared to the previous year.

As the Wall Street Journal explained in an article titled “China’s Workers Are Fighting Back as Economic Dream Fades“:

Factory employment in China has fallen for 25 months, according to a business-sentiment index released by Caixin, a Chinese magazine. China’s labor ministry says it expects employment to remain stable near term but says the impact of China’s slowdown and restructuring can’t be ignored. . . .

Chinese researchers and business executives say chances are rising that the Communist government may face the kind of social unrest that it has long feared. Chinese authorities recently detained and interrogated over a dozen labor activists, mainly in Guangdong.

“They definitely see protests as threatening social security, and are concerned,” says Anita Chan, a visiting fellow with the Political and Social Change Department of Australian National University.

The KOTRA report demonstrates that transnational corporations remain committed to their strategy of using mobility (or the threat of it) to force down production costs despite the fact that this strategy will only intensify global stagnation tendencies.  Hopefully, the pressures generated by capitalist globalization will strengthen worker organizing and encourage the building of cross-border solidarity and demands for greater control over corporate investment and production decisions.

Patterns Of Globalization

Capitalism is a dynamic system and so is its globalization process.  In its contemporary form, capitalist globalization has been shaped by the efforts of transnational corporations to establish and extend cross border production networks or global value chains (GVCs) which, in the words of the Asian Development Bank, involve “dividing the production of goods and services into linked stages of production scattered across international borders.  While such exchange of inputs is as old as trade itself, rapid growth in the extent and complexity of GVCs since the late 1980s is unprecedented.”

Asia, in particular Northeast and Southeast Asia, is the region that has been most transformed by the establishment of these cross border production networks.  Japanese transnational corporations began the process with their investment in several Southeast Asian countries.  This move eventually forced Korean and Taiwanese corporations into adopting a similar strategy.   The process kicked into high gear in the mid to late 1990s, once China opened up to foreign investment and embraced an export-led growth strategy.  European corporations have established their own regional GVCs with investment in several of the European Union’s new member countries.  And US corporations took advantage of NAFTA to build their own regional networks.  Still, thanks to China’s extensive built infrastructure and sizeable low wage work force, European and North American transnational corporations have also invested heavily in that country, thereby securing Asia’s status as the premier location for the production and export of manufactures.

The Development of Cross Border Production Networks

The economist Prema-chandra Athukorala charts the development and significance of this new corporate strategy using trade data to isolate the trade in parts and components and final assembly within global production networks.  (See Prema-chandra Athukorala, Southeast Asian Countries in Global Production Networks in Bruno Jetin and Mia Mikic, editors, ASEAN Economic Community, A Model for Asia-wide Regional Integration?)  One consequence: the share of developed countries in total world manufacturing exports fell from 77.9 percent to 61.8 percent over the period 1992-3 to 2011-12.  The share of total world manufacturing exports produced by developing East Asian countries (DEA—East Asia without Japan) rose from 18.4 percent to 32.5 percent over the same period.  In 2011-12, DEA countries accounted for 85.1 percent of all third world exports of manufacturers.

The developed country share of network produced exports of manufactures also fell, from 78 percent in 1992-93 to 49.7 percent in 2011-12. The DEA share of network produced exports of manufactures greatly increased over the same period, from 18.8 percent to 43.8 percent, which means that DEA countries account for more than 87 percent of all third world network activity.

DEA countries, with few exceptions, are now largely producers of parts and components, which are traded multiple times within the region, before the final assembly of the product, more often than not in China, and its eventual export outside the region.  The DEA share of total world final assembly activity rose from 22.5 percent 50.9 percent over the period 1992-93 to 2011-12.  China alone accounted for 25.6 percent of all final assembly work done within networks in 2011-12, up from 1.9 percent in 1992-93.

As the table below shows, parts and components accounted for more than half of all DEA intra-regional manufacturing trade in 2006-2007.  In contrast, the share was only 28.8 percent for intra-Nafta trade and 22 percent for intra-EU15 trade.  One can see China’s special role as final assembly hub for the region:  China’s imports from DEA countries, especially members of ASEAN, are overwhelmingly parts and components.  For example, 74 percent of China’s imports from ASEAN countries are parts and components.  China’s exports to the region, and especially outside the region, include a relatively low share of parts and components.

trade

Source: Prema-Chandra Athukorala and Archanun Kolpaiboon, Intra-Regional Trade in East Asia, in Masahiro Kawai, Mario B. Lamberte, and Yung Chul Park, editors, The Global Financial Crisis and Asia, Implications and Challenges.

 

The Asian Development Bank promotes an alternative methodology to measure the growth of cross-border production activity.  As explained in the Asian Development Outlook 2014 Update, the OECD–WTO Trade in Value-Added (TiVA) database, which combines national input-output tables with trade flows for 57 economies and 18 industries, is used to:

segregate gross exports into three parts: (i) foreign value added that is used to produce economy X’s exports (GVC-B), (ii) domestic value added that is used by a destination economy to produce its exports (GVC-F), and (iii) domestic value added that is consumed in the destination economy. The first two parts identify the two distinct ways that an economy’s trade can integrate into GVCs. GVC-B is economy X’s backward linkage into GVCs, using imported inputs to produce its exports. GVC-F is its forward linkage into GVCs, producing and exporting intermediate goods that are subsequently used in the production of other economies’ exports. Adding the two together provides a measure of total GVC participation.

This can be expressed relative to total trade, which includes an economy’s regular value-added trade that is not part of GVCs and its value added for domestic consumption. A participation value of 50%, for example, means that half of a nation’s trade is comprised of either forward or backward GVC linkages.

