Reports from the Economic Front

a blog by Marty Hart-Landsberg

Category Archives: Taxes

The Struggle For A Decent Life

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

As the site explains:

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

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

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

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

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

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

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

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

Advertisements

The Trump Victory

The election of Donald Trump as president of the United States is the latest example of the rise in support for right-wing racist and jingoistic political forces in advanced capitalist countries.  Strikingly this rise has come after a sustained period of corporate driven globalization and profitability.

As highlighted in the McKinsey Global Institute report titled Playing to Win: The New Global Competition For Corporate Profits:

The past three decades have been uncertain times but also the best of times for global corporations–and especially so for large Western multinationals. Vast markets have opened up around the world even as corporate tax rates, borrowing costs, and the price of labor, equipment, and technology have fallen. Our analysis shows that corporate earnings before interest and taxes more than tripled from 1980 to 2013, rising from 7.6 percent of world GDP to almost 10 percent.  Corporate net incomes after taxes and interest payments rose even more sharply over this period, increasing as a share of global GDP by some 70 percent.

global-profit-pool

As we see below, it has been corporations headquartered in the advanced capitalist countries that have been the biggest beneficiaries of the globalization process, capturing more than two-thirds of 2013 global profits.

advanced-economies-dominate

More specifically:

On average, publicly listed North American corporations . . . increased their profit margins from 5.6 percent of sales in 1980 to 9 percent in 2013. In fact, the after-tax profits of US firms are at their highest level as a share of national income since 1929. European firms have been on a similar trajectory since the 1980s, though their performance has been dampened since 2008. Companies from China, India, and Southeast Asia have also experienced a remarkable rise in fortunes, though with a greater focus on growing revenue than on profit margins.

And, consistent with globalizing tendencies, it has been the largest corporations that have captured most of the profit generated.  As the McKinsey report explains:

The world’s largest companies (those topping $1 billion in annual sales) have been the biggest beneficiaries of the profit boom. They account for roughly 60 percent of revenue, 65 percent of market capitalization, and 75 percent of profits. And the share of the profit pool captured by the largest firms has continued to grow. Among North American public companies, for instance, firms with $10 billion or more in annual sales (adjusted for inflation) accounted for 55 percent of profits in 1990 and 70 percent in 2013. Moreover, relatively few firms drive the majority of value creation. Among the world’s publicly listed companies, just 10 percent of firms account for 80 percent of corporate profits, and the top quintile earns 90 percent.

bigger-the-better

Significantly, most large corporations have chosen not to use their profits for productive investments in new plant and equipment.  Rather, they built up their cash balances.  For example, “Since 1980 corporate cash holdings have ballooned to 10 percent of GDP in the United States, 22 percent in Western Europe, 34 percent in South Korea, and 47 percent in Japan.”  Corporations have often used these funds to drive up share prices by stock repurchase, boost dividends, or strengthen their market power through mergers and acquisitions.

In short, it has been a good time for the owners of capital, especially in core countries.  However, the same is not true for most core country workers.  That is because the rise in corporate profits has been largely underpinned by a globalization process that has shifted industrial production to lower wage third world countries, especially China; undermined wages and working conditions by pitting workers from different communities and countries against each other; and pressured core country governments to dramatically lower corporate taxes, reduce business regulations, privatize public assets and services, and slash public spending on social programs.

The decline in labor’s share of national income, illustrated below, is just one indicator of the downward pressure this process has exerted on majority living and working conditions in advanced capitalist countries.labor-share

Tragically, thanks to corporate, state, and media obfuscation of the destructive logic of contemporary capitalist accumulation dynamics, worker anger in the United States has been slow to build and largely unfocused.  Things changed this election season.  For example, Bernie Sanders gained strong support for his challenge to mainstream policies, especially those that promoted globalization, and his call for social transformation.  Unfortunately, his presidential candidacy was eventually sidelined by the Democratic Party establishment that continues, with few exceptions, to embrace the status-quo.

However, another “politics” was also gaining strength, one fueled by a racist, xenophobic, misogynistic right-wing movement that enjoyed the financial backing of the most reactionary wing of the capitalist class.  That movement, speaking directly to white (and especially male) workers, offered a simplistic and in its own way anti-establishment explanation for worker suffering: although corporate excesses were highlighted, the core message was that white majority decline was caused by the growing demands of “others”—immigrants, workers in third world countries, people of color, women, the LGBTQ community, Muslims, and Jews—which in aggregate worked to drive down wages, slow growth, and misuse and bankrupt governments at all levels.  Donald Trump was its political representative, and Donald Trump is now the president of the United States.

