Posts Tagged ‘capitalism’

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President-elect Donald Trump’s decision to bribe Carrier into keeping 800 manufacturing jobs in Indiana, instead of moving them to one of its Mexican plants, has met with opposition from mainstream economists, both liberal and conservative.

Clearly, it’s not about the size of the deal (although $7 million in incentives to keep less than one thousand jobs is a big deal). Carrier corporate parent United Technologies is still planning to outsource production that will eliminate 1300 jobs in Indiana. And 900 jobs make up a minuscule portion (0.17 percent, to be exact) of the total number of manufacturing jobs in that Midwestern state.*

No, mainstream economists’ opposition rests on other grounds. Justin Wolfers, for example, uses the silly analogy of a parking garage to defend the process of “creative destruction” and the idea that a “fluid labor market. . .is the secret of American dynamism.”

Think of the American economy as a 10-level parking structure or garage, where each car represents an active firm, and the seats in the car are the jobs available. A well-managed business like this is usually pretty full. But it’s also in a state of constant flux, with new cars entering as some people arrive, and previously parked cars leaving as others head home. Every hour, around a tenth of the cars leave the lot, just as a tenth of existing business establishments close each year and leave the labor market.

The deal at Carrier is akin to Mr. Trump’s intercepting a driver on his way to his car, and trying to persuade him to stay parked a little longer — perhaps by pointing to the enticing Christmas specials at the nearby stores.

Tyler Cowen, for his part, is worried that under a Trump administration, a kind of “crony capitalism”—where companies that are good to a presidency are rewarded—will prevail.

But it’s the response by Larry Summers that interests me the most, since he sees the “the negotiation with Carrier is a small thing that is actually a very big thing—a change very much for the worse with regards to the operating assumptions of American capitalism.”

Central to Summers’s argument is the distinction between two kinds of capitalism. One is “rule and law based,” which he believes is how American capitalism operates now.

Courts enforce contracts and property rights in ways that are largely independent of just who it is who is before them. Taxes are calculable on the basis of an arithmetic algorithm. Companies and governments buy from the cheapest bidder. Regulation follows previously promulgated rules. In the economic arena, the state’s monopoly on the use of force is used to enforce contract and property rights and to enforce previously promulgated laws.

The other is “deals based,” which is the world of New York City under Tammany Hall, of Suharto’s Indonesia, and of Putin’s Russia—and, it seems, under Trump.

Economic actors assume that they have to protect their property and do their own contract enforcement.  Tax collectors use discretion in assessing taxes.  Companies and governments buy from their friends rather than seek low cost bids.  Regulators abuse their power. The state’s monopoly on the use of force is used to enrich and satisfy the desires of those who control the apparatus of the state.

So, what’s the difference? Clearly, Summers is referring to variations on a theme: both are forms of capitalism.

As I see it, the difference between “rule and law based” capitalism and “deals based” capitalism comes down to whether the capitalist class as a whole or individual capitalists are the beneficiaries of state policies. In the former, the rules and laws, backed with the state’s monopoly on the use of force, are such that the capitalist class as a whole—although not necessarily any individual capitalist—has the right to appropriate the surplus and decide privately how to distribute it. They, as a class, are the winners (even when some of the individual capitalists lose out in competitive battles with other capitalists). In the latter, when deals are made with the government, once again backed by the state’s monopoly on the use of force, individual capitalists are picked out to be winners (or, if they’re on the wrong side of the deals, losers). But it’s still the case, even when ad hoc decisions are made, that the capitalist class as a whole is allowed to capture and distribute the surplus.**

In the end, maybe Justin Wolfers’s parking-garage analogy is the appropriate one. Under “rule and law based” capitalism, garage owners compete with one another under a general set of rules and regulations—and some will win while others lose. Under a “deals based” system, individual owners find themselves negotiating concessions with the government, which can decide who the individual winners and losers will be.

So, there are differences. But in both cases, the rest of us are forced to have the freedom to park our cars in garages that we neither own nor have any say in operating.

 

*As it turns out, Indiana is the state with the highest percentage of manufacturing jobs, at 16.8 percent. But the share of those jobs has fallen dramatically since 1990, when it was 24 percent.

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**Another difference between the two systems is how the surplus is distributed and then spent. Under a “rule and law based” system, the state captures a portion of the surplus via taxes and then spends it to create the conditions under which the capitalism system as a whole is reproduced, while under a “deals based” system, individual capitalists can bribe the state with a portion of the surplus they appropriate from their workers and then receive concessions that pertain to them but not to other capitalists. In both cases, however, the surplus is used to protect capitalists’ property and enforce contracts—all the while backed by the state’s monopoly on the use of force.

