Climate Change, The Green New Deal, and the Struggle for Climate Justice

Most calls for a Green New Deal correctly emphasize that it must include a meaningful commitment to climate justice.  That is because climate change—for reasons of racism and capitalist profit-making—disproportionately punishes frontline communities, especially communities of color and low-income.

A 2020 published study on redlining (“the historical practice of refusing home loans or insurance to whole neighborhoods based on a racially motivated perception of safety for investment”) and urban heat islands helps to shed light on the process.  The authors of the study, Jeremy S. Hoffman, Vivek Shandas, and Nicholas Pendleton, examined temperature patterns in 108 US urban areas and found that 94 percent of them displayed “consistent city-scale patterns of elevated land surface temperatures in formerly redlined areas relative to their non-redlined neighbors by as much as 7 degrees Celsius (or 13 degrees Fahrenheit).”

As one of the authors explained in an interview:

“We found that those urban neighborhoods that were denied municipal services and support for home ownership during the mid-20th century now contain the hottest areas in almost every one of the 108 cities we studied,” Shandas said. “Our concern is that this systemic pattern suggests a woefully negligent planning system that hyper-privileged richer and whiter communities. As climate change brings hotter, more frequent and longer heat waves, the same historically underserved neighborhoods — often where lower-income households and communities of color still live — will, as a result, face the greatest impact.”

Urban heat islands

Climate scientists have long been aware of the existence of urban heat islands, localized areas of excessive land surface heat.  The urban heat island effect can cause temperatures to vary by as much as 10 degrees C within a single urban area.  As heat extremes become more common, and last longer, the number of associated illnesses and even deaths can be expected to rise.  Already, as Hoffman, Shandas, and Pendleton note,

extreme heat is the leading cause of summertime morbidity and has specific impacts on those communities with pre-existing health conditions (e.g., chronic obstructive pulmonary disease, asthma, cardiovascular disease, etc.), limited access to resources, and the elderly. Excess heat limits the human body’s ability to regulate its internal temperature, which can result in increased cases of heat cramps, heat exhaustion, and heatstroke and may exacerbate other nervous system, respiratory, cardiovascular, genitourinary, and diabetes-related conditions.

Studies have identified some clear causes for urban heat extremes—one is the density of impervious surface area; the greater the density, the hotter the land surface temperature.  The other is the tree canopy; the greater the canopy, the cooler the land surface temperature.  And as the three authors observe, “emerging research suggests that many of the hottest urban areas also tend to be inhabited by resource-limited residents and communities of color, underscoring the emerging lens of environmental justice as it relates to urban climate change and adaptation.” What their study helps us understand is that the process by which communities of color and poor came to live in areas with more impervious surface area and fewer green spaces was to a large degree the “result of racism and market forces.”

Racism and redlining

Racism in housing has a long history.  Kale Williams, writing in the Oregonian newspaper, highlights the Portland, Oregon history:

Exclusionary covenants, legal clauses written into property deeds, prohibited people of certain races, specifically African Americans and people of Asian descent, from purchasing homes. In 1919, the Portland Realty Board adopted a rule declaring it unethical to sell a home in a white neighborhood to an African American or Chinese person. The rules stayed in place until 1956.

In 1924, Portland voters approved the city’s first zoning policies. More than a dozen upscale neighborhoods were zoned for single-family homes. The policy, pushed by homeowners under the guise of protecting their property values, kept apartment buildings and multi-family homes, housing options more attainable for low-income residents, in less-desirable areas.

Portland was no isolated case; racism shaped national housing policy as well.  In 1933, Congress, as part of the New Deal, passed the Home Owners’ Loan Act, which established the Home Owners’ Loan Corporation (HOLC).  The purpose of the HOLC was to help homeowners refinance mortgages currently in default to prevent foreclosure and, of course, reduce stress on the financial system. It did that by issuing bonds, using the funds to purchase housing loans from lenders, and then refinancing the original mortgages, offering homeowners easier terms.

Between 1935 and 1940, the HOLC drew residential “security” maps for 239 cities across the United States.  These maps were made to access the long-term value of real estate now owned by the Federal Government and the health of the banking industry. They were based on input from local appraisers and neighborhood surveys, and neighborhood demographics.

As Hoffman, Shandas, and Pendleton describe, the HOLC:

created color-coded residential maps of 239 individual US cities with populations over 40,000. HOLC maps distinguished neighborhoods that were considered “best” and “hazardous” for real estate investments (largely based on racial makeup), the latter of which was outlined in red, leading to the term “redlining.” These “Residential Security” maps reflect one of four categories ranging from “Best” (A, outlined in green), “Still Desirable” (B, outlined in blue), “Definitely Declining” (C, outlined in yellow), to “Hazardous” (D, outlined in red).

This identification of problem neighborhoods with the racial makeup of the neighborhood was no accident.  And because the maps were widely distributed to other government bodies and private financial institutions, they served to guide private mortgage lending as well as government urban planning in the years that followed.  Areas outlined in red were almost always majority African-American.  And as a consequence of the rating system, those who lived in them had more difficulty getting home loans or upgrading their existing homes. Redlined neighborhoods were also targeted as prime locations for development of multi-unit buildings, industrial use, and freeway construction.

As expected, a 2019 paper by three researchers with the Chicago Federal Reserve Bank found:

a significant and persistent causal effect of the HOLC maps on the racial composition and housing development of urban neighborhoods. These patterns are consistent with the hypothesis that the maps led to reduced credit access and higher borrowing costs which, in turn, contributed to disinvestment in poor urban American neighborhoods with long-run repercussions.

What Hoffman, Shandas, and Pendleton establish in their paper is that this racially influenced mapping has also had real climate consequences.  Urban heat islands are not just randomly distributed through an urban area—they are more often than not located in redlined areas.  And those extra degrees of heat have real health and financial consequences. As Hoffman explains, the impact on residents of those heat islands is serious and wide-ranging:

“They are not only experiencing hotter heat waves with their associated health risks but also potentially suffering from higher energy bills, limited access to green spaces that alleviate stress and limited economic mobility at the same time,” Hoffman said. “Our study is just the first step in identifying a roadmap toward equitable climate resilience by addressing these systemic patterns in our cities.”

Redlining and climate change

Hoffman, Shandas, and Pendleton condensed the 239 HOLC maps into a database of 108 US cities.  They excluded cities that were not mapped with all four HOLC security rating categories and in some cases had to remove overlapping security rating boundaries, or merge them because they were drawn in different years.  The map below shows the location of the 108 cities.

They then used land surface temperature (LST) maps generated in summer months between 2014 and 2017 to estimate land surface temperatures in all four color-coded neighborhoods in each of these 108 cities to determine whether there was a relationship between LST and neighborhood rating in each city.

They found that present-day temperatures were noticeably higher in D-rated areas relative to A-rated areas in approximately 94 percent of the 108 cities.  The results are illustrated below. Figure a shows the LST difference between ranked neighborhoods for the country as a whole.  The four other figures do the same for each designated region of the country.

Portland, Oregon and Denver, Colorado had the greatest D to A temperature differences, with their D-rated areas some 7 degrees Celsius warmer than their A-rated areas (or some 13 degrees warmer in Fahrenheit).  For the nation as a whole, D-rated areas are now on average 2.6 degrees Celsius warmer than A-rated areas. Thus, as the authors note, “current maps of intra-urban heat echo the legacy of past planning policies.”   Moreover,

indicators of and/or higher intra-urban LSTs have been shown to correlate with higher summertime energy use, and excess mortality and morbidity. The fact that residents living in formerly redlined areas may face higher financial burdens due to higher energy and more frequent health bills further exacerbates the long-term and historical inequities of present and future climate change.

