Magical Bootstraps And The Struggles Of Working Americans

A recession is coming, sooner or later.  Once it hits, we can expect articles bemoaning the fact that working people didn’t build-up their savings during this record expansion to help them through the hard times.  If only they had pinched pennies here and there, skipped a new TV or smart phone, they could have generated some capital that could have been invested . . . Ah the missed opportunities.

Of course, the reality is quite different.  One reason is that the current so-called good times have not been very good for working people.  For example, as Jonathan Spicer points out, “the rise in median expenditures has outpaced before-tax income for the lower 40 percent of earners in the five years to mid-2017 while the upper half has increased its financial cushion, deepening income disparities.” In other words, a significant percentage of workers have had to run down their savings or borrow to survive; wealth accumulation has been out of the question.

The bootstrap theory of success

The notion that under capitalism each individual has the ability, without outside help, to “pull themselves up by their bootstraps,” has a powerful hold on popular consciousness.  And, its message of self-reliance and individual responsibility serves capitalist interests well by deflecting attention away from the systemic causes of current economic problems.

The irony is that the phrase itself originally referred to something that was physically impossible to achieve.  As Caroline Bologna explains:

The concept is simple: To pull yourself up by your bootstraps means to succeed or elevate yourself without any outside help.

But when you examine this expression and its current meaning, it doesn’t seem to make much sense.

To pull yourself up by your bootstraps is actually physically impossible. In fact, the original meaning of the phrase was more along the lines of “to try to do something completely absurd.”

Etymologist Barry Popik and linguist and lexicographer Ben Zimmer have cited an American newspaper snippet from Sept. 30, 1834 as the earliest published reference to lifting oneself up by one’s bootstraps. A month earlier, a man named Nimrod Murphree announced in the Nashville Banner that he had “discovered perpetual motion.” The Mobile Advertiser picked up this tidbit and published it with a snarky response ridiculing his claim: “Probably Mr. Murphree has succeeded in handing himself over the Cumberland river, or a barn yard fence, by the straps of his boots.”

“Bootstraps were a typical feature of boots that you could pull on in the act of putting your boots on, but of course bootstraps wouldn’t actually help you pull yourself over anything,” Zimmer told HuffPost. “If you pulled on them, it would be physically impossible to get yourself over a fence. The original imagery was something very ludicrous, as opposed to what we mean by it today of being a self-made man.” . . .

Beyond the Murphree example, versions of the phrase appeared in many published texts to describe something ridiculous. Popik has documented several of these examples on his blog.

Leaving aside questions about why the phrase “pulling oneself up by their bootstraps” is no longer used as a way to dismiss an impossibility or absurdity, its original meaning captures capitalist realities far better than does is its current meaning.  Quite simply, there are no magical bootstraps that enable working people to “pull themselves up” to economic security and well-being by dint of their own hard work.  The problem is that far too many Americans still believe in their existence and thus blame themselves for their economic situation.

The struggles of working Americans

In a Reuters article, Jonathan Spicer illustrates the fact that “behind the headlines of roaring job growth and consumer spending . . . the boom continues in large part by the poorer half of Americans fleecing their savings and piling up debt.”

The figure below shows the median income for each of five groups of Americans based on their before-tax income.

The next figure shows, for 2017, the difference between expenses and pre-tax income for each of the five groups.  As one can see, expenses (red circle) outstrip income (blue circle) for the bottom two groups or 40 percent of the population.  Those in the third group are barely keeping their heads above water.

The last figure below shows that 2017 was no aberration.  Despite the longest expansion in post-war US history, most Americans are struggling to meet expenses.  As Spicer comments, “lower-earners have been sinking deeper into red over the last five years.”

It is no wonder that the Federal Reserve, in its Report on the Economic Well-Being of US Households in 2017, found that forty percent of American adults don’t have enough savings to cover a $400 emergency expense such as an unexpected medical bill, car problem or home repair.

One important reason for these depressing trends is that there has been little growth in wages.   And as Jared Bernstein explains in the New York Times, that outcome is largely due to the exercise of class power:

The United States labor market is closing in on full employment in an economic expansion that just began its 10th year, and yet the real hourly wage for the working class has been essentially flat for two years running. Why is that?

Economists ask this question every month when the government reports labor statistics. We repeatedly get solid job growth and lower unemployment, but not much to show for wages. Part of that has to do with inflation, productivity and remaining slack in the labor market.

But stagnant wages for factory workers and non-managers in the service sector — together they represent 82 percent of the labor force — is mainly the outcome of a long power struggle that workers are losing. Even at a time of low unemployment, their bargaining power is feeble, the weakest I’ve seen in decades. Hostile institutions — the Trump administration, the courts, the corporate sector — are limiting their avenues for demanding higher pay.

It matters how Americans understand their situation and the broader dynamics that shape it.  Challenging the ideology that misleads popular understandings, and that includes fanciful notions of what pulling on bootstraps can accomplish, is an important part of the movement building process needed to achieve any meaningful social change.

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US Militarism Marches On

Republicans and Democrats like to claim that they are on opposite sides of important issues.  Of course, depending on which way the wind blows, they sometimes change sides, like over support for free trade and federal deficits.  Tragically, however, there is no division when it comes to militarism.

For example, the federal budget for fiscal year 2018 (which ends on September 30, 2018), included more money for the military than even President Trump requested.  Trump had asked for a military budget of $603 billion, a sizeable $25 billion increase over fiscal year 2017 levels; Congress approved $629 billion.  Trump had also asked for $65 billion to finance current war fighting, a bump of $5 billion; Congress approved $71 billion.  The National Defense Authorization Act of 2018, which set the target budget for the Department of Defense at this high level, was approved by the Senate in a September 2017 vote of 89-9.

In the words of the New York Times: “In a rare act of bipartisanship on Capitol Hill, the Senate passed a $700 billion defense policy bill . . . that sets forth a muscular vision of America as a global power, with a Pentagon budget that far exceeds what President Trump has asked for.”

That Act also called for a further increase in military spending of $16 billion for fiscal year 2019 (which begins October 1, 2018).  And, in June 2018, the Senate voted 85 to 10 to authorize that increase, boosting the Defense Department’s fiscal year 2019 total to $716 billion.

This bipartisan embrace of militarism comes at enormous cost for working people.  This cost includes cuts in funding for public housing, health care and education; the rebuilding of our infrastructure; basic research and development; and efforts to mitigate climate change.  It also includes the militarization of our police, since the military happily transfers its excess or outdated equipment to willing local police departments.

And it also includes a belligerent foreign policy.  A case in point: Congress has made clear its opposition to the Trump administration decision to meet with North Korean leader Kim Jong-un and halt war games directed against North Korea, apparently preferring the possibility of a new Korean War.  Congress is also trying to pass a law that will restrict the ability of the President to reduce the number of US troops stationed in South Korea.

In brief, the US military industrial complex, including the bipartisan consensus which helps to promote militarism’s popular legitimacy, is one of the most important and powerful foes we must overcome if we are to seriously tackle our ever-growing social, economic, and ecological problems.

