The Importance of Theory

The economy has officially been in recovery since June 2009, but it is only wealthy individuals and corporations that are celebrating.  For example, real wages fell by almost 2 percent in 2011.  At the same time corporate profits hit a record high in the third quarter of 2011.   Businessweek explains how corporations continue to enjoy profits in the face of declining wages as follows:

Companies are improving margins and generating profits as wage growth for the American worker lags behind the prices of goods and services. The year-over-year change in the so-called core consumer price index, which excludes volatile food and fuel, has outpaced hourly earnings for the last four months. In January, average hourly earnings climbed 1.5 percent from a year earlier, while core inflation was up 2.3 percent.

“A lot of the outperformance of profits has been due to the fact that margins are expanding,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “Firms have been able to keep prices intact even though labor costs have been declining.” While benefiting the bottom line for businesses, the decline in inflation-adjusted wages bodes ill for the sustainability of economic growth as consumers may eventually be forced to cut back, Feroli said. Businesses have also been slow to redeploy their profits into new hiring.

“So far what you’ve had is the government has been able to step in and prop up household purchasing power by various cuts in payroll taxes, various increases in social benefits,” said Feroli. “That has sort of kept the whole thing going, but you might worry with real wages being hit spending is going to decline.”

In other words, as far as business is concerned, things are pretty good.  Economic conditions enable them to suppress wages while tax cuts and social spending ensure sufficient demand. So goes “the recovery.”

Working people increasingly understand that the system is not working for them; their sacrifices are translating into corporate gains, gains sufficiently satisfying to those at the top that business and political leaders have no interest in pursuing change.  Here and there successful resistance has taken place.  But to this point, popular pressure has not been great enough to really shake business or government leaders out of their complacency.

What will it take?  We can learn an important lesson from the recent WikiLeaks publication of over 5 million emails taken from the servers of Stratfor, a so-called intelligence/information company, by Anonymous.  As explained by a Yes Men blog post:  

The emails, which reveal everything from sinister spy tactics to an insider trading scheme with Goldman Sachs (see below), also include several discussions of the Yes Men and Bhopal activists. (Bhopal activists seek redress for the 1984 Dow Chemical/Union Carbide gas disaster in Bhopal, India, that led to thousands of deaths, injuries in more than half a million people, and lasting environmental damage.)

Many of the Bhopal-related emails, addressed from Stratfor to Dow and Union Carbide public relations directors, reveal concern that, in the lead-up to the 25th anniversary of the Bhopal disaster, the Bhopal issue might be expanded into an effective systemic critique of corporate rule, and speculate at length about why this hasn’t yet happened—providing a fascinating window onto what at least some corporate types fear most from activists.

[Bhopal activists] have made a slight nod toward expanded activity, but never followed through on it—the idea of ‘other Bhopals’ that were the fault of Dow or others,” mused Joseph de Feo, who is listed in one online source as a “Briefer” for Stratfor.

“Maybe the Yes Men were the pinnacle. They made an argument in their way on their terms—that this is a corporate problem and a part of the a [sic] larger whole,” wrote Kathleen Morson, Stratfor’s Director of Policy Analysis.

“With less than a month to go [until the 25th anniversary], you’d think that the major players—especially Amnesty—would have branched out from Bhopal to make a broader set of issues. I don’t see any evidence of it,” wrote Bart Mongoven, Stratfor’s Vice President, in November 2004. “If they can’t manage to use the 25th anniversary to broaden the issue, they probably won’t be able to.”

Mongoven even speculates on coordination between various activist campaigns that had nothing to do with each other. “The Chevron campaign [in Ecuador] is remarkably similar [to the Dow campaign] in its unrealistic demand. Is it a follow up or an admission that the first thrust failed? Am I missing a node of activity or a major campaign that is to come? Has the Dow campaign been more successful than I think?” It’s almost as if Mongoven assumes the two campaigns were directed from the same central activist headquarters. Just as Wall Street has at times let slip their fear of the Occupy Wall Street movement, these leaks seem to show that corporate power is most afraid of whatever reveals “the larger whole” and “broader issues,” i.e. whatever brings systemic criminal behavior to light. “Systemic critique could lead to policy changes that would challenge corporate power and profits in a really major way,” noted Joseph Huff-Hannon, recently-promoted Director of Policy Analysis for the Yes Lab.

 Thus, what those with power really fear is not popular outrage at a particular injustice, or even financial penalties in response to that injustice, but rather that somehow people will come to see an overall pattern of behavior that ties together these injustices, revealing an underlying exploitative class system.  Said more plainly, those with power fear that an aware populace will come to understand the need to challenge and transform capitalism.  No doubt that is why they fear the Occupy movement.  And that is why we need to ensure that our organizing and resistance efforts are conducted in ways that help promote this understanding.  

