Living On The Edge: Americans In A Time Of “Prosperity”

These are supposed to be the good times—with our current economic expansion poised to set a record as the longest in US history. Yet, according to the Federal Reserve’s Report on the Economic Well-Being of US Households in 2017, forty percent of American adults don’t have enough savings to cover a $400 emergency expense such as an unexpected medical bill, car problem or home repair.

The problem with our economy isn’t that it sometimes hits a rough patch.  It’s that people struggle even when it is setting records.

The expansion is running out of steam

Our current economic expansion has already gone 107 months.  Only one expansion has lasted longer: the expansion from March 1991 to March 2001 which lasted 120 months.

A CNBC Market Insider report by Patti Domm quotes Goldman Sachs economists as saying: “The likelihood that the expansion will break the prior record is consistent with our long-standing view that the combination of a deep recession and an initially slow recovery has set us up for an unusually long cycle.”

The Goldman Sachs model, according to Domm:

shows an increased 31 percent chance for a U.S. recession in the next nine quarters. That number is rising. But it’s a good news, bad news story, and the good news is there is now a two-thirds chance that the recovery will be the longest on record. . . . The Goldman economists also say the medium-term risk of a recession is rising, “mainly because the economy is at full employment and still growing above trend.”

The chart below highlights the growing recession risk based on a Goldman Sachs model that looks at “lagged GDP growth, the slope of the yield curve, equity price changes, house price changes, the output gap, the private debt/GDP ratio, and economic policy uncertainty.”

Sooner or later, the so-called good times are coming to an end.  Tragically, a large percent of Americans are still struggling at a time when our “economy is at full employment and still growing above trend.” That raises the question: what’s going to happen to them and millions of others when the economy actually turns down?

Living on the edge

The Federal Reserve’s report was based on interviews with a sample of over 12,000 people that was “designed to be representative of adults ages 18 and older living in the United States.”  One part of the survey dealt with unexpected expenses.  Here is what the report found:

Approximately four in 10 adults, if faced with an unexpected expense of $400, would either not be able to cover it or would cover it by selling something or borrowing money. The following figure shows that the share of Americans facing financial insecurity has been falling, but it is still alarming that the percentage remains so high this late in a record setting expansion.

Strikingly, the Federal Reserve survey also found, as shown in the table below, that “(e)ven without an unexpected expense, 22 percent of adults expected to forgo payment on some of their bills in the month of the survey. Most frequently, this involves not paying, or making a partial payment on, a credit card bill.”

And, as illustrated in the figure below, twenty-seven percent of adult Americans skipped necessary medical care in 2017 because they were unable to afford its cost.  The table that follows shows that “dental care was the most frequently skipped treatment, followed by visiting a doctor and taking prescription medicines.”

Clearly, we need more and better jobs and a stronger social safety net.  Achieving those will require movement building.  Needed first steps include helping those struggling see that their situation is not unique, a consequence of some individual failing, but rather is the result of the workings of a highly exploitative system that suffers from ever stronger stagnation tendencies.  And this requires creating opportunities for people to share experiences and develop their will and capacity to fight for change.  In this regard, there may be much to learn from the operation of the Councils of the Unemployed during the 1930s.

It also requires creating opportunities for struggle.  Toward that end we need to help activists build connections between ongoing labor and community struggles, such as the ones that education and health care workers are making as they fight for improved conditions of employment and progressive tax measures to fund a needed expansion of public services.  This is the time, before the next downturn, to lay the groundwork for a powerful movement for social transformation.

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This post was updated May 31, 2018.  The original post misstated the length of the current expansion.

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Corporate Taxes And False Promises: US Workers And The 2017 Tax Cuts And Jobs Act

In December 2017 the Congress approved and the President signed into law the Tax Cuts and Jobs Act.  The Act reduced business and individual taxes, with corporations and the wealthy the greatest beneficiaries.  But, as usual, government and business leaders promoted this policy by also promising substantial gains for working people.  Any surprise that they lied?

Corporate Tax Giveaways And Wage Promises

Corporations, and their stockowners, were the biggest winners of this tax scam.  The Act lowered the US corporate tax rate from 35 percent to 21 percent and eliminated the corporate Alternative Minimum Tax.

