Posts Tagged ‘economy’

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David Brooks should have left well enough alone.

Middle-class wage stagnation is the biggest economic fact driving American politics. Over the past many years, so the common argument goes, capitalism has developed structural flaws. Economic gains are not being shared fairly with the middle class. Wages have become decoupled from productivity. Even when the economy grows, everything goes to the rich.

But then Brooks spends the rest of his column trying to convince us that there aren’t any really structural flaws, that “the market is working more or less as it’s supposed to.”

Well, maybe it’s working “more or less as it’s supposed to” for those at the top. But it’s certainly not working for everyone else, for those who actually have to work for a living.

The relevant debate is all about wages and productivity.

For Brooks (and the mainstream economists whose work he relies on), wages aren’t growing not because something is wrong, but because productivity isn’t growing. Or in his inimitable, sloganeering fashion:

It’s not that a rising tide doesn’t lift all boats; it’s that the tide is not rising fast enough.

Except, of course, productivity has grown—and wages haven’t kept up. Not by a long shot!

As is clear from the chart above, productivity has increased enormously since 1987—whether measured in terms of real GDP per capita (the orange line) or, even more, real nonfarm business output per hour worked (the green line).

So, yes, Americans have become more productive over the course of the past three decades. But wages have lagged far behind.

In fact, as is also clear in the chart, real wages (measured in terms of real weekly earnings, the blue line) have been virtually stagnant. They’ve risen only 5.5 percent over that period, much less than GDP per capita (54.4 percent) and labor productivity in nonfarm businesses (76.1 percent).

In the end, maybe Brooks is right. Maybe the growing gap between wages and productivity is not a structural flaw. Maybe it’s the way the market is supposed to work.

If so, then it’s time the break the system that both generates and relies on the large and growing gap between wages and productivity—the one Brooks and mainstream economists work so hard to convince us isn’t broken at all.

Our job, then, is to get to work imagining and creating a radically different economic and social system.

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Russia is back in the news again in the United States, with the ongoing investigation of Russian interference in the U.S. presidential election as well as a growing set of links between a variety of figures (including Cabinet and family members) associated with Donald Trump and the regime of Vladimir Putin.

This year is also the hundredth anniversary of the October Revolution, which sought to create the conditions for a transition to communism in the midst of a society characterized by various forms of feudalism, peasant communism, and capitalism. But we shouldn’t forget that, in addition, the Red Century has clearly left its mark on the political economy of the West, including the United States—both in the early years, when the “communist threat” undoubtedly led to reforms associated with a more equal distribution of income, and later, when the Fall of the Wall reinforced the neoliberal turn to privatization and deregulation.

Now we have a third reason to think about Russia, which happens to intersect with the first two concerns. A new study of income and wealth data by Filip Novokmet, Thomas Piketty, Gabriel Zucman reveals just how much has changed in Russia from the time of the tsarist oligarchy through the Soviet Union to rise of the new oligarchy during and after the “shock therapy” that served to create a new form of private capitalism under Putin.

As is clear from the chart, income inequality was extremely high in Tsarist Russia, then dropped to very low levels during the Soviet period, and finally rose back to very high levels after the fall of the Soviet Union. Thus, for example, the top 1-percent income share was somewhat close to 20 percent in 1905, dropped to as little as 4-5 percent during the Soviet period, and rose spectacularly to 20-25 percent in recent decades.

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The data sets used by Novokmet et al. reveal a level of inequality under the new oligarchs that is much higher that was the case using survey data—a top 1-percent income share that is more than double for 2007-08.

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Novokmet et al. also show that the income shares of the top 10 percent and the bottom 50 percent moved in exactly opposite directions after the privatization of Russian state capitalism in the early 1990s. While the top 10-percent income share rose from less than 25 percent in 1990-1991 to more than 45 percent in 1996, the share of the bottom 50 percent collapsed, dropping from about 30 percent of total income in 1990-1991 to less than 10 percent in 1996, before gradually returning to 15 percent by 1998 and about 18 percent by 2015.

