Pandemic economic woes continue, but so do deep structural problems, especially the long-term growth in the share of low wage jobs

Many are understandably alarmed about what the September 4th termination of several special federal pandemic unemployment insurance programs will mean for millions of workers.  Twenty-five states ended their programs months earlier, with government and business leaders claiming that their termination would spur employment and economic activity.  However, several studies have disproved their claims.

One study, based on the experience of 19 of these states, found that for every 8 workers that lost benefits, only one found a new job.  Consumer spending in those states fell by $2 billion, with every lost $1 of benefits leading to a fall in spending of 52 cents.   It is hard to see how anything good can come from the federal government’s willingness to allow these programs to expire nationwide. 

The Biden administration appears to believe that adoption of its physical infrastructure bill and $3.5 trillion spending plan will ensure that those left without benefits will find new jobs.  But chances for Congressional approval are growing dim.  Even more importantly, and largely overlooked in the debate over whether the time is right to replace the pandemic unemployment insurance programs with new spending measures, is that an increasing share of the jobs created by economic growth are low-wage, and thus inadequate to ensure workers and their families an acceptable standard of living. 

For example, according to another study, the share of low wage jobs has been steadily growing since 1979.  More specifically, the share of workers (18-64 years of age) with a low wage job rose from 39.1 percent in 1979 to 45.2 percent in 2017.  For workers 18 to 34 without a college degree the share soared from 46.9 percent to 61.6 percent over the same tyears. Thus, a meaningful improvement in worker well-being will require far more than a return to “normal” labor market conditions.  It will require building a movement able to directly challenge and transformation the way the US economy operates.  

The importance of government programs

The figure below provides some sense of how important government programs have been to working people.  Government support was truly a lifeline for working people, delivering a significant boost to total monthly personal income (relative to the February 2020 start of the pandemic-triggered recession), especially during the first months.  Even now, despite the fact that the recession has officially been declared over, it still accounts for approximately half the increase in total monthly income.   

The government’s support of personal income was anchored by three special unemployment insurance programs–the Federal Pandemic Unemployment Compensation (FPUC), Pandemic Emergency Unemployment Compensation (PEUC), and Pandemic Unemployment Assistance (PUA). 

The FPUC was authorized by the March 2020 CARES Act and renewed by subsequent legislation and a presidential order. It originally provided $600 per week in extra unemployment benefits to unemployed workers in states that opted in to the program. In August 2020, the extra payment was lowered to $300.

The PEUC was also established by the CARES Act. It provided up to 13 weeks of extended unemployment compensation to individuals that had exhausted their regular unemployment insurance compensation.  This was later extended to 24 additional weeks and then by a further 29 weeks, allowing for a total of 53 weeks.  The PUA allowed states to provide unemployment assistance to the self-employed and those seeking part-time employment, or who otherwise did not qualify for regular unemployment compensation.

Tragically, the federal government allowed all three programs to expire on September 4th. Months earlier, in June 2021, 25 states actually ended these programs for their unemployed workers, eliminating benefits for over 2 million.  Several studies, as we see next, have documented the devastating cost of that decision. 

The cost of state program termination

Beginning in April 2021, a number of business analysts and politicians began to aggressively argue that federally provided unemployment benefit programs were no longer needed.  In fact, according to them, the programs were actually keeping workers from pursuing available jobs, thereby holding back the country’s economic recovery. Using these arguments as cover, in June, 25 states ended their participation in one or more of these programs. 

For example, Henry McMaster, the governor of South Carolina, announced his decision to end his state’s participation in the federal programs, saying: “This labor shortage is being created in large part by the supplemental unemployment payments that the federal government provides claimants on top of their state unemployment benefits.”

Similarly, Tate Reeves, the governor of Mississippi, stated in a May 2021 tweet:

It has become clear to me that we cannot have a full economic recovery until we get the thousands of available jobs in our state filled. . . . Therefore, I have informed the Department of Employment Security to direct the Biden Administration that Mississippi will be opting out of the additional federal unemployment benefits as early as federal law allows—June 12, 2021.

The argument that these special federal unemployment benefit programs hurt employment and economic activity was tested and found wanting.  Business Insider highlights the results of several studies:

Economist Peter Ganong, who co-authored a paper that found the disincentive effect of benefits was small, told the [Wall Street] Journal: “If the question is, ‘Is UI [unemployment insurance] the key thing that’s holding back the labor market recovery?’ The answer is no, definitely not, based on the available data.” 

That aligns with other early research on the impact of benefits ending. CNBC reports that analyses from payroll firms UKG and Homebase both found that employment didn’t go up in the states cutting off the benefits; in fact, that Homebase analysis found that employment declined in the states opting out of federal benefits, while it went up in states that chose to retain benefits. In June, Indeed’s Hiring Lab found that job searches in states ending benefits were below April’s baseline.

In July, Arindrajit Dube, an economics professor at University of Massachusetts Amherst, found that ending benefits didn’t make workers rush back. “Even as there was a clear reduction in the number of people who were receiving unemployment benefits — and a clear increase in the number of people who said that they were having difficulty paying their bills — that didn’t seem to translate, at least in the short run, into an uptick in overall employment rates,” Dube told Insider at the time.

Dube, along with five other researchers, examined “the effect of withdrawing pandemic UI on the financial and employment trajectories of unemployed workers in [19] states that withdrew benefits, compared to workers with the same unemployment duration in states that retained these benefits.” 

They found, as noted above, that for every 8 workers who lost their benefits, only 1 found a new job.  And for every $1 of reduced benefits, spending fell by 52 cents—only 7 cents of new income was generated for each dollar of lost benefits. “Extrapolating to all UI recipients in the early withdrawal states, we estimate these states eliminated $4 billion in unemployment benefits paid by federal transfers as of August 6 [2021].  Spending fell by $2 billion and earnings rose by $270 million.  These states therefore saw a much larger drop in federal transfers than gains from job creation.”

An additional 8 million workers have now lost benefits because of the federal termination of these special unemployment insurance programs.  It is hard to be optimistic about what awaits them, given the experience of the early termination states.  And equally important, even if the “optimists” are proven right, and those workers are able to find employment, there is still reason for concern about the likely quality of those jobs given long-term employment trends.

The lack of decent jobs

There is no agreed upon definition of a low wage job.  David R. Howell and Arne L. Kalleberg note two of the most popular in their study of declining job quality in the United States.  One is to define low wage jobs as those that pay less than two-thirds of the median hourly wage.  The other, used by the OECD, is to define low wage jobs as those that pay less than two-thirds of the median hourly wage for full-time workers.

Howell and Kallenberg find both inadequate.  Instead, they define low wage jobs as those that pay less than two-thirds of the mean hourly wage for full-time prime-age workers (35-59).  Their definition sets the dividing line between low wage and what they call “decent” wage jobs at $17.50 in 2017.  As they explain:

This wage is well above the wage that would make a full-time (or near full-time) worker eligible for food stamps and several dollars above the basic needs budget for a single adult in most American cities, but is conservative in that the basic needs budget for a single adult with one child ranges from $22 to $30).

The figure below, based on their definition, shows the growth in low wage jobs for workers 18-34 years of age without a college degree (in blue), all workers 18-64 years of age (in gold), and prime age workers 35-59 years of age (in green).  Their dividing line between low wage and decent wage jobs, equivalent to $17.50 in 2017, is far from a generous wage.  Yet, all three groupings show an upward trend in the share of low wage jobs.  

The authors then divide their low wage and decent wage categories into upper and lower tiers.   The lower tier of the low wage category includes jobs that pay less than two-thirds of the median wage for full-time workers, which equaled $13.33 in 2017.  As the authors report:

Based on evidence from basic needs budgets, this is a wage that, even on a full-time basis, would make it extremely difficult to support a minimally adequate standard of living for even a single adult anywhere in the country. This wage threshold ($13.33) is just above the wage cutoff for food stamps ($12.40) and Medicaid ($12.80) for a full- time worker (thirty-five hours per week, fifty weeks per year) with a child; full-year work at thirty hours per week would make a family of two eligible for the food stamps with a wage as high as $14.46 and as high as $14.94 for Medicaid.  For this reason, we refer to this as the poverty-wage threshold.

The lower tier of the decent wage category includes jobs that pay less than 50 percent more than the decent-job threshold, which equaled $26.50 in 2017.  The figure below shows the overall job distribution in 2017.

The following table shows the changing distribution of jobs over the years 1979 to 2017 for all workers 18 to 64, for workers 18-34 without a college degree, and for workers 18-34 with a college degree.

While the share of upper-tier decent jobs held by workers 18 to 64 has remained relatively stable, there has been a notable decline in the share of workers with lower-tier decent jobs.  Also worth noting is the rise in the share of poverty-level low wage jobs. 

Perhaps most striking is the large decline in the share of decent jobs held by workers 18 to 34, those with and those without a college degree.  The share of poverty level jobs held by those without a college degree soared from 35.7 percent to 53.5 percent.  The share of low wage jobs also spiked for those with a college degree, rising from 22 percent to 39.1 percent, with an increase in the share of both low-wage tiers.

This long-term decline in job quality will not reverse on its own.  And, not surprisingly, corporate leaders remain largely opposed to policies that might threaten the status quo.

So, do we need a better unemployment insurance system? For sure.  Do we need a better funded and more climate resilient social and physical infrastructure?  Definitely.  But we also need a dramatically different economy, one that, in sharp contrast to our current system, is grounded in greater worker control over both the organization and aims of production.  Lots of work ahead.

COVID-19 Economic Crisis Snapshot

 Workers in the United States are in the midst of a punishing COVID-19 economic crisis.  Unfortunately, while a new fiscal spending package and an effective vaccine can bring needed relief, a meaningful sustained economic recovery will require significant structural changes in the operation and orientation of the economy.

The unemployment problem

Many people blame government mandated closure orders for the decline in economic activity and spike in unemployment.  But the evidence points to widespread concerns about the virus as the driving force.  As Emily Badger and Alicia Parlapiano describe in a New York Times article, and as illustrated in the following graphic taken from the article:

In the weeks before states around the country issued lockdown orders this spring, Americans were already hunkering down. They were spending less, traveling less, dining out less. Small businesses were already cutting employment. Some were even closing shop.

