US Public School Teachers: Declining Pay, Growing Militancy

Strikes continue to be an effective way for teachers to improve their living and working (and by extension student learning) conditions.  And, polls show that a strong majority of parents continue to support them.

Popular support for teacher strikes remains strong

The education pollster PDK recently asked adults what they thought about teacher salaries and whether they would support teachers if they struck to improve their conditions.   According to PDK,

73% of Americans surveyed in the 2018 PDK poll say they would support public school teachers in their community if they went on strike for higher pay. Even among public school parents — those who would be most directly affected by a strike — 78% say they’d support a teacher walkout.

This strong public support was certainly visible during the spring public teacher strikes in West Virginia, Oklahoma, and Arizona.  And it continues this fall.  For example, teacher strikes delayed the start of the new school year for thousands of students in Washington state.  As Don McIntosh reports in the Northwest Labor Press:

As many as 5,000 teachers went out on strike the week before Labor Day at seven Southwest Washington school districts — districts where school superintendents tried to hold on to funds the Legislature had granted for long-overdue teacher raises. In each case, strikes were authorized by overwhelming majorities — from 93 percent to as high as 98.4 percent. The strikes resulted in the complete closure of whole school districts, postponing the school year’s start for over 60,000 students.

Highlighting public support for Evergreen High School teachers, McIntosh writes:

All day long, passing motorists honked their support, and parents, students and members of the community dropped by bringing water and snacks. Some parents handed out strips of paper with a message: “We love you and support you! Thank you for taking the time to show us what it means to stand up for yourself even when it is difficult.”

“Kids and parents and dogs, everybody’s walking the line with us,” [Evergreen Education Association president] Beville said. “Among all the things that we expected when we went on strike, the most unexpected was the overwhelming support we’re getting from the community. Even on Facebook, when people post negative messages, parents are jumping on them like piranhas.”

Washington teachers ended their strikes with sizeable wage increases in five districts, but remain out in two others.  School officials in Tumwater in Thurston County and Longview in Cowlitz County filed injunctions in an attempt to force teachers back to work.  County judges in both districts declared the strikes illegal, but significantly refused to impose any penalties; the strikes continue.

Teacher pay is too low

While right-wing politicians like to portray public school teachers as a “labor aristocracy,” profiting at the expense of ordinary workers, the fact is that teachers have suffered real wage declines.  A case in point: average teacher pay in Washington state fell 8 percent in real (inflation-adjusted) dollars over the last 16 years according to figures from the U.S. Education Department.

More generally, as a Guardian article explains:

American teachers are getting paid less – even though they are better qualified than ever, new research has found.

Teacher salaries are down by nearly 5% compared with before the Great Recession – and it’s not because teachers are younger or less educated, according to the Brown Center on Education Policy at the Brookings Institution.

In fact, the opposite is true.

And, as the following figure shows, not only has teacher pay fallen over the last seven years, the gap in earnings relative to other college educated workers has significantly grown.

In fact, an Economic Policy Institute study determined, as shown below, that there is no state in which public school teachers are paid more than college graduates.

The teacher wage penalty has dramatically grown, even when wages are adjusted for “education, experience, and other factors known to affect earnings.”  More specifically the Economic Policy Institute study found that the regression-adjusted wage gap for all public sector teachers grew from 1.8 percent in 1994, to 4.3 percent in 1996, and reached a record 18.7 percent in 2017.

Challenges ahead

Teacher strikes have been fueled by a number of factors in addition to the wage declines highlighted above, including new testing mandates which crowd out instruction and planning time, and cuts in education budgets which have left teachers with outdated materials and overcrowded classrooms.  The recent Janus decision and the efforts of the rightwing State Policy Network to weaken public sector unions makes clear that the teacher movement cannot stand still if it hopes to maintain if not actually build on its recent gains.  Public school teachers will have to strengthen their unions and deepen their community ties, and in concert with other public sector workers, build a campaign that makes clear the importance of a well-funded and accountable public sector and the need for new progressive tax measures to raise the required funds.

Obviously, this is no simple task.  It is not just a rightwing fringe that opposes public sector unions and raising taxes to ensure a healthy public sector that meets community needs.  For example, as the Intercept reports:

State Policy Network member think tanks generally do not disclose their donors. Several are generously funded by foundations controlled by billionaire brothers David and Charles Koch. The Texas Public Policy Foundation, the State Policy Network affiliate in Texas, inadvertently revealed its donor list several years ago. The donor list included foundation grants from the Koch Industries, AT&T, Verizon, Altia, Geo Group, Exxon Mobil, Coca-Cola, Blue Cross Blue Shield of Texas, and the Claude Lambe Charitable Foundation, a nonprofit controlled by the Kochs, among others.

In short, we are engaged in a real class struggle and that understanding has to be built into our organizing from the very beginning.

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Forgotten Workers And The US Expansion

There is a lot of celebrating going on in mainstream policy circles.  The economy is said to be running at full steam with the unemployment rate now below 4 percent.  As Clive Crook puts it in Bloomberg Businessweek, “The U.S. expansion has put millions of people back to work and economists agree that the economy is now at or close to full employment.”

Forgotten in all this celebration is the fact that wages remain stagnant.  Also forgotten are the millions of workers who are no longer counted as part of the labor force and thus not counted as unemployed.