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In comparison to other countries, Russia was much more equal during the Soviet period and, by 2015, had approached a level of inequality higher than that of France and comparable only to that of the United States.

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Finally, Novokmet et al. have been able to estimate the enormous growth of private wealth under the new oligarchy, especially the wealth that was captured by a tiny group at the very top and is now owned by Russia’s billionaires. As the authors explain,

The number of Russian billionaires—as registered in international rankings such as the Forbes list—is extremely high by international standards. According to Forbes, total billionaire wealth was very small in Russia in the 1990s, increased enormously in the early 2000s, and stabilized around 25-40% of national income between 2005 and 2015 (with large variations due to the international crisis and the sharp fall of the Russian stock market after 2008). This is much larger than the corresponding numbers in Western countries: Total billionaire wealth represents between 5% and 15% of national income in the United States, Germany and France in 2005-2015 according to Forbes, despite the fact that average income and average wealth are much higher than in Russia. This clearly suggests that wealth concentration at the very top is significantly higher in Russia than in other countries.

Clearly, there is nothing “natural” about the distribution of income and the ownership of wealth. This new study demonstrates that different economic structures and political events create fundamentally different levels of inequality in both income and wealth, both within and between countries.

The Russian experience is a perfect example how inequality can fall and then, later, be reversed with radical economic and political transformations—thus creating a new oligarchy that dominates the national political economy and seeks to intervene in other countries.

Not unlike the United States.

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We’ve long known there is a strong correlation between growing up in poverty and low academic achievement. Thus, for example, children living in poverty tend to have lower scores on standardized tests, lower grades, and are less likely to graduate from high school or go on to college.

Now we’re learning that that there is a correlation between poverty and children’s actual brain development.

According to Mike Mariani, the results of studying the “neurocognitive profile” of socioeconomic status and the developing brain are startling. For example, according to one study, kids from poorer, less-educated families tended to have thinner subregions of the prefrontal cortex—a part of the brain strongly associated with executive functioning—than better-off kids. Moreover, according to the data from another study:

small increases in family income had a much larger impact on the brains of the poorest children than similar increases among wealthier children. And [Kimberly] Noble’s data also suggested that when a family falls below a certain basic level of income, brain growth drops off precipitously. Children from families making less than $25,000 suffered the most, with 6 percent less brain surface area than peers in families making $150,000 or more.

Noble is one of the pioneers in this area and, in order to go beyond correlation to causality, she’s now proposing a randomized controlled trial of giving some mothers a $333 monthly income supplement or others a $20 monthly income supplement.

I am all in favor of giving cash to members of poor households—as against, for example, taking over poor people’s lives by using brain science to promote more effective “executive function skills” such as “impulse control” and “mental flexibility” of the sort proposed by the Crittenton Women’s Union (pdf).

However, as I see it, there are two problems inherent in the way these new poverty-brain trials are proceeding.

First, the trial that Noble proposes is another instance of the kind of work we’re now seeing in development economics (associated especially with Abhijit Banerjee and Esther Duflo), which conducts experiments on poor people. One “treatment” group is assigned randomly to receive an intervention, and the other is randomized to receive the “control” experience, enabling the investigators to assess the impact of one intervention or another—in this case, on brain development. In other words, poor people are being used as human guinea pigs to conduct scientific experiments.

What’s the alternative? Set up programs, with the participation of poor people, to analyze the causes and consequences of poverty and identify changes that need to be made in the system in order to end existing poverty and prevent its recurrence in the future.

Second, the focus is on the brains of poor children, which in Noble’s language are “at much greater risk of not going through the paces of normal development to eventually become the three-pound wonder able to perform intellectual feats, whether composing symphonies or solving differential equations.”

