Reports from the Economic Front

a blog by Marty Hart-Landsberg

The Need For A New US Foreign Policy Towards North Korea

US-North Korean relations remain very tense, although the threat of a new Korean War has thankfully receded.  Still the US government remains determined to tighten economic sanctions on North Korea and continues to plan for a military strike aimed at destroying the country’s nuclear infrastructure.  And the North for its part has made it clear that it would respond to any attack with its own strikes against US bases in the region and even the US itself.

This is not good, but it is important to realize that what is happening is not new.  The US began conducting war games with South Korean forces in 1976 and it was not long before those included simulated nuclear attacks against the North, and that was before North Korea had nuclear weapons.  In 1994, President Bill Clinton was close to launching a military attack on North Korea with the aim of destroying its nuclear facilities.  In 2002, President Bush talked about seizing North Korean ships as part of a blockade of the country, which is an act of war.  In 2013, the US conducted war games which involved planning for preemptive attacks on North Korean military targets and “decapitation” of the North Korean leadership and even a first strike nuclear attack.

I don’t think we are on the verge of a new Korean war, but the cycle of belligerency and threat making on both sides is intensifying.  And it is always possible that a miscalculation could in fact trigger a new war, with devastating consequences. The threat of war, perhaps a nuclear war, is nothing to play around with.  But – and this is important — even if a new war is averted, the ongoing embargo against North Korea and continual threats of war are themselves costly: they promote/legitimatize greater military spending and militarization more generally, at the expense of needed social programs, in Japan, China, the US, and the two Koreas.  They also create a situation that compromises democratic possibilities in both South and North Korea and worsen already difficult economic conditions in North Korea.

There is a choice for peace

We doesn’t have to go down this road—we have another option—but it is one that the US government is unwilling to consider, much less discuss.  That option is for the US to accept North Korean offers of direct negotiations between the two countries, with all issues on the table.

The US government and media dismiss this option as out of hand—we are told that (1) the North is a hermit kingdom and seeks only isolation, (2) the country is ruled by crazy people hell bent on war, and (3) the North Korean leadership cannot be trusted to follow through on its promises.  But none of this is true.

First: if being a hermit kingdom means never wanting to negotiate, then North Korea is not a hermit kingdom.  North Korea has been asking for direct talks with the United States since the early 1990s.  The reason is simple: this is when the USSR ended and Russia and the former Soviet bloc countries in central Europe moved to adopt capitalism.  The North was dependent on trade with these countries and their reorientation left the North Korean economy isolated and in crisis.

The North Korean leadership decided that they had to break out of this isolation and connect the North Korean economy to the global economy, and this required normalization of relations with the United States.  Since then, they have repeatedly asked for unconditional direct talks with the US in hopes of securing an end to the Korean War and a peace treaty as a first step towards their desired normalization of relations, but have been repeatedly rebuffed.  The US has always put preconditions on those talks, preconditions that always change whenever the North has taken steps to meet them.

The North has also tried to join the IMF and WB, but the US and Japan have blocked their membership.

The North has also tried to set up free trade zones to attract foreign investment, but the US and Japan have worked to block that investment.

So, it is not the North that is refusing to talk or broaden its engagement with the global economy; it is the US that seeks to keep North Korea isolated.

Second: the media portray North Korea as pursuing an out of control militarism that is the main cause of the current dangerous situation.  But it is important to recognize that South Korea has outspent North Korea on military spending every year since 1976.  International agencies currently estimate that North Korean annual military spending is $4 billion while South Korean annual military spending is $40 billion.  And then we have to add the US military build-up.

North Korea does spend a high percentage of its budget on the military, but that is because it has no reliable military ally and a weak economy.  However, it has largely responded to South Korean and US militarism and threats, not driven them.  As for the development of a nuclear weapons program: it was the US that brought nuclear weapons to the Korean peninsula.  It did so in 1958 in violation of the Korean War armistice and threatened North Korea with nuclear attack years before the North even sought to develop nuclear weapons.

Third: North Korea has been a more reliable negotiating partner than the US. Here we have to take up the nuclear issue more directly.  The North has tested a nuclear weapon 5 times: 2006, 2009, 2013, and twice in 2016.

Critically, North Korean tests have largely been conducted in an effort to pull the US into negotiations or fulfill past promises.  And the country has made numerous offers to halt its testing and even freeze its nuclear weapons program if only the US would agree to talks.

North Korea was first accused of developing nuclear weapons in early 1990s.  Its leadership refused to confirm or deny that the country had succeeded in manufacturing nuclear weapons but said that it would open up its facilities for inspection if the US would enter talks to normalize relations.  As noted above, the North was desperate, in the wake of the collapse of the USSR, to draw the US into negotiations.  In other words, it was ready to end the hostilities between the two countries.

The US government refused talks and began to mobilize for a strike on North Korean nuclear facilities.  A war was averted only because Jimmy Carter, against the wishes of the Clinton administration, went to the North, met Kim Il Sung, and negotiated an agreement that froze the North Korean nuclear program.

The North Korean government agreed to end their country’s nuclear weapons program in exchange for aid and normalization.  And from 1994 to 2002 the North froze its plutonium program and had all nuclear fuel observed by international inspectors to assure the US that it was not engaged in making any nuclear weapons.   Unfortunately, the US did not live up to its side of the bargain; it did not deliver the aid it promised or take meaningful steps towards normalization.

In 2001 President Bush declared North Korea to be part of the axis of evil and the following year unilaterally canceled the agreement.  In response, the North restarted its nuclear program.

In 2003, the Chinese government, worried about growing tensions between the US and North Korea, convened multiparty talks to bring the two countries back to negotiations.  Finally, in 2005, under Chinese pressure, the US agreed to a new agreement, in which each North Korean step towards ending its weapons program would be matched by a new US step towards ending the embargo and normalizing relations.  But exactly one day after signing the agreement, the US asserted, without evidence, that North Korea was engaged in a program of counterfeiting US dollars and tightened its sanctions policy against North Korea.

The North Korean response was to test its first nuclear bomb in 2006.  And shortly afterwards, the US agreed to drop its counterfeiting charge and comply with the agreement it had previously signed.

