Posts Tagged ‘chart’

US-gini-color

On behalf of millions of young people striking on behalf of climate justice, 15-year-old Greta Thunberg excoriated world leaders for “moving forward with the same bad ideas that got us into this mess.”

Our civilization is being sacrificed for the opportunity of a very small number of people to continue making enormous amounts of money. . .

Until you start focusing on what needs to be done rather than what is politically possible, there is no hope. We cannot solve a crisis without treating it as a crisis.

We need to keep the fossil fuels in the ground, and we need to focus on equity. And if solutions within the system are so impossible to find, maybe we should change the system itself.

Much the same applies, of course, to the economic system that generates such grotesque levels of inequality. At the same time that Thunberg was making headlines in the United States and around the world, the U.S. Census Bureau reported that inequality—as measured by the Gini index for income—hit its highest level since the Census Bureau started tracking it more than five decades ago.

I’ve compiled the numbers in the chart at the top of the post. In 1967, the Gini index stood at 0.397; as of last year, it had risen to 0.486. In other words, income inequality had grown by more than 22 percent during that period.

As I warned back in 2014, Gini coefficients should be used with more than a few grains of salt. First, they should never be used to compare degrees of inequality across countries. Second, because the Gini boils down the overall distribution of income to a single number, it loses some detail. For example, if the Gini coefficient has gone up, it doesn’t tell us whether this is because the share going to the bottom 90 percent went down or the top 1 percent (or, for that matter, the top 0.1 percent or the top 0.01 percent) went up.

Shares

So, we need to look at the actual income shares for various percentiles of the U.S. population to find out why inequality has grown so spectacularly since the late 1960s.

As is clear from the chart above (which, given the availability of data, ends in 2014), while the share of income going to the middle 40 percent (the orange line) did in fact decline (from 0.44 to 0.40), those in the bottom 50 percent (dark blue) were the real losers (as their share declined from an already low 0.20 to just 0.13). And at the top? The shares of the surplus captured by all of them—the top 1 percent (green, from 0.12 to .20), the top 0.1 percent (yellow, from 0.04 to 0.09), and the top 0.01 percent (light blue, from 0.02 to 0.04)—increased in what can only be described as an obscene manner.

The conclusion is therefore obvious: the rise in the Gini coefficient in the United States does reveal a long-term shift in the distribution of income from those at the bottom to a tiny group at the top.

And, yes, as Thunberg has correctly noted, if solutions within the system are so impossible to find, it’s time to change the system itself.

AD

The American Dream is dead. Long live the American Dream!

Let me explain. The official American Dream, the one that has been produced and disseminated at least as far back as the transition from the farm to the factory (in other words, since the late-nineteenth century), lies in tatters. Americans have long been encouraged to believe that everyone gets what they deserve—and, with equal opportunity, those who start at the bottom have a real chance of working their way to the top. Within generations, all workers had a chance to “make it.” And, between generations, children would likely be better off than their parents.

That promise—let’s call it the capitalist American dream—is now in tatters. It is dead and (almost) buried.

It’s not the first time, of course, that the capitalist American Dream has been called into question. During the Great Depression of the 1930s, American capitalism was not able to deliver the goods, at least for the majority of the population. Widespread unemployment and poverty, as capitalists shuttered their factories were shuttered and banks foreclosed on farms, meant that most Americans were faced with an economic nightmare. And much the same happened after the crash of 2007-08 when, in the midst of the Second Great Depression, millions of Americans were unable to find a decent job or purchase (unless they went further into debt) the necessary goods and services, for themselves and their children.

graph_dl

The one major difference, of course, is that, while economic inequality fell after the first Great Depression, it actually resumed its upward trajectory during the so-called recovery from the Second Great Depression.

We also have to remember that that American Dream was only ever partial and incomplete. It was a promise but it really only held during the immediate postwar period. And, even then, only for white working-class families; Blacks and hispanics were mostly excluded, at least until the Civil Rights movement took hold. It also depended on the hegemony of the American economy, Pax Americana, after the recovery from the economic collapse and the destruction elsewhere occasioned by World War II.

Those conditions ended in the 1970s and, with stagnant wages and growing inequality culminating in the crash of 2007-08, one American Dream has died. One response to that ignominious death was the election of Donald Trump, who arose from the carnage and stands over it with his enablers, who have no interest in doing anything but to enrich themselves.

