Reports from the Economic Front

a blog by Marty Hart-Landsberg

Category Archives: Economic Theory

The 2016 Survey of Consumer Finances paints a grim picture of working class finances

The Survey of Consumer Finances (SCF) is a triennial survey of U.S. families that is sponsored by the Federal Reserve Board (Fed) and carried out by the NORC at the University of Chicago.  It includes information on families’ balance sheets, pensions, income, and demographics. As the Fed notes, “No other study for the country collects comparable information.”

Sadly, as we see below, the wealth data from the 2016 survey paints a grim picture of working class finances, reinforcing what many people already know, that US capitalism works to enrich the few at the expense of the many.

The following figure and table from the 2016 survey shows trends in the median net worth for all families, measured in 2016 dollars.  Strikingly, the median in 2016 was 8 percent below what it had been in 1998.

Of course, while the median value is useful for capturing broad trends, the next figure and table, also from the 2016 survey, makes clear that capitalism’s motion does not treat all families equally.  More specifically, the bottom fifth of families saw their net worth fall by 24 percent over the period 1998 to 2016, while the next lowest income tier experienced an even greater decline, 34 percent.  Those in the next two higher income tiers basically treaded water.  In sharp contrast, the top ten percent enjoyed a net worth increase of 146 percent over the same period.

Matt Bruenig, drawing on data from the survey, provides an even clearer picture of wealth inequality in the following figure.  As he explains:

[it] shows what percent of wealth is owned by each wealth decile.  The way this reads is as follows: the bottom 10 percent owns -0.5 percent of the wealth in the country (they are net debtors) while the top 10 percent owns 77.1 percent of the wealth in the country.

In fact, wealth is even more concentrated than it appears in this figure.  In 2016 the top 1 percent owned 38.5 percent of the wealth, more than the bottom 90 percent combined. This was a sharp rise from the 29.9 percent share they held in 1989.

So, the next time you hear media analysts celebrate US capitalism as a great wealth creating machine, remember that they are celebrating a social system that largely works for the benefit of a very few.

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Just Say No To NAFTA

The North American Free Trade Agreement (NAFTA) is unpopular with many working people in the United States, who correctly blame it for encouraging capital flight, job losses, deindustrialization, and wage suppression.   President Trump has triggered the renegotiation of the agreement, which will likely conclude early next year.  Unfortunately, progressives are in danger of missing an important opportunity to build a working class movement for meaningful economic change.  By refusing to openly call for termination of the agreement, they are allowing President Trump to present himself as the defender of the US workers, a status that will likely help him secure the renewal of the treaty and a continuation of destructive globalization dynamics.

The NAFTA debate

According to a recent poll commissioned by Public Citizen:

At a time of great peril for our democracy and deepening public opposition to Donald Trump on many fronts, he wins high marks from voters on handling trade and advocating for American workers: 46 percent approve of his handling of trade agreements with other countries, 51 percent, his ‘putting American workers ahead of the interests of big corporations’ and 60 percent, how he is doing “keeping jobs in the United States.”

This perception of Trump’s advocacy for workers is encouraged by media stories of the strong opposition by leading multinational corporations to several of President Trump’s demands for changes to the existing NAFTA agreement.

The most written about and controversial proposals include:

  • Major modifications to NAFTA’s investor-state dispute settlement system, which allows foreign investors to sue host governments in secret tribunals that trump national laws if these investors believe that government actions threaten their expected profits. The Trump administration proposes to change this system by (1) establishing an “opt-in” provision that would make participation voluntary and (2) ending the ability of private investors to use claims of denial of “minimum standard of treatment” or an “indirect expropriation” as grounds for filing a claim.
  • A tightening of the rules on the origins of car parts. NAFTA rules govern the share of a product that must be sourced within NAFTA member countries to receive the agreement’s low tariff benefits. The Trump administration wants to raise the auto rules of origin to 85 percent from the current 62.5 percent and include steel as one of the products to be included in the calculations.  It has also proposed adding a new US-only content requirement of 50 percent.
  • The introduction of a NAFTA sunset clause that would allow any of the participating countries to terminate the deal after five years, a clause that could well mean a renegotiation of the agreement every five years.

Canadian and Mexican government trade representatives have publicly rejected these proposals.  The US corporate community has called them “poison pills” that could doom the renegotiating process, possibly leading to a termination of the agreement.  The president of the US Chamber of Commerce has said that:

All of these proposals are unnecessary and unacceptable. They have been met with strong opposition from the business and agricultural community, congressional trade leaders, the Canadian and Mexican governments, and even other U.S. agencies. . . . The existential threat to the North American Free Trade Agreement is a threat to our partnership, our shared economic vibrancy, and clearly the security and safety of all three nations.

Corporate lobbyists are hard at work, trying to convince members of Congress to use their influence to get Trump to withdraw these proposals, but so far with little success.  In fact, the Trump administration has pushed back:

In remarks to the news media in mid-October, Robert E. Lighthizer, the United States trade representative, said that businesses should be ready to forego some of the advantages they receive under NAFTA as the United States seeks to negotiate a better deal for workers. In order to win the support of people in both parties, businesses would have to “give up a little bit of candy,” he said.

It is this kind of public back and forth between corporate leaders and the Trump administration that has encouraged many working people to see President Trump as sticking up for their interests.  In broad brush, workers do not trust a dispute resolution settlement system that allows corporations to pursue profits through secret tribunals that stand above national courts.  They also welcome measures that appear likely to force multinational corporations to reverse their past outsourcing of jobs, especially manufacturing jobs, and promote “Buy American” campaigns.  And, they have no problem with periodic reviews of the overall agreement to allow for ongoing corrections that might be needed to improve domestic economic conditions.

The rest of the story

Of course, NAFTA negotiations are not limited to these few contentious issues.  In fact, trade negotiators have made great progress in reaching agreement in many other areas.  However, because of the lack of disagreement between corporations and the Trump administration on the relevant issues, the media has said little about them, leaving the public largely ignorant about the overall pace and scope of the renegotiation process.

Perhaps the main reason that agreement is being reached quickly on many new issues is because many of the Trump administration’s trade proposals closely mirror those previously agreed to by all three NAFTA country governments during the Transpacific Partnership negotiations.  These include “measures to regulate treatment of workers, the environment and state-owned enterprises” as well as “new rules to govern the trade of services, like telecommunications and financial advice, as well as digital goods like music and e-books.”  In short, taken overall, it is clear that the Trump administration remains committed to “modernizing” NAFTA in ways designed to expand the power and profitability of transnational corporations.

A case in point is the proposed change to the existing NAFTA side-agreement on labor rights.  NAFTA currently includes a rather useless side agreement on labor rights.  It only requires the three governments to enforce their own existing labor laws and standards and limits the violations that are subject to sanctions.  For example, sanctions can only be applied—and only after a long period of consultations, investigations, and hearings–to violations of laws pertaining to minimum wages, child labor, and occupational safety and health.  Violations of the right to organize, bargain collectively, and strike are not subject to sanctions.

