Posts Tagged ‘corporations’

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Teaching critical literacy.

That’s what professors do in the classroom. We teach students languages in order to make some sense of the world around them. How to view a film or read a novel. How to think about economics, politics, and culture. How to understand cell biology or the evolution of the universe.

And, of course, how to think critically about those languages—both their conditions and their consequences.

I’ve been thinking about the task of teaching critical literacy as I prepare the syllabi and lectures for my final semester at the University of Notre Dame.

Lately, I’ve been struck by the way mainstream economics is usually taught as a choice between markets and policy. Whenever a problem comes up—say, inequality or climate change—one group of mainstream economists offers the market as a solution, while the other group suggests that markets aren’t enough and need to be supplemented by government policies. Thus, for example, conservative, market-oriented economists teach students that, with free markets, everybody gets what they deserve (so inequality isn’t really a problem) and greenhouse gas emissions will decline over time (by imposing a tax on the burning of carbon-based fuels). Liberal economists generally argue that market outcomes are inadequate and require additional policies—for example, minimum-wage laws (to lower inequality) and stringent regulations on carbon emissions (because allowing the market to work through carbon taxes, or even cap-and-trade schemes, won’t achieve the necessary reductions to avoid global warming).*

That’s the way mainstream economists frame the issues for students—and, for that matter, for the general public. Markets or policies. Either rely on markets or implement new policies. Once someone learns the language, they see the world in a particular way, and they’re permitted to participate in the debate on those terms.

The problem is, something crucial is being left out of those languages, and thus the economic and political debate: institutions. The existing set of institutions are taken as given. Therefore, the possibility of changing existing institutions or creating new institutions to solve economic and social problems is simply taken off the table.

Among those institutions, perhaps the key one is the corporation. The presumption within mainstream economics is that privately owned, publicly traded corporations are simply there, allowed to operate freely within markets or nudged in a better direction by government policies. What mainstream economists never encourage students (or, again the general public) to consider is the possibility that institutions—especially the corporation—might be modified or radically transformed to create the foundation for a different kind of economy.

Consider how strange that is. Corporations are the central institution when it comes to the distribution of income and therefore the obscene, and still-growing, levels of inequality in the U.S. and world economies. It’s how most workers are paid (because that’s where jobs are available) and where the surplus is first appropriated (by the boards of directors) and then distributed (to shareholders and others). And as workers’ wages stagnate, and the surplus grows, economic inequality becomes worse and worse.

The same is true with climate change. The major institution involved in producing and using fossil fuels—and therefore creating the conditions for global warming—is the corporation. Especially gigantic multinational corporations. Some make profits by extracting fossil fuels; others use those fuels to produce commodities and to transport them around the world. They are the basis of the fossil-fuel-intensive Capitalocene.

Within the language of mainstream economists, the corporation is always-already there. They may allow for different kinds of markets and different kinds of policies but never for an alternative to the institution of the corporation —whether a different kind of corporation or a non-corporate way of organizing economic and social life.

If the goal of teaching economic is critical literacy, then we have to teach students the multiple languages of economics—including the possibilities that are foreclosed by some languages and opened up by other languages. One of our tasks, then, is to look beyond the language of markets and policy and to expose students to a language of changing institutions.

Now that I begin to look back on my decades of teaching economics, I guess that’s what I’ve been doing the entire time, exploring and promoting critical literacy. I’ve always taken as one of my responsibilities the teaching of the language of mainstream economists. But I haven’t stopped there. I’ve also always endeavored to expose students to other languages, other ways of making sense of the world around them.

Maybe, as a result, some of them have left knowing that it’s not just a question of markets or policy. Economic institutions are important, too.

