Reports from the Economic Front

a blog by Marty Hart-Landsberg

Category Archives: Government Spending

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.

The Sorry State Of The US Economy

Although reluctant to say it, a recent IMF report on the state of US economy makes clear that US policy makers have failed to protect majority living conditions.

When a country joins the IMF, it agrees to have its economic and financial policies evaluated, in most cases annually, by an IMF team of economists.  As the IMF explains:

The IMF’s regular monitoring of economies and associated provision of policy advice is intended to identify weaknesses that are causing or could lead to financial or economic instability. . . The consultations are known as “Article IV consultations” because they are required by Article IV of the IMF’s Articles of Agreement.

The IMF recently concluded and published a summary of its Article IV consultations with the United States.  While the IMF generally pulls no punches in criticizing the policies of most member governments if it determines that they threaten to slow capitalist globalization dynamics, it tends to tap dance around disagreements when it comes to the policies of its more powerful member countries, especially the United States.  As Adam Tooze points out in his commentary on the IMF statement:

With respect to the US, the stakes are particularly high. The US has the largest vote on the IMF’s board and Congress controls the largest part of the IMF’s budget.

Not surprisingly, then, the IMF went the extra mile in finding nice ways of talking about the state of the US economy and even more importantly the wisdom of Trump administration policies. Even so, US economic challenges could not be completely hidden.  For example, after noting that the “The U.S. economy is in its third longest expansion since 1850,” the IMF goes on to comment:

However, the outlook is clouded by important medium-term imbalances. The U.S. economic model is not working as well as it could in generating broadly shared income growth. It is burdened by a rising public debt. The U.S. dollar is moderately overvalued (by around 10-20 percent). The external position is moderately weaker than implied by medium term fundamentals and desirable policies. The current account deficit is expected to be around 3 percent of GDP over the medium-term and the net international investment position has deteriorated markedly in the past several years. Most critically, relative to historical performance, post-crisis growth has been too low and too unequal.

To address these shortcomings, the administration intends a wide-ranging overhaul of policies, although a fully articulated policy plan has yet to emerge. The administration’s budget proposes to reduce the fiscal deficit and debt, to reprioritize public spending, and to revamp the tax system. However, during the Article IV consultation it became evident that many details about these plans are still undecided. Given these policy uncertainties, the IMF’s macroeconomic forecast uses a baseline assumption of unchanged policies. Specifically, it neither builds in the effect of tax reform nor the expenditure reductions proposed in the administration’s budget. Under this forecast, growth is expected to rise modestly above 2 percent this year and next, driven by continued solid consumption growth and a cyclical rebound in private investment. Growth is forecast to subsequently converge to the underlying potential growth rate of 1.8 percent.

However, IMF concerns over an uncertain US economic outlook and an unclear Trump administration policy plan pale in importance compared to the decline in US living standards illustrated in the following chart that was also in the report.

In broad brush, the US ranking on most of the selected living standards indicators has declined, which means that the US economy is losing ground relative to the other OECD countries in the sample.  But what really cries out for notice is how low the US is on such key indicators as: life expectancy at birth, overall mortality rate, health coverage, poverty rate, and secondary school graduation.  On these indicators, the US is approaching the bottom of the group of 24.  And of course, Trump administration policies, which aim to reduce spending on Medicare and Medicaid, gut worker-protecting health and safety and labor laws, slash taxes on corporations and the wealthy, and weaken unions will only intensify downward trends.

The IMF could easily have pointed out that, because of competitiveness pressures, US policies harm the well-being of workers in other countries as well as in the US, and pressed the US government to reverse course.  But majority living standards are not the most important thing to the IMF or the US government, and that is not how consultations work.

If we want improved living conditions we are going to have to fight for them.  Perhaps greater awareness of just how bad things are in the United States will help speed the effort.