Forgotten workers

One of the best indicators of the weakness of the current recovery is the labor market status of what is called the core workforce, those ages 25-54.  Their core status stems from the fact that, as Jill Mislinski explains, “This cohort leaves out the employment volatility of the high-school and college years, the lower employment of the retirement years and also the age 55-64 decade when many in the workforce begin transitioning to retirement … for example, two-income households that downsize into one-income households.”

The unemployment rate of those 25-54 reached a peak of 9 percent in 2009 before falling steadily to a low of 3.2 percent as of July 2018.  However, the unemployment rate alone can be a very misleading indicator of labor market conditions.  That is certainly true when it comes to the labor market status of today’s core workforce.

A more revealing measure is the Labor Force Participation Rate, which is defined as the Civilian Labor Force (i.e. the sum of those employed and unemployed) divided by the Civilian Noninstitutional Population (i.e. those of working age who are not in the military or institutionalized). Because there can be significant monthly swings in both the numerator and denominator of this measure, the Labor Force Participation Rate shown in the chart below is calculated using a 12-month moving average.

As we can see, the Labor Force Participation Rate for the 25-54 core cohort has sharply declined, from a mid-2000 high of 84.2 percent, down to a low of 81.9 percent in July 2018. Mislinski calculates that:

Based on the moving average, today’s age 25-54 cohort would require 1.6 million additional people in the labor force to match its interim peak participation rate in 2008 and 2.9 million to match the peak rate around the turn of the century.

A related measure of labor market conditions is the Employment-to-Population Ratio, which is defined as the Civilian Employed divided by the Civilian Noninstitutional Population.  As we can see in the next chart, the Employment-to-Population Ratio of our core cohort has also declined from its mid-2000 peak.

Again, according to Mislinski,

First the good news: This metric began to rebound from its post-recession trough in late 2012. However, the more disturbing news is that the current age 25-54 cohort would require an increase of 1.2 million employed prime-age participants to match its ratio peak in 2007. To match its mid-2000 peak would require a 3.1 million participant increase.

The takeaway

Both the Labor Force Participation Rate and the Employment-to-Population Ratio are useful measures of the employment intensity of the economy.  And in a healthy economy we should expect to see high values for both measures for the 25-54 age cohort. That is especially true for a country like the United States, where the non-market public provision of education, health care, and housing is quite limited, and an adequate retirement depends upon private savings.  In other words, people need paid employment to live and these are prime work years.

The decline, over the business cycle, in both the Labor Force Participation Rate and the Employment-to-Population Ratio for our core cohort strongly suggests that our economy is undergoing a profound structural change, with business increasingly organizing its activities in ways that require fewer workers. More specifically, the lower values in these measures mean that millions of prime age workers are being sidelined, left outside the labor market.

It is hard to know what will become of these workers and by extension their families and communities.  Moreover, this is not a problem only of the moment.  This cohort is still relatively young, and the social costs of being sidelined from employment—and here we are not even considering the quality of that employment—will only grow with age.  We can only hope that workers of all ages will eventually recognize that our growing employment problems are the result, not of individual failings, but an increasingly problematic economic system, and begin pushing for its structural transformation.

The 21st Century Has Been Hard On US Households

The 21st Century has not been a good one for most working people in the United States.  In fact, for most of this century, real median household income has been below its starting value in January 2000.

The chart below shows real (inflation-adjusted) and nominal (or current dollar) median household income over this century.  As we can see, the fall in real median household income over most of the first eight years was nothing compared to the hit median household income took over the next 8 years. This record is even more appalling when one considers that the US was officially in an economic expansion from November 2001 to December 2007, and then again from June 2009 to the present.

The next chart brings the pressures working families have faced this century into sharper relief.  It shows the percentage change in real median household income, both monthly and using a three-month moving average, over time.  It does this by dividing the value of each median income variable by its respective value at the beginning of 2000.

It has been a long, hard slog, but finally, in 2018, the average household is enjoying some real growth in income.  Real median household income, as of March 2018, was 1.8 percent above its January 2000 level. The 3-month moving average was also 1.8 percent above its January 2000 benchmark.

While encouraging, recent gains have been far too small to compensate for the many preceding years of actual loss. Moreover, it remains to be seen how much longer this expansion will continue.  As the New York Times reported,

Federal Reserve officials are beginning to worry about a possibility that seems remote to workers who still feel left behind: the danger of the economy’s running too hot, destabilizing financial markets and setting off a rapid escalation in wages and prices that could force the central bank to slam the brakes on growth.

Translated, this means that if labor costs rise enough to eat into corporate profits, Federal Reserve officials will respond with interest rate hikes to slow down economic activity and weaken labor’s bargaining power.  And so goes the new century.

Magical Bootstraps And The Struggles Of Working Americans

A recession is coming, sooner or later.  Once it hits, we can expect articles bemoaning the fact that working people didn’t build-up their savings during this record expansion to help them through the hard times.  If only they had pinched pennies here and there, skipped a new TV or smart phone, they could have generated some capital that could have been invested . . . Ah the missed opportunities.

Of course, the reality is quite different.  One reason is that the current so-called good times have not been very good for working people.  For example, as Jonathan Spicer points out, “the rise in median expenditures has outpaced before-tax income for the lower 40 percent of earners in the five years to mid-2017 while the upper half has increased its financial cushion, deepening income disparities.” In other words, a significant percentage of workers have had to run down their savings or borrow to survive; wealth accumulation has been out of the question.

The bootstrap theory of success

The notion that under capitalism each individual has the ability, without outside help, to “pull themselves up by their bootstraps,” has a powerful hold on popular consciousness.  And, its message of self-reliance and individual responsibility serves capitalist interests well by deflecting attention away from the systemic causes of current economic problems.