In 2007 North Korea shut down its nuclear program and even began dismantling its nuclear facilities—but the US again didn’t follow through on the terms of the agreement, falling behind on its promised aid and sanction reductions.  In fact, the US kept escalating its demands on North Korea, calling for an end to North Korea’s missile program and improvement in human rights in addition to the agreed upon steps to end North Korea’s nuclear weapons program.  And so, frustrated, North Korea tested another nuclear weapon in 2009.

And the US responded by tightening sanctions.

In 2012 the North launched two satellites.  The first failed, the second succeeded.  Before each launch the US threatened to go to the UN and secure new sanctions on North Korea.  But the North asserted its right to launch satellites and went ahead.  After the December 2012 launch, the UN agreed to further sanctions and the North responded with its third nuclear test in 2013.

This period marks a major change in North Korean policy. The North now changed its public stance: it declared itself a nuclear state—and announced that it was no longer willing to give up its nuclear weapons.  However, the North Korean government made clear that it would freeze its nuclear weapons program if the US would cancel its future war games.  The US refused and its March 2013 war games included practice runs of nuclear equipped bombers and planning for occupying North Korea.  The North has therefore continued to test and develop its nuclear weapons capability.

Here is the point: whenever the US shows willingness to negotiate, the North responds.  And when agreements are signed, it is the US that has abandoned them.  The North has pushed forward with its nuclear weapons program largely in an attempt to force the US to seriously engage with the North because it believes that this program is its only bargaining chip.  And it is desperate to end the US embargo on its economy.

We lost the opportunity to negotiate with a non-nuclear North Korea when we cut off negotiations in 2001, before the country had a nuclear arsenal. Things have changed.  Now, the most we can reasonably expect is an agreement that freezes that arsenal.  However, if relations between the two countries truly improve it may well be possible to achieve a non-nuclear Korean Peninsula, an outcome both countries profess to seek.

New possibilities and our responsibilities

So, why does US refuse direct negotiations and risk war?  The most logical reason is that there are powerful forces opposing them.  Sadly, the tension is useful to the US military industrial complex, which needs enemies to support the ongoing build-up of the military budget.  The tension also allows the US military to maintain troops on the Asian mainland and forces in Japan.  It also helps to isolate China and boost right-wing political tendencies in Japan and South Korea.  And now, after decades of demonizing North Korea, it is difficult for the US political establishment to change course.

However, the outcome of the recent presidential election in South Korea might open possibilities to force a change in US policy. Moon Jae-in, the winner, has repudiated the hard-line policies of his impeached predecessor Park Guen-Hye, and declared his commitment to re-engage with the North.  The US government was not happy about his victory, but it cannot easily ignore Moon’s call for a change in South Korean policy towards North Korea, especially since US actions against the North are usually presented as necessary to protect South Korea. Thus, if Moon follows through on his promises, the US may well be forced to moderate its own policy towards the North.

What is clear is that we in the US have a responsibility to become better educated about US policy towards both Koreas, to support popular movements in South Korea that seek peaceful relations with North Korea and progress towards reunification, and to work for a US policy that promotes the demilitarization and normalization of US-North Korean relations.

I discuss this history of US-North Korean relations and current developments in South Korea in a May 8 interview on KBOO radio; you can hear the interview here: http://kboo.fm/media/57730-how-us-has-provoked-north-korea

To keep up on developments I encourage you to visit the following two websites:

Korea Policy Institute: kpolicy.org

ZoominKorea: zoominkorea.org

The Fading American Dream

A recently published study in Science Magazine by six scholars, “The fading American dream: Trends in absolute income mobility since 1940,” makes clear that the workings of the contemporary US economy have largely destroyed one of the core tenets of the so-called American dream–that children can expect to enjoy a higher standard of living than their parents.

In particular, the authors found that rates of “absolute income mobility”– the fraction of children who earn more than their parents—“have fallen from approximately 90 percent for children born in 1940 to 50 percent for children born in the 1980s.”

The study

The authors baseline study used data from the U.S. Census, Current Population Surveys, and tax records to determine the percentage of children with pretax measured earnings greater than those of their parents at a comparable age.  More specifically, “child income is measured at age 30 . . . as the sum of individual and spousal income, excluding immigrants after 1994. Parent income is measured . . . as the sum of the spouses’ incomes for families in which the highest earner is between ages 25 and 35.”

The following two figures show the results of their base line study.  Figure A shows the fraction of children earning more than their parents by parent income percentile for selected birth cohorts. Figure B shows the same for the average of all children in the given birth cohort.  Both charts make clear that the American dream is fading, and fading fast.

The authors summarize the results displayed in Figure A as follows:

In the 1940 birth cohort, nearly all children grew up to earn more than their parents, regardless of their parents’ income. Naturally, rates of absolute mobility were lower at the highest parent income levels, as children have less scope to do better than their parents if their parents had very high incomes.

Rates of absolute mobility have fallen substantially since 1940, especially for families in the middle and upper class. At the 10th percentile of the parent income distribution, children born in 1940 had a 94% chance of earning more than their parents, compared with 70% for children born in 1980. At the 50th percentile, rates of absolute mobility fell from 93% for children born in 1940 to 45% for those born in 1980. And at the 90th percentile, rates of absolute mobility fell from 88% to 33% over the same period.

As for Figure B:

Absolute mobility declined starkly across birth cohorts: On average, 92% of children born in 1940 grew up to earn more than their parents. In contrast, only 50% of children born in 1984 grew up to earn more than their parents. The downward trend in absolute mobility was especially sharp between the 1940 and 1964 cohorts. The decline paused for children born in the late 1960s and early 1970s, whose incomes at age 30 were measured in the midst of the economic boom of the late 1990s. Absolute mobility then continued to fall steadily in the remaining birth cohorts.

The following two figures show how trends in absolute mobility vary by state.  Figure A shows absolute mobility by birth cohort for four states while Figure B does the same for all states.  As the authors explain:

Absolute mobility fell substantially in all 50 states between the 1940 and 1980 birth cohorts. Absolute mobility fell particularly sharply in the industrial Midwest, where rates of absolute mobility fell by 48 percentage points in Michigan and about 45 percentage points in Indiana, Illinois, and Ohio. The smallest declines occurred in states such as Massachusetts, New York, and Montana, where absolute mobility fell by about 35 percentage points.