But there’s another American Dream that has captured the imagination of farmers and workers, young and old, for at least as long as the official one. It’s a dream of democracy and equality, of collective solidarity, that has animated many political and social movements and become enshrined in myriad policies and programs. Let’s call this one the socialist American Dream.

That’s the dream Americans have invoked to organize labor unions and farmer- and worker-owned cooperatives. It’s what has inspired attempts to expand the political franchise—to women and ethnic and racial minorities—and to create government programs whereby citizens help one another and force those at the top to participate. As a result, Americans have created progressive income taxes, a minimum wage, food stamps (now supplemental nutrition assistance), health and safety regulations, Social Security, Medicaid and then Medicare, environmental regulations, and now Medicare for All and a Green New Deal.

The ultimate historical irony is that the socialist American Dream made the capitalist American Dream possible. Without unions and cooperatives, and in the absence of social welfare programs whereby a portion of the surplus has been captured and distributed so that citizen-workers collectively could help one another, the official American Dream would have remained a myth. That is was a reality, at least for many and for a certain period of time, was due at least in part because of the existence of a socialist dream of betraying and moving beyond a capitalist logic of organizing economic and social life in the United States.

Moreover, the capitalist American Dream of individual success and intergenerational mobility began to unravel precisely when the socialist American Dream came under attack. The concerted attempt to weaken labor unions—not to mention, first, to halt the expansion of social programs and, then, to actively restrict access to them, accompanied by new ways of highjacking the electoral process—undermined American workers’ ability for themselves and for their children to get ahead. Ultimately, it ended any attempt they had at the official American Dream.

Why does the intertwining of these two American Dreams matter? Right now, it has enormous consequences because of the movement to unseat Trump and the ongoing debate inside the Democratic Party. I’m thinking, in particular, of the left-wing of the Democratic Party, represented by the democratic socialist Bernie Sanders and the radical populist Elizabeth Warren. As I see it, Sanders has long championed the socialist American Dream while Warren has been positioned, by her campaign and by those who see her as the capitalist alternative to Sanders, as rescuing the official American Dream with more progressive policies.

In my view, both Sanders and Warren would be better served by understanding the history of the two American Dreams. As I argued back in 2015, needs to drop the references to Canada and the Scandinavian countries and make the case that socialism—democratic socialism—has long been an American Dream.* And Warren, if she wants to live up to the aspirations of the Working Families Party (which just endorsed her), has to highlight the ways her policies will transform the economy in a manner that “fights for workers over bosses and people over the powerful”—in other words, that extends the socialist American Dream.

The death knell of one American Dream, symbolized tragically and with vengeance by Trump’s presidency, creates even more space for another American Dream, a socialist one, with its own long, rich history.

 

*During the third Democratic debate, in response to an inane question about the main differences between his “kind of socialism and the one being imposed in Venezuela, Cuba and Nicaragua,” Sanders responded: “I’ll tell you what I believe in terms of democratic socialism. I agree with goes on in Canada and in Scandinavia, guaranteeing health care to all people as a human right.”

The same day I wrote that capitalism was coming apart at the seams, indicated by the shocking disparity between the compensation of corporate CEOs and workers, the Business Roundtable published its new statement of purpose of a corporation.*  The 180 or so corporate executives who signed the statement declared that all their stakeholders, not just owners of equity shares, were important to their mission.

Many business pundits, such as Andrew Ross Sorkin, greeted the new statement as a sign that the era of shareholder democracy (what he refers to as “shareholder primacy”) had finally come to an end and that a “significant shift” in corporate responsibility to society would be ushered in. Readers, however, had their doubts, most of them echoing JDK’s response to Sorkin’s piece: “Talk is cheap.”

fredgraph

The fact is, over the past three decades, net dividend payments to shareholders have soared—from $178 billion in 1989 to $1.3 trillion in 2019 (that’s an increase of 630 percent, for those keeping track).** And much of the responsibility is laid at the feet of mainstream economists like Milton Friedman (pdf), who famously declared that “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits” and the only responsibility of corporate executives is to their employers, the shareholders—and corporate raiders such as Carl Icahn.

As I see it, the idea of shareholder democracy has merely served as a cover for any and all corporate decisions and strategies. When pushed to take on other responsibilities, or to make other decisions, the corporate defense has long been that it ran counter to the mission of maximizing profits or shareholder value.

