The Trump Tax Plan Proves A Bonanza For Business

Every time a progressive policy captures the public imagination, like the Green New Deal, opponents are quick to raise the revenue question in an effort to discredit it.  While higher taxes on the wealthy and leading corporations should be an obvious starting point in any response, until recently elites have been remarkably successful in winning tax reductions, spinning the argument that cuts are the best way to stimulate private investment and create jobs.  And they have enjoyed a double gain: not only do the cuts benefit them financially, the loss of public revenue encourages people to think small when it comes to public policy.

However, there are signs that the times might be changing.  Alexandria Ocasio-Cortez’s proposal to tax annual incomes over $10 million at a marginal tax rate of 70 percent has won significant public support. Strong popular opposition in New York to a plan to heavily subsidize a new Amazon headquarters forced the company to withdraw its proposal. And then there is the negative lesson of the Wisconsin fiasco, where the state showered Foxconn with massive tax and other subsidies in an effort to land a new manufacturing facility, only to have the company walk-back its commitments after significant state expenditures.

But there is still important education as well as political work that remains to be done to win majority support for the kind of tax reform we so desperately need. President Trump’s “Tax Cuts and Jobs Act,” which was signed into law on Dec. 22, 2017, is one example of what we are up against.

The “American model”

President Trump’s signature tax law included significant benefits for the wealthy as well as most major corporations.  Looking just at the business side, the law:

  • lowered the US corporate tax rate from 35 percent to 21 percent and eliminated the corporate Alternative Minimum Tax.
  • changed the federal tax system from a global to a territorial one.  Under the previous global tax system, US multinational corporations were supposed to pay the 35 percent US tax rate for income earned in any country in which they had a subsidiary, less a credit for the income taxes they paid to that country. However, the tax payment could be deferred until the earnings were repatriated.  Under the new territorial tax system, each corporate subsidiary only has to pay the tax rate of the country in which it is legally established; foreign profits face no additional US taxes.
  • established a new “global minimum” tax of 10.5 percent that is only applied to total foreign earnings greater than a newly established “normal rate of return” on tangible investments in plant and equipment (set at 10 percent).
  • offered multinational corporations a one-time special lower tax rate of 8 percent on repatriated funds that were held overseas by corporate subsidiaries in tax-haven countries.

Of course, President Trump sold these changes as a means to rebuild the American economy, predicting a massive return of overseas money and increase in domestic investment.  As he explained:

For too long, our tax code has incentivized companies to leave our country in search of lower tax rates. My administration rejects the offshoring model, and we have embraced a brand new model. It’s called the American model. We want companies to hire and grow in America, to raise wages for the American workers, and to help rebuild American cities and towns.

The same old story

Not surprisingly, the so-called new American model looks a lot like the old one, with corporations–and their managers and stockholders–gaining at the public expense.

Corporate investment has not been limited by a lack of money.  Rather, corporate profits have steadily increased while investment in plant and equipment has remained weak.  Instead of investing, corporations have used their surplus to finance dividend payments, stock repurchases, and mergers and acquisitions. Instead of stimulating new productive investment, the tax cut only gave firms more money to use for the same purposes.

The new territorial tax system, which was supposed to promote domestic investment and production, actually continues to encourage the globalization of production since it lowers the taxes corporations have to pay on profits generated outside the country. The new global minimum tax does much the same.  Although its supporters claimed that it would ensure that corporations pay some US tax on their foreign profits, as structured it encourages foreign investment.  The minimum tax rate remains far below the US domestic rate, and the larger the capital base of the foreign subsidiary, the greater the foreign profits the parent firm can shield from taxation.

As for the one-time tax break on repatriated profits, the fact is that most of the money supposedly held abroad was already in the country, sitting in accounts protected from taxation.  Moreover, since firms remain reluctant to invest, the one-time break only served to give firms the opportunity to channel more money into nonproductive uses at a special lower tax rate.

Tax realities

According to the Treasury Department, corporate income tax receipts fell by 31 percent in fiscal year 2018.  As a Peter G. Peterson blog post explains:

The 31 percent drop in corporate income tax receipts last year is the second largest since at least 1934, which is the first year for which data are available. Only the 55 percent decline from 2008 to 2009 was larger. While that decrease can be explained by the Great Recession, the drop from 2017 to 2018 can be explained by tax policy decisions.

The Tax Cuts and Jobs Act, enacted in December 2017, is responsible for the plunge in corporate income tax receipts in 2018. Those changes include a reduction in the statutory rate from 35 percent to 21 percent and the expanded ability to immediately deduct the full value of equipment purchases. The Congressional Budget Office points out that about half of the 2018 decline occurred since June, which includes estimated tax payments made by corporations in June and September that reflected the new tax provisions.

Ben Foldy, writing for Bloomberg news, highlights the spoils that went to the banking sector:

Major U.S. banks shaved about $21 billion from their tax bills last year — almost double the IRS’s annual budget — as the industry benefited more than many others from the Republican tax overhaul. . . .

On average, the banks saw their effective tax rates fall below 19 percent from the roughly 28 percent they paid in 2016. And while the breaks set off a gusher of payouts to shareholders, firms cut thousands of jobs and saw their lending growth slow. . . .