The authors tested the robustness of their results by changing some of their baseline assumptions.

  • They redid their analysis using net income after taxes and transfers, rather than pretax earnings. They then adjusted the income variable to account for the growing use of fringe benefits.

 

  • They also reran their study with new target ages, measuring child income at 40 and parent income at ages 35 to 45, in recognition that social changes may have lengthened the time before children reached their peak earnings years.

 

  • They also tested to see if their results were sensitive to changes in marriage patterns and family size. And finally, they also carried out their study using individual rather than household earnings, looking at sons and fathers and then daughters and fathers.

 

None of these adjustments changed their conclusion that absolute mobility has fallen substantially since 1940.

Explanations

The authors examined two different explanations for the dramatic decline in absolute mobility since 1940: slowing rates of economic growth and increasing income inequality.

They tested these explanations using two counterfactual scenarios.  In the first, they asked what would have happened to absolute mobility for the 1980 birth cohort if the rate of growth was faster, similar to what it had been in the mid-20th century.   In the second, they asked what would have happened to absolute mobility for the same birth cohort if the rate of growth remained unchanged but income was distributed more equitably, as it was for the 1940 birth cohort.

Here is what they found:

Under the higher-growth counterfactual, the mean rate of absolute mobility [for the 1980 birth cohort] is 62%. This rate is 12 percentage points higher than the empirically observed value of 50% in 1980, but closes only 29% of the decline relative to the 92% rate of absolute mobility in the 1940 cohort. The increase in absolute mobility is especially modest, given the magnitude of the change in the aggregate economy: A growth rate of 2.5% per working-age family from 1980 to 2010 would have led to GDP of $20 trillion in 2010, $5 trillion (35%) higher than the actual level.

The more broadly shared growth scenario increases the average rate of absolute mobility to 80%, closing 71% of the gap in absolute mobility between the 1940 and 1980 cohorts.

In other words, most of the decline in absolute mobility is due to the rise in inequality, not the slowdown in growth.  Thus, efforts to speed up growth are unlikely to do much to reverse current trends.  As the authors say:

With the current distribution of income, higher GDP growth rates alone are insufficient to restore absolute mobility to the levels experienced by children in the 1940s and 1950s. If one wants to revive the “American dream” of high rates of absolute mobility, then one must have an interest in growth that is spread more broadly across the income distribution.

Unfortunately, left unexamined are the causes of this growth in inequality.  And this takes us to the workings of the contemporary US economy and more importantly, the core strategies embraced by corporations in their pursuit of profit: globalization, financialization, privatization, the gutting of social programs, the destruction of unions, and the restructuring of work.  Said differently, the enormous growth in inequality over the last decades is the result of policies, many of them promoted by government, that were designed to boost the power and profits of a small group of people. Thus, “spreading growth more broadly across the income distribution” is going to require nothing less than the creation of a powerful social movement willing and able to challenge and change those policies.

Robots And Automation Are Not The Cause Of Our Labor Market Troubles

Employment growth remains weak in the United States.  Many in the media happily encourage us to blame the growing use of robots, or automation more generally, for this situation.  Their message is that we are just experiencing the consequences of technological progress and no one should want to fight that.  However, that is just misdirection; the numbers make clear that it is corporate financial “wheelings and dealings,” not robots and automation, that is the primary cause of our current employment woes.

Productivity Trends

If robots or automation were holding back employment growth we should see rapidly rising rates of output per labor hour or what economists call productivity.  In other words, the new technology would allow companies to greatly increase their production with the same number or even fewer hours of human labor.  And, as a consequence, the demand for labor would slow, leading to weak employment growth.

Here is how the Bureau of Labor Statistics (BLS) explains productivity:

Labor productivity is a measure of economic performance that compares the amount of goods and services produced (output) with the number of labor hours used in producing those goods and services. It is defined mathematically as real output per labor hour, and growth occurs when output increases faster than labor hours. . . . Technological advances, greater investment in machinery and equipment by businesses, increases in worker skill and experience, and other improvements to production can all lead to labor productivity growth.

The problem for those who want to blame our labor market woes on robots and automation is that US productivity gains have been historically weak, not strong, during this economic expansion.

Chart 1 shows the growth in output, hours worked, and labor productivity (shown by the red bar) for the non-farm business sector over every business cycle starting in 1948, as well as for the average business cycle for the historical period.  Of course, our current cycle is not yet over, and the data in this chart only take us through the 3rd quarter of 2016.  But our current expansion is already the longest, and since productivity tends to fall the longer an expansion goes on, we are unlikely to see much of an improvement in the numbers over the rest of the cycle.

As we can see, the growth in labor productivity in the current business cycle, at 1.1 percent, is tied with the 1980-1981 cycle for the lowest rate of productivity growth for the entire historical period.  Labor productivity growth for the average cycle is 2.3 percent.  The current business cycle also has the second lowest rate of growth in output.

Chart 5 offers another way to appreciate how weak productivity growth has been during the current business cycle.  It compares the growth in labor productivity over this cycle with the growth in productivity over the previous cycle (2001 to 2007) and the longer period 1947 to 2007.

In the words of the BLS:

Through most of the Great Recession, labor productivity lagged behind historical growth rates, but then it achieved above-average gains coming out of the recession and into the early quarters of the recovery. The U.S. economy actually caught up to the long-term historical trend (the dashed red line) in the fourth quarter of 2009, although it was still slightly behind the trend from the last cycle (the dotted red line) at that point. However, after 2010, productivity growth stagnated and a substantial deficit relative to historical trends developed over the next 5 years. By the third quarter of 2016, labor productivity in the current business cycle had grown at an average rate of just 1.1 percent, well below the long-term average rate of 2.3 percent from 1947 to 2007 and even further behind the 2.7 percent average rate over the cycle from 2001 to 2007.