As this study so clearly shows, we are not all in the same boat when it comes to climate change; racial and class dimensions matter.  The poor and people of color are disproportionately suffering the most from global warming largely because of the way racism and profit-making combined to shape urbanization in the United States.  But this is only one example.  A transformative Green New Deal must bring to light the ways in which this dynamic has shaped countless other processes and embrace and support the struggles of frontline communities, economic and climate.

What the New Deal can teach us about winning a Green New Deal: Part III—the First New Deal

In Part I and Part II of this series on lessons to be learned from the New Deal I argued that despite the severity of the Great Depression, sustained organizing was required to transform the national political environment and force the federal government to accept direct responsibility for financing relief and job creation programs. In this post, I begin an examination of the evolution and aims of New Deal programs in order to highlight the complex and conflictual nature of a state-directed reform process.

The New Deal is often talked about as if it were a set of interconnected programs that were introduced at one moment in time to reinvigorate national economic activity and ameliorate the hardships faced by working people.  Advocates for a Green New Deal, which calls for a new state-led “national, social, industrial, and economic mobilization” to confront our multiple interlocking problems, tend to reinforce this view of the New Deal.  It is easy to understand why: state action is desperately needed, and pointing to a time in history when it appears that the state rose to the occasion, developing and implementing the programs necessary to solve a crisis, makes it easier for people to envision and support another major effort.

Unfortunately, this view misrepresents the experience of the New Deal.  And, to the extent it influences our approach to shaping and winning a Green New Deal, it weakens our ability to successfully organize and promote the kind of state action we want.

The New Deal actually encompasses two different periods; the First New Deal was begun in 1933, the Second New Deal in 1935.  In both periods, the programs designed to respond to working class concerns fell far short of popular demands.  In fact, it was continued mass organizing, spearheaded by an increasingly unified unemployed movement and an invigorated trade union movement, that pushed the Roosevelt administration to initiate its Second New Deal, which included new and significantly more progressive initiatives.

Unfortunately, as those social movements lost energy and vision in the years that followed, pressure on the state for further change largely abated, leaving the final reforms won compromised and vulnerable to future attack.   The lesson from this history for those advocating for a Green New Deal is clear: winning a Green New Deal requires, in addition to carefully constructed policy demands, an approach to movement building that prepares people for a long struggle to overcome expected state efforts to resist the needed transformative changes.

The First New Deal

Roosevelt’s initial policies were largely consistent with those of the previous Hoover administration.  Like Hoover, he sought to stabilize the banking system and balance the budget.  On his first day in office Roosevelt declared a national bank “holiday,” dismissing Congressional sentiment for bank nationalization.  He then rushed through a new law, the Emergency Banking Act, which gave the Comptroller of the Currency, the Secretary of the Treasury, and the Federal Reserve new powers to ensure that reopened banks would remain financially secure.

On his sixth day in office, he requested that Congress cut $500 million from the $3.6 billion federal budget, eliminate government agencies, reduce the salaries of civilian and military federal workers, and slash veterans’ benefits by 50 percent.  Congressional resistance led to spending cuts of “only” $243 million.

Roosevelt remained committed, against the advice of many of his most trusted advisers, to balanced budget policies for most of the decade.  While his administration did boost government spending to nearly double the levels of the Hoover administration, it also collected sufficient taxes to keep deficits low.  It wasn’t until 1938 that Roosevelt proposed a Keynesian-style deficit spending plan.

At the same time, facing escalating demands for action from the unemployed as well as many elected city leaders, Roosevelt also knew that the status quo was politically untenable.  And, in an effort to halt the deepening depression and growing militancy of working people, he pursued a dizzying array of initiatives, most within his first 100 days in office.  The great majority were aimed at stabilizing or reforming markets, which Roosevelt believed was the best way to restore business confidence, investment, and growth.  This emphasis is clear from the following list of some of his most important initiatives.

• The Agricultural Adjustment Act (May 1933). The act sought to boost the prices of agricultural goods. The government bought livestock and paid subsidies to farmers in exchange for reduced planting. It also created the Agricultural Adjustment Administration to manage the payment of subsidies.
• The Securities Act of 1933 (May 1933). The act sought to restore confidence in the stock market by requiring that securities issuers disclose all information necessary for investors to be able to make informed investment decisions.
• The Home Owners’ Loan Act of 1933 (June 1933). The act sought to stabilize the finance industry and housing industry by providing mortgage assistance to homeowners. It created the Home Owners Loan Corporation which was authorized to issue bonds and loans to help homeowners in financial difficulties pay their mortgages, back taxes, and insurance.
• The Banking Act of 1933 (June 1933). The act separated commercial and investment banking and created the Federal Deposit Insurance Corporation to insure bank deposits, curb bank runs, and reduce bank failures.
• Farm Credit Act (June 1933). The act established the Farm Credit System as a group of cooperative lending institutions to provide low cost loans to farmers.
• National Industrial Recovery Act (June 1933). Title I of the act suspended anti-trust laws and required companies to write industrywide codes of fair competition that included wage and price fixing, the establishment of production quotas, and restrictions on market entry.  It also gave workers the right to organize unions, although without legal protection.  Title I also created the National Recovery Administration to encourage business compliance.  The Supreme Court ruled the suspension of anti-trust laws unconstitutional in 1935.  Title II, which established the Federal Emergency Administration of Public Works or Public Works Administration, is discussed below.

Roosevelt also pursued several initiatives in response to working class demands for jobs and a humane system of relief.  These include:

• The Emergency Conservation Work Act (March 1933). The act created the Civilian Conservation Corps which employed jobless young men to work in the nation’s forests and parks, planting trees, reducing erosion, and fighting fires.
• The Federal Emergency Relief Act of 1933 (May 1933). The act created the Federal Emergency Relief Administration to provide work and cash relief for the unemployed.
• The Federal Emergency Administration of Public Works or Public Works Administration (June 1933). Established under Title II of the National Industrial Recovery Act, the Public Works Administration was a federally funded public works program that financed private construction of major public projects such as dams, bridges, hospitals, and schools.
• The Civil Works Administration (November 1933).  Established by executive order, the Civil Works Administration was a short-lived jobs program that employed jobless workers at mostly manual-labor construction jobs.

This is without doubt an impressive record of accomplishments, and it doesn’t include other noteworthy actions, such as the establishment of the Tennessee Valley Authority, the ending of prohibition, and the removal of the US from the gold standard.  Yet, when looked at from the point of view of working people, this First New Deal was sadly lacking.

Roosevelt’s pursuit of market reform rather than deficit spending meant a slow recovery from the depths of the recession.  In fact, John Maynard Keynes wrote Roosevelt a public letter in December 1933, pointing out that the Roosevelt administration appeared more concerned with reform than recovery or, to be charitable, was confusing the former with the latter.  Primary attention, he argued, should be on recovery, and that required greater government spending financed by loans to increase national purchasing power.

Roosevelt also refused to address one of the unemployed movement’s major policy demands: the establishment of a federal unemployment insurance fund financed by taxes on the wealthy.  Finally, as we see next, even the New Deal’s early job creation and relief initiatives were deliberately designed in ways that limited their ability to meaningfully address their targeted social concerns.

First New Deal employment and relief programs

The Roosevelt administration’s first direct response to the country’s massive unemployment was the Civilian Conservation Corps (CCC).  Its enrollees, as Roosevelt explained, were to be “used in complex work, not interfering with normal employment and confining itself to forestry, the prevention of soil erosion, flood control, and similar projects.”  The project was important for establishing a new level of federal responsibility, as employer of last resort, for boosting employment.  Over its nine-year lifespan, its participants built thousands of miles of hiking trails, planted millions of trees, and fought hundreds of forest fires.

