Archive for November, 2016

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Special mention

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Back in 2010, Charles Ferguson, the director of Inside Job, exposed the failure of prominent mainstream economists who wrote about and spoke on matters of economic policy to disclose their conflicts of interest in the lead-up to the crash of 2007-08. Reuters followed up by publishing a special report on the lack of a clear standard of disclosure for economists and other academics who testified before the Senate Banking Committee and the House Financial Services Committee between late 2008 and early 2010, as lawmakers debated the biggest overhaul of financial regulation since the 1930s.

Well, economists are still at it, leveraging their academic prestige with secret reports justifying corporate concentration.

That’s according to a new report from ProPublica:

If the government ends up approving the $85 billion AT&T-Time Warner merger, credit won’t necessarily belong to the executives, bankers, lawyers, and lobbyists pushing for the deal. More likely, it will be due to the professors.

A serial acquirer, AT&T must persuade the government to allow every major deal. Again and again, the company has relied on economists from America’s top universities to make its case before the Justice Department or the Federal Trade Commission. Moonlighting for a consulting firm named Compass Lexecon, they represented AT&T when it bought Centennial, DirecTV, and Leap Wireless; and when it tried unsuccessfully to absorb T-Mobile. And now AT&T and Time Warner have hired three top Compass Lexecon economists to counter criticism that the giant deal would harm consumers and concentrate too much media power in one company.

Today, “in front of the government, in many cases the most important advocate is the economist and lawyers come second,” said James Denvir, an antitrust lawyer at Boies, Schiller.

Economists who specialize in antitrust — affiliated with Chicago, Harvard, Princeton, the University of California, Berkeley, and other prestigious universities — reshaped their field through scholarly work showing that mergers create efficiencies of scale that benefit consumers. But they reap their most lucrative paydays by lending their academic authority to mergers their corporate clients propose. Corporate lawyers hire them from Compass Lexecon and half a dozen other firms to sway the government by documenting that a merger won’t be “anti-competitive”: in other words, that it won’t raise retail prices, stifle innovation, or restrict product offerings. Their optimistic forecasts, though, often turn out to be wrong, and the mergers they champion may be hurting the economy.

Right now, the United States is experiencing a wave of corporate mergers and acquisitions, leading to increasing levels of concentration, reminiscent of the first Gilded Age. And, according to ProPublica, a small number of hired guns from economics—who routinely move through the revolving door between government and corporate consulting—have written reports for and testified in favor of dozens of takeovers involving AT&T and many of the country’s other major corporations.

Looking forward, the appointment of Republican former U.S. Federal Trade Commission member Joshua Wright to lead Donald Trump’s transition team that is focused on the Federal Trade Commission may signal even more mergers in the years ahead. Earlier this month Wright expressed his view that

Economists have long rejected the “antitrust by the numbers” approach. Indeed, the quiet consensus among antitrust economists in academia and within the two antitrust agencies is that mergers between competitors do not often lead to market power but do often generate significant benefits for consumers — lower prices and higher quality. Sometimes mergers harm consumers, but those instances are relatively rare.

Because the economic case for a drastic change in merger policy is so weak, the new critics argue more antitrust enforcement is good for political reasons. Big companies have more political power, they say, so more antitrust can reduce this power disparity. Big companies can pay lower wages, so we should allow fewer big firms to merge to protect the working man. And big firms make more money, so using antitrust to prevent firms from becoming big will reduce income inequality too. Whatever the merits of these various policy goals, antitrust is an exceptionally poor tool to use to achieve them. Instead of allowing consumers to decide companies’ fates, courts and regulators decided them based on squishy assessments of impossible things to measure, like accumulated political power. The result was that antitrust became a tool to prevent firms from engaging in behavior that benefited consumers in the marketplace.

And, no doubt, there will be plenty of mainstream economists who will be willing, for large payouts, to present the models that justify a new wave of corporate mergers and acquisitions in the years ahead.

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I’m always pleased when Marx’s critique of political economy and the theory of value are topics of discussion, especially since students are rarely exposed to those ideas in their usual mainstream economics courses. Their professors generally don’t know about any theory of value other than the neoclassical economics they learned and preach—and, as a consequence, students aren’t taught that there is a fundamental critique of the neoclassical theory of value that stems from Marx’s work.