His administration will no doubt launch new attacks on unions, laws protecting human and civil rights, and social programs, leaving working people worse off.  Political tensions are bound to grow, and because capitalism is itself now facing its own challenges of profitability, the new government will find it has little room for compromise.

According to McKinsey,

After weighing various scenarios affecting future profitability, we project that while global revenue could reach $185 trillion by 2025, the after-tax profit pool could amount to $8.6 trillion. Corporate profits, currently almost 10 percent of world GDP, could shrink to less than 8 percent–undoing in a single decade nearly all the corporate gains achieved relative to world GDP over the past three decades. Real growth in corporate net income could fall from 5 percent to 1 percent per year. Profit growth could decelerate even more sharply if China experiences a more pronounced slowdown that reverberates through capital-intensive sectors.

future

History has shown that we cannot simply count on “hard times” to build a powerful working class movement committed to serious structural change.  Much depends on the degree of working class organization, solidarity with all struggles against exploitation and oppression, and clarity about the actual workings of contemporary capitalism.  Therefore we need to redouble our efforts to organize, build bridges, and educate. Our starting point must be resistance to the Trump agenda, but it has to be a resistance that builds unity and is not bounded in terms of vision by the limits of a simple anti-Trump alliance.   We face great challenges in the United States.

The Importance of Oregon’s Measure 97

Approval of Measure 97 is critical for the well-being of most Oregonians; its passage could also encourage efforts in other states to reverse the slashing of public capacities in the name of tax relief for profit-rich large corporations.

The national picture is well illustrated in a New York Times article.   As David Leonhardt explains:

Consider corporate taxes, which ultimately tend to be paid by the well-off, because they own the most stock. The official corporate rate is 35 percent, infamously higher than in any other advanced economy. Yet there are so many loopholes that companies often pay relatively little in tax.

The following chart highlights just how well corporations have done at avoiding taxes—and remember this shows the tax rate for all taxes paid (federal, state, local, and foreign) by corporations.

national-tax-mess

Here in Oregon, corporations have also done well.  In fact, according to the Anderson Economic Group, which does a yearly state-by-state study of the overall tax burden faced by businesses relative to their profits, Oregon has the lightest business tax burden in the country, and has secured that dead last position three years running.  The table below comes from its 2016 edition.

anderson-tax-burden

No wonder Oregon is short of funds and unable to deliver high quality early childhood and K-12 education, affordable health care, and critical senior services.

Measure 97 is designed to change this situation.  Although the Oregon initiative process limits the kinds of changes people can make to state law, the authors of this measure have crafted a well-designed change to the tax code.   The proposed measure makes one simple, but critical change to the state’s existing minimum tax code.

Here a bit of history is useful.  Oregon introduced a $25 minimum corporate tax in 1929.  The tax was lowered to $10 in 1931 and the rate remained unchanged until 2010.  By 2009, some two-thirds of C-corporations were paying just this $10 minimum.  As we can see below in the figure taken from an Oregon Center for Public Policy study, corporations currently pay only 6.7 percent of Oregon income taxes; thirty years ago it was 18.5 percent.

shrinking-oregon-corporate-taxes

The Great Recession, which caused the state deficit to explode, finally forced the legislature to act on tax reform.  It proposed, after consultation with the business community, a ballot measure which called for a new flat tax for all businesses and a new minimum tax schedule based on sales only for C-corporations. This measure, Measure 67, was approved by the voters.  The change, although helpful, was a modest one.  Most importantly, the new minimums remained set in unchanging dollar terms; were quite low; and were regressive in that the implicit minimum tax rate went down as sales went up.

Measure 97 seeks to remedy these shortcomings by changing only the minimum tax schedule, and only for the largest corporations.   Corporations with less than $25 million in in-state sales will see no change in their taxes.  Corporations with more than $25 million in in-state sales will now have to pay a new higher minimum tax equal to 2.5% of the amount of their sales above $25 million.

According to the Oregon Legislative Revenue Office, this new minimum will raise taxes on only 1051 corporations, less than one percent of all businesses operating in Oregon and less than 4 percent of all corporations operating in Oregon.  It will however raise a significant amount of money, some $3 billion a year; that amount will produce a 30 percent increase in the state’s general fund.  Moreover, as structured, the tax will fall heavily on the largest firms; more than half of the new revenue will come from the top 50 firms.  Finally, because the tax is based on sales, corporations will have little choice but to pay it.  They cannot fudge their sales figures like they can their profits, and it doesn’t matter where they produce as long as they sell in Oregon.  No wonder these large corporations don’t like the measure.