Addendum

To complicate matters a bit further, the three elements I’ve focused on in this blog post—markets, policy, and institutions—are not mutually exclusive. Thus, for example, at least some conservative mainstream economists do understand that properly functioning markets do presume certain institutions (such as the rule of law and the protection of private property) and policies (especially not regulating markets), while liberals often advocate policies that allow markets to operate with better outcomes (I’m thinking, in particular, of antitrust legislation) and institutions to be safeguarded (especially when they might be threatened by grotesque levels of inequality and the effects of climate change). As for institutions, I can well imagine noncorporate enterprises—for example, worker cooperatives—operating within markets and relying on government policy. However, such enterprises imply the existence of markets and policies that differ markedly from those that prevail today, which are taken as given and immutable by mainstream economists.

 

*Dani Rodrik summarizes the terms of the debate well in a recent column: when a local factory closes because a firm has decided to outsource production,

Economists’ usual answer is to call for “greater labor market flexibility”: workers should simply leave depressed areas and seek jobs elsewhere. . .

Alternatively, economists might recommend compensating the losers from economic change, through social transfers and other benefits.

Once again, it’s a question of markets (in this case, the labor market) and policy (more generous social transfers to the “losers”).

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Those aren’t my words. The quotation that forms the title of this post is from a recent Federal Reserve Bank of St. Louis blog post.

And they’re important to keep in mind in light of the news coverage (e.g., by the New York Times) of last week’s Labor Department report on hiring and unemployment. Yes, 250 thousand jobs were added in the U.S. economy last month and average earnings did rise by 0.2 percent and are up 3.1 percent over the past year.

But. . .

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The rate of growth of American workers’ wages (the blue line in the chart above) is only a hair above the increase in consumer prices (the red line). So, for all intents and purposes, real wages remain stagnant.

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Meanwhile, the profits captured by American corporations continue to grow, reaching new record highs.

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It should come as no surprise, then, that the labor share of national income (the light blue line in the chart above) remains below its pre-crash level (and much lower than any earlier year in postwar history), while the share of national income that is distributed to wealthy households in the form of dividends (the light green line) is still much higher than it’s been throughout the postwar period.

Never have corporate profits and dividends outgrown workers’ wages so clearly and for so long. And the political party dominating all three branches of the U.S. government is doing everything in its power to make sure that trend continues.

That’s the proper context for the latest jobs report—and for tomorrow’s elections across America.

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Last month, Philip Alston, the United Nations Special Rapporteur on extreme poverty and human rights (whose important work I have written about before), issued a tweet about the new poverty and healthcare numbers in the United States along with a challenge to the administration of Donald Trump (which in June decided to voluntarily remove itself from membership in the United Nations Human Rights Council after Alston issued a report on his 2017 mission to the United States).

The numbers for 2017 are indeed stupefying: more than 45 million Americans (13.9 percent of the population) were poor (according to the Supplemental Poverty Measure*), while 28.5 million (or 8.8 percent) did not have health insurance at any point during the year.

But the situation in the United States is even worse than widespread poverty and lack of access to decent healthcare. It’s high economic inequality, which according to a new report in Scientific American “negatively impacts nearly every aspect of human well-being—as well as the health of the biosphere.”

As Robert Sapolsky (unfortunately behind a paywall) explains, every step down the socioeconomic ladder, starting at the very top, is associated with worse health. Part of the problem, not surprisingly, stems from health risks (such as smoking and alcohol consumption) and protective factors (like health insurance and health-club memberships). But that’s only part of the explanation. But that’s only part of the explanation. The rest has to do with the “stressful psychosocial consequences” of low socioeconomic status.

while poverty is bad for your health, poverty amid plenty—inequality—can be worse by just about any measure: infant mortality, overall life expectancy, obesity, murder rates, and more. Health is particularly corroded by your nose constantly being rubbed in what you do not have.

It’s not only bodies that suffer from inequality. The natural environment, too, is negatively affected by the large and growing gap between the tiny group at the top and everyone else. According to James Boyce (also behind a paywall), more inequality leads to more environmental degradation—because the people who benefit from using or abusing the environment are economically and politically more powerful than those who are harmed. Moreover, those at the bottom—with less economic and political power—end up “bearing a disproportionate share of the environmental injury.”

