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

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

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

The expansion is running out of steam

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

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

The Goldman Sachs model, according to Domm:

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

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

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

Living on the edge

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

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

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

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

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

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

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

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

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

Corporate Tax Giveaways And Wage Promises

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

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

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

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

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

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

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

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

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

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

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

Corporate Taxes Go Down and Wages Remain Low

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

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

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

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

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

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

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

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

 

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

US Workers And Their Decades Of Lost Earnings

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

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

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

The Stock Market

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

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

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

As the Washington Post explains:

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

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

Lost Decades

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

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

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

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

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

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

 

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

Taxes, Inequality, And Class Power

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

The rich really are different

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

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

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

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

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

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

As with measures of income inequality, changes in the distribution of earnings indicate that inequality has risen owing largely to a concentration of earnings at the top of the distribution. Gross earnings differentials between the 9th and 5th deciles of the distribution have increased over four times as much as the differential between the 5th and 1st deciles. Moreover, data from the Luxembourg Income Survey on net income shares indicate that income shares of the top 10 percent earners have increased at the expense of all other income groups. While there is some country heterogeneity, the increase in top income shares since the 1980s appears to be a pervasive phenomenon.  

Class power counts

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

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

As Taylor explains:

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

The question is why wages of ordinary households lagged.

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

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

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

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

Our benchmark estimates of gross income inequality indicate that the weakening of unions is related to increases in the top 10 percent income share. A 10 percentage point decline in union density is associated with a 5 percent increase in the top 10 percent income share. The relation between union density and the Gini of gross income is also negative and significant.

On average, the decline in union density explains about 40 percent of the 5 percentage point increase in the top 10 percent income share . . . . By contrast, the decline in unionization contributes more modestly to the rise of the gross income Gini, reflecting the somewhat weaker relation between these variables. However, about half of the increase in the Gini of net income is explained by the decline in union density, evidencing the additional and statistically significant relation between this institution and redistribution. The decline in union density was a widespread phenomenon which, as our estimation results suggest, could be an important contributing factor to the rise in top income shares.

The takeaway

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

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

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

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

Tax Cuts: Its All About Capitalism

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

Proposed tax changes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Ideological cover

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

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

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

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

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

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

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

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

 

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

Recession On The Horizon

According to Bloomberg News, analysts at a number of major financial institutions see “mounting evidence” that a recession is not too far away.

In a way, their assessment is not surprising.  The current expansion, which started in June 2009, is now 99 months long, making it the third longest expansion in US history. Only the expansions from March 1991 to March 2001 (120 months) and February 1961 to December 1969 (106 months) are longer.  It is likely that this expansion will pass the 1960s expansion in length but fall short of the record.

Warning signs

The financial analysts cited by Bloomberg News did not base their warnings simply on longevity.  Rather it was the behavior of corporate profits, more specifically their downward trend, that concerned them.  Historically, expansions have come to an end because declining profits cause corporations to slash investment spending, which leads to a decline in employment and eventually consumption, and finally recession.

As the Bloomberg article explains, “The gross value-added of non-financial companies after inflation — a measure of the value of goods after adjusting for the costs of production — is now negative on a year-on-year basis.”  As an analyst for Oxford Economics Ltd. concludes, “The cycle of real corporate profits has turned enough to be a potential source of concern in the next four quarters.”

Real gross corporate value added is a proxy for profits.  Its recent decline, as shown in the figure above, means that corporate profitability is falling over time.  As long as it remained positive (the red line was above zero), corporate profits were continuing to grow, just not as fast as they did in the previous year. However, it has now become negative, which means that total profits are actually falling.  And, as we can see, whenever this happened in the past, a recession soon followed.

The primary reason recessions follow a decline in profits is that investment decisions are very sensitive to changes in profit. A decline in profit tends to produce a much larger decline in investment, leading to recession.  The investment connection to recession is is well illustrated in the following figure, taken from a blog post by the economist Michael Roberts. It shows the change in personal consumption and investment one year before the start of a recession.  As we can see, it is the decline in investment that leads the downturn, and the decline takes place more often than not while consumption is still growing.