In short, if robots or automation were replacing workers this would be reflected in strong productivity growth.  In fact, we see quite the opposite: the weakest productivity growth for any business cycle in the post-1947 historical period.

While high productivity does not guarantee strong wage gains, workers normally find it easier to force business to boost wages when output per labor hour is significantly growing.  Low productivity gains, on the other hand, normally translate into weak wage growth.  And that is what we see today.

Chart 6 shows the growth in labor productivity, real hourly compensation, and the wage gap (difference between productivity and compensation) over the 1948 to 2016 period.

As we can see, the growth in real hourly compensation (shown by the gold bar) has been extremely weak this business cycle, growing by only 0.7 percent.  As the BLS notes:

[This] is low by historical standards. The rate is lower than the average real hourly compensation growth rate of 1.7 percent observed during other business cycles. The rate is also below the rates of all other cycles, except for a brief six-quarter cycle in the early 1980s. Note also that the low growth rate of the current business cycle is a near-continuation of the similarly low growth rate of the early-2000s cycle (0.8 percent).

 Behind The Scenes

For all the talk about technology, business investment has been weak, as illustrated in the following charts from the Economic Policy Institute.  Capital investment has been slow compared with past periods and the same is true for business investment in information technology equipment and software—the alleged drivers of technological innovation.

So, what are businesses doing with their ample profits?  The answer is that they are using them to repurchase their own stock in order to boost stock prices (and managerial salaries) and to pay large dividends to their stockholders.  In other words, engaging in financial transactions to enrich those at the top.

Figure 1, from Yardeni Research, shows the annual dollar value (in billions) of stock buybacks, which is the repurchase of shares by the company that initially issued them, for S&P 500 listed firms over the years 1999 to 2016.  Figure 2 shows annual dividend payouts for these same firms.   Each has been substantial since 2003, although the period of the Great Recession did produce a steep short term dip.

Figure 12,  by showing the value of S&P 500 buybacks and dividends as a percent of operating earnings, illustrates just how substantial this financial activity has become.  Operating earnings are a key measure of profitability and are calculated by subtracting direct business expenses–such as the cost of production, administration and marketing, depreciation, etc.–from revenues.  What we see is that business spending on buybacks and dividends has actually been greater than total operating earnings for several years since 2007, including 2016.

In short, S&P 500 listed businesses are shoveling almost all their profits, and then some in many years, into financial dealings.  No wonder real capital investment has been weak and productivity, wage, and employment growth slow.  Forget that stuff about robots and automation.

The US Economy Doesn’t Create Jobs Like It Used To

Business pursuit of private profit drives our economy.  Sadly, firm profit-maximizing activity increasingly appears to view job creation as a distraction.

The official US unemployment rate fell to 4.5 percent in March 2017; that is the lowest unemployment rate since May 2007.  Many economists, and even more importantly members of the Federal Reserve Board, believe that this low rate indicates that the US economy is now operating at full employment.  As a result, they now advocate policies designed to slow economic activity so as to minimize the dangers of inflation.

Unfortunately, the unemployment rate is a poor indicator of the current state of the labor market.  For one thing, it fails to include as unemployed those who have given up looking for work.

An examination of recent trends in the employment/population ratio (EPOP) makes clear that our economy, even during periods of economic growth, is marked by ever weaker job creation.  It also appears that this is not a problem correctable by faster rates of growth.  Rather, we need to change the organization of our economy and reshape its patterns of income and wealth distribution.

The Employment/Population Ratio and the shortage of jobs

The employment/population ratio (EPOP) equals the share of the non-institutional population over 16 that works for money.  The non-institutional population includes everyone who is not in prison, a mental hospital, or a nursing home.

The figure below, from a LBO News blog post by Doug Henwood, shows the movement of the EPOP for all workers and separately for male and female workers.

As we can see, the participation rate of male workers fell steadily from the early 1950s through the early 1980s recession years.  It then slowed its decent over the next two decades until the 2008 Great Recession, which caused it to tumble.  Its post-recession rise has been weak.  The male EPOP was 66 percent in March 2017.

The female EPOP rose steadily from 30.9 percent in 1948 to a peak of 58 percent in 2000.  Thereafter, it drifted downward before falling significantly during the Great Recession.  Its post-recession rise has also been weak.  It was 54.7 percent in March 2017.

The overall EPOP, the “all” line, began at 56.6 percent in 1948, hit a peak of 64.7 percent in April 2000, and was 60.1 percent in March 2017.

The recent decline in the EPOP for all workers over 16 translates into hard times for millions of people. As Henwood explains:

If the same share of the population were employed today as was in December 2007, just as the Great Recession was taking hold, 4.3 million more people would have jobs.  If it were the same share as the all-time high in April 2000, 7.3 million more people would be working for pay.  Either one is a big number, even in a country where 153 million people are employed.

In other words, it is likely that there are many people who want and need work but cannot find it.  And it is important to remember that the EPOP only measures the share of the non-institutional population with paid employment.  It tells us nothing about the quality of the existing jobs.

Flagging job creation  

It is easier to appreciate the growing inability of our economy to provide jobs by examining the movement of the EPOP over the business cycle.  Figure 1, from a note by Ron Baiman, a member of the Chicago Political Economy group, shows the number of quarters it takes for an economic expansion to return the EPOP to its pre-recession level.

As we can see, the expansion that started in November 2001, and which lasted for 73 months, ended with an EPOP that was 2.48 percent below where it had been before the start of the March 2001 recession.   This was the first post-war expansion that failed to restore the EPOP to its pre-recession level.  But, it is very likely not the last.  In particular, it appears that our current expansion will be the second expansion.

Our current expansion started June 2009 and as of October 2016 it was 88 months long.  Yet, it remains 4.78 percent below its pre-recession level, which as noted above, was already lower than the EPOP at the start of the March 2001 recession. Given that the EPOP is currently growing very slowly, it is doubtful that it will close that gap before the next recession begins.

