Posts Tagged ‘1 percent’

unions

It’s clear, at least to many of us, that if the United States had a larger, stronger union movement things would be much better right now. There would be fewer cases and deaths from the novel coronavirus pandemic, since workers would be better paid and have more workplace protections. There would be fewer layoffs, since workers would have been able to bargain for a different way of handling the commercial shutdown. And there would be more equality between black and white workers, especially at the lower end of the wage scale.

But, in fact, the American union movement has been declining for decades now, especially in the private sector. Just since 1983, the overall unionization rate has fallen by almost half, from 20.1 percent to 10.3 percent. That’s mostly because the percentage of private-sector workers in unions has decreased dramatically, from 16.8 percent to 6.2 percent. And even public-sector unions have been weakened, declining from a high of 38.7 percent in 1994 to 33.6 percent last year.

The situation is so dire that even Harvard economist Larry Summers (along with his coauthor Anna Stansbury) has had to recognize that the “broad-based decline in worker power” is primarily responsible for “inequality, low pay and poor work conditions” in the United States.*

Summers is, of course, the extreme mainstream economist who has ignited controversy on many occasions over the years. The latest is when he was identified as one as one of Joe Biden’s economic advisers back in April. Is this an example, then, of a shift in the economic common sense I suggested might be occurring in the midst of the pandemic? Or is it just a case of belatedly identifying the positive role played by labor unions now that they’re weak and ineffective and it’s safe for to do so?

I’m not in a position to answer those questions. What I do know is that the theoretical framework that informs Summers’s work has mostly prevented him and the vast majority of other mainstream economists from seeing and analyzing issues of power, struggle, and class exploitation that haunt like dangerous specters this particular piece of research.

Let’s start with the story told by Summers and Stansbury. Their basic argument is that a “broad-based decline in worker power”—and not globalization, technological change, or rising monopoly power—is the best explanation for the increase in corporate profitability and the decline in the labor share of national income over the past forty years.

Worker power—arising from unionization or the threat of union organizing, firms being run partly in the interests of workers as stakeholders, and/or from efficiency wage effects—enables workers to increase their pay above the level that would prevail in the absence of such bargaining power.

So far, so good. American workers and labor unions have been under assault for decades now, and their ability to bargain over wages and working conditions has in fact been eroded. The result has been a dramatic redistribution of income from labor to capital.

labor share

Clearly, as readers can see in the chart above, using official statistics, the labor share of national income fell precipitously, by almost 10 percent, from 1983 to 2020.**

profit rate

Not surprisingly, again using official statistics, the profit rate has risen over time. The trendline (the black line in the chart above), across the ups and downs of business cycles, has a clear upward trajectory.***

Over the course of the last four decades is that, as workers and labor unions have been decimated, corporations have been able to pump out more surplus from their workers, thereby lowering the wage share and increasing the profit rate.

But that’s not how things look in the Summers-Stansbury world. In their view, worker power only gives workers an ability to receive a share of the rents generated by companies operating in imperfectly competitive product markets. So, theirs is still a story that relies on exceptions to perfect competition, the baseline model in the world of mainstream economic theory.

And that’s why, while their analysis seems at first glance to be pro-worker and pro-union, and therefore amenable to the concerns of dogmatic centrists, Summers and Stansbury hedge their bets by references to “countervailing power,” the risk of increasing unemployment, and “interferences with pure markets” that “may not enhance efficiency” if measures are taken to enhance worker power.

Still, within the severe constraints imposed by mainstream economic theory, moments of insight do in fact emerge. Summers and Stansbury do admit that the wage-profit conflict that is at the center of their story does explain the grotesque levels of inequality that have come to characterize U.S. capitalism in recent decades—since “some of the lost labor rents for the majority of workers may have been redistributed to high-earning executives (as well as capital owners).” Therefore, in their view, “the decline in labor rents could account for a large fraction of the increase in the income share of the top 1% over recent decades.”

The real test of their approach would be what happens to workers’ wages and capitalists’ profits in the absence of imperfect competition. According to Summers and Stansbury, workers would receive the full value of their marginal productivity, and there would be no need for labor unions. In other words, no power, no struggle, and no class exploitation.