What about the brains of rich children—why are they presumed to go through “the paces of normal development”? I’m thinking, for example, of the new psychological research on the “pathologies of the rich,” which involves studies of “social class as culture” and “sharing the marbles.” And, of course, there’s the infamous 2013 manslaughter trial of Ethan Couch, whose defense included a witness saying the teen was a product of “profoundly dysfunctional” parents who gave him too much and never taught him the consequences of his actions.

The issue here is not just the continued existence of obscene poverty, but also grotesque levels of inequality—which affect both poor and rich children, albeit in different ways. In my view, we need to be worried about an economic and social system that generates extreme levels of both poverty and inequality and that alters the brains of all children.

There’s nothing normal not just about the minds of children who are born into such a system, but the system itself.

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Mark Tansey, “Duet” (2004)

There are plenty of reasons why contemporary libertarians might want to read Karl Marx—and at least one reason why they wouldn’t.

Chris Dillow suggests libertarians “would be surprised by a lot of Marx” and offers three reasons why they should read him.

One is that Marx saw economics as a historical process.

One implication of this for libertarians is that they must ask: what material economic basis would make our ideas more popular? I’d argue that one such basis is greater equality, as this would diminish demands for statist regulation.

A second is Marx’s view of the relationship between property rights and technical progress.

This might speak to our current secular stagnation. Why are productivity growth and capital spending so weak? Might one reason be that the fear of future losses from competition is deterring investment? Or that excessively tight intellectual property laws are restricting innovation? Marx poses the question: how should property rights alter to foster growth? This surely should interest libertarians.

The third reason lies in Marx’s attitudes about the expansion of the realm of freedom.

Marx’s main gripe with capitalism wasn’t so much that it was unfair but that it thwarted our freedom to develop our human potential. Work, instead of being a source of self-expression, is oppressive and alienating under capitalism.

According to Dillow, libertarians should read Marx because, in all three cases, he poses some questions to them that should sharpen their thinking.

I agree.* But, as I explained back in 2012, there’s at least one reason why Marx would infuriate libertarian readers—because of their sense of the right of private individuals to do what they like on and with their property.

Marx, in chapter 6 of volume 1 of Capital, presents an analysis of private power to which libertarians are—and, I suspect, always will be—blind:

This sphere that we are deserting, within whose boundaries the sale and purchase of labour-power goes on, is in fact a very Eden of the innate rights of man. There alone rule Freedom, Equality, Property and Bentham. Freedom, because both buyer and seller of a commodity, say of labour-power, are constrained only by their own free will. They contract as free agents, and the agreement they come to, is but the form in which they give legal expression to their common will. Equality, because each enters into relation with the other, as with a simple owner of commodities, and they exchange equivalent for equivalent. Property, because each disposes only of what is his own. And Bentham, because each looks only to himself. The only force that brings them together and puts them in relation with each other, is the selfishness, the gain and the private interests of each. Each looks to himself only, and no one troubles himself about the rest, and just because they do so, do they all, in accordance with the pre-established harmony of things, or under the auspices of an all-shrewd providence, work together to their mutual advantage, for the common weal and in the interest of all.

On leaving this sphere of simple circulation or of exchange of commodities, which furnishes the “Free-trader Vulgaris” with his views and ideas, and with the standard by which he judges a society based on capital and wages, we think we can perceive a change in the physiognomy of our dramatis personae. He, who before was the money-owner, now strides in front as capitalist; the possessor of labour-power follows as his labourer. The one with an air of importance, smirking, intent on business; the other, timid and holding back, like one who is bringing his own hide to market and has nothing to expect but — a hiding.

 

*Although I can’t agree with Dillow’s suggestion that readers should start volume 1 of Capital at chapter 10, and turn to the first nine chapters last. In my view, readers should begin with the first three chapters, on the commodity, where Marx presents the initial steps in his critique of political economy. In fact, every time I teach Capital, I run the risk of rushing through the remaining material precisely because I find so much to present to contemporary students about commodities and markets in that first section.