Explanations

Many economists argue that the downward trend in the EPOP over the last business cycles is largely due to the aging of the population.  The EPOP of older workers is always lower than that of younger workers, so as their weight in the population grows, the overall EPOP falls.  However, as Baiman explains, and shows in Figure 2, this cannot fully explain what is happening:

Figure 2 below repeats the analysis of Figure 1, but does so within population cohorts of ages 16-24, 25- 54, and 55 and over, whose shares are held constant at October 2016 levels to remove the effects of changing demographics over the post-war period. For example, this eliminates the impact of an increased over 55 population share that is likely to reduce the overall employment/population ratio.

Thus, even with this correction, the current expansion seems very unlikely to recover its “demographically controlled pre-recession employment/population ratio.”

In fact, it is younger, not older workers that are suffering most from a declining EPOP.  As Henwood points out: “Those aged 35-44 and 45-54 have yet to return to their 2000 and 2007 peaks—but those aged 55-64 have, and those over 65 have surpassed them (though obviously a much smaller share of the 65+ population is working than the rest.”

In short, we can rule out an aging population as the primary cause of the growing inability of economic growth to ensure adequate job creation.

A look at the behavior of our dominant firms produces a far more likely explanation.  As Henwood notes:

despite copious profits, firms are shoveling vast pots of cash to their executives and shareholders rather than investing in capital equipment and hiring workers. From 1952 to 1982, nonfinancial corporations distributed 17 percent of their internal cash flow (profits plus depreciation allowances) to shareholders; that rose to about 30 percent in the 1980s and 1990s, and to 48 percent since 2000. (In 2016, the average was an incredible 64 percent.)

This behavior certainly pays off handsomely for top managers and already wealthy stock holders.  But it is not so great for the rest of us, especially for those workers–and their families–who find paid employment increasingly difficult to obtain, even during an economic expansion.

US Corporations Continue Their Global Dominance

“Make America Great Again,” Donald Trump’s campaign slogan, was cleverly designed to suggest that the nation as a whole has been in decline.  And Trump repeatedly blamed past administrations for this situation, attacking them for pursuing policies that he said left US corporations unable to compete with their foreign rivals to the detriment of US workers.

US workers have indeed experienced a steady deterioration in their working and living conditions.  But Trump’s focus on national decline and call for national revitalization obscures what a class analysis plainly shows: leading US corporations have greatly benefited from past policies and continue to dominate global markets and profit handsomely.  In other words, US workers and US corporations do not share a common interest.  Moreover, Trump administration policies designed to strengthen US corporate competitiveness can be expected to further depress worker well-being.

Globalization Changes Things

We live in a world where economic processes and outcomes are heavily shaped by corporate globalization strategies.  This means that national statistics and measures of economic performance can be misleading.  Sean Starrs, in an essay titled “China’s Rise is Designed in America, Assembled in China,” makes this point by using a global lens to evaluate the relative economic strength of China and the United States.

In the pre-globalization era, a country’s production tended to be nationally rooted.  Thus, for example, Japan’s post World War II rise as a major producer and exporter of cars and consumer electronics meant that Japan’s “rising world share of national accounts [could be considered] synonymous [with] rising national economic power.”  But transnational corporate globalization strategies have dramatically changed things.

Thanks to the expansion of transnational corporate controlled cross-border production networks, the production of many goods and services has been divided into multiple segments, with each segmented located in a different country.  As a result, national economic activity tends to be truncated and less revealing of national value-added than in the past.

These networks are most fully developed in East Asia, and their expansion helped transform China into “the workshop of the world.” China is now the leading producer and exporter, largely to the United States, of such key products as cell phones and laptop computers.  However, in sharp contrast to the Japanese experience, most of the value-added in the production of these high-technology goods is captured by non-Chinese firms.  Thus, Chinese national accounts, especially its trade account, greatly overstate Chinese economic power.  At the same time, US national accounts, including its trade account, greatly overstate the loss of US economic power.

The table below, from Starrs’s article, shows China’s top five exports of manufactures, as well as export values and market share for each product.  It also shows US export values and market shares for the same products.  Finally, it also includes the relative share of global profits from sale of these products earned by Chinese and US corporations.  Starrs used the Forbes Global 2000 list, which ranks the top 2000 corporations in the world using a composite of four indices–assets, market value, profit and sales–and groups them by their appropriate sector of activity, to calculate the profit shares.

As we can see, China was responsible for 38 percent of world exports of telecommunications equipment in 2013, compared with a 7.4 percent share for the United States.  Yet, US firms captured 59 percent of the profit generated by sales of these products; the Chinese share was only 6 percent.  Perhaps even more striking:

There is not a single profitable Chinese firm in textiles that is large enough to make the Forbes Global 2000, despite China’s exports making up 39 percent of the world’s. Exports of clothing from production in the United States is miniscule compared to the rest of the world, at 1.3 percent, yet American firms reap 46 percent of the profit-share — even when the top two firms in the world, Inditex (owner of Zara) and H&M, are both European (Spanish and Swedish, respectively).

The reason for this is simple: Chinese production of the products listed in the table takes place within cross-border production networks largely dominated by US corporations.  US firms are able to monopolize the profits generated by the production and sale of these products thanks to their control over the relevant technologies, product branding, and marketing.

The point then is that in the age of globalization, national accounts are no longer a reliable indicator of national economic strength.

Continued US Global Dominance

A simple look at national accounts does paint a picture of declining US economic power.  For example, the US share of global GDP has slowly but steadily declined.  It was 37 percent in the mid-1960s, 33 percent in the mid-1980s, 27 percent in the mid-2000s, and most recently approximately 22 percent.  The US share of world merchandise exports has also declined.  It averaged approximately 12 percent throughout the 1980s and 1990s and then began rapidly falling.  It was down to 8.5 percent by 2010.

However, Starrs finds that once one takes globalization dynamics into account, US corporations continue to dominate international economic activity.