More money has been spent on the fight over Measure 97 than on any any other ballot measure in Oregon’s history.   According to the Oregonian:

With more than two weeks to go before the state’s Nov. 8 general election, groups against the corporate tax measure have contributed more than $22.5 million toward its defeat.

That surpasses the previous record of $21.2 million contributed in 2014 toward the defeat of Measure 92, the proposed GMO labeling measure. . . .

The group supporting the measure, Yes on 97, has raised more than $10.5. That puts the combined figure for spending on the measure at more than $33 million, which also eclipses the previous record of $29.6 million in total spending on a ballot measure. The prior record was also set during the contentious run-up to the GMO labeling measure election, in which it lost by fewer than 1,000 votes.

Among the biggest contributors to the No on 97 are retail corporations like Costco, Safeway, and Kroger, each of which has given almost $2 million.  More than 80 percent of the new revenue is predicted to come from large, multi-state corporations headquartered outside Oregon and not surprisingly it is these firms that are pouring in the most money to defeat the measure.

Their strategy is to scare working people, by claiming that the tax will be passed on to consumers through higher prices.  Little is said, of course, about the fact that the measure directs that the new money is to be spent on improving early childhood and K-12 education, expanding health care options, and funding senior services—all programs with high payoff for working people.  However, this fact aside, corporate threats of higher prices are merely that, empty threats.

There are three simple reasons why these large corporations will have little choice but to absorb the tax, and accept lower profits.  First, as mentioned above, very few firms will have their taxes raised by the measure.  Thus, these firms will be facing many firms that will not be subject to higher taxes. This is well illustrated by the following figure taken from an Oregon Center for Public Policy study.  If the firms affected by the new tax try to raise their prices, they risk losing market share.  In short, competitive pressures will make it difficult for them to raise their prices.

affected-firms-by-industry

Second, research shows that most large, out of state corporations employ national pricing strategies.  This means that they charge the same price for the same product in every state in which they sell.  In other words, there is no relationship between their pricing strategies and the various tax regimes they face in the different states in which they operate.  For example, the Oregon Consumer League examined prices charged by a number of major retailers.  What they found in the case of Target was typical:

Target is one of the biggest retailers in America, making $3.4 billion in net profits from $73.8 billion in sales in 2015. Target stores can be found in every state except Vermont. We selected one Target store in each state and looked up prices online for a sample of five items: a digital camera, laundry detergent, sunscreen, a box of Cheerios, and a spiral notebook. No matter which store was chosen, the prices did not change. . . . [P]rices remain consistent despite Target paying higher taxes in some states and much lower taxes in others.

Finally, there is the internet.  Most large firms offer on-line shopping.  Oregonians could easily check to see whether firms were raising local prices and if they found that to be true, simply order the same product on-line for the national price.  And, there is always Amazon, which is ready to sell anything to anyone.

In short, Measure 97 will raise much needed money that will be used to boost the quality of the state’s schools, health care, and senior services.  And it will do so by targeting the biggest and richest corporations, making them finally pay the taxes they have so far avoided.

For more on the importance of this measure and why I strongly support it you can read my article, Measure 97 corporate tax would put state on right track, which was recently published in the excellent local newspaper Street Roots.

 

 

 

 

The Fading Magic Of The Market

Poorer than their Parents?  That was the question McKinsey & Company posed and attempted to answer in their July 2016 report titled: Poorer Than Their parents? Flat or Falling Incomes in Advanced Economies.

Here is the report’s key takeaway, which is illustrated in the figure below:

Our research shows that in 2014, between 65 and 70 percent of households in 25 advanced economies were in income segments whose real market incomes—from wages and capital—were flat or below where they had been in 2005.  This does not mean that individual households’ wages necessarily went down but that households earned the same as or less than similar households had earned in 2005 on average.  In the preceding years, between 1993 and 2005, this flat or falling phenomenon was rare, with less than 2 percent of households not advancing.  In absolute numbers, while fewer than ten million people were affected in the 1993-2005 period, that figure exploded to between 540 million and 580 million people in 2005-14.chart-1

More specifically, McKinsey & Company researchers divided households in six advanced capitalist countries (France, Italy, the Netherlands, Sweden, the United Kingdom, and the United States) into various income segments based on their rank in their respective national income distributions.  They then examined changes in the various income segments over the two periods noted above.  Finally, they “scaled up the findings to include 19 other advanced economies with similar growth rates and income distribution patterns, for a total of 25 countries with a combined population of about 800 million that account for just over 50 percent of global GDP.”

