Reports from the Economic Front

a blog by Marty Hart-Landsberg

Monthly Archives: March 2012

We Are Not All In It Together

It is common around election time to hear politicians talk about how they are standing up for “America,” as if we all had similar interests and were well served by the same policies.   Sounds nice.  The problem is that it is just not true.  

Want evidence?  Look at the distribution of gains from our current economic recovery.  According to a New York Times summary of a recent study of inequality: 

In 2010, as the nation continued to recover from the recession, a dizzying 93 percent of the additional income created in the country that year, compared to 2009 — $288 billion — went to the top 1 percent of taxpayers, those with at least $352,000 in income. That delivered an average single-year pay increase of 11.6 percent to each of these households.

Still more astonishing was the extent to which the super rich got rich faster than the merely rich. In 2010, 37 percent of these additional earnings went to just the top 0.01 percent, a teaspoon-size collection of about 15,000 households with average incomes of $23.8 million. These fortunate few saw their incomes rise by 21.5 percent.

The bottom 99 percent received a microscopic $80 increase in pay per person in 2010, after adjusting for inflation. The top 1 percent, whose average income is $1,019,089, had an 11.6 percent increase in income.

nyt.png

Moreover, “the top 1 percent has done progressively better in each economic recovery of the past two decades. In the Clinton era expansion, 45 percent of the total income gains went to the top 1 percent; in the Bush recovery, the figure was 65 percent; now it is 93 percent.”

It is hard to celebrate economic expansion when we have an economy structured in such a way that the income generated by our collective efforts ends up in the pockets of a very few.   

Who Needs Government Anyway

Representative Paul Ryan (Wisconsin), the chairman of the House Budget Committee, recently put forward his party’s budget plan.  Dean Baker reports on the Washington Post story which says of the plan that it “calls for spending cuts and tax changes that would put the nation on course to wipe out deficits and balance the budget by 2040.”  He notes that unfortunately the Post forgot to mention that the plan also largely does away with the government.  

The following table comes from the Congressional Budget Office analysis of the Ryan budget plan.  

ryan-cbo.jpg

In 2011, spending on “health care” came to 5 percent of GDP, spending on “social security” equaled 4.75 percent of GDP, and spending on “other mandatory and defense and nondefense discretionary spending” totaled 12.5 percent of GDP.  Congressional Budget Office estimates are that by 2040, the Ryan plan will have reduced spending on “other mandatory and defense and nondefense discretionary spending” to 4.75 percent of GDP.  By 2050, that category will be down to 3.75 percent of GDP. 

As Baker explains:  

The defense budget is currently over 4.0 percent of GDP and Representative Ryan has indicated that he wants to leave it at this level. That would leave little for the Justice Department, Education Department, Park Service, education, transportation and everything else government does in 2040 and nothing in 2050. That fact would have been worth pointing out in this article. 

It is worth adding that the Congressional Budget Office noted in its report that “The amounts of revenues and spending to be used in these calculations for 2012 through 2022 were provided by Chairman Ryan and his staff.”  In other words, the Congressional Budget Office has taken no position on whether Ryan’s plan would actually produce the balanced budget it predicts.  This outcome is especially questionable since his plan projects increases in revenue along with cuts in taxes.  The Congressional Budget Office just extended the plan’s assumed values into the future using standard modeling procedures.   

At some point we really need to get serious about the destructive nature of private profit driven economic activity and the importance of strengthening the capacity of the state to regulate and redirect economic activity in line with majority needs. 

Capitalist Globalization

The Obama administration continues to push new free trade agreements, arguing that they are needed to boost job creation.  The latest attempt is the Trans-Pacific Partnership (TPP).    So far nine countries are engaged in negotiating this free trade agreement: Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam, and the United States.  The United States in particular is thinking big; it insisted that the agreement also have a “docking clause,” which means that it is structured to make it easy for other Pacific Rim countries to join.  Canada, Japan and Mexico have already expressed interest.

Following standard procedures, the U.S. trade representative is negotiating the terms of the agreement with other trade representatives with the support and active involvement of some 600 multinational corporations.  Unfortunately, they are the only ones who know what is being negotiated.  As the Eyes on Trade Blog writes 

Not only is the text secret during the negotiations, but all TPP countries signed a secret agreement to classify the negotiating texts for at least four years after the TPP goes into effect. After taking heat for this secret agreement that keeps everything secret, New Zealand was forced to release the text of the secrecy pact. Though neither the public nor members of Congress are permitted to view the negotiating texts, over 600 representatives from corporations have access to the texts, allowing them to steer the negotiations in their favor.