The irony is that the phrase itself originally referred to something that was physically impossible to achieve.  As Caroline Bologna explains:

The concept is simple: To pull yourself up by your bootstraps means to succeed or elevate yourself without any outside help.

But when you examine this expression and its current meaning, it doesn’t seem to make much sense.

To pull yourself up by your bootstraps is actually physically impossible. In fact, the original meaning of the phrase was more along the lines of “to try to do something completely absurd.”

Etymologist Barry Popik and linguist and lexicographer Ben Zimmer have cited an American newspaper snippet from Sept. 30, 1834 as the earliest published reference to lifting oneself up by one’s bootstraps. A month earlier, a man named Nimrod Murphree announced in the Nashville Banner that he had “discovered perpetual motion.” The Mobile Advertiser picked up this tidbit and published it with a snarky response ridiculing his claim: “Probably Mr. Murphree has succeeded in handing himself over the Cumberland river, or a barn yard fence, by the straps of his boots.”

“Bootstraps were a typical feature of boots that you could pull on in the act of putting your boots on, but of course bootstraps wouldn’t actually help you pull yourself over anything,” Zimmer told HuffPost. “If you pulled on them, it would be physically impossible to get yourself over a fence. The original imagery was something very ludicrous, as opposed to what we mean by it today of being a self-made man.” . . .

Beyond the Murphree example, versions of the phrase appeared in many published texts to describe something ridiculous. Popik has documented several of these examples on his blog.

Leaving aside questions about why the phrase “pulling oneself up by their bootstraps” is no longer used as a way to dismiss an impossibility or absurdity, its original meaning captures capitalist realities far better than does is its current meaning.  Quite simply, there are no magical bootstraps that enable working people to “pull themselves up” to economic security and well-being by dint of their own hard work.  The problem is that far too many Americans still believe in their existence and thus blame themselves for their economic situation.

The struggles of working Americans

In a Reuters article, Jonathan Spicer illustrates the fact that “behind the headlines of roaring job growth and consumer spending . . . the boom continues in large part by the poorer half of Americans fleecing their savings and piling up debt.”

The figure below shows the median income for each of five groups of Americans based on their before-tax income.

The next figure shows, for 2017, the difference between expenses and pre-tax income for each of the five groups.  As one can see, expenses (red circle) outstrip income (blue circle) for the bottom two groups or 40 percent of the population.  Those in the third group are barely keeping their heads above water.

The last figure below shows that 2017 was no aberration.  Despite the longest expansion in post-war US history, most Americans are struggling to meet expenses.  As Spicer comments, “lower-earners have been sinking deeper into red over the last five years.”

It is no wonder that the Federal Reserve, in its Report on the Economic Well-Being of US Households in 2017, found that forty percent of American adults don’t have enough savings to cover a $400 emergency expense such as an unexpected medical bill, car problem or home repair.

One important reason for these depressing trends is that there has been little growth in wages.   And as Jared Bernstein explains in the New York Times, that outcome is largely due to the exercise of class power:

The United States labor market is closing in on full employment in an economic expansion that just began its 10th year, and yet the real hourly wage for the working class has been essentially flat for two years running. Why is that?

Economists ask this question every month when the government reports labor statistics. We repeatedly get solid job growth and lower unemployment, but not much to show for wages. Part of that has to do with inflation, productivity and remaining slack in the labor market.

But stagnant wages for factory workers and non-managers in the service sector — together they represent 82 percent of the labor force — is mainly the outcome of a long power struggle that workers are losing. Even at a time of low unemployment, their bargaining power is feeble, the weakest I’ve seen in decades. Hostile institutions — the Trump administration, the courts, the corporate sector — are limiting their avenues for demanding higher pay.

It matters how Americans understand their situation and the broader dynamics that shape it.  Challenging the ideology that misleads popular understandings, and that includes fanciful notions of what pulling on bootstraps can accomplish, is an important part of the movement building process needed to achieve any meaningful social change.

US Militarism Marches On

Republicans and Democrats like to claim that they are on opposite sides of important issues.  Of course, depending on which way the wind blows, they sometimes change sides, like over support for free trade and federal deficits.  Tragically, however, there is no division when it comes to militarism.

For example, the federal budget for fiscal year 2018 (which ends on September 30, 2018), included more money for the military than even President Trump requested.  Trump had asked for a military budget of $603 billion, a sizeable $25 billion increase over fiscal year 2017 levels; Congress approved $629 billion.  Trump had also asked for $65 billion to finance current war fighting, a bump of $5 billion; Congress approved $71 billion.  The National Defense Authorization Act of 2018, which set the target budget for the Department of Defense at this high level, was approved by the Senate in a September 2017 vote of 89-9.

In the words of the New York Times: “In a rare act of bipartisanship on Capitol Hill, the Senate passed a $700 billion defense policy bill . . . that sets forth a muscular vision of America as a global power, with a Pentagon budget that far exceeds what President Trump has asked for.”

That Act also called for a further increase in military spending of $16 billion for fiscal year 2019 (which begins October 1, 2018).  And, in June 2018, the Senate voted 85 to 10 to authorize that increase, boosting the Defense Department’s fiscal year 2019 total to $716 billion.

This bipartisan embrace of militarism comes at enormous cost for working people.  This cost includes cuts in funding for public housing, health care and education; the rebuilding of our infrastructure; basic research and development; and efforts to mitigate climate change.  It also includes the militarization of our police, since the military happily transfers its excess or outdated equipment to willing local police departments.

