Creating a democratically run economy: lessons from World War II price control struggles*

Many activists in the United States are working to build a movement for a Green New Deal transformation of the economy.  Not surprisingly, a growing number look to the World War II conversion of the US economy from civilian to military production for inspiration and policy ideas.  The conversion experience shows that a rapid, system-wide transformation of the U.S. economy is indeed possible. It also demonstrates that state capacities and action are critical; the successful conversion required state planning, public financing and ownership, and state direction of economic activity.  At the same time, with very few exceptions, the conversion process was structured in ways that minimized any serious challenge to existing class relations.¹ 

One of the most important exceptions was the government’s approach to price stability.  Faced with business determination to boost its prices and profits, and worker willingness to strike to maintain their real income, the Office of Price Administration was eventually forced to “deputize” volunteers to administer and ensure compliance with its system of price control.  Tens of thousands of volunteers were authorized to visit retail locations to monitor business compliance with the controls and tens of thousands of additional volunteers served on price boards that were empowered to investigate and fine retailers who were found to be in violation of the controls. 

State Conservatives Block City Progressives

Recently, organizers in a number of cities helped to build strong local coalitions which successfully won passage, either though ballot or elected official vote, of measures that improved majority living and working conditions.  Examples include higher minimum wages as well as fair scheduling, paid leave, and improved prevailing wage laws.

Now, conservative forces, organized by groups such as ALEC, are using their influence in state legislatures to pass preemption laws to block this progressive city strategy and, in some cases, roll back past gains. This development is well described by Marni von Wilpert in a recent Economic Policy Institute report titled “City governments are raising standards for working people—and state legislators are lowering them back down.”

Preemption and the rise of the right

Preemption allows a higher level of government to restrict the power of a lower level of government in areas where it believes that lower level government action conflicts, or might conflict, with its own actions. In terms of state politics, state governments can use preemption to restrict the rights of city governments.

A case in point, as described by von Wilpert:

In 2015, the Birmingham City Council passed an ordinance raising the city’s minimum wage to $8.50 effective July 2016 and to $10.10 effective July 2017. At the beginning of the 2016 session, the Alabama state legislature fast-tracked a minimum wage preemption law, which Governor Robert Bentley signed 16 days after the bill was first introduced, nullifying Birmingham’s ordinance and knocking the minimum wage back down to $7.25

At one time, preemption was used by more liberal state governments to keep more conservative city governments from undercutting social standards.  However, as von Wilpert explains, “Now that the Republican Party controls 33 governorships and has majority representation in both chambers of most state legislatures, conservative state legislators have increasingly used preemption laws to strike down local government efforts to increase the quality of life for working people in their municipalities.”

Preemption and minimum wage laws

The federal minimum wage has not been increased since 2009. In 2017, the federal minimum wage of $7.25 was worth 12 percent less, in real terms, than when it was last raised, and is 27 percent below its peak value in 1968.  Working people have therefore pushed hard to get their states and/or localities to take action, and with growing success at the local level.  “Before 2012, only five localities had enacted their own local minimum wage laws, but as of 2017, forty counties and cities have done so.”

But now, as the following figure from the EPI report makes clear, conservative state lawmakers are fighting back, using preemption to restrict local action.  Twenty-five states now have preemption laws denying local governments the right to set their own minimum wages; more than half of these laws were passed beginning in 2013.

Preemption and paid leave

State level right-wing forces have also taken aim at paid leave laws, which generally include the right to paid sick and family medical leave.  There is no federal law guaranteeing workers the right to paid leave, and, as with minimum wage gains, workers have been most successful in winning paid leave at the local level.  However, as we see in the following figure, state legislatures, since 2013, have been busy denying local governments the right to implement their own higher standards.  Twenty states now have preemption laws covering paid leave.

Preemption and fair scheduling

There are currently no federal laws that ensure workers basic fairness and predictability in scheduling.  As von Wilpert describes,

While waiting for the federal government to act, four cities and two states have passed various forms of fair work schedules legislation. But in the last few years, as local governments have begun to innovate in the arena of fair scheduling, state governments have stripped local governments’ abilities to do so—[as we see in the following figure] at least nine states have passed work scheduling preemption laws since 2015.

Preemption and prevailing wage/project labor agreements

Prevailing wage and project labor agreements require private contractors to treat workers fairly, including paying all their workers the prevailing wage, when doing work under government contract.  Such agreements keep private contractors from competing for public work at the expense of their workers.

And, as in the other areas of labor rights discussed above, we see a similar explosion in action by states to restrict the right of their localities to set higher standards for public contracting. At least 12 states now have preemption laws, all but one of which was passed beginning in 2013.

What’s next?

The current right-wing strategy highlighted above greatly reduces what working people can win at the city level in many states.  Of course, there are still many states where local initiatives can bring real improvement and these should obviously continue.  At the same time, it seems clear that the political environment is changing and not for the better in terms of what local efforts can produce.

While far from easy, this means that organizers have little choice but to deepen and extend their work. Among other things, this means pursuing efforts to link local/city coalitions in order to strengthen state level influence.  It also means that more emphasis needs to be put into building organizations as well as alliances of working people around a vision of good jobs for all, a strong and accountable public sector serving human needs, and healthy cities and communities that is to be won through organizing and direct action as well as electoral work.  Above all,  this will require seeking and sharing creative ways to strengthen working class solidarity, which is key if we are to overcome the existing divisions that allow right-wing forces to set the terms of our political choices.

Prepare For The Coming Attack On Social Security

Powerful financial interests want you to believe that Social Security is a broken, bankrupt system.  Don’t believe them—it’s not true.

They don’t care that Social Security is an incredibly popular program that has, for decades, successfully provided a reliable income floor for seniors.  Their ultimate goal is to privatize the system, transforming the more than $2.8 trillion dollars in interest-earning, non-tradeable US government bonds that are currently held in the Social Security Trust Fund into a pool of investment funds they can profitably manage and invest in the stock market.

Candidate Trump said he would defend Social Security.  But his appointments suggest otherwise.  A case in point: his selection of South Carolina Congressman John Mulvaney to run the Office of Management and Budget.  Mulvaney made clear during his confirmation hearing that cutting Social Security was one of his priorities.  The Republican Party leadership has long been on record in favor of gutting Social Security, a first step towards its privatization.   Now that the Republicans control both the Senate and House, as well as the Presidency, it takes no stretch of the imagination to believe that Social Security is in danger.