The labor standards agreement that the US proposes to include in NAFTA is one that it has used in more recent trade agreements and was to be part of the Transpacific Partnership.  It says that “No Party shall fail to effectively enforce its labor laws through a sustained or recurring course of action or inaction in a manner affecting trade or investment between the Parties, after the date of entry into force of this Agreement for that Party.”

This labor agreement is included in the US-Dominican-Central American Free Trade Agreement (DR-CAFTA) and we now have an example of how it works, thanks to a case filed in 2011 by the US against Guatemala.  The panel chosen to hear the case concluded, in June 2017, that the US “did not prove that Guatemala failed to conform to its obligations.”  The reason: the three person panel made its own monetary calculations about whether Guatemalan labor violations were serious enough to affect trade or investment flows between the two countries and decided they were not.

As Sandra Polaski, former Deputy Director-General for Policy of the International Labor Organization, writes:

The panel reached its decision that Guatemala had not breached its obligations under the DR-CAFTA because the violations had not occurred “in a manner affecting trade” between the parties. . . . The panel chose to establish a demanding standard in its interpretation of that phrase, requiring that a complaining country would have to prove that there were cost savings from specific labor rights violations and that the savings were of sufficient scale to confer a material competitive advantage in trade between the parties.  This threshold is unprecedented in any analogous applications: WTO panels have interpreted similar language much more narrowly, as affecting conditions of competition, without requiring demonstration of costs and their effects. Demonstrating changes in costs at this level would require access to sensitive internal company accounts (at a minimum), and the perpetrators of labor violations would likely have hidden them in any case. This standard could not be met without subpoena power, which does not exist under the trade agreements. . . .

The decision is disturbing for multiple reasons: because of the injustice toward the affected Guatemalan workers; because it invalidated the parties’ explicit commitment to broad enforcement of labor rights contained both in the obligatory commitments and the overall stated purposes of the agreement; and because as the first and as of now only arbitration arising from a labor clause (or environmental clause) it set a precedent for future cases.

In short, labor exploitation is likely to continue unchecked under a possible new NAFTA, which can be expected to remain as corporate friendly as the original agreement.

The need for a new progressive strategy of opposition

President Trump has threatened to withdraw the US from NAFTA if the other two countries do not agree to his demands for key NAFTA changes, in particular to the investor-state dispute settlement system and rules on the origins of car parts, the inclusion of a sunset clause, and an end to government procurement restrictions.  While we cannot predict the future, the odds are great that compromises will be reached on these issues, allowing President Trump to present a renegotiated NAFTA as a win for working people.

As Jeff Faux, founder of the Economic Policy Institute, comments:

The erratic and belligerent Trump might, of course, drive US-Mexican relations over a cliff. But he prides himself as a deal-maker, not a deal-breaker. So the most likely outcome is a modestly revised NAFTA that: 1) Trump can boast fulfills his pledge 2) Peña Nieto can use to claim that he stood up to the bullying gringo 3) doesn’t threaten the low-wage strategy for both countries that NAFTA represents.

Revisions might include weakening NAFTA’s dispute settlement courts, raising the minimum required North American content for duty-free goods, and reducing the obstacles to cross-border trade for small businesses on both sides of the border.

Changes like this could marginally improve the agreement, and would be acceptable to the Canadians, who have been told by Trump that he is not going after them. But from the point of view of workers in the American industrial states who voted for Trump, the new NAFTA is likely to be little different from of the old one. The low-wage strategy underlying NAFTA that keeps their jobs drifting south and US and Mexican workers’ pay below their productivity will continue.

But you can bet that Trump will assure them that it is the greatest trade deal the world has ever seen.

Sadly, the progressive movement has pursued the wrong strategy to build the kind of movement we need to oppose the likely NAFTA renewal or take advantage of a possible US withdrawal.  In fact, it has largely allowed President Trump to shape the public discussion around the renegotiations.

To this point, progressive trade groups, labor unions, and Democratic Party politicians have refrained from calling Trump’s bluff and demanding termination of the agreement, despite the fact that this and other so-called free trade agreements are not really reformable in a meaningful pro-worker sense. Instead, they have concentrated on demonstrating the ways that NAFTA has harmed workers, highlighting areas that they think are in most need of revision and offering suggestions for their improvement, and mobilizing their constituencies to press the US trade representative to adopt their desired changes.  Progressive trade groups have generally turned their spotlight on the investor-state dispute resolution system and outsourcing, as have Democratic Party politicians.  Trade unions, for their part, have emphasized outsourcing and labor rights.

Significantly, these are all areas, with the exception of labor rights, where the Trump administration has put forward proposals for change which if realized would go some way to meeting progressive demands.  The result is that the progressive movement appears to be tailing or reinforcing Trump’s claims to represent popular interests.  And, by focusing on targeted issues, the movement does little to educate the population about the ways in which the ongoing negotiations are creating new avenues for corporations to enhance their mobility and profits, especially in services, finance, and e-commerce.

Apparently, leading progressive groups plan to wait until they see the final agreement and then, if they find it unacceptable with regards to their specific areas of concern, call for termination of the agreement.  But this wait and see strategy is destined to fail, not only to build a movement capable of opposing a revised NAFTA agreement, but even more importantly to advance the creation of a working class movement with the political awareness and vision required to push for a progressive transformation of US economic dynamics.

For example, this strategy of creating guidelines for selective changes in the agreement tends to encourage people to see the government as an honest broker that, when offered good ideas, is likely to do the right thing.  It also implies that the agreement itself is not a corporate creation and that a few key changes can make it an acceptable vehicle for advancing “national” interests.  Finally, because agreements like NAFTA are complex and hard to interpret it will be no simple matter for the movement to help its various constituencies truly understand whether a renegotiated NAFTA is better, worse, or essentially unchanged from the original, an outcome that is likely to demobilize rather than energize the population to take action.  Of course, if Trump actually decides to terminate the agreement, the movement will be put in the position of either having to praise Trump or else criticize him for not doing more to save NAFTA, neither outcome being desirable.

There is, in my opinion, a better strategy: engage in popular education to show the ways that trade agreements are a direct extension of decades of domestic policies designed to break unions and roll back wages and working conditions, privatize key social services, reduce regulations and restrictions on corporate activity, slash corporate taxes, and boost multinational corporate power and profitability.  Then, organize the most widespread movement possible, in concert with workers in Mexico and Canada, to demand an end to NAFTA.  Finally, build on that effort, uniting those fighting for a change in domestic policies with those resisting globalization behind a campaign directed at transforming existing relations of power and creating a new, sustainable, egalitarian, and solidaristic economy.

It is not too late to take up the slogan: just say no to NAFTA!

Budget Wars: The Rich Want More

The rich and powerful keep pushing for more.  And the odds are increasingly good that they will get what they want through the federal budget process now underway. As the Center on Budget and Policy Priorities explains:

Congressional Republicans this fall are poised to launch step one of a likely two-step tax and budget agenda: enacting costly tax cuts now that are heavily skewed toward wealthy households and profitable corporations, then paying for them later through program cuts mostly affecting low- and middle-income families.