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 Problem Of Hunger In The US

Food insecurity is a major problem in the US.   The food stamp program–renamed the Supplemental Nutrition Assistance Program (SNAP) in 2008–helps, but that program is now threatened by the Trump administration.  An organization of the food insecure, echoing the Councils of the Unemployed of the 1930s, may well be needed if we are to make meaningful progress in reducing hunger.

The extent of food insecurity  

The federal government measures food insecurity using a yearly set of questions that are part of the U.S. Census Bureau’s Current Population Survey (CPS).  The questions asked, as a Hamilton Project study on food insecurity and SNAP explains, are about:

households’ resources available for food and whether adults or children in the household adjusted their food intake—cutting meal size, skipping meals, or going for a day without food—because of lack of money for food. A household is considered to be “food insecure” if, due to a lack of resources, it had difficulty at some time during the year providing enough food for all of its members. The more-severe categorization of “very low food security” status describes those food-insecure households in which members’ food intake was reduced and their normal eating patterns disrupted at some point during the year because of a lack of resources for food. Food insecurity and very low food security are measured at the household level, though questions about adults and children are asked separately.

Officially, 12.7 percent of US households were food insecure in 2015.  Five percent were very low food secure.

The extent of food insecurity is significantly greater in households with children under 18.  As we see below, 16.6 percent of all households with children suffered from food insecurity in 2015.  In more than half of those households, the adults were able to shelter their children.  However, both children and adults were food insecure in 7.8 percent of all households with children.

Food insecurity trends

Food insecurity is a problem in the United States even during periods of economic expansion.  As the following chart shows, more than one in ten households suffered from food insecurity during the growth years of 2001 to 2007.  The percentage of households experiencing food insecurity spiked with the start of the Great Recession and was slow to decline.  Although it is now falling, it is unclear whether it will return to pre-recession levels.

And, not surprisingly, non-white households are far more likely to experience food insecurity than white households.

It is also important to recognize that annual rates of food insecurity tend to minimize the true extent of the problem.  That is because households tend to move into and then out of food insecurity over time.  In other words, it is often a temporary problem.  Thus, many more families will experience food insecurity over a period of time than suggested by the annual numbers.  Of course, even one year of food insecurity can have serious health consequences.

As the Hamilton Institute study notes:

Annual rates of food insecurity mask the extent of the food insecurity problem. Using the Current Population Survey, we can follow large numbers of households across two consecutive years, allowing us to compare food security status over time. In consecutive years during the post-recession period 2008–14, over 24 percent of households with children experienced food insecurity in one or both years: 9 percent of household experienced food insecurity in consecutive years, and an additional 15 percent of households experienced food insecurity in only one of the two years.

SNAP 

SNAP is one of the most important federal responses to food insecurity. To qualify for food stamps, a household needs to earn at or below 130% of the poverty line—or about $26,000 or less a year for a family of three. As of May 2017, 42.3 million people were receiving food stamps. Without the SNAP program, many more people would be experiencing food insecurity.

The following figures show the rise in the number and percentage of people receiving food stamps, and the average monthly food stamp benefit.  The growth in the number of food stamp recipients over the 2001 to 2007 period of economic growth reflects the explosion in inequality and weak job growth.  And the need for food assistance exploded with the Great Recession and has remained high because of the weak economic recovery that has followed.

The challenge ahead

Determined to slash all non-military discretionary programs, President Trump’s proposed budget calls for cutting almost $200 billion over the next decade from the Department of Agriculture’s SNAP program.  That is a cut of approximately 25 percent.

With weak job growth and stagnant wages likely in the years ahead, any cut to the SNAP budget will mean a new spike in hunger, especially for children.  One has to wonder when people will reach their limit and begin to organize and fight back.

Those struggling with food insecurity might well take inspiration from the work of the unemployed councils of the 1930s.  These councils provided a basis for the unemployed to resist rent increases and evictions, as well as fight for public assistance, unemployment insurance, and a public works program.  The councils also strongly supported union organizing efforts, ensuring that the unemployed respected union picket lines.  In return, many unions supported the work of the councils.

