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.

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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.

What Next For The Teacher’s Movement?

Public school teachers in West Virginia, Oklahoma, Kentucky, and Arizona have won meaningful salary gains for themselves, and in several cases other school workers, and real although limited increases in education spending.  Unfortunately, their demands for significant tax reform, including new taxes on corporations and the wealthy to fund a more general increase in public services, remain largely unfulfilled.  Hopefully, the lessons learned and the connections made will lead to more democratic and powerful unions and worker-community movements for change that can carry the fight forward.

Teachers deserved a raise

Teachers definitely deserve a raise.  A recent Economic Policy Institute study by Sylvia Allegretto and Lawrence Mishel finds a substantial and growing wage and compensation gap between what teachers and other similarly educated workers earn.  For example:

  • Average weekly wages (inflation adjusted) of public-sector teachers decreased $30 per week from 1996 to 2015, from $1,122 to $1,092 (in 2015 dollars). In contrast, weekly wages of all college graduates rose from $1,292 to $1,416 over this period.
  • For all public-sector teachers, the relative wage gap (regression adjusted for education, experience, and other factors) has grown substantially since the mid-1990s: It was ‑1.8 percent in 1994 and grew to a record ‑17.0 percent in 2015.
  • While relative teacher wage gaps have widened, some of the difference may be attributed to a tradeoff between pay and benefits. Non-wage benefits as a share of total compensation in 2015 were more important for teachers (26.6 percent) than for other professionals (21.6 percent). The total teacher compensation penalty was a record-high 11.1 percent in 2015 (composed of a 17.0 percent wage penalty plus a 5.9 percent benefit advantage). The bottom line is that the teacher compensation penalty grew by 11 percentage points from 1994 to 2015.
  • Collective bargaining helps to abate the teacher wage gap. In 2015, teachers not represented by a union had a ‑25.5 percent wage gap—and the gap was 6 percentage points smaller for unionized teachers.

The figure below highlights the growing wage gap between public school teachers and similar workers (controlling for age, education, race/ethnicity, geographic region, marital status, and gender).

The next figure shows that in no state are teachers paid more than other college graduates.  In fact, as the EPI study points out:

The ratio for the overall United States is 0.77, meaning that, on average, teachers earn just 77 percent of what other college graduates earn in wages. . . . In 18 states, public school teacher weekly wages lag by more than 25 percent. In contrast, there are only five states where teacher weekly wages are less than 10 percent behind.

And, as the table below makes clear, teachers suffer an overall compensation gap, with their benefit advantage not nearly big enough to compensate for their large and growing wage penalty.

The rightwing playbook

Teacher victories in West Virginia, Oklahoma, Kentucky, and Arizona were made possible by strong community support for their strike actions.  However, teachers and other activists need to prepare for the likely rightwing counter attack, which will aim to break the newly created bonds of solidarity and support for collective, militant action.

A Guardian newspaper article, which includes a secret three-page manual on how to talk about teacher strikes produced by the State Policy Network, sheds light on rightwing fears and planning.  The State Policy Network is “an alliance of 66 rightwing ‘ideas factories’ that span every state in the nation,” that is well funded by, among others, the Koch brothers, the Walton Family Foundation, and the DeVos family.

The manual talks about the need to discredit the strikes by portraying them as harmful to low income parents and their children.  But it also recognizes that this is a challenging task.  For example, it says:

A message that focuses on teacher hours or summer vacations will sound tone-deaf when there are dozens of videos and social media posts going vital from teachers about their second jobs, teachers having to rely on food pantries, classroom books that are falling apart, paper rationing, etc.  This is an opportunity to sympathize with teachers, while still emphasizing that teacher strikes hurt kids.  It is also not the right time to talk about social choice—that’s off topic, and teachers at choice-schools are often paid less than district school teachers.