Sadly, it is an open question how much we can rely on the Democratic Party leadership to defend the system.  Presidents Clinton and Obama both embraced the idea that Social Security was a broken system that needed radical change, one option being its privatization.

In short, it is going to be up to us to defend, if not expand, the system.

Social Security Basics  

In broad brush, the Social Security system works as follows: workers and their employers make yearly payments into the Social Security system.  Workers pay 6.2 percent of their wage and salary earnings, up to a cap which rises each year based on the movement in average wages.  The 2016 cap was $127,200.  Their employers pay a matching amount.  The self-employed pay both shares, for a total of 12.4 percent. Social Security beneficiaries receive inflation-adjusted monthly payments based on a formula tied to their lifetime earnings, years of work, date of birth, and age at retirement.

From 1983 to the present, payments into the Social Security system have been greater than payouts to retirees.  By law, the surplus was invested in interest-earning, non-tradeable, US government bonds and held in the Social Security Trust Fund.  The combination of yearly surpluses and interest earnings produced the trust fund surplus of roughly $2.8 trillion.

Every year the Social Security Board of Trustees issues an annual report on the financial health of the system.  The report includes future projections of the earnings and expenditures over a 75 year period.  Three different outcomes, based on different assumptions about the likely movements in key economic variables, are highlighted.  The intermediate outcome is the one commonly used for assessment of the stability of the system.

Since 2010, worker and employer yearly contributions into the system have been too small to cover payments to beneficiaries; the gap has been covered by using some of the interest earned from the system’s bond holdings.  Still, up to now, the interest earnings have been large enough that their reinvestment has enabled the Trust Fund to keep growing.  However, the Trustees project that beginning in 2020, the system’s non-interest deficit will grow so large that interest earnings will be insufficient to fill the gap. Bonds will have to be sold to meet beneficiary obligations.  Finally, they believe that in 2034 the Trust Fund will be depleted, making it impossible to fully pay scheduled benefits.

It is on this basis, that important political players from both Republican and Democratic parties, representing powerful financial interests, declare the system in crisis and call for its radical transformation.

The Trumped-Up Crisis

There are many reasons to reject this declaration of crisis.  First, the conclusion depends heavily on the assumptions used in the projections of the economy’s movement over the next 75 years.  These assumptions are vetted by the system’s trustees.  There are supposed to be six Trustees.  Four hold positions in the federal government: the Secretary of the Treasury, the Secretary of Labor, the Secretary of Health and Human Services, and the Commissioner of Social Security. The other two are “public representatives” appointed by the President, subject to confirmation by the Senate.  The two Public Trustee positions are currently vacant.  Significantly, all the trustees are political appointees.

A slight change in assumptions can dramatically change the outcome.  For example, the report assumes, for the intermediate forecast, an annual productivity rate of 1.68 percent.  Is that reasonable? For the 41-year period from 1966 to 2007, the annual increase in total-economy productivity averaged 1.73 percent.  From 1995 to 2010 productivity grew by a yearly average of 2.18 percent.  The lower the assumed rate of productivity the more likely the system is to run short of funds; assume a higher rate and the crisis disappears.  The same question can be asked with regard to the assumptions made about immigration and wage increases.

Successive administrations, Republican and Democratic, have talked about the necessity of weakening or actually privatizing Social Security.  One has to wonder about the forecasting assumptions chosen by their appointed trustees.

The role of assumptions also figures prominently when examining the arguments commonly made by advocates for privatizing the Social Security system.  These people almost always point to the historical performance of the stock market to argue that returns would be higher and thus the system more secure if the system were privatized.  But there is a slight of hand here—the conclusion that the Social Security system will fail is based on a future projection of relatively slow growth.  An honest comparison would involve projecting the future earnings of the stock market using the same relatively gloomy assumptions.

However, that is not what is done.  Rather, we are asked to accept the historical performance of the stock market as a reference point for its likely 75 year future performance–an assumption that strongly biases the comparison in favor of privatization.  And, of course, this comparison ignores the considerable fluctuations in stock market performance; a worker who retires during a market slump could be left with little in retirement support.

Another reason to reject the crisis story:  even if we assume that the Trustee’s forecasts are accurate, it is not true that the system would be bankrupt in 2034, leaving retirees penniless.  Funds would still be contributed after all.  As a Newsweek article points out:

The Social Security Trustees estimate that in 2034, there will be enough revenue from payroll taxes and other sources to pay 79 percent of projected benefit obligations based on current law. Granted, a one-fifth cut in benefits will be painful for many Social Security recipients, but it won’t be the catastrophic disappearance of monthly checks.

Moreover, it is not difficult to dramatically reduce, if not eliminate this shortfall.  As noted above, wage and salary income is taxed up to a cap, which in 2016 was $127,200.  That cap means that income earned from work above that level is not subject to social security taxes. [Investment income is never subject to social security taxes.]  The use of a cap means that Social Security’s financial health has been negatively affected by the explosion of income inequality.  As Dean Baker wrote in 2013:

In 1983, the Greenspan commission set the cap at a level where 90 percent of wage income would be subject to the tax, meaning that 10 percent would escape taxation.

Since that date, the upward redistribution of wages has increased the portion of wage income over the cap to 16.8 percent, with just 83.2 percent of wage income subject to the cap. The share going over the wage cap is projected to rise further, reaching 17.5 percent of wage income in a decade. In this way, the upward redistribution of income directly worsens the finances of the program. . . .

The chart below shows the path of Social Security revenue and spending if there had been no upward redistribution of income over the last three decades. In 2012, if 90 percent of wage income has been subject to the tax then the system would have raised another $58.1 billion in taxes. It would have paid out an additional $15.7 billion in benefits for a net increase in revenue of $42.4 billion, before counting the additional interest.

If we imagine keeping the cap adjusted to maintain the 90 percent path and include the interest earnings on the newly generated surplus, the projected social security shortfall comes close to vanishing.  A recent proposal calls for applying the social security tax on incomes over $250,000.  As we see below, only 5.8 percent of workers have incomes above the payroll tax cap and only 1.6 percent have incomes above $250,000.  As Alan Barber and Cherrie Bucknor report, “According to an analysis from the Social Security office of the Chief Actuary, this [policy of imposing the social security tax on incomes over $250,000] would have eliminated 80 percent of the projected Trust Fund shortfall.”  Another proposal calls for limiting the tax to the 0.7 percent of workers whose incomes are above $400,000.