In brief—this is another terrible free trade agreement.  Beyond reducing tariffs what little we do know of the treaty suggests it will also include 26 chapters designed to enhance the freedom and profits of multinational corporations at majority expense.  There is nothing about this agreement that will promote jobs or a higher quality of life for workers in any of the participating countries.

One way to appreciate just how damaging capitalist structured globalization has been to the health of the U.S. economy is to read Michael Spence and Sandile Hlatshwayo’s study of trends in U.S. employment and value added in both tradeable and nontradeble sectors over the period 1990 to 2008.    

Starting with employment, the authors found that almost all job growth from 1990 to 2008 occurred in the nontradeable sector.  Specifically, there was a 27.3 million increase in jobs between 1990 and 2008, from a starting a base of 121.9 million.  Approximately 98 percent of that increase, 26.7 million jobs, was generated in the nontradeable sector.  Job creation in the tradeable sector was basically nonexistent in the aggregate. 

job-creation.jpg

In 2008, the nontradeable sector had 114.9 million jobs and the tradeable sector 34.3 million jobs. Government at all levels was the largest employer in the nontradable sector, accounting for 22.5 million jobs in 2008.  Health care was second, with a total of 16.3 million.  In terms of job growth over the period, health care generated the most new jobs, followed by government, with a growth of 6.3 million and 4.1 million respectively.  These two sectors together combined for approximately 40 percent of total net employment gains.  The other large job creating sectors were retail, accommodation and food service and construction.  In 2008, these five accounted for 73.5 million jobs or approximately 50 percent of total employment.

jobs-major-sectors-nontrade.jpg

Significantly, employment in both government and health care depends heavily on public spending.  Current austerity trends threaten to limit future employment gains in these sectors, foreshadowing future difficulties for U.S. workers.  Retail, accommodation and food service, and construction employment growth was largely supported by debt-financed consumption.  The end of the housing bubble will likely limit future employment growth in those sectors as well. 

As noted above, trends in employment creation in the tradeable sector have been dismal, strongly suggesting that workers have good reason to fear the ongoing restructuring of the U.S. economy in line with capitalist globalization plans.  Growing numbers of workers will be forced to compete for jobs in the nontradeable sector at a time when employment opportunities in that sector will also be limited. 

tradeable-jobs.jpg

Of course, the lack of aggregate job growth in the tradeable sector masks the existence of divergent trends within the sector.  In particular, globalization did produce employment increases in industries that service transnational corporations and their international operations.  As Spence and Hlatshwayo noted:

The tradable sector experienced job growth in high-end services including management and consulting services, computer systems design, finance, and insurance. These increases were roughly matched by declines in employment in most areas of manufacturing.

The loss of employment in the manufacturing sector was caused by the out-migration of functions in global supply chains associated with lower valued added per job. But as the emerging markets grow, they will compete for more sophisticated functions. This does not mean that the United States will lose all the sectors in which it has developed a comparative advantage—just that more potential competition is on the horizon.

Despite past growth, largely made possible by the rapid run-up in consumer debt, private sector employment gains in the nontradeable sector were not large enough to compensate for the lack of job creation in the tradeable sector.  Michael Mandel summed up the situation as follows:

Between May 1999 and May 2009, employment in the private sector only rose by 1.1 percent, by far the lowest 10-year increase in the post-depression period. It’s impossible to overstate how bad this is. Basically speaking, the private sector job machine has almost completely stalled over the past ten years.

Over the past 10 years, the private sector has generated roughly 1.1 million additional jobs, or about 100K per year. The public sector created about 2.4 million jobs.

But even that gives the private sector too much credit. Remember that the private sector includes health care, social assistance, and education, all areas which receive a lot of government support.

Without a decade of growing government support from rising health and education spending and soaring budget deficits, the labor market would have been flat on its back.