And it also includes a belligerent foreign policy.  A case in point: Congress has made clear its opposition to the Trump administration decision to meet with North Korean leader Kim Jong-un and halt war games directed against North Korea, apparently preferring the possibility of a new Korean War.  Congress is also trying to pass a law that will restrict the ability of the President to reduce the number of US troops stationed in South Korea.

In brief, the US military industrial complex, including the bipartisan consensus which helps to promote militarism’s popular legitimacy, is one of the most important and powerful foes we must overcome if we are to seriously tackle our ever-growing social, economic, and ecological problems.

The military is everywhere

The US has approximately 800 formal military bases in 80 countries, with 135,000 soldiers stationed around the globe.  Putting this in perspective, Alice Slater reports that:

only 11 other countries have bases in foreign countries, some 70 altogether. Russia has an estimated 26 to 40 in nine countries, mostly former Soviet Republics, as well as in Syria and Vietnam; the UK, France, and Turkey have four to 10 bases each; and an estimated one to three foreign bases are occupied by India, China, Japan, South Korea, Germany, Italy, and the Netherlands.

US special forces are deployed in even more countries.  According to Nick Turse, as of 2015, these forces were operating in 135 countries, an 80 percent increase over the previous five years.  “That’s roughly 70 percent of the countries on the planet. Every day, in fact, America’s most elite troops are carrying out missions in 80 to 90 nations practicing night raids or sometimes conducting them for real, engaging in sniper training or sometimes actually gunning down enemies from afar.”

This widespread geographic deployment represents not only an aggressive projection of US elite interests, it also provides a convenient rationale for those that want to keep the money flowing.  The military, and those that support its funding, always complain that the military needs more funds to carry out its mission.  Of course, the additional funds enable the military to expand the reach of its operations, thereby justifying another demand for yet more money.

The US military is well funded 

It is no simple matter to estimate of how much we spend on military related activities.  The base military budget is the starting point.  It represents the amount of the discretionary federal budget that is allocated to the Department of Defense.  Then there is the overseas contingency operations fund, which is a separate pool of money sitting outside any budgetary restrictions, that the military receives yearly from the Congress to cover the costs of its ongoing warfare.

It is the combination of the two that most analysts cite when talking about the size of the military budget. Using this combined measure, the Stockholm International Peace Research Institute finds that the United States spends more on its military than the next seven largest military spenders combined, which are China, Russia, Saudi Arabia, India, France, the UK, and Japan.

As the following chart shows, US military spending (base budget plus overseas contingency operations fund), adjusted for inflation, has been on the rise for some time, and is now higher than at any time other than during the height of the Iraq war.  Jeff Stein, writing in the Washington Post, reports that the military’s base budget will likely be “the biggest in recent American history since at least the 1970s, adjusting for inflation.”

As big as it is, the above measure of military spending grossly understates the total.  As JP Sottile explains:

The Project on Government Oversight (POGO) tabulated all “defense-related spending” for both 2017 and 2018, and it hit nearly $1.1 trillion for each of the two years. The “defense-related” part is important because the annual National Defense Authorization Act, a.k.a. the defense budget, doesn’t fully account for all the various forms of national security spending that gets peppered around a half-dozen agencies.

William Hartung, an expert on military spending, went agency by agency to expose all the various military-related expenses that are hidden in different parts of the budget.  As he points out:

You might think that the most powerful weapons in the U.S. arsenal — nuclear warheads — would be paid for out of the Pentagon budget.   And you would, of course, be wrong.  The cost of researching, developing, maintaining, and “modernizing” the American arsenal of 6,800 nuclear warheads falls to an obscure agency located inside the Department of Energy, the National Nuclear Security Administration, or NNSA. It also works on naval nuclear reactors, pays for the environmental cleanup of nuclear weapons facilities, and funds the nation’s three nuclear weapons laboratories, at a total annual cost of more than $20 billion per year.

Hartung’s grand total, which includes, among other things, the costs of Homeland Security, foreign military aid, intelligence services, the Veterans Administration, and the interest on the debt generated by past spending on the military, is $1.09 trillion, roughly the same as the POGO total cited above.  In short, our political leaders are far from forthcoming about the true size of our military spending.

Adding insult to injury, the military cannot account for how it spends a significant share of the funds it is given.  A Reuters’ article by Scott Paltrow tells the story:

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.” . . .

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.

“Where is the money going? Nobody knows,” said Franklin Spinney, a retired military analyst for the Pentagon and critic of Defense Department planning. . . .

For years, the Inspector General – the Defense Department’s official auditor – has inserted a disclaimer on all military annual reports. The accounting is so unreliable that “the basic financial statements may have undetected misstatements that are both material and pervasive.”

Military spending is big for business

Almost half of the US military budget goes to private military contractors.  These military contracts are the lifeblood for many of the largest corporations in America.  Lockheed Martin and Boeing rank one and two on the list of companies that get the most money from the government.  In 2017 Lockheed Martin reported $51 billion in sales, with $35.2 billion coming from the government.  Boeing got $26.5 billion. The next three in line are Raytheon, General Dynamics, and Northrop Grumman.  These top five firms captured some $100 billion in Pentagon contracts in 2016.

And, as Hartung describes,

The Pentagon buys more than just weapons. Health care companies like Humana ($3.6 billion), United Health Group ($2.9 billion), and Health Net ($2.6 billion) cash in as well, and they’re joined by, among others, pharmaceutical companies like McKesson ($2.7 billion) and universities deeply involved in military-industrial complex research like MIT ($1 billion) and Johns Hopkins ($902 million).

