Posts Tagged ‘distribution’

distribution

Liberals have a problem: the kinds of redistribution they advocate and support just don’t do a lot to fundamentally alter the profoundly unequal distribution of income in the United States.

Consider the chart above, which illustrates the cash-income effects of the U.S. tax system (with dark colors marking the pre-tax distribution of income and the lighter colors the post-tax distribution). The results are quite meager: in 2014, the share of the top 1 percent (blue lines, measured on the right) was only lowered from 20.2 percent to 17 percent, while the share of the bottom 90 percent (plum lines, measured on the left) rose from 53 percent to just 59.2 percent.

So, even after all the tax-based redistributions are completed, the top 1 percent still ends up with a larger and larger share of income—and the share left over for the bottom 90 percent continues to fall.

All of that political fighting over tax rates and government programs to ameliorate the unequalizing effects of American capitalism and that’s all we end up with.

It should come as no surprise then that Isabel Sawhill [ht: ja] concludes that changing the tax structure, even radically, won’t really change much.

Sawhill’s analysis of both the political hurdles and the limited benefits of progressives’ favorite tax-and-spend schemes is certainly accurate. Existing economic institutions produce such an obscenely unequal distribution of income in the United States that it’s difficult to envision any political feasible changes in the tax structure that will bring down inequality into a region that progressives would consider fair and just.

So, what’s the alternative? Sawhill favors “stakeholder capitalism” (or what others have called “shared capitalism”):

It means paying attention not just to shareholders but also to workers, customers, and the community. It has proven to be a successful strategy for many companies. They have showcased what can be accomplished when the private sector takes greater responsibility for helping workers—whether in the form of profit sharing, training, or providing benefits such as paid leave and flexible hours. The fact is that without such an approach, it will be difficult to achieve broadly based economic growth. It would simply require too much redistribution after the fact. We need instead to test the limits of equalizing the distribution of market incomes before taxes and benefits enter the picture.

And perhaps Sawhill and other American liberals can convince employers to become “high-road,” stakeholder employers instead of taking the “low-road” of the shareholder economy.

Perhaps. But why does Sawhill limit the discussion to the choices existing employers might or might not want to make? Why not open up the discussion to consider other ways of organizing enterprises?*

I’m thinking, for example, of worker cooperatives and other kinds of enterprises owned by workers and the communities in which they live. If we think the existing distribution of income is fundamentally unjust and redistributive efforts are generally limited and ineffective—both of which are arguments that Sawhill herself makes—then why not focus on ways of actually improving the initial distribution without requiring the assent of existing employers?

The advantage of worker- and community-owned enterprises is they include the stakeholders from the very start. The stakeholders are the ones who decide how the firms will be organized, what the workers will be paid, how the surplus funds will be allocated, and so on. And from all the existing examples we have, from Cleveland’s Evergreen to Spain’s Mondragón, the initial distribution of income would be much more equal than anything we’ve seen, not only in the past few decades, but over the entire modern history of the United States.

Then, on top of that, people might want to have a tax-based redistributive scheme—for example, to correct for differences in enterprise success, regional discrepancies, and so on. But such redistribution would be much easier and more effective than anything Sawhill and others envision for the United States today. It just wouldn’t have an enormous mountain of inequality to dismantle.

So, while I agree with Sawhill that “our failure to achieve anything close to broadly based economic growth in the United States is very troubling,” I want to expand the discussion and see a much bigger role for alternatives to capitalism in distributing the rewards to workers and the members of the communities in which they live.

That one change, in the direction of more worker- and community-owned enterprises, can serve as the basis of an economy that would produce an array of incomes that brings us much closer to an initial distribution that many progressives consider fair and just.

 

*As Penn Loh explains,

Too often “the economy” is equated with markets where corporations compete to make profits for the wealthiest 1 percent and the rest work for a wage or salary (or don’t make money at all). . .

When everything that we label “economic” is assumed to be capitalist — transactional and market-driven — then it is no wonder that we run short on imagination.

To escape this “capitalocentrism,” we need to broaden the definition of economy beyond capitalism.

Racing-with-machines

New technologies—automation, robotics, artificial intelligence—have created a specter of mass unemployment. But, as critical as I am of existing economic institutions, I don’t see that as the issue, at least at the macro level. The real problem is the distribution of the value that is produced with the assistance of the new technologies—in short, the specter of growing inequality.