Tax savings contributed to a banner year for banks, with the six largest surpassing $120 billion in combined profits for the first time. Dividends and stock buybacks at the 23 [largest] lenders surged by an additional $28 billion from 2017 — even more than their tax savings.

The stability and profitability of global corporate networks

US firms also continue to take advantage of overseas tax havens.  As Brad Setser, writing in the New York Times, points out:

despite Mr. Trump’s proud rhetoric regarding tax reform . . . there is no wide pattern of companies bringing back jobs or profits from abroad. The global distribution of corporations’ offshore profits — our best measure of their tax avoidance gymnastics — hasn’t budged from the prevailing trend.

Well over half the profits that American companies report earning abroad are still booked in only a few low-tax nations — places that, of course, are not actually home to the customers, workers and taxpayers facilitating most of their business. A multinational corporation can route its global sales through Ireland, pay royalties to its Dutch subsidiary and then funnel income to its Bermudian subsidiary — taking advantage of Bermuda’s corporate tax rate of zero.

The chart below makes this quite clear, showing that US profits are disproportionately booked in countries where there is little or no actual productive activity.

In fact, as Setser notes, “the new [tax] law encourages firms to move ‘tangible assets’ — like factories — offshore.”

The chart below, from a Fortune magazine post, provides an overview of the large cash holdings of some of America’s largest corporations and the share held “outside” the country.

Economists estimated that US firms held approximately $2.6 trillion outside the country and the Trump administration predicted that a large share would be brought back, funding new productive investments, thanks to the one-time lower tax rate included in the 2017 tax reform act.  Government officials and the media talked about this money in a way that gave the impression that it was actually sitting outside the country. But it wasn’t.

Adam Looney, in a Brookings blog post, clarifies that:

”repatriation” is not a geographic concept, but refers to a set of rules defining when corporations have to pay taxes on their earnings. For instance, paying dividends to shareholders triggers a tax bill, but simply bringing the cash to the U.S. does not. Indeed, nearly all of the $2.6 trillion is already invested in the U.S. . . .

U.S. multinational corporations can defer paying tax on profits they earn abroad indefinitely by agreeing not to use the earnings for certain purposes, like paying dividends to shareholders, financing domestic acquisitions, guaranteeing loans, or making investments in physical capital in the U.S. In short, the rules prohibit a company from using pre-tax money in transactions that benefit shareholders. No one believes this is rational or efficient, and it is certainly onerous for shareholders, who would rather have that cash in their pockets than held by the corporation. But those rules don’t place requirements on the geographic location of the cash. Multinational firms are allowed to bring those dollars back to the U.S. and to invest them in our financial system.

Indeed, that’s exactly what they do. Don’t take my word for it, the financial statements of the companies with large stocks of overseas earnings, like Apple, Microsoft, Cisco, Google, Oracle, or Merck describe exactly where their cash is invested. Those statements show most of it is in U.S. treasuries, U.S. agency securities, U.S. mortgage backed securities, or U.S. dollar-denominated corporate notes and bonds.

Of course, these firms could easily have used their tax deferred dollar assets as collateral to borrow to finance any investment projects they found attractive.  Their lack of interest in doing so provides additional evidence that low corporate rates of investment are not due to funding constraints.  Rather, corporations have only a limited interest in undertaking productive investments in the US.

Thus, it should come as no surprise that the one-time tax break resulted in a one-time, modest, “repatriation” and that the money was largely used for financial rather than productive purposes. The New York Times reports that:

 JPMorgan Chase analysts estimate that in the first half of 2018, about $270 billion in corporate profits previously held overseas were repatriated to the United States and spent as a result of changes to the tax code. Some 46 percent of that, JPMorgan Chase analysts said, was spent on $124 billion in stock buybacks.

The flow of repatriated corporate cash is just one tributary in what has become a flood of payouts to shareholders, both as buybacks and dividends. Such payouts are expected to hit almost $1.3 trillion this year, up 28 percent from 2017, according to estimates from Goldman Sachs analysts.

In sum, thanks to the Trump tax plan, trillions of dollars that could have been used to transform our transportation and energy infrastructure, industrial structure, and system of social services are instead being transferred to big businesses, who use them for speculative activities and to further enrich their already wealthy managers and stock holders.

Given current realities, we can expect growing popular interest in and support for new public initiatives like the Green New Deal and a new progressive system of taxation to help finance it.  Hopefully, exposing the workings of our current tax system and the lies our government and business leaders tell about whose interests it serves, will help speed this development.

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Foxconn: Playing Fast and Loose in Wisconsin

When state and local governments bid for corporate investment, working people lose.  It is as simple as that.  And Foxconn’s on-again, off-again, and on-again shrinking investment in Wisconsin is a case in point.

In July 2017 Foxconn announced, at the White House, its agreement to spend $10 billion to build a factory in Wisconsin to produce flat-panel display screens for televisions and other consumer electronics, creating 13,000 manufacturing jobs within six years.  In return, the state of Wisconsin offered the company $3 billion in subsidies.  The agreement was celebrated by then Wisconsin governor Scott Walker and, of course, lauded by President Trump.