Not surprisingly, given how lucrative these contracts are, private contractors work hard to ensure the generosity of Congress. In 2017, for example, 208 defense companies spent almost $100 million to deploy 728 reported lobbyists.  Lobbying is made far easier by the fact that more than 80 percent of top Pentagon officials have worked for the defense industry at some point in their careers, and many will go back to work in the defense industry.

Then there are arms sales to foreign governments. Lawrence Wittner cites a study by the Stockholm International Peace Research Institute that found that sales of weapons and military services by the world’s largest 100 corporate military suppliers totaled $375 billion in 2016. “U.S. corporations increased their share of that total to almost 58 percent, supplying weapons to at least 100 nations around the world.”

Eager to promote the arms industry, government officials work hard on their behalf.  As Hartung explains: From the president on his trips abroad to visit allied world leaders to the secretaries of state and defense to the staffs of U.S. embassies, American officials regularly act as salespeople for the arms firms.”

More for the military and less for everything else

The federal budget is divided into three categories: mandatory spending (primarily social security and medicare), discretionary spending, and interest on the debt. Two trends in discretionary spending, the component of the budget set each year at the discretion of Congress, offer a window on how militarism is squeezing out funding for programs that serve majority needs.

The first noteworthy trend is the growing Congressional support for defense (base military budget) over non-defense programs. In 2001, the majority of discretionary funds went to non-defense programs,  However, that soon changed, as we see in the chart below, thanks to the “war on terror.”  In the decade following September 11, 2001, military spending increased by 50 percent, while spending on every other government program increased by only 13.5 percent.

In the 2018 federal budget, 54 percent of discretionary funds are allocated to the military (narrowly defined), $700 billion to the military and $591 billion to non-military programs. The chart below shows President Trump’s discretionary budgetary request for fiscal year 2019. As we can see, the share of funds for the military would rise to 61 percent of the total.

According to the National Priorities Project, “President Trump’s proposals for future spending, if accepted by Congress, would ensure that, by 2023, the proportion of military spending [in the discretionary budget] would soar to 65 percent.”  Of course, militarism’s actual share is much greater, since the military is being defined quite narrowly.  For example, Veterans’ Benefits is included in the non-defense category.

The second revealing trend is the decline in non-defense discretionary spending relative to GDP.  Thus, not only is the military base budget growing more rapidly than the budget for nondefense programs, spending on discretionary non-defense programs is not even keeping up with the growth in the economy.  This trend translates into a declining public capacity to support research and development and infrastructure modernization, as well as meet growing needs for housing, education, health and safety, disaster response . . . the list is long.

The 2018 bipartisan budget deal increased discretionary spending for both defense and non-defense programs, but the deal did little to reverse this long run decline in non-defense discretionary spending relative to the size of the economy.  A Progressive Policy Institute blog post by Ben Ritz explains:

The Budget Control Act of 2011 (BCA) capped both categories of discretionary spending as part of a broader effort to reduce future deficits. When Congress failed to reach a bipartisan agreement on taxes and other categories of federal spending, the BCA automatically triggered an even deeper, across-the-board cut to discretionary spending known as sequestration. While the sequester has been lifted several times since it first took effect, discretionary spending consistently remained far below the original BCA caps.

That trend ended with the Bipartisan Budget Act of 2018 (BBA). This budget deal not only lifted discretionary spending above sequester levels – it also went above and beyond the original BCA caps for two years. Nevertheless, projected domestic discretionary spending for Fiscal Year 2019 is significantly below the historical average as a percentage of gross domestic product. Moreover, even if policymakers extended these policy changes beyond the two years covered by the BBA, we project that domestic discretionary spending could fall to just 3 percent of GDP within the next decade – the lowest level in modern history [see dashed black line in chart below].

The story is similar for defense spending. Thanks to the pressure put on by the sequester, defense discretionary spending fell to just under 3.1 percent of GDP in FY2017. Under the BBA, defense spending would increase to 3.4 percent of GDP in FY2019 before falling again [see dashed black line in following chart]. Unlike domestic discretionary spending, however, defense would remain above the all-time low it reached before the 2001 terrorist attacks throughout the next decade.

In sum, Congress appears determined to squeeze non-defense programs, increasingly privileging defense over non-defense spending in the discretionary budget and allowing non-defense spending as a share of GDP to fall to record lows.  The ratio of discretionary defense spending relative to GDP appears to be stabilizing, although at levels below its long-term average.  However, discretionary defense spending refers only to the base budget of the Department of Defense and as such is a seriously understated measure of the costs of US militarism.  Including the growing costs of Homeland Security, foreign military aid, intelligence services, the Veterans Administration, the interest on the debt generated by past spending on the military, and the overseas contingency operations fund, would result in a far different picture, one that would leave no doubt about the government’s bipartisan commitment to militarism.

The challenge ahead

Fighting militarism is not easy.  Powerful political and business forces have made great strides in converting the United States into a society that celebrates violence, guns, and the military. The chart below highlights one measure of this success.  Sadly, 39 percent of Americans polled support increasing our national defense while 46 percent think it is just about right. Only 13 percent think it is stronger than it needs to be.

