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.

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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.

Living On The Edge: Americans In A Time Of “Prosperity”

These are supposed to be the good times—with our current economic expansion poised to set a record as the longest in US history. Yet, according to the Federal Reserve’s Report on the Economic Well-Being of US Households in 2017, 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.

The problem with our economy isn’t that it sometimes hits a rough patch.  It’s that people struggle even when it is setting records.

The expansion is running out of steam

Our current economic expansion has already gone 107 months.  Only one expansion has lasted longer: the expansion from March 1991 to March 2001 which lasted 120 months.

A CNBC Market Insider report by Patti Domm quotes Goldman Sachs economists as saying: “The likelihood that the expansion will break the prior record is consistent with our long-standing view that the combination of a deep recession and an initially slow recovery has set us up for an unusually long cycle.”

The Goldman Sachs model, according to Domm:

shows an increased 31 percent chance for a U.S. recession in the next nine quarters. That number is rising. But it’s a good news, bad news story, and the good news is there is now a two-thirds chance that the recovery will be the longest on record. . . . The Goldman economists also say the medium-term risk of a recession is rising, “mainly because the economy is at full employment and still growing above trend.”

The chart below highlights the growing recession risk based on a Goldman Sachs model that looks at “lagged GDP growth, the slope of the yield curve, equity price changes, house price changes, the output gap, the private debt/GDP ratio, and economic policy uncertainty.”

Sooner or later, the so-called good times are coming to an end.  Tragically, a large percent of Americans are still struggling at a time when our “economy is at full employment and still growing above trend.” That raises the question: what’s going to happen to them and millions of others when the economy actually turns down?

Living on the edge

The Federal Reserve’s report was based on interviews with a sample of over 12,000 people that was “designed to be representative of adults ages 18 and older living in the United States.”  One part of the survey dealt with unexpected expenses.  Here is what the report found:

Approximately four in 10 adults, if faced with an unexpected expense of $400, would either not be able to cover it or would cover it by selling something or borrowing money. The following figure shows that the share of Americans facing financial insecurity has been falling, but it is still alarming that the percentage remains so high this late in a record setting expansion.

Strikingly, the Federal Reserve survey also found, as shown in the table below, that “(e)ven without an unexpected expense, 22 percent of adults expected to forgo payment on some of their bills in the month of the survey. Most frequently, this involves not paying, or making a partial payment on, a credit card bill.”

And, as illustrated in the figure below, twenty-seven percent of adult Americans skipped necessary medical care in 2017 because they were unable to afford its cost.  The table that follows shows that “dental care was the most frequently skipped treatment, followed by visiting a doctor and taking prescription medicines.”

Clearly, we need more and better jobs and a stronger social safety net.  Achieving those will require movement building.  Needed first steps include helping those struggling see that their situation is not unique, a consequence of some individual failing, but rather is the result of the workings of a highly exploitative system that suffers from ever stronger stagnation tendencies.  And this requires creating opportunities for people to share experiences and develop their will and capacity to fight for change.  In this regard, there may be much to learn from the operation of the Councils of the Unemployed during the 1930s.

It also requires creating opportunities for struggle.  Toward that end we need to help activists build connections between ongoing labor and community struggles, such as the ones that education and health care workers are making as they fight for improved conditions of employment and progressive tax measures to fund a needed expansion of public services.  This is the time, before the next downturn, to lay the groundwork for a powerful movement for social transformation.

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This post was updated May 31, 2018.  The original post misstated the length of the current expansion.

Corporate Taxes And False Promises: US Workers And The 2017 Tax Cuts And Jobs Act

In December 2017 the Congress approved and the President signed into law the Tax Cuts and Jobs Act.  The Act reduced business and individual taxes, with corporations and the wealthy the greatest beneficiaries.  But, as usual, government and business leaders promoted this policy by also promising substantial gains for working people.  Any surprise that they lied?

Corporate Tax Giveaways And Wage Promises

Corporations, and their stockowners, were the biggest winners of this tax scam.  The Act lowered the US corporate tax rate from 35 percent to 21 percent and eliminated the corporate Alternative Minimum Tax.

It also gave a special bonus to multinational corporations, changing the federal tax system from a global to a territorial one.  Under the previous global tax system, US multinational corporations were supposed to pay the 35 percent US tax rate for income earned in any country in which they had a subsidiary, less a credit for the income taxes they paid to that country.  Now, under the new territorial tax system, each corporate subsidiary is only required to pay the tax rate of the country in which it is legally established.

As the Center on Budget and Policy Priorities points out, this change:

risks creating a large, permanent incentive for U.S. multinationals to shift overseas not just profits on paper but actual investment as well.  This could lead to a reduction in capital investment in the United States and thereby wind up reducing U.S. workers’ wages, as Congressional Research Service economist Jane Gravelle has explained. The law includes several provisions to try to limit the damage this incentive could cause, but they don’t alter the basic incentive to shift profits and investment offshore.

The Act also offers multinational corporations a one-time special lower tax rate of 8 percent on repatriated profits that are currently held by overseas subsidiaries in tax-haven countries; estimates are that there are some $3 trillion dollars parked offshore.

And, what are working people supposed to get for this massive tax giveaway to corporations?  According to President Trump and House Speaker Paul Ryan, the Act would generate a substantial increase in investment and productivity, thereby boosting employment and wages.  Both political leaders cited, in support of their claims, the work of the president’s Council of Economic Advisers which argued that:

Reducing the statutory federal corporate tax rate from 35 to 20 percent would, the analysis below suggests, increase average household income in the United States by, very conservatively, $4,000 annually. The increases recur each year, and the estimated total value of corporate tax reform for the average U.S. household is therefore substantially higher than $4,000. Moreover, the broad range of results in the literature suggest that over a decade, this effect could be much larger. These conclusions are driven by empirical patterns that are highly visible in the data, in addition to an extensive peer-reviewed research.