Total private sector wage growth, critical to any sustainable consumption driven expansion, has also stagnated.  As Jed Graham noted:

The increase in total real private-sector wages over the period 2001-11 was smaller than in any other 10 year period since World War II.  In fact its 4 percent growth rate was even lower than the 5 percent increase from 1929 to 1939.  To put that in perspective, since the Great Depression, 10-year gains in real private wages had always exceeded 25 percent with one exception: the period ending in 1982-83, when the jobless rate spiked above 10 percent and wage gains briefly decelerated to 16 percent.

Spence and Hlatshwayo also examined trends in value added in both nontradeable and tradeable sectors.  Significantly, the lack of net job creation in the tradeable sector, especially in manufacturing, did not translate into a decline in value added.  According to the authors, “Valued added in the tradable and nontradable parts of the economy grew at similar rates [over the years 1990 to 2008]. In fact, the tradable sector, though smaller than the nontradable, grew slightly faster and hence marginally increased its share of total value added, in marked contrast to the employment trends.”

Ironically, the cause of both the loss in employment and rise in value added in tradeable sectors like manufacturing was the same: the internationalization of production.  For example, the decline in manufacturing production was encouraged by multinational corporations shifting production to other lower labor cost locations. The rise in manufacturing value added was due in large part to the fact that, by cheapening the cost of production, such activity not only expanded the market for many manufactures (such as consumer electronics), it also widened the gap between final sales price and production cost, thereby raising both profit and value added.  Not surprisingly, then, according to Spence and Hlatshwayo, tradeable value added over the period 1990 to 2008 rose by 363 percent in electronics.

This outcome makes clear why U.S. multinational corporations, especially those involved in the tradeable sector, have embraced the internationalization of production and the free trade agreements that encourage it.  Of course transnational retailers have also benefited.  In fact, retailers like Walmart have aggressively pushed manufacturers to move their production offshore in order to lower production costs.  Finally, the new international division of labor has also created profitable opportunities for business and financial service companies.

In short, it is perfectly understandable why most major corporations happily support U.S. government efforts to enhance corporate mobility through new international agreements.  And given the negative consequences of these agreements for most working people, it is also perfectly understandable why they want the terms of negotiation kept secret.  At issue is whether we will find a way to deny them what they want.    

The Unsustainable Recovery

The news is filled with reports of positive economic trends–supposedly we are making slow but steady progress in recovering from the Great Recession.  The Great Recession ended in June 2009, which means we have been in economic expansion for almost 3 years.  So, how seriously should we take these reports?  

One indicator worth looking at is median household income.  Unfortunately its trend suggests little reason for cheer. In January 2012, median household income was $50,020.  That was 5.4% lower than it was in June 2009.  Even worse, as the chart below reveals, after a brief uptick it headed back down again.

 untitled.jpg

It is true that employment is finally growing, a development reflected in the decline in the unemployment rate (see above).  Unfortunately, this has done little to boost wages.  In fact, real wages actually fell in 2011.  The first chart below highlights the downward turn.  The second chart reveals just how far per capita earnings remain below historical trend.

us-real-wages_thumb.gif

 real-wage-and-salary-disbursements-per-capita.jpg

This situation helps to explain why growth has been so anemic.  As the Wall Street Journal wrote:

Many economists in the past few weeks have again reduced their estimates of growth.  The economy by many estimates is on track to grow at an annual rate of less than 2% in the first three months of 2012.  The economy expanded just 1.7% last year.  And since the final months of 2009, when unemployment peaked, the economy has expanded at a pretty paltry 2.5% annual rate. 

Without a dramatic change in median household income, growth will remain slow and even the limited employment gains we currently celebrate will likely prove impossible to sustain.  Given the current political climate, it is hard to see how this expansion will be either long lasting or bring meaningful improvements in majority living and working conditions. 

China and Neoliberalism

China is widely celebrated as an economic success story.  And it is as far as GDP, investment, and export growth is concerned.   However, as we know well from our experience in the United States, such economic indicators often reveal little about the reality of people’s lives.  In China workers are subject to intense working conditions with a disproportionate share of the benefits of production going to a top few.   For example, as Bloomberg News notes 

The richest 70 members of China’s legislature added more to their wealth last year than the combined net worth of all 535 members of the U.S. Congress, the president and his Cabinet, and the nine Supreme Court justices.