The military is everywhere

The US has approximately 800 formal military bases in 80 countries, with 135,000 soldiers stationed around the globe.  Putting this in perspective, Alice Slater reports that:

only 11 other countries have bases in foreign countries, some 70 altogether. Russia has an estimated 26 to 40 in nine countries, mostly former Soviet Republics, as well as in Syria and Vietnam; the UK, France, and Turkey have four to 10 bases each; and an estimated one to three foreign bases are occupied by India, China, Japan, South Korea, Germany, Italy, and the Netherlands.

US special forces are deployed in even more countries.  According to Nick Turse, as of 2015, these forces were operating in 135 countries, an 80 percent increase over the previous five years.  “That’s roughly 70 percent of the countries on the planet. Every day, in fact, America’s most elite troops are carrying out missions in 80 to 90 nations practicing night raids or sometimes conducting them for real, engaging in sniper training or sometimes actually gunning down enemies from afar.”

This widespread geographic deployment represents not only an aggressive projection of US elite interests, it also provides a convenient rationale for those that want to keep the money flowing.  The military, and those that support its funding, always complain that the military needs more funds to carry out its mission.  Of course, the additional funds enable the military to expand the reach of its operations, thereby justifying another demand for yet more money.

The US military is well funded 

It is no simple matter to estimate of how much we spend on military related activities.  The base military budget is the starting point.  It represents the amount of the discretionary federal budget that is allocated to the Department of Defense.  Then there is the overseas contingency operations fund, which is a separate pool of money sitting outside any budgetary restrictions, that the military receives yearly from the Congress to cover the costs of its ongoing warfare.

It is the combination of the two that most analysts cite when talking about the size of the military budget. Using this combined measure, the Stockholm International Peace Research Institute finds that the United States spends more on its military than the next seven largest military spenders combined, which are China, Russia, Saudi Arabia, India, France, the UK, and Japan.

As the following chart shows, US military spending (base budget plus overseas contingency operations fund), adjusted for inflation, has been on the rise for some time, and is now higher than at any time other than during the height of the Iraq war.  Jeff Stein, writing in the Washington Post, reports that the military’s base budget will likely be “the biggest in recent American history since at least the 1970s, adjusting for inflation.”

As big as it is, the above measure of military spending grossly understates the total.  As JP Sottile explains:

The Project on Government Oversight (POGO) tabulated all “defense-related spending” for both 2017 and 2018, and it hit nearly $1.1 trillion for each of the two years. The “defense-related” part is important because the annual National Defense Authorization Act, a.k.a. the defense budget, doesn’t fully account for all the various forms of national security spending that gets peppered around a half-dozen agencies.

William Hartung, an expert on military spending, went agency by agency to expose all the various military-related expenses that are hidden in different parts of the budget.  As he points out:

You might think that the most powerful weapons in the U.S. arsenal — nuclear warheads — would be paid for out of the Pentagon budget.   And you would, of course, be wrong.  The cost of researching, developing, maintaining, and “modernizing” the American arsenal of 6,800 nuclear warheads falls to an obscure agency located inside the Department of Energy, the National Nuclear Security Administration, or NNSA. It also works on naval nuclear reactors, pays for the environmental cleanup of nuclear weapons facilities, and funds the nation’s three nuclear weapons laboratories, at a total annual cost of more than $20 billion per year.

Hartung’s grand total, which includes, among other things, the costs of Homeland Security, foreign military aid, intelligence services, the Veterans Administration, and the interest on the debt generated by past spending on the military, is $1.09 trillion, roughly the same as the POGO total cited above.  In short, our political leaders are far from forthcoming about the true size of our military spending.

Adding insult to injury, the military cannot account for how it spends a significant share of the funds it is given.  A Reuters’ article by Scott Paltrow tells the story:

The United States Army’s finances are so jumbled it had to make trillions of dollars of improper accounting adjustments to create an illusion that its books are balanced.

The Defense Department’s Inspector General, in a June [2016] report, said the Army made $2.8 trillion in wrongful adjustments to accounting entries in one quarter alone in 2015, and $6.5 trillion for the year. Yet the Army lacked receipts and invoices to support those numbers or simply made them up.

As a result, the Army’s financial statements for 2015 were “materially misstated,” the report concluded. The “forced” adjustments rendered the statements useless because “DoD and Army managers could not rely on the data in their accounting systems when making management and resource decisions.” . . .

The report affirms a 2013 Reuters series revealing how the Defense Department falsified accounting on a large scale as it scrambled to close its books. As a result, there has been no way to know how the Defense Department – far and away the biggest chunk of Congress’ annual budget – spends the public’s money.

The new report focused on the Army’s General Fund, the bigger of its two main accounts, with assets of $282.6 billion in 2015. The Army lost or didn’t keep required data, and much of the data it had was inaccurate, the IG said.

“Where is the money going? Nobody knows,” said Franklin Spinney, a retired military analyst for the Pentagon and critic of Defense Department planning. . . .

For years, the Inspector General – the Defense Department’s official auditor – has inserted a disclaimer on all military annual reports. The accounting is so unreliable that “the basic financial statements may have undetected misstatements that are both material and pervasive.”

Military spending is big for business

Almost half of the US military budget goes to private military contractors.  These military contracts are the lifeblood for many of the largest corporations in America.  Lockheed Martin and Boeing rank one and two on the list of companies that get the most money from the government.  In 2017 Lockheed Martin reported $51 billion in sales, with $35.2 billion coming from the government.  Boeing got $26.5 billion. The next three in line are Raytheon, General Dynamics, and Northrop Grumman.  These top five firms captured some $100 billion in Pentagon contracts in 2016.

And, as Hartung describes,

The Pentagon buys more than just weapons. Health care companies like Humana ($3.6 billion), United Health Group ($2.9 billion), and Health Net ($2.6 billion) cash in as well, and they’re joined by, among others, pharmaceutical companies like McKesson ($2.7 billion) and universities deeply involved in military-industrial complex research like MIT ($1 billion) and Johns Hopkins ($902 million).

Not surprisingly, given how lucrative these contracts are, private contractors work hard to ensure the generosity of Congress. In 2017, for example, 208 defense companies spent almost $100 million to deploy 728 reported lobbyists.  Lobbying is made far easier by the fact that more than 80 percent of top Pentagon officials have worked for the defense industry at some point in their careers, and many will go back to work in the defense industry.

Then there are arms sales to foreign governments. Lawrence Wittner cites a study by the Stockholm International Peace Research Institute that found that sales of weapons and military services by the world’s largest 100 corporate military suppliers totaled $375 billion in 2016. “U.S. corporations increased their share of that total to almost 58 percent, supplying weapons to at least 100 nations around the world.”

Eager to promote the arms industry, government officials work hard on their behalf.  As Hartung explains: From the president on his trips abroad to visit allied world leaders to the secretaries of state and defense to the staffs of U.S. embassies, American officials regularly act as salespeople for the arms firms.”

More for the military and less for everything else

The federal budget is divided into three categories: mandatory spending (primarily social security and medicare), discretionary spending, and interest on the debt. Two trends in discretionary spending, the component of the budget set each year at the discretion of Congress, offer a window on how militarism is squeezing out funding for programs that serve majority needs.

The first noteworthy trend is the growing Congressional support for defense (base military budget) over non-defense programs. In 2001, the majority of discretionary funds went to non-defense programs,  However, that soon changed, as we see in the chart below, thanks to the “war on terror.”  In the decade following September 11, 2001, military spending increased by 50 percent, while spending on every other government program increased by only 13.5 percent.