It also gave a special bonus to multinational corporations, changing the federal tax system from a global to a territorial one.  Under the previous global tax system, US multinational corporations were supposed to pay the 35 percent US tax rate for income earned in any country in which they had a subsidiary, less a credit for the income taxes they paid to that country.  Now, under the new territorial tax system, each corporate subsidiary is only required to pay the tax rate of the country in which it is legally established.

As the Center on Budget and Policy Priorities points out, this change:

risks creating a large, permanent incentive for U.S. multinationals to shift overseas not just profits on paper but actual investment as well.  This could lead to a reduction in capital investment in the United States and thereby wind up reducing U.S. workers’ wages, as Congressional Research Service economist Jane Gravelle has explained. The law includes several provisions to try to limit the damage this incentive could cause, but they don’t alter the basic incentive to shift profits and investment offshore.

The Act also offers multinational corporations a one-time special lower tax rate of 8 percent on repatriated profits that are currently held by overseas subsidiaries in tax-haven countries; estimates are that there are some $3 trillion dollars parked offshore.

And, what are working people supposed to get for this massive tax giveaway to corporations?  According to President Trump and House Speaker Paul Ryan, the Act would generate a substantial increase in investment and productivity, thereby boosting employment and wages.  Both political leaders cited, in support of their claims, the work of the president’s Council of Economic Advisers which argued that:

Reducing the statutory federal corporate tax rate from 35 to 20 percent would, the analysis below suggests, increase average household income in the United States by, very conservatively, $4,000 annually. The increases recur each year, and the estimated total value of corporate tax reform for the average U.S. household is therefore substantially higher than $4,000. Moreover, the broad range of results in the literature suggest that over a decade, this effect could be much larger. These conclusions are driven by empirical patterns that are highly visible in the data, in addition to an extensive peer-reviewed research.

In fact, the Council’s report went on to say: “When we use the more optimistic estimates from the literature, wage boosts are over $9,000 for the average U.S. household.”

Modeling the effects of a tax cut is far from simple.  And, given the political nature of tax policy, it should come as no surprise that the estimate of gains for workers by President Trump’s Council of Economic Advisers was based on questionable assumptions and a real outlier.  This is highlighted by a Washington Center for Equitable Growth issue brief:

This issue brief examines estimates of the change in wages resulting from the Tax Cuts and Jobs Act after 10 years implied by the macroeconomic analyses of the Tax Policy Center, the Congressional Budget Office, the Penn Wharton Budget Model, the Tax Foundation, and the White House Council of Economic Advisers. The Tax Policy Center estimated that the law would increase wages by less than 0.1 percent after 10 years. The Congressional Budget Office estimated an increase of about 0.3 percent in the same year. The Penn Wharton Budget Model produced two estimates of the impact on wages, about 0.25 percent and 0.8 percent. The Tax Foundation estimated an increase of about 2 percent, and the White House Council of Economic Advisers estimated increases between 5 percent and 11 percent.  All of these estimates compare wages in 2027 to what they would have been in that year had the legislation not been enacted. . . .

These estimates imply widely varying labor incidence of the corporate tax cuts in the Tax Cuts and Jobs Act, ranging from near zero for the Tax Policy Center to multiples of the conventional revenue estimate for the Council of Economic Advisers. As a reference point, wage rates would need to increase by about 1 percent above what they would have been in the absence of the law to shift the benefits of the corporate tax cuts from shareholders to workers—and even more if revenue-raising provisions of the new law scheduled to take effect in the future are delayed or repealed.

Corporate Taxes Go Down and Wages Remain Low

Chris Macke, writing in the Hill, highlights just how little workers have benefited to this point from the Tax Cuts and Jobs Act:

The latest Employment Situation report from the Bureau of Labor Statistics shows weekly employee earnings have grown $75 since tax reform passed, well short of the $4,000 to $9,000 annual increases projected by President Trump and House Speaker Paul Ryan.

During the three months following passage of the tax bill, the average American saw a $6.21 increase in average weekly earnings. Assuming 12 weeks of work during the three months following passage of the corporate tax cuts, this equates to a $75 increase.