However, in January 2019, the special assistant to the president of Foxconn announced that “In Wisconsin we’re not building a factory. You can’t use a factory to view our Wisconsin investment.” The reason, according to the special assistant, was that Foxconn decided that it couldn’t compete in the US TV market using US labor to build LCD panels.

As for jobs, the company has already fallen short on its employment promises.  It pledged to create 260 jobs in 2018 but added only 178.  It also promised to employ 5,200 workers by the end of 2020, but now estimates that the total will likely be closer to 1,000. And most of the future hires will be engaged in research and development, not manufacturing.

And the cost to Wisconsin’s communities?  The size of the subsidy quickly grew by over a billion dollars from its initial figure.  As the Verge reports:

By December 2017, the public cost had grown to include $764 million in new tax incentives from local governments in Racine County, which is just 40 minutes south of Milwaukee where the plant was to be located. Other additions included $164 million for road and highway connections built to service the plant, plus $140 million for a new electric transmission line to Foxconn that would be paid for by all 5 million ratepayers of the public utility We Energies. With other small costs added, the total Foxconn subsidy hit $4.1 billion — a stunning $1,774 per household in Wisconsin.

The original plan specified that the subsidy would be given out in increments as investments were made and jobs created.  It remains to be seen how the state will respond to Foxconn’s retrenchment.  But the additional $1.1 billion highlighted above will cost the public regardless of what Foxconn does, since local governments have already begun building the infrastructure that Foxconn wanted.  Those are real outlays that will come at the expense of other, far more critical social programs. And then there are the families who lost their homes when eminent domain was used to seize their properties to prepare the land for Foxconn’s proposed factory.

Not surprisingly, Foxconn’s announcement that it was walking back its commitment has generated a lot of anger in Wisconsin.  And bad press for President Trump.  And so, after a January 2019 phone exchange between President Trump and Foxconn chairman Terry Gou, the company announced that it will indeed build a factory in Wisconsin, just a smaller one than originally promised.

I think we all know how this will work out.

The Deal 

Foxconn’s proposed investment was seen as a significant win for both Governor Walker and President Trump. The Guardian quoted a senior administration official “who said the announcement was ‘meaningful,’ because ‘it [represents] a milestone in bringing back advanced manufacturing, specifically in the electronics sector, to the United States.’”  President Trump followed with “If I didn’t get elected, [Foxconn] definitely would not be spending $10bn.”

But Foxconn was always an unreliable investor. As the Cap Times pointed out, Foxconn had a track record of broken promises:

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

Even more importantly, the deal was a stinker for working people in Wisconsin.  Wisconsin’s Legislative Fiscal Bureau, after examining the initial agreement, concluded that that the state wouldn’t break even on its investment until 2043 — and that was an absolute best-case scenario.

Playing fast and loose

The agreement was announced in July 2017.  Less than one year later, in June 2018, Foxconn announced a change to its plan.  Instead of a Generation 10.5 plant producing 10-foot by 11-foot panels for 75-inch TV screens, Foxconn said it would build a Generation 6 plant that only produced 5-foot by 6-foot panels.  The smaller plant would require only about one-third the initially promised investment.

Then, in late August, Foxconn announced yet another change, when its spokesperson, Louis Woo, told the Journal Times that even the Gen 6 panels might not be manufactured in Racine for long.  “We are not really interested in television,” Woo told the newspaper.

And then in January 2019, Foxconn announced it might not ever build a factory in Wisconsin or have need for manufacturing workers.  As Reuters explained, the company:

is reconsidering plans to make advanced liquid crystal display panels at a $10 billion Wisconsin campus, and said it intends to hire mostly engineers and researchers rather than the manufacturing workforce the project originally promised.

Rather than a focus on LCD manufacturing, Foxconn wants to create a “technology hub” in Wisconsin that would largely consist of research facilities along with packaging and assembly operations, Woo said. It would also produce specialized tech products for industrial, healthcare, and professional applications, he added.

“In Wisconsin we’re not building a factory. You can’t use a factory to view our Wisconsin investment,” Woo said.”

Finally, as noted above, after a phone conversation between President Trump and Chairman Gou, some kind of factory is back in Foxconn’s plans.  But for how long?

Foxconn failed to earn its 2018 tax credits because it fell short of its employment target.  As Reuters reports: “The company may be prepared to walk away from future incentives if it is unable to meet Wisconsin’s job creation and capital investment requirements, according to the source familiar with the matter.”

Lessons

Governor Walker went all in to get Foxconn, giving the company far more than he needed to do. As the Verge explains:

In retrospect, it’s clear that Walker had a strong hand to play in negotiations with Foxconn. The company had to locate in a Great Lakes state because of the huge amount of water needed to clean the glass used in manufacturing LCD screens. And no other Great Lakes state came close to offering the $4.1 billion Foxconn is getting. Michigan came the closest, offering $2.3 billion, but it was partly a tax subsidy rather than cash.

The Walker administration also gave Foxconn an exemption for the state’s environmental rules, “allowing it to discharge materials into wetlands and reroute streams during construction and operation.” And it “also agreed to allow Foxconn to draw massive amounts of water from Lake Michigan” in violation of “the provisions of the Great Lake Compact signed by the Great Lakes states and Canadian provinces to protect the lakes.”