Polls, of course, just reveal individual responses at a moment in time to questions that, in isolation, often provide respondents with no meaningful context or alternatives and thus reveal little about people’s true thoughts.  At the same time, results like this show just how important it is for us to work to create space for community conversations that are informed by accurate information on the extent and aims of US militarism and its enormous political, social, economic, and ecological costs for the great majority of working people.

The US Is A World Leader In Income and Wealth Inequality

A recent article published in the American Economic Review, “Global Inequality Dynamics: New Findings from WID.world,” draws upon the World Wealth and Income Database to examine trends in global inequality.

Two main takeaways:

  • US economic dynamics have greatly enriched those at the top at the expense of the great majority.
  • Chinese elites, thanks to China’s post-Mao capitalist transformation, are hard at work replicating US patterns of inequality.

While US and Chinese political leaders threaten each other with talk of trade wars, there has certainly been a lot of win-win for those at the top in both countries.

Income inequality

Figure 1, below, highlights the sharp rise in the income share of the top 1 percent and the sharp fall in the income share of the bottom 50 percent in the United States.  It also shows that while China’s elite have also found globalization dynamics beneficial, especially after the country’s 2001 entrance into the WTO, their relative income position has changed little since the Great Recession.  Perhaps most striking is the steady fall in the income share going to the bottom 50 percent of Chinese since the late 1970s start of the country’s process of marketization and privatization.  In contrast to both countries, income shares in France have been remarkably stable.

As shown in Table 1, real income growth for those at the top is positively correlated with earnings—the greater the income, the greater the percentage gain. Things were not so positive for the bottom 50 percent in the US, as the group actually lost income over the period despite overall economic growth.

In the case of China, it appears that growth was so great over the period 1978 to 2015, that even the bottom 50 percent benefited, with that group’s income growing by 401 percent.  However, that figure needs to be treated with caution.  Before the reform period, most Chinese workers earned low salaries but that was balanced by the fact that the Chinese government provided them with a vast array of goods and services at little or no cost.  Everything changed with the country’s capitalist transformation.  Thus, while Chinese workers now earn far more money from their work than in the past, their costs for housing, health care, food, transportation, education, and the like, has also soared.  As a result, income gains for most Chinese likely overstate the benefits they have received from their country’s high rates of growth.

Privatization and concentration of wealth

The article also highlighted trends in the share of private wealth.  As the authors comment:

We observe a general rise of the ratio between net private wealth and national income in nearly all countries in recent decades. It is striking to see that this phenomenon was largely unaffected by the 2008 financial crisis. The unusually large rise of the ratio for China is notable: net private wealth was a little above 100 percent of national income in 1978, while it is above 450 percent in 2015. The private wealth-income ratio in China is now approaching the levels observed in the United States (500 percent), United Kingdom, and France (550–600 percent).

Figure 2 illustrates trends in the share of public wealth in national wealth. China’s downward trend reflects the country’s capitalist transformation, which has led to an increase in the share of national wealth in private hands.  More striking is the fact that “Net public wealth has become negative in the United States, Japan, and the United Kingdom, and is only slightly positive in Germany and France.”

Figure 3 reveals a sharp and sustained rise in the share of wealth held by the top 1 percent in the United States and China in recent decades, and more moderate increases in France and the United Kingdom.

It remains to be seen whether these trends in income and wealth inequality will continue. The fact that inequality trends in France differ greatly from those in the US and China strongly suggests that while capitalist globalization exerts a strong pull in favor of the rich and powerful everywhere, national institutions and relations of power also matter.  And that means that future developments will likely depend heavily on the actions of workers in the US and China, the two countries whose accumulation dynamics appear to exert the strongest force on the international economy.

The Chinese Economy: Problems and Prospects

The Chinese economy is big. In 2017, it was the world’s biggest based on purchasing power parity.  Its output equaled $23.12 trillion, compared with $19.9 trillion for the EU and $19.3 trillion for the US.

China also regained its position as the world’s largest exporter in 2017, topping the EU which held the position in 2016.  Chinese exports totaled $2.2 trillion compared with EU exports of $1.9 trillion. The United States was third, exporting $1.6 trillion.

The Chinese economy also recorded an impressive 6.9 percent increase in growth last year, easily beating the government’s 2017 target of 6.5 percent and the 6.7 percent rate of growth in 2016.  According to international estimates, China was responsible for approximately 30 percent of global economic growth in 2017.

The Chinese government as well as many international analysts also claim that China has entered a new economic phase, one that is far more domestic-centered and responsive to popular needs, and thus more stable than in the past when the country relied on exports to record even higher rates of growth.

It all sounds good.  However, there are many reasons to question China’s growth record as well as the stability of the country’s economy and turn towards a new domestic-centered growth strategy.  Glowing reports aside, hard times might well lie ahead for workers in China and the broader Asian region.

Chinese Growth

As the chart below shows, China’s rate of growth fell for six straight years, from 2011 to 2016, before registering an increase in 2017. Current predictions are for a further decline, down to 6.5 percent, in 2018.

However, Chinese growth figures still need to be taken with the proverbial “grain of salt.”  As Lucy Hornby, Archie Zhang, and Jane Pong discuss in a Financial Times article, Chinese provinces routinely fudge their growth data, which compromises the reliability of national growth figures.  For example:

Inner Mongolia, one of China’s most coal-dependent areas, and the major northern port city of Tianjin, have admitted to falsifying data that will probably require their 2016 GDP to be revised down. They join neighboring Liaoning, the first province to admit to a contraction during the four-year correction in commodities markets.