As to what should be said, the manual encourages rightwing activists to respond to concerns about insufficient school funding by calling for more efficient use of existing monies, in particular by reducing “administrative bloat” and “red tape.”  And, it has special advice for those that live in states where taxes have been recently slashed:

That is obviously a challenging message to counter.  But you can consider something like “One of the most important things we can do to make sure our schools are properly funded is to have a strong economy where everyone who can work can find a job and contribute to the tax coffers that fund the government. Lower tax rates help contribute to stronger job growth.  Also lower taxes on individuals let teachers keep more of the money they earn.”

More dangerous are some of the ways in which the rightwing actually seeks to punish or intimidate teachers.  Jeff Bryant, writing at OurFuture.org provides a sobering list:

Leading into the two-day teacher walkout in Colorado, Republican legislators introduced a bill that would lead to fines and potentially up to six month’s jail time for the striking teachers. The bill was pulled, when it became clear even some Republicans weren’t too keen on the measure.

In Arizona, a libertarian think tank sent letters to school district superintendents threatening them with lawsuits if they didn’t reopen closed schools and order striking teachers to return to work. It’s unclear how or whether the threat will actually be carried out now that teachers are back on the job.

In West Virginia, where teachers used a nine-day strike to secure a five percent raise, Republicans have vowed to get their revenge by cutting $20 million to Medicaid and other parts of the state budget to pay for the increase. No doubt, when the axe falls on these programs, Republican lawmakers will be quick to blame the “greedy” teachers.

In Kentucky, Republican Governor Matt Bevin accused striking teachers of leaving children exposed to sexual assaults or being in danger of ingesting toxic substances because teachers weren’t at school. Now that the uprising has ended, Bevin has turned his revenge against teachers into an effort to take over the largest school system in the state and take away local control of the schools.

No doubt, this is just the beginning, which means that activists need to move quickly to build on victories and expand their challenge to existing relations of power.

The challenges ahead

One hopes that teacher activists in states where strikes have taken place are finding ways to build upon recent mobilizations to build organizations and revitalize their unions.  And, that they are also reaching out to other public sector unions, with the aim of building a broad alliance that can spearhead a grass-roots movement for new progressive taxes and a more class conscious vision of state policy. Despite the dangers, this is a hopeful political moment for all of us.

What’s Driving Trade Tensions Between The US and China

There is a lot of concern over the possibility of a trade war between China and the US.  In early April President Trump announced that his administration was considering levying $100 billion of additional tariffs on Chinese exports, after the Chinese government responded to a previously proposed US tariff hike on Chinese goods of $50 billion by announcing its own equivalent tariff hikes on US exports.  And the Chinese government has made clear it will again respond in kind if these new tariffs are actually imposed.

So, what’s it all about?

To this point, it is worth emphasizing that no new tariffs have in fact been levied, by either the US or Chinese governments.  The first round of announced US tariffs on Chinese goods are still subject to a public comment period before becoming effective, and the content of the second round has yet to be formally decided upon.  Thus, both countries have time to back away from their threats.

Also significant is the fact that both countries are being careful about the products they are threatening to tax.  For example, the Trump administration has carefully avoided talking about placing tariffs on computers or cell phones, two of the biggest US imports from China.  The US has also refrained from putting tariffs on clothing, shoes, and furniture, also major imports from China.

It is not hard to guess the reason why: these goods are produced as part of multinational corporate controlled production and marketing networks that operate under the direction of leading US corporations like Dell, Apple, and Walmart.  Taxing these goods would threaten corporate profitability. As a former commissioner of the US International Trade Commission pointed out: “It seems that the U.S. trade representative was very much aware of the global value chains in keeping some of these items off the list.”

The Chinese government, for its part, as been equally careful. For example, it put smaller planes on its proposed tariff list while exempting the larger planes made by Boeing.

Although the media largely echoes President Trump’s claim that his tariff threats directed at China are all about trying to reduce the large US trade deficit with China in order to save high paying manufacturing jobs and revitalize US manufacturing, the president really has a far narrower aim—that is to protect the monopoly position and profits of dominant US corporations.  The short hand phrase for this is the protection of “intellectual property rights.” As Trump tweeted in March: “The U.S. is acting swiftly on Intellectual Property theft. We cannot allow this to happen as it has for many years!”