And of course, the production of LCD screens requires the use of a number of hazardous materials, such as benzene, chromium, cadmium, mercury, zinc, and copper. Foxconn’s track record in handling such materials is far from good, even if it promised to build a Zero Liquid Discharge system, “which will go beyond any local, state and federal requirements relating to industrial water discharge.”

When the Legislative Fiscal Bureau did its evaluation of the deal, it concluded, as noted above, that it would take until 2043 for taxpayers to recoup the subsidy. But that was based on a $3 billion subsidy. At $4.1 billion, the current amount, the date gets pushed back to 2050.  And again, that assumes that all goes according to the initial plan.

In short, there is no good outcome here for the people of Wisconsin. Given the enormous social and environmental costs associated with this project, Wisconsin is probably better off if it can cancel the deal the previous governor made with Foxconn. Most importantly, one hopes that the Foxconn fiasco will solidify popular understandings that it never pays to compete for corporate investment with tax cuts and public subsidies.

Millennials: Hit Hard And Fighting Back

A lot has been written and said critical of millennials. The business press has been tough on their spending habits.  As a recent Federal Reserve Board study of millennial economic well-being explained:

In the fields of business and economics, the unique tastes and preferences of millennials have been cited as reasons why new-car sales were lackluster during the early years of the recovery from the 2007–09 recession, why many brick-and-mortar retail chains have run into financial trouble (through lower brand loyalty and goods spending), why the recoveries in home sales and construction have remained slow, and why the indebtedness of the working-age population has increased.

Politicians, even some Democratic Party leaders, have tended to write them off as complainers. For example, while on a book tour, former Vice President Joe Biden told a Los Angeles Times interviewer that “The younger generation now tells me how tough things are. Give me a break. I have no empathy for it. Give me a break.” Biden went on to say that things were much tougher for young people in the 1960s and 1970s.

In fact, quite the opposite is true.  For better or worse, the authors of the Federal Reserve Board study found that there is “little evidence that millennial households have tastes and preference for consumption that are lower than those of earlier generations, once the effects of age, income, and a wide range of demographic characteristics are taken into account.”  More importantly, millennials are far poorer than past generations were at a similar age, and are becoming a significant force in revitalizing the labor movement.

Economic hard times for millennials

The Federal Reserve Board study leaves no doubt that millennials are less well off than members of earlier generations when they were equally young. They have lower earnings, fewer assets, and less wealth.  All despite being better educated.

The study compares the financial standing of three different cohorts: millennials (those born between 1981 and 1997), Generation Xers (those born between 1965 and 1980), and baby boomers (those born between 1946 and 1964).  Table 1, below, shows inflation adjusted income in three different time periods for all households with a full-time worker and for all households headed by a worker younger than 33 years.

The median figures, which best represent the earnings of the typical member of the group, are shown in brackets.  Comparing the median annual earnings of young male heads of households and of young female heads of household across the three time periods shows the millennial earnings disadvantage.  For example, while the median boomer male head of household earned $53,400, the median millennial male head of household earned only $40,600.  Millennial female heads of household suffered a similar decline, although not nearly as steep.

Table 4 compares the asset and wealth holdings of the three generations, and again highlights the deteriorating economic position of millennials.  As we can see, the median total assets held by millennials in 2016 is significantly lower than that held by baby boomers and only half as large as that held by Generation Xers.  Moreover, millennials suffered a decrease in asset holdings across most asset categories.

Finally, we also see that millennials have substantially lower real net worth than earlier cohorts. In 2016, the average real net worth of millennial households was $91,700, some 20 percent less than baby boomer households and almost 40 percent less than Generation X households.

Fighting back

Millennials have good reason to be concerned about their economic situation.  What is encouraging is that there are signs that growing numbers see structural failings in the operation of capitalism as the cause of their problems and collective action as the best response.  A recent Gallup poll offers one sign.  It found a sharp fall in support for capitalism among those 18 to 29 years, from 68 percent positive in 2010 down to 45 percent positive in 2018.  Support for socialism remained unchanged at 51 percent.

A recent Pew Research poll offers another, as shown below. Young people registered the strongest support for unions and the weakest support for corporations.

Of course, what millennials do rather than say is what counts. And millennials are now boosting the ranks of unions.  Union membership grew in 2017 for the first time in years, by 262,000.  And three in four of those new members was under 35.  Figures for 2018 are not yet available, but given the strong and successful organizing work among education, health care, hotel, and restaurant workers, the positive trend is likely to continue.

Millennials are now the largest generation in the United States, having surpassed the baby boomers in 2015.  Hopefully, self-interest will encourage them to play a leading role in building the movement necessary to transform the US political-economy, improving working and living conditions for everyone.

The Law Versus Worker Rights

Organizing a union is no easy task in the United States.  Although organizing a union is supposed to be a protected right, businesses regularly fire union supporters knowing that they face minimal punishment even if found guilty for their actions.  In fact, the rights of all workers, regardless of their interest in unionization, are being whittled down. Simply put, US law doesn’t work for workers.