Cartoon of the day

Posted: 26 October 2016 in Uncategorized
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Cartoon of the day

Posted: 22 October 2016 in Uncategorized
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Cartoon of the day

Posted: 15 October 2016 in Uncategorized
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Special mention

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Yesterday, I argued that capitalism has, over the course of its history, generated movements of masses of people, both within and between nations. However, in the United States, the effects of capitalism’s laws of population are mostly ignored, as are the links between internal and external migrations of workers. Instead, the discussion tends to focus only on the consequences of immigration (and, even then, on only some of the consequences).

And that’s exactly the focus of the new study, “The Economic and Fiscal Consequences of Immigration,” by the Panel on the Economic and Fiscal Consequences of Immigration of the National Academies of Sciences, Engineering, and Medicine.

I won’t attempt to summarize the entire, 508-page study (itself a follow-up to the last major report on the topic by the National Academies, The New Americans: Economic, Demographic, and Fiscal Effects of Immigration, in 1997). However, as I read it, the study boils down to two key questions: First, what are the consequences of immigration, particularly those involving wage and employment prospects, for individuals already established in the United States? Second, what are the fiscal impacts of immigrants for local, state, and federal governments?

The answer to the first question is covered in Chapter 5 of the report, titled “Employment and Wage Impacts of Immigration.” The panel surveys a large, diverse literature, which they summarize as follows (on p. 4):

When measured over a period of 10 years or more, the impact of immigration on the wages of natives overall is very small. However, estimates for subgroups span a comparatively wider range, indicating a revised and somewhat more detailed understanding of the wage impact of immigration since the 1990s. To the extent that negative wage effects are found, prior immigrants—who are often the closest substitutes for new immigrants—are most likely to experience them, followed by native-born high-school dropouts, who share job qualifications similar to the large share of low-skilled workers among immigrants to the United States.

The first result, concerning the effects over a decade or more, should be treated with more than a few grains of salt. That’s because, as George Borjas explains, the finding (that “the impact of immigration on the wages of natives overall is very small”) is actually an artifact of the mathematical assumptions on which the models are built. More important are the shorter-run effects on the wages of workers against whom immigrants are often thrown into competition: prior immigrants and native-born high-school dropouts. Their wages do fall when large numbers of foreign-born workers immigrate and are forced to have the freedom to sell their ability to work within U.S. labor markets. And, of course, one can argue that new immigrants’ wages are lower than they otherwise might have been because of the existence of a large pool of previous immigrants (many of them without documents) and native-born workers without high-school degrees.

So, who gains from immigration?  Clearly, employers benefit from the existing “stock” as well as the annual “flow” of immigrants, especially since foreign-born workers “are more responsive than natives to regional differences in labor demand” (p. 222) and because “immigrants can be employed under arrangements in which payroll taxes are ignored and labor regulations are not observed” (p. 242).* That’s particularly true in the construction industry, where foreign-born workers constitute about 25 percent of the labor force.**

And, of course, there are two other major groups that benefit from an influx of workers: wealthy households that directly employ them, in “child care, landscaping, . . .and other household services” (p. 226); and the owners of the housing stock, who rent to immigrant workers and their families.***

The other major area of academic and policy research, and a key area in the Panel’s report, has to do with the impact of immigration on public finances. As with labor-market effects, estimating the fiscal impacts of immigration is complex (since it involves different levels of government as well as different generations of foreign-born workers and their families). The general conclusion is that the fiscal impacts of immigrants are generally positive at the federal level and negative at the state and local levels (p. 354):

State and local governments bear the burden of providing education benefits, upon arrival and continuing, to young immigrants and to the children of immigrants, but their methods of taxation tend to recoup relatively fewer contributions later from the most highly educated taxpayers. Federal benefits, in contrast, are largely focused on the elderly, so the relative youthfulness of arriving immigrants means that they tend to have positive fiscal impacts on federal finances in the short term. In addition, federal taxes are more strongly progressive, drawing more contributions from the most highly educated. The investment in public education requires public funds and pays public dividends, but a key issue is that the public dividends tend to be absorbed by the federal government, while the public funds are provided by the states. The fact that states bear much of the fiscal burden of immigration may incentivize state-level policies to exclude immigrants. Equity issues between the federal government and across states should be given consideration in future iterations of immigration policy.

It should come as no surprise, then, that especially at the local and state levels, where taxation is generally much less progressive than for the federal government, native-born workers (in additional to small-business owners and others) are forced to shoulder a higher burden of financing the expansion of education and other public programs needed by immigrant (especially first-generation immigrant) workers and their families. Over the longer-run, though, the net fiscal impact of immigrant (especially second- and higher-generation immigrant) workers turns positive, particularly at the federal level—and their future contributions to Social Security and other national programs will take some of the burden off other workers.

And the bottom line? The Panel itself never attempts to combine the labor-market and fiscal effects to determine the overall impact of immigration.**** But it’s clear from the various pieces of information this study provides that, as with all of the other periods of internal and external migration induced by U.S. capitalism, recent waves of immigration have benefited a tiny group of employers at the top, who in turn have managed to shift the costs—through wage reductions and higher taxes—onto workers (both recent immigrants and native-born workers).