The potential gains for those at the top from this first step are enormous.  For example, the Republican plan currently calls for ending the estate tax, slashing the top tax rate on pass-through income from partnerships and limited liability companies from 39.6 percent to 25 percent, lowering the corporate income tax rate from 35 percent down to 20 percent, and repealing the corporate alternative minimum tax.  Republicans are also considering a tax holiday on repatriated multinational corporate profits.

The Tax Policy Center estimates that the Senate tax plan would lower personal income taxes by an average of $722,510 for the top 0.1 percent of income earners compared with just $60 for those in the lowest quintile; as much as two-thirds of personal income tax cuts would go to the top 1 percent.  Corporate America, for its part, would be reward with a $2.6 trillion cut in business taxes over the next decade.

Naturally, President Trump and his family are well positioned to gain from these changes.  Democracy Now reports that the Center for American Progress Action Fund estimates that “President Trump’s family and Trump’s Cabinet members would, combined, reap a $3.5 billion windfall from the proposed repeal of the estate tax alone.” And capping the pass-through income tax rate “would give Trump’s son-in-law, his senior adviser, Jared Kushner, an annual tax cut of up to $17 million.” The Center for American Progress estimates that Trump, based on his 2016 financial disclosures, would enjoy a $23 million tax cut.

As for the second step in two-step agenda, it would work as follows: the Senate’s budget resolution provides a very general outline of federal spending and revenues over the next decade.  It calls for an allowed increase in the budget deficit of $1.5 trillion as well as the achievement of a balanced budget within a decade.  House leaders are hopeful that the House will approve the Senate budget resolution with few if any changes, thereby speeding the path for the House and Senate to quickly agree on the specific tax changes that will drive the budget deficit and then deliver the completed budget to President Trump for his signature before the end of the year.

However, all independent analysts agree that the Republican tax plan will push the deficit far beyond its stated limit of $1.5 trillion.  The table below, based on estimates by the Tax Policy Center, is representative.

It shows that business tax cuts are likely to lead to $2.6 trillion in lost revenue, producing an overall estimate of a $2.4 trillion deficit increase.  What we can expect then, is the return of the “deficit hawks.”  If Republicans succeed in passing their desired tax cuts, and they produce the expected ever growing budget deficits, we can count on these legislators to step forward to sound the alarm and call for massive cuts in social spending, targeting key social programs, especially Medicare and Medicaid, thereby completing the second step.

Not surprisingly, the Republican leadership denies the danger of growing deficits.  It presents its tax plan as a pro-growth plan, one that will generate so much growth that the increased revenue will more than compensate for the tax cuts.  It’s the same old, same old: once we get government off our backs and unleash our private sector, investment will soar, job creation will speed ahead, and incomes will rise for everyone.  The history of the failure of past efforts along these lines is never mentioned.

Of course, it is possible that political differences between the House and Senate will throw a monkey wrench in the budget process, forcing Republicans to accept something much more modest.  But there are powerful political forces pushing for these tax changes and, at least at present, it appears likely that they will be approved.

One of the most important takeaways from what is happening is that those with wealth and power remain committed to get all they can regardless of the social consequences for the great majority.  In other words, they won’t stop on their own.  If we want meaningful improvements in working and living conditions we will have to do more to help build a popular movement, with strong organizational roots, capable of articulating and fighting for its own vision of the future.

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.

US Health Care: Profits Over People

The US health care system produces healthy profits while leaving growing numbers of people without access to affordable, quality health care.

The US is one of the only advanced capitalist countries without a system of universal health coverage.  Tens of millions are uninsured, and many millions more pay for insurance that is either too limited in its coverage or too expensive to use.  What we need, and could implement if political realities change, is a “Medicare for all,” single-payer system of national health insurance.

As the organization Physicians for a National Health Program explains:

Single-payer national health insurance, also known as “Medicare for all,” is a system in which a single public or quasi-public agency organizes health care financing, but the delivery of care remains largely in private hands. Under a single-payer system, all residents of the U.S. would be covered for all medically necessary services, including doctor, hospital, preventive, long-term care, mental health, reproductive health care, dental, vision, prescription drug and medical supply costs.

The program would be funded by the savings obtained from replacing today’s inefficient, profit-oriented, multiple insurance payers with a single streamlined, nonprofit, public payer, and by modest new taxes based on ability to pay. Premiums would disappear; 95 percent of all households would save money. Patients would no longer face financial barriers to care such as co-pays and deductibles, and would regain free choice of doctor and hospital. Doctors would regain autonomy over patient care.

Bad health care outcomes

Our health care system fails to deliver affordable, accessible, quality health care. Even a writer for Forbes magazine, a publication that proclaims itself to be a “capitalist tool,” acknowledges this:

It’s fairly well accepted that the U.S. is the most expensive healthcare system in the world, but many continue to falsely assume that we pay more for healthcare because we get better health (or better health outcomes). The evidence, however, clearly doesn’t support that view.

For example, take a look at the exhibit below, which comes from a 2014 Commonwealth Fund study on health care in the eleven listed nations.

As you can see, the US ranked last in the overall ranking, thanks to its relative poor performance in the category of access and last place standing in the categories of efficiency, equity, and healthy lives.

The Forbes article summarizes the reasons given by the Commonwealth Fund for the poor US performance:

Access: Not surprisingly — given the absence of universal coverage — people in the U.S. go without needed health care because of cost more often than people do in the other countries.

Efficiency: On indicators of efficiency, the U.S. ranks last among the 11 countries, with the U.K. and Sweden ranking first and second, respectively. The U.S. has poor performance on measures of national health expenditures and administrative costs as well as on measures of administrative hassles, avoidable emergency room use, and duplicative medical testing.

Equity: The U.S. ranks a clear last on measures of equity. Americans with below-average incomes were much more likely than their counterparts in other countries to report not visiting a physician when sick; not getting a recommended test, treatment, or follow-up care; or not filling a prescription or skipping doses when needed because of costs. On each of these indicators, one-third or more lower-income adults in the U.S. said they went without needed care because of costs in the past year.

Healthy lives: The U.S. ranks last overall with poor scores on all three indicators of healthy lives — mortality amenable to medical care, infant mortality, and healthy life expectancy at age 60. Overall, France, Sweden, and Switzerland rank highest on healthy lives.

What accounts for this outlier status in health care?  According to the report:

The most notable way the U.S. differs from other industrialized countries is the absence of universal health insurance coverage. Other nations ensure the accessibility of care through universal health systems and through better ties between patients and the physician practices that serve as their medical homes.

A Guardian article on the US health care system provides further confirmation of US outlier status:

Broadly speaking, the World Health Organization (WHO) defines universal health coverage as a system where everyone has access to quality health services and is protected against financial risk incurred while accessing care. . . . Among the 35 OECD member countries, 32 have now introduced universal healthcare legislation that resembles the WHO criteria.