That’s certainly not what the world of capitalism looks like outside the confines of mainstream economic extremism. It’s always been an economic and social landscape of unequal power, intense struggle, and ongoing class exploitation.

The only difference in recent decades is that capital has become much stronger and labor weaker, at least in part because of the theories and policies produced and disseminated by mainstream economists like Summers and Stansbury. Now, as they stand at the gates of hell, it may just be too late for their extreme views and the economic and social system they have so long celebrated.

*The link in the text is to the column by Summers and Stansbury published in the Washington Post. That essay is based on their research paper, published in May by the National Bureau of Economic Research.

**We need to remember that the labor share as calculated by the Bureau of Labor Statistics includes incomes (such as the salaries of corporate executives) that should be excluded, since they represent distributions of corporate profits.

***I’ve calculated the profit as the sum of the net operating surpluses of the nonfinancial and domestic financial sectors divided by the net value added of the nonfinancial sector. The idea is that the profits of both sectors originate in the nonfinancial sector, a portion of which is distributed to and realized by financial enterprises. The trendline is a second-degree polynomial.

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Economic inequality in the United States and around the world is now so obscene, and has convinced more and more people to do something about it, that the business press has initiated a campaign to deny its very existence.

They and the folks they represent are losing the battle of public opinion. And they’ve decided to do whatever they can to turn things around.

First up was the Economist, the “newspaper” of record for liberal capitalism [ht: sk], claiming that new research undermines the pillars of the seemingly universal belief that “inequality has risen in the rich world.” Yes, as I have documented from the very beginning on this blog (e.g., here, here, and here), there are plenty of mainstream economists who have attempted to prove that inequality isn’t really a problem—either because it doesn’t really exist or, if it does, it’s not something we can or should do much about. And so the Economist managed to find pieces of research that call into question some of the key pillars of the inequality argument—that the gap between the top 1 percent and everyone else is growing, the middle-class is shrinking, capital is gaining at the expense of labor, and wealth inequality is soaring.

I won’t waste readers’ time repeating the arguments I’ve made on all four of those points over the past decade. You can use the search function at the top of the page to see what I and others have written on these issues—or look at the latest report from the Congressional Budget Office, which I discuss below.

What’s more interesting is where the Economist wants to take the discussion—away from wealth taxes (of the sort being proposed by Bernie Sanders and Elizabeth Warren) and toward the sorts of policies that, while they won’t lessen the degree of inequality, conform to the Economist‘s fantasy of liberal capitalism. Thus, they propose more building (so that young workers can afford housing), antitrust regulation (as if capitalism didn’t have an inherent tendency toward monopoly), less regulation of high-income professions (to create more competition for those high-paying jobs), and fewer restrictions on immigration (but only for “high-skilled” workers).

That’s the Economist’s derisory attempt to minimize the existence of inequality (against most of the available evidence and widespread belief) and to devise some tiny tweaks in existing economic arrangements (and avoid more serious efforts to lessen the degree of inequality).

The Wall Street Journal has also decided to confront the growing campaign against economic inequality—by attempting to show that Donald Trump’s administration has done more to decrease inequality than Barack Obama’s, by promoting economic growth through deregulation and increased business investment. Now, it’s true, Obama oversaw a bailout of Wall Street and a return (after a brief hiatus in 2009) to the same unequalizing trends that predated the Second Great Depression. So, that’s a very low bar to surpass.

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And even though the wages of low-income workers have been rising at a faster rate in recent quarters (the supposedly “happy wages of a growing economy”), it is still the case that the wage share of national income (as seen in the chart above) is still less than what it was in 2008 (when it was 44.9, compared to 43.2 in 2018) and far below its postwar peak in 1970 (at 51.6).

To rely on continued growth to solve the problem of inequality is simply a pipe dream, which is even less convincing than the castle in the air invented by the business press on the other side of the pond.

CBO

The fact is, the Congressional Budget Office [pdf] projects that income in the United States—both before and after transfers and taxes—will be more unevenly distributed in 2021 than it was in 2016. That’s because, even though average incomes for the bottom four quintiles are expected to grow, incomes for the top quintile (and especially for the top 1 percent) are expected to grow even faster.