Assuming a full 52 weeks of work, the $6.21 increase in weekly earnings would result in a $323 annual increase, nowhere near the minimum $4,000 promised and $9,000 potential annual increases projected by President Trump and Speaker Ryan if significant cuts were made to corporate tax rates.

Unless something drastically changes, it seems that Americans are going to have to settle for much less than the $4,000 to $9,000 projected wage increases. An extra $322 a year isn’t going to do much to pay down the $1 trillion in additional debt they are projected to take on as a result of the tax cuts.

Mark Whitehouse, writing in Bloomberg Businessweek, provides additional evidence that the business tax cuts are doing little for the average worker.  As he put it: “Companies getting bigger breaks aren’t giving bigger raises.”

The following chart from his article shows that industries “getting bigger tax breaks aren’t giving bigger raises.”  Actually, quite the opposite appears to be true.  To this point, we actually see a negative correlation between the size of the tax cuts and wage increases.

The next chart provides a more useful look at the relationship between expected tax breaks and wage increases, showing how much companies in the different industries have boosted wages relative to the previous year.  Not only does the negative correlation remain, wage growth has actually fallen in the industries expected to enjoy the largest tax cuts.

 

What we see is corporate power at work.  And, in the face of growing stagnation tendencies, those who wield this power appear willing to pursue ever more extreme policies in defense of their interests, apparently confident that they will be able to manage any instabilities or crises that might arise.  It is up to us to stop them, by building a movement able to help working people see through corporate and government misrepresentations and take-up their side of the ongoing class war.

US Trade Deficits, Trump Trade Policies, and Capitalist Globalization

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

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

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

The globalization of the US economy

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

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

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

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

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


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

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

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

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

Trends in trade

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

In the words of the World Bank:

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

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

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

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

The take-away

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

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

US Workers And Their Decades Of Lost Earnings

It happened gradually, but thanks to the US media, economic news has largely been reduced to stock market reporting.  Want to know how the economy is doing?  Check the S&P 500 Index.  Want to know whether the latest Trump proposal is good or bad?  Check the S&P 500 Index.

And perhaps even more amazingly, the media has also transformed the stock market into a new superhero.  In good times it roars or soars.  In bad time it weathers the storm, regroups, and battles back to defend our collective well-being.

Somehow real economic processes and even more importantly the actual economic well-being of people has largely been shoved to the background.  Largely lost from view is the fact that most workers have suffered lost decades of earnings.

The Stock Market

As we see below the stock market, represented by the S&P 500, has enjoyed quite a run over the last few decades.

Left out of the celebration is the fact that few Americans own stock; in fact more than half of all US households own no stock at all, even indirectly through pension plans or mutual funds.

According to NYU economist Edward N. Wolff, as shown below, the wealthiest 10 percent of US households owned 84 percent of all stocks, by value, in 2016.  That is up from 77 percent in 2001.  By contrast, the bottom 60 percent of households owned just 1.8 percent of total stock value.

As the Washington Post explains:

For the top 20 percent of households, the day-to-day movements of the Dow Jones reflect real changes in their net worth and financial health. Big shifts in the market might mean the difference between retiring today and retiring five years from now, or between buying that bungalow right on the beach and buying the one a few blocks away.

But for many of the remaining 80 percent of American families, who collectively own less than 7 percent of the stock market even when you factor in their retirement accounts, the Dow and the S&P 500 are little more than numeric abstractions.

Lost Decades

The stock market’s rise and our growing identification with it tends to hide what is really happening to people.  Here, at a ground level, the sad reality is that most workers have experienced lost decades of earnings.

The chart below, taken from an analysis by Jill Mislinski for Advisor Perspectives, shows the real average hourly earnings of production and nonsupervisory employees in the private sector, a category that includes close to 85 percent of all private sector employees.  As we can see, real average hourly earnings in January 2018 are about what they were in 1978, four decades earlier, and considerably below their 1973 peak, and that is after a sustained rise.  A lot of income was lost over that period.

The loss of income is even greater when we take into account the gradual, long term decline in average weekly hours, illustrated next.

Putting the two series together gives us the trend in average real weekly earnings.  As we can see, despite decades of growth in the economy and stock market, real average weekly earnings of production and nonsupervisory employees have a long way to go to compensate for decades of decline and stagnation.