If we were to make all wages subject to the tax, then even under the assumptions used by the Social Security Administration, the system would remain solvent until the year 2067, at which point there would be a 14 percent shortfall in mandated benefits.

The Importance of Social Security

Millions of people count on Social Security.  In fact, over 60 percent of seniors, more than 24 million people, rely on Social Security for at least half their income.  “This includes 53% of married couples and 74% of single beneficiaries. What’s more, 33% of Social Security beneficiaries rely on Social Security for nearly at least 90% of their income.”

It is also an incredibly popular program.  A strong majority support doing whatever it takes to ensure its future.  As Matthew Frankel explains:

According to a survey by the National Academy of Social Insurance, 85% of Americans agree with the statement “Social Security benefits now are more important than ever to ensure that retirees have a dependable income.” This percentage included a majority of all political affiliations, income levels, and age groups.

Additionally, 81% say they don’t mind paying Social Security taxes because of the stability it provides to millions of retirees. And 72% say that we should consider increasing Social Security benefits — including 65% of Republicans, 61% of high-income individuals, and at least 65% of every age group.

So it’s fair to say the consensus is that Social Security is worth preserving.

In short, Social Security is not in crisis.  It is a strong program and, if necessary, simple reforms can ensure its continuing smooth operation.  What does need our attention is the broader workings of our economy.  Among the most pressing issues is the disappearance of secure, well-paying jobs.  In fact, a growing number of analysts worry that the labor market has become so bad for workers that we may be facing the end of retirement; low pay and the lack of benefits will force people to work until they literally drop.  That we have come to this point is a real crisis.

 

Globalization and Precarious Work In Asia

The Asia-Pacific region is regularly celebrated as the bright spot in the world economy, especially East Asia.  This is largely because the region has been the most successful in attracting foreign direct investment and producing exports of manufacturers.

Generally overlooked is the fact that these “accomplishments” have done little to create adequate formal sector employment opportunities for the region’s workers.  In fact, it is likely that the region’s preeminent position in global production networks is closely tied to government policies which have kept workers in a weak bargaining position.

LOW SHARE OF WORKERS IN WAGE EMPLOYMENT

Perhaps the most basic labor market division is between those that work for wages and those that don’t.  As the International Labor Organization explains:

Poor job quality is pervasive in developing Asia and the Pacific and hinders progress towards improving living standards. One indicative measure is the low share of workers in wage employment which typically is more productive and provides higher earnings. Conversely, the bulk of those workers not in salaried jobs are less likely to have formal employment arrangements and social protection coverage.

In the developing Asia-Pacific region, the estimated number of wage employees totaled 766 million in 2015.  While this represents a remarkable increase of 63.4 per cent since 2000, salaried workers still accounted for only two in five of the region’s workforce. Taken by sub-region, the wage employment rate was lowest in South Asia (a ratio of one in four workers). In East Asia the share was around three in five and in South-East Asia and the Pacific approximately two in five.

Here is a look at the situation in some individual countries:

The large number of non-wage workers, many of who are desperate for wage work, have given employers and the state a powerful lever which they have used to weaken worker efforts at unionization and wage bargaining.

THE SLOWDOWN IN FORMAL SECTOR JOB CREATION

University of the Philippines professor Rene E. Ofreneo summarizes recent employment trends, highlighting the slowdown in job creation which began in the 1990s:

Since the 1990s, the UNDP has been pointing out that the outcomes of deeper integration and globalization have been unequal and uneven for most countries, especially for China. The UNDP Report for Asia-Pacific (2006) said that growth has been jobless for some Asian countries, as reflected in East Asia’s job record: 337 million jobs created in the l980s and only 176 million jobs in the l990s. The ILO Report for Asia-Pacific in 2011 also highlights the remarkable divergence between high GDP growth and low employment growth. Note that China has the highest GDP growth and yet it also has the lowest employment growth, with the exception of slumping Japan. . . .

The ILO’s observations on low employment elasticities [which show the increase in employment from an increase in growth] are supported by the study of Jesus Felipe and Rana Hasan (2005), who undertook a labor market survey for the ADB. They estimated a sharp decline in employment elasticities for Asia’s fast-growing economies – China (from 0.33 in the l980s to 0.129 in the l990s), India (from 0.384 to 0.312), Malaysia (from 0.683 to 0.406), Thailand (from 0.315 to 0.193) and Taiwan (from 0.242 to 0.193).  However, Singapore doubled its employment elasticity (from 0.375 to 0.711), while the Philippines registered substantial increase (from 0.535 to 0.711). South Korea’s elasticity hardly changed (from 0.223 to 0.225). One implication of the above statistics is that growth in the fast-growing economies like China and India is indeed accounted for by the increased use of labor-displacing technology, which explains why Felipe and Hasan also found a substantial increase in informal sector employment in these two countries.

While the ILO focus on wage employment is important, it also matters whether the jobs being created represent formal or informal employment. In broad brush, formal sector employment refers to jobs covered by national labor law.  In these jobs, workers are supposed to receive established social benefits, like unemployment compensation or pensions, and work conditions are supposed to be covered by established health and safety regulations.  Wage workers employed in the informal sector are normally not entitled to such benefits or protected by such regulations.  The informal sector can include both wage and nonwage workers.

The definition of formal employment varies greatly across the region.  As Professor Ofreneo describes:

In Bangladesh, formal employment applies only to establishments with 10 or more employees, meaning jobs in enterprises with less than 10 employees are by implication considered informal. Similarly, in Pakistan, the measurement for formal employment is in terms of the number of employees – 20 or more for nonindustrial and 10 or more for industrial establishments. In India, informal employment is simply any employment outside the “organized sector” consisting of the public sector, recognized educational institutions and enterprises registered under the Indian Factories, Co-operative Societies and Provident Fund Acts. In Indonesia, the informals are the own-account workers, self-employed assisted by family members, farmer employees and unpaid family workers. In the case of the Philippines, informal employment includes the self-employed, unpaid family workers and those employed in enterprises with less than 10 people. Thailand, on the other hand, has introduced a more nuanced definition: “informal sector” includes enterprises operating with a low level of organization on a small scale, with low and uncertain wages and with no social welfare and security. Malaysia’s informal definition is focused on the individual workers – the unprotected workers who are not covered by the social security system or the Employees Provident Fund and the self-employed, including unpaid family workers. China defines the informal sector as the totality of small-scale economic units that are not legally established or registered, consisting mainly of micro enterprises, family enterprises and independent service persons.