The result is, in fact, quite embarrassing. When I ask students to compare Marx’s theory of profits with the neoclassical theory of profits, they have no idea what I’m talking about. The way they learn economics from my neoclassical colleagues, profits are competed away. “So,” I ask them, “what you have is a theory of capitalism according to which there are no profits”? Then, of course, I have to start all over, teach them the neoclassical theory of profits (as the normal return to capital, rK, where r is the profit rate and K the amount of capital) and only then explain to them the Marxian critique of neoclassical profits (based on s, the amount of surplus-value that arises through exploitation). I am forced to make up for mainstream economists’ poor understanding and explanation of their own theory.

So, good, we now have a new discussion of Marx’s approach—first in the form of Branko Milanovic’s “primer” and then in Fred Moseley’s response to Milanovic. Both are well worth reading in their entirety—and I agree with many of the ideas they put forward.

But I do have a few major disagreements with their treatments. Milanovic, for example, insists that Marx develops his theory through three kinds of production: non-capitalism, “petty commodity production,” and capitalism. I read Marx differently. My view is that Marx starts with the commodity and then proceeds to develop, step by step (across volumes 1, 2, and 3 of Capital), the conditions of existence of capitalist commodity production, which is the goal of the analysis. These are not different historical stages or kinds of production but, rather, different levels of abstraction. So, conceptually, Marx starts from one proposition (that the value and exchange-value of commodities are equal to the amount of socially necessary abstract labor-time embodied in their production), then proceeds to another (where the value and exchange-value of commodities are equal to the value of capital, both variable and constant, and surplus-value embodied in the commodity during the course of production), and finally to a third level (where value and exchange-value can’t be equal, since the price of production, p, now includes an average rate of return on capital).

My other two concerns pertain to both authors. Milanovic and Moseley assert that Marx’s focus was mainly at the macro level, “the determination of the total profit (or surplus-value) produced in the capitalist economy as a whole.” I didn’t understand that idea back in 2013 and I remain unconvinced today. As I see it, Marx focused on both the micro and macro level and in fact worked to make his theory consistent at the two levels. Starting with the value of individual commodities (as I explained above), Marx concluded that, at the aggregate level, two identities needed to hold: the total value of commodities equaled the sum of their prices, and total surplus-value equalled total profits. That’s both a micro theory and a macro theory, a theory of value, price, and profit at both levels.*

The second, and perhaps most important, idea missing from Milanovic’s and Moseley’s interpretations of Marx’s approach is critique. Both authors proceed as if Marx developed his own theory of labor value, instead of seeing it as a critique of the classicals’ theory of value (which, we must remember, is the sub-title of Capital, “A Critique of Political Economy”). In my view, Marx begins where the classicals leave off (with an “immense accumulation of commodities,” Adam Smith’s wealth of nations) and then shows how the production of wealth in a capitalist society involves the performance, appropriation, and distribution of surplus labor.

That’s Marx’s class critique of political economy, which pertains as much to the mainstream economics of our time as to his.

 

*I don’t have the space here to explain how, for any individual commodity, the amount of value embodied during the course of its production won’t generally be equal to the amount of value for which the commodity exchanges. It is conceptually important that individual commodities have both numbers—value and exchange-value—attached to them, especially when they are not quantitatively equal at the micro level. It speaks to the fact that surplus-value is both appropriated (by capitalists from workers, through exploitation) and redistributed (among capitalists, within and across industries).

Chart of the day

Posted: 29 November 2016 in Uncategorized
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The new numbers are out and the business press is celebrating:

U.S. economic growth last quarter was stronger than initially thought and corporate profits rose, signs of continued health in the world’s largest economy.

Corporate profits are, indeed, up 6.6 percent from the previous quarter. In fact, as readers can see from the blue line in the chart above, U.S. corporate profits have increased by over 65 percent since the recovery from the Great Recession began.

And workers? Their situation is anything but healthy. Average hourly earnings for production and nonsupervisory employees (the red line in the chart) have increased by only 16 percent since the recovery began.

Is it any wonder that one Party of Business, which focused on the rigged game and promised to drain the swamp, beat out the other Party of Business, which called for a continuation of business as usual?

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In the first installment of this series on “class before Trumponomics,” I argued that the recovery from the crash of 2007-08 created conditions that were favorable to capital at the expense of labor—and that trend represented a continuation of the class dynamic that had characterized the U.S. economy for decades, going back at least to the early 1980s.

There are, of course, many details that were left out of that story, and I want to present a more fine-grained class analysis of the U.S. economy prior to Donald Trump’s election in this post.