Moshe Z. Marvit, writing in the newspaper In These Times, provides a recent example of the ongoing legal attack on union rights, in this case those of unionized janitors.  As he explains, the National Labor Relations Board, using a provision of the 1947 Taft-Hartley Act designed to weaken labor solidarity:

ruled [in October 2018] that janitors in San Francisco violated the law when they picketed in front of their workplace to win higher wages, better working conditions and freedom from sexual harassment in their workplace.

The provision in question is one that prohibits workers from engaging in actions against a so-called “secondary” employer.  The provision makes it illegal for workers to organize boycotts or pickets directed against an employer with which the union does not have a dispute in order to get that firm to pressure the union’s employer to settle its dispute with the union.

The NLRB’s ruling dramatically stretches the meaning of this provision, in that the San Francisco janitors were actually engaged in workplace actions against an employer that had significant influence over their terms of employment.  However, Board members were able to justify their ruling thanks to the complexities generated by the increasingly common corporate strategy of subcontracting.

In this case, the janitors were employed by Ortiz Janitorial Services, which was in turn subcontracted by Preferred Building Services, to work in the building of yet a third company. An administrative law judge had previously ruled that Preferred Building Services had meaninful control over the employment terms of the janitors hired by Ortiz Janitorial Services.

More specifically, the judge found “that Preferred Building Services was involved in the hiring, firing, disciplining, supervision, direction of work, and other terms and conditions of the janitors’ employment with Ortiz Janitorial Services.” That made Ortiz and Preferred joint employers of the janitors, and the worker’s actions legal.  Undeterred, the NLRB simply rejected the administrative law judge’s ruling, declaring instead that the janitors worked only for Ortiz which made the worker’s actions, which were also aimed at Preferred, illegal.

As Marvit summarizes:

The NLRB’s recent case restricting the picketing rights of subcontractors, temps and other workers who do not have a single direct employment relationship is a further sign that the labor board will continue limiting its joint employer doctrine. This will make it more difficult or even impossible for many workers to have any meaningful voice in the workplace. But the case also highlights some of the core problems of labor law as it currently exists. By being included under the NLRA, workers lose basic rights that all other Americans enjoy.

Given how important the use of subcontracted labor has become, it should surprise no one that Trump’s appointees to the National Labor Relations Board are actively working to tighten the standard under which workers can claim to face, and organize against, a joint employer.

But the attack on worker rights is not limited to efforts to weaken union power.  The Supreme Court, in a 5-4 vote in May, ruled in Epic Systems Corp v. Lewis, that employers can include a clause in their employment contract requiring nonunion workers to arbitrate their disputes individually, a ruling that eliminates the ability of workers to sue a company for workplace violations or use collective actions such as class action suits. The ruling resolved three separate cases–Epic Systems Corp. v. Lewis, Ernst & Young LLP v. Morris, and National Labor Relations Board v. Murphy Oil USA–that were argued together in front of the Court on the same day because they all raised the same basic issue.

Marvit explains what led to Lewis’s decision to sue Epic Systems:

On April 2, 2014, Jacob Lewis, who was a technical writer for Epic Systems, received an email from his employer with a document titled “Mutual Arbitration Agreement Regarding Wages and Hours.” The document stated that the employee and the employer waive their rights to go to court and instead agreed to take all wage and hour claims to arbitration. Furthermore, unlike in court, the employee agreed that any arbitration would be one-on-one. This “agreement” did not provide any opportunity to negotiate, and it had no place to sign or refuse to sign. Instead, it stated, “I understand that if I continue to work at Epic, I will be deemed to have accepted this Agreement.” The workers had two choices: immediately quit or accept the agreement. . . .

When Lewis tried to take Epic Systems to court for misclassifying him and his fellow workers as independent contractors and depriving them of overtime pay, he realized that by opening the email and continuing to work, he waved his right to bring a collective action or go to court.

As the Court saw it, the case pitted the Federal Arbitration Act against the National Labor Relations Act.  The former established a legal foundation for using one-on-one arbitration to settle disputes while the latter gives workers the right to work together for “mutual aid and protection.” The Court’s ruling priviledged arbitration.

Jane McAlevey, writing before the Supreme Court combined the cases and decided Epic Systems Corp v. Lewis, highlights the likely anti-worker consequences of the Court’s decision:

As for loud liberal voices — union and nonunion — that declare unions as a thing of the past, the forthcoming SCOTUS ruling on NLRB v Murphy Oil will prove most of the nonunion “innovations” moot. Murphy Oil is a complicated legal case that boils down to removing what are called the Section 7 protections under the National Labor Relations Act, and preventing class action lawsuits.

Murphy Oil blows a hole through the legal safeguards that non-union workers have enjoyed for decades, eviscerating much of the tactical repertoire of so-called Alt Labor, such as class-action wage-theft cases, and workers participating in protests called by nonunion community groups in front of their workplaces. The timing is horrific and uncanny: As women are finally finding their voices about sexual harassment at work, mostly in nonunion workplaces (as the majority are), Murphy Oil will prevent class action sexual harassment lawsuits.