According to ILO estimates, approximately 65 percent of non-agricultural employment in the Asia-Pacific region is informal employment. More alarming is the fact that formal sector wage employment appears to be shrinking in many countries, often both absolutely and relatively.

THE CHINESE EXPERIENCE

The situation in China is striking.  The following is an excerpt from a past blog post:

In “Misleading Chinese Legal and Statistical Categories: Labor, Individual Entities, and Private Enterprises,” a 2013 article published in the journal Modern China, Philip C.C. Huang describes the evolution and application of Chinese labor law, highlighting its relevance for and growth of different categories of labor.  As he explains, Chinese statistical categories recognize four main types of labor activity based on the legal standing of the employing firm: labor by “employee-workers,” labor by workers employed by legally registered “private enterprises,” labor by people in legally registered “individual entities,” and “unregistered” labor.

Only “employee-workers” are considered formal sector workers and covered by the country’s labor law. . . .

Significantly, as the next table illustrates, both the number and percentage of workers employed in the formal urban economy are shrinking.  The number employed in the formal economy in 2010 was less than the number employed in 1990.  As of 2010, only 36.8% of all workers in the urban economy were employed in formal sector jobs.  In short, all the growth in urban employment over recent decades has been in categories not covered by Chinese labor law, which means that those workers are not covered by legally established minimum wage, overtime regulations, and social benefit requirements.

Who are the workers employed outside the formal sector?  “Private enterprises” are mainly legally registered small-scale businesses averaging 13-15 people.  As Huang describes: “They are also as a rule not formally incorporated as a limited liability entity with separate ‘legal person’ status and are therefore not considered legal ‘employing units’ that are involved in ‘labor relations’. . . . These small businesses rely mainly on the cheapest labor available, the majority of them on disemployed workers and peasant-workers, who are considered to be only in a casual work relationship with them and for whom they need provide no benefits.”

“Individual entities” include legally registered small scale operations employing one or perhaps two people, usually the owner and a family member or friend.  In the largest cities, these workers are “largely engaged in wholesale and retail trade (mainly of daily necessities and clothing), followed by small and modest eateries and hostels, domestic and other services, and transport work. . . .Regardless, the great majority of the people operating the individual entities come from the ranks of the disemployed urban workers and the migrant peasant-workers.”

“Unregistered” workers are those, as the category name implies, whose work is unregistered and therefore largely illegal or extralegal.  They are primarily “newer and less established peasants-workers working in the lowest levels of the informal economy, as temporary construction workers, janitors, itinerant peddlers or stall keepers, guards standing outside residential compounds and commercial buildings the help in eateries and hostels domestic servants manual transport and loading-unloading workers, and the like, many of whom work in the shadow of the law without permits, truly members of the so-called floating population.”

Unregistered workers “appear in the official state statistical tallies only as the difference between those who have registered with the official state administrative entities and the actual numbers of laborers counted up by the decennial population censuses (which have made every effort to enumerate every person living and working in the cities).”  As we can see from the table above, the number of unregistered urban workers are quickly catching up to the number of formal sector urban workers.

The critical point here is that despite record rates of growth few formal sector jobs have been created in urban areas.  That means that official Chinese labor laws and regulations cover a relatively small and declining share of Chinese urban sector workers. . . .

At the same time, things are far from rosy for most formal sector workers.  For example, many companies, especially foreign owned companies, have been actively seeking to weaken formal sector job rights by employing so-called dispatched workers and student interns to avoid paying the wages and benefits mandated by Chinese labor law.  It is therefore not surprising, as recent labor struggles make clear, that even workers in the formal sector have been forced to take direct action to ensure compliance with their country’s labor laws and improve their working conditions.

THE KOREAN EXPERIENCE

In Korea, workers are said to have regular or irregular rather than formal or informal labor market status.  The category of irregular workers includes limited-term workers “whose termination of employment is predetermined or fixed”; part-time workers “who work less than 36 hours a week”; and atypical workers who are dispatched workers, subcontracted workers, specially-employed persons, independent contractors, and home-based workers.

A recent story on the rise of irregular workers in South Korea explains the difference between regular and irregular work as follows:

According to attorney S. Nathan Park these terms “are shorthand rather than precise legal definitions. Broadly speaking, a regular worker is a worker who receives the fullest benefits afforded by Korea’s labor laws; an irregular workers is a worker who does not.” The latter could be anything from a sub-contracted worker doing a one-off job to an office worker on a short, two-year contract.

Irregular workers are, in short, precariously employed people. What makes them precarious, Park indicates, is that they aren’t guaranteed the “’four major insurances’” that corporations are legally obligated to provide regular workers — health insurance, occupational hazard insurance, unemployment insurance, and the national pension. These insurances were the legal accomplishments of the labor unions’ post-1987 democratic transition legal victories.

Additionally, and perhaps most importantly, irregular workers aren’t guaranteed employment unlike regular workers. The latter category of employment, Park adds, “cannot be subject to a defined end date of their employment other than the mandatory retirement age, nor can they be terminated without cause.”

The Korean government has been actively promoting, in concert with large Korean firms, the growth of irregular employment.  In many cases this is being achieved through the introduction of laws that allow corporations to transform work relations, converting regular into irregular work.  For example, until the late 1990s, labor regulations made it difficult for corporations to fire workers or to make significant use of sub-contracted workers, workers dispatched from a temp agency, or workers hired on a temporary contract.  The regulations were changed, enabling large companies to aggressively shed their regular workers, either replacing them with or rehiring them as subcontracted, dispatched, or temporary labor.

A South Korean newspaper article highlights the outcome of this process:

“Each company and industry makes its own determination as to what percentage of irregular workers represents an optimal balance in terms of performance, and that forms the basis of their hiring strategy,” explained Lee Kwang-ho, head of the employment policy team for the Korea Employers’ Federation.