David Autor and Anna Salomons (pdf) are the latest to attempt to answer the question about technology and employment in their contribution to the recent ECB Forum on Central Banking. Their empirical work leads to the conclusion that while “industry-level employment robustly falls as industry productivity rises. . .country-level employment generally grows as aggregate productivity rises.”

To me, their results make sense. But for a different reason.

fredgraph

It is clear that, in many sectors—perhaps especially in manufacturing—the growth in output (the red line in the chart above) is due to the growth in labor productivity (the blue line) occasioned by the use of new technologies, which in turn has led to a decline in manufacturing employment (the green line).

nonfarm

But for the U.S. economy as a whole, especially since the end of the Great Recession, the opposite is true: the growth in hours worked has played a much more important role in explaining the growth of output than has the growth in labor productivity.

The fact is, increases in labor productivity—which stem at least in part from labor-saving technologies—have not, at least in recent years, led to massive unemployment. (The losses in jobs that have occurred are much more a cyclical phenomenon, due to the crash of 2007-08 and the long, uneven recovery.)

But that’s not because, as Autor and Salomons (and mainstream economists generally) would have it, there are “positive spillovers” of technological change to the rest of the economy. It’s because, under capitalism, workers are forced to have the freedom to sell their ability to work to employers. There’s no other choice. If workers are displaced from their jobs in one plant or sector, they can’t just remain unemployed. They have to find jobs elsewhere, often at lower wages than their earned before. That’s how capitalism works.

Much the same holds for workers who don’t lose their jobs but who, as new technologies are adopted by their employers, are deskilled and otherwise become appendages of the new machines. They can’t just quit. They remain on the job, even as their working conditions deteriorate and the value of their ability to work falls—and their employers’ profits rise.

What happens, in other words, is the gains from the new technologies that are adopted are distributed unevenly.

share

This is clear if we look at labor productivity for the economy as a whole (the blue line in the chart above) since the end of the Great Recession, which has increased by 7.5 percent. However, the wage share (the green line) has barely budged and is actually now lower than it was in 2009.

productivity

The results are even more dramatic over a long time frame—over periods when labor productivity was growing relatively quickly (from 1947 through the 1970s, and from 1980 until the most recent crash) and when productivity has been growing much more slowly (since 2009).

During the initial period (until 1980), labor productivity (the blue line in the chart) almost doubled while income shares—to the bottom 90 percent (the red line) and the top 1 percent (the green line)—remained relatively constant.

After 1980, however—during periods of first rapid and then slow growth in productivity—the situation changed dramatically: the share of income going to the bottom 90 percent declined, while the share captured by the top 1 percent soared. Even as new technologies were adopted across the economy, the vast majority of people were forced to find work, at stagnant or declining wages, while their employers and corporate executives captured a larger and larger share of the new value that was being created.

Autor and Salomons think they’ve arrived at a conclusion—concerning the “relative neutrality of productivity growth for aggregate labor demand”—that is optimistic.

The conclusions of my analysis are much more disconcerting. The broad sharing of the fruits of technological change, from the end of World War II to the late 1970s, was relatively short-lived. Since then, the conditions within which new technologies have been adopted have created a mass of increasingly desperate workers, who have either been forced to labor in more automated workplaces or have been displaced and thus forced to find employment elsewhere. In both cases, their share of income has declined while the share captured by a tiny group at the top has continued to rise. That’s the “new normal” (from 1980 onward) which looks a lot like the “old normal” of capitalist growth (prior to the first Great Depression), interrupted by a relatively short period (during the three postwar decades) that is becoming increasingly recognized as the exception.

Even more, I can make the case that things would be much better if the adoption of new technologies did in fact displace a large number of labor hours. Then, the decreasing amount of labor that needed to be performed could be spread among all workers, thus lessening the need for everyone to work as many hours as they do today.

But that would require a radically different set of economic institutions, one in which people were not forced to have the freedom to sell their ability to work to someone else. However, that’s not a world Autor and Salomons—or mainstream economists generally—can ever imagine let alone work to create.

countries

This semester, we’re teaching A Tale of Two Depressions, a course designed as a comparison of the first and second Great Depressions in the United States. And one of the themes of the course is that, in considering the conditions and consequences of the two depressions, we’re talking about a tale of two countries.