However, the program was far from meeting the needs of the tens of million jobless and their dependents.  Participation in the program was limited to unmarried male citizens, 18 to 25 years of age, whose families were on local relief, and who were able to pass a physical exam.  By law, maximum enrollment in the program was limited to 300,000.

Moreover, although the CCC provided its participants with shelter, clothing, and food, the wages it paid, $30 a month ($25 of which had to be sent home to their families), were low.  And, while white and black were supposed to be housed together in the CCC camps where participants lived under Army supervision, many of the camps were segregated, with whites given preference for the best jobs.

Two months later, the Roosevelt administration launched the Federal Emergency Relief Administration (FERA), the first program of direct federal financing of relief.  Under the Hoover administration, the federal government had restricted its support of state relief efforts to the offer of loans.  Because of the precariousness of their own financial situation, many states were unable to take on new debt, and were thus left with no choice but to curtail their relief efforts.

FERA, in contrast, offered grants as well as loans, providing approximately $3 billion in grants over its 2 ½ year lifespan. The grants allowed state and local governments to employ people who were on relief rolls to work on a variety of public projects in agriculture, the arts, construction and education.  FERA grants supported the employment of over 20 million people, or about 16 percent of the total population of the United States.

However, the program suffered from a number of shortcomings.  FERA provided funds to the states on a matching basis, with states required to contribute three dollars for every federal dollar.  This restriction meant that a number of states, struggling with budget shortfalls, either refused to apply for FERA grants or kept their requests small.

Also problematic was the program’s requirement that participants be on state relief rolls.  This meant that only one person in a family was eligible for FERA work.  And the amount of pay or relief was determined by a social worker’s evaluation of the extent of the family’s financial need.  Many states had extremely low standards of necessity, resulting in either low wages or inadequate relief payments which could sometimes be limited to coupons exchangeable only for food items on an approved list.

Finally, FERA was not directly involved in the administration and oversight of the projects it funded. This meant that compensation for work and working conditions differed across states.  It also meant that in many states, white males were given preferential treatment.

A month later, the Public Works Administration (PWA) was created as part of the National Industrial Recovery Act.  The PWA was a federal public works program that financed private construction of major long-term public projects such as dams, bridges, hospitals, and schools.  Administrators at PWA headquarters planned the projects and then gave funds to appropriate federal agencies to enable them to help state and local governments finance the work. The PWA played no role in hiring or production; private construction companies carried out the work, hiring workers on the open market.

The program lasted for six years, spent $6 billion, and helped finance a number of important infrastructure projects.  It also gave federal administrators valuable public policy planning experience, which was put to good use during World War II.  However, as was the case with FERA, PWA projects required matching contributions from state and local governments, and given their financial constraints, the program never spent as much money as was budgeted.

These programs paint a picture of a serious but limited effort on the part of the Roosevelt administration to help workers weather the crisis.  In particular, the requirement that states match federal contributions to receive FERA and PWA funds greatly limited their reach.  And, the participant restrictions attached to both the CCC and FERA meant that program benefits were far from adequate.  Moreover, because all of these were new programs, it often took time for administrators to get funds flowing, projects developed, participants chosen, and benefits distributed.  Thus, despite a flurry of activity, millions of workers and their families remained in desperate conditions with winter approaching.

Pressed to do more, the Roosevelt administration launched its final First New Deal jobs program in November 1933, the Civil Works Administration (CWA), under the umbrella of FERA.  It was designed to be a short-term program, and it lasted only 6 months, with most employment creation ending after 4 months.  The jobs created were primarily low-skilled construction jobs, improving or constructing roads, schools, parks, airports, and bridges. The CWA gave jobs to some 4 million people.

This was a dramatically different program from those discussed above.  Most importantly, employment was not limited to those on relief, greatly enlarging the number of unemployed who could participate.  At the end of Hoover’s term in office, only one unemployed person out of four was on a relief roll.  It also meant that participants would not be subject to the relief system’s humiliating means tests or have their wages tied to their family’s “estimated budgetary deficit.”  Also significant was the fact that although many of the jobs were inherited from current relief projects, CWA administrators made a real effort to employ their workers in new projects designed to be of value to the community.

For all of these reasons, jobless workers flocked to the program, seeking an opportunity to do, in the words of the time, “real work for a real wage.”   As Harry Hopkins, the program’s chief administrator, summed up in a talk shortly after the program’s termination:

When we started Civil Works we said we were going to put four million men to work.  How many do you suppose applied for those four million jobs? About ten million. Now I don’t say there were ten million people out of work, but ten million people walked up to a window and stood in line, many of them all night, asking for a job that paid them somewhere between seven and eighteen dollars a week.

In point of fact, there were some fifteen million people unemployed.  And as the demand for CWA jobs became clear, Roosevelt moved to end the program.   As Jeff Singleton describes:

In early January Hopkins told Roosevelt that CWA would run out of funds sooner than expected.  According to one account, Roosevelt “blew up” and demanded that Hopkins begin phasing out the program immediately.  On January 18 Hopkins ordered weekly wages cut (through a reduction in hours worked) and hinted that the program would be terminated at the beginning of March.  The cutback, coming at a time when the program had just reached its promised quota, generated a storm of protest and a movement in Congress to continue CWA through the spring of 1934.  These pressures helped the New Deal secure a new emergency relief appropriation of $950 million, but the CWA was phased out in March and April.

Lessons

The First New Deal did represent an important change in the economic role of the federal government.  In particular, the Roosevelt administration broke new ground in acknowledging federal responsibility for job creation and relief.  Yet, the record of the First New Deal also makes clear that the Roosevelt administration was reluctant to embrace the transformative role that many now attribute to it.

As Keynes pointed out, Roosevelt’s primary concern in the first years of his administration was achieving market stability through market reform, not a larger financial stake in the economy to speed recovery.  In fact, in some cases, his initiatives gave private corporations even greater control over market activity.

The Roosevelt administration response to worker demands for jobs and a more humane system of welfare was also far from transformative.  Determined to place limits on federal spending, its major initiatives required substantial participation from struggling state governments.  They also did little to challenge the punitive and inadequate relief systems operated by state governments.  The one exception was the CWA, which mandated wage-paying federally directed employment.  And that was the one program, despite its popularity, that was quickly terminated.

Of course, there was a Second New Deal, which included a number of important and more progressive initiatives, including the Works Progress Administration, the Social Security Act, and the National Labor Relations Act.  However, as I will discuss in the next post in this series, this Second New Deal was largely undertaken in response to the growing strength of the unemployed movement and workplace labor militancy.   And as we shall see, even these initiatives fell short of what many working people demanded.

One lesson to be learned from this history for those advocating a Green New Deal is that major policy transformations do not come ready made, or emerge fully developed.  Even during a period of exceptional crisis, the Roosevelt administration was hesitant to pursue truly radical experiments.  And the evolution of its policy owed far more to political pressure than the maturation of its administrative capacities or a new found determination to experiment.

If we hope to win a Green New Deal we will have to build a movement that is not only powerful enough to push the federal government to take on new responsibilities with new capacities, but also has the political maturity required to appreciate the contested nature of state policy and the vision necessary to sustain its forward march.