Jill Mislinksi offers the following perspective on this trend in average weekly earnings:

If we multiply the hypothetical weekly earnings by 50, we get an annual figure of $37,531. That’s a 13.5% decline from the similarly calculated real peak in October 1972. In the charts above, we’ve highlighted the presidencies during this time frame. Our purpose is not necessarily to suggest political responsibility, but rather to offer some food for thought. We will point out that the so-called supply-side economics popularized during the Reagan administration (aka “trickle-down” economics), wasn’t very friendly to production and nonsupervisory employees.

 

One small way we can help speed needed change is to challenge the media embrace of the stock market as our representative economic indicator and demand that economic reporting focus on meaningful realities for the great majority.

Taxes, Inequality, And Class Power

No doubt about it, the recently passed tax bill is terrible for working people.  But as Lance Taylor states in a blog post titled “Why Stopping Tax ‘Reform’ Won’t Stop Inequality”: “Inequality isn’t driven by taxes—its driven by the power of capital in relation to workers.”  Said differently we need to concentrate our efforts on shifting the balance of class power.  And that means, among other things, putting more of our energy into workplace organizing and revitalizing the trade union movement.

The rich really are different

Taylor uses the Palma ratio to highlight the growth of income inequality.  The measure, proposed by the Cambridge University economist Jose Gabriel Palma, is defined as the ratio of the average income of a wealthy group relative to the average income of a poorer group.  Taylor calculates Palma ratios “for the top one percent vs. households between the 61st and 99th percentiles of the size distribution (the ‘middle class’) and the sixty percent at the bottom.”

The first figure looks at Palma ratios for pre-tax income.  The second figure uses disposable or after-tax income.

In both figures we see growing ratios, which means that the top 1 percent is increasing its income faster than the other two groups, although the gains are not quite as large in the case of after-tax income, suggesting that taxes and transfers do make a small but real difference.

Be that as it may, the ratio of the top group’s after-tax income relative to Taylor’s middle group grew 3.85 percent per year over the period 1986 to 2014, while the ratio with the bottom group grew 3.54 percent a year.  As Taylor comments, “Such rising inequality is unprecedented. These rates are a full percentage point higher than output growth, and are not sustainable in the long run.”

What is also noteworthy is that the Palma growth rates for both the middle and bottom groups are quite close.  This is important because it shows that inequality is largely driven by the top earners pulling income from the rest of the population, rather than a widening income gap between Taylor’s middle and bottom groups.

An IMF study of the relationship between income inequality and labor market institutions in twenty developed capitalist countries over the period 1980 to 2011 came to a similar conclusion, although it focused on the top 10 percent rather than the top 1 percent. As Florence Jaumotte and Carolina Osorio Buitro, the authors of the study, explain (and illustrate in the figure below):

As with measures of income inequality, changes in the distribution of earnings indicate that inequality has risen owing largely to a concentration of earnings at the top of the distribution. 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. While there is some country heterogeneity, the increase in top income shares since the 1980s appears to be a pervasive phenomenon.  

Class power counts

As we can see in the first figure above, rich households, with a mean income of greater than $2 million a year, have “40 times the income of the bottom 60 percent and 13.5 times payments going to the middle class.” In the figure below, Taylor illustrates the source of that income.  One way or another, he finds that it comes from capital ownership and profits.

As we can see, labor compensation has grown rapidly over the last few years, and now exceeds $500,000 per year.  Still, it represents only roughly nine percent of the total, significantly less than either of the other two main income categories, proprietor’s income and interest and dividends.  Proprietor’s income, interest and dividends, and capital gains all flow from ownership.  So, in fact, does an important share of labor compensation which includes bonuses and stock options.

As Taylor explains:

Given that the bulk of income of the top one percent comes from profits through one channel or another, the obvious inference is that the rising Palma ratios in Figure 1 were fueled by an ongoing shift away from wages in the “functional” income distribution between labor and capital.

The question is why wages of ordinary households lagged.