People were behaving this way — effectively winding down the economy — before the government told them to. And that pattern, apparent in a range of data looking back over the past two months, suggests in the weeks ahead that official pronouncements will have limited power to open the economy back up.

As the graphic shows, economic activity nosedived around the same time regardless of whether state governments were quick to mandate closings, slow to mandate closings, or unwilling to issue stay-at-home orders.

The resulting sharp decline in economic activity caused unemployment to soar. Almost 21 million jobs were lost in April at the peak of the crisis.  The unemployment rate hit a high of 14.7 percent.  By comparison the highest unemployment rate during the Great Recession was 10.6 percent in January 2010.

Employment recovered the next month, with an increase of 2.8 million jobs in May.  In June, payrolls grew by an even greater number, 4.8 million.  But things have dramatically slowed since.  In July, only 1.8 million jobs came back.  In August it was 1.5 million.  And in September it was only 661,000.  To this point, only half of the jobs lost have returned, and current trends are far from encouraging.

The unemployment rate fell to 7.9 percent in September, a significant decline from April.  But a large reason for that decline is that millions of workers have given up working or looking for work and are no longer counted as being part of the labor force.  And, as Alisha Haridasani Gupta writes in the New York Times:

A majority of those dropping out were women. Of the 1.1 million people ages 20 and over who left the work force (neither working nor looking for work) between August and September, over 800,000 were women, according to an analysis by the National Women’s Law Center. That figure includes 324,000 Latinas and 58,000 Black women. For comparison, 216,000 men left the job market in the same time period.

The relationship between the fall in the unemployment rate and worker exodus from the labor market is illustrated in the next figure which shows both the unemployment rate and the labor force participation rate (LFPR), which is measured by dividing the number of people 16 and over who are employed or seeking employment by the size of the civilian noninstitutional population that is 16 and over.

The figure allows us to see that even the relatively “low” September unemployment rate of 7.9 percent is still high by historical standards.  It also allows us to see that its recent decline was aided by a decline in the LFPR to a level not seen since the mid-1970s.  If those who left the labor market were to decide to once again seek employment, pushing the LFPR back up, unless the economic environment changed dramatically, the unemployment rate would also be pushed up to a much higher level.

Beyond the aggregate figures is the fact, as Heather Long, Andrew Van Dam, Alyssa Fowers and Leslie Shapiro explain in a Washington Post article, that “No other recession in modern history has so pummeled society’s most vulnerable.”

As we can see in the above graphic, the 1990 recession was a relatively egalitarian affair with all income groups suffering roughly a similar decline in employment.  That changed during the recessions of 2001 and 2008, with the lowest earning cohort suffering the most.  But, as the authors of the Washington Post article state, “even that inequality is a blip compared with what the coronavirus inflicted on low-wage workers this year.”  By the end of the summer, the employment crisis was largely over for the highest earners, while employment was still down more than 20 percent for low-wage workers and around 10 percent for middle-wage workers.

Poverty is on the rise

In line with this disproportionate hit suffered by low wage workers, the poverty rate has been climbing.  Five Columbia University researchers, using a monthly version of the Supplemental Poverty Measure (SPM), provide estimates of the monthly poverty rate from October 2019 through September 2020.  They found, as illustrated below, “that the monthly poverty rate increased from 15% to 16.7% from February to September 2020, even after taking the CARES Act’s income transfers into account. Increases in monthly poverty rates have been particularly acute for Black and Hispanic individuals, as well as for children.”

The standard poverty measure used by the federal government is an annual one, based on whether a family’s total annual income falls below a specified income level.  It doesn’t allow for monthly calculations and is widely criticized for using an extremely low emergency food budget to set its poverty level.   The SPM includes a more complete and accurate measure of family resources, a more expansive definition of family, the cost of a broader basket of necessities, and is adjusted for cost of living across metro areas.

As we can see in the above figure, the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was passed by Congress and signed into law on March 27th, 2020, has had a positive effect on poverty levels.  For example, without it, the poverty rate would have jumped to 19.4 percent in April. “Put differently, the CARE Act’s income transfers directly lifted around 18 million individuals out of poverty in April.”

However, as we can also see, the positive effects of the CARES Act have gradually dissipated.  The Economic Impact Payments (“Recovery Rebates”) were one-time payments.  The $600 per week unemployment supplement expired at the end of July.  Thus, the gap between the monthly SPM with and without the CARES Act has gradually narrowed.  And, with job creation dramatically slowing, without a new federal stimulus measure it is likely we will not see much improvement in the poverty rate in the coming months.  In fact, if working people continue to leave the labor market out of discouragement and the pressure of home responsibilities, there is a good chance the poverty rate will climb again.

It is also important to note that the rise in monthly rates of poverty, even with the CARES Act, differs greatly by race/ethnicity as illustrated in the following figure.

The need to do more

Republican opposition to a new stimulus ensures that that there will be no follow-up to the CARES Act before the upcoming election.  Opponents claim that the federal government has already done enough and the economy is well on its way to recovery. 

As for the size of the stimulus, the United States has been a lagger when it comes to its fiscal response to the pandemic.  The OECD recently published an interim report titled “Coronavirus: Living with uncertainty.”  One section of the report looks at fiscal support as a percent of 2019 GDP for nine countries. As the following figure shows, the United States trails every country but Korea when it comes to direct support for workers, firms, and health care.  

A big change is needed

While it is natural to view COVID-19 as responsible for our current crisis, the truth is that our economic problems are more long-term.  The U.S. economy has been steadily weakening for years.  In the figure below, the “trend” line is based on the 2.1% average rate of growth in real per capita GDP from 1970 to 2007, the year before the Great Recession.  Not surprising, real per capita GDP took a big hit during the Great Recession.  But as we can also see, real per capita GDP has yet to return to its historical trend. In fact, the gap has grown larger despite the record long recovery that followed. 

As Doug Henwood explains:

Since 2009, the growth rate has averaged 1.6%. Last year [2019], which Trump touted as the greatest economy ever, it managed to get back to the pre-2008 average of 2.1%, an average that includes two deep recessions (1973–1975 and 1981–1982).

At the end of 2019, actual [real GDP per capita] was 13% below trend. At the end of the 2008–2009 recession it was 9% below trend. Remarkably, despite a decade-long expansion, it fell further below trend in well over half the quarters since the Great Recession ended. The gap is now equal to $10,200 per person—a permanent loss of income, as economists say. 

The pre-coronavirus period of expansion (June 2009 to February 2020), although the longest on record, was actually also one of the weakest. It was marked by slow growth, weak job creation, deteriorating job quality, declining investment, rising debt, declining life expectancy, and narrowing corporate profit margins. In other words, the economy was heading toward recession even before the start of state mandated lockdowns.  The manufacturing sector actually spent much of 2019 in recession.   

Thus, there is strong reason to believe that a meaningful sustained recovery from the current COVID-19 economic crisis is going to require more than the development of an effective vaccine and a responsive health care system to ensure its wide distribution.  Also needed is significant structural change in the operation and orientation of the economy.

The pandemic, technology, and remote work: the corporate push for greater control over workers’ lives

The U.S. economy is undergoing a major transformation largely driven by the coronavirus pandemic.  One hallmark of that transformation is the explosion in what is called “remote” work.

In 2017, according to a Census Bureau study, only 3 percent of full-time workers in the United States reported that they primarily worked from home.  Today, in response to the pandemic, some 42 percent of the U.S. labor force is working from home—with only 26 percent still working on-site.

Corporate leaders appear to have embraced this shift to at-home work and are pursing the use of new technologies designed to increase managerial control over the remote work process. The response of workers to these changes is still evolving.

The pandemic and the corporate embrace of at-home work

Although most corporations initially viewed the shift to remote work as a necessary short-term response to government mandated closures and consumer and worker health concerns, a number are now planning for a permanent, post-pandemic increase in its use. As the New York Times reports:

Facebook expects up to half its workers to be remote as soon as 2025. The chief executive of Shopify, a Canadian e-commerce company that employs 5,000 people, tweeted in May that most of them “will permanently work remotely. Office centricity is over.” Walmart’s tech chief told his workers that “working virtually will be the new normal.”

Quora, a question-and-answer site, said last week that “all existing employees can immediately relocate to anywhere we can legally employ them.” Those who do not want to go anywhere can still use the Silicon Valley headquarters, which would become a co-working space.

And these large firms are not alone.  As Luke Savage, writing in Jacobin, notes:

With the lockdown still only a few weeks old, a survey of company CFOs by PricewaterhouseCoopers found that almost 30 percent were already planning to reduce their business’s physical footprint, with an April study by Gartner suggesting that some three-quarters were planning to shift at least some employees to remote work on a permanent basis.

It’s a different world

Of course, this is not the first time that corporations have embraced remote work.  A number—including such major companies as IBM, Aetna, Best Buy, Bank of America, Yahoo, AT&T and Reddit—actively promoted telecommuting as recently as 15 years ago.  But they all eventually reversed course, concluding that employee productivity, loyalty, and innovation suffered.  Tech companies, in particular, responded by building expansive and expensive new facilities that offered a range of free on-site benefits such as communal cafeterias and gyms to keep employees motivated and loyal.

Because of this history, some analysts doubt that the current corporate celebration of remote work will last long.  But there is reason to believe that this time is different.  Certainly, early indications are that at-home workers remain focused and hard at work.  Savage cites a Globe and Mail article that leads with this head: “Employers used to believe remote workers were happier but less productive. Turns out it’s the opposite.”  The Globe and Mail article goes on to say:

One fear about shifting to a work-from-home culture is that it would lead to operational chaos: missed meetings, spotty WiFi, games of broken telephone (both figurative and literal). Instead, even companies with tens of thousands of employees are finding that the IT infrastructure is holding up and so are lines of authority. Workers are responding to their emails and joining Zoom calls at approximately the right time. Everyone is always reachable.

The Globe and Mail is not alone in finding evidence of high worker productivity.  For example, the New York Times quotes John Sullivan, a professor of management:

“The data over the last three months is so powerful,” he said. “People are shocked. No one found a drop in productivity. Most found an increase. People have been going to work for a thousand years, but it’s going to stop and it’s going to change everyone’s life.”  Innovation, Dr. Sullivan added, might even catch up eventually.