Bloomberg News offers a more detailed explanation of the connection between the tariff threats and the goal of defending corporate intellectual property:

the White House is considering imposing tariffs on a broad range of consumer goods to punish China for its IP [intellectual property] practices. . . . the U.S. alleges . . . that China has been stealing U.S. trade secrets, forcing American companies to hand over proprietary technology as a condition of doing business on the mainland, and providing state support for Chinese firms to acquire critical technology abroad. A consensus is growing that these policies, designed to establish China as a dominant player in key technologies of the future, from semiconductors to electric cars, threaten to erode America’s technological edge, both commercial and military.

In other words, US tariff threats are, in reality, a bargaining chip to get the Chinese government to accept stronger protections for the intellectual property rights and technology of leading US firms in industries such as pharmaceuticals, aerospace, telecommunications, and autos.  If Trump succeeds, US multinational corporations will become more profitable.  But there will be little gain for US workers.

The auto industry offers a good case in point.  President Trump has repeatedly said that forcing China to lower its tariffs on imported US cars will help the US auto industry.  As he correctly points out, there is a 2.5 percent tariff on cars shipped from China to the U.S. and a 25 percent tariff on cars shipped from the U.S. to China.  Trump claims that lowering the Chinese tariff would allow US automakers to export more cars to China and boost auto employment in the US.

However, GM, Ford and other automakers have already established joint ventures with Chinese firms and the great majority of the cars they sell in China are made in China.  This allows them to avoid the tariff.  China is GM’s biggest market and has been for six years straight.  The company has 10 joint ventures and two wholly owned foreign enterprises as well as more than 58,000 employees in China. It sells approximately 4 million cars a year in China, almost all made in China.

The two largest automobile exporters from the US to China are actually German.  BMW shipped 106,971 vehicles from the U.S. to China in 2017; Mercedes sent 71,198.  Ford was the leading US owned auto exporter and in third place with total yearly exports of 45,145 vehicles.  Fiat Chrysler was fourth with 16,545.

In short, lowering tariffs on auto imports from the US will do little to boost auto production or employment in the US, or even corporate profits.  The leading US automakers have already globalized their production networks.  But, changes to the joint venture law, or a toughening of intellectual property rights in China could mean a substantial boost to US automaker profits.

For its part, the Chinese government is trying to use its large state-owned enterprises, control over finance, investment restrictions on foreign investment, licensing powers, government procurement policies, and trade restrictions to build its own strong companies.  These are reasonable development policies, ones very similar to those used by Japan, South Korea, and Taiwan.  It is short-sided for progressives in the US to criticize the use of such policies.  In fact, we should be advocating the development of similar state capacities in the US in order to rebuild and revitalize the US economy.

That doesn’t mean we should uncritically embrace the Chinese position.  The reason is that the Chinese government is using these policies to promote highly exploitative Chinese companies that are themselves increasingly export oriented and globalizing.  In other words, the Chinese state seeks only a rebalancing of power and wealth for the benefit of its own elites, not a progressive restructuring of its own or the global economy.

In sum, these threats and counter-threats over trade have little to do with defending worker interests in the US or in China.  Unfortunately, this fact has been lost in the media frenzy over how to interpret Trump’s grandstanding and ever-changing policies.  Moreover, the willingness of progressive analysts to join with the Trump administration in criticizing China for its use of state industrial policies ends up blurring the important distinction between the capacities and the way those capacities are being used.  And that will only make it harder to build the kind of movement we need to reshape the US economy.

US Trade Deficits, Trump Trade Policies, and Capitalist Globalization

Understandably concerned about the consequences of the large and sustained US trade deficit, many workers have grown tired of waiting for so-called market forces to produce balance.  Thus, they cheer Trump administration promises to correct the imbalance through tariffs or reworked trade agreements that will supposedly end unfair foreign trade practices.

