Haunted by surplus

 

Inequality in the United States is now so obscene that it’s impossible, even for mainstream economists, to avoid the issue of surplus.

Consider the two charts at the top of the post. On the left, income inequality is illustrated by the shares of pre-tax national income going to the top 1 percent (the blue line) and the bottom 90 percent (the red line). Between 1976 and 2014 (the last year for which data are available), the share of income at the top soared, from 10.4 percent to 20.2 percent, while for most everyone else the share has dropped precipitously, from 53.6 percent to 39.7 percent.

The distribution of wealth in the United States is even more unequal, as illustrated in the chart on the right. From 1976 to 2014, the share of wealth owned by the top 1 percent (the purple line) rose dramatically, from 22.9 percent to 38.6 percent, while that of the bottom 90 percent (the green line) tumbled from 34.2 percent to only 27 percent.

The obvious explanation, at least for some of us, is surplus-value. More surplus has been squeezed out of workers, which has been appropriated by their employers and then distributed to those at the top. They, in turn, have managed to use their ability to capture a share of the growing surplus to purchase more wealth, which has generated returns that lead to even more income and wealth—while the shares of income and wealth of those at the bottom have continued to decline.

But the idea of surplus-value is anathema to mainstream economists. They literally can’t see it, because they assume (at least within free markets) workers are paid according to their productivity. Mainstream economic theory excludes any distinction between labor and labor power. Therefore, in their view, the only thing that matters is the price of labor and, in their models, workers are paid their full value. Mainstream economists assume we live in the land of freedom, equality, and just deserts. Thus, everyone gets what they deserve.

Even if mainstream economists can’t see surplus-value, they’re still haunted by the idea of surplus. Their cherished models of perfect competition simply can’t generate the grotesque levels of inequality in the distribution of income and wealth we are seeing in the United States.

That’s why in recent years some of them have turned to the idea of rent-seeking behavior, which is associated with exceptions to perfect competition. They may not be able to conceptualize surplus-value but they can see—at least some of them—the existence of surplus wealth.

The latest is Mordecai Kurz, who has shown that modern information technology—the “source of most improvements in our living standards”—has also been the “cause of rising income and wealth inequality” since the 1970s.

For Kurz, it’s all about monopoly power. High-tech firms, characterized by highly concentrated ownership, have managed to use technical innovations and debt to erect barriers to entry and, once created, to restrain competition.

Thus, in his view, a small group of U.S. corporations have accumulated “surplus wealth”—defined as the difference between wealth created (measured as the market value of the firm’s ownership securities) and their capital (measured as the market value of assets employed by the firm in production)—totaling $24 trillion in 2015.

Here’s Kurz’s explanation:

One part of the answer is that rising monopoly power increased corporate profits and sharply boosted stock prices, which produced gains that were enjoyed by a small population of stockholders and corporate management. . .

Since the 1980s, IT innovations have largely been software-based, giving young innovators an advantage. Additionally, “proof of concept” studies are typically inexpensive for software innovations (except in pharmaceuticals); with modest capital, IT innovators can test ideas without surrendering a major share of their stock. As a result, successful IT innovations have concentrated wealth in fewer – and often younger – hands.

In the end, Kurz wants to tell a story about wealth accumulation based on the rapid rise of individual wealth enabled by information-based innovations (together with the rapid decline of wealth created in older industries such as railroads, automobiles, and steel), which differs from Thomas Piketty’s view of wealth accumulation as taking place through a lengthy intergenerational process where the rate of return on family assets exceeds the growth rate of the economy.

The problem is, neither Kurz nor Piketty can tell a convincing story about where that surplus comes from in the first place, before it is captured by monopoly firms and transformed into the wealth of families.

Kurz, Piketty, and an increasing number of mainstream economists are concerned about obscene and still-growing levels of inequality, and thus remained haunted by the idea of a surplus. But they can’t see—or choose not to see—the surplus-value that is created in the process of extracting labor from labor power.

In other words, mainstream economists don’t see the surplus that arises, in language uniquely appropriate for Halloween, from capitalists’ “vampire thirst for the living blood of labour.”

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The gilded age: a tale of today*

The timing could not have been better, at least for me. It just so happens I’m teaching Thorsten Veblen’s Theory of the Leisure Class this week. It should become quickly obvious to students that, as I have argued before on this blog, we’re now in the midst of a Second Gilded Age.