The table below, again from Starrs’s article, looks at 16 leading sectors and the national profit share for the top 2000 publicly traded global corporations within each sector, for the years 2006, 2010, and 2014.   As we can see, in 2014, the US was the only country with corporations that finished in one of the top three places in all 16 sectors.  US corporations had the largest profit shares in 10 of the 16 sectors, including those at the technological frontier.  They are:

  • Aerospace and defense
  • Chemicals
  • Computer hardware and software
  • Conglomerates
  • Electronics
  • Financial Services
  • Heavy Machinery
  • Oil and Gas
  • Pharmaceuticals and Personal Care
  • Retail

If we define market control as either a 40 percent share of global profits or a profit share more than twice that of the second-place nation, US corporations dominated in 8 of these sectors:

  • Aerospace and defense
  • Chemicals
  • Computer Hardware and Software
  • Conglomerates
  • Financial Services
  • Heavy Machinery
  • Pharmaceuticals and Personal Care
  • Retail

Here are the 6 sectors which were led by a country other than the United States:

  • Auto Trucks and Parts: Japan is first and the US third
  • Banking: China is first and the US second.
  • Construction: China is first and the US tied for second.
  • Forestry, Metals, and Mining: Australia is first and the US third.
  • Real estate: Hong Kong is first and the US third.
  • Telecommunications: the UK is first and the US second.

China is the only country other than the United States that finished first in more than one sector.  But as Starrs points out:

Almost all of these top Chinese firms are state-owned enterprises with heavily protected domestic [markets] with very few operations abroad (with the partial exception of Chinese firms in natural resource extraction). None of these behemoth state-owned enterprises can be characterized as globally competing head-to-head with the world’s top corporations to advance the technological frontier, yet these firms constitute the bulk of the non-foreign ownership of profit from production and investment conducted in China.

And the US is second to China in both sectors.

In short, US corporations remain dominant and highly profitable.  And, US dominance is even greater then these results suggest.  That is because US capital “disproportionately owns not only the economic activity occurring within the territory of the United States, but also around the world.”  Thus, while the US “accounts for only 22 percent of global GDP . . . the proportion of American millionaires and total household wealth is 42 percent and 41 percent respectively [of world totals].”

In sum, it is clear that the US state has done well by leading US firms and their owners.  The problem for us is that the policies that helped produce this outcome—deregulation, liberalization, privatization, and globalization, to list a few—have not benefited US workers, and in most cases workers in other countries as well.  Moreover, sustained US corporate dominance does not guarantee the vitality, or even the stability of the global economy.  Core economies continue to stagnate and there is no reason to think that renewal is on the horizon.  In fact, quite the opposite is true; there are growing signs that the US expansion is near end and that Chinese growth will continue to weaken.

Trump, with his call to “Make American Great Again,” aims to use nationalism to win support for his own efforts to advance US corporate interests. While it remains unclear to what extent his policies will differ from those of past administrations, it is already certain that they will not serve majority interests.  This destructive use of nationalism must be challenged.  The best way is to promote a strategy of resistance that flows from and helps to popularize a grounded class analysis of the workings of our economy.

College Education No Ticket To Financially Rewarding Job

For some time, some in the media have blamed workers themselves for their low and stagnate wages. We now have a technology intensive economy, they said, and to get ahead you need a college education. Well, the trends, as illustrated in the following two charts from the Federal Reserve Bank of New York are clear: college grads are also struggling.

The chart below shows underemployment rates for college graduates with a bachelor degree or higher.  A college graduate is considered underemployed if they work in a job that typically does not require a college degree.  The red line shows the percent of recent college graduates, 22 to 27 years of age, that are underemployed.  The blue line shows the percent of all college graduates, 22 to 65, that are underemployed.

As we can see, approximately 44 percent of all recent college graduates with a bachelor degree or higher are currently working in what the Federal Reserve Bank of New York calls “non-college” jobs.   The same is true for roughly one-third of all college graduates.

While the percentage of underemployed college graduates has largely remained unchanged, the same is not true about earnings trends for college graduates employed in non-college jobs.  The following chart highlights the share of college graduates in what the Federal Reserve Bank of New York calls good non-college jobs–those paying an annual salary of $45,000 or more–and low-wage jobs–those paying an annual salary of $25,000 or less.

As we can see, the percentage of college graduates employed in good non-college jobs has steadily declined since 2001.  For recent college graduates (dark red line), the rate fell from approximately 50 percent down to 35 percent.  The percentage with low-wage jobs rose, over the same period, from roughly 10 percent to 13 percent.

There are many good reasons to pursue a college education.  But there is little evidence that employers are now busily creating jobs that require high skill or that a bachelor’s degree or higher is some automatic ticket to a financially rewarding job.

As shown above, a significant share of college educated workers are unable to find jobs requiring a college education.  And those workers are finding it ever harder to land a “good” non-college job.  The problem is not with US workers—it is with the job creating strategies of most businesses operating in the US.

Even The Good Times of Economic Expansion Aren’t So Good For Most In US

Recessions are bad for most people: production, employment, income all fall.   But economic expansions are supposed to more than compensate for the down times.  However, as we see below, that is no longer the case.

Increasingly, the lion’s share of all the new income generated during economic expansions now goes to a very few.  In other words, a sizeable majority of the US population now loses regardless of the state of the economy.  It is time to shift the focus of our discussions from how best to control the business cycle to how to build a movement strong enough to transform the workings of contemporary capitalism.

Pavline R. Tcherneva has calculated the distribution of new income between the top 10 percent and bottom 90 percent of households and the top 1 percent and bottom 99 percent of households in every post-war US economic expansion.  The following figures come from her Levy Economics Institute of Bard College policy paper titled Inequality Update: Who Gains When Income Grows?

Figure 2 shows a steady rise in the share of income growth claimed by the top 10 percent of households (red bar).  However, as we can see, a striking change takes place with the 1982-90 economic expansion.  Starting with that expansion, the top 10 percent have come to dominate the income gains, leaving little for the bottom 90 percent of households (blue bar).  And as Tchervena comments: “Notably, the entire 2001–7 recovery produced almost no income growth for the bottom 90 percent of households.”  So much for the pre-Great Recession debt-driven golden years.

Figure 4 illustrates the distribution of income gains between the top 1 percent of households and the bottom 99 percent of households.  As we can see, the top 1 percent of households now capture a greater share of newly created income than the bottom 99 percent of US households.  It is no exaggeration to say that our economy now largely works only for the benefit of those few families.