Unfortunately, this view of trade encourages workers in the United States to see themselves standing with their employers and against workers in other countries who are said to be benefiting from the trade successes of their employers.  As a consequence, it also encourages US workers to support trade policies that will do little to improve their well-being.

To understand the driving force behind and develop a helpful response to US trade imbalances one must start by recognizing the interrelated nature of US domestic and international patterns of economic activity.  Large US multinational corporations, seeking to boost profits, have slowly but steadily globalized their economic activity through either the direct establishment of overseas affiliates or their use of foreign-owned subcontractors that operate under terms set by the lead multinational.  This process of globalization has meant reduced investment in plant and equipment and slower job creation in the United States, and the creation of competitiveness pressures that work to the disadvantage of workers in both the US and other countries.  It has also led to the creation of a structural trade deficit that is financed by massive flows of money back into the US as well as consumer debt, both of which swell the profits of the financial industry.  In other words, the real problem confronting workers here is capitalist globalization.

The globalization of the US economy

The World Bank divides international trade into either intra-firm trade or arm’s length trade.  Intra-firm trade refers to international trade carried out between affiliates of the same multinational corporation.  Arm’s length trade refers to international trade carried out between “independent” firms.  Independent is in quotes here because international trade between a multinational corporation and a firm operating in another country under contract would still be classified as arm’s length, even though the production and resulting trade activity is determined by the needs of the dominant multinational corporation.

As the World Bank explains in its study of intra-firm trade:

In practice, multinationals employ intra-firm and arm’s length transactions to varying degrees. In 2015, intra-firm transactions are estimated to have accounted for about one-third of global exports. Vertically integrated multinational companies, such as Samsung Electronics, Nokia, and Intel, trade primarily intrafirm. Samsung, the world’s biggest communications equipment multinational, has 158 subsidiaries across the world, including 43 subsidiaries in Europe, 32 in China and 30 in North and South America. Other multinationals, such as Apple, Motorola, and Nike, rely mainly on outsourcing, and hence on arm’s length trade with non-affiliated suppliers.

The four figures below, taken from the World Bank study, illustrate the extent to which multinational corporations shape US trade patterns with both other advanced economies (AEs) and emerging markets and developing economies (EMDEs).  The numbers shown in figures A and B are averages for the period 2002 to 2014.

Figure A shows that approximately one-third of all US exports of goods are intra-firm, meaning that they were sold by one unit of a multinational corporation operating in the US to another unit of the same multinational corporation operating outside the US.  Figure B shows that approximately one-half of all US imports of goods are intra-firm.  In both cases the share of intra-firm trade was higher with AEs than with EMDEs.  Figure E shows that the share of intra-firm exports to AEs remained remarkably constant despite the overall slump in trade that followed the 2008 Great Recession.  Figure F reveals that the share of imports that are intra-firm actually grew over the period, especially from EMDEs.


As noted above, many multinational corporations choose to subcontract production, producing arm’s length trade, rather than establish and buy goods from their own foreign affiliates.  In this case, arm’s length trade is not really independent trade.  We can gain some insight into how important this development is by examining the main sources of arm’s length US imports.  As we can see in figure B below, more than half of all US arm’s length imports come from China.

Most of these Chinese imports are actually exported by non-affiliated suppliers that operate within corporate controlled cross border production or buyer networks. For example, China is the primary US supplier of many high technology consumer goods, most notably cell phones and laptops.  Almost all are manufactured by foreign companies operating in China under according to terms set by the relevant lead multinational corporation.  The same is true for many low technology, labor intensive products such clothing, toys, and furniture, which are usually produced under contract by foreign suppliers for large retailers like Walmart.

Thus, the relatively low share of intra-firm imports from EMDEs compared with AEs owes much to the preference of many important US based multinational corporations–like Apple, Dell, and Nike–to have non-affiliated supplier firms hire workers and produce for them in China.  The same is true, although not on such a large scale, for a significant share of arm’s length US imports from Mexico.