The overall number of irregular workers in South Korea has hovered between 8.18 million and 8.65 million for the seven years since the Fixed-Term Worker Act was enacted in July 2007. The increase has appeared to level off at times, but the number has been more or less set in stone, with legislation, institutional changes, and labor union struggles failing to put a dent in it.

The recent data now show one possible explanation: identical hiring strategies by chaebol [large Korean conglomerates], all of which maintained set percentages of irregular workers through large-scale hiring of “unaffiliated” dispatch workers and subcontractors.

In the past, employers’ groups have pointed to the low percentage of irregular workers hired by companies with over 300 employees as indicating the situation is basically unfixable. They noted that such large companies accounted for just 5.6% of irregular workers in August 2013, while most of the rest were at small workplaces with a staff of 30 or fewer.

But the employment information data now shows that the companies have been breeding grounds for irregular hiring practices.

“Analysis of the data provided by the companies shows that 1,910,000 of the 4,358,000 salaried workers at companies with over 300 employees, or about 43.8%, are irregular workers,” said Kim Yu-seon, a senior research fellow at the Korea Labour and Society Institute (KLSI).

The nearly identical percentages of overall irregular workers – 45.4% of all salaried workers or 8.52 million people as of August, according to KLSI – and irregular workers at large companies suggests that those companies are at the heart of both the problem and its resolution.

This 45.4 percent figure doesn’t capture the full extent of irregular work in South Korea.  Adding self-employed independent contractors, home based workers, and day laborers brings the share of irregular workers to approximately 55 percent of the waged workforce.

Moreover, the Korean government is now aggressively promoting still new changes to the country’s labor laws which will further the growth of irregular work.  For example, proposed reforms will increase the number of industries allowed to use temporary workers and double the length of time that a worker can be employed on a temporary basis, from two years to four years.  And there is nothing in the law that prevents a company from continually rehiring the same worker on the same temporary contract.

This transformation of Korean work relations has greatly increased corporate power at worker expense.  First, workers are being stripped of their job security and their ability to organize and negotiate over their working conditions.  Second, companies are able to greatly reduce their wage and benefit costs.  For example, irregular workers currently earn approximately 54 percent of what regular employees earn for similar work; it was 65 percent in 2004.

PRECARIOUSNESS AND RESISTANCE

China and South Korea are just two examples.  Similar trends exist in the majority of countries in the region.

The takeaway: capitalist globalization dynamics are not leading to the creation of stable, formal labor sector jobs, even in the region with the most dynamic economies.  In fact, current trends in many countries suggest that the reverse is happening, that the drive for profit is encouraging the growth of ever more precarious work and the associated worsening of majority living and working conditions.

At the same time, there is growing labor resistance to this development.  Examples include the recent general strike in Indonesia, widespread labor actions in China, massive demonstrations in Korea, and general strike organizing in India.  In sum, the Asia-Pacific is becoming a region of active national labor struggles for change.

 

 

 

 

 

 

A Test Of Power In Brussels

There is a lot to learn from the standoff in Brussels between Syriza and the Troika (European Commission, European Central Bank, and the IMF) over whether the latter will release the last tranche of bailout funds to the former.  Perhaps the most important lesson is that “politics” triumphs “economics.”  Said differently, Troika leaders are determined to crush any movement, regardless of human cost, that threatens dominant capitalist interests.  In this case, the threat is a popular and successful Syriza and its demonstration effect on class awareness and movements in other European countries, especially Spain, Portugal, and Ireland.

Alex Tsipras, the Greek Prime Minister, understands this.  The following is from a Guardian story:

Greece’s prime minister has said the International Monetary Fund has “criminal responsibility” for the country’s debt crisis as it emerged Athens could miss a €1.6bn (£1.15bn) payment to the lender this month.

Speaking in the Greek parliament Alexis Tsipras called on creditors to reassess the IMF’s insistence on tough cuts as part of the country’s bailout.

“The time has come for the IMF’s proposals to be judged not just by us but especially by Europe,” he said. “Right now, what dominates is the IMF’s harsh views on tough measures, and Europe’s on denying any discussion over debt viability.”

He added: “The fixation on cuts … is most likely part of a political plan … to humiliate an entire people that has suffered in the past five years through no fault of its own.”

The Greek government is running big national budget and trade deficits and is deeply in debt to Troika institutions.  Making these problems worse is the fact that Greece no longer prints its own money, having adopted the euro as its currency in 2001.  Quite simply, as things stand, without a new infusion of funds the government will find it impossible to pay its international debts and support the country’s economic activity. It is this position of weakness that allows the Troika leadership to present Syriza with a “take it or leave it” ultimatum of more austerity, privatizations, and labor market liberalization in exchange for a new loan.

A Little History

Greece didn’t get into this mess overnight or on its own.  The country joined the euro area in 2001, after finally convincing the European Commission that it met the eurozone’s requirements of a budget deficit below 3% of GDP and a national debt below 60% of GDP.  In 2004, Greece finally admitted that it had fudged the figures and had continuously run a greater budget deficit than was allowed.  It was later revealed that Goldman Sachs was a key player in the chicanery.

The European Commission responded to this admission by placing Greece under monitoring and requiring the Greek government to slash public spending.  Greece, it is important to add, was not the only country to have busted these deficit limits—Germany and France, for example, also recorded deficits over the 3% limit–but it was, as far as we know, the only one to manipulate its data.

By 2006 Greece was growing again and in compliance with European Commission deficit rules.  However, the Greek economy remained fragile despite relatively high rates of growth over much of the decade.  Greek growth depended upon debt fueled housing construction and public sector spending.  Its industrial base remained weak as the country experienced an ever growing trade deficit, in large part a consequence of a German export offensive built on a common eurozone currency and wage suppression. In turn, a growing share of the borrowed funds supporting Greek growth came from German and French banks who recycled export earnings back to Greece.

When the global financial crisis exploded in 2008, the Greek economy quickly collapsed.  A sharp recession in 2009 pushed the country’s deficit to over 12.5% of GDP. Greek national debt also soared, leaving the country with the highest debt ratio in the eurozone, over 120% of GDP.

