Posts Tagged ‘capital’

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Mainstream economists and economic commentators continue to invoke the so-called “dignity of work” to criticize the idea of a universal basic income.

It’s an argument I’ve dealt with before (e.g., here and here). As I see it, there’s nothing necessarily dignified about most people being forced to have the freedom to sell their ability to work to a tiny group of employers. The idea may be intrinsic to capitalism—but that doesn’t mean it contributes to the dignity of people who work for a living, especially when they have no control over how they work or what they produce when they work.

Matt Bruenig, to his credit, suggests an alternative argument against the critics of a universal basic income:

these writers dislike the fact that a UBI would deliver individuals income in a way that is divorced from working. Such an income arrangement would, it is argued, lead to meaninglessness, social dysfunction, and resentment.

One obvious problem with this analysis is that passive income — income divorced from work — already exists.

Bruenig is making a distinction between income related to work and income that comes from other sources—passive or not-work—which represents a fundamental divide within contemporary society.

As is clear from the data in the chart above, very little of the income (15 percent in 2014) of the bottom 90 percent of Americans stems from not-work (and, even then, most of their apparently not-work income is actually related to previous work, in the form of pension incomes). However, for the tiny group at the top, most of their income (59 percent for the top 1 percent, 75 percent for the top 0.01 percent) is related to not-working (and, of course, most of their work-related income is based on sole proprietorships and elevated executive salaries). In other words, most of their income represents a claim on the extra work performed by others.

So, when critics of a universal basic income rely on the “dignity of work” argument, what they’re really doing is reinforcing the idea that most people can and should derive dignity from working for a small group of employers. At the same time, critics are presuming there’s no loss of dignity for the tiny group at the top, those who have managed to capture most of their income from sources related not to their own work, but the work of everyone else.*

Where’s the dignity in that?

*Now, it’s true, as Noah Smith observes, “many rich people believe that investing constitutes work.” But spending a few minutes a day reading the business press and examining alternative investments does not constitute work—at least as most people understand what it means to work. Or are those rich people referring to the fact that they hire a whole host of other people, from financial advisors to accountants, to do the actual work of managing their not-work investments?

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There are two sides to the recent China Shock literature created by David Autor and David Dorn and surveyed by Noah Smith.

On one hand, Autor and Dorn (with a variety of coauthors) have challenged the free-trade nostrums of mainstream economists and economic elites—that everyone benefits from free international trade. Using China as an example, they show that increased trade hurt American workers, increased political polarization, and decreased U.S. corporate innovation.

The case for free international trade now lies in tatters, which of course played an important role in the Brexit vote as well as in the U.S. presidential campaign.

On the other hand, invoking the China Shock has tended to reinforce economic nationalism—treating China as an unitary entity, a country has shaken up world trade patterns, and disregarding the conditions and consequences of increased trade with other countries, including the United States.

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Why has there been an increasing U.S. trade deficit with China in recent decades? As James Chan explained, in response to an August 2016 article in the Wall Street Journal,

Our so-called China problem isn’t really with the Chinese but rather our own multinational companies.

As I see it, U.S. corporations have made a variety of decisions—to subcontract the production of parts and components with enterprises in China (which are then used in products that are later imported into the United States), to purchase goods produced in China to sell in the United States (which then show up in U.S. stores), to outsource their own production of goods (to sell in China and to export to the United States), and so on. The consequences of those corporate decisions (and not just with respect to China) include disrupting jobs and communities in the United States (through outsourcing and import competition) and decreasing innovation (since existing technologies can be used both to produce goods in China and sell in the expanding Chinese consumer market), thereby increasing political polarization in the United States.

The flip side of the story is the accumulation of capital in China. Until the development of the conditions for the development of capitalism existed in China, none of those corporate decisions were possible—not by U.S. corporations nor by multinational enterprises from other countries, all of whom were eager to take advantage of the growth of capitalism in China. Which of course they then contributed to, thus spurring the widening and deepening of capital accumulation within China.

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It should come as no surprise, then, that there’s been an upsurge of strike activity by workers in the fast-growing centers of manufacturing and construction within China—especially in the provinces of Guandong, Shandong, Henan, Sichuan, and Hebei.

According to Hudson Lockett, China this year

saw a total of 1,456 strikes and protests as of end-June, up 19 per cent from the first half of 2015

The problem with the China Shock literature, which has served to challenge the celebration of free-trade by mainstream economists and economic elites in the West, is that it hides from view both the decisions by U.S. corporations that have increased the U.S. trade deficit with China (with the attendant negative consequences “at home”) and the activity by Chinese workers to contest the conditions under which they have been forced to have the freedom to labor (which we can expect to continue for years to come).

It’s our responsibility to keep those decisions and events in view. Otherwise, we risk the economic and political equivalent of the China Syndrome.