The net worth of the 70 richest delegates in China’s National People’s Congress, which opens its annual session on March 5, rose to 565.8 billion yuan ($89.8 billion) in 2011, a gain of $11.5 billion from 2010, according to figures from the Hurun Report, which tracks the country’s wealthy. That compares to the $7.5 billion net worth of all 660 top officials in the three branches of the U.S. government.

The income gain by NPC members reflects the imbalances in economic growth in China, where per capita annual income in 2010 was $2,425, less than in Belarus and a fraction of the $37,527 in the U.S. The disparity points to the challenges that China’s new generation of leaders, to be named this year, faces in countering a rise in social unrest fueled by illegal land grabs and corruption.

“It is extraordinary to see this degree of a marriage of wealth and politics,” said Kenneth Liberthal, director of the John L. Thornton China Center at Washtington’s Brookings Institution.  “It certainly lends vivid texture to the widespread complaints in China about an extreme inequality of wealth in the country now.”  

Growing numbers of Chinese workers and farmers have been engaged in workplace and community struggles in opposition to corporate and government policies, especially those designed to intensify the privatization, deregulation, and liberalization of the Chinese economy.  The number and determination of participants in these struggles has forced business and government leaders on the defensive.  

Recently, the People’s Daily ran an editorial calling for renewed commitment to “reform” in an attempt to shore up support for the government’s neoliberal policies.  The editorial appears to have triggered growing discussions and debates on and off the internet among academics and activists about alternatives. 

One concrete outcome from these discussions and debates is a 16 point proposal which was developed collectively and recently published on the Red China website; it has gained significant support.  The following is an English translation of the proposal by the China Study Club at University of Massachusetts, Amherst.   Reading it provides a window into political developments in China and also highlights the similarity of struggles in China and the United States.  

A SIXTEEN-POINT PROPOSAL ON CHINA’S REFORM  

1. That the personal and family wealth of all officials be publicized and their source clarified, and all “naked bureaucrats” be expelled from the Party and the government. (“Naked bureaucrats” refer to those officials whose family lives in developed countries and whose assets have been transferred abroad, leaving nothing but him/herself in China.)  

2. That the National Congress concretely exercises its legislative and monitory function, comprehensively review the economic policies implemented by the state council, and defend our national economic security.   

3. That the existing pension plans be consolidated and retirees be treated equally regardless of sector and rank.  

4. That elementary and secondary education be provided free of charge throughout the country; compensation for rural teachers be substantially raised and educational resources be allocated on equal terms across urban and rural areas; and the state assume the responsibility of raising and educating vagrant youth.  

5. That the charges of higher education be lowered, and public higher education gradually become fully public-funded and free of charge.   

6. That the proportion of state expenditure on education be increased to and beyond international average level.   

7. That the price and charge of basic and critical medicines and medical services be managed by the state in an open and planned manner; the price of all medical services and medicines should be determined and enforced by the state in view of social demand and actual cost of production.   

8. That heavy progressive real estate taxes be levied on owners of two or more residential housings, so as to alleviate severe financial inequality and improve housing availability.

9. That a nation-wide anti-corruption online platform be established, where all PRC citizens may file report or grievance on corruption or abuse instances; the state should investigate in openly accountable manner and promptly publicized the result.   

10. That the state of national resources and environmental security be comprehensively assessed, exports of rare, strategic minerals be immediately cut down and soon stopped, and reserve of various strategic materials be established.  

11. That we pursue a self-reliant approach to economic development; any policy that serves foreign capitalists at the cost of the interest of Chinese working class should be abolished.  

12. That labor laws be concretely implemented, sweatshops be thoroughly investigated; enterprises with arrears of wage, illegal use of labor, or detrimental working condition should be closed down if they fail to meet legal requirements even after lawfully limited term for self-correction.   

13. That the coal industry be nationalized across the board, all coal mine workers receive the same level of compensation as state-owned enterprise mine workers do, and enjoy paid vacation and state-funded medical service.  

14. That the personal and family wealth of managerial personnel in state-owned enterprises be publicized; the compensation of such personnel should be determined by the corresponding level of people’s congress.   

15. That all governmental overhead expenses be restricted; purchase of automobile with state funds be restricted; all unnecessary traveling in the name of “research abroad” be suspended.   

16. That the losses of public assets during the “reforms” be thoroughly traced, responsible personnel be investigated, and those guilty of stealing public properties be apprehended and openly tried.