This is confirmed in a new report by UBS/PwC, according to which, after a brief pause in 2015, the expansion in billionaire wealth around the world has resumed.

Thus, billionaire wealth rose 17 percent in 2016 (up from $5.1 trillion to $6 trillion), far more than the 5.8-percent nominal GDP growth figure and double the rate of the MSCI AC World Index.** There was also a 10-percent rise in the number of billionaires globally to 1,542. Despite a period of heightened geopolitical uncertainty, the world’s ultrawealthy are flourishing.

The United States still has the world’s largest concentration of billionaire wealth. It grew by 15 percent from $2.4 trillion to $2.8 trillion as billionaires prospered, far outstripping the MSCI AC World Index. Thirty-nine Americans entered the billion-dollar plus wealth band and 14 dropped off.

Europe’s billionaire population was static in 2016. Twenty-four entered this wealth band, while 21 dropped off.*** There were 342 European billionaires at the end of 2016.

The biggest jump occurred in Asia. Three quarters of the newly minted billionaires are from the region’s two biggest economies—China and India. China had by far the highest number, adding a net 67 to total 318. India’s billionaire population climbed 16 to 100. Taken together, the wealth of Asian billionaires grew by almost a third (31 percent) in 2016, up from $1.5 trillion to $2 trillion.

So, what do the world’s billionaires do with their vast wealth? Most of it is used to capture even more income and wealth. Thus, the 1,542 billionaires in the UBS/PwC database own or partly own companies that directly employ at least 27.7 million people worldwide—roughly the same as the UK’s working population. And, via an array of financial instruments and “club deals,” they manage to siphon off a large part of the surplus created by the rest of the global working-class.****

Apparently, the world’s billionaires are also becoming major patrons of sports, such as football (both global and American), hockey, baseball, and basketball. According to the report, more than 140 of the top sports clubs globally are owned by just 109 billionaires.*****

One European entrepreneur explains why he owns a sports club in the following way. “Sport is my life and my dearest hobby,” he says. “Further, the publicity you get from the broadcasting is global. The business works according to the theme ‘you win on Sunday and sell on Monday.’ People always identify themselves with winners. A er all, I not only sponsor, whatever I do in this eld must be sustainable and needs to make commercial sense.”

It should come as no surprise that Veblen held a quite different view:

Addiction to athletic sports, not only in the way of direct participation, but also in the way of sentiment and moral support, is, in a more or less pronounced degree, a characteristic of the leisure class; and it is a trait which that class shares with the lower-class delinquents, and with such atavistic elements throughout the body of the community as are endowed with a dominant predaceous trend.

Clearly, the Gilded Age today shares with its historical predecessor a “dominant predaceous trend” that enables the world’s billionaires to accumulate more and more wealth and leaves the rest of us behind.

 

*The title of this post is from the collection of short stories by Mark Twain and Charles Dudley Warner, published in 1873. Apparently, the name chosen by Twain and Warner was inspired by William Shakespeare’s The Life and Death of King John (Act 4, Scene 2):

Therefore, to be possess’d with double pomp,
To guard a title that was rich before,
To gild refined gold, to paint the lily,
To throw a perfume on the violet,
To smooth the ice, or add another hue
Unto the rainbow, or with taper-light
To seek the beauteous eye of heaven to garnish,
Is wasteful and ridiculous excess.

**The MSCI AC World Index is a market capitalization weighted index designed to provide a broad measure of equity-market performance throughout the world. It is maintained by Morgan Stanley Capital International, and is comprised of stocks from both developed and emerging markets.

***Germany, Europe’s largest economy, also has the most billionaires, at 117. The United Kingdom comes a distant second, at 55, followed by Italy (42), France (39) and Switzerland (35).

****One high-profile example of clubbing together occurred when Warren Buffett’s Berkshire Hathaway group backed the ill-fated Kraft Heinz $143-billion bid for Unilever in February 2017. Buffett has a record of helping the 3G private equity vehicle behind the bid to finance its deals. 3G is controlled by Jorge Paolo Lemann, Brazil’s richest man, and his partners. Buffett has added his financial firepower to 3G’s acquisitions of doughnut chain Tim Hortons as well as Kraft Heinz.