In sum, it is likely that the globalization strategies of multinational corporations, not the decisions of truly independent foreign producers, are responsible for some 2/3 of all US imports.

Trends in trade

Global trade growth has dramatically slowed since the end of the Great Recession.  Global trade grew by an average of 7.6 percent a year over the years 2002 to 2008.  It has grown by an average of only 4.3 percent a year over the years 2010-14.  Significantly, the greatest decline has come in arm’s length trade.  This should not be surprising, since intra-firm trade is essential to the operation of the world’s leading multinational corporations.  US trade exhibits a similar trend.

In the words of the World Bank:

The U.S. trade data highlight that arm’s length trade accounted disproportionately for the overall post-crisis trade slowdown. This reflected a higher pre-crisis average and a weaker post-crisis rebound in arm’s length trade growth compared with intrafirm trade. . . . By 2014, intra-firm trade growth had returned close to its pre-crisis average (4.3 percent of exports and 5.0 percent for imports). In contrast, arm’s length trade growth remained significantly below its high pre-crisis average: its growth slowed to a post-crisis annual average of 4.7 percent compared to 11.3 percent during 2002-08.

Figures A and B below highlight these trends in US trade.

As trade becomes ever more dominated by intra firm exchanges, it will become ever more difficult for governments to manage their international trade accounts using traditional trade tools, and that includes the US government.  For example, according to the World Bank:

Trade conducted through global value chains generally shows less sensitivity to real exchange rates. That’s because competitiveness gains from real depreciations are partly offset by rising input costs. To the extent that intra-firm trade is more strongly associated with global value chains than arm’s length trade, intra-firm U.S. exports may have benefited less from the pre-crisis U.S. dollar depreciation and been dampened to a lesser degree by the post-crisis appreciation than arm’s-length exports. In addition, firms integrated vertically may have a wider range of tools available to them to hedge against exchange rate movements.

The take-away

The US trade deficit is the result of a conscious globalization strategy by large multinational corporations.  And this strategy has greatly paid off for them.  They have been able to use their mobility to secure lower wages (by putting workers from different countries into competition for employment) and reduced regulations and lower taxes (by putting governments into competition for investment).  The result is a structural deficit in US trade that is no accident and not likely to be significantly reduced by policies that do not directly challenge multinational corporate production and investment decisions.

It is hard to imagine that the Trump administration, no matter its public pronouncements, will pursue its tariff policy or NAFTA renegotiation efforts in ways that will threaten corporate power and profits.  Whether its misdirection efforts on trade can continue to encourage workers in the United States to see other workers rather than corporate globalization as the main cause of its problems remains to be seen.

Globalization and US Labor’s Falling Share Of National Output

As the Trump administration pushes ahead with its effort to renegotiate NAFTA, we must never miss an opportunity to remind people that the globalization of US economic activity has, by design, shifted the balance of class power away from working people.  A commonly cited indicator of class power is labor’s share of output (or income), which, as shown below, dramatically fell after the turn of the 21st century after decades of slow decline.

Michael W. L. Elsby, Bart Hobijn, and Aysegül Sahin, writing in the Fall 2013 Brookings Papers on Economic Activity, tested several hypotheses about the cause of labor’s declining share of output.  They concluded, based on their econometric work, that “increases in the import exposure of U.S. businesses” was key, accounting for approximately 85 percent of the decline in the U.S. payroll share over the period 1987 to 2011.  This finding led them to suggest “that a particularly fruitful avenue for future research will be to delve further into the causal channels that underlie this statistical relationship, in particular the possibility that the decline in the U.S. labor share was driven by the offshoring of the labor-intensive component of the U.S. supply chain.”