The Epic Systems decision is a big deal, since there is a growing and already sizeable use of mandatory arbitration by employers.  A study by the Economic Policy Institute found that:

  • More than half—53.9 percent—of nonunion private-sector employers have mandatory arbitration procedures. Among companies with 1,000 or more employees, 65.1 percent have mandatory arbitration procedures.
  • Among private-sector nonunion employees, 56.2 percent are subject to mandatory employment arbitration procedures. Extrapolating to the overall workforce, this means that 60.1 million American workers no longer have access to the courts to protect their legal employment rights and instead must go to arbitration.
  • Of the employers who require mandatory arbitration, 30.1 percent also include class action waivers in their procedures—meaning that in addition to losing their right to file a lawsuit on their own behalf, employees also lose the right to address widespread rights violations through collective legal action.
  • Large employers are more likely than small employers to include class action waivers, so the share of employeesaffected is significantly higher than the share of employers engaging in this practice: of employees subject to mandatory arbitration, 41.1 percent have also waived their right to be part of a class action claim. Overall, this means that 23.1 percent of private-sector nonunion employees, or 24.7 million American workers, no longer have the right to bring a class action claim if their employment rights have been violated.
  • Mandatory arbitration is more common in low-wage workplaces. It is also more common in industries that are disproportionately composed of women workers and in industries that are disproportionately composed of African American workers.

The Court’s decision means that workers without unions will have little power. The NLRB’s decision weakens the laws that are supposed to protect union rights. The only effective response to this trend is, as the recent wave of teacher strikes demonstrated, militant, rank and file-led union organizing, with strong community involvement and support.  Hopefully, exposing the class-biased nature of US laws may help encourage this kind of activism.

Corporate Concentration, Intellectual Property Rights, and US Public Policy

Dominant corporations have dramatically increased their market power in the US over the last decades, allowing them to boost their profits and, by extension, political power. And, although rarely acknowledged by the media, this trend owes much to the way public policy has promoted corporate intellectual property rights at the public expense.

The growing concentration of market power

Gwynn Guilford, drawing on a study published in the Journal of Economic Perspectives, highlights the growing concentration of market power with the aid of the following charts.

Number-of-firms-accounting-for-50-percent-of-combinedThe first chart shows that while 109 public corporations captured half of the total profits earned by all public corporations in 1975, that number fell to just 30 by 2015.  And as the second chart reveals, this growth in market concentration is reflected in other key market indicators as well, such as control over assets, cash flow, and cash holdings.

A recent International Monetary Fund working paper provides additional evidence of the growth in corporate market power, highlighting the ability of leading corporations to markup their prices and increase their profit share.  Defining market power as “the ability of a firm to maintain prices above marginal cost—the level that would prevail under perfect competition,” the authors of the IMF paper “estimate markups between prices and marginal costs for publicly traded firms in 33 advanced economies and 41 emerging market and developing economies from 1980-2016.” According to the authors, “this is the first study . . . to report firm-level markups for such a broad range of economies over such an extended period.”

The figure below shows a dramatic increase in markups by US publicly listed firms, which means that US firms have enjoyed growing power to push up their prices relative to their costs of production.

As the authors report:

markups of U.S. firms have increased by a sales-weighted average of 42 percent during 1980-2016.  Markups increased across all major industries, and not only technology ones, with the sales-weighted average increase ranging between 7 and 137 percent for the 10 broad FTSE/Dow Jones Industrial Classification Benchmark industries available within Thomson Reuters Worldscope.

Some industry subsectors, especially those in Health Care, like Biotechnology and Pharmaceuticals, have seen extreme increases (as shown in the following figure).  “The sub-sector featuring the largest increase in markups over this period (by 419 percent) is ‘Biotechnology,’ part of the ‘Health Care’ industry.”

An IMF blog post commenting on this study notes:

The growing economic wealth and power of big companies—from airlines to pharmaceuticals to high-tech companies—has raised concerns about too much concentration and market power in the hands of too few. In particular, in advanced economies, rising corporate market power has been blamed for low investment despite rising corporate profits, declining business dynamism, weak productivity, and a falling share of income paid to workers.

The role of public policy in promoting market concentration, profits, and power

Public policy, in particular, government efforts to promote and protect corporate intellectual property rights (e.g. patents and copyrights), is one reason for the trend in market concentration.  As Dean Baker, co-director of the Center for Economic and Policy Research, explains:

Patents, copyrights, and other forms of intellectual property are public policy. They are not facts given to us by the world or the structure of technology somehow. While this point should be self-evident, it is rarely noted in discussions of inequality or ways to address it.

[And] there is an enormous amount of money at stake with intellectual property rules. Many items that sell at high prices as a result of patent or copyright protection would be free or nearly free in the absence of these government granted monopolies. Perhaps the most notable example is prescription drugs where we will spend over $420 billion in 2018 in the United States for drugs that would almost certainly cost less than $105 billion in a free market. The difference is $315 billion annually or 1.6 percent of GDP. If we add in software, medical equipment, pesticides, fertilizer, and other areas where these protections account for a large percentage of the cost, the gap between protected prices and free market prices likely approaches $1 trillion annually, a sum that is more than 60 percent of after-tax corporate profits.

The US patent system has helped boost the monopoly power of many of the country’s most profitable firms in numerous ways.  For example, the government has increased the duration of both patents and copyrights.  Even more importantly, the government has steadily expanded the scope of what can be patented to “include biological organisms, software, and business methods.” This expansion has enabled corporations to lockup an ever-growing number of products and processes, and force other companies to pay them for their use.