And yet we pay the most

The graphic below, from the Guardian article, provides a stark picture of just how much we pay to get our poor health care outcomes.

Significantly, it was in the early 1980s that our per capita health care spending began to soar compared with all other developed capitalist countries, a period marked by the government’s growing embrace of pro-market, neoliberal policies designed to promote corporate profitability. And as the graphic also makes clear, we have seen limited gains in life expectancy despite dramatically outspending the other listed developed countries.

So what gives?

So, you might ask, where is all the money we spend on health care going if not to improve our health care outcomes?  Well, the answer is simple: higher profits for the health care industry.

The headline of a New York Times article says it all: “Gripes About Obamacare Aside, Health Insurers Are in a Profit Spiral.”  As a result:

Since March 2010, when the Affordable Care Act was signed into law, the [stock prices of] managed care companies within the Standard & Poor’s 500-stock index — UnitedHealth, Aetna, Anthem, Cigna, Humana and Centene — have risen far more than the overall stock index. This is no small matter: The stock market soared during that period.

The numbers are astonishing. The Standard & Poor’s stock index returned 135.6 percent in those seven years through Thursday, a performance that we may not see again in our lifetimes. But the managed care stocks, as a whole, have gained nearly 300 percent including dividends, according to calculations by Bespoke Investment Group.

These and other leading health care corporations oppose a Medicare for all system because its adoption would put an end to their massive profits.  And these companies have many allies in the rest of the corporate community because any policy that strengthens the principle of putting people before profits is a threat to them all.

Hopefully, however, the importance of health care and the obviously poor performance of our health care system as a health care system (as opposed to a profit center) will motivate people to keep pressing for real change.  And, who knows, a health care victory might also encourage a broader public discussion about how best to organize the rest of our economy.

Secular Stagnation

Government policy makers, no matter the party in power, like to project a rosy future. However, claims of economic renewal, absent fundamental changes in the structure and workings of the US economy, should not be taken seriously.  The fundamental changes I would advocate are those that would: dramatically boost worker power; secure a progressive and growing funding base for a needed expansion of public housing and infrastructure and public spending on health care, education, and transportation; and end the production and use of fossil fuels and significantly reduce greenhouse emissions.

Fundamental changes are needed because the United States is suffering from an extended period of slow and declining growth, what is known as secular stagnation.

The following figure, taken from a Financial Times blog post, shows the duration and average rate of growth of every economic expansion in the postwar period.  The current expansion, which started in the second quarter of 2009, is the third longest, although soon to become the second.  Among other things, that means that a new recession is likely not far off (especially with the Federal Reserve Board apparently committed to boosting interest rates).

As we can see, the current expansion has recorded the slowest rate of growth of any expansion.  Moreover, as Cardiff Garcia, the author of the blog post, points out: “Also worrying is the observation from the chart that every subsequent expansion since 1970 has grown at a slower pace than its predecessor, regardless of what caused the downturn from which it was recovering.”

Michalis Nikiforos and Gennaro Zezza begin their Levy Economics Institute report on current economic trends as follows:

From a macroeconomic point of view, 2016 was an ordinary year in the post–Great Recession period. As in prior years, the conventional forecasts predicted that this would be the year the economy would finally escape from the “new normal” of secular stagnation. But just as in every previous year, the forecasts were confounded by the actual result: lower-than-expected growth—just 1.6 percent.

The following figures illustrate the overall weakness of the current expansion.  Each figure shows, for every postwar expansion, a major macro indicator and its growth over time since the end of its preceding recession.  The three most recent expansions, including the current one, are color highlighted.

Figure 1A makes clear that growth has been slower in this expansion than in any previous expansion. Figure 1B shows that “real consumption has grown only about 18 percent compared to the trough of 2009—similar to the expansion of GDP—and also stands out as the slowest recovery of consumption growth in the postwar period.”

Perhaps most striking is the actual decrease in real government expenditure shown in figure 1D.  Real government expenditure is some 6 percent lower than it was eight years ago.  In no other expansion did real government expenditure fall.  Without doubt austerity is one of the main reasons for our current slow expansion.

Significantly, as we see in figure 7 below, the stock market has continued to boom in spite of the weak performance of the economy.  This figure shows that the total value of the stock market has risen sharply, regardless of whether compared to the growth in personal income or profits (measured by net operating surplus).   This rise has generally kept those at the top of the income pyramid happy despite the country’s weak overall economic performance.

No doubt, on-going wage stagnation, which has depressed consumption, and privatization, which has grown in concert with austerity, has helped to fuel this new stock market bubble.  One reason top income earners have been so favorable to the broad contours of Trump administration policy is that it is designed to strengthen both trends.

Recession will come.  In an era of secular stagnation that means the downturn will hit an already weak economy and struggling working class.  And the upturn that follows will likely be weaker than the current one.  Market forces will not save us.  Real improvements demand transformative policy changes.

The US Economy Doesn’t Create Jobs Like It Used To

Business pursuit of private profit drives our economy.  Sadly, firm profit-maximizing activity increasingly appears to view job creation as a distraction.

The official US unemployment rate fell to 4.5 percent in March 2017; that is the lowest unemployment rate since May 2007.  Many economists, and even more importantly members of the Federal Reserve Board, believe that this low rate indicates that the US economy is now operating at full employment.  As a result, they now advocate policies designed to slow economic activity so as to minimize the dangers of inflation.

Unfortunately, the unemployment rate is a poor indicator of the current state of the labor market.  For one thing, it fails to include as unemployed those who have given up looking for work.

An examination of recent trends in the employment/population ratio (EPOP) makes clear that our economy, even during periods of economic growth, is marked by ever weaker job creation.  It also appears that this is not a problem correctable by faster rates of growth.  Rather, we need to change the organization of our economy and reshape its patterns of income and wealth distribution.

The Employment/Population Ratio and the shortage of jobs

The employment/population ratio (EPOP) equals the share of the non-institutional population over 16 that works for money.  The non-institutional population includes everyone who is not in prison, a mental hospital, or a nursing home.

The figure below, from a LBO News blog post by Doug Henwood, shows the movement of the EPOP for all workers and separately for male and female workers.

As we can see, the participation rate of male workers fell steadily from the early 1950s through the early 1980s recession years.  It then slowed its decent over the next two decades until the 2008 Great Recession, which caused it to tumble.  Its post-recession rise has been weak.  The male EPOP was 66 percent in March 2017.

The female EPOP rose steadily from 30.9 percent in 1948 to a peak of 58 percent in 2000.  Thereafter, it drifted downward before falling significantly during the Great Recession.  Its post-recession rise has also been weak.  It was 54.7 percent in March 2017.

The overall EPOP, the “all” line, began at 56.6 percent in 1948, hit a peak of 64.7 percent in April 2000, and was 60.1 percent in March 2017.

