Reports from the Economic Front

a blog by Marty Hart-Landsberg

Category Archives: Inequality

It is time for audacity: demand the termination of NAFTA and KORUS.

Unfortunately, progressive forces appear content to harp on Trump policies rather than provide leadership in building a class-based movement for real change.  Exhibit A: the unwillingness of key US progressive groups to call for the termination of the North American Free Trade Agreement (NAFTA) and the Korea-US Free Trade Agreement (KORUS).

President Trump has demanded changes to both agreements and threatened to cancel them if he doesn’t get the changes he wants.  He declared NAFTA the worst trade agreement in American history.  He called KORUS a “horrible deal” that has left America “destroyed.” Progressives fought hard to stop approval of both NAFTA and KORUS when they were being negotiated, but now that Trump has raised the possibility of their termination, they seem reluctant to take up the demand.   In my opinion, that is a big mistake.

The costs of holding back

Take the current NAFTA negotiations.  Progressives seem content to criticize Trump’s negotiating process for being nontransparent and negotiating agenda for being too restricted, in particular avoiding change to the Investor-State Dispute System (ISDS). Both true criticisms.  But where is the call for actual withdrawal from the agreement?

For example, here is the AFL-CIO’s trade and globalization policy expert on the current NAFTA negotiations:

On Sept. 5, the United States, Canada and Mexico finished the second round of talks on renegotiating a new North American Free Trade Agreement. The AFL-CIO laid out 17 ways that NAFTA needs to be improved so that we can have a North American economy that works for families, not just global corporations. So how well are the U.S. negotiators doing at creating a better deal for workers? Not well.

Granted, it is early in the process, and we don’t know a lot yet, but that’s part of the problem.

Our number one recommendation was that negotiators should be more transparent, most importantly by making public the rules they’re proposing for the new NAFTA. So far, the U.S. negotiators are failing. There has been no improvement in making the process open to the general public. As working people know, if we are not at the table, we are on the menu, so this grade is crucial.

In some important areas, the United States has not made proposals, including on labor and tax dodging. In other important areas, such as rules of origin or Buy American, the U.S. proposals are incomplete. Basically, this progress report has a lot of incomplete grades.

Is the U.S. team doing well in any areas at all? Well…the positions on enforcement and state-owned enterprises are a good starting point but need to go much further.

In sum, the U.S. negotiators need to up their game. If I were still a teacher and the U.S. negotiators were in my class, I’d be calling the parents tonight to work out an improvement plan to make sure they could pass my class. Of course, there is still plenty of time left to bring the grade up, but the question is whether the U.S. negotiators are motivated to improve or whether they just want to keep recycling failed trade ideas that will add up to another pro-corporate, anti-worker deal.

Another example: a coalition of major progressive groups has united around the demand to remove the ISDS from the NAFTA agreement.  Here is the text of their call to supporters:

If you live in North America, we need you to make sure your government representative stops a corporate power grab in the new NAFTA renegotiations.

NAFTA gave vast new powers for corporations that make it easier to offshore jobs and attack the environmental and health laws on which we all rely.

Deals like NAFTA give multinational corporations the power to sue governments in front of a tribunal of three corporate lawyers. These lawyers can order taxpayers to pay the corporations unlimited sums of money, including for the loss of expected future profits.

The multinational corporations only need to convince the lawyers that a law protecting public health, digital rights or the environment violates their special NAFTA rights. The corporate lawyers’ decisions are not subject to appeal.

This corporate power grab is formally called Investor-State Dispute Settlement (ISDS).

END ISDS: Add your name to demand that any North American Free Trade Agreement (NAFTA) renegotiation removes the corporate power grab known as ISDS.

If You Live In the U.S., Canada or Mexico:

Add your name to tell your government representative (in the U.S., your member of Congress) to commit to oppose any North American Free Trade Agreement (NAFTA) renegotiation or any other agreement that includes Investor-State Dispute Settlement (ISDS).

This focus on the limitations of the process and agenda is problematic for many reasons.  One is that the call for reform can quickly become muddied as people struggle to understand the complex legal and technical nature of the agreement’s various chapters and evaluate whether changes that might be proposed will actually improve or worsen the agreement.