The Employment-Education Mismatch

The Bureau of Labor Statistics recently published its employment/wage projections for the years 2010-2020.   The following table lists the 30 occupations that the BLS believes will have the largest numerical growth in employment over the period.  

The table is worth a long look.  Among other things it challenges the assertion that more education is the key to a better employment future.  More education is, of course, generally a good thing.  But given BLS projections, it appears that our corporations have little interest in creating jobs requiring (and thus paying) a more highly educated workforce.

Of the 30 occupations with the largest projected numerical employment growth, 10 require less than a high school education and an additional 13 require only a high school diploma or its equivalent.  Only 4 require a bachelor’s degree or higher.


The following table, which comes from the same report, shows the distribution of projected job openings by education level for all occupations: 79.7% of all projected jobs will require less than a bachelor’s degree.


Germany: A False Model

As growing numbers of countries face renewed austerity pressures, there is a tendency to explain the trend by searching for specific policy failures in each country rather than considering broader structural dynamics.  Key to the credibility of those who argue for a focus on national decisions is the existence of countries that people believe are performing well.  Thus, the argument goes, if only policy makers followed best practices their people wouldn’t find themselves in such a bad place.  Recently, German has become one of these model countries.

 Here is a typical framing of the German experience:  

At a time when unemployment rates in France, Italy, the UK, and the US are stuck around 8%-9%, many are turning to the apparent miracle in the German labor market in search of lessons. In 2008–09, German GDP plummeted 6.6% from peak to trough, yet joblessness rose only 0.5 percentage points before resuming a downward trend, and employment fell only 0.5%. In August 2011, the standardized unemployment rate was about 6.5%, the lowest since the post-reunification boom of 20 years ago.

In other words, Germany seems to be doing things right. Despite suffering a deep decline it actually enjoyed a lower unemployment rate. So, how did it do it?  Often cited are recent German policies which have increased labor market flexibility. But are these the best practices that should be adopted elsewhere?  One way to answer that question is to look at what these changes have meant to German workers.  A Reuters report concluded

Job growth in Germany has been especially strong for low wage and temporary agency employment because of deregulation and the promotion of flexible, low-income, state-subsidised so-called “mini-jobs”.

The number of full-time workers on low wages – sometimes defined as less than two thirds of middle income – rose by 13.5 percent to 4.3 million between 2005 and 2010, three times faster than other employment, according to the Labor Office.

Jobs at temporary work agencies reached a record high in 2011 of 910,000 — triple the number from 2002 when Berlin started deregulating the temp sector. . . .

Data from the Organization for Economic Co-operation and Development shows low-wage employment accounts for 20 percent of full-time jobs in Germany compared to 8.0 percent in Italy and 13.5 percent in Greece.

New categories of low-income, government-subsidized jobs – a concept being considered in Spain – have proven especially problematic. Some economists say they have backfired.

They were created to help those with bad job prospects eventually become reintegrated into the regular labor market, but surveys show that for most people, they lead nowhere.

Employers have little incentive to create regular full-time jobs if they know they can hire workers on flexible contracts.

One out of five jobs is a now a “mini-job”, earning workers a maximum 400 euros a month tax-free. For nearly 5 million, this is their main job, requiring steep publicly-funded top-ups.

“Regular full-time jobs are being split up into mini-jobs,” said Holger Bonin of the Mannheim-based ZEW think tank.

And there is little to stop employers paying “mini-jobbers” low hourly wages given they know the government will top them up and there is no legal minimum wage.

This development was far from accidental.  It was the result of policy changes implemented in the early 2000s by then Chancellor Gerhard Schroder.  In 2005, Schroeder proudly announced at the World Economic Forum in Davos, Switzerland, that “We have built up one of the best low wage sectors in Europe.”

The New York Times described the German employment miracle as follows:  

But hidden behind the so-called German economic miracle is an underclass of low-paid employees whose incomes have benefited little from the country’s stability and in fact have shrunk in real terms over the last decade, according to recent data.

And because of government policies intended to keep wages low to discourage outsourcing and encourage skills training, the incomes of these workers are not likely to rise anytime soon.

That, in turn, means they are likely to continue to depend on government aid programs to make ends meet, costing taxpayers billions of euros a year.

The paradox of a rising tide that does not lift all boats stems in part from the fact that Germany has no federally set minimum wage. But it also has its roots in recent German politics, which have favored measures to keep unemployment low and win support from employers. . . .