The Bloomberg article highlights other studies that come to the same conclusion about the direction of profits and the growing likelihood of recession.  For example, as illustrated below, “The U.S. is in the mature stage of the cycle — 80 percent of completion since the last trough — based on margin patterns going back to the 1950s, according to Societe Generale SA.”

As we can see, the decline in profit margins in the current expansion mirrors the decline during other expansions as they neared their end.  It certainly appears that time is running out for this expansion.

Further evidence comes from the recent reduction in corporate buybacks. As the economist William Lazonick explains:

Buybacks have come to define the “investment” strategies of many of America’s biggest businesses. Figure 1 [below] shows net equity issues of U.S. corporations from 1946 to 2014. Net equity issues are new corporate stock issues minus outstanding stock retired through stock repurchases and M&A activity. Since the mid-1980s, in aggregate, corporations have funded the stock market rather than vice versa (as is conventionally assumed).  Over the decade 2005-2014 net equity issues of nonfinancial corporations averaged minus $399 billion per year.

In other words, corporations have been major players in the stock market, buying and retiring stock in order to drive up stock prices.  The process has, by design, enriched the top end of the income distribution.  It also helped to boost consumption spending, and by extension the expansion.  However, this corporate promotion of stock prices appears to have come to an end.  As a Fortune Magazine article reports:

The great stock buyback boom may be on the wane, undermined by falling company earnings.

U.S. company stock buybacks are down 21% in the first seven months of 2016 compared to the same period a year earlier, according to TrimTabs Investment Research, a fall driven in part by five consecutive quarters of year-over-year earnings declines among S&P 500 stocks.

Buybacks, which cancel shares and thus increase per-share earnings, have played a crucial role in supporting the stock market since the financial crisis, flattering earnings even for companies with static or falling revenues.

They, along with dividends, return cash to shareholders, a process often facilitated by borrowed money.

A decline in market values can thus be expected, adding further downward pressure on economic activity.

Social consequences

The business cycle is an inherent feature of capitalist economies and the US economy has experienced many ups and downs. But expansions and recessions do not balance out, leaving the economy on a stable long-term economic trajectory. Unfortunately, while recent cycles have greatly enriched those at the top, working people have generally experienced deteriorating living and working conditions.  The trend in job creation is one example.

The employment to population ratio is a commonly used measure of employment.  It is calculated by dividing the number of people employed by the total working-age population.  The figure below, from a report by the Chicago Political Economy Group, shows the relative employment or job creation strength of each post-World War II expansion.

As we can see, the November 2001 expansion ended without restoring the pre-recession employment to population ratio. The ratio was 2.48 percent below where it had been prior to the recession’s start.  That means the expansion was not strong enough or structured properly to ensure adequate job creation.  And, despite its length, the current expansion’s employment to population ratio remains nearly 5 percent below that lower starting point.  Moreover, this employment measure doesn’t take into account that a growing share of the jobs created during this expansion are low-paying and precarious.

 

In sum, there are strong reasons to expect a recession within the next year or so.  And it will likely hit an increasingly vulnerable working class hard.  Given trends, where the good times seem to pass most people by and the bad times punish those who gained the least the most, the need for a radical transformation of our economy seems clear.

Americans At Work: Not A Pretty Picture

What is work like for Americans?  The results of the Rand Corporation’s American Working Conditions Survey (AWCS) paint a troubling picture.

As the authors write in their summary:

The AWCS findings indicate that the American workplace is very physically and emotionally taxing, both for workers themselves and their families. Most Americans (two-thirds) frequently work at high speeds or under tight deadlines, and one in four perceives that they have too little time to do their job. More than one-half of Americans report exposure to unpleasant and potentially hazardous working conditions, and nearly one in five American workers are exposed to a hostile or threatening social environment at work.

The authors do note more positive findings.  These include:

that workers appear to have a certain degree of autonomy, most feel confident about their skill set, and many receive social support on the job. Four out of five American workers report that their job met at least one definition of “meaningful” always or most of the time.