After examining patterns and trends in business profits, Taylor concludes that the primary answer lies in the ability of firms to hold down wages.  Among the reasons for their success:

Changes in institutional norms (laws, unionization and other of the game) surely played a role. Robert Solow (2015) from MIT, the doyen of mainstream macroeconomics, observes that labor suffered for reasons including “the decay of unions and collective bargaining, the explicit hardening of business attitudes, the popularity of right-to-work laws, and the fact that the wage lag seems to have begun at about the same time as the Reagan presidency all point in the same direction: the share of wages in national value added may have fallen because the social bargaining power of labor has diminished.”

Divide-and-rule in a “fissuring” labor market, as described by David Weil (2014) is one aspect of this process. Globalization, which came to the forefront in the 2016 Presidential election, also played a role.

The IMF study again provides support for this conclusion. A simple correlation test of the relationship between labor market institutions and inequality produced “a strong negative relation between the top 10 percent income share and union density.”  Econometric tests that attempted to control for technology, globalization, financialization, tax rates and a host of other variables confirmed the relationship.  As the authors explain:

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.

On average, the decline in union density explains about 40 percent of the 5 percentage point increase in the top 10 percent income share . . . . 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.

The takeaway

Taylor doesn’t minimize the significance of the ongoing tax changes.  But as he states:

it took 30 or 40 years for the present distributional mess to emerge. It may well take a similar span of time to clean it up.  Progressive tax changes of $100 billion here or $50 billion there are not going to impact overall inequality. The same is true of once-off interventions such as raising the minimum wage by a few dollars per hour.

Long-term improvement requires changes to the present situation that can cumulate over time.

And that requires rebuilding labor’s strength so as to secure meaningful wage increases and a transformation in economic institutions and dynamics.  As the IMF study makes clear, fighting for strong unions must be an important part of the process.

Just Say No To NAFTA

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

The NAFTA debate

According to a recent poll commissioned by Public Citizen:

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

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

The most written about and controversial proposals include:

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

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

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

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

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

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

The rest of the story

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

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

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

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

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

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

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

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

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

The need for a new progressive strategy of opposition

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

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

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

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

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

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

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

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

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

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

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

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

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

Tax Cuts: Its All About Capitalism

Powerful corporations and the rich in the United States continue their winning ways.  By narrow margins, both the House of Representatives and Senate have agreed on a budget proposal that calls for an increase in the federal deficit of $1.5 trillion dollars in order to fund a major reform of the US tax system that will make the rich and powerful even more so.

Proposed tax changes

Republicans in each house of Congress still need to work out the specifics of their desired tax reform and then negotiate any differences before they can send the budget to President Trump for his signature.  But, there seems to be general consensus on the following business tax changes:

  • slash the top tax rate on pass-through business income from partnerships and limited liability companies or sole proprietorships from 39.6 percent to 25 percent; most law firms, hedge fund and real-estate companies are pass-through companies in which profits are counted and taxed as the owner’s personal income
  • reduce the corporate income tax from 35 percent down to 20 percent
  • repealing the corporate alternative minimum tax
  • replace the current global profit tax on business with a territorial tax, which means corporations will no longer be required to pay taxes on their foreign earnings.
  • institute a one-time lower tax rate on repatriated corporate profits currently held outside the country.

The Tax Policy Center estimates that these and other less significant changes would give corporate America a $2.6 trillion tax cut over the next decade.

There will also be changes to the personal tax code, although in dollar terms not nearly as large as the likely business tax changes highlighted above.  There seems to be agreement in both the House and Senate on ending the inheritance tax and alternative minimum income tax and reducing the number of individual income tax brackets from seven to three, with tax rates of 12 percent, 25 percent and 35 percent, although some members of congress would like to add a fourth higher bracket for very high-income earners.

The only serious disagreements involve whether to raise funds to offset the huge deficits that will be generated by the business tax cuts by ending federal deductions for state and local government taxes and restricting the yearly contributions taxpayers can make to their tax deferred 401(k) retirement accounts, both changes that would hit middle income earners hard.

The Tax Policy Center estimates that the likely personal income tax changes would be roughly revenue neutral, although as much as two-thirds of the likely personal income tax cuts would go to the top 1 percent of income earners.

No doubt as both houses of congress set to work, public attention will be directed away from both corporate tax cutting, which is the main aim of the tax reform and the primary driver of a growing federal debt, and the various tax give-aways to high income earners, and towards possibly heated congressional debates over the possible loss of personal tax deductions enjoyed by middle income earners.