In this regard, it is possible that a renegotiated NAFTA agreement will actually include changes to the ISDS, ones that were proposed by the Obama administration for the Transpacific Partnership agreement.  If that happens, the progressive movement may well find itself divided and unable to communicate a clear position on the agreement’s renewal.

An even more important reason that the call for NAFTA reform is problematic is that it encourages people to believe that the US government is capable of representing something called the “national interest” and that it is possible for a “good” agreement to somehow emerge from the negotiations.  But really, these are corporate agreements negotiated by a captured state to advance a corporate agenda.

In point of fact, if you have a domestic economic agenda that is designed to weaken unions, privatize public services, slash taxes, and deregulate economic activity, like that of the US over the last several decades, then it is almost impossible to have a progressive international economic policy.  International policy flows out of domestic policy.  Said differently, you can’t have anti-worker domestic policies and hope to tack on a progressive international policy.

This means that the progressive movement, anchored by the trade union movement, needs to attack on all fronts in a consistent way, demanding wholesale change in US economic policy by highlighting the integrated and destructive nature of both domestic and international economic policy.  Until that happens, we will remain as we are now, in a situation where international economic issues are largely seen as an add on or set of separate issues that are highly technical and largely divorced from what are considered to be the more important domestic challenges.

Unfortunately, there has been almost no discussion by the progressive community of the KORUS renegotiation.  Public Citizen has been one of the few groups to take the issue on, and it has called for the agreement’s termination, although largely because of the exploding trade imbalance between Korea and the US.  It also correctly points out that most Koreans also oppose the agreement.

The odds are overwhelming that Trump will not terminate NAFTA or KORUS.  Rather it is more likely that the negotiations will end up producing a few minor improvements and several major extensions that will expand corporate power.   If we continue to call for reform rather than termination we will again find ourselves on the political sidelines, with working people turning to the mainstream media for analysis and evaluation, where they will receive misleading information on what was negotiated and the consequences of the renegotiated agreements.

If we want to build a class movement it is time for us to show leadership.  We need to do more than challenge Trump to improve these agreements.  We need to demand that he terminate them; we should call his bluff.

What is holding us back?

So, what is holding us back?  Three reasons come to mind.  The first is that the progressive movement in the US fears being tainted with Trump nationalistic rhetoric.  Some activists have told me that the termination of NAFTA to defend US interests will leave Mexico in a bad situation.  This belief highlights the desperate need within our movements for more class analysis.  The demand for termination is not a demand to defend US interests at the expense of Mexican interests, it is a demand that asserts the rights of workers in the US, Canada, and Mexico against the interests of big capital in all three countries.

A second reason is the fear of being labeled a protectionist.  Most of the progressive movement has always mistakenly accepted the notion that these agreements are primarily about trade. They are clearly about far more than that.  Actually, one could say that one is for fair trade, as most progressive movements like to do, and demonstrate that we could have fairer trade without these agreements.  Having allowed successive administrations to cleverly identify these agreements with trade, the progressive movement has undermined its ability to highlight and take-on the broader neoliberal economic agenda that drives and shapes them.

These agreements are above all designed to boost capitalist mobility, power, and profits.  By making that clear, we can show that our demand for termination is not based on a simple objection to trade, and thus does not represent for a call for protectionism as commonly understood.  Rather, our demand is motivated by a determination to refashion our economy and help workers in other countries do the same; demanding an end to NAFTA and KORUS allows us to stand with workers in Canada, Mexico, and Korea who have also suffered as their economies have become more globalized and dominated by global capitalist accumulation dynamics.

The final reason, and one rarely voiced, is the fear of the unknown.  The media drums into our heads that existing agreements are all that stand in the way of chaos.  We are told that the world economy might spiral into depression if NAFTA and KORUS are terminated.  That is hooey.  If we end these agreements the world will not end.  We still have the WTO after all; trade will continue. But we will terminate chapters that encourage deregulation, privatization, monopolization, capital mobility, competition between workers, and union busting.

Clearly, we need to strengthen our confidence in the belief that there can be life after capitalism, that we can build movements that have the capacity to restructure economic relationships and patterns of economic activity along more sustainable, solidaristic, egalitarian, and democratic lines.  This will never happen if we fear mounting a direct challenge to capitalist imperatives.

Trump has given us an incredible opportunity.  He has put the issue of termination of existing trade agreements on the political agenda.  We need the audacity to seize the moment.