Social and institutional trust, too, decline with growing inequality. And, as Bo Rothstein explains, societies like that of the United States can get trapped in a “feedback loop of corruption, distrust and inequality.”

Voters may realize they would benefit from policies that reduce inequality, but their distrust of one another and of their institutions prevents the political system from acting in the way they would prefer.

But what are the economics behind the kind of degrading and destructive inequality we’ve been witnessing in the United States in recent decades? For that, Scientific American turned to Nobel laureate Joseph Stiglitz for an explanation. Readers of this blog will be on familiar ground. As I’ve explained before (e.g., here), Stiglitz criticizes the “fictional narrative” of neoclassical economics, according to which everyone gets what they deserve through markets (which “may at one time have assuaged the guilt of those at the top and persuaded everyone else to accept this sorry state of affairs”), and offers an alternative explanation based on the shift from manufacturing to services (which in his view is a “winner-takes-all system”) and a political rewriting of the rules of economic game (in favor of large corporations, financial institutions, and pharmaceutical companies and against labor). So, for Stiglitz, the science of inequality is based on a set of power-related “market imperfections” that permit those at the top to engage in extracting rents (that is, in withdrawing “income from the national pie that is incommensurate with societal contribution”).

The major problem with Stiglitz’s “science” of economic inequality is that he fails to account for how the United States underwent a transition from less inequality (in the initial postwar period) to growing inequality (since the early 1980s). In order to accomplish that feat, he would need to look elsewhere, to the alternative science of exploitation.

While Stiglitz does mention exploitation at the beginning of his own account (with respect to American slavery), he then drops it from his approach in favor of rent extraction and market imperfections. If he’d followed his initial thrust, he might have been able to explain how—while New Deal reforms and World War II managed to engineer the shift from agriculture to manufacturing, reined in large corporations and Wall Street, and bolstered labor unions—what was kept intact was the ability of capital to appropriate and distribute the surplus produced by workers. Thus, American employers, however regulated, retained both the interest and the means to avoid and attempt to undo those regulations. And eventually they succeeded.

What is missing, then, from Stiglitz’s account is a third possibility, an approach that combines a focus on markets with power, that is, a class analysis of the distribution of income. According to this science of exploitation or class, markets are absolutely central to capitalism—on both the input side (e.g., when workers sell their labor power to capitalists) and the output side (when capitalists sell the finished goods to realize their value and capture profits). But so is power: workers are forced to have the freedom to sell their labor to capitalists because it has no use-value for them; and capitalists, who have access to the money to purchase the labor power, do so because they can productively consume it in order to appropriate the surplus-value the workers create.

That’s the first stage of the analysis, when markets and power combine to generate the surplus-value capitalists are able to realize in the form of profits. And that’s under the assumption that markets are competitive, that is, there are not market imperfections such as monopoly power. It is literally a different reading of commodity values and profits, and therefore a critique of the idea that capitalist factors of production “get what they deserve.” They don’t, because of the existence of class exploitation.

But what if markets aren’t competitive? What if, for example, there is some kind of monopoly power? Well, it depends on what industry or sector we’re referring to. Let’s take one of the industries mentioned by Stiglitz: Big Pharma. In the case where giant pharmaceutical companies are able to sell the commodities they produce at a price greater than their value, they are able to appropriate surplus from their own workers and to receive a distribution of surplus from other companies, when they pay for the drugs covered in their health-care plans. As a result, the rate of profit for the pharmaceutical companies rises (as their monopoly power increases) and the rate of profit for other employers falls (unless, of course, they can change their healthcare plans or cut some other distribution of their surplus-value).**

The analysis could go on. My only point is to point out there’s a third possibility in the debate over growing inequality in the United States—a theory that is missing from Stiglitz’s article and from Scientific American’s entire report on inequality, a science that combines markets and power and is focused on the role of class in making sense of the obscene levels of inequality that are destroying nearly every aspect of human well-being including the natural environment in the United States today.

