Posts Tagged ‘Dodd-Frank’

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First there was the Great Gatsby curve. Then there was the Proust index. Now, thanks to Neil Irwin, we have the Marx ratio.

Each, in their different way, attempts to capture the ravages of contemporary capitalism. But the Marx ratio is a bit different. It was published in the New York Times. Its aim is to capture one of the underlying determinants of the obscene levels of inequality in the United States today—not class mobility or the number of years of national income growth lost to the global financial crash. And, of course, it takes its name from that ruthless nineteenth-century critic of mainstream economics and capitalism itself.

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Now, to be clear, there are lots of ratios that can be found in Marx’s critique of political economy—for example, the rate of exploitation, the intensity of labor, the technical productivity of labor, the exchange-value per unit use-value, and the value rate of profit (as illustrated above in a fragment from one of my class handouts)—and the ratio Irwin presents is not one of them.

But that doesn’t make Irwin’s ratio wrong, or uninteresting. On the contrary.

Basically, what Irwin has done is take the data from corporate financial reports (net income and the number of employees) and from a minor provision of the Dodd-Frank Act, which requires that publicly traded corporations reveal the gap between what they pay their CEOs and their average worker (and thus they need to report median worker pay), and calculated a number:

The Marx Ratio, as we’re calling it, captures the relationship between a company’s profits — the return to capital, on a per-employee basis — and how much its median employee is compensated, a rough proxy for the return to labor.

Thus, for example, Wells Fargo, which reported $22.2 billion in net income in 2017, with 262,700 employees and median worker pay of $60,446, had a Marx ratio of 1.40. Similarly, we have the ratio for other corporations—from the relatively small real estate investment trust Duke Realty (37.7) to independent energy company Hess (-12.2).

Irwin is clear: notwithstanding the limitations in the data, “companies with high Marx Ratios offer particularly strong rewards to their shareholders relative to workers.”* But that doesn’t mean, contra Irwin, that “Numbers below 1 signal the reverse: a more favorable return to labor.” Any positive number indicates that, after paying all expenses (including workers’ wages, taxes, interest on debt, deductions for depreciation, and CEO salaries), the net income or profit per employee is positive.

In fact, with a little algebraic manipulation, Irwin’s Marx ratio turns out to look a lot like Marx’s rate of exploitation.**

They’re not the same, of course. First, because corporate net income leaves out many of the distributions of surplus-value corporate boards of directors make—such as interest payments, taxes, and managers’ salaries—and the number of employees refers to all workers, not just nonmanagerial workers. Second, because the Irwin ratio is calculated for all publicly traded companies and therefore makes no distinction between finance, real-estate, insurance and companies that actually produce goods and services. From a Marxian perspective, the former capture surplus-value that is produced and appropriated and distributed elsewhere in the economy (both nationally and globally).

So, the Marx ratio is not Marx’s ratio.

But Irwin’s Marx ratio does tell us a great deal about how wildly profitable American corporations are, especially in comparison to how little they pay their employees—to the tune of 3, 4, 30 times what the average worker makes. And that’s one of the principal causes of the obscene and growing levels of inequality we’ve seen in the United States for decades now.

I, for one, would love to see the Marx ratio reported in the financial news on a regular basis. Alongside the ratio of CEO to average worker pay. And, even better, Marx’s own indicator of capitalist class injustice, the rate of exploitation.

 

*The data are a bit of a problem, especially because median worker pay is based on self-reporting:

The denominator is the compensation to the median employee, as disclosed in the company’s proxy statement, which can create distortions in representing rank-and-file employees.

Companies also have some degree of flexibility in how they calculate median pay, so comparisons are not necessarily apples-to-apples. For example, they may choose to use statistical sampling instead of actual payroll records, and may exclude non-U.S. employees depending on privacy rules in overseas markets.

A better number for the idea we’re really trying to get at would be average compensation for nonexecutive employees, but companies aren’t required to report that publicly.

**Mathematically, Irwin’s Marx ratio is (NI/L)/(W/L), which turns out to be NI/W, where NI is net income, L is the number of employees, and W is the wage bill (calculated by multiplying median worker pay by the number of employees). Marx’s rate of exploitation is S/V, where S is the amount of surplus-value and V is the value of labor power.

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lowec20161121_low December 11, 2016

Here’s Fred Mishkin [ht: ra], an economist at the Columbia Business School and star of Charles Ferguson’s Inside Job, on the possibility of preventing a rerun of the 2008 financial crisis:

Frederic S. Mishkin, a former Fed governor, noted that financial firms tend to resist increased regulation, often with considerable success. “They’re going to hire a lot of lawyers to figure out how to get around these regulations and undermine them,” Mr. Mishkin, a Columbia University economist, said.

This is the same Mishkin who argued, in late 2011, it was necessary to regulate Too Big to Fail banks:

Too-big-to-fail is now a larger problem than before, in part because banks have merged in a way that creates even larger banking institutions and because, with the Fed bailout of Bear Stearns in March 2008 and then the financial assistance to AIG by the Fed and the U.S. Treasury in September of 2008, it has become clear that a much wider range of financial firms are likely to be considered “too big to fail” in the future. Indeed, the most prominent case of a firm that was not bailed out—Lehman Brothers in September 2008—was followed by such a severe crisis that it is unlikely that governments would let this happen again. In the wake of the Lehman failure, governments throughout the world bailed out or guaranteed all their major financial institutions.

One way to address the too-big-to-fail problem is to limit the size of fifinancial institutions, which might involve either the breakup of large fifinancial institutions and/or limits on what activities banking institutions can engage in. However, arbitrary limits on their size or activities might well decrease the effificiency or raise other risks in the fifinancial system. An alternative approach is to subject systemically important institutions to greater regulatory oversight, say by a systemic regulator. . ., or by imposing larger capital requirements for systemically important financial firms.

The Dodd–Frank financial reform bill passed in summer 2010 gives the federal government one more tool for dealing with systemically important financial companies. Before Dodd–Frank, the U.S. government only could take over individual banking institutions, but not fifinancial holding companies that own banks and other fifinancial institutions. (In other words, it could take over Citibank, but not Citigroup or a free-standing investment bank like Lehman Brothers.) It used to be that the government had only two alternatives with such fifirms: send them into bankruptcy or bail them out. Now, the federal government has “resolution authority” over such fifirms, which means that they can treat them as they would an insolvent bank. Critics have expressed concerns that this federal resolution authority will further entrench too-big-to-fail and so make the moral hazard problem worse. . . As with all regulatory authority, the devil will be in the details. But the new resolution authority is likely to help limit moral hazard because it gives the government a big stick to force systemically important financial institutions to desist from risk taking or to raise more capital—or else face a government takeover that imposes costs on managers and shareholders.

On one hand, according to Mishkin, we have Too Big to Fail banks, which are “now a larger problem than before,” that need to be regulated. On the other hand, also according to Mishkin, the banks will resist regulation by hiring a lot of lawyers “to get around these regulations and undermine them.”

So, why are we repeating the mistakes of the past, after the last great depression, when the banks were left with both the incentive and the means to evade and ultimately overturn the regulations?

Economists like Mishkin might even write that up in a working paper if only we paid them enough money.

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