What the New Deal can teach us about winning a Green New Deal: Part I–Confronting Crisis

The New Deal has recently become a touchstone for many progressive efforts, illustrated by Bernie Sanders’ recent embrace of its aims and accomplishments and the popularity of calls for a Green New Deal.  The reasons are not hard to understand. Once again, growing numbers of people have come to the conclusion that our problems are too big to be solved by individual or local efforts alone, that they are structural and thus innovative and transformative state-led actions will be needed to solve them.

The New Deal was indeed a big deal and, given contemporary conditions, it is not surprising that people are looking back to that period for inspiration and hope that meaningful change is possible.  However, inspiration, while important, is not the same as seeking and drawing useful organizing and strategic lessons from a study of the dynamics of that period.

This is the first of a series of posts in which I will try to illuminate some of those lessons.  In this first post I start with the importance of crisis as a motivator of change.  What the experience of the Great Depression shows is that years of major economic decline and social devastation are not themselves sufficient to motivate business and government elites to pursue policies likely to threaten the status quo.  It was only after three and a half years of organizing had also created a political crisis, that the government began taking halting steps at serious change, marked by the policies associated with the First New Deal.  In terms of contemporary lessons, this history should serve to dispel any illusions that simply establishing the seriousness of our current multifaceted crisis will be enough to win elite consideration of a transformative Green New Deal.

The Great Depression

The US economy expanded rapidly throughout the 1920s, a period dubbed the Roaring Twenties. It was a time of rapid technological change, business consolidation, and wealth concentration.  It was also a decade when many traditional industries struggled, such as agriculture, textiles, coal, and shipbuilding, as did most of those who worked in them.  Growth was increasingly sustained by consumer demand underpinned by stock market speculation and debt.

The economy suffered a major downturn in 1920-21, and then mild recessions in 1924 and 1927.  And there were growing signs of the start of another recession in summer 1929, months before the October 1929 stock market collapse, which triggered the beginning of the Great Depression.  The collapse quickly led to the unraveling of the US economy.

The Dow Jones average dropped from 381 in September 1929 to forty-one at the start of 1932.  Manufacturing output fell by roughly 40 percent between 1929 and 1933.  The number of full-time workers at United States Steel went from 25,000 in 1929 to zero in 1933.  Five thousand banks failed over the same period.  Steve Frazer captured the extent and depth of the decline as follows: “In early 1933, thirty-six of forty key economic indicators had arrived at the lowest point they were to reach during the whole eleven grim years of the Great Depression.”

The resulting crisis hit working people hard.   Between 1930 and 1932, the number of unemployed grew from 3 million to 15 million, or approximately 25 percent of the workforce.  The unemployment rate for those outside the agricultural sector was close to 37 percent.  As Danny Lucia describes:

Workers who managed to hold onto their jobs faced increased exploitation and reduction in wages and hours, which made it harder for them to help out jobless family and friends. The social fabric of America was ripped by the crisis: One-quarter of children suffered malnutrition, birth rates dropped, suicide rates rose. Many families were torn apart. In New York City alone, 20,000 children were placed in institutions because their parents couldn’t support them. Homeless armies wandered the country on freight trains; one railroad official testified that the number of train-hoppers caught by his company ballooned from 14,000 in 1929 to 186,000 in 1931.

“Not altogether a bad thing”

Strikingly, despite the severity of the economic and social crisis, business leaders and the federal government were in no hurry to act.  There was certainly no support for any meaningful federal relief effort.  In fact, business leaders initially tended to downplay the seriousness of the crisis and were generally optimistic about a quick recovery.

As the authors of Who Built America (volume 2) noted:

when the business leaders who made up the National Economic League were asked in January 1930 what the country’s ‘paramount economic problems’ were, they listed first, ‘administration of justice,’ second, ‘Prohibition,” and third, ‘lawlessness.’ Unemployment was eighteenth on their list!

Some members of the Hoover administration tended to agree. Treasury Secretary Andrew Mellon thought the crisis was “not altogether a bad thing.”  “People,” he argued, “will work harder, live a more moral life.  Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

President Hoover repeatedly stated that the economy was “on a sound and prosperous basis.”  The solution to the crisis, he believed, was to be found in restoring business confidence and that was best achieved through maintaining a balanced budget.  When it came to relief for those unemployed or in need, Hoover believed that the federal government’s main role was to encourage local government and private efforts, not initiate programs of its own.

At time of stock market crash, relief for the poor was primarily provided by private charities, which relied on donations from charitable and religious organizations.  Only 8 states had any type of unemployment insurance.  Not surprisingly, this system was inadequate to meet popular needs.  As the authors of Who Built America explained:

by 1931 most local governments and many private agencies were running out of money for relief.  Sometimes needy people were simply removed from the relief rolls.  According to one survey, in 1932 only about one-quarter of the jobless were receiving aid.  Many cities discriminated against nonwhites.  In Dallas and Houston, African-Americans and Mexican-Americans were denied any assistances.

It was not until January 1932 that Congress made its first move to strengthen the economy, establishing the Reconstruction Finance Corporation (RFC) to provide support to financial institutions, corporations, and railroads.  Six months later, in July, it approved the Emergency Relief and Construction Act, which broadened the scope of the RFC, allowing it to provide loans to state and local governments for both public works and relief.  However, the Act was structured in ways that undermined its effectiveness. For example, the $322 million allocated for public works could only be used for projects that would generate revenue sufficient to pay back the loans, such as toll bridges and public housing.  The $300 million allocated for relief also had to be repaid.  Already worried about debt, many local governments refused to apply for the funds.

Finally, as 1932 came to a close, some business leaders began considering the desirability of a significant federal recovery program, but only for business.  Most of their suggestions were modeled on World War I programs and involved government-business partnerships designed to regulate and stabilize markets.  There was still no interest in any program involving sustained and direct federal relief to the millions needing jobs, food, and housing.

By the time of Roosevelt’s inauguration in March 1933, the economy, as noted above, had fallen to its lowest point of the entire depression.  Roosevelt had won the presidency promising “a new deal for the American people,” yet his first initiatives were very much in line with the policies of the previous administration. Two days after his inauguration he declared a national bank holiday, which shut down the entire banking system for four days and ended a month-long run on the banks. The “holiday” gave Congress time to approve a new law which empowered the Federal Reserve Board to supply unlimited currency to reopened banks, which reassured the public about the safety of their accounts.

Six days after his inauguration, Roosevelt, who had campaigned for the Presidency, in part, on a pledge to balance the federal budget, submitted legislation to Congress which would have cut $500 million from the $3.6 billion federal budget.  He proposed eliminating government agencies, reducing the pay of civilian and military federal workers (including members of Congress), and slashing veterans’ benefits by 50 percent.  Facing Congressional opposition, the final bill cut spending by “only” $243 million.

Lessons

It is striking that some 3 ½ years after the start of the Great Depression, despite the steep decline in economic activity and incredible pain and suffering felt by working people, business and government leaders were still not ready to support any serious federal program of economic restructuring or direct relief.  That history certainly suggests that even a deep economic and social crisis cannot be counted on to encourage elites to explore policies that might upset existing structures of production or relations of power, an important insight for those hoping that recognition of the seriousness of our current environmental crisis might encourage business or government receptivity to new transformative policies.

Of course, we do know that in May 1933 Roosevelt finally began introducing relief and job creation programs as part of his First New Deal.  And while many factors might have contributed to such a dramatic change in government policy, one of the most important was the growing movement of unemployed and their increasingly militant and collective action in defense of their interests.  Their activism was a clear refutation of business and elite claims that prosperity was just around the corner.  It also revealed a growing radical spark, as more and more people openly challenged the legitimacy of the police, courts, and other state institutions.  As a result, what was an economic and social crisis also became a political crisis.  As Adolf Berle, an important member of Roosevelt’s “Brain Trust,” wrote, “we may have anything on our hands from a recovery to a revolution.”