In reality, corporations have never attempted to achieve just one objective or to maximize one value. One issue is that the usual objectives or values ascribed to corporate managers are ill-defined. There is neither singular meaning of profits (since, as they’re reported, they’re largely the result of a particular set of accounting conventions, defined over the fuzzy boundaries of the inside and outside of a corporate entity) nor a unique time frame (over what period are profits or dividends maximized—a week, quarter, year?).*** But the defense of such a corporate mission has served as a convenient excuse to resist pressures to make different decisions or adopt alternative strategies—such as increasing worker pay, improving working conditions, implementing environmentally sustainable practices, and so on.

My view, as I argued back in 2013, is that corporations have never done just one thing or followed a single rule. They do make profits (at least sometimes, depending on the definition and timeframe). But they also seek to grow their enterprises and destroy the competition and maintain good public relations and buy government officials and reward their CEOs and squeeze workers and lower costs and reward shareholders and implement new forms of automation and build factories that collapse and. . .well, you get the idea. In other words, they appropriate and distribute surplus-value in all kinds of ways depending on the particular conditions and struggles that take place over the shape and direction of their enterprises.

The problem inherent both in the new Business Roundtable statement of purpose and in the attempts by corporate critics to argue that corporations should take on additional social responsibilities is that corporations are already too central to the U.S. economy and society. They’re the main institution where the surplus is appropriated and then distributed—with all the consequent effects on the wider society. The private decisions of corporate entities, as decided by the boards of directors and implemented by the chief executives, are responsible for the Second Great Depression, the grotesque levels of economic inequality that have been growing for decades now, the global-warming crisis, and so much more. Why would anyone want to give corporations even more power or scope to decide how to solve those problems when they’re the root of the problem in the first place?

No, the only viable strategy is make corporations less important, to decenter the American economy and society from the decisions made by corporate directors and executives. That begins with fostering the growth of other types of firms (such as worker-owned cooperatives) and making sure that the workers employed by corporations play a significant role in corporations (including how much surplus there will be and how it will be utilized). That’s the best way of moving beyond the era of shareholder democracy to a real economic democracy.

Anything else is just cheap talk.

 

*I certainly don’t want to imply that the Business Roundtable was responding to my blog post. No, the fact that they felt it necessary to issue such a new statement of purpose is an indication that American corporations—and, with them, U.S. capitalism—have lost a great deal of legitimacy in recent years. As Farhad Manjoo [ht: ja] recently wrote,

A recession looms, and the nation’s C.E.O.s are growing fearful.

It isn’t the potential of downturn itself that has them alarmed — downturns come and downturns go, but whatever happens, chief executives, like cats, tend to land on their comfortably padded feet.

Instead, the cause of their fear appears to be something more fundamental. . .They’re worried that when the next recession breaks, revolution might, too. This could be the hour that the ship comes in: The coming recession might finally prompt the masses to sharpen their pitchforks and demand a reckoning.

**During that same period, average hourly earnings (for production and nonsupervisory workers) increased by only 140 percent—but corporate profits (after tax) rose by 570 percent.

***As I have long explained to students, that’s the myth that serves as the foundation of the neoclassical theory of the profit-maximizing firm: what exactly are corporate profits and over what time frame are they supposed to be maximized? The assumption of a profit-maximizing firm is equivalent to what one hears from many so-called radical economists, that “capitalists accumulate capital.” Again, no. Accumulating capital (that is, purchasing new elements of constant and variable capital) is only one of the many possible forms in which capitalists distribute the surplus-value they appropriate from their workers. Sometimes they accumulate capital, and other times they don’t. The presumption that they always seek to accumulate capital is the heroic story proffered by classical economists (so that, in their view, capitalist growth would take place), much as neoclassical economists today presume that capitalists maximize profits (so that, in their view, an efficient allocation of resources will result). Marxists presume neither that capitalists maximize profits nor that they always and everywhere accumulate capital.

EB7OuYhXsAAOES9

American capitalism is coming apart at the seams.

Truth be told, it’s been coming apart for decades now—and that trend has only continued during the recovery from the worst crash since the 1930s.

A good indicator of the shredding of the U.S. economic and social fabric is the difference in the level of compensation of Chief Executive Officers of major American corporations compared to that of the average worker. While they labor, workers create value, some of which they receive back in the form of compensation; the rest of what they produce is the surplus, which is appropriated by the boards of directors of the enterprises that hire the workers. The boards also hire CEOs, to supervise the production of the surplus, who in turn get a cut of the surplus. In other words, the executives share in the booty created by the workers they supervise. Thus, both groups—CEOs and workers—perform labor and are compensated for their work but the source and level of their compensation couldn’t be more different.