And Bloomberg came to much the same conclusion, reporting that corporate executives at several different finance and investment companies all see evidence of gains in productivity.

Underlying these gains are three potentially long-lasting developments that provide support for the view that the current corporate commitment to expanding remote work needs to be taken seriously. The first is the availability of relatively low cost and easy-to-use online communication platforms like Zoom that allow managers to easily communicate with their workers and for workers to engage in group work when necessary.  The online infrastructure for corporate communication continues to improve.

The second is the recent and ongoing development of technologies that allow management to monitor and evaluate the online work effort of their employees.  As the New York Times explains: “Demand has surged for software that can monitor employees, with programs tracking the words we type, snapping pictures with our computer cameras and giving our managers rankings of who is spending too much time on Facebook and not enough on Excel.”

Of course, corporations have long used technology to monitor and direct work, and large companies like Amazon have pioneered the development and use of software for directing and intensifying the pace of warehouse workers.  Josh Dzieza, writing in the Verge, offers an example:

Every Amazon worker I’ve spoken to said it’s the automatically enforced pace of work, rather than the physical difficulty of the work itself, that makes the job so grueling. Any slack is perpetually being optimized out of the system, and with it any opportunity to rest or recover. A worker on the West Coast told me about a new device that shines a spotlight on the item he’s supposed to pick, allowing Amazon to further accelerate the rate and get rid of what the worker described as “micro rests” stolen in the moment it took to look for the next item on the shelf.

But as Dzieza makes clear, there is also growing availability and use of new software that makes it possible for corporations to easily oversee the work effort of their online workers.  One example is WorkSmart.  Dzieza describes the experience of a software engineer in Bangladesh who was required to download the software as a condition of his employment with Austin-based Crossover Technologies.  Among other things:

The software tracked his keystrokes, mouse clicks, and the applications he was running, all to rate his productivity. He was also required to give the program access to his webcam. Every 10 minutes, the program would take three photos at random to ensure he was at his desk. If [he] wasn’t there when WorkSmart took a photo, or if it determined his work fell below a certain threshold of productivity, he wouldn’t get paid for that 10-minute interval.

Other recently developed software programs currently in use to monitor the work of call center employees could easily be used to monitor home-based employees doing the same work. Recording the number and length of calls is old hat.  These new programs, using artificial intelligence, can now evaluate the “emotional” tone of the worker’s voice during their conversations with customers.  Some programs can even “coach workers in real time, telling them to speak more slowly or with more energy or to express empathy.” The growing corporate interest in remote work can be expected to spur the development of ever more sophisticated products that will allow even tighter control over at-home work and more detailed evaluation of at-home workers.

The nature of the ongoing transformation of the economy is the third reason that this period may well mark the start of a major shift in the location of work.  Simply stated: unemployment is now high and, when possible, workers welcome a safe alternative to on-site employment.

In the past on-site work was the standard corporate practice and most workers preferred it.  Thus, workers were generally able to undermine individual corporate attempts to push them into working from home.  Now, not only is remote work the new norm, because of the virus it has actually become the desired alternative.  With fear of the virus likely to remain for some time, corporations are in a far stronger position than in the past to normalize remote work and win worker acceptance of new work relations even after the pandemic is brought under control.

Benefits and costs

It is easy to understand why corporations are excited about increasing their use of remote work.  One reason is that it will allow them to greatly reduce their spending on facilities.  Gains on the labor side are likely even larger.  Companies will be able to expand their job search, hiring workers who may live thousands of miles away from the location of corporate operations with no need to pay moving expenses and with the possibility of cheapening the cost of labor by paying salaries commensurate with local living costs.  And, as a bonus, the more a company’s labor force is geographically separated and isolated, the harder it will be for its workers to build the bonds of solidarity needed to challenge management demands.

The use of remote work opens up possibilities for even greater labor savings by making possible the reclassification of new hires into independent contractors.  After all, many remote workers are already paying for the equipment they need (desks, chairs, computers, webcam), the supporting technological infrastructure (high speed Wi-Fi), and office maintenance (cleaning).

Of course, most workers also viewed at-home work positively, at least initially.  They appreciated being able to remain employed and work safely from their homes during the pandemic. But the costs of remote work, as currently structured, are mounting up for workers.

As a Bloomberg article summarizes, “We log longer hours. We attend more meetings with more people. And, we send more emails.”  The article highlights a recently published study by the National Bureau of Economic Research which was based on surveys of some 3 million people at more than 21,000 companies across 16 cities in North America, Europe and the Middle East.  The researchers:

compared employee behavior over two 8 week periods before and after Covid-19 lockdowns. Looking at email and meeting meta-data, the group calculated the workday lasted 48.5 minutes longer, the number of meetings increased about 13% and people sent an average of 1.4 more emails per day to their colleagues.

An online survey of 20,262 people in 10 countries by the technology company Lenovo Group Ltd. found that “A disturbing 71% of those working from home due to Covid-19 have experienced a new or exacerbated ailment caused by the equipment they now must use. . . the most common symptoms [being] back pain, poor posture (e.g., hunched shoulders), neck pain, eye irritation, insomnia and headaches.”

Looking just at the United States, a study done by NordVPN, based on tracking when at-home workers connected and disconnected from its service, found that at-home workers logged three hours more per day on the job than before the start of city and state lockdowns.  And a survey of 1,001 U.S. employees by Eagle Hill Consulting found that “By early April, about 45% of workers said they were burned out. Almost half attributed the mental toll to an increased workload, the challenge of juggling personal and professional life, and a lack of communication and support from their employer.”

Given the direction of corporate planning, it is likely that the costs of remote work for workers—physical and emotional—will only increase.  As one public relations executive explained when discussing why his company now views remote work so positively: The technology is better. Moreover, “we have rules now,” he said. “You have to be available between 9 a.m. and 5:30 p.m. You can’t use this as child care.”

Challenges ahead

For many workers, it is the pandemic, with its forced isolation of family in small housing units, that has made remote work so difficult and emotionally wearing.  And, for many, the experience of on-site work before the coronavirus pandemic forced closures was also far from ideal.  Thus surveys show, as the New York Times reports,

Most American office workers are in no hurry to return to the office full time, even after the coronavirus is under control. But that doesn’t mean they want to work from home forever. The future for them, a variety of new data shows, is likely to be workweeks split between office and home.

For example, a survey by the company Morning Consult done in mid-June found that:

Overall, 73 percent of U.S. adults who have careers where remote work is possible report that the pandemic has made them feel more positively about the prospect of remote work. And given the option, three quarters of these workers say they would like to work from home at least 1-2 days a week once the pandemic is under control.

At issue, then, is who will decide the place of work and perhaps even more importantly, the conditions of work, including remote work.  Current indications are that corporations plan to push workers into more remote work than surveys suggest they want, and definitely under conditions of surveillance and evaluation that they will find objectionable.  It is less clear whether those working remotely or threatened with remote work will be able to organize rapidly enough to force corporations to bargain with them over both the location of work and the work process, on- and off-site, including the aim and uses of new technology.

If there is a reason for optimism it is that there appears to be a growing solidarity between white- and blue-collar workers in the tech industry that includes support for unionization, especially at some of the large firms like Google and Amazon. As Tyler Sonnemaker and Allana Akhtar, writing for Business Insider, describe:

Even a year ago, the idea that tech’s cafeteria workers and office workers were on the same page about forming a labor union would have seemed unthinkable.

The recent wave of employee activism and organizing efforts represents a widening rift between the industry’s rank-and-file employees and its executives. For the first time, developers and product managers with higher pay and closer ties to management are siding with their lower-paid colleagues in warehouses, cafeterias, and contract gigs. . . .

Frequent leaks to the media – notable given the historically tight-knit culture at tech companies – and the emergence of groups like Rideshare Drivers United, Tech Workers Coalition, Athena, and Amazonians United are just two signs of the rise in employee activism in recent years. But over the past few months, emboldened by the pandemic and racial justice protests, workers at startups like Away and giants like Facebook have become a vocal chorus of critics.

Passively allowing management to use technology to shape the work process and the resulting final product is a recipe for ever worsening working and living conditions for the great majority of working people. Hopefully, the ongoing worker agitation and organizing in the United States will continue regardless of the unpredictable nature of the pandemic, producing a shared critique of profit-driven work and support for new organizational forms, including unions, that can fight for a more humane economic system.

The economy: we are still in big trouble

The announcement by the Bureau of Labor Statistics that the federal unemployment rate declined to 13.3 percent in May, from 14.7 percent in April, took most analysts by surprise.  The economy added 2.5 million jobs in May, the first increase in employment since February.  Most economists had predicted further job losses and a rise in the unemployment rate to as high as 20 percent.

This employment gain has encouraged some analysts, especially those close to the Trump administration, to proclaim that their predicted V-shaped economic recovery had begun.  But there are strong reasons to believe that the US economy is far from recovery.

Long term trends and the coronavirus

Predictions for a V-shaped recovery rest to a considerable degree on the belief that our current economic collapse was caused by state mandated business closures to battle the coronavirus which unsurprisingly choked off our long expansion.  Now that a growing number of states are ending their forced lockdowns it is only natural that the economy would resume growing.  Certainly, the stock market’s recent rise suggests that many investors agree. 

However, there are many reasons to challenge this upbeat story of impending recovery.  One of the most important is that the pre-coronavirus period of expansion (June 2009 to February 2020), although the longest on record, was also one of the weakest. It was marked by slow growth, weak job creation, deteriorating job quality, declining investment, rising debt, declining life expectancy, and narrowing corporate profit margins. In other words, the economy was heading toward recession even before the start of state mandated lockdowns.  For example, the manufacturing sector spent much of 2019 in recession.   

Another reason is that the downturn in economic activity that marks the start of our current recession predates lockdown orders.  It was driven by health concerns.  As Emily Badger and Alicia Parlapiano explain in their New York Times article, and as illustrated in the following graphic taken from the article:

In the weeks before states around the country issued lockdown orders this spring, Americans were already hunkering down. They were spending less, traveling less, dining out less. Small businesses were already cutting employment. Some were even closing shop.