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State Conservatives Block City Progressives

Recently, organizers in a number of cities helped to build strong local coalitions which successfully won passage, either though ballot or elected official vote, of measures that improved majority living and working conditions.  Examples include higher minimum wages as well as fair scheduling, paid leave, and improved prevailing wage laws.

Now, conservative forces, organized by groups such as ALEC, are using their influence in state legislatures to pass preemption laws to block this progressive city strategy and, in some cases, roll back past gains. This development is well described by Marni von Wilpert in a recent Economic Policy Institute report titled “City governments are raising standards for working people—and state legislators are lowering them back down.”

Preemption and the rise of the right

Preemption allows a higher level of government to restrict the power of a lower level of government in areas where it believes that lower level government action conflicts, or might conflict, with its own actions. In terms of state politics, state governments can use preemption to restrict the rights of city governments.

A case in point, as described by von Wilpert:

In 2015, the Birmingham City Council passed an ordinance raising the city’s minimum wage to $8.50 effective July 2016 and to $10.10 effective July 2017. At the beginning of the 2016 session, the Alabama state legislature fast-tracked a minimum wage preemption law, which Governor Robert Bentley signed 16 days after the bill was first introduced, nullifying Birmingham’s ordinance and knocking the minimum wage back down to $7.25

At one time, preemption was used by more liberal state governments to keep more conservative city governments from undercutting social standards.  However, as von Wilpert explains, “Now that the Republican Party controls 33 governorships and has majority representation in both chambers of most state legislatures, conservative state legislators have increasingly used preemption laws to strike down local government efforts to increase the quality of life for working people in their municipalities.”

Preemption and minimum wage laws

The federal minimum wage has not been increased since 2009. In 2017, the federal minimum wage of $7.25 was worth 12 percent less, in real terms, than when it was last raised, and is 27 percent below its peak value in 1968.  Working people have therefore pushed hard to get their states and/or localities to take action, and with growing success at the local level.  “Before 2012, only five localities had enacted their own local minimum wage laws, but as of 2017, forty counties and cities have done so.”

But now, as the following figure from the EPI report makes clear, conservative state lawmakers are fighting back, using preemption to restrict local action.  Twenty-five states now have preemption laws denying local governments the right to set their own minimum wages; more than half of these laws were passed beginning in 2013.

Preemption and paid leave

State level right-wing forces have also taken aim at paid leave laws, which generally include the right to paid sick and family medical leave.  There is no federal law guaranteeing workers the right to paid leave, and, as with minimum wage gains, workers have been most successful in winning paid leave at the local level.  However, as we see in the following figure, state legislatures, since 2013, have been busy denying local governments the right to implement their own higher standards.  Twenty states now have preemption laws covering paid leave.

Preemption and fair scheduling

There are currently no federal laws that ensure workers basic fairness and predictability in scheduling.  As von Wilpert describes,

While waiting for the federal government to act, four cities and two states have passed various forms of fair work schedules legislation. But in the last few years, as local governments have begun to innovate in the arena of fair scheduling, state governments have stripped local governments’ abilities to do so—[as we see in the following figure] at least nine states have passed work scheduling preemption laws since 2015.

Preemption and prevailing wage/project labor agreements

Prevailing wage and project labor agreements require private contractors to treat workers fairly, including paying all their workers the prevailing wage, when doing work under government contract.  Such agreements keep private contractors from competing for public work at the expense of their workers.

And, as in the other areas of labor rights discussed above, we see a similar explosion in action by states to restrict the right of their localities to set higher standards for public contracting. At least 12 states now have preemption laws, all but one of which was passed beginning in 2013.

What’s next?

The current right-wing strategy highlighted above greatly reduces what working people can win at the city level in many states.  Of course, there are still many states where local initiatives can bring real improvement and these should obviously continue.  At the same time, it seems clear that the political environment is changing and not for the better in terms of what local efforts can produce.

While far from easy, this means that organizers have little choice but to deepen and extend their work. Among other things, this means pursuing efforts to link local/city coalitions in order to strengthen state level influence.  It also means that more emphasis needs to be put into building organizations as well as alliances of working people around a vision of good jobs for all, a strong and accountable public sector serving human needs, and healthy cities and communities that is to be won through organizing and direct action as well as electoral work.  Above all,  this will require seeking and sharing creative ways to strengthen working class solidarity, which is key if we are to overcome the existing divisions that allow right-wing forces to set the terms of our political choices.