Tcherneva sums up her work well:

the growth pattern that emerged in the ’80s and delivered increasing income inequality is alive and well. The rising tide no longer lifts most boats. Instead, the majority of gains go to a very small segment of the population. As I have discussed elsewhere, this growth pattern is neither accidental nor unavoidable. It is largely a by-product of policy design, specifically, the shift in macroeconomic methods used to stabilize an unstable economy and stimulate economic growth.

President Trump’s Hollow Job Promises

President Trump’s election success rested to a considerable degree on his pre-election attack on globalization and verbal pledge to bring manufacturing jobs back to the United States. However, as I argued in a previous post, there is no reason to believe that President Trump is serious about wanting to restrict corporate mobility or fashion new, more domestically-centered, worker-friendly trade relations.

In fact, several of his appointees to key economic policy positions are people whose past work was promoting the very globalization he criticized.

Still, there are some in the labor and progressive communities who continue to hold out hope that they can find common ground with the Trump administration on trade.  Unfortunately, it appears that these people are ignoring what we do know about the nature of existing manufacturing jobs in the globalized industries that President Trump claims he will target for restructuring.  Sadly, the experience of workers in many of those jobs reveals the hollowness of Trump’s promises to working people.

The Southern Strategy of the Automobile Industry

The automobile industry, one of the most globalized of US manufacturing industries, offers a powerful example of the dangers of thinking simply about employment numbers. As an Economic Policy Institute report describes:

Political and market pressure on Japanese and European (and later, Korean) manufacturers to reduce imports to the United States has led to a rising number of “transplants” supplying auto components and assembling autos.

Initially, the transplants operated in the Midwest, including assembly plants in Illinois (Mitsubishi), Michigan (Mazda), Ohio (Honda), and Pennsylvania (Volkswagen), along with California (Toyota’s joint venture with General Motors, now a Tesla facility). More recently, however, the growth has been in Southern states, including assembly plants in Alabama (Honda, Hyundai, and Mercedes-Benz), Georgia (Kia), Kentucky (Toyota), Mississippi (Nissan and Toyota), South Carolina (BMW and Mercedes-Benz), Tennessee (Nissan and Volkswagen), and Texas (Toyota).

As a result of these trends, the weight of motor vehicle manufacturing employment (including parts suppliers) in the United States has shifted from the Midwest to the South.  And what kind of jobs has this investment brought?  The title of a Bloomberg Businessweek article – Inside Alabama’s Auto Jobs Boom: Cheap Wages, Little Training, Crushed Limbs – sums it up all too well.

As the article explains:

Alabama has been trying on the nickname “New Detroit.” Its burgeoning auto parts industry employs 26,000 workers, who last year earned $1.3 billion in wages. Georgia and Mississippi have similar, though smaller, auto parts sectors. This factory growth, after the long, painful demise of the region’s textile industry, would seem to be just the kind of manufacturing renaissance President Donald Trump and his supporters are looking for.

Except that it also epitomizes the global economy’s race to the bottom. Parts suppliers in the American South compete for low-margin orders against suppliers in Mexico and Asia. They promise delivery schedules they can’t possibly meet and face ruinous penalties if they fall short. Employees work ungodly hours, six or seven days a week, for months on end. Pay is low, turnover is high, training is scant, and safety is an afterthought, usually after someone is badly hurt. Many of the same woes that typify work conditions at contract manufacturers across Asia now bedevil parts plants in the South.

“The supply chain isn’t going just to Bangladesh. It’s going to Alabama and Georgia,” says David Michaels, who ran OSHA for the last seven years of the Obama administration. Safety at the Southern car factories themselves is generally good, he says. The situation is much worse at parts suppliers, where workers earn about 70¢ for every dollar earned by auto parts workers in Michigan, according to the Bureau of Labor Statistics. (Many plants in the North are unionized; only a few are in the South.)

In 2014, OSHA’s Atlanta office, after detecting a high number of safety violations at the region’s parts suppliers, launched a crackdown. The agency cited one year, 2010, when workers in Alabama parts plants had a 50 percent higher rate of illness and injury than the U.S. auto parts industry as a whole. That gap has narrowed, but the incidence of traumatic injuries in Alabama’s auto parts plants remains 9 percent higher than in Michigan’s and 8 percent higher than in Ohio’s. In 2015 the chances of losing a finger or limb in an Alabama parts factory was double the amputation risk nationally for the industry, 65 percent higher than in Michigan and 33 percent above the rate in Ohio.

The article provides several stories of low paid workers forced to work in unsafe conditions who suffered devastating injuries.  “OSHA records obtained by Bloomberg document burning flesh, crushed limbs, dismembered body parts, and a flailing fall into a vat of acid. The files read like Upton Sinclair, or even Dickens.”

The Story of Reco Allen

Here is one story from the article: in 2013 Reco Allen, a 35 year old father of three, with a wife working at Walmart, took at $9 an hour job with Surge Staffing, a temp agency that provides workers to Matsu Alabama, a Honda parts supplier.  Allen sought and was given a janitorial position at Matsu.  But after six weeks on the job, he was pressured by a supervisor to finish his shift by working on a metal-stamping press.  Matsu was in danger of not meeting its parts quota and the company “could have been fined $20,000 by Honda for every minute its shortfall held up the company’s assembly line.”

Allen received no training on operating the machine.  Moreover, there were known problems with the vertical safety beam that was supposed to keep the machine from operating if a worker was in danger of being caught in the stamping process.  Tragically, Allen’s arm was indeed caught by the die that stamped the metal parts.  As Businessweek reports:

He stood there for an hour, his flesh burning inside the heated press. Someone brought a fan to cool him off. . . . When emergency crews finally freed him, his left hand was “flat like a pancake,” Allen says, and parts of three fingers were gone. His right hand was severed at the wrist, attached to his arm by a piece of skin. A paramedic cradled the gloved hand at Allen’s side all the way to the hospital. Surgeons removed it that morning and amputated the rest of his right forearm to avert gangrene several weeks later.