People were behaving this way — effectively winding down the economy — before the government told them to. And that pattern, apparent in a range of data looking back over the past two months, suggests in the weeks ahead that official pronouncements will have limited power to open the economy back up.

In some states that have already begun that process, like Georgia, South Carolina, Oklahoma and Alaska, the same daily economic data shows only meager signs so far that businesses, workers and consumers have returned to their old routines.

Thus, while some rebound in economic growth is to be expected given the severity of the downturn to this point, it is unlikely that the May employment jump signals the start of a powerful economic recovery.  Weak underlying economic conditions and health worries remain significant obstacles.

In fact, even the optimistic US Congressional Budget Office predicts at best a long, slow recovery.  As Michael Roberts describes:

It now expects US nominal GDP to fall 14.2% in the first half of 2020, from the trend it forecast in January before the COVID-19 pandemic broke. Then it expects the various fiscal and monetary injections by the authorities and the end of the lockdowns to reduce this loss from the January figure to 9.4% by end 2020. The CBO still expects a sort of V-shaped recovery in US GDP in 2021 but does not expect the pre-pandemic crisis trend in US economic growth (already reduced in the Long Depression since 2009) to be reached until 2029 and may not even return to the previous trend growth forecast until after 2030! So there will be a permanent loss of 5.3% in nominal GDP compared to pre-COVID forecasts – $16trn in value lost forever. In real GDP terms, the loss will be about 3% cumulatively, or $8trn in 2019 money.  And this assumes no second wave in the pandemic and no financial collapse as companies go bust.

Depression level unemployment

Although President Trump has celebrated the May employment gains, the fact is we continue to suffer depression level unemployment.  The following figure from the Washington Post provides some historical perspective.  The current official unemployment rate of 13.3 percent is more than a third higher than the highest level of unemployment reached during the Great Recession. 

But even the Bureau of Labor Statistics acknowledges that because of the unique nature of the current crisis the official announced unemployment rate for each of the last three months is flawed.  The unemployment rate is based on household surveys.  For the past three months, in an attempt to better understand the impact of the coronavirus, interviewers were supposed to classify people not working because of the virus as “unemployed on temporary layoff.” However, as the Bureau of Labor Statistics acknowledges, many of those people were incorrectly classified as “employed but absent at work,” which is the classification used when a person isn’t coming to work because of vacation, illness, bad weather, a labor dispute, or other reasons.  People in this latter category are not counted as unemployed.

The BLS has determined that correcting the classification error would boost the official April unemployment rate to 19.7 percent and the May rate to 16.3 percent.  And, it is important to note that this unemployment rate does not include those workers who have stopped looking for work and those who are involuntarily working part-time.  Including them would push the May rate close to 25 percent.  

Stephen Moore, an economic adviser to President Trump, has stated that the May job numbers take “a lot of the wind out of the sails of any phase 4 [stimulus bill] — we don’t need it now. There’s no reason to have a major spending bill. The sense of urgent crisis is very greatly dissipated by the report.”  This is crazy.

Danger signs ahead

There are three reasons to fear that without substantial new federal action May employment gains will be short-lived. 

First, it has been relatively low-wage production and nonsupervisory workers who have suffered the greatest number of job losses.  That has left many businesses relatively top-heavy with managers and high-income professionals. A number of business analysts are now predicting a new wave of layoffs or firings of higher-income and management personal to bring staffing levels back into pre-coronavirus balance.

The following figure shows that almost 90 percent of the jobs lost from mid-February to mid-April were in the six lowest paid supersectors as defined by the Bureau of Labor Statistics. The May employment gains were also in these six sectors.

Economists with Bloomberg Economics are now warning of a second wave of job losses that will include “higher-paid supervisors in sectors where frontline workers were hit first, such as restaurants and hotels. It also includes the knock on-effects to connected industries such as professional services, finance and real estate.”

As Bloomberg explains:

The pandemic isn’t finished with the U.S. labor market, threatening a second wave of job cuts—this time among white-collar workers. . . .

For the analysis, [Bloomberg Economics economists] looked at job losses by sector in March and April—with affected industries dominated by blue-collar, hospitality and production workers—and determined how those layoffs would move to supervisory positions, since management cuts tend to lag the frontline workers.

The economists then took government data on relations between industries to compute the ones most reliant on demand from the most-affected sectors. Combining that information with the hit to employment in the most affected sectors they extrapolated to other jobs at risk, most of which were higher-skilled, white-collar roles.

The second reason to downplay the significance of the May employment gains is that critically important stimulus measures–in particular the one-time grant of $1200 for individuals and the $600 a week additional unemployment benefit (which expires at the end of July)–appear unlikely to be renewed.  If that boost to earnings is withdrawn, economic demand and employment will likely fall again.

As Ben Casselman, writing in the New York Times, points out:

Research routinely finds that unemployment insurance is one of the most effective parts of the safety net, both in cushioning the effects of job loss on families and in lifting the economy. In economists’ parlance, the program is “well targeted” — it goes to people who need the money and who will spend it. Various studies have found that in the last recession, the system helped prevent 1.4 million foreclosures, saved two million jobs and kept five million people out of poverty.

The impact could be greater in this crisis because the program is reaching more people and giving them more money. The government paid $48 billion in benefits in April and has reached $86 billion in May, according to the Treasury Department.

As the following figure shows, almost all workers have suffered significant declines in employment income with low income workers taking the biggest hit.

Yet, the increase in food insecurity has been relatively small, especially for low income workers.

It is, as highlighted in the next figure, the massive individual benefit boosts included in the March stimulus package that has so far kept the decline in employment income from translating into dramatic spikes in food insecurity. If Congress refuses to pass a new stimulus that includes direct aid to the unemployed, the odds are great that the economic recovery will stall and unemployment will grow again.

The last reason for pessimism is the likely further contraction in state and local government spending and, by extension, employment and services, as a result of declining revenue.  State and local government employment fell by 1 million from February to April, and by an additional 600 million in May.  Looking just at state budgets, the Center for Budget and Policy Priorities estimates a shortfall in state budgets of $765 billion over fiscal years 2020-22, “much deeper than in the Great Recession of about a decade ago” (see the figure below).

And unfortunately, as the Center for Budget and Policy Priorities also notes, the federal government has, up to now, been unwilling to do much to help state governments manage their ballooning deficits:

Federal aid that policymakers provided in earlier COVID-19 packages isn’t nearly enough. Only about $65 billion is readily available to narrow state budget shortfalls. Treasury Department guidance now says that states may use some of the aid in the CARES Act of March to cover payroll costs for public safety and public health workers, but it’s unclear how much of state shortfalls that might cover; existing aid likely won’t cover much more than $100 billion of state shortfalls, leaving nearly $665 billion unaddressed. States hold $75 billion in their rainy-day funds, a historically high amount but far too little to meet the unprecedented challenge they face. And, even if states use all of it to cover their shortfalls, that still leaves them about $600 billion short.

States must balance their budgets every year, even in recessions. Without substantial federal help during this crisis, they very likely will deeply cut areas such as education and health care, lay off teachers and other workers in large numbers, and cancel contracts with many businesses. . . . That would worsen the recession, delay the recovery, and further harm families and communities.

Without a new stimulus measure that also includes support for state and local governments, their forced reduction in spending and cuts in employment can only add to the existing pressures working against recovery.

In sum, the crisis is real.  A new stimulus that included a renewal of special unemployment payments as well as direct support for state and local governments and other critical services like the postal service could help stabilize the economy.  But real progress will require a major effort on the part of the federal government to ensure adequate production of COVID-19 test kits and PPE as well as nationwide testing and contact tracing programs and then, most importantly, a fundamental reorganization of our economy.

The 1930s and Now: Looking Back to Move Forward

My article What the New Deal Can Teach Us About Winning a Green New Deal is in the latest issue of the journal Class, Race and Corporate Power.  As I say in the abstract,

While there are great differences between the crises and political movements and possibilities of the 1930s and now, there are also important lessons that can be learned from the efforts of activists to build mass movements for social transformation during the Great Depression. My aim in this paper is to illuminate the challenges faced and choices made by these activists and draw out some of the relevant lessons for contemporary activists seeking to advance a Green New Deal.

Advocates of a Green New Deal often point to the New Deal and its government programs to demonstrate the possibility of a progressive state-directed process of economic change.  I wrote my article to show that the New Deal was a response to growing mass activity that threatened the legitimacy and stability of the existing economic and political order rather than elite good-will, and to examine the movement building process that generated that activity.

Depression-era activists were forced to organize in a period of economic crisis, mass unemployment and desperation, and state intransigence. While they fell short of achieving their goal of social transformation, they did build a movement of the unemployed and spark a wave of militant labor activism that was powerful enough to force state policy-makers to embrace significant, although limited, social reforms, including the creation of programs of public employment and systems of social security and unemployment insurance.

Differences between that time period and this one are shrinking and the lessons we can learn from studying the organizing strategies and tactics of those activists are becoming ever more relevant.  The US economy is now in a deep recession, one that will be more devastating than the Great Recession.  US GDP shrank at a 4.8 percent annualized rate in the first quarter of this year and will likely contract at a far greater 25 percent annualized rate in the second quarter.  While most analysts believe the economy will begin growing again in the third quarter, their predictions are for an overall yearly decline in the 6-8 percent range.   As for the years ahead—no one can really say.  The Economist, for example, is talking about a 90 percent economy for years after the current lockdown ends.  In other words, life will remain hard for most working people for some time.

Not surprisingly, given the size of the economic contraction, unemployment has also exploded. According to the Economic Policy Institute, “In the past six weeks, nearly 28 million, or one in six, workers applied for unemployment insurance benefits across the country.”  More than a quarter of the workforce in the following states have filed for benefits: Hawaii, Kentucky, Georgia, Rhode Island, Michigan, and Nevada.  And tragically, millions of other workers have been prevented from applying because of outdated state computer systems and punitive regulations as well as overworked employment department staff.  Even at its best, the US unemployment system, established in 1935 as part of the New Deal reforms, was problematic, paying too little, for too short a time period, and with too many eligibility restrictions.  Now, it is collapsing under the weight of the crisis.