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Let me start with labor. In the first post, my analysis actually understated the capital share and overstated the labor share. That’s because a large share of the surplus was actually included in wages, and thus attributed to labor, when in fact it properly belongs in the share captured by capital. The idea is that high-level executives and others (e.g., CEOs and those working in finance), while much of their income is reported as “wages,” are actually receiving a cut of the surplus from their employers. Therefore, their wages are actually part of the capital share, while the incomes of the rest of workers form the basis of the labor share properly understood.

This is clear in the chart above (modified, from a paper by Michael W. L. Elsby, Bart Hobijin, and Aysegül Sahin [pdf]), where the labor share is split up by income fractiles. Based on a rough class analysis of the U.S. labor force, the labor share actually includes the first two components (making up the bottom 95 percent of the labor force), while the other fractiles (those making up the top 5 percent) represent a distribution of the surplus from capital. As is evident from a quick glance at the chart, the share of total wages going to the working-class has been declining since the early 1970s, while the share representing distributions of the surplus has grown.

The consequence of making such a distinction is that the fall in the labor share and the rise in the capital share are actually much more dramatic—both in the decades leading up to the crash and during the so-called recovery—than when we look just at wages and corporate profits.

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The U.S. working-class has also changed over time, especially in the decades leading up to the crash, as the economy itself was fundamentally transformed by a combination of automation, the offshoring of production, and imports from abroad. In terms of sectors and thus types of jobs, the biggest change that can be seen in the charts above was the decline in Manufacturing, which took place mostly between 1980 and 2007—from 21 percent of total employment to only 10 percent—with a further decrease (to 8 percent) by 2016. The sectors that grew as shares of total employment include Leisure & Hospitality, Education & Health, and Business Services. Mining and Logging, which was never more than a sliver of total employment, began and remained small. And Government jobs, as a share of total employment, actually declined. The result is that, over time, American workers have been forced to sell their ability to work less to employers in the production of goods (who have offshored production and automated many of the manufacturing jobs that remain) and more to those involved in the production of services (who are already engaged in a new round of automation, thus threatening service-sector jobs).

The U.S. working-class has also changed in many other ways over the course of the past few decades.

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For example, union membership has steadily declined in the United States. In 1983, 20 percent of all workers in the United States belonged to unions, which negotiated wages and benefits on their behalf. By 2015, however, only 11.1 percent of all U.S. workers were union members. The decline has almost entirely been driven by a large decrease in private-sector union membership. In 1983, union members accounted for 16.8 percent of private-sector workers, and in 2015 they only accounted for 6.7 percent. Public-sector unions, meanwhile, remain quite prevalent among government workers. In 2015, 35.2 percent of government workers were union members, which is virtually unchanged from 1983.*

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Not only do U.S. workers enjoy less protection as a result of the decline in labor unions; the wage floor, represented by the minimum wage, has also fallen over time. The real value of the federal minimum wage is now less than it was in 1968 (when it was equal to $9.63 in today’s dollars)—and it is now much less than what it would be had it grown at the same rate as average wages and, especially, the growth in productivity.

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Another change in recent decades has to do with foreign-born workers (both legal and undocumented), which increased dramatically from 1970 through 2010—from 4.3 to 24.7 million workers and, as a percentage of the U.S. labor force, from 5.2 to 15.8 percent. After the crash, however, the growth in both the number and the percentage slowed considerably.

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What about other segments of the U.S. working-class? As is clear from the chart above, wages “for all groups of workers (not just those without a bachelor’s degree), regardless of race, ethnicity, or gender,” have (since 1979) have lagged the growth in economy-wide productivity. The gender gap has close somewhat in recent decades—in part because women’s real wages have risen but also because men’s real wages have fallen. Still, white women have narrowed the wage gap with white men to a much greater degree than black and Hispanic women. Black and Hispanic men, for their part, have made no progress in narrowing the wage gap with white men since 1980, in part because the real hourly earnings of white, black or Hispanic men have all fallen over this 35-year period. As a result, black men earned the same 73 percent share of white men’s hourly earnings in 1980 as they did in 2015, and Hispanic men earned 69 percent of white men’s earnings in 2015 compared with 71 percent in 1980. We also need to consider the other side of that relationship—that increased racial and ethnic disparities reinforce the growing gap between productivity and the wages of all workers. Black workers are paid less than their white counterparts (of both genders), and all workers’ wages are as a result less than they otherwise would be. Thus, wealthy individuals and large corporations, who capture the resulting surplus, are the only ones who benefit from racial and ethnic wage disparities.