And, of course, that third approach has policy implications very different from the others—not to force workers to increase their productivity in order to receive higher wages through the labor market or to hope that decreasing market concentration will make the distribution of income more equal, but instead to attack the problem at its source. That would mean changing both markets and power with the goal of eliminating class exploitation.

 

*The official rate was 12.3 percent, which means that 39.7 million Americans fell below the poverty line.

**This is one of the reasons capitalist employers might support “affordable” healthcare, to raise their rates of profit.

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No, the stock market is not predictable. And no one knows the exact causes of last week’s carnage on Wall Street—with the Dow down 4.2 percent, the S&P 4.1 percent and the Nasdaq 3.7 percent, representing their worst weekly performances since March.

But the precipitous fall in all major indices, which many analysts blamed at least in part on the earnings blackout period, did serve to highlight one of the factors that has been driving the bull market: corporations purchasing their own stock.

As Matt Phillips explained,

When companies have more cash than they believe they can use productively, they typically return it to shareholders either with cash payments—known as dividends—or by repurchasing shares in the market. Buybacks raise demand, putting upward pressure on share prices.

Such repurchases have boomed this year as the strong economy—and steep cuts in corporate tax rates—have left American companies flush with profits. Companies including Apple, Cisco Systems and Amgen have returned billions in cash to shareholders by buying back shares. Apple is responsible for the largest sum, spending nearly $64 billion on buybacks in the 12 months ending in June 2018, the last period for which full data is available, according to data from S&P Dow Jones Indices.

Generally, around earnings reporting season, corporations avoid repurchasing their own stocks, to avoid the appearance of insider trading. And, without those corporate buybacks, it seems the stock market has fallen off a cliff various times already this year.

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But the overall trend is for U.S. corporations to spend (or to leverage, via debt) a large portion of their profits on buying their own stocks—with plans to spend $770 billion on share buybacks in 2018, and even more next year.*

And when they cut back on those purchases, as they seem to have done last week, a large part of the demand for stocks collapses.

The fact is, corporations have three major ways of goosing their golden goose, which they and a small group of wealthy households in the United States benefit from.

First, employers endeavor to keep workers’ wages low, even as productivity increases, thereby boosting their pretax profits (of which they then distribute a portion in the form of salaries to their CEOs and dividends to stockowners).

Second, corporations lobby for tax breaks on their profits, an effort that once Donald Trump was elected delivered a slashing of the tax rate, from 35 percent to 21 percent.

Third, businesses use a portion of those higher post-tax profits to purchase their own stocks, which tends to boost the price of shares, producing additional wealth for shareholders who hang onto their stock. It also improves per-share performance on key metrics like earnings, which in turn attracts more stock purchases from other institutional and noninstitutional investors with their own growing share of the surplus.**

The result, of course, is an increase in the already-obscene degree of income and wealth inequality in the United States.

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According to my calculations (illustrated in the chart above), the top 1 percent in the United States owns (as of 2014, the last year for which data are available) 62 percent of equities, which has been climbing since the late 1970s. Meanwhile, the share of the entire bottom 90 percent has been falling, and is now only 11 percent.

So, it’s really only the small group at the top that is in a position to receive a cut of corporate profits in the form of dividends and to increase their wealth as corporate buybacks boost the prices of the stocks they keep in their portfolios.

Everyone else is forced to have the freedom to try to get by on their stagnant wages—and to watch with both fascination and horror the ongoing spectacle in the Trump White House.

 

*For most of the twentieth century, stock buybacks were deemed illegal because they were thought to be a form of stock market manipulation. But since 1982, when they were essentially legalized by the Securities and Exchange Commission, buybacks have become perhaps the most popular financial engineering tool in the American corporate tool shed.

*According to the S&P Dow Jones Indices, the top 100 stocks with the highest buyback ratios in the S&P 500 have regularly outperformed the overall S&P 500 index (as seen in the chart below).

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