In the 2018 federal budget, 54 percent of discretionary funds are allocated to the military (narrowly defined), $700 billion to the military and $591 billion to non-military programs. The chart below shows President Trump’s discretionary budgetary request for fiscal year 2019. As we can see, the share of funds for the military would rise to 61 percent of the total.

According to the National Priorities Project, “President Trump’s proposals for future spending, if accepted by Congress, would ensure that, by 2023, the proportion of military spending [in the discretionary budget] would soar to 65 percent.”  Of course, militarism’s actual share is much greater, since the military is being defined quite narrowly.  For example, Veterans’ Benefits is included in the non-defense category.

The second revealing trend is the decline in non-defense discretionary spending relative to GDP.  Thus, not only is the military base budget growing more rapidly than the budget for nondefense programs, spending on discretionary non-defense programs is not even keeping up with the growth in the economy.  This trend translates into a declining public capacity to support research and development and infrastructure modernization, as well as meet growing needs for housing, education, health and safety, disaster response . . . the list is long.

The 2018 bipartisan budget deal increased discretionary spending for both defense and non-defense programs, but the deal did little to reverse this long run decline in non-defense discretionary spending relative to the size of the economy.  A Progressive Policy Institute blog post by Ben Ritz explains:

The Budget Control Act of 2011 (BCA) capped both categories of discretionary spending as part of a broader effort to reduce future deficits. When Congress failed to reach a bipartisan agreement on taxes and other categories of federal spending, the BCA automatically triggered an even deeper, across-the-board cut to discretionary spending known as sequestration. While the sequester has been lifted several times since it first took effect, discretionary spending consistently remained far below the original BCA caps.

That trend ended with the Bipartisan Budget Act of 2018 (BBA). This budget deal not only lifted discretionary spending above sequester levels – it also went above and beyond the original BCA caps for two years. Nevertheless, projected domestic discretionary spending for Fiscal Year 2019 is significantly below the historical average as a percentage of gross domestic product. Moreover, even if policymakers extended these policy changes beyond the two years covered by the BBA, we project that domestic discretionary spending could fall to just 3 percent of GDP within the next decade – the lowest level in modern history [see dashed black line in chart below].

The story is similar for defense spending. Thanks to the pressure put on by the sequester, defense discretionary spending fell to just under 3.1 percent of GDP in FY2017. Under the BBA, defense spending would increase to 3.4 percent of GDP in FY2019 before falling again [see dashed black line in following chart]. Unlike domestic discretionary spending, however, defense would remain above the all-time low it reached before the 2001 terrorist attacks throughout the next decade.

In sum, Congress appears determined to squeeze non-defense programs, increasingly privileging defense over non-defense spending in the discretionary budget and allowing non-defense spending as a share of GDP to fall to record lows.  The ratio of discretionary defense spending relative to GDP appears to be stabilizing, although at levels below its long-term average.  However, discretionary defense spending refers only to the base budget of the Department of Defense and as such is a seriously understated measure of the costs of US militarism.  Including the growing costs of Homeland Security, foreign military aid, intelligence services, the Veterans Administration, the interest on the debt generated by past spending on the military, and the overseas contingency operations fund, would result in a far different picture, one that would leave no doubt about the government’s bipartisan commitment to militarism.

The challenge ahead

Fighting militarism is not easy.  Powerful political and business forces have made great strides in converting the United States into a society that celebrates violence, guns, and the military. The chart below highlights one measure of this success.  Sadly, 39 percent of Americans polled support increasing our national defense while 46 percent think it is just about right. Only 13 percent think it is stronger than it needs to be.

Polls, of course, just reveal individual responses at a moment in time to questions that, in isolation, often provide respondents with no meaningful context or alternatives and thus reveal little about people’s true thoughts.  At the same time, results like this show just how important it is for us to work to create space for community conversations that are informed by accurate information on the extent and aims of US militarism and its enormous political, social, economic, and ecological costs for the great majority of working people.

US Manufacturing Is Far From Healthy And The Main Reason Appears To Be Globalization

Public awareness and acceptance of the negative consequences of corporate-driven globalization on US workers has grown dramatically over the last years, aided in part by Donald Trump’s attacks on trade agreements like NAFTA.  Of course, Trump deliberately and misleadingly claims that US corporations have also suffered.  And, his tariff-raising actions are an ineffective response to worker difficulties.

Still, many economists continue to argue that the concern over trade is misplaced, that the US manufacturing sector is generally healthy, and it is technology, in particular automation, that is the main reason for the decline in US manufacturing employment.

A new paper by the economist Susan Houseman, “Understanding the Decline of US Manufacturing Employment,” is an effective rebuttal to their arguments. As she concludes: “The widespread denial of domestic manufacturing’s weakness and globalization’s role in its employment collapse has inhibited much-needed, informed debate over trade policies.”

What’s up with the manufacturing sector?  

Figure 1 shows that manufacturing employment remained roughly stable from the mid-1960s through the early 1980s, then began a slow decline until 2000, after which it fell dramatically.

Figure 2 compares the performance of the manufacturing sector–production and employment–with that of the private sector as a whole.  As we can see, the real GDP growth of the manufacturing sector has roughly matched the real GDP growth of the private sector (red and yellow lines; left scale).

Figure 2 also shows that manufacturing’s share of private sector GDP and employment has steadily fallen (green and blue-gray lines; right scale). Manufacturing’s share of private sector GDP peaked at 33 percent in 1953, falling to 13 percent in 2016.  Manufacturing’s share of private sector employment peaked at 35 percent, also in 1953, and fell to just under 10 percent in 2016.

Those who argue that our manufacturing sector remains healthy do so on the basis of the sector’s relatively strong growth record and the fact that it was achieved with ever fewer workers.  As Houseman comments:

many [research economists] have taken it as strong prima facie evidence that higher productivity growth in manufacturing—implicitly or explicitly assumed to reflect automation—has largely caused the relative and absolute declines of manufacturing employment. Even when some role for trade is recognized, it is deemed small, and the decline is taken as inevitable.

However, there is a bit of a puzzle here.  Figure 2 shows that manufacturing GDP growth has generally matched the GDP growth of the entire private sector at the same time that manufacturing’s share of private GDP has steadily fallen.  Houseman offers the solution to this puzzle: “If real GDP growth for manufacturing has kept pace with real GDP growth in the aggregate economy yet manufacturing’s share of private sector GDP is falling, then it must be the case that the average price growth of manufactured goods has been slower than the average price growth for the goods and services produced in the economy.”

In other words, a relatively slow growth in the price of manufactured goods would boost the real value of the goods produced.  At the same time, it would also cause a decline in the manufacturing sector’s share of total output.  And, an examination of price deflators shows just such price trends, with the overall price deflator for the private sector steadily rising and the price deflator for manufacturing remaining relatively constant in the post 1980 period.  Thus, the strong growth in manufacturing GDP and its related productivity/automation story rests heavily on the striking behavior of the manufacturing price deflator.

And therein lies the problem.  Houseman finds that the strong growth in real manufacturing GDP is driven by the price behavior of goods produced by a small subset of manufacturing, namely the computer industry (which she broadens to include semiconductors).  “Although the computer industry has accounted for less than 15 percent of value-added in manufacturing throughout the period, it has an outsized effect on measured real output and productivity growth in the sector, skewing these statistics and giving a misleading impression of the health of American manufacturing.”