Yet, at the same time, worker organizing and militancy is growing. Payday Report has a strike tracker that has already identified over 150 strikes, walkouts, and sickouts since early March across a range of sectors and industries, including retail, fast food, food processing, warehousing, manufacturing, public sector, health care, and the gig economy.  As an Associated Press story points out:

Across the country, the unexpected front-line workers of the pandemic — grocery store workers, Instacart shoppers and Uber drivers, among them — are taking action to protect themselves. Rolling job actions have raced through what’s left of the economy, including Pittsburgh sanitation workers who walked off their jobs in the first weeks of lockdown and dozens of fast-food workers in California who left restaurants last week to perform socially distant protests in their cars.

Rather than defending workers, governments are now becoming directly involved in suppressing their struggles. For example, after meatpacker walkouts closed at least 22 meat plans and threatened the operation of many others, triggered by an alarming rise in the number of workers testing positive for the virus, President Trump signed an executive order requiring companies to remain open and fully staffed. It remains to be seen how workers will respond.  In Pennsylvania, the Governor responded to nurse walkouts at nursing homes and long-term care facilities to protest a lack of protective equipment by sending national guard members to replace them.

Activists throughout the country are now creatively exploring ways to support those struggling to survive the loss of employment and those engaged in workplace actions to defend their health and well-being.  Many are also seeking ways to weave the many struggles and current expressions of social solidarity together into a mass movement for radical transformation.  Despite important differences in political and economic conditions, activists today are increasingly confronting challenges that are similar to ones faced by activists in the 1930s and there is much we can learn from a critical examination of their efforts.  My article highlights what I believe are some of the most important lessons.

The Harsh Reality of Job Growth in America

The current US economic expansion, which began a little over a decade ago, is now the longest in US history.  But while commentators celebrate the slow but steady growth in economic activity, and the wealthy toast continuing strong corporate profits, lowered taxes, and record highs in the stock market, things are not so bright for the majority of workers, despite record low levels of unemployment.

The fact is, despite the long expansion, the share of workers in low-wage jobs remains substantial. To make matters worse, the share of low-quality jobs in total employment seems likely to keep growing. And, although US workers are not unique in facing hard times, the downward press on worker well-being in the US has been more punishing than in many other advanced capitalist countries, leaving the average US worker absolutely poorer than the average worker in several of them.

The low wage reality

According to a recent Bookings report by Martha Ross and Nicole Bateman, titled Meet the Low-wage Workforce,

Low-wage workers comprise a substantial share of the workforce.  More than 53 million people, or 44 percent of all workers ages 18 to 64 in the United States, earn low hourly wages. More than half (56 percent) are in their prime working years of 25-50, and this age group is also the most likely to be raising children (43 percent).

Ross and Bateman draw upon the Census Bureau’s 2012-2016 American Community Survey 5-year Public Use Microdata Sample to identify low-wage workers.  Although their work does not incorporate the small increase in wages between 2017-2019, they are confident that doing so would not significantly change their findings.

Their workforce definition started with all civilian, non-institutionalized individuals, 18 to 64 years of age, who worked at some point in the previous year (during the survey period) and remained in the labor force (either employed or unemployed).  They then removed graduate and professional students and traditional high school and college students, as well as those who reported being self-employed or earning self-employment income and those who worked without pay in a family business or farm.  This left them with a total of 122 million workers.

Their definition of a low-wage worker started with the “often-employed threshold” of two-thirds the median hourly wage of a full-time/full year worker, with one major modification. They used the male wage because they wanted to establish a threshold that was not affected by gender inequality.  They identified anyone earning a lower hourly wage as a low-wage worker.

The average national threshold across their five years of data, in 2016 real dollars, was $16.03.  They then adjusted this value, using the Bureau of Economic Analysis’s Regional Price Parities, to take into account variations in the cost of living in individual metropolitan areas.  The adjusted thresholds ranged from $12.54 in Beckley, West Virginia to $20.02 in San Jose, California.  Using these thresholds, the authors found that 44 percent of the workforce, some 53 million workers, were low-wage workers.

These low-wage workers were a racially diverse group.  Fifty-two percent were white, 25 percent Latinx, 15 percent Black, and 5 percent Asian American. Both Latinx and Black workers were over-represented relative to their share of the total workforce.

Strikingly, 57 percent of low-wage workers worked full time year-round.  And half of all low-wage workers “are primary earners or contribute substantially to family living expenses. Twenty-six percent of low-wage workers are the sole earners in their families, with median family earnings of $20,400.”

Finally, as the authors also note, the economic mobility of low wage workers appears quite limited. They cite one study that “found that, within a 12-month period, 70 percent of low-wage workers stayed in the same job, 6 percent switched to a different low-wage job, and just 5 percent found a better job.”

The growing share of low-wage jobs

The downward movement in a new monthly index, the job quality index (JQI), makes clear that economic growth alone will not solve the problem of too many workers employed in low-wage work.  The index measures the ratio of high-quality jobs (those that pay more than the average weekly income) to low quality jobs (those that pay less than the average weekly income).  The index steadily declined over the past three decades, during periods of expansion as well as recession, from a ratio of 94.9 in 1990 to a ratio of 79.0 as of July 2019 (as illustrated below).

The process of creating the index and its usefulness is described in a recent paper authored by Daniel Alpert, Jeffrey Ferry, Robert C. Hockett, Amir Khaleghi.  The index itself is maintained by a group of researchers from Cornell University Law School, the Coalition for a Prosperous America, the University of Missouri-Kansas City, and the Global Institute for Sustainable Prosperity.  As the authors note, the most prominent factor underlying the three decade fall in the ratio is the “relative devaluation” of US labor.

The index tracks private sector jobs provided by third party employers, which excludes self-employed workers, and, for now, covers only production and nonsupervisory (P&NS) positions, which account for approximately 82 percent of total private sector jobs in the country.

The index draws on the BLS’s Current Employment Statistics which provides average weekly hours, average hourly wages, and total employment for 180 distinct job categories organized in industry groups.  As the authors explain:

JQI itself is a fairly simple measure. The index divides all categories of jobs in the US into high and low quality by calculating the mean weekly income (hourly wages multiplied by hours worked) of all P&NS jobs and then calculates the number of P&NS jobs that are above or below that mean. An index reading of 100 would indicate an even distribution, as between high- and low-quality jobs. Readings below 100 indicate a greater concentration in lower quality (those below the mean) positions, and a reading above 100 would greater concentration in high quality (above the mean) positions.

Recognizing that some groups are quite large and include a wide range of jobs hovering around the mean, the JQI is further adjusted by disaggregating those particular groups into subgroups. The average income of each of those subgroups is then compared with the mean weekly income derived from the entire sample to determine whether the positions should be classified as high or low quality jobs.

As noted above, the JQI fell from 94.9 in 1990 to 79.0 as of July 2019.  As for the significance of this decline:

The decline confirms sustained and steadily mounting dependence of the U.S. employment situation on private P&NS jobs that are below the mean level of weekly wages. . . .

Notably, movements in the JQI are not particularly correlated with recession; it is important to note that the first big decline occurred during the expansion of the late 1990s. The index was steady during the 2001 recession, and its second big decline occurred during and after the Great Recession. There is admittedly some cyclical patterning evidenced in the JQI output, but this is overwhelmed by a larger secular phenomenon.

Losing ground

Not only are US workers facing a labor market increasingly oriented towards low-wage employment, the resulting downward pressure on wages appears to be proceeding at a more rapid pace in the US than in other countries.  As a consequence, a majority of US workers are now poorer, in real terms, than many of their counterparts in other countries.

For example, in a study comparing income inequality in France and the US, the economists Thomas Piketty, Emmanuel Saez, and Gabriel Zucman found that the average pre-tax national income of adults in the bottom 50 percent of the income distribution is now greater in France than in the United States.  “While the bottom 50 percent of incomes were 11 percent lower in France than in the US in 1980, they are now 16 percent higher.”  Moreover,

The bottom 50 percent of income earners makes more in France than in the US even though average income per adult is still 35 percent lower in France than in the US (partly due to differences in standard working hours in the two countries). Since the welfare state is more generous in France, the gap between the bottom 50 percent of income earners in France and the US would be even greater after taxes and transfers.

A recent study by the Center for the Study of Living Standards finds that growing numbers of US workers are also falling behind their Canadian counterparts.  More specifically, “the study compares incomes in every percentile of the income distribution, and finds that up through the 56th percentile Canadians are better off than their U.S. counterparts.”

The study’s author, Simon Lapointe, in words that echo the comments of Piketty, Saez, and Zucman, adds:

Our income estimates may actually underestimate the economic well-being of Canadians relative to Americans. Indeed, Canadians usually receive more in-kind benefits from their governments, including notably in health care. Had these benefits been included in the estimates, the median augmented household income in Canada would likely surpass the American median by a greater margin. While these benefits also come with higher taxes, the progressivity of the income tax system is such that the median household is most likely a net beneficiary.

The takeaway

There are many reasons for those at the top of the US income distribution to celebrate the performance of the US economy and tout the superiority of current US economic and political institutions and policies.  Unfortunately, there is a strong connection between the continuing gains for those at the top and the steadily deteriorating employment conditions experienced by growing numbers of workers.  Hopefully, this economic reality will become far better understood, leading to a more widespread recognition of the need for collective action to transform the US economy in ways that are responsive to majority interests.

Portrait of the 2009-2019 US expansion

June 2019 marks the 10th anniversary of the current US economic expansion.  If it makes it through July it will surpass the 1991-2001 expansion as the longest on record.  But while expansions are to be preferred over recessions, there are many reasons to view this record-breaking expansion critically.  In fact, the nature of this expansion, hopefully captured in the following portrait, highlights the growing inability of the US economic system, even when performing “well,” to meet majority needs.

Weak Growth

This has been a weak expansion in terms of growth.  By way of comparison, GDP grew by 43 percent over the first 39 quarters of the 1991-2001 expansion (which was the previous record holder).   In the first 39 quarters of this expansion, through March 2019, GDP grew by only 22 percent.