According to the Economic Policy Institute, in 2018, average compensation (including realized capital gains) of CEOs at the top 350 American firms was $17.2 million. And for workers? It was only $56 thousand. As a result, the ratio of CEO compensation to that of workers was an astounding 278.1 to 1! In 1978, that ratio stood at 29.7 to 1. The spectacular growth in the CEO-to-average-worker-compensation ratio reflects the fact that, over that same period, CEO compensation has risen 940.3 percent while that of workers has grown only 11.9 percent.

Just in the past nine years of the so-called recovery, CEO compensation far outpaced that of workers: 52.6 percent compared to only 12.7 percent.

L share

It should come as no surprise, then, that over the 1978-2018 period, the labor share of national income has dropped precipitously, by 8.7 percent (falling 2.1 percent just since 2009). Corporate CEOs have thus done their job—extracting more surplus from workers—and been rewarded handsomely for their efforts.

And Americans are quite aware of how unfair the U.S. corporate economy has become.

CEO-2  CEO-3

According to a 2016 survey conducted by David F. LarckerNicholas E. Donatiello, and Brian Tayan for the Stanford Rock Center for Corporate Governance, 74 percent of Americans believe that CEOs are not paid the correct amount relative to the average worker; only 16 percent believe that they are. And 70 percent believe that CEO compensation in the United States is a problem; only 18 percent think it’s not. 

CEO-1

And that’s even when Americans grossly underestimate the amount of the surplus corporate CEOs manage to capture. The typical American believes a CEO earns $1 million in pay (with an average of $9.3 million), whereas median reported compensation for the CEOs of these companies was approximately $10.3 million (with an average of $12.2 million).

In other words, CEO compensation figures are much higher than the public is aware of, and for many Americans it is simply incomprehensible that anyone can earn that much money.

Moreover, Americans are not convinced corporate CEOs should be able to capture as much of the surplus as they do. For example, according to the same survey, when respondents are given a hypothetical situation in which a company’s value increases by $100 million over the course of a year, the median respondent believes that the CEO should receive only 0.5 percent ($500,000) as compensation. In other words, as Donatiello put it, “Either the public is not sold on the idea that CEOs should share in value creation to the extent that they do. Or they do not believe that CEOs play an important role in value creation.”

Clearly, the high level of exploitation—and the subsequent distribution of a large portion of the resulting surplus to CEOs—is the source of the rending of the U.S. economic and social fabric. Unless corporations are fundamentally transformed, so that workers and society as a whole have a say in the size and distribution of the surplus, American capitalism will continue to come apart at the seams.

labor share

They keep promising, ever since the recovery from the Great Recession started more than eight years ago, that the share of national income going to American workers will finally begin to increase. But it’s not.

Sure, profits continue to rise. And so is the stock market. But not what workers receive.

In fact, as is clear from the magnified section of the chart above, the labor share has actually been declining in recent quarters—even as the unemployment rate has fallen about as far as it’s going to go.*

But you don’t have to believe me. Even the Wall Street Journal has noticed this trend.

Labor’s share of domestic income has been declining since 1970 and has barely recovered in this expansion from lows last seen when the U.S. was pulling out of the Great Depression.

Employee pay and benefits as a percentage of gross domestic income fell to 52.7% in last year’s third quarter, for the fourth straight quarterly decline, according to data from the Bureau of Economic Analysis. It was as high as 59% in 1970 and 57% in 2001. If workers were commanding as much of domestic income as they did in 2001, they’d have nearly $800 billion more in their pockets, or $5,100 per employed American.

While the labor share has fallen, business profits are on the rise. Income of corporations, proprietorships, landlords and other businesses has climbed from less than 12% of gross domestic income in the 1980s to more than 20%.

It’s time then to call out the hollowness of the promises that economic growth and low unemployment will lead to improvements for the nation’s workers. Clearly, both economists and politicians, conservatives as well as liberals, continue to make such pledges.

But those promises are as empty as hell—because, as the king’s son once declared, “all the devils are here.”

 

 

*And, as I explained back in 2017, the situation may be even worse for workers than the official numbers capture. That’s because the “labor share” doesn’t give an accurate picture of the “workers’ share” of national income—for two reasons: First, the labor share (as calculated by the Bureau of Labor Statistics) includes both employee compensation and the labor compensation of proprietors (and thus a portion, minus the capital share, of the income going to proprietors). Second, the labor share does not account for inequality between the different groups who receive what is officially measured as labor compensation. Thus, the compensation of a highly paid CEO and a low-wage worker are both included in the labor share.

productivity-wages

Mainstream economists continue to insist that workers benefit from economic growth, because wages rise with productivity.