Digging into the data 

Figure 4 shows price indices for private industry and manufacturing, omitting the computer industry, and for the computer industry alone. Without the computer industry, the price indices for private industry and manufacturing have largely tracked each other.  The computer industry price index, on the other hand, has marched to the beat of a far different drummer.

Figure 5 illustrates the importance of the above deflators to the debate about the health of the manufacturing sector.  Starting in the mid-1980s we see an ever-greater gap between the real GDP growth of manufacturing without the computer industry (blue-gray line) and the growth of real GDP in the private sector and manufacturing (including the computer industry).

More specifically, “From 1979 to 2000, measured real GDP growth in manufacturing was 97 percent of the average for the private sector; when the computer industry is dropped from both series, manufacturing’s real GDP growth rate is just 45 percent that of the private sector average.” Growth in the manufacturing sector, with the computer industry omitted, has been exceptionally slow over the years 2000 to 2016. Over that period, “real GDP growth in manufacturing was 63 percent of the average private sector growth. Omitting the computer industry from each series, manufacturing’s measured real output growth is near zero (about 0.2 percent per year) and just 12 percent of the average for the private sector in the 2000s.”

So, without the computer industry, manufacturing is clearly struggling.  But what explains the strong computer industry performance?  As we see next, there is also reason to believe that the computer industry’s performance, and thus its contribution to the manufacturing sector, is also seriously overstated, thereby further undermining claims of manufacturing’s health.

The computer industry

The real GDP of an industry is calculated by dividing the yearly dollar value of industry sales by its price deflator.  A real increase in output thus requires that industry sales grow faster than industry prices; if sales double and prices double there is no real gain.

Product quality changes slowly in most industries allowing rather straightforward year to year comparisons of dollar output.  However, the computer industry stands as an outlier; for years now, it has produced significantly more powerful products each year.  And, on top of that, it has even lowered their prices.

As a result of this unusual behavior, estimating the real growth of the computer industry requires a complicated adjustment of the industry’s price index to account for the yearly increase in computer power and speed.  In broad brush the adjustment is handled as follows: If a consumer buys a computer that has 20 percent more computing power than the previous year’s model, the government considers that every 100 new computers produced are the equivalent of 120 of the previous year’s model.  The result of such an adjustment is a significant increase in the industry’s output even if the same number of actual computers are produced, an increase that is further magnified by the decline in industry prices.

While it is entirely reasonable to adjust the computer industry’s output for quality when studying the performance of that industry, we have to be careful when the results are used in the calculation of manufacturing’s overall performance. In fact, the computer industry’s rapid gains, based on significant increases in output with declining employment, are misleading as a measure of actual manufacturing activity for two reasons: first, they owe more to difficult-to-measure quality improvements driven by research and development, and second, a growing share of computer industry production has been globalized which means that it takes place outside the country.

As Houseman says, “quality adjustment [for the computer industry] can make the numbers difficult to interpret. Because the computer industry, though small in dollar terms, skews the aggregate manufacturing statistics and has led to much confusion, figures that exclude this industry, as shown in Figure 5, provide a clearer picture of trends in manufacturing output.”  And as we can see those trends do not support the claims made that we have a healthy manufacturing sector.

The decline in manufacturing employment

Houseman similarly shows that productivity’s role in the decline in manufacturing employment has also been seriously overstated. As Figure 1, above, makes clear, the number of manufacturing workers has been falling for some time.

From 1979 to 1989 manufacturing lost 1.4 million jobs, with the losses concentrated in the primary metals and textile and apparel industries. “Employment in manufacturing was relatively stable in the 1990s. Although measured employment declined by about 700,000, or 4 percent, from 1989 to 2000, the net decline in jobs can be entirely explained by the [domestic] outsourcing of tasks previously done in-house. . . . Had these workers been counted in manufacturing, manufacturing employment would have risen by an estimated 1.3 percent rather than declining.”

As Figure 1 also shows, the explosive decline in manufacturing employment begins in the 2000s.  From 2000 to 2007, manufacturing employment fell by 3.4 million, or 20 percent. From 2007 to 2016, manufacturing fell by another 1.5 million.  And, of course, this was a period of intensified globalization, perhaps best marked by China’s 2001 entry into the WTO.

Examining the data, Houseman found that average annual employment growth in manufacturing was approximately 2.5 percent lower than the average employment growth in the private sector as a whole over the period 1977 to 2016.  Only 15 percent of that differential is accounted for by lower output growth in manufacturing, the rest is explained by higher productivity growth.  However, “When the computer industry is omitted from both series, 61 percent of the lower manufacturing employment growth is accounted for by manufacturing’s lower output growth, and just 39 percent by its higher labor productivity growth.”

As Housemen comments, “The point of this exercise is to show that there is no prima facie evidence that productivity growth is entirely or primarily responsible for the relative and absolute decline in manufacturing employment.”

And there is also reason to question the meaning of the strong computer industry productivity figures. Labor productivity is defined as the value-added of an industry divided by labor input.  In the case of the computer industry, the industry’s productivity growth was probably driven most by product improvements, not automation, that boosted its value added. However, global outsourcing of production also made a contribution. While outsourcing reduces the value added of the industry, the decline in labor input is far greater. Thus, it remains unclear how much productivity increases based on the automation of production have actually contributed to the decline in US manufacturing employment, even in the computer industry.

Most importantly, there is a growing body of research that points to globalization as the major factor behind the recent decline in US manufacturing employment.  For example, Economists David Autor, David Dorn and Gordon Hanson “conservatively estimate that Chinese import competition explains 16 percent of the U.S. manufacturing employment decline between 1990 and 2000, 26 percent of the decline between 2000 and 2007, and 21 percent of the decline over the full period.”  They also find that Chinese import competition “significantly reduces earnings in sectors outside manufacturing.”

In sum, there are good reasons for concern about the health of the US manufacturing sector and opposition to corporate-driven globalization strategies.

Ignore Their Threats, Tax The Rich

In most states in the United States, the rich have enjoyed ever lower rates of taxation while working people have suffered from inadequately funded public services.  Calls for an end to this situation are more often than not met with statements by state officials and the wealthy themselves that higher taxes on the rich will prove counterproductive; the rich will just move to lower-tax states.  In fact, research by the sociologist Christobal Young shows that this is largely an empty threat.  The rich rarely move to escape high taxes.

The threat

Oregon offers one example of this threat.  In 2009, the Oregon Legislature passed two measures (66 and 67) in an effort to boost funding for education, health and public safety.  Measure 66 would raise taxes on high income Oregonians—couples earning over $250,000 a year and individuals earning over $125,000 a year.  Measure 67 would raise taxes on profitable corporations.

Opponents of the measures succeeded in placing them on the ballot, hoping that they could scare voters into rejecting them.  Almost all major business leaders threatened calamity if they passed.  For example, Phil Knight, the CEO of Nike, not only gave $100,000 to the anti-measures campaign, he also wrote an article published in the Oregonian newspaper in which he said:

Measures 66 and 67 should be labeled Oregon’s Assisted Suicide Law II.

They will allow us to watch a state slowly killing itself.