The problem in American public debate is, now as in previous battles over immigration, foreign-born workers are scapegoated—and attention is shifted from the real cause of immigration.***** As I see it, American workers have every right to be concerned about lower wages and higher taxes. But they also have to recognize that wage stagnation and their growing tax burden are only partly caused by immigration—and that capitalism, not the influx of foreign-born workers, is what is responsible for their plight.

 

*As a result, immigrant workers are “more likely to hold jobs characterized by poor working conditions or high risk than are natives” (p. 242).

**Overall, if immigrant labor accounts for a large percentage (according to the report, 16.5 percent) of the total number of hours worked in the United States, the Panel estimates that “the current stock of immigrants lowered wages by 5.2 percent and generated an immigration surplus of $54.2 billion, representing a 0.31 percent overall increase in income that accrues to the native population” (p. 128), most of which flows to their employers.

***For example, according to the Panel (p. 227),

The immigrant share of rental unit growth was 26.4 percent in the 1980s, 60.4 percent in the 1990s, and 31.7 percent in the 2000s; it is projected to be 26.4 percent in the 2010s. The unusually high immigrant share of rental unit growth in the 1990s is attributed to an upswing in immigration in that decade, combined with a downswing in the population growth of native-born young adults, due to the arrival in adult years of the undersized cohort known as Generation X (those born from the mid-1960s to the early 1980s).

****In a footnote, Borjas attempts a back-of-the-envelope calculation of the total wealth transfer—which amounts to $500 billion—caused by immigration:

The calculation of the immigration surplus reported in Chapter 4 of the NAS report assumes that GDP is $17.5 trillion; that 65% of GDP goes to workers; and that 16.5% percent of the workforce is foreign-born. The report also says that “the current stock of immigrants lowered wages by 5.2 percent.”

Because only 65% of GDP goes to workers, that means that the total earnings of all workers is $11.4 trillion (or 0.65 × 17.5). But because only 16.5% of workers are foreign-born, the fraction of total earnings that goes to native workers is $9.5 trillion (or 0.835 × 11.4). The NAS report says that native earnings fell by 5.2 percent, so that the wage transfer from native workers to employers is $494 billion (or 0.052 × 9.5).

****There is, of course, a large nativist lobby that has spearheaded that scapegoating.

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Capitalism has, from the very beginning, generated movements of masses of people, both within and between nations. On one hand, the development of capitalism has disrupted and in many cases destroyed other modes of production and ways of life, and forced workers to have the freedom to sell their ability to work elsewhere—sometimes within their home countries (e.g., by moving from the countryside into small towns and large cities), often in other countries (when, of course, it was possible to assemble the finances to make the journey). On the other hand, the emergence and growth of capitalist enterprises have created the means to hire a larger and larger labor force—a demand that has been met by a changing combination of native-born and immigrant workers. Capitalism, in this sense, has demonstrated its own laws of population, including national and international migration.

And, as people have moved, shouldering the costs of their migrations across regions and national boundaries has been as unevenly distributed as the actual wealth those workers eventually created. It should come as no surprise, therefore, that across the history of capitalism the resulting large-scale movements of people have erupted in intense debates and battles over their effects.

The United States, of course, is no exception to these movements and controversies. The development of capitalism within U.S. borders, as well as the transformations it has simultaneously induced in other territories and countries (within the Americas and across the globe), have had the effect of creating both a mass of people who have no alternative but to sell their ability to work to someone else and a much smaller group of employers who have the capacity and interest to hire them. The result has been an ever-changing demography within the United States—as people of different ethnicities, races, and nationalities have been induced to move between regions and from other countries—as well as sporadic but intense debates about the consequences and costs of that ever-changing “melting-pot.”

That debate has, once again, erupted in the United States, in the midst of the current presidential campaign. While the terms of the debate are often couched (and thus mishandled and manipulated) in other terms, Americans are once again attempting to come to grips with the effects of the history of capitalism’s laws of population, which first concentrated and then abandoned generations of migrant workers in some regions and cities (especially in the now-deindustrialized Midwest), while simultaneously creating the conditions for the immigration of masses of people to work on the industrial farms and increasingly across the economy, from construction to services (everywhere else, both North and South).

Since Americans are encouraged to overlook the actual causes of migration and, in addition, to treat the two—internal and external—migrations as separate, independent processes, they end up concentrating only on the consequences of immigration (and, even then, on only some of the consequences). And that’s exactly the focus of the new study, “The Economic and Fiscal Consequences of Immigration,” by the Panel on the Economic and Fiscal Consequences of Immigration of the National Academies of Sciences, Engineering, and Medicine.

I plan to discuss the Panel’s major findings in a separate post tomorrow.