The following figure illustrates market income dynamics over the 2005-14 period in the six above mentioned advanced capitalist countries. For example, 81 percent of the US population were in groups with flat or falling market income.

six-target-countries

The next figure provides a more detailed look at these market income dynamics.

market-income-six-target-countries

McKinsey & Company researchers also looked at disposable income trends, which required them to incorporate taxes and transfer payments.  As seen in the first figure of this post, government intervention meant that the percentage of households experiencing flat or declining disposable income was considerably less than the percentage experiencing flat or declining market incomes, 20-25 percent versus 65-70 percent.

The researchers attempted to explain these trends by analyzing “the patterns of median market and median disposable incomes for two periods: 1993 to 2005 and 2005 to 2014.  We focus on income changes of the median income household because middle-income households are representative of the overall flat or falling income trend in most countries, with the singular exception of Sweden.”

They highlighted five factors: aggregate demand factors, demographic factors, labor market factors, capital income factors, and tax and transfer factors.  As we can see from the second figure above, labor market changes hammered median market income in the United States, the United Kingdom, and the Netherlands.  And as we can also see, tax reductions and transfer payments helped to offset declines in median market disposable income in those three countries. In the case of the United States, while median market income fell by 3 percent over the period, median disposable income grew by 2 percent.

What is the answer to the question posed by McKinsey & Company?  Most likely large numbers of people will indeed be poorer than their parents.  Why?  Aggregate demand continues to stagnate as does investment and productivity.  Employment growth remains weak while precariousness of employment continues to grow.  Finally, the elite embrace of austerity works against the likelihood of new progressive government social interventions.  Without significant change in the political economies of the major capitalist countries, the next 14 years are going to be painful for billions of people.

Yes on Oregon Measure 97

Straight Talk About Measure 97

If we want Oregon to prosper we need to dramatically improve our state’s badly underfunded public schools, health care system, and senior services.  Here are some of the consequences of current funding levels: Oregon ranks 38th in school funding, has the 3rd largest class sizes, and has the 4th lowest graduation rate in the country.  Growing numbers of working people are unable to afford health care or financially survive a medical emergency; Oregon ranks 39th in the country for public health funding.  The number of seniors being forced to leave their homes because of a lack of social services also continues to grow.

The primary reason our state doesn’t have the funds it needs is that corporations operating in Oregon have quietly but steadily found ways to stop paying state income taxes.  As the Oregon Center for Public Policy pointed out in a recent study, “In the 1973-75 budget period, corporations paid 18.5 percent of all Oregon income taxes. Today they pay just 6.7 percent, a decline of nearly two-thirds. Absent any significant policy change, corporations are projected to pay just 4.6 percent of all Oregon income taxes by the mid 2020s.”  A study funded by The Council On State Taxation, a business lobbying group, found Oregon tied with Connecticut for the lowest “total effective business tax rate” in the country.

There is no point in beating around the bushes.  The only reasonable way to generate the tax revenue we need to fund critical state programs is by forcing corporations to pay more in taxes. If we don’t, as bad as things are now, they will get worse.  The state Chief Financial Officer, George Naughton, reports that the state of Oregon is facing a $1.4 billion gap between projected revenue and what it needs to maintain existing service levels.  State officials are talking possible 7 percent cuts across state programs.

There is an answer: Pass Measure 97 in November.

The virtues of Measure 97

Measure 97 will tax few corporations and the heaviest burden will fall on large out of state corporations.  Measure 97 makes one change to the existing Oregon tax code: it raises the corporate minimum tax on Oregon sales over $25 million for the largest C-corporations selling in the state.

Currently, the state minimum tax for C-corporations with sales of 25 to 50 million is $30,000 and tops out at $100,000 for C-corporations with sales above $100 million.  Measure 97 would impose a new tax rate of 2.5% on sales above the $25 million threshold.  The Oregon Legislative Revenue Office (LRO) offers the following example: “a C-corporation with Oregon sales of $50 million would pay a corporate minimum tax of $30,001 for the first $25 million in sales (the current tax) plus 2.5% on the second $25 million ($625,000) for a total minimum tax of $655,001.”