The unemployed in the 1930s eventually recognized that their situation was largely the result of the dysfunctional workings of the economic system of the time and they organized to defend their rights and change that system.  Households experiencing hunger today need to develop that same understanding about the root cause of their situation and respond accordingly.

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 “Skinny Budget” Has A Lot Of Military

President Trump released what is called a “skinny budget.”   It may contain far less information then the skinny budgets released by the five previous administrations, but its aim is crystal clear: more money for militarism, less money for pretty much everything else.

As the Center on Budget and Policy Priorities explains:

The Trump budget includes only estimates for fiscal 2018 and only for its proposed changes to discretionary programs (those funded through the annual appropriations process) — even though discretionary programs make up less than one-third of the federal budget.  The Trump budget omits any figures on entitlement or mandatory spending (e.g., Social Security, Medicare, Medicaid, federal retirement, or SNAP), interest payments, revenues, or deficits.

The following table shows the Trump administration’s proposed changes in discretionary program spending for fiscal year 2018 (which begins in October 2017).

The budget calls for a continuation of Obama administration cuts in overall discretionary spending—a 1.2 percent decline in real dollars for fiscal year 2018.  The figure below highlights the trend. 

In many cases, the proposed cuts to nonmilitary programs appear designed to dismantle key government agencies and programs.  A few examples:

The Environmental Protection Agency would take the biggest hit, with a proposed 31 percent cut to its budget. This would give the agency its smallest budget since it was formed in 1970.  Angela Chen and Alessandra Potenza, writing in the Verge, highlight what is at stake:

Through legislation like the Clean Air Act and the Clean Water Act, the EPA has ensured that Americans live in a relatively healthy environment. Thanks to the EPA’s work, from 1970 to 2015, national emissions of pollutants like lead, carbon monoxide, and nitrogen dioxide have declined by an average of 70 percent. These and more changes meant 160,000 people in the US didn’t die prematurely due to air pollution in 2010 alone. Since the 1980s, the EPA has also worked with local authorities to clean up some of the most polluted sites in the US, from landfills that caught fire to radioactive waste housed close to residential areas.

The proposed Department of Health and Human Services budget would, in real terms, be rolled back 18 years, to its 2000 spending level. The Department, as Chen and Potenza describe:

oversees several major agencies, including the Food and Drug Administration, the National Institutes of Health, the Centers for Disease Control and Prevention, the Substance Abuse and Mental Health Services Administration, and the Office for Civil Rights. . . .These agencies make sure our drugs are safeprovide funding for medical research, lead the way during public health outbreaks such as the ebola scare, and provide services to those struggling with drug addiction. . . .Half of the most transformative drugs of the last 25 years were made possible because of publicly funded research, according to a 2015 study.

The proposed budget for the Education Department would be its lowest in 17 years.

The discretionary part of the Department of Agriculture budget would be slashed to its lowest level since the 1970s.

Transportation would have its lowest real budget in 18 years.

Labor’s budget would be rolled back to levels last seen in the 1970s.

And then there is Defense and Homeland Security, both of which enjoy substantial real increases.  This despite the fact that the Defense Department cannot even account for how it spends its money.  As Reuters reports:

The United States Army’s finances are so jumbled it had to make trillions of dollars of improper accounting adjustments to create an illusion that its books are balanced.

The Defense Department’s Inspector General, in a June [2016] report, said the Army made $2.8 trillion in wrongful adjustments to accounting entries in one quarter alone in 2015, and $6.5 trillion for the year. Yet the Army lacked receipts and invoices to support those numbers or simply made them up.

As a result, the Army’s financial statements for 2015 were “materially misstated,” the report concluded. The “forced” adjustments rendered the statements useless because “DoD and Army managers could not rely on the data in their accounting systems when making management and resource decisions.”

Disclosure of the Army’s manipulation of numbers is the latest example of the severe accounting problems plaguing the Defense Department for decades.