Greece was again put under EU supervision and its government pressed to again slash spending to reduce the public sector deficit and, by extension, its reliance on borrowed funds.  However, the rapidly expanding global economic crisis froze international financial markets, and by early 2010 it was clear that the Greek government would not be able to borrow enough to meet its debt obligations.  In April, after considerable delay due to German resistance, the European Commission finally agreed to establish a bailout fund for Greece with the participation of the IMF.  Eurozone countries agreed to provide 30 billion euros and the IMF an additional 15 billion if Greece accepted monitoring and a tough IMF crafted austerity plan.

This was too little too late.  In May, the European Commission, European Central Bank, and the IMF were forced to put together a much larger bailout package.  Here is the Guardian report of the deal:

European countries stepped into uncharted territory tonight, deciding on the first bailout of a single currency member state by agreeing a three-year package worth 110bn euros (£95bn) to rescue Greece from financial meltdown in return for pledges on the most drastic overhaul of a European economy ever attempted.

Finance ministers from the 16 countries using the single currency met yesterday in Brussels to seal the pact following months of sitting on the fence and two weeks of tough negotiations in Athens involving the International Monetary Fund, the European commission, and the European central bank . . . .

With Greece’s debt relegated to junk status and the country staring at Europe’s first sovereign debt default without the bailout, European leaders sought to put the months of foot-dragging and squabbling behind them to try to shore up the euro and prevent the debt crisis rippling across to Portugal, Spain and Italy.

Of the €110bn over three years, the other 15 euro countries are to supply €80bn in bilateral loans, while the IMF puts up the remaining €30bn. Rehn said that the “systematic, specific, and rigorous” bailout plan came with strings attached tightly, including quarterly monitoring of Greek austerity measures. He revealed the deal required Greece to slash its soaring budget deficit by 6.5% this year alone, a staggering feat if it can be achieved.

The deficit is currently 14% and is to be under 3% by 2014. Several countries need to take the rescue package through parliaments. This is to be done swiftly over the next week, said Jean-Claude Juncker, the Luxembourg leader and chair of the eurogroup, so that the first funds can be released before 19 May when Greece needs to redeem debt of €8.5bn.

It is uncharted territory. The euro rulebook proscribes bailouts of profligate member states and many leaders, foremost Angela Merkel of Germany, are queasy about coming to Athens’ rescue.

In return for the lifeline, Papandreou has committed to the most ambitious and draconian reshaping of Greece’s welfare state ever attempted. Spending cuts amounting to more than €36bn or 11% of national GDP are to be made over the next three years. Wages, pensions, and benefits in Greece’s bloated public sector will be cut, and large VAT and other tax rises will be imposed. The retirement age is to be raised. The savage program will inevitably deepen Greece’s recession.

The Greek government dutifully slashed spending in response to Troika mandates but the result was self-defeating.  Cutting spending in the midst of a recession only deepened the country’s decline, reducing government revenue and therefore doing little to narrow the budget deficit.  Greece’s economy contracted by -0.4% in 2008, -4.4% in 2009, -5.4% in 2010, -8.9% in 2011, and -6.6% in 2012.  Its budget deficit as a percent of GDP was -10.4% in 2010, -9.9% in 2011, and -9.4 in 2012.

In March 2012, the Troika was forced to extend its first bailout.  As the New York Times explains:

After months of tortuous and tense negotiations, a second bailout for Greece finally became a reality  . . . when euro zone nations formally approved the plan and authorized the release of the first multibillion-euro loan installment.

In a statement, Jean-Claude Juncker, who, as the president of the Eurogroup, leads the finance ministers of the 17 European Union members that use the euro, said the national governments had formally approved Greece’s second rescue, which is valued at 130 billion euros ($170 billion). “All required national and parliamentary procedures have been finalized,” he said. . . .

A first installment of 39.4 billion euros ($51.4 billion) in loans will be disbursed from the euro zone’s temporary bailout fund, the European Financial Stability Facility.

The board of the International Monetary Fund is scheduled to meet on Thursday and is expected to agree to contribute 28 billion euros ($37 billion) to the package.

Greece will not be handed a blank check. The bailout loans will be paid in installments, and each tranche of aid will be conditional on the government in Athens hitting goals and completing structural changes to its economy, including the privatization of state-owned assets.

If the reform program is successful, Greece’s debt level by 2020 could be slightly lower than once expected, according to the latest projections, though it would still equal 116.5 percent of gross domestic product.

In all, Greece is expected to receive almost 173 billion euros ($226 billion) from international lenders, taking into account the new bailout and loans from its first rescue package, granted in 2010.

This program was supposed to run through the end of 2014 but was extended again after the election of Syriza in January 2015.  It is the last payment from the 2012 bailout that is at the center of current talks between the Troika and Syriza.  The Troika is withholding this payment until Syriza agrees to abide by the same policies approved by the previous Greek government, which means that Syriza must agree to more budget cuts, privatizations, and labor market liberalization.  Without the money, Syriza will be unable to make its June payment to the IMF and July payment to the European Commission, an outcome that would likely force the country out of the eurozone and into uncharted waters.

Syriza, for its part, having been elected to office on its anti-austerity platform, has refused these terms, proposing instead a different plan of action, one which includes permission to increase both its public spending and taxes on the wealthy, strengthen labor rights, and support re-industrialization.  It also seeks an actual debt reduction to lighten the load that the sizeable debt payments place on the country’s recovery.  It argues that agreeing to continue with the same Troika policies that have been in place since 2010 will only produce the same result: economic decline and unsustainable budget and debt loads, necessitating yet more borrowing.

Trokia Politics

Germany and the IMF have taken leadership in demanding that Syriza toe the line. Angela Merkel and Christine Lagarde argue that their demand for austerity is based on sound economics, but history has shown the folly of their position.  In fact, even IMF staff acknowledge that Troika demands are counterproductive. As the economic journalist Ambrose Evans-Pritchard explains:

The IMF knows that Greece cannot possibly pay [down its debts] by draconian austerity – the policy already implemented for five years with such self-defeating effects – and the longer it pretends otherwise, the more its authority drains away. . . .

The IMF enforced brute liquidation without compensating stimulus or relief. It claimed that its policies would lead to a 2.6pc contraction of GDP in 2010 followed by brisk recovery.

What in fact happened was six years of depression, a deflationary spiral, a 26pc fall in GDP, 60pc youth unemployment, mass exodus of the young and the brightest, chronic hysteresis that will blight Greece’s prospects for a decade to come, and to cap it all the debt ratio exploded because of the mathematical – and predictable – denominator effect of shrinking nominal GDP.