The Confederation of German Employers’ Associations says the introduction of a minimum wage would push up labor costs and lead to more unemployment. Jobs would simply move out of Germany and to Eastern Europe or Asia. 

These new labor policies have not only taken a toll on German workers, they have also greatly contributed to the growing crisis in Europe.  The low wages and insecure employment conditions have both enabled German employers to boost exports and limited imports. Global Employment Trends 2012, an ILO report, highlights this connection.  According to an article summarizing its contents:

“The rising competitiveness of German exporters has increasingly been identified as the structural cause underlying the recent difficulties in the Euro area,” the report said. Crisis countries had not been able to export enough of their goods to Germany as domestic demand there was not strong enough because of low wages.

The ILO said German policies to keep down wages had created conditions for a prolonged slump in Europe as other nations on the continent increasingly saw only even harsher wage deflation as a solution to their lack of competitiveness.

The body called on Germany to enact swift changes. “An end to a low-wage policy would create positive spillover effects to the rest of Europe and restore a more equitable income distribution,” it said in the study.

   As the chart below shows, German wages have been stagnating for over a decade.  


No wonder that Germany has been exporting so successfully and that other economies in Europe have found it difficult to compete.  While German politicians blame these other economies for their problems, the fact is that German growth has depended on the high consumption and borrowing in these other countries.  As one analyst noted:

Germany, remember, accounts for 28% of the whole Eurozone economy.  It is not fanciful to imagine that imbalances in the German economy are capable of driving — or at least amplifying — imbalances within the entire region.  Indeed Germany’s capacity to buy from Europe is even more limited than its stagnating wages would suggest.  Because on top of this Germany has experienced a sharp increase in inequality.  This means wealth has been redistributed from poor, who tend to spend, to the rich, who tend to save.  

In short, if we are going to meaningfully address our economic problems we need to begin looking critically at how capitalist accumulation dynamics actually work.  Trying to emulate so-called success stories is not the way to go.

Big Trouble Brewing In Europe

There is big trouble brewing in Europe.  John Ross, in his blog Key Trends in the World Economy, highlights this brewing crisis in a series of charts, some of which I repost below. 

Chart 1 (below) shows the extent of the recovery from the recent economic crisis in the U.S., the EU, and Japan.  While the U.S. GDP has finally regained its past business cycle peak, the same cannot be said for Europe (or Japan).  As of the 3rd quarter 2011, EU GDP was still 1.7% below its previous business cycle peak.  The Eurozone was 1.9% below. 

Recent GDP estimates for the 4th quarter show European GDP once again contracting, which strongly suggests that the region is headed back into recession without having regained its previous business cycle peak.  This development implies that Europe faces serious stagnationist pressures.


Chart 2 (below) looks at the growth record for the 5 largest European economies.  Germany has regained its previous GDP peak.  France is making progress toward that end.  These two countries account for 36.2% of European GDP.  However, things are quite different for the UK, Italy and Spain.  These three countries account for 34.7% of European GDP and not only do they each remain far below their respective previous GDP peaks, their economies are once again heading downward. 


Chart 3 (below) highlights the economic performance of the three countries which have received the most media attention because of fears that their governments will be unable to repay their respective debts.  They are clearly in trouble, adding to the downward pressure on European GDP.  However, despite all the attention paid to them, their combined economies are only one-eighth the size of the combined economies of the UK, Italy and Spain. 


Charts 4 and 5 (below) highlight the fact that economic trends are also dire throughout much of Eastern Europe. 



The take-away is that European economic problems are not limited to a few smaller countries.  Some of the largest are also performing poorly and apparently headed back into recession without ever having regained their past business cycle peaks.  It is hard to see Europe escaping recession.  And it is hard to see the U.S., Asia, and Africa escaping the consequences.

Housing Prices Still Heading Down

Housing prices are an important indicator of future economic trends.  One reason is that houses represent one of the most important assets owned by households. 

Sadly, despite predictions of a housing recovery, housing prices are still heading downward, at least according to the well respected S&P Case-Shiller Index.   The most recent data, which takes the index through November, shows price declines of 1.3 percent for both the 10- and 20-City Composites in November over October.  The two Composites posted annual returns of -3.6% and -3.7% versus November 2010, respectively (see chart below).    


The following chart looks at actual home values rather than their yearly price change.   As of November 2011, average home prices across the United States were back to where they were in mid-2003.   Measured from their June/July 2006 peaks through November 2011, the peak-to-current decline for both the 10-City Composite and 20-City Composite was -32.9%.