As it turns out, the tale of two countries may be even more true in the case of the most recent crises of capitalism. That’s because the two countries were growing apart in the decades leading up to the crash—and the gap has continued growing afterward.

It seems we learned even less than we thought about the first Great Depression. Or maybe those at the top learned even more.

As Thomas Piketty, Emmanuel Saez, and Gabriel Zucman remind us,

Because the pre-tax incomes of the bottom 50% stagnated while average national income per adult grew, the share of national income earned by the bottom 50% collapsed from 20% in 1980 to 12.5% in 2014. Over the same period, the share of incomes going to the top 1% surged from 10.7% in 1980 to 20.2% in 2014.

What is clear from the data illustrated in the chart at the top of the post, these two income groups basically switched their income shares, with about 8 points of national income transferred from the bottom 50 percent to the top 1 percent.

groups

The consequence is that the bottom half of the income distribution in the United States has been completely shut off from economic growth since the 1970s. From 1980 to 2014, average national income per adult grew by 61 percent in the United States, yet the average pre-tax income of the bottom 50 percent of individual income earners stagnated at about $16,000 per adult after adjusting for inflation, which barely registers on the chart above. In contrast, income skyrocketed at the top of the income distribution, rising 205 percent for the top 1%, 321 percent for the top 0.01%, and 636 percent for the top 0.001%.

Clearly, “an economy that fails to deliver growth for half of its people for an entire generation”—and, I would add, distributes the growth that has occurred to a tiny group at the top—”is bound to generate discontent with the status quo and a rejection of establishment politics.”

fig1

Trickle-up economics, by any other name. . .

According to a new study of the distributional effects of the Republicans’ American Health Care Act (as introduced on 6 March 2017 and modified on 21 March 2017) by the Urban Institute and Brookings (pdf),

Upper-income families would receive net benefits from the tax and spending changes proposed in the AHCA, and lower-income families would experience net losses. Higher-income families benefit the most from the tax cut, with 70.6 percent of the tax reductions in 2022 received by those with incomes over $200,000 and 46.2 percent of the tax reductions received by those with incomes over $1,000,000. Reductions in federal funding for health benefits would hurt lower-income families the most; families with incomes below $30,000 would sustain more than three-quarters of the losses in benefits. Taking both tax and benefit changes into account, the largest average gains under the AHCA would go to those with the highest incomes ($5,640 on average for those with incomes over $200,000), and the largest average losses from the AHCA would go those with the lowest incomes.

Leftists versus Liberals

Special mention

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source

In the end, it all comes down to the theory of value.

That’s what’s at stake in the ongoing debate about the growing gap between productivity and wages in the U.S. economy. Robert Lawrence tries to define it away (by redefining both output and compensation so that the growth rates coincide). Robert Solow, on the other hand, takes the gap seriously and then looks to rent as the key explanatory factor.

The custom is to think of value added in a corporation (or in the economy as a whole) as just the sum of the return to labor and the return to capital. But that is not quite right. There is a third component which I will call “monopoly rent” or, better still, just “rent.” It is not a return earned by capital or labor, but rather a return to the special position of the firm. It may come from traditional monopoly power, being the only producer of something, but there are other ways in which firms are at least partly protected from competition. Anything that hampers competition, sometimes even regulation itself, is a source of rent. We carelessly think of it as “belonging” to the capital side of the ledger, but that is arbitrary. The division of rent among the stakeholders of a firm is something to be bargained over, formally or informally.

This is a tricky matter because there is no direct measurement of rent in this sense. You will not find a line called “monopoly rent” in any firm’s income statement or in the national accounts. It has to be estimated indirectly, if at all. There have been attempts to do this, by one ingenious method or another. The results are not quite “all over the place” but they differ. It is enough if the rent component lies between, say, 10 and 30 percent of GDP, where most of the estimates fall. This is what has to be divided between the claimants—labor and capital and perhaps others. It is essential to understand that what we measure as wages and profits both contain an element of rent.

Until recently, when discussing the distribution of income, mainstream economists’ focus was on profit and wages. Now, however, I’m noticing more and more references to rent.

