Reports from the Economic Front

a blog by Marty Hart-Landsberg

Monthly Archives: November 2015

Political And Economic Struggle In South Korea

Tens of thousands are expected to gather in Seoul on December 5 to protest South Korean President Park Geun-hye’s proposed anti-worker labor market reforms, as well as her pursuit of new free trade agreements and plans for public schools to use a state authored history book. They hope to build on the momentum generated by the November 14 rally, when nearly 100,000 people, mostly farmers, workers, and students, marched in the country’s capital to call for her ouster.

South_Korea_Protests-3

The South Korean National Police Agency has banned the upcoming gathering but the Korean Confederation of Trade Unions (KCTU), calling the ban “unconstitutional,” remains committed to the protest.  Workers see the fight to stop the labor market reforms as critical to the future of the South Korean economy. The reforms are designed to make it easier for companies to fire workers and unilaterally restructure work conditions, as well as increase their use of temporary and sub-contracted labor.

The South Korean government has responded to the protest movement by cracking down on organizers and protesters. It has come under widespread criticism for its excessive use of force against demonstrators on November 14.  A 69-year old farmer remains in critical condition after being doused with tear gas and water cannons. Since November 14, the government has intensified police raids on labor unions and issued an arrest warrant for the president of the KCTU, Han Sang-gyun, for his role in organizing the protest. The police have surrounded the Jogyesa Buddhist Temple, where Han has sought sanctuary.

Han has said he will voluntarily turn himself in to the police if the government will abandon its labor market reform plans. However, if the government refuses to change course, the KCTU vows to launch a general strike. According to Han, “We’re talking about stopping production, freight trucks stopping in their tracks, railroad and subway workers on illegal strikes, and immobilizing the country so that the government will feel the outrage of the workers.”

President Park has also come under fire for comments she made likening protesters to Islamic State (IS) terrorists.  At a recent National Assembly meeting to discuss new counterterrorism bills she is reported to have said, “Rallies where protesters wear face masks should be banned. Isn’t that how IS does it? Hiding their faces….”.

The South Korean experience is far from unique. With the deepening of corporate-led globalization processes, governments everywhere seek to weaken labor movements and worker protections and restrict options for public education and democratic debate. As a consequence, the KCTU’s efforts to revitalize its own union structures through its first ever direct election for top officers and renewed internal education and anchor a broad coalition of social forces around an alternative social vision deserves widespread support and serious study.

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Election Politics And The Economy

It’s election season in the US and so politicians, supported by their favorite economists, are busy telling us how they will lift the US economy out of its doldrums, ensuring more and better jobs for Americans.

A case in point: the New York Times ran an article highlighting how most Republican presidential candidates are pushing for some form of consumption tax coupled with reductions in income and corporate taxes.

Then the story adds:

. . . the broad direction of their proposals — toward taxing spending rather than income — is one that many economists in both parties applaud. It is also one that politicians, of necessity, may eventually embrace. . . .

“Every one of the Republican plans I have looked at closely has more of a consumption basis,” said Leonard Burman, a former official in President Bill Clinton’s administration who directs the Urban-Brookings Tax Policy Center.

Democratic politicians typically oppose taxing consumption on fairness grounds; lower earners spend a greater proportion of their income than higher earners. They favor what are called progressive taxes, those that tax a higher proportion of wealthier people’s income. That instinct is especially acute in an era of stagnant middle-class wages and widening income inequality.

Yet Democratic economists, like their Republican counterparts, say taxing consumption encourages savings, investment and greater economic growth.

Whoa!—can that be true, that there is a growing consensus for a shift in taxes that would penalize consumption, and that this is the best way to promote savings, investment, and greater economic growth?

Reading this, one might well assume that weak savings must be the main cause of the low investment and stagnant economic growth in the US.  However, as the economist Michael Roberts demonstrated in a recent blog post, such an assumption would be wrong.

Roberts, drawing on both an article by Martin Wolfe (a Financial Times economic analyst), and a research study by Joseph W. Gruber and Steven B. Kamin (two US Federal Reserve Bank economists), pursues the reason for weak investment in advanced capitalist economies, including the US, by examining trends in corporate savings and investment.

As Wolfe points out,

companies generate a huge proportion of investment. In the six largest high-income economies (the US, Japan, Germany, France, the UK and Italy), corporations accounted for between half and just over two-thirds of gross investment in 2013 (the lowest share being in Italy and the highest in Japan).