Inner Mongolia admitted this month that its data for “added value of industrial enterprises of a certain scale” were inflated 40 per cent in 2016. According to the Chinese statistical yearbook, secondary industry comprises 47 per cent of its GDP. Assuming its 2015 figures are accurate, the revised 2016 figures mean the region’s economy shrank 13 per cent. . . .

Like Inner Mongolia, Liaoning admitted to a contraction in 2016 compared with its official performance in 2015. Liaoning admits it faked data for about five years but has not issued a revised series. . . .

Tianjin, one of the big ports that services northern China, could also see a revision. Its Binhai financial district, which offers tax and foreign exchange incentives to registered businesses, swelled to comprise roughly half of Tianjin’s reported GDP last year.

Binhai included in GDP the commercial activity of companies that were only registered there for tax purposes, according to revelations last week. That could result in a 20 per cent drop in reported GDP for Tianjin in 2017, according to FT calculations. Binhai’s high debt levels and access to domestic and international financing make its phantom results a concern for broader markets.

Another possible data offender is Shanxi, China’s most coal-dependent province. Its official GDP growth held up admirably during the commodities downturn.

Last summer China’s anti-corruption watchdog announced unspecified problems with Jilin’s data, adding another troubled northeastern province to the list of candidates to watch.

Wang Xiangwei, former editor-in-chief of the South China Morning Post, sums up the situation as follows:

This [falsification of data] has given rise to a popular saying that “data makes an official and an official makes data”.  The malpractice is so rampant and blatant that over the years, a long-running joke is that simply adding up the figures from all the provinces and municipalities reveals a sum that overshoots the national GDP – by 6.1 trillion yuan (more than 10 per cent!) in 2013, 4.78 trillion yuan in 2014, and 3.6 trillion yuan in 2016.

This data manipulation certainly suggests that China has regularly failed to meet government growth targets.  Perhaps more importantly, even the overstated published nation growth statistics show that China’s rate of growth has steadily fallen.

Debt problems threaten economic stability

There are also reasons to doubt that China can sustain its targeted growth rate of 6.5 percent. A major reason, as the next chart shows, is that China’s growth has been underpinned by ever increasing debt.  Said differently, it appears that ever more debt is required to sustain ever lower rates of growth.

As Matthew C Klein, writing in the Financial Times Alphaville Blog, explains:

The rapidity and size of China’s debt boom in the past decade has been almost entirely without precedent. The few precedents that do exist — Japan in the 1980s, the US in the 1920s— are not encouraging.

Most coverage has rightly focused on China’s corporate sector, particularly the debts that state-owned enterprises owe to the big four state-owned banks. After all, these liabilities constitute the biggest bulk of the total debt outstanding, and also explain most of the total growth in Chinese debt since the mid-2000s.

The explosive nature of China’s corporate sector debt growth is well illustrated by comparisons to the relatively stable corporate debt ratios in other major countries, as shown in the following chart.

China’s growing debt means it likely that sometime in the not too distant future the Chinese state will be forced to tighten its monetary policy, making it harder for Chinese companies to borrow to finance their existing levels of employment and investment, thus triggering a potentially sharp slowdown in growth.  At the same time, since much of China’s corporate debt is owed to government-controlled banks, it is also likely that the Chinese state will be able to limit the economic fallout from expected corporate defaults and avoid a major financial crisis.

But, while corporate debt has drawn the most attention, household debt is also on the rise, and not so easily managed if serious repayment problems develop. According to Klein,

Since the start of 2007, Chinese disposable household income has grown about 12 per cent each year on average, while Chinese household debt has grown about 23 per cent each year on average. The cumulative effect [as illustrated below] is that (nominal) income has slightly more than tripled but debts have grown by nearly a factor of nine. . . .

All this is finally starting to affect the aggregate debt numbers. Household debt in China is still small relative to the total — about 18 per cent as of mid-2017 — but household borrowers are now responsible for about one third of the growth in total nonfinancial debt.

By mid-2017, Chinese households held debt equal to approximately 106 percent of their disposable income, roughly equal to the current American ratio.  What makes Chinese household debt so dangerous is that, as Klein notes, “households cannot service their debts out of GDP. Instead they have to rely on their meagre incomes.”  And as we see below, the share of Chinese national output going to households is not only low but has generally been trending downward.  By comparison, disposable income in the US normally runs around 72-76 percent of GDP.

In addition, it has been “finance companies and private loan sharks” that have done most of the consumer lending, not state banks.  This will make it harder for the state to keep repayment problems from having a significant negative effect on domestic economic activity.

Thus, while Chinese officials argue that China’s new lower rate of growth represents a switch to a new more stable level of economic activity, the country’s debt explosion suggests otherwise.  As Michael Pettis argues in his August 14, 2017 Monthly Report on China:

To argue that the authorities have been successful in stabilizing GDP growth rates and now must address credit growth misses the point entirely. If GDP growth “stabilizes” while credit growth accelerates, GDP growth cannot be said to have stabilized, at least not in any meaningful way. Chinese economic growth can only be said to have stabilized if GDP growth rates remain constant without any increase in the debt burden – i.e. credit grows in line with or slower than nominal GDP – and in my opinion, as I said above, this cannot happen except at growth rates well below half the current reported GDP growth rate, or less than 3 percent.

What new growth model?

For several years Chinese leaders have acknowledged the need for a new growth model that would produce slower but more sustainable rates of growth.  As Chinese Premier Li Keqiang explained in a recent speech to the National People’s Congress:

China’s economy is now in a pivotal period in the transformation of its growth model, its structural improvement and its shift to new growth drivers.  China’s economy is transitioning from a phase of rapid growth to a stage of high-quality development.