The Struggle For A Decent Life

The following graphic from the HowMuch webpage puts into sharp relief the difficulties most workers face trying to live a decent life. Drawing on a number of databases, the graphic illustrates, by city, the amount of money a “typical American working-class family” would have at year’s end assuming “a reasonable standard of living.”

As the site explains:

Each bubble represents a city. The color corresponds to the amount of money a typical working-class family would have left over at the end of the year after paying for their living costs, like housing, food and transportation. The darker the shade of red, the worse off you are. The darker the shade of green, the better off you are. The size of the bubble also fits on a sliding scale—large and dark red means the city is totally unaffordable. Bigger dark green bubbles likewise indicate a city where the working class can get by.

The site defines its typical American working-class family as having four members: two adults (both in their 30s) and two children (ages 4 and 8 years).  The adults, who work full-time, have salaries equal to the median city earnings of their assigned professions, home appliance repairer and manicurist.  The family lives on a Department of Agriculture low-cost food plan and rents a 1500 square foot apartment.

It turns out that in only one of the ten largest American cities would it be possible for a working-class family to enjoy a decent standard of living without taking on debt: San Antonio.  Only 12 of the top 50 largest cities would be affordable.

Here are the five worse cities (from a financial perspective) and the debt that would be required for the family to achieve the target standard of living:

  1. New York, NY (-$91,184)
  2. San Francisco, CA (-$83,272)
  3. Boston, MA (-$61,900)
  4. Washington, DC (-$50,535)
  5. Philadelphia, PA (-$37,850)

As Raul, the author of the page notes: “You read that correctly. The typical working-class family would need an additional $91K+ per year in New York City just to break even on a reasonable standard of living.”

Of course, workers can’t run up such debts.  So, they do what they have to do to survive—they abandon any hope of having a reasonable standard of living.  They move far from their workplace and travel long distances to work, seek additional employment, economize further on meals, place their children in less than ideal day care situations, and crowd into small apartments, all of which take their toll.

And with wages continuing to stagnate, the Trump administration determined to slash spending on social services and roll back workplace protections, and a recession looming, the struggle for a decent life is not going to get easier.

Recession On The Horizon

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

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

Warning signs

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Social consequences

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

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

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

 

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

False Promises: Trump And The Revitalization Of The US Economy

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

Microsoft closes shop

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

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

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

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

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

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

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

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

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

Foxconn says it is investing

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

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

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

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

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

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

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

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

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

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

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

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

Forget the new trade deals

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

As Inside US Trade explains:

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

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

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

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

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

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

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

The Popularity Of Unions Is Growing, Especially Among Younger People

The Pew Research Center recently surveyed Americans about their views of labor unions and corporations.

As the chart below shows, a growing percentage of Americans view both unions and corporations favorably.  The favorable rating for unions, at 60 percent, is near its 2001 high.  The favorable rating for corporations still remains significantly below its 2001 high.

Favorable ratings for corporations are no doubt boosted by the steady drumbeat of media celebrations of corporate leaders as American heroes and “job creators.”  Unions, on the other hand, rarely get positive press.  In fact, they are being attacked across most of the country by state legislators eager to curry corporate favor by passing new laws designed to weaken worker and unions rights.  Thus, it seems likely that their growing popularity is the result of a growing awareness that organized resistance is needed to reverse the decline in majority living and working conditions, and that unions are one of the most important instruments to help organize that resistance.

As we see next, there is broad support for unions.  Dividing the population by age, with the exception of those over 65 years of age, the favorable view of unions is greater than the favorable view of corporations.  The strong support by those 18-29 is especially striking; three out of four have a favorable view of labor unions.  Dividing the population by family income, only those with an income of $75,000 or more view corporations more favorably than unions.

Looking at political party registration shows that “Democrats and Democratic-leaning independents are much more favorable toward labor unions than business corporations, while the inverse is true for Republicans and Republican leaners.”

However, while “There are no significant demographic differences among Democrats in views of labor unions, . . . Republicans are divided along age, educational and ideological lines.”  In particular, as we see below, among Republican and Republican leaners 18 to 49 years of age, the percent with a favorable view of unions is far greater than the percent with an unfavorable view.