The report affirms a 2013 Reuters series revealing how the Defense Department falsified accounting on a large scale as it scrambled to close its books. As a result, there has been no way to know how the Defense Department – far and away the biggest chunk of Congress’ annual budget – spends the public’s money.

The new report focused on the Army’s General Fund, the bigger of its two main accounts, with assets of $282.6 billion in 2015. The Army lost or didn’t keep required data, and much of the data it had was inaccurate, the IG said.

None of this matters, of course, to those powerful political and economic forces that are determined to push the militarization of the country.

Whether this skinny budget turns out to be a trial balloon, a way for the Trump administration to gauge how far it can go, followed by modest adjustments if it meets strong resistance, remains to be seen.  Regardless, it is critical that we begin now to engage in serious coalition building involving those communities that rely on public services and the public sector workers, at all levels of government, that deliver those services, to shape and advance a powerful and positive vision of the public sector we want and need.  Otherwise, we face a future of ever worsening tradeoffs, with profit-driven corporations steadily moving into the vacuum created by cuts in public programs to increase their control over all facets of our lives.

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.

The Trump Victory

The election of Donald Trump as president of the United States is the latest example of the rise in support for right-wing racist and jingoistic political forces in advanced capitalist countries.  Strikingly this rise has come after a sustained period of corporate driven globalization and profitability.

As highlighted in the McKinsey Global Institute report titled Playing to Win: The New Global Competition For Corporate Profits:

The past three decades have been uncertain times but also the best of times for global corporations–and especially so for large Western multinationals. Vast markets have opened up around the world even as corporate tax rates, borrowing costs, and the price of labor, equipment, and technology have fallen. Our analysis shows that corporate earnings before interest and taxes more than tripled from 1980 to 2013, rising from 7.6 percent of world GDP to almost 10 percent.  Corporate net incomes after taxes and interest payments rose even more sharply over this period, increasing as a share of global GDP by some 70 percent.

global-profit-pool

As we see below, it has been corporations headquartered in the advanced capitalist countries that have been the biggest beneficiaries of the globalization process, capturing more than two-thirds of 2013 global profits.

advanced-economies-dominate

More specifically:

On average, publicly listed North American corporations . . . increased their profit margins from 5.6 percent of sales in 1980 to 9 percent in 2013. In fact, the after-tax profits of US firms are at their highest level as a share of national income since 1929. European firms have been on a similar trajectory since the 1980s, though their performance has been dampened since 2008. Companies from China, India, and Southeast Asia have also experienced a remarkable rise in fortunes, though with a greater focus on growing revenue than on profit margins.

And, consistent with globalizing tendencies, it has been the largest corporations that have captured most of the profit generated.  As the McKinsey report explains:

The world’s largest companies (those topping $1 billion in annual sales) have been the biggest beneficiaries of the profit boom. They account for roughly 60 percent of revenue, 65 percent of market capitalization, and 75 percent of profits. And the share of the profit pool captured by the largest firms has continued to grow. Among North American public companies, for instance, firms with $10 billion or more in annual sales (adjusted for inflation) accounted for 55 percent of profits in 1990 and 70 percent in 2013. Moreover, relatively few firms drive the majority of value creation. Among the world’s publicly listed companies, just 10 percent of firms account for 80 percent of corporate profits, and the top quintile earns 90 percent.

bigger-the-better

Significantly, most large corporations have chosen not to use their profits for productive investments in new plant and equipment.  Rather, they built up their cash balances.  For example, “Since 1980 corporate cash holdings have ballooned to 10 percent of GDP in the United States, 22 percent in Western Europe, 34 percent in South Korea, and 47 percent in Japan.”  Corporations have often used these funds to drive up share prices by stock repurchase, boost dividends, or strengthen their market power through mergers and acquisitions.