The recent decline in the EPOP for all workers over 16 translates into hard times for millions of people. As Henwood explains:

If the same share of the population were employed today as was in December 2007, just as the Great Recession was taking hold, 4.3 million more people would have jobs.  If it were the same share as the all-time high in April 2000, 7.3 million more people would be working for pay.  Either one is a big number, even in a country where 153 million people are employed.

In other words, it is likely that there are many people who want and need work but cannot find it.  And it is important to remember that the EPOP only measures the share of the non-institutional population with paid employment.  It tells us nothing about the quality of the existing jobs.

Flagging job creation  

It is easier to appreciate the growing inability of our economy to provide jobs by examining the movement of the EPOP over the business cycle.  Figure 1, from a note by Ron Baiman, a member of the Chicago Political Economy group, shows the number of quarters it takes for an economic expansion to return the EPOP to its pre-recession level.

As we can see, the expansion that started in November 2001, and which lasted for 73 months, ended with an EPOP that was 2.48 percent below where it had been before the start of the March 2001 recession.   This was the first post-war expansion that failed to restore the EPOP to its pre-recession level.  But, it is very likely not the last.  In particular, it appears that our current expansion will be the second expansion.

Our current expansion started June 2009 and as of October 2016 it was 88 months long.  Yet, it remains 4.78 percent below its pre-recession level, which as noted above, was already lower than the EPOP at the start of the March 2001 recession. Given that the EPOP is currently growing very slowly, it is doubtful that it will close that gap before the next recession begins.

Explanations

Many economists argue that the downward trend in the EPOP over the last business cycles is largely due to the aging of the population.  The EPOP of older workers is always lower than that of younger workers, so as their weight in the population grows, the overall EPOP falls.  However, as Baiman explains, and shows in Figure 2, this cannot fully explain what is happening:

Figure 2 below repeats the analysis of Figure 1, but does so within population cohorts of ages 16-24, 25- 54, and 55 and over, whose shares are held constant at October 2016 levels to remove the effects of changing demographics over the post-war period. For example, this eliminates the impact of an increased over 55 population share that is likely to reduce the overall employment/population ratio.

Thus, even with this correction, the current expansion seems very unlikely to recover its “demographically controlled pre-recession employment/population ratio.”

In fact, it is younger, not older workers that are suffering most from a declining EPOP.  As Henwood points out: “Those aged 35-44 and 45-54 have yet to return to their 2000 and 2007 peaks—but those aged 55-64 have, and those over 65 have surpassed them (though obviously a much smaller share of the 65+ population is working than the rest.”

In short, we can rule out an aging population as the primary cause of the growing inability of economic growth to ensure adequate job creation.

A look at the behavior of our dominant firms produces a far more likely explanation.  As Henwood notes:

despite copious profits, firms are shoveling vast pots of cash to their executives and shareholders rather than investing in capital equipment and hiring workers. From 1952 to 1982, nonfinancial corporations distributed 17 percent of their internal cash flow (profits plus depreciation allowances) to shareholders; that rose to about 30 percent in the 1980s and 1990s, and to 48 percent since 2000. (In 2016, the average was an incredible 64 percent.)

This behavior certainly pays off handsomely for top managers and already wealthy stock holders.  But it is not so great for the rest of us, especially for those workers–and their families–who find paid employment increasingly difficult to obtain, even during an economic expansion.

Even The Good Times of Economic Expansion Aren’t So Good For Most In US

Recessions are bad for most people: production, employment, income all fall.   But economic expansions are supposed to more than compensate for the down times.  However, as we see below, that is no longer the case.

Increasingly, the lion’s share of all the new income generated during economic expansions now goes to a very few.  In other words, a sizeable majority of the US population now loses regardless of the state of the economy.  It is time to shift the focus of our discussions from how best to control the business cycle to how to build a movement strong enough to transform the workings of contemporary capitalism.

Pavline R. Tcherneva has calculated the distribution of new income between the top 10 percent and bottom 90 percent of households and the top 1 percent and bottom 99 percent of households in every post-war US economic expansion.  The following figures come from her Levy Economics Institute of Bard College policy paper titled Inequality Update: Who Gains When Income Grows?

Figure 2 shows a steady rise in the share of income growth claimed by the top 10 percent of households (red bar).  However, as we can see, a striking change takes place with the 1982-90 economic expansion.  Starting with that expansion, the top 10 percent have come to dominate the income gains, leaving little for the bottom 90 percent of households (blue bar).  And as Tchervena comments: “Notably, the entire 2001–7 recovery produced almost no income growth for the bottom 90 percent of households.”  So much for the pre-Great Recession debt-driven golden years.

Figure 4 illustrates the distribution of income gains between the top 1 percent of households and the bottom 99 percent of households.  As we can see, the top 1 percent of households now capture a greater share of newly created income than the bottom 99 percent of US households.  It is no exaggeration to say that our economy now largely works only for the benefit of those few families.

Tcherneva sums up her work well:

the growth pattern that emerged in the ’80s and delivered increasing income inequality is alive and well. The rising tide no longer lifts most boats. Instead, the majority of gains go to a very small segment of the population. As I have discussed elsewhere, this growth pattern is neither accidental nor unavoidable. It is largely a by-product of policy design, specifically, the shift in macroeconomic methods used to stabilize an unstable economy and stimulate economic growth.

Trump’s Economic Policies Are No Answer To Our Problems

President Trump has singled out unfair international trading relationships as a major cause of US worker hardship.  And he has promised to take decisive action to change those relationships by pressuring foreign governments to rework their trade agreements with the US and change their economic policies.

While international economic dynamics have indeed worked to the disadvantage of many US workers, Trump’s framing of the problem is highly misleading and his promised responses are unlikely to do much, if anything, to improve majority working and living conditions.

President Trump and his main advisers have aimed their strongest words at Mexico and China, pointing out that the US runs large trade deficits with each, leading to job losses in the US.  For example, Bloomberg News reports that Peter Navarro, the head of President Trump’s newly formed White House National Trade Council “has blamed Nafta and China’s 2001 entry into the World Trade Organization for much, if not all, of a 15-year economic slowdown in the U.S.” In other words, poor negotiating skills on the part of past US administrations has allowed Mexico and China, and their workers, to gain at the expense of the US economy and its workers.

However, this nation-state framing of the origins of contemporary US economic problems is seriously flawed. It also serves to direct attention away from the root cause of those problems: the profit-maximizing strategies of large, especially US, multinational corporations.  It is the power of these corporations that must be confronted if current trends are to be reversed.

Capitalist Globalization Dynamics

Beginning in the late 1980s large multinational corporations, including those headquartered in the US, began a concerted effort to reverse declining profits by establishing cross border production networks (or global value chains).  This process knitted together highly segmented economic processes across national borders in ways that allowed these corporations to lower their labor costs as well as reduce their tax and regulatory obligations.   Their globalization strategy succeeded; corporate profits soared.  It is also no longer helpful to think about international trade in simple nation-state terms.

As the United Nations Conference on Trade and Development explains:

Global trade and foreign direct investment have grown exponentially over the last decade as firms expanded international production networks, trading inputs and outputs between affiliates and partners in GVCs [Global Value Chains].