In sum, the Pew survey points to the growth of an increasingly fertile environment for the rebirth of a strong union movement, especially among younger people.

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.

Unions Fight Inequality

The decline in unionization is one of the most important factors promoting the concentration of income at the upper end of the income distribution.  The statement may not surprise you, but the fact that this was the conclusion of an IMF study of the causes of inequality might.

Here is how the authors of Inequality and Labor Market Institutions summarize their main findings:

The results indicate that the rise of inequality in the advanced economies included in this study has been driven by the upper part of the income distribution, owing largely to the increase in income shares of top 10 percent earners. We find evidence that the decline in union density—the fraction of union members in the workforce—is strongly associated with the rise of top income shares. . . . Our empirical results also indicate that unions can affect income redistribution through their influence on public policy. We further find that reductions in the minimum wage relative to the median wage are related to significant increases in inequality.

Of course, the authors of the study were quick to add: “These findings, however, should not be seen as a blanket recommendation for strengthening these labor market institutions.”

While we should never count on the IMF to promote progressive policies, the findings of the study do highlight the importance of a strong trade union movement if we want to build an economy that works for the great majority of working people.  The fact that unionization has been in decline in the great majority of the twenty advanced capitalist countries studied by the IMF researchers strongly suggests that elites know exactly what they want.

Trends in inequality and labor market institutions

Inequality has been on the rise in almost all advanced capitalist economies, with attention increasingly focused on the growing concentration of income at the top of the distribution.  Common explanations for this trend include globalization, skill-based technological change, financial deregulation, and the decline in top marginal personal tax rates.  In their study for the IMF, Florence Jaumotte and Carolina Osorio Buitron investigate whether labor market institutions, in particular the degree of unionization and relative value of minimum wage, might also be responsible.

The authors examine inequality trends in twenty advanced capitalist countries over the period 1980 to 2010 using two main measures of inequality, the income share of the top 10 percent earners and the Gini coefficient (which ranges from 0 to 1 with higher numbers showing greater inequality).  The former is most useful for capturing changes at the top of the income distribution.  The latter, because of data limitations, is better at showing changes at the middle and bottom of the income distribution.  They therefore use Gini coefficients of gross and net income to test whether the strength of labor market institutions affects redistribution.

Figure 2 below illustrates the growth in inequality in the sample of advanced capitalist economies, and the importance of income concentration at the top of the income distribution.  As the authors explain:

Gross earnings differentials between the 9th and 5th deciles of the distribution have increased over four times as much as the differential between the 5th and 1st deciles. Moreover, data from the Luxembourg Income Survey on net income shares indicate that income shares of the top 10 percent earners have increased at the expense of all other income groups.

Figure 3 looks at trends in union density and relative minimum wage values, the authors’ proxies for the strength of labor market institutions.  As we can see, the degree of unionization has fallen steadily over the period, while the decline in the relative value of the minimum wage has been far more modest.  However, national experiences differ greatly.  In the case of union density, some countries actually registered an increase while in others density declined by almost 50 percent. Interestingly, the authors find no evidence of a relationship between changes in union density and changes in the minimum wage.

Union strength reduces inequality

The authors begin their test of the relationship between labor market institutions and inequality by running simple correlations between the two.  They find

a strong negative relation between the top 10 percent income share and union density, both within and across countries. The Gini of gross income is also negatively related with union density, but the relationship is somewhat weaker and mostly present within countries. The correlation coefficients for the minimum wage and the various inequality measures are more mixed. A similar exercise suggests a positive association between union density and redistribution: while the correlation between union density and the Gini coefficient of gross income is weak, its correlation with the Gini of net income is clearly negative.

While these correlation results suggest that greater union density helps workers claw back income from those at the top and improve the overall income distribution, simple correlations are far from conclusive because they do not hold other factors that might influence the variables constant.

Therefore, the authors use sophisticated econometric methods to try and isolate the importance of labor market institutions on inequality.  Among the factors they control for are:

technology (the share of information and communications technology capital in the total capital stock); globalization (the share of China in world exports interacted with the country’s lagged level of income per capita); financial reform (the index constructed by Abiad, Detragiache, and Tressel, 2008, which varies with changes in credit controls and reserve requirements, interest rate controls, entry barriers, state ownership, securities market policies, banking regulations, and capital account restrictions); the top marginal personal income tax rate; and a banking crisis dummy variable.