The company had been told by the plant’s safety committee several times that the machine needed horizontal as well as vertical safety beams. In fact, one year before Allen’s accident, another worker suffered a crushed hand on the same machine.  Moreover, the company’s treatment of Allen was far from unusual.  Matsu “provided no hands-on training, routinely ordered untrained temps to operate machines, sped up presses beyond manufacturers’ specifications, and allowed oil to leak onto the floor.”

And what happened to the company?  They received a $103,000 fine from an Occupational Safety and Health Review Commission.

The Businessweek article includes several other stories of workers maimed because of unsafe work conditions at firms with long histories of safety violations.  And they all ended in much the same way: with corporations paying minimal fines.  And, apparently with little change in corporate behavior.

Known Knowns

We know that most employers will push production as hard as they can to cut costs, with little regard for worker safety.  We also know that union jobs are better than non-union jobs in terms of wages and benefits, and safety.

We also know that President Trump is taking steps to weaken labor laws and unions, as well as gut federal and state agencies charged with protecting worker health and safety and the environment.

Thus, even if President Trump does succeed in enticing some globalized corporations to shift parts of their respective production networks back to the US, the experience of the auto industry demonstrates that the resulting job creation is unlikely to satisfy worker demands for safe, living wage jobs.

In sum, no matter the campaign rhetoric, and no matter the twists and turns in policy, it should be clear to all that President Trump is committed to an anti-worker agenda.

Fake or Not, The News is Mostly Corporate Controlled

From the Transnational Institute:

 

See the complete infographic to learn more about the leading media, thinktanks, and corporations that seek to shape our thinking.

Trump’s “Skinny Budget” Has A Lot Of Military

President Trump released what is called a “skinny budget.”   It may contain far less information then the skinny budgets released by the five previous administrations, but its aim is crystal clear: more money for militarism, less money for pretty much everything else.

As the Center on Budget and Policy Priorities explains:

The Trump budget includes only estimates for fiscal 2018 and only for its proposed changes to discretionary programs (those funded through the annual appropriations process) — even though discretionary programs make up less than one-third of the federal budget.  The Trump budget omits any figures on entitlement or mandatory spending (e.g., Social Security, Medicare, Medicaid, federal retirement, or SNAP), interest payments, revenues, or deficits.

The following table shows the Trump administration’s proposed changes in discretionary program spending for fiscal year 2018 (which begins in October 2017).

The budget calls for a continuation of Obama administration cuts in overall discretionary spending—a 1.2 percent decline in real dollars for fiscal year 2018.  The figure below highlights the trend. 

In many cases, the proposed cuts to nonmilitary programs appear designed to dismantle key government agencies and programs.  A few examples:

The Environmental Protection Agency would take the biggest hit, with a proposed 31 percent cut to its budget. This would give the agency its smallest budget since it was formed in 1970.  Angela Chen and Alessandra Potenza, writing in the Verge, highlight what is at stake:

Through legislation like the Clean Air Act and the Clean Water Act, the EPA has ensured that Americans live in a relatively healthy environment. Thanks to the EPA’s work, from 1970 to 2015, national emissions of pollutants like lead, carbon monoxide, and nitrogen dioxide have declined by an average of 70 percent. These and more changes meant 160,000 people in the US didn’t die prematurely due to air pollution in 2010 alone. Since the 1980s, the EPA has also worked with local authorities to clean up some of the most polluted sites in the US, from landfills that caught fire to radioactive waste housed close to residential areas.

The proposed Department of Health and Human Services budget would, in real terms, be rolled back 18 years, to its 2000 spending level. The Department, as Chen and Potenza describe:

oversees several major agencies, including the Food and Drug Administration, the National Institutes of Health, the Centers for Disease Control and Prevention, the Substance Abuse and Mental Health Services Administration, and the Office for Civil Rights. . . .These agencies make sure our drugs are safeprovide funding for medical research, lead the way during public health outbreaks such as the ebola scare, and provide services to those struggling with drug addiction. . . .Half of the most transformative drugs of the last 25 years were made possible because of publicly funded research, according to a 2015 study.

The proposed budget for the Education Department would be its lowest in 17 years.

The discretionary part of the Department of Agriculture budget would be slashed to its lowest level since the 1970s.

Transportation would have its lowest real budget in 18 years.

Labor’s budget would be rolled back to levels last seen in the 1970s.

And then there is Defense and Homeland Security, both of which enjoy substantial real increases.  This despite the fact that the Defense Department cannot even account for how it spends its money.  As Reuters reports:

The United States Army’s finances are so jumbled it had to make trillions of dollars of improper accounting adjustments to create an illusion that its books are balanced.

The Defense Department’s Inspector General, in a June [2016] report, said the Army made $2.8 trillion in wrongful adjustments to accounting entries in one quarter alone in 2015, and $6.5 trillion for the year. Yet the Army lacked receipts and invoices to support those numbers or simply made them up.

As a result, the Army’s financial statements for 2015 were “materially misstated,” the report concluded. The “forced” adjustments rendered the statements useless because “DoD and Army managers could not rely on the data in their accounting systems when making management and resource decisions.”

Disclosure of the Army’s manipulation of numbers is the latest example of the severe accounting problems plaguing the Defense Department for decades.

The report affirms a 2013 Reuters series revealing how the Defense Department falsified accounting on a large scale as it scrambled to close its books. As a result, there has been no way to know how the Defense Department – far and away the biggest chunk of Congress’ annual budget – spends the public’s money.

The new report focused on the Army’s General Fund, the bigger of its two main accounts, with assets of $282.6 billion in 2015. The Army lost or didn’t keep required data, and much of the data it had was inaccurate, the IG said.

None of this matters, of course, to those powerful political and economic forces that are determined to push the militarization of the country.

Whether this skinny budget turns out to be a trial balloon, a way for the Trump administration to gauge how far it can go, followed by modest adjustments if it meets strong resistance, remains to be seen.  Regardless, it is critical that we begin now to engage in serious coalition building involving those communities that rely on public services and the public sector workers, at all levels of government, that deliver those services, to shape and advance a powerful and positive vision of the public sector we want and need.  Otherwise, we face a future of ever worsening tradeoffs, with profit-driven corporations steadily moving into the vacuum created by cuts in public programs to increase their control over all facets of our lives.