It is a public policy scandal of the first order. One part of the IMF has issued a mea culpa admitting that its own analysts misjudged the fiscal multiplier badly. Plaudits to them.

Another part of the Fund continues to push new variants of the same indefensible policies, demanding a combined fiscal squeeze from pension cuts and VAT rises equal to 1pc of GDP this year and 2pc next year even as the economy lurches back into recession.

Ashoka Mody, former chief of the IMF’s bail-out in Ireland, refuses to criticize his former colleagues on the European desk, but the meaning of [his] words are clear enough.

“Everything that we have learned over the last five years is that it is stunningly bad economics to enforce austerity on a country when it is in a deflationary cycle. Trauma patients have to heal their wounds before they can train for the 10K.”

“I am frankly shocked that we are even having a discussion about raising VAT at all in these circumstances. We have just seen a premature rise in VAT knock the wind out of a country as strong as Japan.”

“Syriza should recruit the IMF’s research department to be their spokesman because they are saying almost exactly the same thing as Syriza on the economics of this. The entire strategy of the creditors is wrong and the longer this goes on, the more is its going to cost them.”

The IMF’s Original Sin in Greece was to allow the urbane Parisian Dominique Strauss-Kahn to hijack the institution to prop up Europe’s monetary union and the European banking system when the crisis erupted in 2010.

The Fund’s mission is to save countries, not currencies or banks, and it certainly should not be doing dirty work for a rich currency union that is fully capable of sorting out its own affairs, but refuses to do so for political reasons.

It was of course a difficult moment in May 2010. The eurozone was spinning out of control. There were no backstop defences – due to the criminal negligence of Europe’s leaders and banking regulators – and fears of a euro-Lehman were all too real.

Yet leaked minutes from the IMF board meetings showed that all the emerging market members (and Switzerland) opposed the terms of the first loan package for Greece. They protested that it was intended to save the euro, not Greece.

It loaded yet more debt onto the crushed shoulders of an already bankrupt country, and further complicated the picture by allowing one large French bank and one German bank – no names please – to offload much of their €25bn combined exposure onto EMU taxpayers.

“Debt restructuring should have been on the table,” said Brazil’s member. The loans “may be seen not as a rescue of Greece, which will have to undergo a wrenching adjustment, but as a bailout of Greece’s private debt holders, mainly European financial institutions”.

Arvind Virmani, India’s member, was prophetic. “The scale of the fiscal reduction without any monetary policy offset is unprecedented. It is a mammoth burden that the economy could hardly bear,” he said.

“Even if, arguably, the program is successfully implemented, it could trigger a deflationary spiral of falling prices, falling employment and falling fiscal revenues that could eventually undermine the program itself.” This is exactly what has happened.

Pensions

The Troika have taken direct aim at Greek pensions, well-aware that Syriza has said that it will not accept any agreement that requires them to further reduce payouts, especially to those at the bottom of the income distribution.   The situation is well described by the economist Michael Roberts:

The callous disregard of the poverty of Greeks, particularly the old, is shown in the statement of IMF chief economist Olivier Blanchard in a blog post.  Blanchard blithely pontificates “we believe that even the lower new [deficit] target cannot be credibly achieved without a comprehensive reform of the value-added tax (VAT) – involving a widening of its base – and a further adjustment of pensions.  Why insist on pensions? Pensions and wages account for about 75% of primary spending; the other 25% have already been cut to the bone.  Pension expenditures account for over 16% of GDP, and transfers from the budget to the pension system are close to 10% of GDP.  We believe a reduction of pension expenditures of 1% of GDP (out of 16%) is needed, and that it can be done while protecting the poorest pensioners”.

But Blanchard’s demand will not protect the ‘poorest’ pensioners as it involves a cut in EKAS, the pension fund for those on lower incomes. A recent poll revealed that 52% of Greek households claimed their main source of income is pensions. This is not because so many people are ‘gaming’ the system and drawing on pensions; it is more because so many Greeks are unemployed without qualifying for benefits or employed but not being paid. If pensions are cut further, a lot of Greek households will really suffer at a time when the economy will likely continue to shrink.  10,000 Greeks have taken their own lives over the past five years of crisis, according to Theodoros Giannaros, a public hospital governor, whose own son committed suicide after losing his job.

The myth that Greeks are all living off the state and sunning themselves on the beaches with their early retirement pensions – something peddled by the Troika and politicians in northern Europe to their electorates – is just that, a Greek myth.  Yes, pensions amount to 16% of GDP, making Greece appear to have the most expensive pension system in Europe.  But this is partly because Greek GDP has dropped so much in the last five years.  Moreover, Greece’s high spending is largely the result of bad demographics: 20% of Greeks are over age 65, one of the highest percentages in the Eurozone.  If you adjust for this by looking at pension spending per person over 65, then Greek pension outlays are below the Euro average.

But the facts don’t matter.  The Troika continues to reject a series of compromises offered by Syriza, pushing the Greek government to the wall on pensions, taxes, privatization, labor policy and more.

A Test Of Power

Alexis Tsipras, the Greek Prime Minister, voiced his frustration with the talks and determination to keep his party’s election promises in a recent Le Monde article.  The main points of the piece are summarized by the economic journalist Paul Mason:

The key passage is Mr Tsipras’ claim that the tax and spending changes Syriza wants “will increase revenues, and will do so without having recessionary effects since they do not further reduce active demand or place more burdens on the low and middle social strata”. –

Basically the Greek government believes there can be non-austerity fiscal discipline and the lenders do not. And that is why Greece remains, for all the emollience in Tsipras article, on a collision course with its lenders.

And here is where Tsipras’ article gets interesting. He accuses that faction among the lenders that is blocking progress – implicitly the German finance ministry and its hardline allies on the ECB – of wanting to create a “two-speed Europe”:  “where the ‘core’ will set tough rules regarding austerity and adaptation and will appoint a ‘super’ Finance Minister of the EZ with unlimited power, and with the ability to even reject budgets of sovereign states that are not aligned with the doctrines of extreme neoliberalism. For those countries that refuse to bow to the new authority, the solution will be simple: Harsh punishment. Mandatory austerity. And even worse, more restrictions on the movement of capital, disciplinary sanctions, fines and even a parallel currency”.