Researchers found that the share of GVC trade (GVC-B + GVC-F) in total manufacturing exports from the countries included in the TiVA data base rose from 36.9 percent to 48 percent over the period 1995 to 2008.  Thus, by the late 2000s, approximately half of all manufacturing exports were produced within cross border production networks.

Network operations in Asia tend to be far more complex than those in Europe or North America.  In the words of one economist quoted approvingly by the Asian Development Bank:

what makes Asia’s production networks stand out is their intricate open-loop web of transactions within and between firms that span a number of economies and continents. Figure 2.2.1 shows in the left-hand panel production sharing between the US and Mexico, which tends to display a comparably simple structure of closed-loop, back-and-forth transactions. To illustrate, a US firm’s headquarters may send components to its Mexican factory and have final products shipped back to it to sell in the US market. European GVCs have a similar structure. By contrast, the right-hand panel shows a somewhat simplified rendering of the more complex Asian model, with reference to the production and distribution networks of a Japanese manufacturer in the electronics industry, which extends all over East Asia and the US.

organization

As we see in the table below, transnational corporate organized activity in Asia, especially in East Asia, has been the driving force behind the expansion of GVC trade.  The GVC trade share of world manufacturing exports produced in Asia almost doubled, from 8.55 percent in 1995 to 16.20 percent in 2008; the East Asian share more than doubled.  The European share, although higher, remained largely unchanged.

new asia

Transnational capital’s strategic embrace of Asia has had serious consequences for the region’s economies.  Their growth has become more dependent on the production of exports.  And their exports have increasingly narrowed to parts and components.  And their trade patterns have been forced in line with network needs, which means that a growing share of regional economic activity is directed at satisfying extra-regional demand.  For example, as the table below shows, Taiwan’s participation rate, or the share of its exports produced within network structures, rose from less than 50 percent in 1995 to over 70 percent in 2008.   Korea has also had a significant increase in its participation.

new participation

 

The Asian Development Bank also expanded their study of GVCs to include services and commodities as well as manufacturing.  The figures below:

depict the geographic orientation of GVCs and how they are increasing connected. Three main hubs—the US, Germany, and the PRC—occupy the center of a tightly knit web of value-added transfers, mainly among regional economies engaged in split production processes. The US is at the center of the GVCs both as the largest exporter of goods and services measured in gross terms and as the main exporter of value added to the exports of other economies. Germany and the PRC follow in rank in terms of gross and value-added exports. Compared with the US, these economies are positioned further downstream in the GVCs and are involved in a substantial share of value-added inflows and outflows.

In the European regional network, horizontal integration prevails, with value added to goods flowing in both directions between pairs of countries. Asian production networks are more hierarchical. At the top, Japan and the US inject value by providing key components and services directly to the PRC, which is the downstream hub. Malaysia, Thailand, and some other Southeast Asian economies, as well as India, also supply components to the PRC that often embody valued added by the US and other industrial economies. Other key players right at the center of the regional networks are the Republic of Korea, Singapore, and Taipei, China—each economy exporting high shares of foreign value added that reflect their strong GVC involvement.

The time progression panels in [the figures below] show that GVCs have expanded rapidly and grown more complex since 1995. By 2005, the PRC had overtaken Japan as the center of the Asian regional production network. GVC expansion reached a peak in 2008. This was because the global economic crisis slowed consumption in 2009, causing the temporary collapse of international trade that year and curtailing the trade flows associated with GVCs.

expanding 1

expanding 2

expanding 3

expanding 4

Winners and Losers

The work cited above demonstrates the growing web of transnational corporate shaped production and trade.  Most economists see the expansion of GVCs is a boon to development, in that it allows a finer and more efficient comparative advantage to shape global economic activity.  It certainly has been a boon to transnational capital.

For example, the Asian Development Bank cites a study that attempts to break down the winners and losers from the expansion of global value chains.   It concludes that:

From 1995 to 2008, capital’s share of value added in GVCs rose from 40.9% to 47.4% while the share of low- and medium-skilled labor fell from 45.3% to 37.2%. Second, emerging economies increasingly focus on capital-intensive activities. The Republic of Korea saw its low- and medium-skilled labor share fall by 17.1% (as its capital income share rose by 9.3%), the PRC by 11.4% (capital income share up by 9.3%), India by 7.6% (4.5%), and Indonesia by 6.8% (5.3%).

These results are not surprising given that this new corporate strategy was designed to increase corporate mobility and by extension corporate power over labor.  As a consequence national governments find themselves engaged in competition to secure ever narrower segments of corporate production networks, which by their nature can never be made secure.  And they compete by offering up their workers.  Thus, we see ongoing state efforts throughout Asia and elsewhere to weaken labor rights and organization.

Moreover, as I and others have argued, contemporary capitalist globalization dynamics contained a serious contradiction, one that led to mounting global imbalances and instabilities and eventually our current problems of economic stagnation. In the pursuit of profit, transnational corporations promoted an East Asian–centered production system designed to export to core countries, especially the United States, that simultaneously undermind the overall purchasing power of core country consumers, including those in the United States. This contradiction was masked for approximately a decade because of the rise of speculative bubbles in the United States. Those bubbles finally burst and the economies of the US, Japan, and Europe now suffer from stagnation.  This, in turn, has left an export-driven Asia, Latin America, Africa, and Middle East in an increasingly precarious position.

Unfortunately, given the deep structural roots of capitalist globalization in the workings of national economies, there is no way working people will be able to meaningfully improve their living and working conditions without challenging and transforming existing patterns of international production and consumption.  The growing movement against newly proposed trade agreements is a small step in the right direction.

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