They are anti-business, anti-success, anti-inspirational, anti-humanitarian, and most ironically, in the long run, they will deprive the state of tax revenue, not increase it. . . .

Reputable economists forecast 66 and 67 will cost the state thousands — maybe tens of thousands — of jobs, and that thousands of our most successful residents will leave the state.

Knight ended his letter with his own threat to leave the state if the measures passed.  However, voters approved both measures, and Nike and Phil Knight remain in Oregon.

Young provides other examples of threats of “rich flight”:

As California considered similar taxes [to Oregon], policymakers cautioned “nothing is more mobile than a millionaire and his money”. In New Jersey, governor Chris Christie simply stated: “Ladies and Gentlemen, if you tax them, they will leave.”

The reality

Young studied tax return data, which shows where people live, for every million-dollar earner in the United States over the years 1999 to 2011.  His data set included “3.7 million top-earning individuals, who collectively filed more than 45 million tax returns.”

What he found was that the migration rate of millionaires was relatively low, with only 2.4 percent of millionaires changing their state residence in a given year.  Perhaps not surprisingly, as we see below, poorer people tend to move from one state to another more often than do millionaires.

Young does note that “When millionaires do move, they admittedly tend to favor lower-tax states over higher-tax ones – but only marginally so. Around 15 percent of interstate millionaire migrations bring a net tax advantage. The other 85 percent have no net tax impact for the movers.”

Moreover, almost all the movement by millionaires to lower-tax states is accounted for by moves to just one state, Florida.  Other low-tax states, like Texas, were not net-recipients of millionaires fleeing high-tax states.  In short there is no real evidence that millionaires systematically move from high-tax states to low-tax states.

Young believes that one major reason for the lack of migration by the rich is that “migration is a young person’s game.”  As the figure below shows, people tend to move for education and early in their careers. Thus:

By the time people hit their early forties, PhDs, college grads and high school drop-outs all show the same low rate of migration. Typically, millionaires are society’s highly educated at an advanced career stage. They are typically the late-career working rich: established professionals in management, finance, consulting, medicine, law and similar fields. And they have low migration because they are both socially and economically embedded in place.

The global story

Young finds the global story is much the same.  He examined the 2010 Forbes list of world’s billionaires and found that approximately 85 percent still lived in their country of birth.  Moreover, as he explains:

among those who do live abroad, most moved to their current country of residence long before they became wealthy – either as children with their parents, or as students going abroad to study (and then staying). . . . Only about 5% of world billionaires moved abroad after they became successful.

The take-away

The rich have both increased their share of income and reduced their share of state taxes over the last decades.  This has left most states unable to provide the critical public services working people need.  Young’s study demonstrates that we should not allow fears of “rich flight” to keep us from building “tax the rich movements” across the United States.

The US Is A World Leader In Income and Wealth Inequality

A recent article published in the American Economic Review, “Global Inequality Dynamics: New Findings from WID.world,” draws upon the World Wealth and Income Database to examine trends in global inequality.

Two main takeaways:

  • US economic dynamics have greatly enriched those at the top at the expense of the great majority.
  • Chinese elites, thanks to China’s post-Mao capitalist transformation, are hard at work replicating US patterns of inequality.

While US and Chinese political leaders threaten each other with talk of trade wars, there has certainly been a lot of win-win for those at the top in both countries.

Income inequality

Figure 1, below, highlights the sharp rise in the income share of the top 1 percent and the sharp fall in the income share of the bottom 50 percent in the United States.  It also shows that while China’s elite have also found globalization dynamics beneficial, especially after the country’s 2001 entrance into the WTO, their relative income position has changed little since the Great Recession.  Perhaps most striking is the steady fall in the income share going to the bottom 50 percent of Chinese since the late 1970s start of the country’s process of marketization and privatization.  In contrast to both countries, income shares in France have been remarkably stable.

As shown in Table 1, real income growth for those at the top is positively correlated with earnings—the greater the income, the greater the percentage gain. Things were not so positive for the bottom 50 percent in the US, as the group actually lost income over the period despite overall economic growth.

In the case of China, it appears that growth was so great over the period 1978 to 2015, that even the bottom 50 percent benefited, with that group’s income growing by 401 percent.  However, that figure needs to be treated with caution.  Before the reform period, most Chinese workers earned low salaries but that was balanced by the fact that the Chinese government provided them with a vast array of goods and services at little or no cost.  Everything changed with the country’s capitalist transformation.  Thus, while Chinese workers now earn far more money from their work than in the past, their costs for housing, health care, food, transportation, education, and the like, has also soared.  As a result, income gains for most Chinese likely overstate the benefits they have received from their country’s high rates of growth.

Privatization and concentration of wealth

The article also highlighted trends in the share of private wealth.  As the authors comment:

We observe a general rise of the ratio between net private wealth and national income in nearly all countries in recent decades. It is striking to see that this phenomenon was largely unaffected by the 2008 financial crisis. The unusually large rise of the ratio for China is notable: net private wealth was a little above 100 percent of national income in 1978, while it is above 450 percent in 2015. The private wealth-income ratio in China is now approaching the levels observed in the United States (500 percent), United Kingdom, and France (550–600 percent).

Figure 2 illustrates trends in the share of public wealth in national wealth. China’s downward trend reflects the country’s capitalist transformation, which has led to an increase in the share of national wealth in private hands.  More striking is the fact that “Net public wealth has become negative in the United States, Japan, and the United Kingdom, and is only slightly positive in Germany and France.”

Figure 3 reveals a sharp and sustained rise in the share of wealth held by the top 1 percent in the United States and China in recent decades, and more moderate increases in France and the United Kingdom.

It remains to be seen whether these trends in income and wealth inequality will continue. The fact that inequality trends in France differ greatly from those in the US and China strongly suggests that while capitalist globalization exerts a strong pull in favor of the rich and powerful everywhere, national institutions and relations of power also matter.  And that means that future developments will likely depend heavily on the actions of workers in the US and China, the two countries whose accumulation dynamics appear to exert the strongest force on the international economy.

The US-DPRK Singapore Summit Was A Meaningful Step Towards Peace On The Korean Peninsula

The June 12th Singapore Summit between the US and the DPRK was an important, positive step towards the achievement of peace on the Korean Peninsula, normalized relations between the US and North Korea, and the reunification of Korea.

In the words of the Korean Public Service and Transport Workers’ Union, one of South Korea’s largest unions:

The very fact that the top leaders of North Korea and the U.S., two countries whose relationship has been laced with hostility and mutual threats for the last seventy years, sat together in one place and shared dialogue is historic and signals a new era in which peace on the Korean Peninsula is possible. We therefore welcome the North Korea-U.S. Summit and joint statement.

At the same time, it is important not to lose perspective.  The Summit was a step, but only step, towards improved relations.  Many challenges remain on the road ahead, and it is going to require popular pressure to keep us moving forward.

The summit was a real movement away from war

On the North Korean side, Kim Jong Un, even before the Summit, announced an end to his country’s missile and nuclear weapons testing.  At the Summit, he once again committed his country to the denuclearization of the Korean Peninsula, which is a commitment to end the county’s nuclear weapons program if matched by a US commitment to refrain from threatening a nuclear attack on North Korea or introducing nuclear weapons on or around the Korean Peninsula.  He also agreed to destroy his country’s main missile engine testing facility, having already destroyed the country’s nuclear bomb testing facility. He also agreed to allow a return of US military personal to search for and repatriate the remains of US soldiers killed during the Korean War.