In fact, the Council’s report went on to say: “When we use the more optimistic estimates from the literature, wage boosts are over $9,000 for the average U.S. household.”

Modeling the effects of a tax cut is far from simple.  And, given the political nature of tax policy, it should come as no surprise that the estimate of gains for workers by President Trump’s Council of Economic Advisers was based on questionable assumptions and a real outlier.  This is highlighted by a Washington Center for Equitable Growth issue brief:

This issue brief examines estimates of the change in wages resulting from the Tax Cuts and Jobs Act after 10 years implied by the macroeconomic analyses of the Tax Policy Center, the Congressional Budget Office, the Penn Wharton Budget Model, the Tax Foundation, and the White House Council of Economic Advisers. The Tax Policy Center estimated that the law would increase wages by less than 0.1 percent after 10 years. The Congressional Budget Office estimated an increase of about 0.3 percent in the same year. The Penn Wharton Budget Model produced two estimates of the impact on wages, about 0.25 percent and 0.8 percent. The Tax Foundation estimated an increase of about 2 percent, and the White House Council of Economic Advisers estimated increases between 5 percent and 11 percent.  All of these estimates compare wages in 2027 to what they would have been in that year had the legislation not been enacted. . . .

These estimates imply widely varying labor incidence of the corporate tax cuts in the Tax Cuts and Jobs Act, ranging from near zero for the Tax Policy Center to multiples of the conventional revenue estimate for the Council of Economic Advisers. As a reference point, wage rates would need to increase by about 1 percent above what they would have been in the absence of the law to shift the benefits of the corporate tax cuts from shareholders to workers—and even more if revenue-raising provisions of the new law scheduled to take effect in the future are delayed or repealed.

Corporate Taxes Go Down and Wages Remain Low

Chris Macke, writing in the Hill, highlights just how little workers have benefited to this point from the Tax Cuts and Jobs Act:

The latest Employment Situation report from the Bureau of Labor Statistics shows weekly employee earnings have grown $75 since tax reform passed, well short of the $4,000 to $9,000 annual increases projected by President Trump and House Speaker Paul Ryan.

During the three months following passage of the tax bill, the average American saw a $6.21 increase in average weekly earnings. Assuming 12 weeks of work during the three months following passage of the corporate tax cuts, this equates to a $75 increase.

Assuming a full 52 weeks of work, the $6.21 increase in weekly earnings would result in a $323 annual increase, nowhere near the minimum $4,000 promised and $9,000 potential annual increases projected by President Trump and Speaker Ryan if significant cuts were made to corporate tax rates.

Unless something drastically changes, it seems that Americans are going to have to settle for much less than the $4,000 to $9,000 projected wage increases. An extra $322 a year isn’t going to do much to pay down the $1 trillion in additional debt they are projected to take on as a result of the tax cuts.

Mark Whitehouse, writing in Bloomberg Businessweek, provides additional evidence that the business tax cuts are doing little for the average worker.  As he put it: “Companies getting bigger breaks aren’t giving bigger raises.”

The following chart from his article shows that industries “getting bigger tax breaks aren’t giving bigger raises.”  Actually, quite the opposite appears to be true.  To this point, we actually see a negative correlation between the size of the tax cuts and wage increases.

The next chart provides a more useful look at the relationship between expected tax breaks and wage increases, showing how much companies in the different industries have boosted wages relative to the previous year.  Not only does the negative correlation remain, wage growth has actually fallen in the industries expected to enjoy the largest tax cuts.

 

What we see is corporate power at work.  And, in the face of growing stagnation tendencies, those who wield this power appear willing to pursue ever more extreme policies in defense of their interests, apparently confident that they will be able to manage any instabilities or crises that might arise.  It is up to us to stop them, by building a movement able to help working people see through corporate and government misrepresentations and take-up their side of the ongoing class war.

US Policy and Possibilities For Peace On The Korean Peninsula

 

KOREAN CONFEDERATION OF TRADE UNIONS UNIFICATION COMMITTEE AND US LABOR AGAINST THE WAR SOLIDARITY DELEGATION TO KOREA, May 3, 2018, in front of the U.S. Embassy, Seoul, South Korea

The recent inter-Korean summit and the upcoming US-NK summit have suddenly made real the possibility for an end to the Korean War, normalization of relations between the US and North Korea, and meaningful progress toward Korean reunification.  Although the peace process is being driven by Korean efforts, clearly, the outcome depends heavily on US actions.

Unfortunately, the US press is not doing a very good job informing people about the history of US policy towards Korea, North and South, which means that it is not as easy as it should be to build a popular movement for peace. In response, the Korea Policy Institute has just published a reader on US Policy on Korea.  It is 130 pages long, with 19 articles by authors from the United States and Asia, and organized into the following five sections:

  1. The Unending Korea War
  2. US Foreign Policy Towards North Korea
  3. South Korea: The Democratic Struggle
  4. Voices For Peace
  5. A Hopeful Start To An Era Of Peace

You can download it or order hard copies here:

http://kpolicy.org/the-kpi-reader-2018-important-new-resource-on-korea/

And keep checking the Korea Policy Institute website for the latest news and analysis of events.