Oregon has some 400,000 businesses, 30,000 of which are classified as C-corporations.  According to the LRO, only 1051 of these corporations have more than $25 million in state sales and would be required to pay the higher minimum tax; that is approximately one-quarter of one percent of all businesses and 3 percent of all C-corporations selling in the state.  The real burden of the tax will fall on even fewer firms: the LRO estimates that the top 50 C-corporations would likely be responsible for more than 50 percent of the resulting increase in tax revenue.  And most of the money raised by the tax, more than 80 percent, will come from companies headquartered outside the state.

Measure 97 is an effective tax that will raise significant funds.  Measure 97 raises the minimum tax on large C-corporation sales, not profits.  By taxing sales rather than profits firms will not be able to fudge accounts and escape their responsibilities.  And Measure 97 taxes large C-corporations on their sales in Oregon.  Because the tax is on where the sales take place rather than where the goods are produced, firms cannot escape the tax by shifting production outside the state.  As for revenue, the LRO estimates that the tax would raise some $6 billion each biennium, which would boost the state budget by more than 15 percent; we are talking real money.

Measure 97 also makes clear where the money is to be spent.  The measure says that the funds generated by the tax are to be used to “provide additional funding for: public early childhood and kindergarten through twelfth grade education; health care; and services for senior citizens.” While it is true that the legislature will have the final say, passage of the measure will send a clear signal of our priorities to our elected leaders.

Misleading controversies over Measure 97’s effectiveness

The Oregon Legislative Revenue Office studied the likely impact of Measure 97 on the Oregon economy.  Some who oppose the measure have drawn on parts of its report to buttress their opposition.  Unfortunately, most of their objections to Measure 97 have been based on a misunderstanding of both the LRO’s methodology and the report’s conclusions.

Let’s be clear on what the report does say:

First, the report finds that Measure 97 will raise more than $6 billion in each of the next two budget cycles and that the new tax will ensure a more stable funding base for the state going forward.

Second, the report also shows that there is little reason to fear tax pyramiding.  Tax pyramiding is a common consequence of what are called gross receipt taxes, which are taxes that are levied on all business transactions.  As goods and services are sold from one business to another the tax tends to pyramid, growing larger and larger.  Measure 97 is not a typical gross receipts tax.  First, it is not levied on all business transactions.  As we saw above, only 1000 firms will likely pay the tax.  Competition within the economy will make it difficult for these firms to pass on the cost of the tax and other firms that may purchase their products will not be responsible for paying an additional tax.  Second, the LRO report shows that the tax will fall heaviest on large firms that are engaged in “final” rather than “intermediate sales,” for example, retail sales.  Thus, there is no evidence to support fears that Measure 97 will result in significant tax pyramiding and escalating tax rates.

Third, the report also concludes that the gains from greater and more stable funding of vital services come with minimal negative economic consequences.  The LRO study does find, as critics of Measure 97 point out, that the Oregon economy with Measure 97 in place will grow more slowly and create fewer jobs over the next five years than if the measure were not passed.  However, the negative impact of the tax is quite small.  For example, the LRO model predicts that there will be 20,000 fewer jobs in Oregon if Measure 97 is passed, but this is out of a projected labor force of some 2.7 million.  In reality we are talking about rounding errors.  This is highlighted by the results of a study of the effects of Measure 97 by the Northwest Economic Research Center (NERC) at Portland State University.  The NERC, using a similar methodology, concluded that adoption of the measure would generate a small overall gain in employment.

Most importantly, critics of Measure 97 do not appear to understand the LRO’s methodology and the biases that shape its conclusions.  The LRO did not use a forecasting model to assess the economic consequences of Measure 97.  In other words, the LRO never actually tried to predict what would happen to the Oregon economy if we passed or didn’t pass Measure 97.  For example, it did not try to model the consequences of slashing state budgets if the measure does not pass; it did not take the looming budget deficit into account at all.

Rather the LRO used an idealized model of the 2012 Oregon economy that operates in its own time and space, with firms that keep no profit (since all earnings are distributed to their owners) and full employment.  The authors of the study introduced the tax, made assumptions about firm responses, and used their model to simulate their created economy’s return to a new equilibrium state over a five year period.

While this model has its uses when comparing two different tax proposals, it is not very helpful for modeling the actual economic consequences of Measure 97.  In fact, its structure is such that its predicted results overestimate the costs and underestimate the benefits of the measure.  One serious flaw in the model is its assumption that businesses have no retained profits.  This means that firms will automatically seek to pass the entire tax along to consumers, leading to higher prices and declines in real income.