On the US side, Donald Trump pledged to end the war games which are held several times a year in and around the Korean Peninsula and which include simulated nuclear attacks on North Korea and planning for the “decapitation” of North Korea’s leadership.

And both sides agreed to more meetings to work on structuring a process designed to achieve the denuclearization of the Peninsula and the normalization of relations between the US and North Korea, which would mean among other things, an end to the Korean War and US sanctions against North Korea.

And thanks to the positive momentum generated by the Singapore Summit, North and South Korea continue to build on the success of their own recent summit.  For example, the militaries of the two countries recently held their first general level talks in ten years and agreed to fully restore their military communication lines, as well as began talks to demilitarize the DMZ area.

These are incredibly positive developments, especially in light of the fact that only months ago we faced the very real threat of a new Korean War.

There is strong support in South Korea for improved North Korean relations

These developments are extremely popular in South Korea.   More than 80 percent of South Koreans support South Korean President Moon’s policies, including his own summit meeting with Kim.  And in elections held the day after the US-North Korean summit, his Democratic Party won 14 of the 17 mayoral and gubernatorial races and 11 of 12 parliament by-elections.  Opposition parties that criticized Moon’s approach to North Korea were thoroughly defeated.

If this response has surprised people in the United States, it is only because many have little understanding of the costs paid by people in South Korea from the state of war between the US and North Korea.  For example, the state of war has allowed conservative governments in South Korea to use national security laws to outlaw a progressive political party, dissolve militant trade unions, arrest trade union leaders, break strikes, and restrict freedom of speech.  It has also enabled conservative forces to win massive increases in military spending at the expense of social programs and legitimated the growth of US military bases throughout the country, with their immense environmental and social costs.  And then there is the real and constant threat of war.

Of course, the people in North Korea have suffered the most—the threat of war and the need for greater military spending as well as the economic embargo and sanctions have taken a real social and economic toll; political and human rights have also suffered.  At the same time, it is worth pointing out that despite claims that the North Korean government cares little for the well being of its people,

several reports and academic studies show that North Korea’s food situation is stable and on par with – or even better than – some other nations in Asia.

Professor Hazel Smith, Director of the International Institute of Korean Studies at Cranfield University in the UK, concluded in a new research paper that levels of severe wasting – people being underweight for their height because of acute malnutrition – is lower in North Korea than in a number of other low-income countries [including India, Pakistan, and Indonesia] and equal to those in other developing countries in Asia.

Troubling criticisms of the Summit 

Tragically, many liberal voices have been raised in opposition to the Summit and the possibilities for peace it has encouraged.  Progressive commentators, as well as Democratic Party politicians and established journalists, have expressed outrage and worry over the fact that Trump met with Kim.  In broad brush, they say that the US gave Kim all he wanted, which was legitimacy on the world stage, and got nothing in return.  Or that by agreeing to halt war games, the US gave away its most important bargaining chip.  Or that the US flag and NK flag should never have flown side by side—given the dictatorial nature of the North Korean regime.  Or that the US is undermining the ROK-US alliance.

As Korea analyst Tim Shorrock noted:

Even as the first images flashed across the world of Trump and Kim shaking hands against the unusual background of US and DPRK flags flapping together, social media and op-ed sections of media sites were filled with denunciations of Trump. Democratic leaders in the House and Senate led the attack.

“In his haste to reach an agreement, President Trump elevated North Korea to the level of the United States while preserving the regime’s status quo,” charged House minority leader Nancy Pelosi. Senate minority leader Charles Schumer, who last week warned that the Democrats might oppose any agreement that didn’t include the now-famous CVID commitment, said on the Senate floor that Trump had “legitimized a brutal dictator.”

Conservative columnists had a field day. “The spectacle of the murderous dictator Kim Jong Un on equal footing with the president of the United States—each country’s flag represented, a supposedly ‘normal’ diplomatic exchange between two nuclear powers—was enough to turn democracy lovers’ stomachs,” Jennifer Rubin wrote in the Post. Similar analyses were posted all day on Twitter.

Progressive media commentators also joined in.  For example, MSNBC host Rachel Maddow warned that Trump was being played by both Russia and North Korea:

Russia has just this tiny little border, 11 mile long border, with North Korea, with one crossing on a train. And they’ve got a troubled and varied history over the decades with that country. But Russia is also increasingly straining at its borders right now, and shoving back U.S. and Western influence. Especially U.S. and Western military presence anywhere near what it considers to be its own geopolitical interests. And one of the things that they have started to loudly insist on is that the U.S. drop those joint military exercises with South Korea. The U.S. has kept those going as a pillar of U.S. national security strategy for 70 years, now. Until last night, when Trump casually announced that that’s over now. He’s doing away with those. Blindsided everybody involved. And gave North Korea something they desperately want and would do almost anything for. Except he gave it to them for free. How come?

This is puzzling and disturbing.  We were on the verge of a new Korean War, and now we are engaged in serious peace talks.  That is a positive step.  Underlying these criticisms seems to be the assumption that the US always pursues a democratic foreign policy and thus should be allowed to have nuclear weapons, test new ones, and threaten to use them against other countries as it sees fit.  And other countries should refrain from objecting to or actively resisting US actions, especially developing their own weapons in response to US threats.  This is a very problematic assumption.

The importance of history

Most Americans do not know the history that got us here, starting with the fact that the Korean War ended with a cease fire, not a peace treaty. For many years, neither the US or North Korea showed much interest in ending the state of war.  That changed in the early 1990s with the end of the Soviet Union.  This event left North Korea without a powerful military protector and its major trading partner.  At the same time, the country was also hit by major floods in the mid-1990s, further adding to its security and economic problems.  These developments led North Korea to seek an accommodation with the US, which it hoped would lead to an end to the state of hostilities between the two countries.  North Korean overtures were generally rejected by the United States.

The US threatened to drop nuclear bombs on North Korea during the Korean war.  The US introduced nuclear weapons into South Korea in the late 1950s, against the terms of the armistice agreement that ended the fighting in Korea.  In the 1970s the US began war games that soon included simulated nuclear attacks against North Korea.  Without the Soviet Union’s protection, the North felt it had no choice but to take steps to protect itself, and that led it to pursue its own nuclear weapons program while simultaneously seeking peace talks with the United States.  North Korea repeatedly said, as it said again in Singapore, that it would abandon its nuclear program if the US ended its hostile policies.

While North Korea is always presented as an aggressive military power, the fact is that South Korea has outspent North Korea on defense every single year since 1976.  According to the Stockholm International Peace Research Institute, South Korea currently spends roughly $40 billion a year on defense–and this does not include US military spending in the region.  By contrast, North Korea spends only $4 billion.

Trump’s willingness to cancel war games is a positive first step in showing that the US is seriousness about creating a peace regime on the Korean Peninsula.  These war games, which happen at least twice a year, include B-52 bombers that are nuclear capable, stealth fighters, submarines with nuclear missiles, hundreds of thousand troops, and are organized to practice attacking North Korea.