The authors find, consistent with the literature, that technology, globalization, financial liberalization, and tax reductions all increase inequality, with the latter two variables positively associated with an increase in top income shares.  But they also find a significant negative relationship between union strength and inequality and income concentration:

Our benchmark estimates of gross income inequality indicate that the weakening of unions is related to increases in the top 10 percent income share. A 10 percentage point decline in union density is associated with a 5 percent increase in the top 10 percent income share. The relation between union density and the Gini of gross income is also negative and significant.

At the other end of the income distribution, the minimum wage is closely associated with the Gini coefficient of gross income but not with the top income share. A 10 percentage point decline in the ratio of the minimum wage to the median wage is related to a 5 percent increase in the Gini coefficient of gross income.

The authors then test the robustness of their results by adding additional labor market, economic, and social variables, but with little change in outcome.  Their strong conclusion remains: an increase in union density reduces the share of income going to the top 10 percent and improves the overall distribution of income.

Magnitude of the effects

The authors illustrate the relative importance union density and the minimum wage to the growth in inequality in Figure 7, below. “The height of each bar measures the contribution of a variable to the rise in inequality over the period 1980–2010—calculated as the product of the change in the variable over the period and its coefficient—averaged across countries.”

More specifically, as the authors explain:

On average, the decline in union density explains about 40 percent of the 5 percentage point increase in the top 10 percent income share (top panel). . . . By contrast, the decline in unionization contributes more modestly to the rise of the gross income Gini, reflecting the somewhat weaker relation between these variables. However, about half of the increase in the Gini of net income is explained by the decline in union density, evidencing the additional and statistically significant relation between this institution and redistribution. The decline in union density was a widespread phenomenon which, as our estimation results suggest, could be an important contributing factor to the rise in top income shares (middle panel).

Contributions of changes in the minimum wage to inequality appear close to zero on average. However, averaging its contribution across countries hides the important role the minimum wage has played in driving inequality in some countries, as its evolution has been highly heterogenous. Bottom panel in Figure 7 shows the country-specific impact of changes in the minimum wage on the Gini of gross income. In countries where the minimum wage declined the most, it accounts for about 2 percentage points of the increase in the Gini coefficient. Conversely, where the minimum wage rose substantially, it appears to have contributed to reduce the Gini coefficient by 2 percentage points. Overall, these illustrative calculations suggest that changes in labor market institutions are key drivers of the evolution of inequality, alongside other determinants.

Next steps: Movement building

Living conditions have deteriorated for majorities in most advanced capitalist countries.  The rise in inequality, driven by the ever-increasing concentration of income at the top of the distribution, is one major reason.  The IMF has laid out a clear program of action to improve things: strengthen unions and boost minimum wages.  Of course, our fight against inequality would be greatly enhanced if we also intensified our efforts to stop the advance of capitalist globalization, reverse the financialization of economic activity, and raise taxes on the wealthy.

I am not sure that we needed IMF researchers to clarify our tasks, but thanks anyway IMF!

Race and Ethnicity Discrimination in the US Labor Market

The US labor market, much like US society, is marked by discrimination.  The following charts, taken from two Economic Policy Institute blog posts, highlight some of the labor market consequences of racial and ethnic discrimination.

The following chart makes clear that Blacks suffer far higher rates of unemployment than do Whites, at all levels of educational achievement.  In fact, the Black unemployment rate for those with a BA and higher was identical to the White unemployment rate for those with some college but no degree, both at 3.7 percent in June 2017.  The chart also shows the general rise in unemployment since 2000.

The next chart illustrates how unemployment and underemployment rates differ by age and race/ethnicity.    The underemployment rate, officially known as the U-6 rate by the Bureau of Labor Statistics, “includes not only unemployed workers but also those who are working part time because they can’t find full-time work (i.e., part time for economic reasons) and those who are marginally attached to the labor force.”

As we can see, while all young workers suffer high levels of unemployment and underemployment, the rates for Black youth (more than 1 in 4 underemployed) and Hispanic youth (approximately 1 in 5 underemployed) are significantly higher than for White youth.

These racial/ethnic differences mean that our general push for more and better jobs must be accompanied by policies designed to overcome the discriminatory and segmented nature of the US labor market.

 

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.