However, there are many reasons to think that this outcome is unlikely.  First, competitive pressures will, in many cases, make it difficult for large firms to raise their prices.  After all, only some firms in each industry will be required to pay the new tax.  Second, studies have shown, including a recent one jointly authored by the Oregon Consumer League and Our Oregon, that large firms tend to have national pricing strategies.  In other words, these firms charge the same prices for the same products in every state in which they operate.  The study also found no relationship between state tax policies and the cost of living in each state.  Thus, it is likely that large multi-state firms operating in Oregon will simply absorb much of the new tax, accepting slightly lower profits, rather than try to pass it on to consumers through higher prices.

When you hear opponents of Measure 97 confidently predict that its passage will lead to higher prices and real income losses for consumers because businesses will simply pass on the cost of the tax to consumers, take a minute to investigate who is bankrolling the opposition to the measure.  Among the leading contributors to the no campaign are companies like Comcast, Standard Insurance, Procter and Gamble, Weyerhaeuser, Walmart, Well Fargo, and US Bank.  Would they be pouring tens of thousands of dollars each into the campaign if they didn’t fear that the tax will cost them profits?

Another serious flaw in that the model is that it does not try to capture any of the broader social benefits that would accrue to the state and its citizens from passage of Measure 97.  For example, the model does not account for the fact that a better educated and healthier population will likely attract new businesses and employment opportunities.  Or that well-funded social services would enable more people to work, boosting their incomes, or help families better weather hard times and plan and save for the future.   If the LRO had adjusted its model to compensate for these flaws, there is no doubt that its assessment of the effects of Measure 97 would have been far more positive.

In sum, most Oregonians know that many people are hurting.  And we are facing a huge budget deficit that will, if nothing is done, require more cuts to education and critical social services, leading to more suffering.  Measure 97 is a game changer.  Yes, this measure will force a large tax increase on some of the country’s biggest corporations.  But the reason that we need such a large increase is that these corporations have essentially been using our public services for close to nothing.  Until 2010 the state minimum tax was $10.  Even now, many corporations find ways to completely avoid paying even the minimum tax.  Measure 97 will put an end to that.  It will go a long way to creating an Oregon that works for the great majority.

Falling Profit Margins Signal Recession Ahead

Business cycles are intrinsic to the way capitalism operates; they are the outcome of contradictions generated by the private pursuit of profit.  In fact, it is the movement in profits that drives the cycle, with a sustained downward movement in the profit margin signaling growing dangers of a recession.

And, it is a sustained downward movement in the profit margin that is leading business forecasters to raise warnings of a coming recession.  A case in point: a June 2016 J.P. Morgan special report titled Profit Stall Threatens Global Expansion states:

One metric for gauging the stage of the business cycle is the level of the profit margin. In this regard, the timing does not look encouraging. The US experience is instructive in this regard. The rolling over of the profit margin has led every US post-World War II recession by one to three years. Indeed, it is partly for this reason that our medium-term recession-probability models show the odds of a recession within the next three years running near 90%.

Recessions mean hardship, especially for working people.  Unfortunately, because most Americans have benefited little from the current expansion, few will have the financial resources necessary to moderate the social costs that come with any downturn.

Business Cycle Theory

Some definitions are needed to show why profit margins are key to gauging the state of the business cycle.  Profits are the difference between a firm’s total revenue from selling products and its total cost from producing them.  The profit margin is the firm’s profit per dollar of sales or revenue; it is calculated by dividing total profits by total revenue.

If we think about the corporate sector as a whole, we can define total corporate profits as the product of corporate total revenue (or sales) multiplied by the average corporate profit margin (or earnings per dollar of sales).  Total revenue is a function of the level of demand in the economy.  The profit margin is heavily dependent on changes in the cost of production (most importantly changes in productivity, which include the intensity of work, and wages).  Not surprisingly, both demand and business production costs, and thus total revenue and the profit margin change over time, sometimes moving in the same direction and sometimes not.

Coming out of a recession, corporations tend to enjoy rapidly increasing demand for their products and, for them, still pleasingly low costs of production thanks to their recession-era leverage over workers.  This translates into rapidly increasing profits and expectations of continued profitability.  This, in turn, encourages more hiring and investment in new plant and equipment, which helps to strengthen demand and further the expansion.

However, at some point in the expansion, costs of production begin to rise from their recession period lows, causing a fall in the profit rate.  For example, productivity begins to slow as firms press older equipment into use and workers take advantage of the improving labor market to slow the pace of work.  And, as unemployment falls over the course of the expansion, workers are also able to press for and win real wage gains.  With costs of production growing faster than product prices, the profit rate begins to decline.