Thus, for example, since 1979, while the average incomes of the middle three quintiles are expected to grow (after transfers and taxes) by a total of 57 percent, the incomes of those in the top 1 percent are projected to increase by a whopping 281 percent by 2021.

There’s no other way around it: inequality in the United States is obscene, and something—much more than minor regulations and continued growth—needs to be done to overcome it.

As it turns out, Americans are fully aware of the problem. For example, according to Gallup, the overall opinion of capitalism held by young adults (both Millennials and Gen Zers) has deteriorated to the point that capitalism and socialism are tied in popularity.

And a new Reuters/Ipsos poll finds that nearly two-thirds of respondents agree that the very rich should pay more.*

Among the 4,441 respondents to the poll, 64% strongly or somewhat agreed that “the very rich should contribute an extra share of their total wealth each year to support public programs” – the essence of a wealth tax. Results were similar across gender, race and household income. While support among Democrats was stronger, at 77%, a majority of Republicans, 53%, also agreed with the idea.

Moreover, when asked in the poll if “the very rich should be allowed to keep the money they have, even if that means increasing inequality,” 54 percent of respondents disagreed.

That’s the reason the Economist and the Wall Street Journal have decided to launch their campaign about inequality—to attempt to undermine the widespread belief that inequality is growing and, even more, to challenge any and all efforts to actually do something to create a more equal economy and society.

Such a campaign may satisfy their readers, at least in the short run, but the problem itself will remain. This election year, I expect the growing gap between the tiny group at the top and everyone else to overshadow their shabby efforts and culminate in a movement they simply won’t be able to contain.

 

*Ironically, another recent attempt to undermine the Sanders-Warren proposals of new, higher wealth taxes actually serves to reinforce how extreme wealth inequality is in the United States. While admitting that “only a small segment of the population would be subject to the top rate,” the American Action Forum’s Douglas Holtz-Eakin and Gordon Gray [pdf] can only conclude that the taxes would have “broad impacts” only because the wealth holdings of that group “constitute a significant share of the investable wealth in the economy.”

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The idea that GDP numbers don’t tell us a great deal about what is really going on in the world is becoming increasingly widespread.

GDP-DL

David Leonhardt, in reflecting the emerging view, has argued that GDP doesn’t “track the well-being of most Americans.”

Now, we’d expect that someone like socialist Democratic candidate Bernie Sanders would question the extent to which the low unemployment numbers, associated with economic growth, hardly tells the whole story about the condition of the American working-class.

Unemployment is low but wages are terribly low in this country. And many people are struggling to get the health care they need to take care of their basic needs.

But even centrist candidates Joe Biden and Pete Buttigieg are making the case that the headline numbers, such as Gross Domestic Product and stock indices, hide the fact “that a very different reality exists for many Americans who have not seen much improvement in their own bottom lines.”

And one of the last people you’d expect to question the shared gains from economic growth, Robert Samuelson, thinks that “something momentous is clearly occurring.”

economic inequality continues to rise at a steady pace; the further you go up the income scale, the larger the income gains, both relatively and absolutely. . .

The great danger here is social and political. It is the creation, or the expansion, of a multi-tiered society where the largest income gains are enjoyed by relatively small groups of people near the top of the economic distribution.

So, let’s step back a bit and see what these numbers reveal—and what they mostly hide.

GDP-S&P

First, as is clear from the chart immediately above, the growth in the value of U.S. stock markets (as measured by the S&P 500 Index, the red line) doesn’t tell us much about actual economic growth (as indicated by the value of Gross Domestic Product, the blue line). For example, between 2010 and 2019, the stock market increased by 163 percent, while GDP grew by only 46 percent.

Second, neither number alone indicates what is happening to the vast majority of Americans. For example, as I argued back in 2017, ownership of stocks in the United States is grotesquely unequal: while about half of U.S. households hold stocks in publicly traded companies (directly or indirectly), the bottom 90 percent of U.S. households own only 18.6 percent of all corporate stock. The rest (81.4 percent) is in the hands of the top 10 percent.