What’s going on? My sense is, mainstream economists, both liberal and conservative, were content with the idea of “just deserts”—the idea that different “factors of production” were paid what they were “worth” according to marginal productivity theory. And, for the most part, that meant labor and capital, and thus wages and profits. The presumption was that labor was able to capture its “just” share of productivity growth, and labor and capital shares were assumed to be pretty stable (as long as both shares grew at the same rate). Moreover, the idea of rent, which had figured prominently in the theories of the classical economists (like Smith and Ricardo), had mostly dropped out of the equation, given the declining significance of agriculture in the United States and their lack of interest in other forms of land rent (such as the private ownership of land, including the resources under the surface, and buildings).

Well, all that broke down in the wake of the crash of 2007-08. Of course, marginal productivity theory was always on shaky ground. And the gap between wages and productivity had been growing since the mid-1970s. But it was only with the popular reaction to the problem of the “1 percent” and, then, during the unequal recovery, when the tendency for the gap between a tiny minority at the top and everyone else to increase was quickly restored (after a brief hiatus in 2009), that some mainstream economists took notice of the cracks in their theoretical edifice. It became increasingly difficult for them (or at least some of them) to continue to invoke the “just deserts” of marginal productivity theory.

The problem, of course, is mainstream economists still needed a theory of income distribution grounded in a theory of value, and rejecting marginal productivity theory would mean adopting another approach. And the main contender is Marx’s theory, the theory of class exploitation. According to the Marxian theory of value, workers create a surplus that is appropriated not by them but by a small group of capitalists even when productivity and wages were growing at the same rate (such as during the 1948-1973 period). And workers were even more exploited when productivity continued to grow but wages were stagnant (from 1973 onward).

That’s one theory of the growing gap between productivity and wages. But if mainstream economists were not going to follow that path, they needed an alternative. That’s where rent enters the story. It’s something “extra,” something that can’t be attributed to either capital or labor, a flow of value that is associated more with an “owning” than a “doing” (because the mainstream assumption is that both capital and labor “do” something, for which they receive their appropriate or just compensation).

According to Solow, capital and labor battle over receiving portions of that rent.

The suggestion I want to make is that one important reason for the failure of real wages to keep up with productivity is that the division of rent in industry has been shifting against the labor side for several decades. This is a hard hypothesis to test in the absence of direct measurement. But the decay of unions and collective bargaining, the explicit hardening of business attitudes, the popularity of right-to-work laws, and the fact that the wage lag seems to have begun at about the same time as the Reagan presidency all point in the same direction: the share of wages in national value added may have fallen because the social bargaining power of labor has diminished.

The problem, as I see it, is that Solow, like all other mainstream economists, is assuming that profits, wages, and rents are independent sources of income. The only difference between his view and that of the classicals is that Solow sees rents going not to an independent class of landlords, but as being “shared” by capital and labor—with labor sometimes getting a larger share and other times a smaller share, depending on the amount of power it is able to wield.

We’re back, then, to something akin to the Trinity Formula. And, as the Old Moor once wrote,

the alleged sources of the annually available wealth belong to widely dissimilar spheres and are not at all analogous with one another. They have about the same relation to each other as lawyer’s fees, red beets and music.

Cooperative-hire-ourselves

Robert Solow is probably right: government redistribution of income hasn’t had much of an effect on existing inequalities in the United States. So, it’s time to try something else.

“We need to think of ways to change the market determination of income,” Professor Solow told me. “How does capitalism generate inequality?”

To the extent that widening inequality is caused by the yawning gap between the epicurean pay deals in the executive suite and the stagnant wages paid to those on the shop floor, it might best be addressed at the level of the corporation, not by government. . .

To Professor Solow, that means “we have a better shot at doing something with changes in corporate governance than with direct redistribution.”

One way of changing corporate governance is to let the employees participate in determining how firms are run. It’s likely, if the major decisions in corporations were made by the workers, we’d see less much less inequality and more investment in the things that matter, such as hiring the unemployed, improving job safety, and expanding community services for workers and their families.

That kind of change in corporate governance would also increase the possibility that more of the determination of income would be taken out of the market and improve the ways the government redistributes income.

In other words, a fundamental change in corporate governance would likely improve both the distribution and redistribution of income.