Business, at least for now, no longer cares about the deficit

It is the business community that is driving this push to slash corporate taxes.  As an article in Bloomberg Businesweek explains:

It was only about five years ago that powerful people in finance loved talking about the horrendous consequences for the U.S. if it didn’t get its finances under control. They warned that the federal debt—and the interest payments—could eventually get high enough to drag down the economy, burden future generations, and even threaten national security. Chief executive officers of five of the biggest U.S. banks joined a campaign called Fix the Debt, signing on with hedge fund billionaires, asset managers, and private equity executives, as well as former lawmakers and others.

It was not long after Trump’s election that everything changed.  From then on, the business community, including most of the leading members of Fix the Debt, embraced tax cuts without concern for the deficit:

Case in point: Goldman Sachs Group Inc. CEO Lloyd Blankfein, a Fix the Debt supporter who in 2012 told CNBC he’d be for higher taxes if they helped mend the fiscal gap. After the election, Blankfein told colleagues in a companywide voicemail that Trump’s proposals, including tax reform, “will be good for growth and, therefore, will be good for our clients and for our firm.”

He wasn’t alone. It’s “about capitalism,” JPMorgan Chase & Co. CEO Jamie Dimon said in February, as he pushed Washington to lower corporate taxes. He suggested that if corporate rates fell, wages would come up. A few weeks earlier, Bank of America Corp. head Brian Moynihan said Trump should focus on cutting taxes. They were part of the antidebt campaign, too.

Dimon is right—it is about capitalism, which means that business leaders have one goal—maximize profits.  And if their desired tax cuts cause deficit problems down the road, well, these business leaders will effortlessly shift their message back to “fix the debt,” which translates into the need to slash critical social programs, all in the name of promoting a healthy capitalism.

Ideological cover

Of course, there is always an attempt to present policies designed to enrich the powerful as beneficial for all.  The argument has to be made and publicized, regardless of who really believes it.  And here it is: Kevin Hassett, the Chair of President Trump’s Council of Economic Advisers, has announced that the corporate tax cuts being discussed could be expected to increase a typical American household’s income by $3000 to $7000 a year.

The argument made by Hassett and the rest of the Council of Economic Advisers is that high corporate taxes force companies to invest overseas and reduce hiring in the United States.  In contrast, lower corporate taxes ill lead corporations to invest and complete for workers, all of whom would be more productive thanks to the investment, thereby driving up growth and worker earnings.

There is, in fact, little support for this notion that tax cuts lead to higher wages.  As the New York Times reports:

Other research has cast doubt on the theory that businesses would pass tax savings on to their workers in the form of higher wages. A 2012 Treasury Department study, which Treasury recently removed from its website, found that less than a fifth of the corporate tax falls on workers. A Congressional Research Service report last month concluded that the effects of corporate taxes fell largely on high-income Americans, not average workers.

So, how did the Hassett and the Council get its result?  Jared Bernstein, a Senior Fellow at the Center on Budget and Policy Priorities, examined the model used.  As he explains:

The interesting economics question is to why the model predicts such an unrealistic result for the US economy? Which of the assumptions most fail to comport with reality? To the extent that we want to train students to be useful practitioners as opposed to proficient, yet unrealistic, modelers, answering those questions would also provide some real educational value-added.

In this case, the model assumes that the US is a small, open economy such that capital inflows instantaneously fund more investment, such investment immediately boost productivity, and the benefits of faster productivity immediately accrue to paychecks. The simple model ignores the extent to which these inflows would raise the trade deficit as well as their impact on revenue losses and higher budget deficits.

The model assumes away imperfect competition, which is relevant today as a) monopolistic concentration is an increasing problem, and b) the one thing economists agree on in this space is that in these cases, the benefits of the corporate cut flows to profits and shareholders, not workers, other than maybe some “rent sharing” with high-end workers.

 

It may well be too late to stop this round of tax giveaways to business and the rich.  But it is not too late to use the moment to help working people develop a clearer picture of how capitalism works and a more critical understanding of the arguments used to defend its interests.  It wont be long before new economic tensions and difficulties present us with another opportunity to resist and hopefully, if we have used this time well, advance a meaningful movement for change.