Because corporations are responsible for such a large share of investment, they are also, in aggregate, the largest users of available savings, but their own retained earnings are also a huge source of savings. Thus, in these countries, corporate profits generated between 40 per cent (in France) and 100 per cent (in Japan) of gross savings (including foreign savings) available to the economy.

The following three charts all come from Wolf’s article.  This first shows trends in corporate gross savings as a percent of GDP for all six countries.  As we can see, corporate gross savings as a share of GDP grew, although marginally, in every country but France over the period 1998 to 2014.

corporate-gross-savings

The next chart shows trends in corporate investment as a percent of GDP.  In contrast to corporate savings, the investment ratio fell noticeably in every country, again with the exception of France, over the same time period.

corporate-gross-investment

Combining the two ratios yields the trend in net corporate savings as a share of GDP, which is illustrated in the following chart.  The take away is clear: corporations are saving more than they are investing, which means that the decline in investment cannot be explained by a shortfall in savings.  Thus, it is foolish to think that we will boost investment and growth in the United States, or the other countries, by taxing consumption.

corporate-net-lending

So, what explains the lack of corporate investment?  Gruber and Kamin’s investigation into what they call the “corporate saving glut led them to the following conclusions:

First, . . . in most of the G7 economies we studied, the net lending of nonfinancial corporations rose to very high levels in recent years, and this rise started even before the GFC [Global Financial Crisis]. . . . Second, consistent with other studies of recent investment behavior, we found that models estimated up through 2006 generally tracked the weakness of actual investment during the GFC and its aftermath; conversely, models estimated up through 2001 often over-predicted investment in subsequent years, both before and after the GFC. We interpret these results as suggesting that investment in the major advanced economies has indeed weakened relative to what standard determinants would suggest, but that this process started well in advance of the GFC itself. Finally, we find that the counterpart of declines in resources devoted to investment has been rises in payouts to investors in the form of dividends and equity buybacks (often to a greater extent than predicted by models estimated through earlier periods), and, to a lesser extent, heightened net accumulation of financial assets. The strength of investor payouts suggests that increased risk aversion and a precautionary demand for financial buffers has not been the primary reason firms have cut back investment. Rather, our results are consistent with views that, for any number of reasons, there has been a decline in what firms perceive to be the availability of profitable investment opportunities.

Roberts appropriately highlights the last sentence.  We know that capitalism is driven by the pursuit of private profit.  The question for us is: How well does such a system serve majority interests when during this period of great social need our leading corporations are unwilling to invest because existing opportunities do not offer them sufficient profit?

It is as good a time as ever in the US to reject false strategies for economic renewal and seriously begin conversations about alternative ways to organize our economy and political system.

The TPP: A Living Agreement

President Obama has called the TPP a “trade agreement for the 21st century.”  The implication is that this agreement goes a step beyond past trade agreements.  And in at least one critical way this appears true.

As Stan Sorscher explains, the TPP appears to be a “living” agreement, by which he means that the parties to the agreement are not bound by the specific terms of the agreement but in fact enjoy mechanisms that allow them to extend its reach as desired:

The recently released text establishes roughly 20 committees to manage trade in agriculture, government procurement, the Internet, food safety, financial regulation, and other topics covered in the deal. Some committees have narrow authority, but others have open-ended scope, such as the Committee on Trade in Goods which will “…undertak[e] any additional work that the Commission may assign to it.”

So, what is this “Commission,” established under TPP? It coordinates work among the Committees. It also interprets provisions of the agreement. In our tradition, that authority belongs to courts.

The Commission may also “take such other actions as the Parties may agree.” If we are unclear on what that means, we can let the Commission explain to us exactly what it has the authority to do. . . .

The charge and work of the Commission is described Chapter 27 of the agreement.  Here are its first two articles:

Article 27.1: Establishment of the Trans-Pacific Partnership Commission

The Parties hereby establish a Trans-Pacific Partnership Commission (Commission) which shall meet at the level of Ministers or senior officials, as mutually determined by the Parties. Each Party shall be responsible for the composition of its delegation. 

Article 27.2: Functions of the Commission

1. The Commission shall:

(a) consider any matter relating to the implementation or operation of this Agreement;

(b) review within 3 years of entry into force of this Agreement and at least every 5 years thereafter the economic relationship and partnership among the Parties;

(c) consider any proposal to amend or modify this Agreement;

(d) supervise the work of all committees and working groups established under this Agreement;

(e) establish the Model Rules of Procedure for Arbitral Tribunals referred to in Article 28.11.2 and Article 28.12, and, where appropriate, amend such Model Rules of Procedure for Arbitral Tribunals;

(f) consider ways to further enhance trade and investment between the Parties;

(g) review the roster of panel chairs established under Article 28.10 every 3 years, and when appropriate, constitute a new roster; and

(h) determine whether the Agreement may enter into force for an original signatory notifying pursuant to paragraph 4 of Article 30.5.1 (Entry into Force).