Labor’s share of income

It is important to be clear about how the labor share is estimated and how well it captures class dynamics.  The starting point is simple: labor’s share of output is calculated by dividing the labor compensation earned during a given period by the economic output produced over the same period.  Things quickly get more complicated, however, because the labor compensation used in the calculation is actually the sum of the labor earnings of two different groups of workers: those who work for others and those who work for themselves.

The compensation of the first group includes the sum of all employee pay and benefits: wages and salaries; commissions; tips; bonuses; severance payments; early retirement buyout payments; exercised stock options; and employer contributions to employee pension and insurance funds, and to government social insurance.  Calculating the employee share of output, known as the payroll share, is relative straightforward thanks to employer fillings.

Things are not so simple when it comes to the second group, since their earnings reflect “both returns to their work effort and returns to the business property they invested in” and there is no simple way to separate their earnings into those two components.  The Bureau of Labor Statistics (BLS) handles this problem by assuming that the self-employed receive an hourly labor compensation similar to that earned by employees who work in the same sector of the economy.

The figure below, from the Brookings Papers article, shows the division of the labor share into its two component parts, the payroll share and the self-employed share.  As we can see, the payroll share is significantly greater than the self-employed share.  In fact, the share of hours of the self-employed in total work hours “has declined steadily from about 14 percent in 1948 to 8.5 percent in 2012.”  However, as Elsby, Hobijn, and Sahin point out, “In spite of the relatively small share of self-employment hours, the treatment of self-employment income plays an important role in the recent behavior of the evolution of the labor share.”

A number of economists have raised concerns about the methodology used by the BLS to divide the compensation of the self-employed into its labor and capital returns components.  One example: the BLS methodology ends up crediting the self-employed with more labor compensation than their total reported earnings for much of the 1980s and early 1990s, a highly unlikely outcome.

Alternative methodologies have been suggested, and the authors of the Brookings Papers article calculate labor’s share using the two most often cited.  The one they call the “asset basis” assumes that the return on self-employed capital is the same as the return on capital in the non-farm business sector, with the remaining earnings credited to labor.  The other, called the “economy-wide basis,” assumes that the division between labor compensation and capital income is the same for the self-employed as it is for the non-farm business sector.  As we see below, the two alternatives generally produce labor share trends that are relatively close together, and significantly lower than that published by the Bureau of Labor Statistics from the start of the series until the late 1990s, when all three series generally converge.

Because of its methodological shortcoming, Elsby, Hobijn, and Sahin prefer either of the two alternative measures, which leads them to the conclusion that use of the BLS series overstates the actual decline in the labor share.  As they explain:

The upshot of these comparisons is that around one third of the decline in the headline measure of labor’s share appears to be a by-product of the methods employed by the BLS to impute the labor income of the self-employed. Alternative measures that have less extreme implications regarding the return to capital among proprietors are more consistent with one another and indicate a more modest decline.

The fact that the difference between the BLS and the alternative measures of labor’s share largely disappeared beginning in the late 1990s suggests that the average hourly earnings of the self-employed have grown much faster than that of the employed.  This, in turn, suggests a significant transformation in the make-up of the self-employed; in particular an increase in the number of individuals engaged in highly lucrative professional work.  In this regard it is important to recall that labor compensation includes not just wage and salary earnings but also things like bonuses and stock options, rewards that became increasingly popular for a select few starting in the late 1990s thanks to the run-up in the stock market.

And in fact, this transformation is confirmed by the authors, who disaggregated the structure of the labor share for employees and total earnings for the self-employed.  The results are illustrated in the following figure, which shows that “the share of income accounted for by both payroll wages and salaries and by proprietors’ income [the sum of their labor and nonlabor earnings] has been buoyed up since the 1980s by substantial rises in the shares accounted for by the very top fractiles of households in the United States.”