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Where does all the surplus in the U.S. economy go?

Well, a large chunk of it is captured by the top 1 percent, whose share of national income almost doubled between 1970 and 2014—from 11 percent to 20.2 percent.

Equally interesting is the composition of that growing share of national income, which we can decompose thanks to new data from Thomas Piketty, Emmanuel Saez, and Gabriel Zucman.

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One way of making sense of the way the top 1 percent manages to capture a portion of the surplus is by distinguishing between a labor component (in shades of red in the chart above) and a capital component (in shades of green). Together, when calculated in terms of shares of national income, they represent the total share of national income that goes to the top 1 percent. (Thus, the top lines in the two charts are equal.)

The labor component comprises two categories: employee compensation (e.g., payments to CEOs and executives in finance) and the labor part of noncorporate business profits (e.g, partnerships and sole proprietorships). Capital income can be similarly decomposed into various categories: interest paid to pension and insurance funds, net interest, corporate profits, noncorporate profits, and housing rents (net of mortgages).

As can be seen in the chart above, by 2014 the top 1 percent derived over half of their incomes from capital-related sources. In earlier decades, from the late-1970s to the late-1990s, a much larger share of their income came from labor sources. They were the so-called “working rich.” This process culminated in 2000 when the capital share in top 1 percent incomes reached a low point of 49.4 percent. Since then, however, it has bounced back—to 58.6 percent in 2014. Thus, the “working rich” of the late-twentieth century may increasingly be living off their capital income, or are in the process of being replaced by their offspring who are living off their inheritances.

What this means, in general terms, is the growth of inequality over decades is due to the ability of the 1 percent to capture a large portion of the growing surplus. But there has also been a change in the nature of that inequality in recent years—which is not due to escalating wages at the top, but to a boom in income from the ownership of stocks and bonds. The high incomes of the “working rich,” it seems, have increasingly been used to purchase financial assets.

It looks then as if the working rich are either turning into or being replaced by rentiers—thus mirroring, after a short interruption, the structure of inequality last seen during the first Gilded Age.

My students are worried—many of them obsessed by the possibility—they’re not going to be better off than their parents.

As it turns out, they’re right.

According to new research by Raj Chetty et al. (pdf), the 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. And the likelihood is, that rate is going to fall even more for the next generations. That’s because rising inequality—not slower economic growth—is the major factor contributing to declining income mobility.

In his 1931 book, The Epic of America, writer and historian James Truslow Adams defined the American Dream as the “dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement.” Such a dream has been central to the legitimacy of capitalism—with each generation supposed to be better off than the previous one. Growing inequality, especially from the mid-1970s onward, took a big chip out of that dream, since it challenged the idea of “just deserts.” But at least there was mobility—that children could still have a life that was “better and richer and fuller” than that of their parents.

Now, it seems that part of the American Dream is quickly disappearing, precisely because of growing inequality.

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For each succeeding generation—those born in 1940, 1950, 1960, 1970, and 1980—the chance of making more money than their parents has fallen—from 92 percent (for those born in 1940) to 50 percent (for 1980). That’s an enormous decrease, which is the key statistical conclusion of the study.

But the authors also consider two counterfactual scenarios: “higher GDP growth” (which asks, what would have happened to absolute mobility for the 1980 cohort if the economy had grown as quickly during their lifetimes as it did in the mid-twentieth century, but with GDP distributed across households as it is today?) and “more broadly shared growth” (which asks, what if total GDP grew at the rate observed in recent decades, but GDP was allocated across households as it was for the 1940 birth cohort?). What they find is that less equality is more significant than higher growth:

Under the higher growth counterfactual, the mean rate of absolute mobility 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. The broadly shared growth counterfactual has larger effects on absolute mobility at the bottom of the income distribution, whereas the higher growth counterfactual has larger effects at higher income levels. Since income shares of GDP are larger for high-income individuals, higher growth rates benefit those with higher incomes the most, while a more equal distribution benefits those at the bottom the most.

As we know, neither presidential candidate made inequality a focus of their campaign. President-elect Donald Trump, however, did point out the economy is rigged—and he appealed directly to the anxieties of workers who feel the economy is not delivering for them in the same way it did for their parents. As it turns out, Chetty et al. highlight several sources of those anxieties in the Trump coalition.

They find barely two in five men born in the mid-80s grew up to earn as much, at age 30, as their fathers did at the same age. They show average rates of mobility falling particularly fast in Rust Belt states, especially Michigan and Indiana. And they find a much steeper drop in absolute mobility for the middle-class than for the poor.

Maybe Trump’s victory signals, like George Carlin’s warning a decade earlier, it’s time we stop dreaming and wake up to the end of the American Dream.