2. The Commission may:

(a) establish, refer matters to, or consider matters raised by, any ad hoc or standing committee or working group;

(b) merge or dissolve any subsidiary bodies established under this Agreement in order to improve the functioning of this Agreement;

(c) consider and adopt, subject to completion of any necessary legal procedures by each Party, any modifications of 1:

(i) the Schedules contained in Annex 2-D (Tariff Elimination), by accelerating tariff elimination;

(ii) the rules of origin established in Annex 3-D (Specific Rules of Origin); or

(iii) the lists of entities and covered goods and services and thresholds contained in each Party’s Annex to Chapter 15 (Government Procurement);

(d) develop arrangements for implementing this Agreement;

(e) seek to resolve differences or disputes that may arise regarding the interpretation or application of this Agreement;

(f) issue interpretations of the provisions of the Agreement;

(g) seek the advice of non-governmental persons or groups on any matter falling within the Commission’s functions; and

(h) take such other action as the Parties may agree.

3. Pursuant to paragraph 1(b), the Commission shall review the operation of this Agreement with a view to updating and enhancing this Agreement, through negotiations, as appropriate, to ensure that the disciplines contained in the Agreement remain relevant to the trade and investment issues and challenges confronting the Parties.

4. In conducting a review pursuant to paragraph 3, the Commission shall take into account:

(a) the work of all committees, working groups and any other subsidiary bodies established under this Agreement;

(b) relevant developments in international fora; and

(c) as appropriate, input from non-governmental persons or groups of the Parties. 

In short, if this agreement is approved, governments can transform its terms and reach at will, including adding new countries.  And the operating principles are clear: more privatization and freedom of action for corporations, resulting in more opportunities for private profit.

 

World Poverty Rates Remain High

The World Bank has a new international poverty line and is celebrating the rapid decrease in the percentage of people living in poverty.  According to the World Bank, the world poverty rate will fall below 10% this year; we are on our way to ending world poverty. Unfortunately, this is a story based on misleading measurements, one that largely serves to buttress the status quo and blunt demands for real change in global economic processes.

The World Bank’s new international poverty line, announced in October 2015, is set at $1.90 per day in 2011 purchasing power parity dollars.  Before discussing the origins of that line, it is worth taking a moment to consider how low that level truly is.  As Jason Hickley explains:

How much is $1.90 per day, adjusted for purchasing power? Technically, it represents the international equivalent of what $1.90 could buy in the United States in 2011. But we know that this amount of money is inadequate to achieve even the most basic nutrition. The US Department of Agriculture calculates that in 2011 the very minimum necessary to buy sufficient food was $5.04 per day. And that’s not taking account of other requirements for survival, such as shelter and clothing.

If you multiply $1.90 times 365 you get the princely annual sum of $693.50.  Imagine living on that in the United States in 2011, and then imagine that according to the World Bank if you make more than that (or its equivalent in other countries) you are no longer to be classified as poor.

Calculating the global poverty line

Countries have their own poverty line calculated in their own respective currencies.  Having a global poverty line means (1) converting national poverty lines to a common standard and (2) finding a way to devise a single number that would have relevance for every country.

While it might be tempting to overcome the first challenge by converting every country’s national poverty line into a dollar value using the existing exchange rate between the country’s currency and the dollar, this would produce widely and rapidly fluctuating poverty lines.  Moreover many goods and services are not traded internationally and so their prices are not actually changed by exchange rate movements.

Therefore, the World Bank employs a different approach.  In broad brush, it constructs a so-called basket of consumer goods and services and determines its cost in the United States in a particular year.  Next, it attempts to determine the national costs of a similar basket in most third world countries.  Finally, it calculates a purchasing power parity exchange rate for the dollar and the currencies of these countries using these relative costs.  In theory, at least, one can then talk about a standardized purchasing power expressed in dollars.