At its current pace, the current expansion would have to run six more years to equal the aggregate growth of the 1991-2001 expansion, and nine more years to match the 54 percent aggregate GDP growth recorded over the 1961-69 expansion.  The figure below illustrates the relative weakness of the current expansion in terms of growth.

Strong corporate profits

At the same time, weak growth did little to dampen corporate earnings.  As we can see in the following figure, corporate earnings have been on the rise since 2001, reaching their maximum in 2015.  While pre-tax profits have leveled off, after tax profits, thanks to the recent Trump tax cut, have resumed their upward march.

We see a similar trend in the figure below which shows corporate profits as a share of GDP.

After-tax corporate profits will likely turn down again soon, as the effects of the tax cut are already weakening, indicating the end to this expansion is not far off.

Weak wage growth

The suppression of wages is one of the main reasons that corporations were able to enjoy such strong profits despite weak growth.  The figure below shows the collapse of labor’s share of corporate income.  The trend began during the 2001-2009 expansion but accelerated during this expansion.  Even more striking, the share has remained low despite the many years of expansion.

The wage stagnation underlying this trend is illustrated more directly in the next figure.

As we can see, there have been only two recent periods when workers (outside those in the 95th percentile) enjoyed real gains: 1997-2001 and 2015-2017.  Both periods were marked by very low rates of unemployment and followed long periods of expansion during which wages remained largely unchanged.  It is worth noting that both periods were also marked by a decline in corporate profits, suggesting that corporations cannot long tolerate any kind of upward movement in majority earnings.

For reasons that remain unclear, wage growth in 2019 has slowed.  The Federal Reserve Board, always keen to make sure that wages remain low to ensure profitability, began pushing up interest rates in late 2015 in response to the rising wage levels noted above.  The recent wage slowdown has, at least temporarily, caused the Fed to halt its interest rate hikes, which will likely help extend the expansion.

Employment struggles

The dramatic decline in unemployment is perhaps the most celebrated achievement of this expansion.  As we can see in the figure below, the unemployment rate steadily fell over the expansion, from a high of 10 percent down to a low of 3.6 percent as of May 2019.  Such a low level suggests a very tight labor market, which makes the wage stagnation difficult to explain.  The likely answer is that the current low level of unemployment is a poor measure of labor tightness.

A better measure appears to be the labor force participation rate, which is calculated as the civilian labor force (i.e., those employed and those unemployed and actively looking for work) divided by the civilian noninstitutional population (i.e., those not in the military or institutionalized). The figure below also shows the labor force participation rate for those 16 years and older.

As we can see, the current labor force participation rate of 62.8 percent remains significantly below its 2008 peak and even further below the even higher peak reached at the turn of the century.  The decline in the labor force participation rate means that millions of workers have yet to return to the labor force, either to hold a job or to look for one.

The seriousness of this problem is highlighted by the labor force participation rate of the prime age cohort, those 25-54 years of age.  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.

In the figure below we can see that the labor force participation rate of the prime age cohort remains significantly below its two previous peaks.  The fact that millions of prime age workers have yet to return to the labor market is a strong indicator that labor market conditions remain far from ideal despite years of economic expansion.

Weak Investment

One reason for the slow growth and associated weak job creation is that business has been reluctant to invest.  Instead, they have been content to use a growing share of their earnings to fund dividend payments and stock buybacks.  The following chart, taken from a Federal Reserve Board study of the relationship between corporate capital investment and net stock buybacks, shows a post-2000 downward trend in business investment as a share of GDP and a rise in the value of dividend payments and stock buybacks as a share of GDP.

While the Federal Reserve study concludes that it is difficult to determine whether “corporations are actively reducing investment in order to finance share repurchases and dividend payments . . . [or] pessimism about future demand and economic growth is leading corporations to defer capital spending, and companies are simply returning cash to their shareholders for want of attractive investment opportunities,” there can be no question that there has been a noticeable change in business behavior.

For example, as can see below, whereas in the past nonfinancial corporations invested up to 40 percent of their cash flow back into their business, that share has fallen below 20 percent for most of the current expansion.  In other words, the lack of investment has nothing to do with a shortage of funds.

As the Federal Reserve study points out, business has been funneling ever more of its earnings, through dividends and stock buybacks, to its top managers and stockholders.  According to the New York Times, “From 2008 to 2017, 466 S.&P. 500 companies distributed $4 trillion to shareholders as buybacks, equal to 53 percent of profits, along with $3.1 trillion as dividends.”  Beyond slowing growth and job creation, such a policy has helped to drive income and wealth inequality to record levels, ensuring that those at the top remain content with the economy’s performance despite the problems faced by most working people.

The following figure, from another Federal Reserve Board study, this one titled A Wealthless Recovery?, highlights the extremely uneven distribution of rewards during this expansion.  The authors of the report grouped working-age households into four different groups according to their reported “usual income.”  As we can see from the blue bars, the Great Recession left all groups with substantially less wealth.  However, as we can see from the green bars, which extend the period under analysis to 2016,  (which includes many years of expansion), only the top income group enjoys a gain in wealth.  In other words, the expansion has done little to help the bottom 90 percent of working-age households recover the wealth they lost during the Great Recession.

Austerity

Sustained fiscal austerity is another reason for the slow growth during this expansion. The figure below shows the cumulative growth in per capita spending by federal, state, and local governments following the troughs of the 11 recessions since World War II.  As Josh Bivens explains:

Astoundingly, per capita government spending in the first quarter of 2016—twenty-seven quarters into the recovery—was nearly 4.9 percent lower than at the trough of the Great Recession. By contrast, 27 quarters into the early 1990s recovery, per capita government spending was 3.6 percent higher than at the trough; 24 quarters after the early 2000s recession (a shorter recovery that did not last a full 27 quarters), it was almost 10 percent higher; and 27 quarters into the early 1980s recovery, it was more than 17 percent higher.

If government spending in this expansion had followed the pattern of previous recoveries, public spending would have been far greater, not only boosting demand and employment but ensuring provision of needed public services.  As Bivens points out,

If government spending following the Great Recession’s end had tracked the spending that followed the early 1980s recession—the only other postwar recession of similar magnitude—governments in 2016 would have been spending almost a trillion dollars more in that year alone.

State and local governments are primarily responsible for this austerity.  In many cases, their actions were the result of tax cuts enacted to benefit the wealthy and leading corporations that left state and local governments short of revenue.  Limited by balanced budget requirements, most ended up slashing spending on social services.  As a consequence, the brunt of austerity has been borne by working people.

Summing up 

This is far from a complete portrait of the current expansion.  Yet, it still clearly reveals how the logic of capitalism works against the interests of the great majority of working people, even during a long period of profitable economic activity.  A recession awaits, and then our troubles will intensify.  Key to our ability to build a popular democratic response in defense of majority interests may well be how people evaluate the benefits of remaining committed to an economic system that that undermines their well-being in multiple ways even when it is functioning well.

They’re at it again: Selling the US-Mexico-Canada Agreement

The headlines once again misrepresent the aims and consequences of a US free trade agreement, in this case repeating the International Trade Commission’s claim that President Trump’s US-Mexico-Canada agreement (USMCA) will boost US growth and employment.

The International Trade Commission is required by law to evaluate the economic consequences of the USMCA, which is supposed to replace the North American Free Trade Agreement (NAFTA), before Congress can debate whether to approve it.  According to its report, which was released on April 18, 2019, the agreement can be expected to “raise U.S. real GDP by $68.2 billion (0.35 percent) and U.S. employment by 176,000 jobs (0.12 percent)” and “would likely have a positive impact on U.S. trade, both with USMCA partners and with the rest of the world.”

While supporters of the agreement happily repeat the Committee’s conclusion “that, if fully implemented and enforced, USMCA would have a positive impact on U.S. real GDP and employment,” the fact is that the predicted gains are miniscule.  Moreover, given the flaws in the Commission’s admittedly sophisticated modeling, there is no reason to take the results seriously.  Finally, a careful examination of the many chapters in the proposed agreement makes clear that its real aim is to strengthen contemporary globalization dynamics, enhancing corporate power and profits at the expense of majority living and working conditions in all three countries.

Putting the projected “gains” in perspective

The Commission assumed that the US economy’s complete adjustment to the agreement would take six years.  It then used a computable general equilibrium model to simulate how the terms of the agreement would change US markets and compared the “equilibrium” outcome at the end of the adjustment period with baseline results that assumed no significant change in US economic policies or global agreements over the same period.

On the basis of such modeling, the Commission concluded that six years after the implementation of the agreement, the US economy would be $68.2 billion bigger than if the agreement had not been approved.  That is, as the Commission acknowledges, a one-time gain of 35/100 of one percent in real GDP.  Current US GDP is over $21 trillion; $68 billion is a rounding error in an economy of that size.

As for the projected growth in employment, the one-time gain of 176,000 jobs relative to the base line forecast translates into an increase in employment after six years of 12/100 of one percent.  That gain in employment is roughly equal to the number of new jobs added in a month of moderate economic growth.  The Commission’s model produced similar miniscule gains for other variables, including US wages.

In short, if we take these predictions seriously, the obvious conclusion is that there is little to gain from approving this agreement.  Of course, that is not the Commission’s position.  However, there is little reason to take these results seriously.

Dodgy methodology

It took a lot for the Commission to produce even these minimal games.  More specifically, it took a dodgy methodology that is biased towards policies that promote globalization.

The Commission organized its work as follows: it first sought to model the economic consequences of “eight groups of USMCA provisions: agriculture, automobiles, intellectual property rights (IPRs), e-commerce, labor, international data transfer, cross-border services, and investment.” Then, it took the provision specific results of each group and used them as modeling inputs for the economy-wide computable general equilibrium model it used to produce the overall estimates cited above.

Since not all the provisions changed current policies, the Commission divided the eight groups into two categories.  The first included the “set of provisions that would alter current policies or set new standards within the three member countries, and that would therefore be expected to modify current conditions after USMCA enters into effect.” This included provisions affecting agriculture, automobiles, IPRs, e-commerce, labor, and investment decisions related to the investor-state dispute settlement mechanism.