In other words, what is taking place in Brussels is not about economics, it is about politics, or better said domination.  The Troika want a different regime in power in Greece, one subservient to their interests. Its leaders hope that the economic pressure they are applying during a period of renewed recession will cause the Greek people to abandon Syriza, or as a second best, that Syriza will break and discredit itself by agreeing to Troika demands.

How this ends isn’t clear.  If Syriza holds firm the Troika have to weigh the gains and losses from having its bluff called. A bankrupt Greece cut free from the euro could cause international investors to become fearful about the stability of Spain or Italy, leading to capital flight from those countries and the eventual unraveling of the entire eurozone project.  The survival of Syriza and the revitalization of the Greek economy will depend heavily on how well its supporters understand what is at stake.

Inequality and Capitalism

Capitalism is a dynamic system, driven above all by the private pursuit of profit.  Contemporary business decisions, supported by government polices, have been very successful in generating high rates of profit. They have also led to slow and unstable growth.  One consequence is the now widely recognized problem of income inequality.

Significantly, this income inequality is reshaping our economy in ways likely to be self-reinforcing.  This is highlighted by the concentration of consumer spending in ever fewer hands and the business response.

According to a study discussed in a recent New York Times article,

The top 5 percent of earners accounted for almost 40 percent of personal consumption expenditures in 2012, up from 27 percent in 1992. Largely driven by this increase, consumption among the top 20 percent grew to more than 60 percent over the same period.

Thus, by 2012 the top 5 percent of earners were responsible for approximately the same share of personal consumption expenditure as the bottom 80 percent.

If we focus on the post-recession period, the spending dominance of those at the top is even more striking.  As the article notes, “Since 2009, the year the recession ended, inflation-adjusted spending by this top echelon has risen 17 percent, compared with just 1 percent among the bottom 95 percent.”  More broadly, the top 20% of households accounted for approximately 90% of the total increase in real consumption spending over the years 2009 to 2012.

Not surprisingly, this trend has triggered major changes in the economy.  In particular, businesses that cater to “middle-income” earners are in decline while those selling to high and low income earners are rapidly expanding:

In Manhattan, the upscale clothing retailer Barneys will replace the bankrupt discounter Loehmann’s, whose Chelsea store closes in a few weeks. Across the country, Olive Garden and Red Lobster restaurants are struggling, while fine-dining chains like Capital Grille are thriving. And at General Electric, the increase in demand for high-end dishwashers and refrigerators dwarfs sales growth of mass-market models. . . .

In response to the upward shift in spending, PricewaterhouseCoopers clients like big stores and restaurants are chasing richer customers with a wider offering of high-end goods and services, or focusing on rock-bottom prices to attract the expanding ranks of penny-pinching consumers.

“As a retailer or restaurant chain, if you’re not at the really high level or the low level, that’s a tough place to be,” Mr. Maxwell [head of the global retail and consumer practice at PricewaterhouseCoopers] said. “You don’t want to be stuck in the middle.” . . .

The effects of this phenomenon are now rippling through one sector after another in the American economy, from retailers and restaurants to hotels, casinos and even appliance makers.

As for the self-reinforcing nature of this development: luxury spending tends to have the highest profit mark-up, thereby boosting the incomes of those at the top.  And low-end businesses prosper only because they underpin their low prices with ever lower wages.  In sum, structural changes are well underway that, if not opposed, are likely to lock-in this growing income inequality to the detriment of most working people.

Austerity Produces . . . Austerity

The British economy is a disaster.  Oddly enough most analysts find it difficult to explain why.

Actually the reason is quite simple. The British government responded to its own Great Recession by cutting spending and raising taxes.  The result, which is anything but mysterious, is that the county remains in deep recession.

Matthew O’Brien, writing in the Atlantic, describes the situation as follows:

public net investment — things like roads and bridges and schools,  and everything else the economy needs to grow — has fallen by half the past three years, and is set to fall even further the next two. It’s the economic equivalent of shooting yourself in both feet, just in case shooting yourself in one doesn’t completely cripple you. Austerity has driven down Britain’s borrowing costs even further, but that’s been due to investors losing faith in its recovery, rather than having more faith in its public finances. Indeed, weak growth has kept deficits from coming down all that much, despite the higher taxes and slower spending. In other words, it’s economic pain for no fiscal gain.

Below is a chart taken from the Atlantic article.  It shows that:

Britain’s stagnating economy has left it in worse shape at this point of its recovery than it was during the Great Depression. GDP is still more than 3 percent below its 2008 peak, and it hasn’t done anything to catchup in years. At this pace, there will be no recovery in our time, or any other time.

 

In other words, while the British economy suffered a deeper decline during the Great Depression period of 1930 to 1934 than to this point in the Great Recession which started in 2008, the economy recovered far more quickly then than now.  In fact, it doesn’t seem to be recovering now at all.

Perhaps the most surprising thing about the situation is that political leaders appear determined to stay the course.

US Tax Rates

Considering the enormous time spent debating tax policy, it is easy to imagine that the U.S. must have one of the high tax rates in the world.  Well, that is not the case.

The Atlantic has a great blog post which includes graphs from a Business Insider blog post that are drawn from a KPMG report on global tax rates.

The following graph is one of them.  It shows the personal tax rate paid by people making the equivalent of $100,000 a year in 2012.  The U.S. is the 55th ranked country out of 114 in terms of tax rates.

The next graph shows the same thing but for those earning the equivalent of $300,000 a year.  The U.S. ranking is similar for this upper income group, 53rd highest out of 114.

 Moreover, as Derek Thompson, the author of the Atlantic post, notes:

But these numbers might understate how low taxes have been in the U.S. Unlike most advanced economies, the U.S. don’t supplement personal income taxes with a national sales tax, or value-added tax (VAT). Consumption taxes accounted for about a fifth of total U.S. revenue in 2008 (mostly at the state and local level) compared to an OECD average of 32 percent. In other words, the U.S. relies uniquely on personal tax rates to raise revenue — and we have relatively low personal tax rates.

Finally, here is a look at the U.S. ranking among OECD countries for taxes as a share of GDP in 2008.

So, given that the U.S. doesn’t seem to be a high-tax rate country, why is tax policy so contentious?  No doubt the answer has a lot to do with who actually pays the taxes and, perhaps even more importantly, what the revenue is used for.