About 60 per cent of global trade, which today amounts to more than $20 trillion, consists of trade in intermediate goods and services that are incorporated at various stages in the production process of goods and services for final consumption. The fragmentation of production processes and the international dispersion of tasks and activities within them have led to the emergence of borderless production systems – which may be sequential chains or complex networks and which may be global, regional or span only two countries.

UNCTAD estimates (see the figure below) that some 80 percent of world trade “is linked to the international production networks of TNCs [transnational corporations], either as intra-firm trade, through NEMs [non-equity mechanisms of control] (which include, among others, contract manufacturing, licensing, and franchising), or through arm’s-length transactions involving at least one TNC.”

tnc-involvement

In other words, multinational corporations have connected and reshaped national economies along lines that best maximize their profit.  And that includes the US economy.  As we see in the figure below, taken from an article by Adam Hersh and Ethan Gurwitz, the share of all US merchandise imports that are intra-firm, meaning are sold by one unit of a multinational corporation to another unit of the same multinational, has slowly but steadily increased, reaching 50 percent in 2013.  The percentage is considerably higher for imports of manufactures, including in key sectors like electrical, machinery, transportation, and chemicals.

onea

The percentage is lower, but still significant for US exports.  As we see in the following figure, approximately one-third of all merchandise exports from the US are sold by one unit of a multinational corporation to another unit of the same company.

oneb

The percentage of intra-firm trade is far higher for services, as illustrated in the next figure.

services

As Hersh and Gurwitz comment,

The trend is clear: As offshoring practices increase, companies need to provide more wraparound services—the things needed to run a businesses besides direct production—to their offshore production and research and development activities. Rather than indicating the competitive strength of U.S. services businesses to expand abroad, the growth in services exports follows the pervasive offshoring of manufacturing and commercial research activities.

Thus, there is no simple way to change US trade patterns, and by extension domestic economic processes, without directly challenging the profit maximizing strategies of leading multinational corporations.  To demonstrate why this understanding is a direct challenge to President Trump’s claims that political pressure on major trading partners, especially Mexico and China, can succeed in boosting the fortunes of US workers, we look next at the forces shaping US trade relationships with these two countries.

The US-Mexican Trade Relationship

US corporations, taking advantage of NAFTA and the Mexican peso crisis that followed in 1994-95, poured billions of dollars into the country (see the figure below).  Their investment helped to dramatically expand a foreign-dominated export sector aimed at the US market that functions as part of a North American region-wide production system and operates independent of the stagnating domestic Mexican economy.

fdi-mexico

Some 80 percent of Mexico’s exports are sold to the US and the country runs a significant merchandise trade surplus with the US, as shown in the figure below.

trade-mexico

Leading Mexican exports to the US include motor vehicles, motor vehicle parts, computer equipment, audio and video equipment, communications equipment, and oil and gas.  However, with the exception of oil and gas, these are far from truly “Mexican” exports.  As a report from the US Congressional Research Service describes:

A significant portion of merchandise trade between the United States and Mexico occurs in the context of production sharing as manufacturers in each country work together to create goods. Trade expansion has resulted in the creation of vertical supply relationships, especially along the U.S.-Mexico border. The flow of intermediate inputs produced in the United States and exported to Mexico and the return flow of finished products greatly increased the importance of the U.S.- Mexico border region as a production site. U.S. manufacturing industries, including automotive, electronics, appliances, and machinery, all rely on the assistance of Mexican [based] manufacturers. One report estimates that 40% of the content of U.S. imports of goods from Mexico consists of U.S. value added content.

Because foreign multinationals, many of which are US owned, produce most of Mexico’s exports of “advanced” manufactures using imported components, the country’s post-Nafta export expansion has done little for the overall health of the Mexican economy or the well-being of Mexican workers. As Mark Weisbrot points out:

If we look at the most basic measure of economic progress, the growth of gross domestic product, or income per person, Mexico, which signed on to NAFTA in 1994, has performed the 15th-best out of 20 Latin American countries.

Other measures show an even sadder picture. The poverty rate in 2014 was 55.1 percent, an increase from the 52.4 percent measurement in 1994.

Wages tell a similar story: There’s been almost no growth in real inflation-adjusted wages since 1994 — just about 4.1 percent over 21 years.

Representative Sander Levin and Harley Shaiken make clear that the gains have been nonexistent even for workers in the Mexican auto industry, the country’s leading export center:

Consider the auto industry, the flagship manufacturing industry across North America. The Mexican auto industry exports 80 percent of its output of which 86 percent is destined for the U.S. and Canada. If high productivity translated into higher wages in Mexico, the result would be a virtuous cycle of more purchasing power, stronger economic growth, and more imports from the U.S.

In contrast, depressed pay has become the “comparative advantage”. Mexican autoworker compensation is 14 percent of their unionized U.S. counterparts and auto parts workers earn even less–$2.40 an hour. Automation is not the driving force; its depressed wages and working conditions.

In other words, US workers aren’t the only workers to suffer from the globalization strategies of multinational corporations.  Mexican workers are also suffering, and resisting.

In sum, it is hard to square this reality with Trump’s claim that because of the way NAFTA was negotiated Mexico “has made us look foolish.” The truth is that NAFTA, as designed, helped further a corporate driven globalization process that has greatly benefited US corporations, as well as Mexican political and business elites, at the expense of workers on both sides of the border.  Blaming Mexico serves only to distract US workers from the real story.

The US-Chinese Trade Relationship

The Chinese economy also went through a major transformation in the mid-1990s which paved the way for a massive inflow of export-oriented foreign investment targeting the United States.  The process and outcome was different from what happened in Mexico, largely because of the legacy of Mao era policies.  The Chinese Communist Party’s post-1978 state-directed reform program greatly benefited from an absence of foreign debt; the existence of a broad, largely self-sufficient state-owned industrial base; little or no foreign investment or trade; and a relatively well-educated and healthy working class.  This starting point allowed the Chinese state to retain considerable control over the country’s economic transformation even as it took steps to marketize economic activity in the 1980s and privatize state production in the 1990s.

However, faced with growing popular resistance to privatization and balance of payments problems, the Chinese state decided, in the mid-1990s, to embrace a growing role for export-oriented foreign investment.  This interest in attracting foreign capital dovetailed with the desire of multinational corporations to globalize their production.  Over the decade of the 1990s and 2000s, multinational corporations built and expanded cross border production networks throughout Asia, and once China joined the WTO, the country became the region’s primary final assembly and export center.