In short, it has been a good time for the owners of capital, especially in core countries.  However, the same is not true for most core country workers.  That is because the rise in corporate profits has been largely underpinned by a globalization process that has shifted industrial production to lower wage third world countries, especially China; undermined wages and working conditions by pitting workers from different communities and countries against each other; and pressured core country governments to dramatically lower corporate taxes, reduce business regulations, privatize public assets and services, and slash public spending on social programs.

The decline in labor’s share of national income, illustrated below, is just one indicator of the downward pressure this process has exerted on majority living and working conditions in advanced capitalist countries.labor-share

Tragically, thanks to corporate, state, and media obfuscation of the destructive logic of contemporary capitalist accumulation dynamics, worker anger in the United States has been slow to build and largely unfocused.  Things changed this election season.  For example, Bernie Sanders gained strong support for his challenge to mainstream policies, especially those that promoted globalization, and his call for social transformation.  Unfortunately, his presidential candidacy was eventually sidelined by the Democratic Party establishment that continues, with few exceptions, to embrace the status-quo.

However, another “politics” was also gaining strength, one fueled by a racist, xenophobic, misogynistic right-wing movement that enjoyed the financial backing of the most reactionary wing of the capitalist class.  That movement, speaking directly to white (and especially male) workers, offered a simplistic and in its own way anti-establishment explanation for worker suffering: although corporate excesses were highlighted, the core message was that white majority decline was caused by the growing demands of “others”—immigrants, workers in third world countries, people of color, women, the LGBTQ community, Muslims, and Jews—which in aggregate worked to drive down wages, slow growth, and misuse and bankrupt governments at all levels.  Donald Trump was its political representative, and Donald Trump is now the president of the United States.

His administration will no doubt launch new attacks on unions, laws protecting human and civil rights, and social programs, leaving working people worse off.  Political tensions are bound to grow, and because capitalism is itself now facing its own challenges of profitability, the new government will find it has little room for compromise.

According to McKinsey,

After weighing various scenarios affecting future profitability, we project that while global revenue could reach $185 trillion by 2025, the after-tax profit pool could amount to $8.6 trillion. Corporate profits, currently almost 10 percent of world GDP, could shrink to less than 8 percent–undoing in a single decade nearly all the corporate gains achieved relative to world GDP over the past three decades. Real growth in corporate net income could fall from 5 percent to 1 percent per year. Profit growth could decelerate even more sharply if China experiences a more pronounced slowdown that reverberates through capital-intensive sectors.

future

History has shown that we cannot simply count on “hard times” to build a powerful working class movement committed to serious structural change.  Much depends on the degree of working class organization, solidarity with all struggles against exploitation and oppression, and clarity about the actual workings of contemporary capitalism.  Therefore we need to redouble our efforts to organize, build bridges, and educate. Our starting point must be resistance to the Trump agenda, but it has to be a resistance that builds unity and is not bounded in terms of vision by the limits of a simple anti-Trump alliance.   We face great challenges in the United States.

Join Koreans In Opposing THAAD Deployment

The US government, with the approval of the South Korean government, wants to locate a Terminal High Altitude Area Defense (THAAD) anti-missile system in South Korea.  Growing numbers of South Koreans oppose this.  They fear that the anti-missile system, which is largely aimed at China and Russia, will only increase military tensions and fuel a new arms race in the region as well as worsen relations with North Korea.  Those living close to the proposed location for the THAAD battery worry about the long term health effects of the associated high-intensity radar system.  Their fears and worries are well founded.

no-war

While the anti- THAAD struggle is big news in Korea, little is known about it in the United States.  This is unfortunate because the U.S. effort to expand its military presence in the Asia-Pacific region also has real consequences for people in this country.  For example, the resulting militarization will lead to ever higher levels of U.S. military spending, draining resources away from needed social programs.  And, of course, it increases the risk of a new war.  In short, it is in the interest of people living in the United States to join with people in South Korea to oppose the THAAD deployment in South Korea.