North Koreans still remember the Korean War, which included, as historian Bruce Cumings describes,

three years of “rain and ruin” by the US air force. Pyongyang had been razed to the ground, with the Air Force stating in official documents that the North’s cities suffered greater damage than German and Japanese cities firebombed during World War II.

Just as the Japan scholar Richard Minear termed Truman’s atomic attacks “exterminationist”, the great French writer and film-maker Chris Marker wrote after a visit to the North in 1957: “Extermination crossed this land.” It was an indelible experience still drilled into the heads of every North Korean.

In light of this history, one can easily understand why North Korean leaders find current US war games threatening.

Agreeing to halt these massive exercises is not giving North Korea something undeserved.  It is an important way for the United States to demonstrate that it is serious about achieving peace.  And, as noted above, North Korea is taking its own actions to demonstrate its seriousness, halting all missile and nuclear tests and destroying its test sites.  In this context, it is worth pointing out that North Korea has not demanded that the US stop all its missile and bomb testing, which continue.  It asks only that the US agree to normalize relations and commit not to threaten to attack the North or introduce nuclear weapons onto the Korean Peninsula—thus producing a nuclear free Korean Peninsula.

Agreeing to end the state of war is not giving North Korea some special benefit.  It is helping the Korean people gain the space they need to deal with their own division. Supporting such a process is also the best way to generate the kinds of interactions needed to promote real democratic change in both Koreas.  It also helps us in the United States, making it easier to confront our own militarism and the huge costs that we pay for it.

Real change is possible.  This is the moment to do what we can to build a strong popular movement on both sides of the Pacific for peace and reconciliation.

 

I recently discussed the Singapore Summit on KBOO radio.  You can hear the interview here.

 

 

 

 

 

 

 

The Chinese Economy: Problems and Prospects

The Chinese economy is big. In 2017, it was the world’s biggest based on purchasing power parity.  Its output equaled $23.12 trillion, compared with $19.9 trillion for the EU and $19.3 trillion for the US.

China also regained its position as the world’s largest exporter in 2017, topping the EU which held the position in 2016.  Chinese exports totaled $2.2 trillion compared with EU exports of $1.9 trillion. The United States was third, exporting $1.6 trillion.

The Chinese economy also recorded an impressive 6.9 percent increase in growth last year, easily beating the government’s 2017 target of 6.5 percent and the 6.7 percent rate of growth in 2016.  According to international estimates, China was responsible for approximately 30 percent of global economic growth in 2017.

The Chinese government as well as many international analysts also claim that China has entered a new economic phase, one that is far more domestic-centered and responsive to popular needs, and thus more stable than in the past when the country relied on exports to record even higher rates of growth.

It all sounds good.  However, there are many reasons to question China’s growth record as well as the stability of the country’s economy and turn towards a new domestic-centered growth strategy.  Glowing reports aside, hard times might well lie ahead for workers in China and the broader Asian region.

Chinese Growth

As the chart below shows, China’s rate of growth fell for six straight years, from 2011 to 2016, before registering an increase in 2017. Current predictions are for a further decline, down to 6.5 percent, in 2018.

However, Chinese growth figures still need to be taken with the proverbial “grain of salt.”  As Lucy Hornby, Archie Zhang, and Jane Pong discuss in a Financial Times article, Chinese provinces routinely fudge their growth data, which compromises the reliability of national growth figures.  For example:

Inner Mongolia, one of China’s most coal-dependent areas, and the major northern port city of Tianjin, have admitted to falsifying data that will probably require their 2016 GDP to be revised down. They join neighboring Liaoning, the first province to admit to a contraction during the four-year correction in commodities markets.

Inner Mongolia admitted this month that its data for “added value of industrial enterprises of a certain scale” were inflated 40 per cent in 2016. According to the Chinese statistical yearbook, secondary industry comprises 47 per cent of its GDP. Assuming its 2015 figures are accurate, the revised 2016 figures mean the region’s economy shrank 13 per cent. . . .

Like Inner Mongolia, Liaoning admitted to a contraction in 2016 compared with its official performance in 2015. Liaoning admits it faked data for about five years but has not issued a revised series. . . .

Tianjin, one of the big ports that services northern China, could also see a revision. Its Binhai financial district, which offers tax and foreign exchange incentives to registered businesses, swelled to comprise roughly half of Tianjin’s reported GDP last year.

Binhai included in GDP the commercial activity of companies that were only registered there for tax purposes, according to revelations last week. That could result in a 20 per cent drop in reported GDP for Tianjin in 2017, according to FT calculations. Binhai’s high debt levels and access to domestic and international financing make its phantom results a concern for broader markets.

Another possible data offender is Shanxi, China’s most coal-dependent province. Its official GDP growth held up admirably during the commodities downturn.

Last summer China’s anti-corruption watchdog announced unspecified problems with Jilin’s data, adding another troubled northeastern province to the list of candidates to watch.

Wang Xiangwei, former editor-in-chief of the South China Morning Post, sums up the situation as follows:

This [falsification of data] has given rise to a popular saying that “data makes an official and an official makes data”.  The malpractice is so rampant and blatant that over the years, a long-running joke is that simply adding up the figures from all the provinces and municipalities reveals a sum that overshoots the national GDP – by 6.1 trillion yuan (more than 10 per cent!) in 2013, 4.78 trillion yuan in 2014, and 3.6 trillion yuan in 2016.

This data manipulation certainly suggests that China has regularly failed to meet government growth targets.  Perhaps more importantly, even the overstated published nation growth statistics show that China’s rate of growth has steadily fallen.

Debt problems threaten economic stability

There are also reasons to doubt that China can sustain its targeted growth rate of 6.5 percent. A major reason, as the next chart shows, is that China’s growth has been underpinned by ever increasing debt.  Said differently, it appears that ever more debt is required to sustain ever lower rates of growth.

As Matthew C Klein, writing in the Financial Times Alphaville Blog, explains:

The rapidity and size of China’s debt boom in the past decade has been almost entirely without precedent. The few precedents that do exist — Japan in the 1980s, the US in the 1920s— are not encouraging.

Most coverage has rightly focused on China’s corporate sector, particularly the debts that state-owned enterprises owe to the big four state-owned banks. After all, these liabilities constitute the biggest bulk of the total debt outstanding, and also explain most of the total growth in Chinese debt since the mid-2000s.

The explosive nature of China’s corporate sector debt growth is well illustrated by comparisons to the relatively stable corporate debt ratios in other major countries, as shown in the following chart.

China’s growing debt means it likely that sometime in the not too distant future the Chinese state will be forced to tighten its monetary policy, making it harder for Chinese companies to borrow to finance their existing levels of employment and investment, thus triggering a potentially sharp slowdown in growth.  At the same time, since much of China’s corporate debt is owed to government-controlled banks, it is also likely that the Chinese state will be able to limit the economic fallout from expected corporate defaults and avoid a major financial crisis.

But, while corporate debt has drawn the most attention, household debt is also on the rise, and not so easily managed if serious repayment problems develop. According to Klein,

Since the start of 2007, Chinese disposable household income has grown about 12 per cent each year on average, while Chinese household debt has grown about 23 per cent each year on average. The cumulative effect [as illustrated below] is that (nominal) income has slightly more than tripled but debts have grown by nearly a factor of nine. . . .