*****The Glazer family, worth an estimated $4.7 billion in 2015, controls 83 percent of my own favorite sports team.

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Reconcile this!

The world joined most South Africans in cheering when Nelson Mandela was finally released from prison, the apartheid regime was largely dismantled, and multiracial elections were eventually held.

Then, of course, the really hard work of restorative justice began, under the aegis of the Truth and Reconciliation Commission. To avoid victor’s justice, no side was exempt from appearing before the commission, which heard reports of human rights violations and considered amnesty applications from all sides. In the end, the commission granted only 849 amnesties out of the 7,112 applications.

The problem is, while the commission exposed human rights abuses, it never took up the issue of economic abuses. And, as is clear from the chart above, the high levels of inequality that characterized South African capitalism under apartheid have only gotten worse.

The share of income captured by the top 1 percent (the blue line in the chart) rose from 10.3 percent in 1993 to 19.2 percent in 2012, while the share captured by the top 10 percent (the red line) was 65 percent.*

It should come as no surprise that the distribution of wealth is even more unequal than the distribution of income. Anna Orthofer (pdf) has surveyed the available data and calculated that the top 1 percent own at least half of all wealth in the country and the 10 percent something like 90 to 95 percent.

That’s why Peter Goodman correctly observes that

In the history of civil rights, South Africa lays claim to a momentous achievement — the demolition of apartheid and the construction of a democracy. But for black South Africans, who account for three-fourths of this nation of roughly 55 million people, political liberation has yet to translate into broad material gains.

Apartheid has essentially persisted in economic form.

Thus far, the existing economic system has been granted a full amnesty.

The day awaits for a new Truth and Reconciliation Commission to be formed, to carry out the project of finding restorative justice with respect to the abuses of the economic system—both during and now after apartheid.

 

*For purposes of comparison, the top 1-percent share in the United States in 2012 was 20.3 percent and that of the top 10 percent was 47.6 percent.

 

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Growing old unequally

Social Security may have decreased the rate of poverty among retirees in the United States.* But it certainly hasn’t solved the problem of inequality.

As is clear from the chart above, from a recent report from the Organisation for Economic Co-operation and Development, old-age inequality among current retirees in the United States is higher than in all other OECD countries, except Chile and Mexico.

But wait, it’s probably going to get worse. That’s because, within each generation of workers, inequality has been rising. For example, researchers tracked U.S. income inequality for four different generations—people born in 1920, 1940, 1960, and 1980. For each group, inequality has been more extreme than the previous generation.

The inequalities among people of working age are a primary reason for inequalities among older Americans. That’s because, with highly unequal current incomes, only households at the top are able to accumulate adequate retirement savings. Everyone else is forced to have the freedom to rely on Social Security payments.

But that’s not the only reason for rising retirement inequality. Ill health is another critical source of difference. It can cause problems at work and trigger the loss of earnings, and of course work can also damage people’s health. As the authors of the report note,

Americans are far more unhealthy than their peers in a number of other countries and people from low socio-economic backgrounds are particularly affected by bad health.

And if ill health follows workers into old age or strikes them after retirement, they will need some kind of long-term care—but the social support for such care is much lower in the United States than in other countries.

Someone with median income receiving home care for moderate needs in the some US states may have as little as 6% of the cost of their care paid by the social protection system. This compares to about 45% in the Czech Republic and Israel and almost 100% in Sweden, Iceland and the Netherlands.

As the authors of the report observe, “ageing unequally starts early and builds up from childhood to old age.” This is no more so than in the United States where severe and growing inequalities in different dimensions—such as education, health, employment, earnings, and wealth—reinforce each and grow over the course of people’s lives.

What we’re seeing, then, is high levels of inequality among older Americans. And, given current trends, it’s only going to get worse for future generations.

 

*But the poverty rate among Americans older than 65 years is still high, at almost 20 percent, and the depth of poverty—the amount by which the average income of poor older people falls below the poverty line—is greater than 30 percent. And, just as worrisome, the poverty risk appears to be shifting from the old to the young. For example, while poverty rates for the elderly have fallen since the mid-1980s (by 2.5 percentage points for Americans 66 to 75 years), they’ve increased for younger workers (by 4 percentage points for those 18 to 25 years).

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