The Bank sought to overcome the second challenge by first using purchasing power parity exchange rates to convert national poverty lines denominated in local currencies into dollars.  Bank researchers then selected, somewhat arbitrarily, the newly converted poverty lines of 15 of the lowest income countries, and determined a consensus poverty line.  It is this consensus poverty line that serves as the Bank’s international poverty line.  Finally, the Bank attempts to estimate the number of people in each country with earnings below that line.

Because the measurement process is expensive and time consuming, the Bank only makes periodic updates to its poverty line.  The 1993 purchasing power parity international poverty line was set at $1.08 a day.  The 2005 purchasing power parity international poverty line was set at $1.25 a day.  And the newly released 2011 purchasing power parity international poverty line was determined to be $1.90 a day.

The figure below, taken from a study by Rahul Lahoti and Sanjay Reddy, highlights the percentage of the world population living below the poverty line for a number of different poverty lines.  As one can see, the percentage of those living in poverty according to the Bank’s latest poverty line is rapidly falling.  In fact, the gains are even greater using the new poverty line than the previous one.

percent poverty


Problems with the Bank’s work

There are many problems with the Bank’s methodology, most importantly its framework is rather arbitrary.  Why should the Bank choose the poorest countries to set a poverty line?  As Hickley points out:

The World Bank picked the $1.90 line because it’s the average of the national poverty lines of the very poorest countries in the world, like Chad and Burundi. But it tells us very little about what poverty is like in most other countries. The bank itself admits that poverty in Latin America, for example, should be measured at about $6 a day. And yet for some reason it persists with the $1.90 line.

Perhaps even more telling there is little reason to have confidence that national poverty lines accurately capture poverty status or that the basket of goods and services used to construct the purchasing power parity exchange rates truly measure basic needs.

And then there are all the difficulties of the computations.  Many of the poorest countries do not have poverty that clearly differentiate between rural and urban poverty or national consumer price indicies, all of which require the Bank to make a number of estimates and/or use adhoc measures to make its calculations.

Moreover, it is tricky to use international poverty lines calculated in one year to measure poverty rates in past or future years.  The international poverty lines are based on prices in a base year which are shaped by the structure of the world economy in that year, while prices in different countries shift yearly in response to changing local and international conditions.  For a more complete discussion of these and other points see the above cited study by Lahoti and Reddy.

Alternative measures and poverty trends

While Lahoti and Reddy call for the construction of an alternative measure of poverty, one that relies not on income but a concrete measure of the goods and services required to live a non-poverty life, they do offer, using U.S. Department of Agricultural data, an alternative estimate of international poverty to illustrate the problematic nature of the World Bank’s work.

As they explain:

The Thrifty Food Plan produced by the US Dept. of Agriculture Center of Nutrition Policy and Promotion established, with great care, the minimum cost of achieving “Recommended Dietary Allowances” in the United States. It does so for a model family of a specified size and composition by collecting “scanner” price data from markets around the US and calculating the mathematical least cost of achieving the allowances at these prices (using linear programming techniques) and by subsequently modestly adjusting the amount to make some allowance for prevailing tastes. It then verifies that the amount suffices for cooking model recipes in a test kitchen. The allowance is based entirely on the supposition of home cooking and makes no reference to the costs of the kitchen or the cooking pots. By definition, the Thrifty Food Plan allowance does not suffice for any non-food requirement (e.g. for shelter, clothing, transportation etc.). It can therefore be taken as a lower bound on real requirements in the US. However, to take note of the possible criticism that the Thrifty Food Plan allowances are overly generous, we consider expenditure levels corresponding both to those allowances (based on per person per day costs in a family of four with two children of intermediate ages) and to half their value. In 2011, these amounts were respectively $5.04 and $2.52. These can be thought of as food poverty lines to which non-food requirements must be added, but have not been. Further, we apply both general consumption PPPs (as does the Bank) and food PPPs more appropriate to food requirements in particular. Combining these possibilities leads to four alternative poverty lines and resulting poverty estimates.

Looking at poverty trends using the $5.04 2011 Food PPP and 2011 PPP we see in the figure above that declines in poverty are quite recent, dating to 2000.  These gains no doubt reflect the high country growth rates powered by soaring commodity prices.  Those prices are now in sharp decline as are growth rates.  Regardless, the percentage of the world population below the poverty line remains extremely high, well over 50%.

The figure below shows numbers of poor rather than percentages.  These two alternative measures show increases, not decreases, in the number of poor people relative to 1980 and 1990.

number poor

Hickley offers two other poverty estimates, both of which also show levels of world poverty far higher than that claimed by the World Bank:

One option is to count poverty country-by-country using each nation’s own poverty line, with $1.90 as an absolute floor. If we did that, we would see that about 1.7 billion people remain in poverty today, which is more than 70% higher than the World Bank would have us believe.