The second category included provisions that “would reduce policy uncertainty. These commitments would primarily serve to deter future trade and investment barriers, thus offering firms some assurance that current regulations and standards, which may or may not be expressly governed by current policies, will not become more restrictive.” Included in this category are provisions that would affect international data transfer, cross-border services trade, and investment decisions related to market access and nonconforming measures.

Significantly, it was the Commission’s determination of the gains from those provisions that would reduce policy uncertainty, by restricting the possibility for future government regulation of corporate activity, that proved decisive.  As a Public Citizen Eyes on Trade blog post pointed out,

Most of the [overall gains reported by the Commission] are derived from a highly dubious new research methodology, which assigns an invented positive economic value to terms that reduce “policy uncertainty” by freezing in place environmental, consumer protection, financial and other safeguards. If the ITC had not done this, the report would have projected a negative outcome. All $68.2 billion of the deal’s supposed economic gains arise from simulating the impact of removing trade barriers that do not exist. In other words, the gains are generated not through the removal of trade barriers directly, but through the elimination of the possibility of new future regulatory policies, which are deemed to be potential trade barriers. Absent this fabrication, the revised NAFTA would have been projected to lower the United States’ GDP by $22.6 billion and reduce the number of jobs by 53,900.

The problems only multiply when these separate results are used as inputs in the Commission’s economy-wide model.  This model, as noted above, is a computable general equilibrium model.  As such, it seeks to process all the ways the changes generated by the agreement interact to change market behavior before eventually producing – over a six-year period in this case — a new equilibrium outcome for the economy.  As one might imagine, this kind of modeling is quite complex and to ensure a result it requires some very significant assumptions.  Among them are:

  • The assumption that product markets are “perfectly competitive (implying zero economic profit for the firm).”
  • The assumption that there is “full capacity utilization of capital.”
  • The assumption that there is no unemployment.
  • The assumption that “global trade balances remain constant.”

In other words, while we may want the Commission to investigate whether a new trade agreement might cause a worsening of trade balances, or unemployment, or deindustrialization, or monopolization, the Commission’s model, by assumption, asserts that these are non-problems.  As a result, the model has a clear pro-trade agreement bias.

Thanks to these assumptions, if a country drops its trade restrictions, market forces will quickly and effortlessly lead capital and labor to shift into new, more productive uses.  It is no wonder that mainstream economic studies, which rely on computable general equilibrium modeling, always produce results supporting ratification of free trade agreements.  In light of this, it is striking how small the estimated gains were for this trade agreement.

The real winners

So, one might ask, what is really going on here?  Well, the agreement enjoys strong corporate support precisely because a number of its chapters include provisions responsive to the interests of leading US multinational corporations.  What follows are just a few examples drawn from the report.

The agreement includes provisions that require harmonization and thus a reduction in food safety standards, force governments to negotiate new standards with industry representatives, set deadlines for import checks, require that new standards be based on scientific principles, and that safety standards be applied “only to the extent necessary to achieve the appropriate level of protection” and “not [be] more trade restrictive than required.”

The agreement also includes a number of market access provisions to promote cross-border trade in services and financial services.  More specifically, the agreement’s market access provisions “are aimed at removing quotas and other barriers that impede the entry of services suppliers into foreign markets.” The Commission believes that “the broadcasting, telecommunications, and courier services sectors in the United States are estimated to gain the most, followed by the commercial banking sector in all three countries.”

The agreement also includes provisions “which would strengthen protections in major IPR categories such as trade secrets, regulatory data protection, patents, trademarks, copyrights, and civil, criminal, and administrative enforcement.”  The pharmaceutical industry will be one of the biggest beneficiaries.  For example, the agreement includes a “patent resolution mechanism that requires notice to patent holders, and an opportunity for relief, when a generic manufacturer seeks to rely on an originator’s test data for marketing approval without the patent holder’s consent.”

The USMCA would be the first U.S. free trade agreement with a chapter on digital trade.  Among other things, it would prevent governments “from restricting cross-border flows of financial data, which would require data to be stored or processed locally” and would “forbid them to adopt restrictive data measures in the future.”  This provision would be especially valuable to U.S. computer services and digital platform services firms. “Other key Digital Trade chapter provisions include a ban on import duties or other discriminatory customs measures on digital products (e.g., e-books, videos, music, software, and games), and prohibition of legal discrimination against digital products produced or created in other signatory countries.”

The agreement also includes a chapter that restricts the ability of governments to use state-owned enterprises to meet public needs by requiring that they be “regulated impartially, and do not benefit from special treatment and unfairly infringe upon the activities of private firms.”

The list goes on.  No wonder that major business associations are expressing strong support for the agreement. As the New York Times reports:

Industry groups called for the pact’s quick passage into law. Linda Dempsey, the vice president for international economic affairs at the National Association of Manufacturers, said that the deal was “a win for manufacturers.”

Jordan Haas, the director of trade policy at the Internet Association, said the report underlined that the deal’s digital trade provisions were “critical to America’s future economic success” and “mean jobs and opportunities in every state.”

There is a lot at stake in this struggle.  We need to stop calling for progressive reform of the agreement, a call that only leads to popular confusion about what drives US government policy.  Instead we need to build a movement that simply says no to NAFTA in any form.

The Uneasy US-China Relationship: What Lies Ahead?

The US and China are the two dominant poles in the global economy, as illustrated in the figure below which traces the global trade in parts and components. And they have a very uneasy relationship.  However, despite current tensions, it is unlikely that either side will succeed in dramatically changing it.  The main reason is that the relationship has been heavily shaped by the activities of leading multinational corporations, including from the US, and their interests in maintaining it can be expected to set limits on the actions of both governments.

China-US tensions

Xi Jinping, the president of the People’s Republic of China and head of the Communist Party of China, is actively pursuing policies that he hopes will reduce the country’s dependence on foreign multinational corporations and western markets.  Toward that end, he has promoted an industrial modernization program called “Made in China 2025” which aims to make the country a global power in 10 strategic industries, signed new trade agreements, created new regional institutions such as the Asian Infrastructure Investment Bank, launched new global initiatives such as the Belt and Road Initiative, and strengthened the country’s military.  This effort is often described in the western media as an attempt at decoupling from the west.

The US government for its part sees these efforts as a challenge to US dominance and has taken steps to block them and to isolate China.  For example, the US has levied tariffs on Chinese exports to the US, and has demanded that China do more to respect US intellectual property rights and open up more domestic markets to US firms.  It has also sought to stop other countries from using Chinese technology, especially in their wireless networks, and from participating in Chinese organized regional organizations and initiatives.  It also seeks to include a so-called “poison pill” clause in the US–Mexico–Canada free trade agreement which would limit the ability of Canada and Mexico to sign trade agreements with China without US approval.  The US hopes to insert such a clause in other trade agreements in order to force countries to choose whether to have closer economic ties with the United States or with China. It has also greatly expanded its military activities in areas surrounding China, for example, in Vietnam and the Philippines.

While the differences between the two governments are serious, and represent conflicting elite interests, there are other important factors that need to be considered in evaluating likely future developments.  One of the most important is the profit considerations of multinational corporations.

The continuing importance of multinational corporations in China

Foreign direct investment has played a key role in boosting Chinese growth and creating a regional production system in which East Asian and Southeast Asian countries sell parts and components to China-based firms for final assembly and export outside the region, especially to the US and Europe.  As an Asian Development Bank study explains:

The pattern of inward FDI to Asia reveals firms’ motivation of entry that is different from that into the rest of the world. . . . Foreign affiliates in Asia established by FDI tend to be engaged more in trade and investment for the purpose of reexporting intermediate and/or final goods to the countries outside the host country (vertical and export-platform FDI) than those in other regions.

Rapid expansion of FDI to EEA [emerging East Asia] has been closely associated with the establishment of regional production networks by multinational companies, especially with the PRC as the region’s main assembly and production hub to create positive spillovers on the rest of the regional economies. Indeed, based on the number of foreign affiliates in Asia that both import and export, the PRC is the most popular host for vertical and export-platform FDI with various parent economies [as shown in the table below].

This positioning by foreign firms in China, as both importers and exporters, means that China, and emerging East Asia more broadly, remain tied to the global economy, and in particular the US economy.  The continuing strength of this relationship is highlighted in the following figure from the Asian Development Bank study.  The high correlation of 0.85 between the growth in US non-oil imports and the growth in exports by emerging East Asia (which includes the PRC) in the period after the Global Financial Crisis, makes clear that there has been relatively little decoupling since the crisis.

In addition, foreign multinational corporations continue to produce China’s most technologically advanced products and exports.  Chip making is a good example of the former.  Historically, the semiconductor industry has concentrated on producing relatively standard computer chips that could be used for multiple purposes.  However, increasingly the electronics industry is demanding new, more powerful and specialized computer chips for use in devices involving artificial intelligence, self-driving cars, and the many products tied to the “internet of things.”

China continues to import most of its chips, but as a Stratfor article notes, foreign firms dominate semiconductor manufacturing in China as well, and especially of the most advanced chips:

the biggest players are often international companies with domestic subsidies. South Korea’s SK Hynix and Samsung are the two largest by revenue, followed closely by the United States’ Intel and Taiwan’s TSMC. But the two Chinese companies in the top six — Huahong Group and SMIC — are generations behind leading non-Chinese companies. And while Chinese tech giant Huawei has become a major player in designing certain chips, those powering the company’s latest generation of high-end smartphones were, in fact, built by TSMC.

As for exports, Sean Kenji Starrs, writing in the Socialist Register 2019, provides the following table listing the top ten exporters from China.  As we can see, electronics are China’s most important export product.  However:

The overwhelming majority of China’s top electronic exporters are foreign firms (especially Taiwanese and South Koreans – only Huawei makes the top ten) Samsung and LG perform their own final assembly in China but Western TNCs (including increasingly Japanese) prefer to outsource their lower value production to Taiwanese firms operating in China.

In short, it will be very challenging for the Chinese government to dramatically end its reliance on foreign multinational corporations or restructure its trade relations, without seriously jeopardizing Chinese growth (which is already falling fast) and the country’s political stability.