As the authors point out:

This rise in inequality is even more striking for proprietors’ income than it is for payroll income. In 1948 the bottom 90 percent of employees earned 75 percent of payroll compensation. By 2010 this had declined to 54 percent. For entrepreneurial income, however, this fraction declined from 42 percent in 1948 to 14 percent in 2010. Even more starkly, over the same period the share of proprietors’ income accounted for by the bottom 99 percent fell from 74 percent to 45 percent. This suggests that the sharp rise in the average hourly compensation of proprietors relative to the payroll-employed since the late 1980s is related to substantial increases in income inequality among proprietors that dominate even the considerable rise in inequality witnessed among the payroll-employed. Moreover, this has been driven by extreme rises in proprietors’ income at the very top of the income distribution—the top 1 percent in particular.

In short, there are a lot of moving parts to the calculation of and evaluation of trends in the labor share of income.  The BLS measure may have overstated the decline, but the explosion of inequality means that the measure’s two components mask an even greater fall in the share of income going to the great majority of working people.

Globalization and the decline in the payroll share of output

Although the labor share is the “headline” statistic, the authors decided to narrow their focus to the payroll share.  As we saw above, it is no simple matter to determine the labor compensation of the self-employed.  In contrast, the payroll share is relatively easy to measure and, as a bonus, can be disaggregated by industry.  Moreover, it is the largest component of the labor share, which means that its movement is most responsible for changes in the overall labor share.

Elsby, Hobijn, and Sahin begin with a standard neoclassical aggregate production model and the most common neoclassical explanations for the decline, which rest on investment and technological change: the growth in the capital/labor ratio and skill-biased technical change.  The basic neoclassical argument is that growing investment shifts income away from labor in the first case and unskilled workers in the second.  However, in both cases the authors found that the movement in relevant variables was not consistent with the actual movement in the payroll share.

Recognizing the limitations inherent in a simple aggregate production function model of the economy, the authors decided to take advantage of their industry data to see whether a more micro/industry perspective yielded better results. More specifically, they econometrically tested whether investment specific technological change, declines in unionization, or increases in import competition can explain the decline in the payroll share.  They found that “Our data yield one robust correlation: that declines in payroll shares are more severe in industries that face larger increases in competitive pressures from imports.”

In the case of investment specific technical change, the authors looked to see whether those industries which enjoyed the lowest price increases for investment goods had the largest declines in payroll share, with the assumption being that these industries would be the most likely to replace workers with capital.  In fact, it turned out that there was a weak negative relationship between the change in equipment prices and the change in payroll shares across industries, the opposite of what was expected “if capital deepening due to the decline in price of equipment were the driving force of the decline in the payroll share.”  This result reinforced the conclusion from their aggregate analysis that investment activity does not explain the decline in the payroll share of output.

The test of unionization was more straight forward.  The authors looked to see if there was a positive relationship between changes in union density in an industry and changes in payroll shares.  While they did find “a positive correlation between the change in unionization and the change in payroll shares across industries,” the relationship was weak. “The weighted least squares regression indicates that cross-industry variation in changes in unionization rates explains less than 5 percent of the variation in changes in payroll shares across industries.”

Last was the test of globalization, or more specifically a test of whether the import-caused hollowing out of US industry was a primary cause of the decline in the payroll share.  Elsby, Hobijn, and Sahin assumed two possible channels for a rise in imports to cause a fall in the payroll share.  The first involved trade-generated capital deepening.  In this case, the outsourcing of production by US firms would lead to a reduction in labor, a rise in the capital-labor ratio, and a decline in the payroll share of income.  However, as the authors noted, they had already tested capital deepening as a potential cause of the decline and found no support for the hypothesis.

The second trade channel relied on wage differentials rather than shifts in capital intensity.  Industries with high labor shares likely have high labor costs, making them vulnerable to import competition.  The greater the competition the more likely firms in these industries were to take actions to lower those costs, including offshoring segments of their production process, thereby producing a decline in their payroll share.

The authors pursued this possibility by computing the import exposure of each industry.  They did so by asking the following question:

If the United States were to produce domestically all the goods that it imports, how much additional value added would each industry have to produce? For example, if all U.S. imports of clothes were produced domestically, how much would value added increase in sectors like retail, textile manufacturing, and so on.