US laws also generally privilege patent and copyright holders when it comes to challenges.  For example, a company that feels its copyright is being infringed can sue not only to reclaim lost royalty payments but also for damages, which can greatly increase the financial stakes.  In addition, the government often prosecutes copyright cases criminally, turning a possibly small financial violation into a potentially major criminal offense.

Baker offers another example of the one-sided nature of the US intellectual property rights regime:

the Digital Millennial Copyright Act of 1998 holds third parties potentially liable for infringement. In order to protect themselves from liability, a web intermediary has the responsibility for promptly taking down allegedly infringing material after being notified. This effectively requires an intermediary to take the side of the person alleging infringement against their customer or friend. By contrast, the law in Canada simply requires that the intermediary notify the person posting the alleged infringing material, after which point they have ended their potential liability.

Perhaps even more revealing of the pro-corporate nature of government policy is the fact that government spending has often financed the innovations that private firms then patent and benefit from.  Considering prescription drugs again, the US National Institutes of Health spends approximately $37 billion a year on biomedical research.  Other government agencies, such as the Centers for Disease Control, spend smaller but still significant amounts.  But, following the passage of the Boyh-Dale act in December 1980, the government, as Baker explains, has allowed “researchers on government contracts to gain ownership rights to their research. This meant they could get patents or other types of protection on work for which the government incurred much or all of the cost. While Bayh–Dole applied to all types of research supported by the government it had the largest impact on the market for prescription drugs.”

Paris Marx offers another example of this public subsidization of private profit-making, noting the ways public research provided key discoveries that made possible the success of the iphone:

Steve Jobs may have been a genius—he certainly had an eye for design—but his most successful product would not exist if it weren’t for the billions of dollars that the US government spends every year on research and development. The best accounting of this has been done by Mariana Mazzucato, author of “The Entrepreneurial State,” who skillfully explains that touch-screen displays, GPS, the Internet and even Siri were the product of public research funding—features the iPhone wouldn’t be very compelling without.

And that’s not to say that Apple should get no credit for the revolutionary product it created. The company assembled those technologies in a compelling package and has developed many of its own innovations to enhance it along the way. But that doesn’t change the fact that the fundamentals wouldn’t exist without the government.

And here is yet another example from Mazzucato:

we continue to romanticize private actors in innovative industries, ignoring their dependence on the products of public investment. Elon Musk, for example, has not only received over $5 billion in subsidies from the US government; his companies, SpaceX and Tesla, have been built on the work of NASA and the Department of Energy, respectively.

Recognizing the value of strong private industry-protecting intellectual property rights, leading corporations have been pushing their respective governments to demand tougher rights as part of new trade agreements, making this a global problem.  Here is what the United Nations Conference on Trade and Development has to say:

Paradoxically, even as tangible barriers to trade imposed by governments, such as tariffs and quotas, have been declining over the last 30 years or so, intangible barriers to competition rooted in “free trade” treaties and erected by large firms themselves have surged, as they exploit the increased legal protection of intellectual property and the broadening scope for intangible intra-firm trade. According to some estimates, intangible assets may represent up to two thirds of the value of large firms. . . .

Returns to knowledge-intensive intangible assets proxied by charges for the use of foreign IPR rose almost unabated throughout the [global financial crisis] and its after­math, even as returns to tangible assets declined. At the global level, charges (i.e. payments) for the use of foreign IPR rose from less than $50 billion in 1995 to $367 billion in 2015. . . .

The rise of intangible barriers that further distort competition, increase corporate leverage and foster monopolistic rents has been partly supported by changes to domestic laws in many countries. But international treaties may have been even more significant, such as double non-taxation agreements and new generation trade agreements that include provisions strengthening the protection of IPR, foreign investment, etc.

The US government has been one of the most aggressive governments pushing this international expansion of restrictive intellectual property rights. The recently negotiated US-Mexico-Canada agreement is, as Peter Dolack describes, a prime example:

It appears that corporate wish lists for intellectual property, financial services and other areas were largely granted. New IP rules, if this agreement is passed into law, include stepped-up enforcement against “camcording of movies” and “cable signal theft,” as well as “Broad protection against trade secret theft.”

The IP rules would extend copyrights to 75 years, long a U.S. demand (and one opposed by the Canadian government); increase pressure on Internet service providers to take works alleged to infringe copyrights (in actuality a tool for censorship); and provide for “strong protection for pharmaceutical and agricultural innovators,” which can be presumed to be code for enabling further medicine price-gouging and crimping accessibility to generic and cheaper alternatives. The last of these was a prominent U.S. goal for the Trans-Pacific Partnership, which, inter alia, sought to eliminate the New Zealand government’s program to provide medicines in bulk at discounted prices at the behest of U.S. pharmaceutical companies. Related to this is a measure to include 10 years’ protection for biologic drugs and an expansion of products eligible for “protection.”

We need a different public policy

In short, it appears that the existing IPR regime has largely helped to promote monopoly power, higher prices, and greater inequality, and at the public expense.  We need a new policy, and, setting aside the daunting political obstacles to change, it is easy to see possibilities for a different and more publicly spirited policy.