US multinational corporations and China

It is well-known that many leading US multinational corporations, including firms like Apple, Nike, and Walmart, depend on China-based production for their US sales.  What is less well-known is that many US multinational corporations occupy highly profitable positions in Chinese domestic markets.  For example, 2017 marked the sixth consecutive year that China was the top market for General Motors in terms of both sales and profit. Starr lists several other important examples: Google has a Chinese market share in smartphone operating systems of over 70 percent. Microsoft has a 90 percent market share in desktop operating systems. Boeing has a 45 percent market share in airplanes.  Coca-cola has a 63 percent market share in carbonated soft drinks. Starbucks has a 55 percent market share in coffeeshops. Cisco has a 55 percent market share in ethernet switches.

Moreover, as the economist Prema-chandra Athukorala shows in the table below, US multinationals operating in China, also use the country as a profitable platform from which to export to other countries.  In fact, in 2013, “the value of goods exported to the rest of the world by US MNE affiliates in China was US$37.5 billion, which was almost three times the value of their exports to the United States.”

Thus, China is extremely important to the operation and profitability of leading US firms.  And any US administration would have to think very carefully about the economic and political repercussions if it were to pursue policies that triggered a serious disruption in existing economic relations with China.

In sum, it is clear that both governments operate subject to real limits set by powerful multinational corporations, limits that will likely constrain China’s push for decoupling as well as the US drive to isolate China.  That said, it is important to keep in mind that there is an even more powerful force that could undermine the stability of the relationship and the contemporary global economy: the growing contradictions at work in both countries that have led to massive inequality and workplace resistance, ever slower growth and financial imbalances, and the likelihood of recession in the United States.

The Trump Administration: Lots of Noise But Nothing Changed For US TNCs

President Trump has long pointed to the US balance of payments deficit as a sign of US economic weakness. Of course, his nation-state focus, and claim that trade deficits with countries such as China and Mexico are the result of unfair trading practices that benefit foreign business and workers at the expense of US business and workers, is misleading.  These deficits owe much to the operation of US corporate controlled cross-border production networks, which have boosted US corporate power and profits largely at the expense of workers in all three countries.

Criticizing past administrations for selling out America, President Trump has pursued a series of policies—renegotiated trade agreements, tariff wars, public shaming of corporate disinvestment, and tax reform—all of which are supposed to help rebuild the US economy by encouraging US firms to modernize and expand their US operations. These policies have all failed to achieve their stated aim.  In fact, they have, largely by design, only served to strengthen existing corporate dominated patterns of international production and value capture.

As a result, there has been little change in US trade patterns.  The US trade deficit in goods, as shown below, has continued to grow every year of the Trump presidency.

Strengthening TNC power and profits

After first threatening to dissolve NAFTA, President Trump eventually pursued a rewrite of the NAFTA agreement.  However, his proposed changes to the agreement primarily speak to corporate needs, especially the new chapters that increase protection for intellectual property rights and promote greater cross-border freedom for electronic commerce and digital trade.  Similarly, the Trump tariff “war” against China appears primarily aimed at forcing the Chinese government to tighten regulations protecting US intellectual property rights and open new sectors of its economy to US foreign investment, especially the finance sector.

President Trump has also engaged in occasional twitter “wars” against corporate decisions to close or relocate abroad part of their operations.  Initially, corporate leaders felt pressure to modify or delay their decisions.  Now, no doubt reassured by the general policy direction of the Trump administration, they no longer appear worried about his periodic outbursts.  For example, both GM and Harley Davidson recently announced plans to shut domestic plants in favor of overseas production and have largely ignored Trump’s tweets critical of their globalization activities.

Much has been written about these efforts, but little about the consequences of the last policy, tax cuts, on US TNC decision-making.  The “Tax Cuts and Jobs Act” Act, signed into law on Dec. 22, 2017, was promoted as a way to encourage US transnational corporations to bring back funds held outside the country and boost their domestic investment.  However, as a Bank of France blog post by Cristina Jude and Francesco Pappadà makes clear, this initiative, like the others, has done nothing to change US corporate behavior, although the lower tax rates make it more profitable.

Jude and Pappadà focus on profit hording and profit shifting.  Profit hording refers to the accumulation of “non-repatriated earnings” by US TNCs.  Economists estimated that US firms held approximately $2.5 trillion outside the country at the end of 2017 and the Trump administration predicted that a large share would be brought back thanks to the one-time lower tax rate included in the 2017 act.  Apple alone is said to hold $252 billion in offshore accounts.

Although economists speak of corporate earnings held abroad, in fact most of those earnings are held in the US.  However, as long as those funds are not used for certain purposes, such as paying dividends to shareholders, financing domestic acquisitions, guaranteeing loans, or making investments in physical capital in the US, they can be invested in the US tax free.

As we can see in the chart below, US companies did respond to the one-time lower tax rate by “repatriating” some funds.  Dividend payouts went up, which resulted in a period of negative “reinvested earnings” in foreign affiliates.

However, as Jude and Pappadà explain:

Despite the permanent cut of the standard corporate tax rate from 35 percent to 21 percent, the adjustment of repatriated dividends and reinvested earnings appears limited to the first and second quarters of 2018. Indeed, dividends decrease substantially in quarter three, whereas reinvested earnings return to positive as they were before the tax reform.

The response of US companies to the corporate tax reform mainly consisted in the partial repatriation of previously accumulated stocks of earnings (around 20 percent of the total) due to the temporary lower tax. This firms’ behavior is similar to the one observed in 2005 when another law granted US multinationals a one-year tax holiday to repatriate foreign profits at a 5.25 percent tax rate.

Thus, the tax change produced a one-time shift in a relatively small share of the non-repatriated earnings held by leading US TNCs, with stock owners the primary beneficiaries. Moreover, this shift did not change the overall size of income receipts from US foreign direct investment, as the increase in dividends was offset by the negative reinvested earnings.

If the “Tax Cuts and Jobs Act,” is to have a long-lasting effect on the US trade balance, it needs to stop the corporate practice of tax shifting, which is how TNCs generated the huge sum of money held as non-repatriated earnings.  Profit shifting refers to the corporate strategy of using various means such as transfer pricing, often achieved using intellectual property rights over patents and trademarks, to book profits generated from US activities in a lower-tax jurisdiction.  As Jude and Pappadà point out, “six small jurisdictions (Bermuda, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland), which count for less than 1 percent of the world’s population, hold 63 percent of the overall profits earned abroad by US multinationals.”

Google is, as Tim Hyde explains, one of the firms that makes good use of this strategy:

it is able to claim billions of profits in Bermuda each year (corporate tax rate: 0 percent) even though it has no office building there and not even any employees on the island. . . . this is legitimate because the rights to Google’s search and advertising technologies are technically owned by a subsidiary called Google Holdings housed in Bermuda, thanks in part to a trick called the Double Irish Dutch Sandwich. Other Google subsidiaries pay billions in royalties to the Bermudian company Google Holdings for the rights to use its technology, which was originally invented by Google employees in California and sold to Google Holdings in 2001. Those billions of profits are reclassified as Bermudian rather than American or Irish and thus not taxed.

If US firms booked their earnings in the US, rather than in a foreign tax haven, foreign direct investment receipts would decline, net US service exports would increase, and the overall trade deficit would narrow.

An Oxfam study of profit shifting by leading pharmaceutical companies shows just how important this strategy is to US TNCs and how much we lose from it:

Abbott, Johnson & Johnson, Merck, and Pfizer—systematically stash their profits in overseas tax havens. As a result, these four corporate giants appear to deprive the United States of $2.3 billion annually and deny other advanced economies of $1.4 billion. And they appear to deprive the cash-strapped governments of developing countries of an estimated $112 million every year—money that could be spent on vaccines, midwives, or rural clinics.

Pharma corporations’ “profit-shifting” may take the form of “domiciling” a patent or rights to its brand not where the drug was actually developed or where the firm is headquartered, but in a tax haven, where a company’s presence may be as little as a mailbox. That tax haven subsidiary then charges hefty licensing fees to subsidiaries in other countries. The fees are a tax-deductible expense in the jurisdictions where taxes are standard, while the fee income accrues to the subsidiary in the tax haven, where it is taxed lightly or not at all. Loans from tax-haven subsidiaries and fees for their “services” are other common strategies to avoid taxes. . . .

Further opportunities for avoiding taxes involve locating corporate brand or patents in tax havens, and fees for marketing, finance, or management services. For example, a pharmaceutical corporation may bill much of its R&D costs on products consumed around the globe to a subsidiary in a tax haven where R&D rights are registered, even though not a single researcher is based there. That immediately creates a cost in the country where the product is consumed, which minimizes the tax bill, and an artificial profit in the tax havens, where almost no taxes are paid in return.

As a result of this practice:

Pfizer posted losses on US operations of 8 percent in 2013, 25 percent in 2014, and 31 percent in 2015. The pattern has continued, with Pfizer posting losses of 32 percent in 2016 and 26 percent in 2017. Meanwhile, Pfizer’s international operations earned 56–58 percent in 2013–2015 and even more in the two years since (64 and 72 percent). The story is similar though less extreme for Abbott and Johnson & Johnson.

The pharmaceutical industry is no outlier.  According to a study by three economists, Thomas Tørsløv, Ludvig Wier, and Gabriel Zucman, “close to 40 percent of multinational profits were artificially shifted to tax havens in 2015.”

And, as the chart below reveals, there is no sign that passage of the Tax Cuts and Jobs Act has produced any change in US TNC profit-shifting activities.  As Jude and Pappadà discuss:

in Chart 2, we observe a change in the composition of foreign direct investment income, but the balance remains stable at its pre-reform level. Moreover, this is not associated with an increase in net exports of services. In particular, the decomposition of the services trade balance in Chart 3 shows that there has not been any increase in intellectual property charges, for which profit shifting is more relevant. At the moment, it is too soon to assess the full impact of the reform as US multinationals may take time to adjust the location of their assets and activities. However, the profit shifting decisions of multinational firms do not seem to be affected so far.

In sum, for all of Trump’s bluster, his administration has done nothing to produce a change in TNC business practices or improve the health of the US economy.  In fact, quite the opposite is true, as almost his initiatives have been designed, above all, to expand the reach and profitability of leading US corporations.