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The final major change I want to draw attention to is the increasing precarity of the U.S. working-class. They’re increasingly employed in part-time jobs (as can be seen in the chart above, which tracks the ratio of part-time to full-time workers) and in “alternative” work arrangements. As Lawrence Katz and Alan Krueger (pdf) have shown, just in the past decade, the percentage of American workers engaged in alternative work arrangements— defined as temporary help agency workers, on-call workers, contract workers, and independent contractors or freelancers—rose from 10.1 percent (in February 2005) to 15.8 percent (in late 2015). And, it turns out, the so-called gig economy is characterized by the same unequalizing, capital-labor dynamics as the rest of the capitalist economy.

What is clear from this brief survey of the changes in the condition of the U.S. working-class in recent decades is that, while American workers have created enormous wealth, most of the increase in that wealth has been captured by their employers and a tiny group at the top—as workers have been forced to compete with one another for new kinds of jobs, with fewer protections, at lower wages, and with less security than they once expected. And the period of recovery from the Second Great Depression has done nothing to change that fundamental dynamic.

 

*According to the latest OECD data, the United States is an outlier on both coverage of collective bargaining agreements and trade-union density, as can be seen in the following charts:

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Special mention

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The extensive media coverage since Fidel Castro died has included many different voices—from those of journalists who interviewed him and wrote about him, especially in the early years, through Cold Warriors and Cuban émigrés who did battle with him to political figures whose comments have been crafted to align with contemporary constituencies and goals.* But the media have left out one important group: ordinary people who, over the years, found themselves inspired by and generally sympathetic with (even when critical of many features of) the Cuban Revolution.

I’m referring to people around the globe—students, workers, peasants, activists, and many others, throughout the Americas and across the world—who have understood the significance of the Revolution for Cuba and, as a historical example of anti-imperialism and human development, for their own attempts to enact radical political and economic change.

What we haven’t learned from recent coverage is that re-revolutionary Cuba was under the thumb of the U.S.-backed dictatorship of Fulgencio Batista, who governed a relatively wealthy but highly unequal country in which the majority of people had no voice and suffered from high unemployment, a low level of literacy, poor health, and inadequate housing. And they were exploited in an economy dominated by large landowners, U.S. corporations, and American organized crime. The 26th of July Movement (a name that originated in the failed attack led by Fidel on the Moncada Barracks in 1953) launched an insurrection in 1956, with the landing of small force that found its way to the Sierra Maestra Mountains, and, with the support of an army of volunteers in the countryside and “Civic Resistance” groups in the cities, succeeded in overthrowing Batista. A small revolutionary organization with widespread popular support managed to confront and ultimately defeat a typical authoritarian Washington-backed Latin American regime just 90 miles off the U.S. coast.

And while a great deal of attention has been paid to the growing tensions from early on between the new Cuban government and the United States, which sponsored a series of clandestine invasions and assassination attempts, mainstream accounts have overlooked the tremendously successful campaigns to do what had seemed impossible in Cuba and elsewhere—to eliminate illiteracy, promote health, and improve living and working conditions, especially in the countryside. In fact, one of the reasons Havana became and remained so shabby (as legions of foreign visitors who rarely venture outside the capital city never fail to describe) was the Cuban government’s focus on transforming conditions in rural areas so that, in contrast to many other countries, impoverished agricultural workers and their families would have no need to move en masse into the city.

That’s what I noticed when I traveled to Cuba in the late-1970s during the administration of Jimmy Carter, when U.S. travel restrictions were allowed to lapse. I didn’t see the urban ghettoes I drove through before boarding my flight in Montreal, and nowhere did I come across the poverty and inequality characteristic of rural areas across all the countries where I’d lived and worked in Latin America.

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Thanks to the Revolution, Cuba has achieved enormous progress—not only in comparison to the rest of Latin America and the Third World but even (at least in terms of indicators like infant mortality) the United States. That radical turnaround, and the ability to maintain it in the face of unrelenting U.S.-government opposition over decades, is the major reason Fidel and the Cuban Revolution have been admired around the world.

By the same token, the Cuban Revolution has not been romanticized or supported uncritically, especially as a model for left-wing movements elsewhere. For the most part, the economy has been organized around state ownership, not worker-run enterprises. And a small number of political leaders, including Fidel himself, and a single political party have managed to hold onto power, with little in the way of democratic decision-making beyond the local level—not to mention public antipathy towards and discrimination against LGBT people, the jailing of journalists and political dissidents, and so on. Economically and politically, Cuba is no paradise.

Still, for all its faults and mis-steps, the Cuban Revolution has long served as an example of the ability of people to struggle against the impossible and to win. Fidel was thus on the right side of history.

 

*Including the anti-socialist drivel offered by John McTernan, a former speech writer for Tony Blair.