As a result of this development, foreign produced exports became one of the most important drivers, if not the most important, of Chinese growth.  For example, according to Yılmaz Akyüz, former Director of UNCTAD’s Division on Globalization and Development Strategies:

despite a high import content ranging between 40 and 50 percent, approximately one-third of Chinese growth before the global crisis [of 2008] was a result of exports, due to their phenomenal growth of some 25 percent per annum. This figure increases to 50 percent if spillovers to consumption and investment are allowed for. The main reason for excessive dependence on foreign markets is under consumption. This is due not so much to a high share of household savings in GDP as to a low share of household income and a high share of profits

The figure below illustrates the phenomenal growth in Chinese exports.

china-exports

The US soon became the primary target of China’s exports (see the trade figures below).   The US now imports more goods from China than from any other country, approximately $480 billion in 2015, followed by Canada and Mexico (roughly $300 billion each).  The US also runs its largest merchandise trade deficit with China, $367 billion in 2015, equal to 48 percent of the overall US merchandise trade deficit.  In second place was Germany, at only $75 billion.

china-trade-us

Adding to China’s high profile is the fact that it is the primary supplier of many high technology consumer goods, like cell phones and laptops. More specifically:

(F)or 825 products, out of a total of about 5,000, adding up to nearly $300 billion, China supplies more than all our other trade partners combined. Of these products, the most important is cell phones, where $40 billion in imports from China account for more than three-quarters of the total value imported.

There are also 83 products where 90 percent or more of US imports come from China; together these accounted for a total of $56 billion in 2015. The most important individual product in this category is laptop computers, which alone have an import value of $37 billion from China, making up 93 percent of the total imported.

Of course, China is also a major supplier of many low-technology, low-cost goods as well, including clothing, toys, and furniture.

Not surprisingly, exports from China have had a significant effect on US labor market conditions. Economists David Autor, David Dorn and Gordon Hanson “conservatively estimate that Chinese import competition explains 16 percent of the U.S. manufacturing employment decline between 1990 and 2000, 26 percent of the decline between 2000 and 2007, and 21 percent of the decline over the full period.”  They also find that Chinese import competition “significantly reduces earnings in sectors outside manufacturing.”

President Trump has accused China of engaging in an undeclared trade war against the United States.   However, while Trump’s charges conjure up visions of a massive state-run export machine out to crush the United States economy for the benefit of Chinese workers, the reality is quite different.

First, although the Chinese state retains important levers of control over economic activity, especially the state-owned banking system, the great majority of industrial production and export activity is carried out by private firms.  In 2012, state-owned enterprises accounted for only 24 percent of Chinese industrial output and 18 percent of urban employment.  As for exports, by 2013 the share of state-owned enterprises was down to 11 percent.  Foreign-owned multinationals were responsible for 47 percent of all Chinese exports.  And, most importantly in terms of their effect on the US economy, multinational corporations produce approximately 82 percent of China’s high-technology exports.

Second, although these high-tech exports come from China, for the most part they are not really “Chinese” exports.  As noted above, China now functions as the primary assembly point for the region’s cross border production networks.  Thus, the majority of the parts and components used in Chinese-based production of high-technology goods come from firms operating in other Asian countries.  In many cases China’s only contribution is its low-paid labor.

A Washington Post article uses the Apple iPhone 4, a product that shows up in trade data as a Chinese export, to illustrate the country’s limited participation in the production of its high technology exports:

In a widely cited study, researchers found that Apple created most of the product’s value through its product design, software development and marketing operations, most of which happen in the United States. Apple ended up keeping about 58 percent of the iPhone 4’s sales price. The gross profits of Korean companies LG and Samsung, which provided the phone’s display and memory chips, captured another 5 percent of the sales price. Less than 2 percent of the sales price went to pay for Chinese labor.

“We estimate that only $10 or less in direct labor wages that go into an iPhone or iPad is paid to China workers. So while each unit sold in the U.S. adds from $229 to $275 to the U.S.-China trade deficit (the estimated factory costs of an iPhone or iPad), the portion retained in China’s economy is a tiny fraction of that amount,” the researchers wrote.

The same situation exists with laptop computers, which are assembled by Chinese workers under the direction of Taiwanese companies using imported components and then exported as Chinese exports.  Economists have estimated that the US-Chinese trade balance would be reduced by some 40 percent if the value of these imported components were subtracted from Chinese exports.  Thus, it is not Chinese state enterprises, or even Chinese private enterprises, that are driving China’s exports to the US.  Rather it is foreign multinationals, many of which are headquartered in the US, including Apple, Dell, and Walmart.

And much like in Mexico, Chinese workers enjoy few if any benefits from their work producing their country’s exports.  The figure below highlights the steady fall in labor compensation as a share of China’s GDP.

china-labor

Approximately 80 percent of Chinese manufacturing workers are internal migrants with a rural household registration.  This means they are not entitled to access the free or subsidized public health care, education, or other social services available in the urban areas where they now work; the same is true for their children even if they are born in urban areas.  Moreover, most migrants receive little protection from Chinese labor laws.

For example, as the China Labor Bulletin reports:

In 2015, seven years after the implementation of the Labor Contract Law, only 36 percent of migrant workers had signed a formal employment contract with their employer, as required by law. In fact the percentage of migrant workers with formal contracts actually declined last year by 1.8 percent from 38 percent. For short-distance migrants, the proportion was even lower, standing at just 32 percent, suggesting that the enforcement of labor laws is even less rigid in China’s inland provinces and smaller cities.

According to the [2014] migrant worker survey . . . the proportion of migrant workers with a pension or any form of social security remained at a very low level, around half the national average. In 2014, only 16.4 percent of long-distance migrants had a pension and 18.2 percent had medical insurance.

Despite worker struggles, which did succeed in pushing up wages over the last 7 years, most migrant workers continue to struggle to make ends meet.   Moreover, with Chinese growth rates now slipping, and the government eager to restart the export growth machine, many local governments have decided, with central government approval, to freeze minimum wages for the next two to four years.

In short, it is not China, or its workers, that threaten US jobs and well-being.  It is the logic of capitalist globalization.  Thus, Trump’s call-to-arms against China obfuscates the real cause of current US economic problems and encourages working people to pursue a strategy of nationalism that can only prove counterproductive.

The Political Challenge Facing US Workers

The globalization process highlighted above was strongly supported by all major governments, especially by successive US administrations.  In contrast to Trump claims of a weak US governmental effort in support of US economic interests, US administrations used their considerable global power to secure the creation of the WTO and approval of a host of other multilateral and bilateral trade agreements, all of which provided an important infrastructure for capital mobility, thereby supporting the globalizing efforts of leading US multinational corporations.

President Trump has posed as a critic of existing international arrangements, claiming that they have allowed other countries, such as Mexico and China, to prosper at US expense.  He has stated that he will pursue new bilateral agreements rather than multilateral ones because they will better serve US interests and he has demanded that US multinational corporations shift their investment and production back to the US.

Such statements have led some to believe that the Trump administration is serious about challenging globalization dynamics in order to rebuild the US economy in ways that will benefit working people.  But there are strong reasons to doubt this.  Most importantly, he seems content to threaten other governments rather than challenge the profit-maximizing logic of dominant US companies, which as we have seen is what needs to happen.

One indicator: an administration serious about challenging the dynamics of globalization would have halted US participation in all ongoing negotiations for new multilateral agreements, such as the Trade in Services Agreement which is designed to encourage the privatization and deregulation of services for the benefit of multinational corporations.  This has not happened.