In Part II, I will discuss the rise and strategic orientation of the unemployment movement, highlighting the ways it was able to transform the political environment and thus encourage government experimentation.  And I will attempt to draw out some of the lessons from this experience for our own contemporary movement building efforts.

The 1933 programs, although important for breaking new ground, were exceedingly modest.  And, as I will discuss in a future post, it was only the rejuvenated labor movement that pushed Roosevelt to implement significantly more labor friendly policies in the Second New Deal starting in 1935.  Another post will focus more directly on the development and range of New Deal policies in order to shed light on the forces driving state policy as well as the structural dynamics which tend to limit its progressive possibilities, topics of direct relevance to contemporary efforts to envision and advance a Green New Deal agenda.

Recession On The Horizon

According to Bloomberg News, analysts at a number of major financial institutions see “mounting evidence” that a recession is not too far away.

In a way, their assessment is not surprising.  The current expansion, which started in June 2009, is now 99 months long, making it the third longest expansion in US history. Only the expansions from March 1991 to March 2001 (120 months) and February 1961 to December 1969 (106 months) are longer.  It is likely that this expansion will pass the 1960s expansion in length but fall short of the record.

Warning signs

The financial analysts cited by Bloomberg News did not base their warnings simply on longevity.  Rather it was the behavior of corporate profits, more specifically their downward trend, that concerned them.  Historically, expansions have come to an end because declining profits cause corporations to slash investment spending, which leads to a decline in employment and eventually consumption, and finally recession.

As the Bloomberg article explains, “The gross value-added of non-financial companies after inflation — a measure of the value of goods after adjusting for the costs of production — is now negative on a year-on-year basis.”  As an analyst for Oxford Economics Ltd. concludes, “The cycle of real corporate profits has turned enough to be a potential source of concern in the next four quarters.”

Real gross corporate value added is a proxy for profits.  Its recent decline, as shown in the figure above, means that corporate profitability is falling over time.  As long as it remained positive (the red line was above zero), corporate profits were continuing to grow, just not as fast as they did in the previous year. However, it has now become negative, which means that total profits are actually falling.  And, as we can see, whenever this happened in the past, a recession soon followed.

The primary reason recessions follow a decline in profits is that investment decisions are very sensitive to changes in profit. A decline in profit tends to produce a much larger decline in investment, leading to recession.  The investment connection to recession is is well illustrated in the following figure, taken from a blog post by the economist Michael Roberts. It shows the change in personal consumption and investment one year before the start of a recession.  As we can see, it is the decline in investment that leads the downturn, and the decline takes place more often than not while consumption is still growing.

The Bloomberg article highlights other studies that come to the same conclusion about the direction of profits and the growing likelihood of recession.  For example, as illustrated below, “The U.S. is in the mature stage of the cycle — 80 percent of completion since the last trough — based on margin patterns going back to the 1950s, according to Societe Generale SA.”

As we can see, the decline in profit margins in the current expansion mirrors the decline during other expansions as they neared their end.  It certainly appears that time is running out for this expansion.

Further evidence comes from the recent reduction in corporate buybacks. As the economist William Lazonick explains:

Buybacks have come to define the “investment” strategies of many of America’s biggest businesses. Figure 1 [below] shows net equity issues of U.S. corporations from 1946 to 2014. Net equity issues are new corporate stock issues minus outstanding stock retired through stock repurchases and M&A activity. Since the mid-1980s, in aggregate, corporations have funded the stock market rather than vice versa (as is conventionally assumed).  Over the decade 2005-2014 net equity issues of nonfinancial corporations averaged minus $399 billion per year.

In other words, corporations have been major players in the stock market, buying and retiring stock in order to drive up stock prices.  The process has, by design, enriched the top end of the income distribution.  It also helped to boost consumption spending, and by extension the expansion.  However, this corporate promotion of stock prices appears to have come to an end.  As a Fortune Magazine article reports:

The great stock buyback boom may be on the wane, undermined by falling company earnings.

U.S. company stock buybacks are down 21% in the first seven months of 2016 compared to the same period a year earlier, according to TrimTabs Investment Research, a fall driven in part by five consecutive quarters of year-over-year earnings declines among S&P 500 stocks.

Buybacks, which cancel shares and thus increase per-share earnings, have played a crucial role in supporting the stock market since the financial crisis, flattering earnings even for companies with static or falling revenues.

They, along with dividends, return cash to shareholders, a process often facilitated by borrowed money.

A decline in market values can thus be expected, adding further downward pressure on economic activity.

Social consequences

The business cycle is an inherent feature of capitalist economies and the US economy has experienced many ups and downs. But expansions and recessions do not balance out, leaving the economy on a stable long-term economic trajectory. Unfortunately, while recent cycles have greatly enriched those at the top, working people have generally experienced deteriorating living and working conditions.  The trend in job creation is one example.

The employment to population ratio is a commonly used measure of employment.  It is calculated by dividing the number of people employed by the total working-age population.  The figure below, from a report by the Chicago Political Economy Group, shows the relative employment or job creation strength of each post-World War II expansion.

As we can see, the November 2001 expansion ended without restoring the pre-recession employment to population ratio. The ratio was 2.48 percent below where it had been prior to the recession’s start.  That means the expansion was not strong enough or structured properly to ensure adequate job creation.  And, despite its length, the current expansion’s employment to population ratio remains nearly 5 percent below that lower starting point.  Moreover, this employment measure doesn’t take into account that a growing share of the jobs created during this expansion are low-paying and precarious.

 

In sum, there are strong reasons to expect a recession within the next year or so.  And it will likely hit an increasingly vulnerable working class hard.  Given trends, where the good times seem to pass most people by and the bad times punish those who gained the least the most, the need for a radical transformation of our economy seems clear.

False Promises: Trump And The Revitalization Of The US Economy

President Trump likes to talk up his success in promoting the reindustrialization of the United States and the return of good manufacturing jobs.  But there is little reason to take his talk seriously.

Microsoft closes shop

For example, as reported in a recent article in the Oregonian, Microsoft just decided to close its two year old Wilsonville factory, where it built its giant touch-screen computer, the Surface Hub.  As the article explains :

Just two years ago, Microsoft cast its Wilsonville factory as the harbinger of a new era in American technology manufacturing.

The tech giant stamped, “Manufactured in Portland, OR, USA” on each Surface Hub it made there. It invited The New York Times and Fast Company magazine to tour the plant in 2015, then hired more than 100 people to make the enormous, $22,000 touch-screen computer. . . .

“We looked at the economics of East Asia and electronics manufacturing,” Microsoft vice president Michael Angiulo told Fast Company in a fawning 2015 article that heaped praise on the Surface Hub and Microsoft’s Wilsonville factory.

“When you go through the math, (offshoring) doesn’t pencil out,” Angiulo said. “It favors things that are small and easy to ship, where the development processes and tools are a commodity. The machines that it takes to do that lamination? Those only exist in Wilsonville. There’s one set of them, and we designed them.” . . .

But last week Microsoft summoned its Wilsonville employees to an early-morning meeting and announced it will close the factory and lay off 124 employees – nearly everyone at the site – plus dozens of contract workers. . . .

Even as President Donald Trump heralds “Made in America” week, high-tech manufacturing remains an endangered species across the United States. Oregon has lost more than 14,000 electronics manufacturing jobs since 2001, according to state data, more than a quarter of the total job base.