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Alec Monopoly, “Flying Monopoly” (2015)

In the second installment of this series on “class before Trumponomics,” I argued that, in recent decades, 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.

In this post, I want to focus on a more detailed analysis of the other side of the class relationship—capital.

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It should come as no surprise that one of the major changes in U.S. capital over the past few decades is the growing importance of financial activities. Since 1980, FIRE (finance, insurance, and real estate) has almost doubled, expanding from roughly 12 percent of the gross output of private industries to over 20 percent.

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And the rise in the share of corporate profits from financial activities was even more spectacular—from 10.8 percent in 1984 to a whopping 37.4 percent in 2002—and then falling during the crash, but still at a historically high 26.6 percent in 2015.

By any measure, U.S. capital became increasingly oriented toward finance beginning in the early 1980s—as traditional banks (deposit-gathering commercial banks), non-bank financial entities (especially shadow banking, such as investment banks, hedge funds, insurers and other non-bank financial institutions), and even the financial arm of industrial corporations (such as the General Motors Acceptance Corporation, now Ally Financial) absorbed and then profited by creating new claims on the surplus.

This process of “financialization” was the flip side of the decreasing labor share in the U.S. economy: On one hand, stagnant wages meant both an increasing surplus, which could be recycled via the financial sector, and a growing market for loans, as workers sought to maintain their customary level of consumption via increasing indebtedness. On the other hand, the production of commodities (both goods and services) became less important than capturing a portion of the surplus from around the world, and utilizing it via issuing loans and selling derivatives to receive even more.

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Not only did finance become increasingly internationalized, so did the U.S. economy as a whole. As a result of employers’ decisions to outsource the production of commodities that had previously been manufactured in the United States and to find external markets for the sale of other commodities (especially services), and with the assistance of the lowering of tariffs and the signing of new trade agreements, the U.S. economy was increasingly opened up from the early-1970s onward. One indicator of this globalization is the increase in the weight of international trade (the sum of exports and imports) in relation to U.S. GDP—more than tripling between 1970 (9.33 percent) to 2014 (29.1 percent).

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The third major change in U.S. capital in recent decades is a rise in the degree of corporate concentration and centralization—to such an extent even the President’s Council of Economic Advisers (pdf) has taken notice. A wave of mergers and acquisitions has made firms larger and has increased the degree of market concentration within a broad range of industries. In finance, for example, the market share of the five largest banks (measured in terms of their assets as a share of total commercial banking assets) more than doubled between 1996 and 2014—rising from 23.2 percent to 47.9 percent.

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The U.S. airline industry also experienced considerable merger and acquisition activity, especially following deregulation in 1978. The figure above (from a report by the U.S. Government Accountability Office [pdf]) provides a timeline of mergers and acquisitions for the four largest surviving domestic airlines—American, Delta, Southwest, and United—based on the number of passengers served. These four airlines accounted for approximately 85 percent of total passenger traffic in the United States in 2013.

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Another piece of evidence that concentration and centralization have increased within the U.S. economy is (following Jason Furmanthe growing gap between corporate profits and interest-rates. The fact that corporate profits (as a share of national income, the top line in the chart above) have risen while interest-rates (the nominal constant-maturity 1-year rate estimated by the Federal Reserve, less inflation defined by the Consumer Price Index, the bottom line in the chart above) indicates that the portion of profits created by oligopoly rents has grown in recent decades.*

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Together, the three main tendencies I have highlighted—financialization, internationalization, and corporate rents—indicate a fundamental change in U.S. capital since the 1980s, which has continued during the current recovery. One of the effects of those changes is a decline in the importance of manufacturing, especially in relation to FIRE, as can be seen in the chart above. Manufacturing (as measured by value added as a percentage of GDP) has declined from 22.9 percent (in 1970) to 12 percent (in 2015), while FIRE moved in the opposite direction—from 14.2 percent to 20.3 percent. Quantitatively, the two sectors have traded places, which qualitatively signifies a change in how U.S. capital manages to capture the surplus. While it still appropriates surplus from its own workers (although now more in the production and export of services than in manufacturing), it now captures the surplus, from workers inside and outside the United States, via financial activities. On top of that, the largest firms are capturing additional portions of the surplus from other, smaller corporations via oligopoly rents.

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What we’ve witnessed then is a fundamental transformation of U.S. capital and thus the U.S. economy, which begins to explain a whole host of recent trends—from the decrease in rates of economic growth (since capital is engaged less in investment than in other activities, such as stock buybacks, hoarding profits in the form of cash, and mergers and acquisitions) to the rise in corporate executive pay in relation to average worker pay (which has ballooned, from 29.9 in 1978 to 275.6 in 2015).