Well, then, what about GDP?

fredgraph (1)

It’s obvious from this chart that the increases in all the indicators of average income in the United States—real median personal income (the red line), real mean personal income (green), and real median household income (purple)—are much lower than the increase in real (inflation-adjusted) GDP. Those discrepancies reveal the fact that the average person or household is benefiting much less than they otherwise would from economic growth. And, of course, the gap increases over time, as in every year people fall further and further behind.

So, all that the GDP numbers indicate is that the monetary value of final goods and services produced and sold in the United States—the “immense accumulation of commodities” that represents the wealth of a capitalist society—is growing. But it doesn’t tell us anything about who gets what, that is, how the incomes generated during the course of producing those commodities are distributed. In other words, GDP numbers are a poor indicator of people’s well-being.

So, what would tell us something about how Americans are faring in the midst of the so-called recovery from the Second Great Depression?

Leonhardt’s view is that “distributional accounts”—that is, estimates of income shares for every decile of the income distribution, as well as for the top 1 percent—will change the national discussion whenever GDP numbers are released.

I don’t know if they’ll change the terms of debate but they will certainly challenge the presumption that GDP (and other headline numbers, such as stock market indices) accurately the economic and social health of the nation.

saez

Thus, for example, as Emmanuel Saez (pdf) has shown, by 2017, real incomes of the bottom 99 percent had still not recovered from the losses experienced during the initial years of the Second Great Depression (from 2007 to 2009), while families in the top 1 percent families captured almost half (49 percent) of total real income growth per family from 2009 to 2017. And, as a result of growing inequality, the 50.6 percent top 10 percent income share in 2017 (with capital gains) is virtually as high as the absolute peak of 50.6 percent reached in 2012.

CBO

Moreover, according to the Congressional Budget Office (pdf), income before transfers and taxes is projected to be more unequally distributed in 2021 than it was in 2016. And while means-tested transfers and federal taxes serve to reduce income inequality, the reduction in inequality stemming from transfers and taxes is actually projected to be smaller in 2021 than it was in 2016.

All of these distributional effects of the current mode of production in the United States are hidden from view by the usual headline economic numbers.

But there’s one more step that can and should be taken. The distributional accounts that have been used to change the discussion focus on the size distribution of income, that is, the distribution of income to groups of individuals (and individual households) that make up the population. What is missing, then, is the factor or class distribution of income.

profits-wages

In the chart above, I have illustrated the changing ratio of corporate profits to workers’ wages in the United States from 1968 to 2018.* Two things are remarkable about the trajectory of this ratio. First, beginning in 2001, the ratio more than doubled, from a low of 0.31 to a high of 0.70 (in 2006). And, second, even though the ratio has fallen in recent years, it still remains as of 2018 much higher (at 0.52) than during the pre-2001 period.**

However inequality is measured—in terms of the size or class distribution of income—it is obvious that most Americans are not sharing in the growth of national income (or, for that matter, the stock-market gains) in recent years.

The focus on GDP (and stock indices, unemployment rates, and the like) serves merely to hide from view what the American workers clearly understand: they’re being left behind.

 

*This is the ratio of, in the numerator, corporate profits before tax (without IVA and CCAdj) and, in the denominator, the total wages paid to production and nonsupervisory workers (assuming a work year of 50 weeks). It is clearly similar to but different from the Marxian rate of exploitation, surplus-value divided by the value of labor power—since, among things, it does not include distributions of the surplus to members of the top 10 percent in the numerator.

**A third observation is also relevant: the ratio of profits to wages has fallen prior to every recession since 1968. The recent decline in the ratio (since 2013) therefore portends another recession in the near future. However, I’m no more keen on making predictions than on coming up with New Year’s resolutions. It was John Kenneth Galbraith who wisely wrote, “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”

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Well that didn’t go so well. . .

Still, Elon Musk’s new Cybertruck would appear to be the perfect design for America’s contemporary dystopia. Its bullet-proof stainless steel alloy panels and transparent metal glass are tailor-made to keep its elite occupants safely guarded from attack. And even though the windows obviously need considerable improvement before production begins, and “despite ‘no advertising & no paid endorsement’,” Tesla has already received almost 150 thousand orders for the truck.