Microsoft is moving production of its Surface Hub to China, which is where it makes all its other Surface products.  Apparently, the combination of China’s low-cost labor and extensive supplier networks is an unbeatable combination for most high-tech firms.  In fact, the Oregonian article goes on to quote a Yale economist as saying:

“Re-shoring” stories like the tale Microsoft peddled in 2015 are little more than public relations fakery,” [providing] “lip services or window-dressing to please politicians and the general public.”

Foxconn says it is investing

But now we have another bigger and bolder re-shoring story: The Taiwanese multinational Foxconn has announced it will spend $10 billion to build a new factory somewhere in Wisconsin (likely in Paul Ryan’s district), where it will produce flat-panel display screens for televisions and other consumer electronics.

As reported in the press, Foxconn is pledging to create 13,000 jobs in six years—but only 3000 at the start.  In return, the state of Wisconsin is offering the company $3 billion in subsidies.

According to the Trump administration, this is a sign that its efforts to bring back good manufacturing jobs is working.  The Guardian quotes a senior administration official “who said the announcement was ‘meaningful,’ because ‘it [represents] a milestone in bringing back advanced manufacturing, specifically in the electronics sector, to the United States.’”  President Trump followed with “If I didn’t get elected, [Foxconn] definitely would not be spending $10bn.”

However, there are warning signs.  For example, as an article in the Cap Times points out, Foxconn doesn’t always follow through on its promises:

• Foxconn promised a $30 million factory employing 500 workers in Harrisburg, Pennsylvania, in 2013. The plant was never built, not a single job was created.
• That same year, the company signed a letter of intent to invest up to $1 billion in Indonesia. Nothing came of it.
• Foxconn announced it would invest $5 billion and create 50,000 jobs over five years in India as part of an ambitious expansion in 2014. The investment amounted to a small fraction of that, according to The Washington Post’s Todd Frankel.
• Foxconn committed to a $5 billion investment in Vietnam in 2007, and $10 billion in Brazil in 2011. The company made its first major foray in Vietnam only last year. In Brazil, Foxconn has an iPhone factory, but its investment has fallen far short of promises.
• Foxconn recently laid off 60,000 workers, more than 50 percent of its workforce at its IPhone 6 factory in Kushan, China, replacing them with robots that Foxconn produces.

In fact, even the Wisconsin Legislative Fiscal Bureau is worried that the state may be overselling the deal, promising billions for very little.  As a Verge article reported:

Wisconsin’s plan to treat Foxconn to $3 billion in tax breaks in exchange for a $10 billion factory is looking less and less like a good deal for the state. In a report issued this week, Wisconsin’s Legislative Fiscal Bureau said that the state wouldn’t break even on its investment until 2043 — and that’s in an absolute best-case scenario.

How many workers Foxconn actually hires, and where Foxconn hires them from, would have a significant impact on when the state’s investment pays off, the report says.

The current analysis assumes that “all of the construction-period and ongoing jobs associated with the project would be filled by Wisconsin residents.” But the report says it’s likely that some positions would go to Illinois residents, because the factory would be located so close to the border. That would lower tax revenue and delay when the state breaks even.

And that’s still assuming that Foxconn actually creates the 13,000 jobs it claimed it might create, at the average wage — just shy of $54,000 — it promised to create them at. In fact, the plant is only expected to start with 3,000 jobs; the 13,000 figure is the maximum potential positions it could eventually offer. If the factory offers closer to 3,000 positions, the report notes, “the break-even point would be well past 2044-45.”

The authors of the report even seem somewhat skeptical of the best-case scenario happening. Foxconn is already investing heavily in automation, and there’s no guarantee it won’t do the same thing in Wisconsin. Nor is there any guarantee that Foxconn will remain such a manufacturing powerhouse. (Its current success relies heavily on the success of the iPhone.)

It is because of concerns like these, that the Milwaukee Journal Sentinel reports that the state’s Senate Majority Leader has said he doesn’t yet have the votes to pass the tax package Governor Scott Walker has promised.

Forget the new trade deals

President Trump has also spoken often about his determination to revisit past trade deals and restructure them in order to strengthen the economy and boost manufacturing employment.  However, it is now clear that the agreement restructuring he has in mind is what he calls “modernization” and that translates into expanding the terms of existing agreements to cover new issues of interest to leading US multinational corporations.

As Inside US Trade explains:

Commerce Secretary Wilbur Ross on Wednesday said “the easiest issues” to be addressed in North American Free Trade Agreement modernization talks “should be” those that were not part of the existing agreement, which entered into force in 1994.

“The easiest ones will be the ones that weren’t contained in the original agreement because that’s new territory; that’s not anybody giving up anything,” Ross said at an event hosted by the Bipartisan Policy Institute on May 31. “And by and large, those should be the easiest issues to get done.”

Ross added that those new issues are important “because one of our objectives will be to try to incorporate in NAFTA kind of basic principles that we would like to have followed in subsequent free-trade agreements, rather than starting each one with a blank sheet of paper.”

Among those issues — which he called “big holes” in the old agreement — he listed the digital economy, services, and financial services. . . .

Ross reiterated the administration’s stance that the “guiding principle is do no harm” in redoing NAFTA, while the second “rule of thumb” is to view concessions made by Mexico and Canada in the Trans-Pacific Partnership negotiations “as sort of a starting point” for NAFTA talks.

Asked whether the administration has set itself up for “unrealistic aspirations” on NAFTA — promising to return to the U.S. jobs that the president has often claimed were lost due to the agreement with Mexico and Canada — Ross cautioned against viewing a retooled deal as a “silver bullet.”

In short, it is foolish and costly to believe the promises made to working people by leading corporations and the Trump administration.  Hopefully, growing numbers of people are getting wise to the game being played, making it easier for us to more effectively organize and advance our own interests.

Robots And Automation Are Not The Cause Of Our Labor Market Troubles

Employment growth remains weak in the United States.  Many in the media happily encourage us to blame the growing use of robots, or automation more generally, for this situation.  Their message is that we are just experiencing the consequences of technological progress and no one should want to fight that.  However, that is just misdirection; the numbers make clear that it is corporate financial “wheelings and dealings,” not robots and automation, that is the primary cause of our current employment woes.

Productivity Trends

If robots or automation were holding back employment growth we should see rapidly rising rates of output per labor hour or what economists call productivity.  In other words, the new technology would allow companies to greatly increase their production with the same number or even fewer hours of human labor.  And, as a consequence, the demand for labor would slow, leading to weak employment growth.

Here is how the Bureau of Labor Statistics (BLS) explains productivity:

Labor productivity is a measure of economic performance that compares the amount of goods and services produced (output) with the number of labor hours used in producing those goods and services. It is defined mathematically as real output per labor hour, and growth occurs when output increases faster than labor hours. . . . Technological advances, greater investment in machinery and equipment by businesses, increases in worker skill and experience, and other improvements to production can all lead to labor productivity growth.

The problem for those who want to blame our labor market woes on robots and automation is that US productivity gains have been historically weak, not strong, during this economic expansion.

Chart 1 shows the growth in output, hours worked, and labor productivity (shown by the red bar) for the non-farm business sector over every business cycle starting in 1948, as well as for the average business cycle for the historical period.  Of course, our current cycle is not yet over, and the data in this chart only take us through the 3^rd quarter of 2016.  But our current expansion is already the longest, and since productivity tends to fall the longer an expansion goes on, we are unlikely to see much of an improvement in the numbers over the rest of the cycle.