What is clear is that the decisions of U.S. capital as it changed over the course of recent decades created the conditions for the crash of 2007-08 and the unevenness of the subsequent recovery, which culminated in the victory of Donald Trump in November 2016.

 

*Another way to get at these oligopoly rents is to distinguish between the capital share and the profit share. According to Simcha Barkai (pdf), the decline in the labor share over the last 30 years was not offset by an increase in the capital share, which actually declined. But it was accompanied by an increase in the profit share, due to a rise in mark-ups.

Cartoon of the day

Posted: 16 October 2016 in Uncategorized
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Technically, there is no Nobel Prize in economics. What it is, instead, is the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, which members of the Nobel family and a previous winner (Friedrich von Hayek) have criticized.

So, where did the prize come from? As Avner Offer explains,

The Nobel prize came out of a longstanding social conflict. On one side, central banks and the better-off striving to keep property intact and prices stable; on the other, everyone else’s quest for economic security. The Swedish social democratic government clipped the wings of the central bank – Sveriges Riksbank – in pursuit of more housing and jobs. In compensation, the government allowed the central bank to keep some funds, which the bank used in 1968 to endow the Nobel prize in economics as a vanity project to mark its tercentenary.

This year’s Nobel Prize in Neoclassical Economics (as I dubbed it 5 years ago) was awarded jointly to Oliver Hart and Bengt Holmstrom. Officially, the 2016 prize recognized “their contributions to contract theory.” Unofficially, as I understand their work, it was all about attempting to solve a longstanding problem in neoclassical economic theory: the theory of the firm.

Historically, neoclassical economists (and, for that matter, not a few heterodox economists) simply assumed capitalist firms maximize profits. But, in the context of a market system, there’s no particular reason a non-market institution like “the firm” should exist (instead of, for example, everyone—workers, managers, suppliers, buyers, and so on—entering into market exchanges in parking lots or coffee shops each morning).* And yet corporations, many of them employing hundreds of thousands of workers and making record profits, have become central to the way capitalist economies are currently organized. Moreover, once you look inside that “black box,” a great deal more is going on. Workers are hired to perform necessary and surplus labor in the course of producing commodities by managers, who run the enterprise on a daily basis and receive a cut of the surplus from the board of directors, who themselves need to be elected by shareholders (who, together with money-lenders, merchants, government officials, and many others, inside and outside the enterprise, receive their own portions of the surplus). Corporations, as it turns out, are pretty complicated—political, cultural, and economic—institutions.

But when neoclassical economists like Hart and Holmstrom look inside the firm what they see is a single issue—a relationship between a “principal” and “agents.” Principals (e.g., capitalists) are presumed to enter into agreements—voluntary contracts—with agents (e.g., workers) to advance a goal (e.g., of maximizing profits). As they see it, contracts are risky because, first, principals and agents often have conflicting interests (e.g., principals want maximum effort while agents are presumed to engage in risk-averse, shirking behavior) and, second, measuring fulfillment of the goal is imperfect (that is, not all the actions of the agents can be perfectly observed). The whole point of contract theory, then, is to devise a relationship such that—through a combination of incentives and monitoring—agents can be made to work hard to fulfill the goal set by the principal.

In one of his most famous and influential papers, “Moral Hazard in Teams” (pdf, a link to the working-paper version), Holmstrom’s starting point is the idea that there’s a problem of “inducing agents to supply proper amounts of productive inputs when their actions cannot be observed and contracted upon directly” (in other words, moral hazard), especially when they work in teams. He then sets up a model in which he demonstrates that “separating ownership from production”—which also provides the incentive for limited monitoring by the owners (i.e., stockholders)—solves the problem of moral hazard and restores efficiency.**

In other words, the Nobel Prize-winning approach to contract theory is used to demonstrate what neoclassical economists had long presumed: that capitalist firms (and not, e.g., worker-owned enterprises) represent the most efficient way to organize production.

That’s why, from a neoclassical perspective, it is only natural that capital hires labor.

 

*In fact, Paul Samuelson (in 1957, in “Wages and Interest: A Modern Dissection of Marxian Economic Models,”American Economic Review) once argued that “In a perfectly competitive market, it really doesn’t matter who hires whom: so have labor hire ‘capital’.”

**Hart, for his part (in a paper with John Moore [pdf]), looked at the issue of property rights in relation to firms by distinguishing between owning a firm and contracting for services from another firm. Their model shows, once again in true neoclassical fashion, that the owner of an enterprise—who exercises “control,” not only over assets, but also over the workers tied to those assets—will have more control, leading to higher efficiency, if they directly employ the workers than if they have an arm’s-length contract with another employer of the workers. That’s because, under single ownership, the employer can “selectively fire the workers of the firm” if they dislike the workers’ performance, whereas under contracted services they can “fire” only the entire firm.