For a time, the growth in sales more than compensates for lower profit margins and total profits continue to rise, but only for a time.  Eventually steadily declining profit margins will overwhelm slowing growth in sales and produce lower profits.  And when that happens, corporations lose enthusiasm for the expansion.  They cut back on production and investment, the effects of which ripple through the economy, leading to recession.

The Data

The following figure from the J.P. Morgan study shows movements in productivity and the profit margin with each point representing a two year average to smooth out trends.  The grey stripes denote periods of recession.  As noted above, the profit margin turns down one to three years before the start of a recession.  The recession, in turn, helps to create the conditions for a new upward movement in the profit rate.

us profit margin

As J.P. Morgan analysts explain:

Indeed, for the US, the turn down in the profit cycle weighs heavily in our estimate of rising recession risks.  The deeper historical experience of the US better highlights the linkage between productivity and corporate profitability. The latest downshift in US productivity suggests the disappointing profit outturns of late likely will not stabilize absent a pickup in productivity growth to an above-1% annualized pace, all else equal. While some acceleration is embedded in our forecast, recent experience suggests the risks are skewed to the downside.

As we can see, in the case of the current expansion, the profit margin is not just falling, it has now moved into negative territory.  Thus, although profits remain high [see figure below], the current decline into negative territory means that profits are now actually falling.  If past trends hold, it is only a matter of time before corporate responses push the US economy into recession.

profit share

When discussing the business cycle it is also important to add that we are not describing a regular pattern of ups and downs around an unchanging rate of growth.  Corporate responses to the conditions they face influence the pattern of future cycles.  For example, if corporations decide to respond to growing worker gains during an expansionary period by shifting production overseas, future recessions will likely be more painful and expansions weaker in terms of job creation and wages.  If fear of corporate flight leads governments to slash corporate taxes, public finances will suffer and so will support for needed investments in physical infrastructure and social services, again boosting profits but at the expense of the longer term health of the economy and its majority population.  This dynamic helps to explain the growing tendency towards long term stagnation coupled with minimal wage gains even during expansions.

J.P. Morgan analysts are not just pessimistic about the US.  They also estimate that profit margins are falling throughout the world, as illustrated in the figure below.

global profit margins

Thus:

If the US experience is any guide, recession risks are elevated broadly. Globally, profit margins peaked near the end of 2013, and declines have occurred across nearly all countries with the exception of Taiwan, Korea, and South Africa [figure above]. Margins have been stable in the Euro area, Japan, and China. By comparison to the huge declines in some countries, the margin compression in the US appears relatively modest. Not surprisingly, Brazil—already in its worst recession since the Great Depression—has seen the most significant margin compression. A similar message is seen for Russia. But for those economies still in expansion, the fall in margin is the most concerning for Poland, the UK, the Czech Republic, Thailand, Australia, Turkey, and India, in order of largest margin declines.

The takeaway: we have plenty to worry about.

Support For Taxing The Rich Growing

For years now the wealthy and their media have hammered on the need for lower taxes on their income, arguing that this would encourage investment, job creation, and growth.  The tax burden on the wealthy has indeed been lowered in one way or the other, but only the wealthy have benefited.  In particular, our public sector and the activities it supports—public infrastructure, education, health care and human services, etc.—have suffered.

Apparently, people are starting to draw the right lesson from this experience.  As the Washington Post reports:

The results from the Public Religion Research Institute and the Brookings Institution [survey] show that 54 percent of Republicans support increasing taxes on those with incomes over $250,000 a year, an increase of 18 percentage points since the last presidential election in 2012. Among Americans as a whole, 69 percent support an increase.

While the change in opinion was greatest for Republicans, as the figure below shows the survey also found increased support for greater taxes on the rich among both Democrats and Independents.  The fact that this support began spiking early in the year suggests that the change is tied to the election process, although it is unclear whether the campaigns are driving the growing support for higher taxes on the wealthy or people are just taking advantage of the process to express their desire for change.

tax increase

Regardless of cause, this is a hopeful development for progressive movement building.

The Greek Tragedy Continues

The Greek tragedy continues.  Greece remains in depression.  The economic downturn began in 2008 and the economy has shrunk every year since, with the exception of 2014.  Although millions are suffering from poverty, the Greek government has continued to make its debt payments, first to foreign banks and now to the Troika.  This pairing is the result of two huge loans by Troika institutions in exchange for the imposition of fierce austerity policies.