As we can see, the growth in labor productivity in the current business cycle, at 1.1 percent, is tied with the 1980-1981 cycle for the lowest rate of productivity growth for the entire historical period.  Labor productivity growth for the average cycle is 2.3 percent.  The current business cycle also has the second lowest rate of growth in output.

Chart 5 offers another way to appreciate how weak productivity growth has been during the current business cycle.  It compares the growth in labor productivity over this cycle with the growth in productivity over the previous cycle (2001 to 2007) and the longer period 1947 to 2007.

In the words of the BLS:

Through most of the Great Recession, labor productivity lagged behind historical growth rates, but then it achieved above-average gains coming out of the recession and into the early quarters of the recovery. The U.S. economy actually caught up to the long-term historical trend (the dashed red line) in the fourth quarter of 2009, although it was still slightly behind the trend from the last cycle (the dotted red line) at that point. However, after 2010, productivity growth stagnated and a substantial deficit relative to historical trends developed over the next 5 years. By the third quarter of 2016, labor productivity in the current business cycle had grown at an average rate of just 1.1 percent, well below the long-term average rate of 2.3 percent from 1947 to 2007 and even further behind the 2.7 percent average rate over the cycle from 2001 to 2007.

In short, if robots or automation were replacing workers this would be reflected in strong productivity growth.  In fact, we see quite the opposite: the weakest productivity growth for any business cycle in the post-1947 historical period.

While high productivity does not guarantee strong wage gains, workers normally find it easier to force business to boost wages when output per labor hour is significantly growing.  Low productivity gains, on the other hand, normally translate into weak wage growth.  And that is what we see today.

Chart 6 shows the growth in labor productivity, real hourly compensation, and the wage gap (difference between productivity and compensation) over the 1948 to 2016 period.

As we can see, the growth in real hourly compensation (shown by the gold bar) has been extremely weak this business cycle, growing by only 0.7 percent.  As the BLS notes:

[This] is low by historical standards. The rate is lower than the average real hourly compensation growth rate of 1.7 percent observed during other business cycles. The rate is also below the rates of all other cycles, except for a brief six-quarter cycle in the early 1980s. Note also that the low growth rate of the current business cycle is a near-continuation of the similarly low growth rate of the early-2000s cycle (0.8 percent).

 Behind The Scenes

For all the talk about technology, business investment has been weak, as illustrated in the following charts from the Economic Policy Institute.  Capital investment has been slow compared with past periods and the same is true for business investment in information technology equipment and software—the alleged drivers of technological innovation.

So, what are businesses doing with their ample profits?  The answer is that they are using them to repurchase their own stock in order to boost stock prices (and managerial salaries) and to pay large dividends to their stockholders.  In other words, engaging in financial transactions to enrich those at the top.

Figure 1, from Yardeni Research, shows the annual dollar value (in billions) of stock buybacks, which is the repurchase of shares by the company that initially issued them, for S&P 500 listed firms over the years 1999 to 2016.  Figure 2 shows annual dividend payouts for these same firms.   Each has been substantial since 2003, although the period of the Great Recession did produce a steep short term dip.

Figure 12,  by showing the value of S&P 500 buybacks and dividends as a percent of operating earnings, illustrates just how substantial this financial activity has become.  Operating earnings are a key measure of profitability and are calculated by subtracting direct business expenses–such as the cost of production, administration and marketing, depreciation, etc.–from revenues.  What we see is that business spending on buybacks and dividends has actually been greater than total operating earnings for several years since 2007, including 2016.

In short, S&P 500 listed businesses are shoveling almost all their profits, and then some in many years, into financial dealings.  No wonder real capital investment has been weak and productivity, wage, and employment growth slow.  Forget that stuff about robots and automation.

The World Economy: Trouble Ahead

Economic conditions are not good and the signs are for more trouble.  The post-Great Recession recovery has been incredibly weak and it appears that it will soon come to an end.  And here I am writing about all the advanced capitalist economies, not just the United States.  Perhaps the key indicator: investment and productivity trends.

Here is the International Monetary Fund [IMF] writing in 2015: “Private fixed investment in advanced economies contracted sharply during the global financial crisis, and there has been little recovery since.”

More specifically, the IMF finds that:

The sharp contraction in private investment during the crisis, and the subsequent weak recovery, have primarily been a phenomenon of the advanced economies. For these economies, private investment has declined by an average of 25 percent since the crisis compared with precrisis forecasts, and there has been little recovery. In contrast, private investment in emerging market and developing economies has gradually slowed in recent years, following a boom in the early to mid-2000s.

The investment slump in the advanced economies has been broad based. Though the contraction has been sharpest in the private residential (housing) sector, nonresidential (business) investment—which is a much larger share of total investment—accounts for the bulk (more than two-thirds) of the slump. There is little sign of recovery toward precrisis investment trends in either sector.

The figure above illustrates how far advanced economy investment has fallen relative to the precrisis period and past forecasts and that there has been no recovery in investment spending (the log scale shows percentage change in investment).

The following figure, which covers only advanced economies, demonstrates that the investment slump has affected both residential and nonresidential investment.  And, as far as the latter is concerned, investment spending on both structures and real equipment are significantly down relative to past trends.

These trends have real consequences.  As the economist Michael Roberts points out,  “Global industrial output growth continues to slow and in the case of the G7 economies (red line below), industrial production is now contracting.”

He also highlights the fact that “world trade . . . is in significant negative territory (red line below).  This is partly due to the collapse in energy and other industrial raw material prices.  But even when you strip out the impact of the deflation in prices, world trade volume is basically static (blue line) and well below even the low world GDP growth rate of around 2.5%.  Countries with low domestic demand can expect no compensation through exports.”

The investment slump has also taken its toll on productivity.  According to the Financial Times:

Output per person . . . grew just 1.2 per cent across the world in 2015, down from 1.9 per cent in 2014. A slowdown in Chinese productivity was a big driver, as was poorer output growth in commodity producing countries in Latin America and Africa because of weaker oil prices and production.

Productivity growth in the eurozone, measured by gross domestic product per hour, is set to be a feeble 0.3 per cent and barely better in Japan at 0.4 per cent.

But the US, which appeared to be outperforming other advanced economies, is now increasingly concerned at the deterioration in its own performance. Growth in output per hour slowed last year to just 0.3 per cent from 0.5 per cent in 2014, well below the pace of 2.4 per cent in 1999 to 2006.

Moreover, things are fast deterioriating in the US.  The Financial Times reports that productivity will likely fall this year for the first time in three decades. “Research by the Conference Board, a US think-tank, also shows the rate of productivity growth sliding behind the feeble rates in other advanced economies, with gross domestic product per hour projected to drop by 0.2 per cent this year.”

Sadly, as Roberts argues, most governments still seek to rejuvenate their respective economies by some combination of monetary easing, cuts in public investment, privatization, weakening labor rights, and new free trade agreements. These policies have not worked and there is no reason to think that they ever will.

The Greek Tragedy Continues

The Greek tragedy continues.  Greece remains in depression.  The economic downturn began in 2008 and the economy has shrunk every year since, with the exception of 2014.  Although millions are suffering from poverty, the Greek government has continued to make its debt payments, first to foreign banks and now to the Troika.  This pairing is the result of two huge loans by Troika institutions in exchange for the imposition of fierce austerity policies.

The Greek people have refused to quietly accept the unraveling of their society.  According to the Greek police, there were 27,103 protests and rallies in Athens alone between 2011 and 2015.  The number of rallies attended by more than 1,000 people were 61 in 2012, 72 in 2013, 58 in 2014 and 72 in 2015.  Knowing the reliability of police record keeping, these are likely undercounts.