Such an administration would also renounce support for existing and future bilateral agreements that contain chapters that strengthen the ability of multinational corporations to dominate key sectors of foreign economies and sue their governments in supranational secret courts.  This has not happened.

Another indicator: an administration serious about creating a healthy, sustainable, and equitable domestic economy would strengthen and expand key public services and programs; rework our tax system to make it more progressive; tighten and increase enforcement of health and safety and environmental regulations; strengthen labor laws that protect the rights of workers, including to unionize; and boost the national minimum wage.  The Trump administration appears determined to do the opposite.

Such an administration would also begin to develop the state capacities necessary to redirect existing production and investment activity along lines necessary to rebuild our cities and infrastructure, modernize our public transportation system, and reduce our greenhouse gas emissions.  The Trump administration appears committed to the exact opposite.

In short, if we take Trump’s statements seriously, that he actually wants to shift trading relationships, then it appears that his primary strategy is to make domestic conditions so profitable for big business, that some of the most globally organized corporations will shift some of their production back to the United States.  However, even if he succeeds, it is very unlikely that this will contribute to an improvement in majority living and working conditions.

The main reason is that US corporations, having battered organized labor with the assistance of successive administrations, have largely stopped creating jobs that provide the basis for economic security and well-being.  Economists Lawrence F. Katz and Alan B. Krueger examined the growth  from 2005 to 2015 in “alternative work arrangements,” which they defined as temporary help agency workers, on-call workers, contract workers, and independent contractors or freelancers.

They found that the percentage of workers employed in such arrangements rose from 10.1 percent of all employed workers in February 2005 to 15.8 percent in late 2015.  But their most startling finding is the following:

A striking implication of these estimates is that all of the net employment growth in the U.S. economy from 2005 to 2015 appears to have occurred in alternative work arrangements. Total employment according to the CPS increased by 9.1 million (6.5 percent) over the decade, from 140.4 million in February 2005 to 149.4 in November 2015. The increase in the share of workers in alternative work arrangements from 10.1 percent in 2005 to 15.8 percent in 2015 implies that the number of workers employed in alternative arrangement increased by 9.4 million (66.5 percent), from 14.2 million in February 2005 to 23.6 million in November 2015. Thus, these figures imply that employment in traditional jobs (standard employment arrangements) slightly declined by 0.4 million (0.3 percent) from 126.2 million in February 2005 to 125.8 million in November 2015.

A further increase in employment in such “alternative work arrangements,” which means jobs with no benefits or security, during a period of Trump administration-directed attacks on our social services, labor laws, and health and safety and environmental standards is no answer to our problems. Despite what President Trump says, our problems are not caused by other governments or workers in other countries.  Instead, they are the result of the logic of capitalism. The Trump administration, really no US administration, is going to willingly challenge that. That is up to us.

Capitalism and Inequality

Defenders of capitalism in the United States often choose not to use that term when naming our system, preferring instead the phrase “market system.”  Market system sounds so much better, evoking notions of fair and mutually beneficial trades, equality, and so on.  The use of that term draws attention away from the actual workings of our system.

In brief, capitalism is a system structured by the private ownership of productive assets and driven by the actions of those who seek to maximize the private profits of the owners.  Such an understanding immediately raises questions about how some people and not others come to own productive wealth and the broader social consequences of their pursuit of profit.

Those are important questions because it is increasingly apparent that while capitalism continues to produce substantial benefits for the largest asset owners, those benefits have increasingly been secured through the promotion of policies – globalization, financialization, privatization of state services, tax cuts, attacks on social programs and unions–that have both lowered overall growth and left large numbers of people barely holding the line, if not actually worse off.

The following two figures come from a Washington Post article by Jared Bernstein, in which he summarizes the work of Thomas Piketty, Emmanuel Saez and Gabriel Zucman. The first figure shows the significant decline in US pre-tax income growth.  In the first period (1946-1980), pre-tax income grew by 95 percent.  In the second (1980-2014), it grew by only 61 percent.

income-trends

This figure also shows that this slower pre-tax income growth has not been a problem for those at the top of the income distribution.  Those at the top more than compensated for the decline by capturing a far greater share of income growth than in the past.  In fact, those in the bottom 50 percent of the population gained almost nothing over the period 1980 to 2014.

The next figure helps us see that the growth in inequality has been far more damaging to the well-being of the bottom half than the slowdown in overall income growth.  As Bernstein explains:

The bottom [blue] line in the next figure shows actual pretax income for adults in the bottom half of the income scale. The top [red] line asks how these folks would have done if their income had grown at the average rate from the earlier, faster-growth period. The middle [green] line asks how they would have done if they experienced the slower, average growth of the post-1980 period.

The difference between the top two lines is the price these bottom-half adults paid because of slower growth. The larger gap between the middle and bottom line shows the price they paid from doing much worse than average, i.e., inequality (aging demographics are also in play, but the researchers show that they do not explain the extent of the slowdown in income growth). That explains about two-thirds of the difference in endpoints. Slower growth hurt these families’ income gains, but inequality hurt them more.

inequality-versus-growth

A New York Times analysis of pre-tax income distribution over the period 1974 to 2014 reinforces this conclusion about the importance of inequality.  As we can see in the figure below, the top 1 percent and bottom 50 percent have basically changed places in terms of their relative shares of national income.

changing-places

The steady ratcheting down in majority well-being is perhaps best captured by studies designed to estimate the probability of children making more money than their parents, an outcome that was the expectation for many decades and that underpinned the notion of “the American dream.”

Such research is quite challenging, as David Leonhardt explains in a New York Times article, “because it requires tracking individual families over time rather than (as most economic statistics do) taking one-time snapshots of the country.”  However, thanks to newly accessible tax records that go back decades, economists have been able to estimate this probability and how it has changed over time.

Leonhardt summarizes the work of one of the most important recent studies, that done by economists associated with the Equality of Opportunity Project.   In summary terms, those economists found that a child born into the average American household in 1940 had a 92 percent chance of making more than their parents.  This falls to 79 percent for a child born in 1950, 62 percent for a child born in 1960, 61 percent for a child born in 1970, and only 50 percent for a child born in 1980.

The figure below provides a more detailed look at the declining fortunes of most Americans.   The horizontal access shows the income percentile a child is born into and the vertical access shows the probability of that child earning more than their parents.   The drop-off for children born in 1960 and 1970 compared to the earlier decade is significant and is likely the result of the beginning effects of the changes in capitalist economic dynamics that started gathering force in the late 1970s, for example globalization, privatization, tax cuts, union busting, etc.  The further drop-off for children born in 1980 speaks to the strengthening and consolidation of those dynamics.

american-dream

The income trends highlighted in the figures above are clear and significant, and they point to the conclusion that unless we radically transform our capitalist system, which will require building a movement capable of challenging and overcoming the power of those who own and direct our economic processes, working people in the United States face the likelihood of an ever-worsening future.