If we want to stick with a single international line, we might use the “ethical poverty line” devised by Peter Edward of Newcastle University. He calculates that in order to achieve normal human life expectancy of just over 70 years, people need roughly 2.7 to 3.9 times the existing poverty line. In the past, that was $5 a day. Using the bank’s new calculations, it’s about $7.40 a day. As it happens, this number is close to the average of national poverty lines in the global south.

Challenges ahead

The UN and the World Bank are strongly committed to the World Bank’s results because it allows both organizations to declare the success of their efforts.  The UN, for example, recently declared its Millennium Development Goals successfully met, thanks in large part to World Bank poverty estimates.  Now, it has launched its Sustainable Development Goals, which includes the eradication of world poverty.

The bankruptcy, perhaps better said danger, in this concerted effort to legitimate business as usual is clearly expressed in the following public letter to the UN by Noam Chomsky and other leading scholar/activists:

As the UN and the world’s governments ratify the Sustainable Development Goals (SDGs) today (September 25), we must be clear that they do not represent the best interests of the world’s majority — those that are currently exploited and oppressed within the current economic and political order.

The SDGs claim they can eradicate poverty in all its forms by 2030. But they rely primarily on global economic growth to achieve this tremendous task. If such growth resembles that seen in recent decades, it will take 100 years for poverty to disappear, not the15 years the SDGs promise. And even if this were possible in a shorter timescale, we would need to increase the size of the global economy by a factor of 12, which, in addition to making our planet uninhabitable, will obliterate any gains against poverty.

Rather than paper over such obvious madness with false hopes, we must address two critical issues head on: income inequality and endless material growth.

If poverty is to be truly overcome by 2030, then much of the improvement in the position of the impoverished must come through reduction in the enormous inequality that has accumulated in the last 200 plus years. The richest 1 percent of humanity will very soon own over half of the world’s private wealth. It would take only modest reductions in inequality to deliver large increases in the socio-economic position of the poorer half of humanity.

The SDGs do talk about reducing inequality. However, their prescription is technocratic, obscure and wholly incommensurate to the task at hand. For example, Target 10.1 states that by 2030 they will “progressively achieve and sustain income growth of the bottom 40 per cent of the population at a rate higher than the national average.” It is hard to imagine a less robust or ambitious goal. This commitment allows inequality to grow without limit until 2029, so long as it then begins to be reduced. The SDGs thus fail to endorse the only means that can achieve their stated goal of ending poverty: substantial inequality reduction, starting now. In effect, they perpetuate severe poverty and leave this fundamental problem to future generations.

The other essential task is for the world’s nations to adopt a saner measure of human progress; one that gears us not towards endless GDP growth based on extraction and consumption, but towards the wellbeing of humanity and our planet as a whole. There are plenty of options to choose from, all of which have been ignored in the SDGs. Instead, Target 17.19 says only that they will, “by 2030, build on existing initiatives to develop measurements of progress on sustainable development that complement GDP”. Another urgent challenge passed down to the next generation.

It is possible to overcome poverty in a way that respects the Earth and helps tackle climate change. The planet is abundant in wealth and its people infinitely resourceful. In order to do so, however, we must be prepared to challenge the logic of endless growth, greed and destruction enshrined in neoliberal capitalism.

It is time to envision a new operating system, based on social justice and symbiosis with the natural world. As currently formulated, the SDGs merely distract us from addressing the challenges we face.

Signed by:

Noam Chomsky, MIT
Thomas Pogge, Yale University
Naomi Klein, Author and activist
Eve Ensler, Playwright and activist
Chris Hedges, Pullitzer-prize winning journalist and author
Helena Norberg-Hodge, International Society for Ecology and Culture
Anuradha Mittal, Oakland Institute
Tom Goldtooth, Indigenous Environmental Network
Maude Barlow, Author and human rights activist
David Graeber, London School of Economics
Medha Patkar, National Alliance of People’s Movments, India
Alnoor Ladha, The Rules

 

Transnational Corporations and Labor

In May I participated in a conference in the Philippines hosted by Asia Monitor Research Center on “The Prospects of Labor Organizing in Asia: Understanding Capital Mobility and Global Production Networks.”

I made a presentation and also was interviewed on transnational capital and the challenges of labor organizing.  The interview is below.  The transcript of the interview is here.