In other words, China is said to have abandoned its past export-driven high-speed growth strategy in favor of a slower, more domestic, human-centered growth strategy.  China’s current slower growth is in line with this transformation and thus should not be taken as a sign of economic weakness.

However, there are few signs of this transformation, other than a lower rate of growth.  For example, one hallmark of the new growth model is supposed to be the shift from external to domestic, private consumption-based drivers of growth.  The slowdown in the global economy in the post 2008 period certainly makes such a shift necessary. But the data, as shown below, reveals that there has been no significant gain in private consumption’s share of GDP.  In fact, it actually declined in 2017.

China’s private consumption accounted for 39.1 percent of GDP in Dec 2017, compared with a ratio of 39.4 percent the previous year.  The ratio recorded an all-time high of 71.3 percent in Dec 1962 and a record low of 35.6 percent in Dec 2010. And as we saw above, there has been no significant increase in disposable income’s share of GDP. Moreover, the existing consumption, in line with income trends, remains heavily skewed towards the wealthy.

What has remained high, as we see in the next chart, is investment, a pillar of the old growth model.

China’s Investment accounted for 44.4 percent of GDP in Dec 2017, compared with a ratio of 44.1 percent in the previous year. The ratio reached an all-time high of 48.0 percent in Dec 2011 and a record low of 15.1 percent in Dec 1962.

This investment continues to emphasize infrastructure, real estate development and enhancing manufacturing capacity.  One example:

A symbol of the investment addiction can be found in “China’s Manhattan.”

Tianjin’s Conch Bay, a 110-hectare district with a cluster of 40 high-rise buildings, was supposed to be the country’s new financial capital as outlays surged over the past several years. But in late November there were few signs of life. A number of buildings were still under construction; the streets were empty; and even completed buildings had no occupants.

From 2000 to 2010, investment in Tianjin — the hometown of former Premier Wen Jiabao — swelled by a factor of 10.3.

In fact, despite official pronouncements, China’s accelerated growth in 2017 owes much to external sources of demand.  As Reuters describes:

China’s economy grew faster than expected in the fourth quarter of 2017, as an export recovery helped the country post its first annual acceleration in growth in seven years, defying concerns that intensifying curbs on industry and credit would hurt expansion. . . .

A synchronized uptick in the global economy over the past year, driven in part by a surge in demand for semiconductors and other technology products, has been a boon to China and much of trade-dependent Asia, with Chinese exports in 2017 growing at their quickest pace in four years.

With fixed asset-investment growth at the weakest pace since 1999, exports helped pick up the slack.

“Real growth of overall exports…more than fully (explained) the pick-up in GDP growth last year,” Oxford Economics head of Asia economics Louis Kuijs wrote in a note.

And as we can see from the chart below, China’s export gains continue to depend heavily on the US market—a market that is becoming increasingly problematic in the wake of US tariff threats.

China’s real new growth strategy: The One Belt, One Road initiative

There are many pressures keeping Chinese leaders from seriously pursuing a real domestic-centered, consumption-based growth model.  One of the most important is that the interests of powerful political forces would be damaged if the government took meaningful steps to significantly increase the wages and improve the working conditions of Chinese workers.  And since many in the government and party directly benefit from existing relations of production they have little reason to pursue a strategy that would threaten the profitability of China-based production activity.

At the same time, it was clear to Chinese leaders that a new strategy was necessary to keep Chinese growth from further decline, an outcome which they feared could spur regime-threatening labor militancy.  Their answer, first discussed in 2013, appears to be the One Belt, One Road initiative.  The beauty of this initiative is that it allows the existing political economy to continue functioning with little change while opening up new outlets for basic industrial products produced by leading state firms, creating new export markets for private producers, and expanding the huge infrastructure that underpins the Chinese construction industry.

Asia Monitor Research Center, in the introduction to its Asian Labor Update issue on the One Belt, One Road initiative, describes what is at stake as follows:

Xi Jinping’s One Belt, One Road has been described as the next round of “opening up” by the Chinese government, following the development of Special Economic Zones and China’s accession to the WTO. Indeed, the OBOR strategy can be seen as a very significant and ambitious next step in the expansion of the role that China plays globally and its implementation will impact on the lives of millions of people domestically and globally.

Chinese government strategies towards both the BRICS and even more so towards OBOR, which has been dubbed “globalization 2.0”, potentially have important implications for the direction of globalization in the future. Given the way that China’s development strategies have led to significant environmental destruction and labor rights violations domestically, and the way that its investment overseas has been frequently criticized or led to opposition due to their adverse social and environmental consequences, suggest that there are legitimate causes for concern about the impacts on people and the environment of this direction.

In fact, the special issue includes several contributions which highlight the negative consequences of this initiative.  The initiative is first and foremost designed to enable Chinese companies to build roads, railway lines, ports and power grids for the benefit of China’s economy.  These projects come with massive environmental degradation, displacement of local communities, and local labor exploitation.  It also aims to advance Chinese efforts to control agricultural land and raw materials in targeted countries and promote the creation of Yuan currency area.

It remains to be seen how successful the One Belt, One Road initiative will be in achieving its aims.  What does seem clear is the talk of a new more stable, humane, high-quality Chinese economy is largely just that, talk.  Chinese leaders appear heavily invested in trying to breathe new life into the country’s existing growth model, a model that comes with enormous human and environmental costs.