For example, we could reduce both the scope of what is patentable as well as the length of patents, thereby weakening monopoly power and promoting lower prices.  And likely at little “economic” cost. Patents and copyrights are supposed to encourage innovation and productivity gains.  Yet, as Baker notes:

A cross-country analysis assessing the impact of stronger protections on productivity growth found no evidence of a positive relationship. In fact, most of the regressions found a negative relationship between patent strength and productivity growth. Similarly, an analysis that looked at multi-factor productivity growth across industries found no relationship between the number of patents issued and the rate of productivity growth.

And we could also end the government’s direct subsidization of privately patented products.  For example, the government could boost its funding of health research though long-term contracts with drug and other health related businesses, with the requirement “that all research findings and patents are placed in the public domain. An advantage of [this] approach is that all research findings would be available for both clinicians and other researchers.”  The public gains from a change in policy, especially in the health field, would likely be enormous.

In sum, we need to go beyond bemoaning current trends, which impoverish us in a variety of ways.  Rather, we need to press for an end to the existing public policies that encourage them and for the development of a new intellectual property rights regime that actually serves the public interest.

Ignore Their Threats, Tax The Rich

In most states in the United States, the rich have enjoyed ever lower rates of taxation while working people have suffered from inadequately funded public services.  Calls for an end to this situation are more often than not met with statements by state officials and the wealthy themselves that higher taxes on the rich will prove counterproductive; the rich will just move to lower-tax states.  In fact, research by the sociologist Christobal Young shows that this is largely an empty threat.  The rich rarely move to escape high taxes.

The threat

Oregon offers one example of this threat.  In 2009, the Oregon Legislature passed two measures (66 and 67) in an effort to boost funding for education, health and public safety.  Measure 66 would raise taxes on high income Oregonians—couples earning over $250,000 a year and individuals earning over $125,000 a year.  Measure 67 would raise taxes on profitable corporations.

Opponents of the measures succeeded in placing them on the ballot, hoping that they could scare voters into rejecting them.  Almost all major business leaders threatened calamity if they passed.  For example, Phil Knight, the CEO of Nike, not only gave $100,000 to the anti-measures campaign, he also wrote an article published in the Oregonian newspaper in which he said:

Measures 66 and 67 should be labeled Oregon’s Assisted Suicide Law II.

They will allow us to watch a state slowly killing itself.

They are anti-business, anti-success, anti-inspirational, anti-humanitarian, and most ironically, in the long run, they will deprive the state of tax revenue, not increase it. . . .

Reputable economists forecast 66 and 67 will cost the state thousands — maybe tens of thousands — of jobs, and that thousands of our most successful residents will leave the state.

Knight ended his letter with his own threat to leave the state if the measures passed.  However, voters approved both measures, and Nike and Phil Knight remain in Oregon.

Young provides other examples of threats of “rich flight”:

As California considered similar taxes [to Oregon], policymakers cautioned “nothing is more mobile than a millionaire and his money”. In New Jersey, governor Chris Christie simply stated: “Ladies and Gentlemen, if you tax them, they will leave.”

The reality

Young studied tax return data, which shows where people live, for every million-dollar earner in the United States over the years 1999 to 2011.  His data set included “3.7 million top-earning individuals, who collectively filed more than 45 million tax returns.”

What he found was that the migration rate of millionaires was relatively low, with only 2.4 percent of millionaires changing their state residence in a given year.  Perhaps not surprisingly, as we see below, poorer people tend to move from one state to another more often than do millionaires.

Young does note that “When millionaires do move, they admittedly tend to favor lower-tax states over higher-tax ones – but only marginally so. Around 15 percent of interstate millionaire migrations bring a net tax advantage. The other 85 percent have no net tax impact for the movers.”

Moreover, almost all the movement by millionaires to lower-tax states is accounted for by moves to just one state, Florida.  Other low-tax states, like Texas, were not net-recipients of millionaires fleeing high-tax states.  In short there is no real evidence that millionaires systematically move from high-tax states to low-tax states.

Young believes that one major reason for the lack of migration by the rich is that “migration is a young person’s game.”  As the figure below shows, people tend to move for education and early in their careers. Thus:

By the time people hit their early forties, PhDs, college grads and high school drop-outs all show the same low rate of migration. Typically, millionaires are society’s highly educated at an advanced career stage. They are typically the late-career working rich: established professionals in management, finance, consulting, medicine, law and similar fields. And they have low migration because they are both socially and economically embedded in place.

The global story

Young finds the global story is much the same.  He examined the 2010 Forbes list of world’s billionaires and found that approximately 85 percent still lived in their country of birth.  Moreover, as he explains:

among those who do live abroad, most moved to their current country of residence long before they became wealthy – either as children with their parents, or as students going abroad to study (and then staying). . . . Only about 5% of world billionaires moved abroad after they became successful.

The take-away

The rich have both increased their share of income and reduced their share of state taxes over the last decades.  This has left most states unable to provide the critical public services working people need.  Young’s study demonstrates that we should not allow fears of “rich flight” to keep us from building “tax the rich movements” across the United States.

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

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

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

The expansion is running out of steam

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

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

The Goldman Sachs model, according to Domm:

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

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

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

Living on the edge

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

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

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

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

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

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

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