To be able to calculate this measure of import exposure we use the annual input-output matrices that are available for the years 1993 to 2010 from the BLS. Import exposure is expressed as the percentage increase in value added needed to satisfy U.S. final demand if the United States would produce all its imports domestically.

The figure below shows the relationship between changes in import exposure and changes in the payroll share for each industry.  As we can see, import exposure increased for almost all industries—reflecting the growing hollowing out of the US economy–and the larger the exposure the greater the decline in payroll share.  A simple regression showed that the import exposure variable was significant in explaining changes in the payroll share, with cross-industry variation in changes in import exposure explaining 22 percent of the variation in changes in payroll share.

The authors then ran a regression which included all three possible explanations for the decline in the payroll share.  The globalization variable remained highly significant and was the only variable to do so.  With the import exposure valuable included in the regression, the unionization variable became insignificant.  “This suggests that those sectors where deunionization was most prevalent are also sectors that saw the biggest increase in import exposure.”

Elsby, Hobijn, and Sahin conclude:

our results indicate a cross industry link between the increases in import exposure and the decline in the labor share.  While this result cannot be interpreted as causal, it is worth noting that the statistical relationship between import exposure and payroll shares across industries is large enough to account for a substantial fraction of the aggregate trend decline in the labor share. In particular, aggregating the results of the weighted-least-squares regression across industries suggests that increases in the import exposure of U.S. businesses can account for 3.3 percentage points of the 3.9 percentage point decline in the U.S. payroll share over the past quarter century.

 

We know that trade agreements are about a lot more than lowering tariffs to promote trade.  Foremost, they are about strengthening corporate power and profitability.  And despite mainstream economic theorizing to the contrary, there is strong evidence that these corporate gains come, as designed, at the expense of majority well-being.

Studies of the effect on US workers from imports from China (see Autor, Dorn, and Hanson)  and Mexico (see Hakobyan and McLaren), most of which are produced within US transnational corporate-controlled production networks, show that US workers pay a steep price in terms of job loss and lost earnings from corporate driven globalization.  And, as we have seen, Elsby, Hobijn, and Sahin’s work strongly suggests that this process is also the main factor behind the decline in the payroll share of output.  This is class power at work–unfortunately theirs, not ours.

Signs Of Economic Trouble Ahead

The current expansion has gone on for 102 months.  Only the expansions from March 1991 to March 2001 (120 months) and from February 1961 to December 1969 (106 months) are longer.  Unfortunately, growth during this expansion has been slow and the gains have largely gone to a very few.  And there are signs of economic trouble ahead.

The figure below shows that the rate of growth of GDP per capita during this expansion has been significantly below those of past expansions.

Weak business investment, as illustrated below, is one reason for the disappointing economic performance. 

Corporations have certainly made money during this expansion.  It is just that they have been more interested in using it to pay dividends and buyback their stock to push up share prices rather than spend it on new plant and equipment.  As Nomi Prins explains, and as illustrated in the next figure, “companies have been on a spree of buying their own stock, establishing a return to 2007-level stock buybacks.”

Not surprisingly, then, growth, as the next chart shows, has recently been driven by private consumption.

However, as we see below, for the last two years that consumption has not been supported by earnings.

Moreover, despite the length of the current expansion, median nominal wage growth not only remains low, it has begun to turn down. Thus, we are unlikely to see any significant boost in median earnings.

There is another reason to doubt that consumption can continue to grow at its current rate.  As the Wall Street Journal Daily Shot Brief notes:

While economists expect consumption to remain strong this year (helped in part by the new tax bill), it’s hard to see the US consumer staying this enthusiastic for too long. That’s because the savings rate as a percentage of disposable income is at a decade low.

At some point over the next year or two, perhaps triggered by interest rate hikes or a fall in investment due to a decline in the rate of profit, the expansion will end.  Majority living and working conditions, already under pressure, will then further deteriorate.  We face big challenges ahead.