All this is finally starting to affect the aggregate debt numbers. Household debt in China is still small relative to the total — about 18 per cent as of mid-2017 — but household borrowers are now responsible for about one third of the growth in total nonfinancial debt.

By mid-2017, Chinese households held debt equal to approximately 106 percent of their disposable income, roughly equal to the current American ratio.  What makes Chinese household debt so dangerous is that, as Klein notes, “households cannot service their debts out of GDP. Instead they have to rely on their meagre incomes.”  And as we see below, the share of Chinese national output going to households is not only low but has generally been trending downward.  By comparison, disposable income in the US normally runs around 72-76 percent of GDP.

In addition, it has been “finance companies and private loan sharks” that have done most of the consumer lending, not state banks.  This will make it harder for the state to keep repayment problems from having a significant negative effect on domestic economic activity.

Thus, while Chinese officials argue that China’s new lower rate of growth represents a switch to a new more stable level of economic activity, the country’s debt explosion suggests otherwise.  As Michael Pettis argues in his August 14, 2017 Monthly Report on China:

To argue that the authorities have been successful in stabilizing GDP growth rates and now must address credit growth misses the point entirely. If GDP growth “stabilizes” while credit growth accelerates, GDP growth cannot be said to have stabilized, at least not in any meaningful way. Chinese economic growth can only be said to have stabilized if GDP growth rates remain constant without any increase in the debt burden – i.e. credit grows in line with or slower than nominal GDP – and in my opinion, as I said above, this cannot happen except at growth rates well below half the current reported GDP growth rate, or less than 3 percent.

What new growth model?

For several years Chinese leaders have acknowledged the need for a new growth model that would produce slower but more sustainable rates of growth.  As Chinese Premier Li Keqiang explained in a recent speech to the National People’s Congress:

China’s economy is now in a pivotal period in the transformation of its growth model, its structural improvement and its shift to new growth drivers.  China’s economy is transitioning from a phase of rapid growth to a stage of high-quality development.

In other words, China is said to have abandoned its past export-driven high-speed growth strategy in favor of a slower, more domestic, human-centered growth strategy.  China’s current slower growth is in line with this transformation and thus should not be taken as a sign of economic weakness.

However, there are few signs of this transformation, other than a lower rate of growth.  For example, one hallmark of the new growth model is supposed to be the shift from external to domestic, private consumption-based drivers of growth.  The slowdown in the global economy in the post 2008 period certainly makes such a shift necessary. But the data, as shown below, reveals that there has been no significant gain in private consumption’s share of GDP.  In fact, it actually declined in 2017.

China’s private consumption accounted for 39.1 percent of GDP in Dec 2017, compared with a ratio of 39.4 percent the previous year.  The ratio recorded an all-time high of 71.3 percent in Dec 1962 and a record low of 35.6 percent in Dec 2010. And as we saw above, there has been no significant increase in disposable income’s share of GDP. Moreover, the existing consumption, in line with income trends, remains heavily skewed towards the wealthy.

What has remained high, as we see in the next chart, is investment, a pillar of the old growth model.

China’s Investment accounted for 44.4 percent of GDP in Dec 2017, compared with a ratio of 44.1 percent in the previous year. The ratio reached an all-time high of 48.0 percent in Dec 2011 and a record low of 15.1 percent in Dec 1962.

This investment continues to emphasize infrastructure, real estate development and enhancing manufacturing capacity.  One example:

A symbol of the investment addiction can be found in “China’s Manhattan.”

Tianjin’s Conch Bay, a 110-hectare district with a cluster of 40 high-rise buildings, was supposed to be the country’s new financial capital as outlays surged over the past several years. But in late November there were few signs of life. A number of buildings were still under construction; the streets were empty; and even completed buildings had no occupants.

From 2000 to 2010, investment in Tianjin — the hometown of former Premier Wen Jiabao — swelled by a factor of 10.3.

In fact, despite official pronouncements, China’s accelerated growth in 2017 owes much to external sources of demand.  As Reuters describes:

China’s economy grew faster than expected in the fourth quarter of 2017, as an export recovery helped the country post its first annual acceleration in growth in seven years, defying concerns that intensifying curbs on industry and credit would hurt expansion. . . .

A synchronized uptick in the global economy over the past year, driven in part by a surge in demand for semiconductors and other technology products, has been a boon to China and much of trade-dependent Asia, with Chinese exports in 2017 growing at their quickest pace in four years.

With fixed asset-investment growth at the weakest pace since 1999, exports helped pick up the slack.

“Real growth of overall exports…more than fully (explained) the pick-up in GDP growth last year,” Oxford Economics head of Asia economics Louis Kuijs wrote in a note.

And as we can see from the chart below, China’s export gains continue to depend heavily on the US market—a market that is becoming increasingly problematic in the wake of US tariff threats.

China’s real new growth strategy: The One Belt, One Road initiative

There are many pressures keeping Chinese leaders from seriously pursuing a real domestic-centered, consumption-based growth model.  One of the most important is that the interests of powerful political forces would be damaged if the government took meaningful steps to significantly increase the wages and improve the working conditions of Chinese workers.  And since many in the government and party directly benefit from existing relations of production they have little reason to pursue a strategy that would threaten the profitability of China-based production activity.

At the same time, it was clear to Chinese leaders that a new strategy was necessary to keep Chinese growth from further decline, an outcome which they feared could spur regime-threatening labor militancy.  Their answer, first discussed in 2013, appears to be the One Belt, One Road initiative.  The beauty of this initiative is that it allows the existing political economy to continue functioning with little change while opening up new outlets for basic industrial products produced by leading state firms, creating new export markets for private producers, and expanding the huge infrastructure that underpins the Chinese construction industry.

Asia Monitor Research Center, in the introduction to its Asian Labor Update issue on the One Belt, One Road initiative, describes what is at stake as follows:

Xi Jinping’s One Belt, One Road has been described as the next round of “opening up” by the Chinese government, following the development of Special Economic Zones and China’s accession to the WTO. Indeed, the OBOR strategy can be seen as a very significant and ambitious next step in the expansion of the role that China plays globally and its implementation will impact on the lives of millions of people domestically and globally.

Chinese government strategies towards both the BRICS and even more so towards OBOR, which has been dubbed “globalization 2.0”, potentially have important implications for the direction of globalization in the future. Given the way that China’s development strategies have led to significant environmental destruction and labor rights violations domestically, and the way that its investment overseas has been frequently criticized or led to opposition due to their adverse social and environmental consequences, suggest that there are legitimate causes for concern about the impacts on people and the environment of this direction.

In fact, the special issue includes several contributions which highlight the negative consequences of this initiative.  The initiative is first and foremost designed to enable Chinese companies to build roads, railway lines, ports and power grids for the benefit of China’s economy.  These projects come with massive environmental degradation, displacement of local communities, and local labor exploitation.  It also aims to advance Chinese efforts to control agricultural land and raw materials in targeted countries and promote the creation of Yuan currency area.

It remains to be seen how successful the One Belt, One Road initiative will be in achieving its aims.  What does seem clear is the talk of a new more stable, humane, high-quality Chinese economy is largely just that, talk.  Chinese leaders appear heavily invested in trying to breathe new life into the country’s existing growth model, a model that comes with enormous human and environmental costs.