The Greek people have refused to quietly accept the unraveling of their society.  According to the Greek police, there were 27,103 protests and rallies in Athens alone between 2011 and 2015.  The number of rallies attended by more than 1,000 people were 61 in 2012, 72 in 2013, 58 in 2014 and 72 in 2015.  Knowing the reliability of police record keeping, these are likely undercounts.

article-1273498-09728EC4000005DC-137_468x286

Despite popular resistance, a commitment to more austerity in exchange for yet more debt was recently approved by the Greek parliament.  It includes new cuts to pensions, increases in required social security contributions, and higher personal and business taxes.  Tragically, the current agreement was negotiated by Syriza, the political party elected in January 2015 on the basis of its commitment to end the austerity and renegotiate the country’s foreign debt.

I recently published an article in the journal Class, Race, and Corporate Power which attempts to explain the forces driving Greece’s economic crisis and the failure of Syriza to fulfill its promises.   The abstract is below.  The article can be accessed for free here, on the journal’s webpage.

 

The Pitfalls and Possibilities of Socialist Transformation: The Case of Greece

Abstract:

With its 2015 electoral victory in Greece, Syriza became the first left political party to lead a European government since the founding of the European Union. As such, its eventual capitulation to the demands of the Troika was a bitter development, and not only for the people of Greece. Because the need for change remains as great as ever, and efforts at electoral-based transformations continue, especially in Europe, this paper seeks to assess the Greek experience, and in particular Syriza’s political options and choices, in order to help activists more effectively respond to the challenges faced when confronting capitalist power.

Section 1 examines how Greece’s membership in the euro area promoted an increasingly fragile and unsustainable economic expansion over the period 2001 to 2007. Section 2 discusses the role of the Troika in Greece’s 2008 to 2014 downward spiral into depression. Section 3 discusses the ways in which popular Greek resistance to their country’s crisis helped to shape and nourish Syriza as a new type of left political organization, “a mass connective party.” Section 4 critically analyzes the Syriza-led government’s political choices, highlighting alternative policies not chosen that might have helped the government break the Troika’s strangle hold over the Greek economy and further radicalize the Greek population. Section 5 concludes with a presentation of five lessons from the Greek experience of relevance for future struggles.

Disappearing Corporate Taxes

The following chart from an Economic Policy Institute economic snapshot makes clear that we have every reason to raise corporate taxes in order to adequately fund needed public investments and social programs.

Corporations have enjoyed a series of tax cuts and loopholes which have enabled them to lower their income tax payments.  In 1952 their income tax payments totaled 5.9 percent of GDP.  In 2015 they were equal to only 1.9 percent of GDP.

 

corporate taxes

US Households Experience Growing Insecurity

People are angry about economic trends and are searching, as voting trends reveal, for ways to communicate their strong desire for change. A recent Pew Charitable Trusts issue brief on Household Expenditure and Income provides powerful insight into those trends.

The issue brief focuses on households in which survey respondents or their spouses are between the ages of 20 and 60.  The households are then divided into thirds based on income.  The key takeaway is the growing economic insecurity of US households.

Figure 1 shows that it took until 2014 for inflation-adjusted median and mean household expenditures to return to their pre-recession levels.

Fig_1_Expen

However, as Figure 2 shows, the median rise in household expenditure was not matched by a corresponding increase in median pre-tax household income.

Fig_2_Expen

As the authors of the issue brief explain:

By 2014, median income had fallen by 13 percent from 2004 levels, while expenditures had increased by nearly 14 percent. This change in the expenditure-to-income ratio in the years following the financial crisis is a clear indication of why and how households feel financially strained.

Figure 4 highlights the recent upswing in costs of housing, food and transportation.

Fig_4_Expen

The housing squeeze has become especially severe for low income renters.  As Figure 6 shows, in 2014, low income renter households spent almost half of their pre-tax income on housing.

Fig_6_Expen

More generally, as Figure 10 reveals, households in all three income groups are experiencing budget tightening; they have significantly less money left over after meeting their regular annual expenditures than they did in 2004.

Fig_10_ExpenIn the words of the study:

The amount of slack that families had in their budgets declined for all income groups between 2004 and 2014. . . . In 2004, the typical household in the lower third had a little less than $1,500 left over after accounting for annual outlays. Just 10 years later, this amount had fallen to negative $2,300, a $3,800 decline. These households may have had to use savings, get help from family and friends, or use credit to meet regular annual household expenditures. The typical household in the middle third saw its slack drop from $17,000 in 2004 to $6,000 in 2014. Of note, because income is measured before taxes, some families will have had even less slack in their budgets than this figure implies.

Sadly, there is no reason to believe that majority economic prospects will take a turn for the better.