Clearly, there’s a lot of surplus available—in cash and loans—to the small group at the top of the U.S. wealth pyramid to purchase such vehicles.

installment

In fact, as we can see from the chart above, auto loans comprise more than 50 percent of the installment loan debt of the top 10 percent of American households (as of 2016, the last year for which data are available). Not so for those in the bottom 50 percent, for whom loans for vehicles make up a little more than a quarter of their installment loans. For them, the largest portion—almost two-thirds—goes to finance higher education.

Consider what this means for the Americans in the bottom 50 percent. According to the latest Survey of Current Finances by the Federal Reserve, 31 percent carry student loans and their average outstanding education debt is $34 thousand. (For those in the bottom 25 percent, it’s even worse: 40 percent of families have student debt, and their average is $43 thousand.) Just student debt is considerably more than the $23,250 average annual pre-tax income of those in the bottom 50 percent.

The only Tesla pickup they’ll be buying is the one with the shattered windows.

A&L

The disparities in the United States are even starker when comparing the assets and liabilities of the bottom 50 percent and the top 1 percent in 2019. As can be seen in the chart above, families in the bottom half own only 6.1 of total assets but are liable for more than one-third of total debts, while the situation of those in the top 1 percent is almost exactly opposite: they have 29 percent of assets but only 4.7 percent of the liabilities.

wealth-A&L

It should come as no surprise, then, that the net worth (excluding real estate assets and mortgage liabilities) of the bottom 50 percent of Americans is tiny ($1.1 trillion) compared to that of the the top 1 percent (more than $30 trillion).

The question is, why is the net worth of the bottom 50 percent of American households so low? As is obvious from the chart above, they don’t own much in the way of assets and their debt is much greater than that of those in the top 1 percent.

real wages

That fundamental inequality in the distribution of wealth in the United States stems from one key factor: American workers’ wages have been stagnant for the past four decades. The average (median) real hourly wage for workers in the private sector is currently $14.99, virtually unchanged (rising only $0.62 or 4 percent) since 1979.*

So, on one hand, American workers simply don’t have the means to acquire many assets, since their wages are just enough for them and their families to get by. And when they do attempt to acquire more, for themselves or their children (in purchasing homes, paying for college, or just keeping with medical bills), they have to go into debt. Therefore, as I argued last week, without wealth of their own, workers and their children are forced to have the freedom to continue to sell their ability to work to employers in order to subsist.

On the other hand, stagnant wages mean that the value workers produce above what they receive in wages goes to their employers, who keep some and distribute the rest to those in the top 1 percent. They’re the ones who accumulate assets, while incurring relatively few liabilities.

That wealth disparity thus ends up playing two roles in the United States: it keeps assets out of the hands of workers (thus forcing them to continue to work to purchase the necessary commodities and to repay their debts) and it concentrates assets at the top of the wealth pyramid (thus permitting the top 1 percent to continue to lay claims on the resulting surplus, whether or not they work).

I have no doubt that taxing some of that wealth would support and expand the kinds of government programs that would help American workers. I’m thinking, for example, of financing universal health care, paying off student debts, providing adequate childcare, and so on. But it wouldn’t increase workers’ wages much less undo the nexus whereby, on a daily basis, most Americans are forced to have the freedom to sell their ability to work to a small group of employers.

One of those employers is, in fact, Tesla, which a California judge recently found is in violation of U.S. labor laws.

Imagine, then, an alternative scenario in which Tesla workers, who since 2016 have been battling to form a union (because of high injury rates and low wages), actually owned and ran the Fremont, California factory. The workers, and not Musk and the other members of the board of directors, would then decide what to do with the surplus. The workers themselves would become the board of directors (which might, in turn, decide to hire Musk as a day-to-day executive). The key is that the workers, as a group, would own the assets—not a tiny group of individuals at the top. The worker-owners would thus have acquired a new freedom: to work for themselves, not for someone else. That change in the way Tesla is organized would serve as an example of how to finally undo the obscene wealth inequality that for now decades now has characterized the United States.

It might also eliminate the need for those bulletproof windows.

 

*I’ll save you the arithmetic: that amounts to a pre-tax annual income of $29.980. That’s the monetary value of the customary standard of living of workers in the United States— which, as we can see, has remained virtually unchanged for the past 40 years.