Despite popular resistance, a commitment to more austerity in exchange for yet more debt was recently approved by the Greek parliament.  It includes new cuts to pensions, increases in required social security contributions, and higher personal and business taxes.  Tragically, the current agreement was negotiated by Syriza, the political party elected in January 2015 on the basis of its commitment to end the austerity and renegotiate the country’s foreign debt.

I recently published an article in the journal Class, Race, and Corporate Power which attempts to explain the forces driving Greece’s economic crisis and the failure of Syriza to fulfill its promises.   The abstract is below.  The article can be accessed for free here, on the journal’s webpage.

 

The Pitfalls and Possibilities of Socialist Transformation: The Case of Greece

Abstract:

With its 2015 electoral victory in Greece, Syriza became the first left political party to lead a European government since the founding of the European Union. As such, its eventual capitulation to the demands of the Troika was a bitter development, and not only for the people of Greece. Because the need for change remains as great as ever, and efforts at electoral-based transformations continue, especially in Europe, this paper seeks to assess the Greek experience, and in particular Syriza’s political options and choices, in order to help activists more effectively respond to the challenges faced when confronting capitalist power.

Section 1 examines how Greece’s membership in the euro area promoted an increasingly fragile and unsustainable economic expansion over the period 2001 to 2007. Section 2 discusses the role of the Troika in Greece’s 2008 to 2014 downward spiral into depression. Section 3 discusses the ways in which popular Greek resistance to their country’s crisis helped to shape and nourish Syriza as a new type of left political organization, “a mass connective party.” Section 4 critically analyzes the Syriza-led government’s political choices, highlighting alternative policies not chosen that might have helped the government break the Troika’s strangle hold over the Greek economy and further radicalize the Greek population. Section 5 concludes with a presentation of five lessons from the Greek experience of relevance for future struggles.

Recession On The Horizon

Economic trends do not look promising, at least for working people.

The UN publication World Economic Situation and Prospects 2016 highlights the dramatic slowdown in economic activity in the years following the world recession.

Looking at the 20 leading developed economies we see that average growth fell from 2.8 percent over the period 3^rd quarter 2002 to 4^th quarter 2007 to 1.3 percent over the period 1^st quarter 2010 to 2^nd quarter 2015.  At the same time, growth became more unstable as shown by the rise in volatility. Consumption growth and investment growth also fell dramatically with volatility increasing. Trends were similar, although not as drastic for the 20 leading developing nations.

The UN study paid careful attention to the collapse in investment.  The authors note:

The global financial crisis has had the most pronounced negative effect on investment rates. . . . After an early recovery in 2010-2011, the growth rates of fixed capital formation have sharply slowed down since 2012, exerting downward pressure on productivity, employment and growth. The growth rates of fixed capital formation nearly collapsed since 2014, registering negative quarterly growth in as many as 9 large developed and developing countries and economies in transition. . . .

Investment in productive capital has been even weaker than the total investment figures suggest, as dwelling and intangible assets account for the majority of investment in developed economies. According to OECD data on fixed capital formation, investments in intangible and intellectual property assets together represent the largest share of fixed capital formation in a number of developed economies in 2014, including in Germany (47.2 per cent) and the United States (42.3 per cent). Acquisition of intangible assets, such as trademarks, copyrights and patents, may increase financial returns to firms without necessarily increasing labor productivity or productive capacity.

Especially noteworthy is that despite their lack of investment in plant and equipment, non-financial corporations have resumed their borrowing.  As the authors of the UN study explain:

A growing disconnect between finance and real sector activities is evident in the data: fixed investment growth nearly collapsed, while debt securities (a financial instrument to raise capital) issued by non-financial corporations increased by more than 55 per cent between 2008 and 2014, representing a nearly 8 per cent increase per year [as the table below shows].

This is noteworthy because it means firms are largely going into debt to engage in mergers and acquisitions, stock repurchases and dividend payments. If world economic growth continues to slide, many of these firms are likely to find themselves in serious debt difficulties.

For most of the post-recession period, world growth was sustained by the high rates of growth in the third world, in particular China.  However, the decline in growth in the developed world eventually produced a slowdown in Chinese exports and growth, which caused a decline in Chinese demand for commodities, triggering a dramatic slide in commodity prices and rates of growth in many developing economies.

The slowdown in third world growth is gathering speed.  One factor is the growing capital flight from the third world.  As the economists Joseph Stiglitz and Hamid Rashid explain:

The real worry, however, is not just falling commodity prices, but also massive capital outflows. During 2009-2014, developing countries collectively received a net capital inflow of $2.2 trillion, partly owing to quantitative easing in advanced economies, which pushed interest rates there to near zero.

The search for higher yields drove investors and speculators to developing countries, where the inflows increased leverage, propped up equity prices, and in some cases supported a commodity price boom. Market capitalization in the Mumbai, Johannesburg, São Paulo, and Shanghai stock exchanges, for example, nearly tripled in the years following the financial crisis. Equity markets in other developing countries also witnessed similar dramatic increases during this period.

But the capital flows are now reversing, turning negative for the first time since 2006, with net outflows from developing countries in 2015 exceeding $600 billion – more than one-quarter of the inflows they received during the previous six years. The largest outflows have been through banking channels, with international banks reducing their gross credit exposures to developing countries by more than $800 billion in 2015. Capital outflows of this magnitude are likely to have myriad effects: drying up liquidity, increasing the costs of borrowing and debt service, weakening currencies, depleting reserves, and leading to decreases in equity and other asset prices. There will be large knock-on effects on the real economy, including severe damage to developing countries’ growth prospects.

This is not the first time that developing countries have faced the challenges of managing pro-cyclical hot capital, but the magnitudes this time are overwhelming. During the Asian financial crisis, net outflows from the East Asian economies were only $12 billion in 1997.

The US financial sector is one of the main beneficiaries of this capital flight.  However, the inflow of funds tends to drive up the value of the dollar to the detriment of US manufacturing, investment, and employment.

It is hard to see positive signs for the world economy.  In fact, many analysts are now predicting recession for the US.  The economist Michael Roberts has long argued that key to “the health of a modern capitalist economy is . . . the direction of average profitability of capital, total business profits and its impact on business investment.” In other words, a decline in profit rates will eventually lead to a fall in total corporate profits and then investment.  When that happens a recession is not far behind.

As Roberts describes:

[R]ecently some mainstream economists have paid the movement in profits a bit more attention. . . . And . . . the economists at the investment bank JP Morgan have started to use profits and profitability as a guide to the likelihood of an oncoming recession.

They first noted that global profit margins have been drifting lower for the past two years, mainly driven by a falling profitability in emerging capitalist economies as the great commodity price boom reversed and China’s economy slowed sharply.

And now “DM (developed market) margins have begun to fall as US corporations come under pressure from the rising dollar and the concentrated hit to the energy sector,” JPM noted.  In another note, JPM economists looked at overall US corporate profits and calculated that “corporate profits were likely down 11% annualized last quarter, and down 7% over year-ago levels.”

They “now put the probability of a recession starting within three years at a startling 92%, and the probability within two years at 67%”. However, they temper this result by pointing out that profit margins are still historically high so there is room for a fall without economic contraction and also the expectation that the US Fed will not continue with its rate hikes as quickly or as far as previously planned. On that basis, their forecast of a US recession is “beginning within three years at about 2/3 and within two years at close to 1/2″. 

It is difficult to predict economic turning points, but the trends appear clear—the long post-crisis expansion is nearing its end.  Tragically, few people have benefited from the expansion and our social structures are far from sufficient to see us through the new approaching recession.

 

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.

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.

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.

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.