Here’s the argument as explained by Donald J. Boudreaux and Liya Palagashvili:

Firms cannot afford a misalignment of their workers’ pay and productivity increases—the employees will move to other firms eager to hire these now more productive workers. Higher economy-wide productivity, after all, means that workers add more to the bottom lines of employers throughout the economy. To secure the services of these more-productive workers, firms bid up worker pay. This competition for labor services is what links pay to productivity.

Except, of course, the link between wages and productivity has been severed for decades now, going back to the late-1970s. Since then, as the folks at the Economic Policy Institute have shown, productivity has increased by 70.3 percent but average worker’s wages have risen by only 11.1 percent.

So, no, there is no necessary or automatic link between productivity and wages within the U.S. economy. There may have been such a relationship after World War II, during the so-called Golden Age of American capitalism, but not in recent decades.*

A natural question that arises is just where did the excess productivity—the extra surplus U.S. employers appropriated from their workers—go? A significant proportion, as I showed last year, went to higher corporate profits. Another large portion went to those at the very top of the wage distribution.

appendix

As is clear in the chart above, the top 1 percent of earners saw cumulative gains in annual wages of 157.3 percent between 1979 and 2017—far in excess of economy-wide productivity growth and nearly four times faster than average wage growth (40.1 percent). Over the same period, top 0.1 percent earnings grew 343.2 percent, with the latest spike reflecting the sharp increase in executive compensation.

In other words, corporate executives—on both Main Street and Wall Street—have been able to share in the extra booty captured from American workers, who were forced to have the freedom to sell their ability to work for wages that have barely increased in recent decades.

That combination of stagnant wages for most workers and the ability of those at the top to capture a large portion of the extra surplus is therefore at the root of increasing inequality in the United States.

 

*Even then, as I explained back in 2017:

The fact is, the supposed Golden Age of American capitalism was based on a set of institutions that allowed the boards of directors of large corporations to appropriate a growing surplus and to distribute it as they wished. At first, during the immediate postwar period, that meant growing incomes for those in the bottom 90 percent. But, even then, the mechanisms for distributing income remained in the hands of a very small group at the top. And they had both the interest and the means to stop the growth of wages, get even more surplus (from U.S. workers and, increasingly, workers around the globe), and distribute a greater share of that surplus to a tiny group at the very top of the distribution of income.

09.29.2017_Trump_and_bull

In a 1999 interview with Fortune, legendary investor Warren Buffett coined the term “economic moats” to sum up the main pillar of his investing strategy. He described it like this:

The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.

The idea of an economic moat, with Buffett’s endorsement, has picked up steam since the article. Morningstar, an investment research firm, created an index that tracks companies with a wide economic moat in order to see if Buffett’s theory holds water. In 2012, VanEck, a money manager, created an exchange-traded fund called “MOAT” that would track Morning Star’s economic moat index.

MOAT

And it works! Since 2012, VenEck’s Wide MOAT fund has beaten the Standard & Poor’s Index: it’s up 125.68 percent compared to the S&P’s 108 percent.

But what’s true for the individual investor does not hold for the U.S. economy as a whole. That’s because corporations with a Buffet moat around them are only managing, for a time, to capture portions of the surplus produced and appropriated elsewhere. It’s a rent—thus, of course, justifying the use of a feudal concept to characterize an investment strategy within contemporary capitalism.

Of course, the U.S. economy is not feudal (at least, for the most part). Instead, it is based on capitalism. And what’s important about American capitalism is the gap between workers’ wages and the total value they produce, which is profits—a portion of which is distributed in the form of dividends.

profits-dividends-wages

As is clear from the chart above, over the course of the past decade both corporate profits (the red line) and dividends to shareholders (the green line) have rebounded spectacularly while the share of national income going to labor (the blue line) has fallen precipitously and remained very low. That’s the case during the so-called recovery from the crash of 2007-08 as well as the 15 or so years prior to the crash.

So, the comparison between feudalism and capitalism is perhaps even more apt than Buffett and other investors are willing to admit: in both cases, the surplus labor pumped out of the direct producers—serfs then, wage-laborers now—is appropriated—in the form of feudal rents or capitalist profits—and is then distributed to still others—to other religious and secular lords or other capitalists and equity owners.

And the result is exactly the same: a growing gap between the small group of gangsters at the top and everyone else.