Therefore, several U.S. based organizations have joined in coalition under the banner of “Stop THAAD in Korea and Militarism in Asia and the Pacific.”  Its demands are simple:

  • We urge the U.S. government to rescind its decision on THAAD deployment in South Korea.
  • We urge the U.S. government to pursue all possible avenues for reducing tensions on the Korean peninsula by re-engaging in diplomacy with North Korea.
  • We urge the U.S. government to resolve conflicts in the Asia-Pacific region peacefully, through diplomacy and dialogue.

The coalition’s website, http://stopthaad.org/, includes a longer statement of purpose and links to articles that analyze both the political aims and consequences of the proposed THAAD deployment and the growth of the resistance movement in South Korea.  As you will see, close to 100 organizations have already endorsed the coalition’s demands.

As a first action, the coalition is organizing candlelight vigils in select U.S. cities in solidarity with candlelight vigils taking place in South Korean cities; information about them can also be found on the website.

 

The Fading Magic Of The Market

Poorer than their Parents?  That was the question McKinsey & Company posed and attempted to answer in their July 2016 report titled: Poorer Than Their parents? Flat or Falling Incomes in Advanced Economies.

Here is the report’s key takeaway, which is illustrated in the figure below:

Our research shows that in 2014, between 65 and 70 percent of households in 25 advanced economies were in income segments whose real market incomes—from wages and capital—were flat or below where they had been in 2005.  This does not mean that individual households’ wages necessarily went down but that households earned the same as or less than similar households had earned in 2005 on average.  In the preceding years, between 1993 and 2005, this flat or falling phenomenon was rare, with less than 2 percent of households not advancing.  In absolute numbers, while fewer than ten million people were affected in the 1993-2005 period, that figure exploded to between 540 million and 580 million people in 2005-14.chart-1

More specifically, McKinsey & Company researchers divided households in six advanced capitalist countries (France, Italy, the Netherlands, Sweden, the United Kingdom, and the United States) into various income segments based on their rank in their respective national income distributions.  They then examined changes in the various income segments over the two periods noted above.  Finally, they “scaled up the findings to include 19 other advanced economies with similar growth rates and income distribution patterns, for a total of 25 countries with a combined population of about 800 million that account for just over 50 percent of global GDP.”

The following figure illustrates market income dynamics over the 2005-14 period in the six above mentioned advanced capitalist countries. For example, 81 percent of the US population were in groups with flat or falling market income.

six-target-countries

The next figure provides a more detailed look at these market income dynamics.

market-income-six-target-countries

McKinsey & Company researchers also looked at disposable income trends, which required them to incorporate taxes and transfer payments.  As seen in the first figure of this post, government intervention meant that the percentage of households experiencing flat or declining disposable income was considerably less than the percentage experiencing flat or declining market incomes, 20-25 percent versus 65-70 percent.

The researchers attempted to explain these trends by analyzing “the patterns of median market and median disposable incomes for two periods: 1993 to 2005 and 2005 to 2014.  We focus on income changes of the median income household because middle-income households are representative of the overall flat or falling income trend in most countries, with the singular exception of Sweden.”

They highlighted five factors: aggregate demand factors, demographic factors, labor market factors, capital income factors, and tax and transfer factors.  As we can see from the second figure above, labor market changes hammered median market income in the United States, the United Kingdom, and the Netherlands.  And as we can also see, tax reductions and transfer payments helped to offset declines in median market disposable income in those three countries. In the case of the United States, while median market income fell by 3 percent over the period, median disposable income grew by 2 percent.

What is the answer to the question posed by McKinsey & Company?  Most likely large numbers of people will indeed be poorer than their parents.  Why?  Aggregate demand continues to stagnate as does investment and productivity.  Employment growth remains weak while precariousness of employment continues to grow.  Finally, the elite embrace of austerity works against the likelihood of new progressive government social interventions.  Without significant change in the political economies of the major capitalist countries, the next 14 years are going to be painful for billions of people.