The findings

As the Survey’s introductory chapter points out, despite the importance of work to our emotional and physical well-being, social relations, and the development of our capacities to shape our world, little has been published about our experience of work:

Most Americans between the ages of 25 and 71 spend most of their available time in a given day, week, or year working. The characteristics of jobs and workplaces—including wages, hours worked, and benefits, as well as the physical demands and risk of injury, the pace of work, the degree of autonomy, prospects for advancement, and the social work environment, to name a few—are important determinants of American workers’ well-being. Some of these job characteristics also affect workers’ social and family lives. Beyond that, job attributes can affect individual workers’ productivity—and, thus, the well-being of their coworkers, their employer, and the economy at large.

Given the potential importance of working conditions, it is surprising that there is little systematic, representative, and publicly available data about the characteristics of American jobs today.

Here, then, is a more detailed look at some of the Survey’s findings:

The Hazardous Workplace

More specifically, the survey revealed that:

American workers are subject to substantial physical demands in the workplace. One-half of men and one-third of women have a job that involves lifting or moving people or carrying or moving heavy loads one-quarter of the time or more frequently. Forty-six percent of men and 35 percent of women have jobs involving tiring or painful positions one quarter of the time or more. Thirty-eight percent of men and 30 percent of women work in jobs that involve standing all or almost all the time. . . . Overall, these patterns indicate that an overwhelming fraction of Americans engage in intense physical exertion on the job—67 percent of men and 54 percent of women report at least one of the three intense physical demand measures (moving heavy loads or people, tiring or painful positions, and prolonged standing). . . .

In addition to physical demands, more than one-half of American workers (55 percent) are exposed to unpleasant or potentially dangerous working conditions. Sixty two percent of men and 46 percent of women are exposed to vibrations (from hand tools or machinery); loud noise (defined as “Noise so loud that you would have to raise your voice to talk to people”); extreme temperatures (high or low); smoke, fumes, powder, dust, or vapors (including tobacco smoke); or chemical products or infectious materials one-quarter of the time or more at work. The next–most-common exposures for men are noise (39 percent); breathing in smoke, fumes, powder, dust, or vapors (17 percent); and vibrations (9 percent). Overall, results show that an important fraction of Americans report exposure to unpleasant and potentially hazardous working conditions.

The Pressures of Work

The survey found that:

Approximately two-thirds of Americans have jobs that involve working at very high speed at least half the time; the same fraction works to tight deadlines at least half the time. The overlap is high, with 56 percent working in jobs that involve both working at high speed and to tight deadlines half the time or more. There are no significant gender differences in working at high speed or working to tight deadlines

The Long Work Day

According to the survey:

While presence at the work place during business hours is required for most Americans, many take work home. About one-half of American workers do some work in their free time to meet work demands. Approximately one in ten workers report working in their free time “nearly every day” over the last month, two in ten workers report working in their free time “once or twice a week,” and two in ten workers report working in their free time “once or twice a month.”

The Work Environment

The survey found that:

Nearly one in five American workers were subjected to some form of verbal abuse, unwanted sexual attention, threats, or humiliating behavior at work in the past month or to physical violence, bullying or harassment, or sexual harassment at work in the past 12 months. Among men, the most common adverse events were verbal abuse and threats (13 percent in the past month), humiliating behavior (10 percent in the past month), bullying or harassment (9 percent in the past year), physical violence (2 percent in the past year), and unwanted sexual attention (1 percent in the past month). Among women, the most common adverse events were verbal abuse and threats (12.1 percent in the past month), bullying or harassment (11 percent in the past year), humiliating behavior (8 percent in the past month), unwanted sexual attention (5 percent in the past month), and physical violence (1 percent in the past year).

At the same time, it is also true that:

While the workplace is a source of hostile social experiences for an important fraction of American workers, it is a source of supportive social experiences for many others. More than one-half of American workers agreed with the statement “I have very good friends at work,” with women more likely to report having very good friends at work than men (61 and 53 percent, respectively).

 

In sum, the survey’s results make clear that work in the United States is physically and emotionally demanding and dangerous for many workers. And with the government weakening many of the labor and employment regulations designed to protect worker rights and safety, it is likely that workplace conditions will worsen.

Worker organizing and workplace struggles for change need to be encouraged and supported. A recent Pew Research Center survey showed growing support for unions, especially among younger workers.  It is not hard to understand why.