Posts Tagged ‘inequality’

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RedMenace

Branko Milanovic has put forward an idea he thinks “will gradually become more popular”:

The idea is simple: the presence of the ideology of socialism (abolition of private property) and its embodiment in the Soviet Union and other Communist states made capitalists careful: they knew that if they tried to push workers too hard, the workers might retaliate and capitalists might end up by losing all.

The idea reminds me of an argument Etienne Balibar made many years ago (unfortunately, I can no long remember or find the original source but here’s a link [pdf] to one version of it)—that the “European project” was more progressive during the Cold War in the sense that the welfare state was constructed, by forces from above and below, as a response to the Soviet model of socialism, in order to prevent the working classes from adopting a communist ideology. (Since then, as Balibar has recently argued, the European project has fundamentally changed, as it has been assimilated by globalized finance capitalism and, under German hegemony, a strategy of industrial competitiveness based on low wages.)

Milanovice discusses some recent empirical work on three channels through which socialism “disciplined” income inequality under capitalism: (a) ideology/politics (e.g., the electoral importance of Communist and some socialist parties), (b) trade unions (some of which were affiliated with Communist or Labor parties), and (c) the “policing” device of the Soviet military power. He then offers his own analysis:

Communism, was a global movement. It does not require much reading of the literature from the 1920s to realize how scared capitalists and those who defended the free market were of socialism. After all, that’s why capitalist countries militarily intervened in the Russian Civil War, and then imposed the trade embargo and the cordon sanitaire on the USSR.  Not a sort of policies you would do if you were not ideologically afraid (because militarily the Soviet Union was then very weak). The threat intensified again after the World War II when the Communist influence through all three channels was at its peak. And then it steadily declined so much that by mid-1970s, it was definitely small. The Communist parties reached their maximum influence in the early 1970s but Eurocomunism had already expunged from its program any ideas of nationalization of property. It was rapidly transforming itself into social democracy. The trade unions declined. And both the demonstration effect and the fear of the Soviet Union receded. So capitalism could go back to what it would be doing anyway, that is to the levels of inequality it achieved at the end of the 19th century. “El periodo especial” of capitalism was over.

He admits the implication of such a story may be rather unpleasant:

left to itself, without any countervailing powers, capitalism will keep on generating high inequality and so the US may soon look like South Africa.

This is not to suggest we need another Cold War for United States to move even closer to looking like South Africa. But it does mean there will be a significant move from above toward more democracy and less inequality only if there’s a real threat to move outside of capitalism from below.

Keep calm?!

Posted: 24 August 2015 in Uncategorized
Tags: , , ,

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All the advice today—as the the Dow Jones Industrial Average fell by 1,089 points in the morning and, at this writing, remains almost 450 points below the opening—has been the same: keep calm and carry on investing.

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Ron Lieber is typical:

The impulse when the stock market falls hard for a few days in a row is to do something. Anything. Our life savings are often on the line, after all.

But that’s just the thing: Stocks are most useful for long-term goals. So unless those goals have changed in the last few days, it probably doesn’t make much sense to overhaul an investment strategy based on a blip of market activity. . .

One final point for new investors (and their parents and grandparents, who ought to be counseling them right about now): This is what markets do. There is absolutely nothing abnormal about what is going on here.

Most of us have to save somewhere, and history suggests that stocks are the most accessible route to get the returns you’ll need to retire someday. It would take decades of systemic economic erosion to prove otherwise, and a few days of market declines do not suggest that anything like that is upon us.

It’s true: many of us have been forced to have the freedom to keep our retirement funds in the stock market, as our employers in recent decades have gotten rid of defined-benefit plans and replaced them with defined-contribution plans. Thus, they’ve managed to shift the risk from themselves to us.

But the ownership of stocks remains profoundly unequal—and the responses to downturns are similarly unequal.

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According to the Wall Street Journal, from the 1980s to the peak of the dot-com bubble, families of all income levels were increasingly likely to own stocks, either directly or through retirement accounts. From 2001 to today, however, ownership of stocks has only increased among the top 10 percent of families; families at all other income levels have been getting out of the market entirely. Thus, as of 2013, nearly 50 percent of stocks and mutual funds were owned by the wealthiest 1 percent of Americans and an additional 41 percent were held by the next 9 percent. Meanwhile, the bottom 90 percent of U.S. families owned only about 9 percent of stocks and mutual funds.

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Not only are the ownership patterns different between a small group at the top and everyone else; the people in those groups also behave differently.

According to Josh Zumbrun,

The Fed’s Survey of Consumer Finances shows that among the bottom 90% of households by wealth, families bailed out of the stock market between 2007 and 2010—the central bank’s study is conducted every three years—and between 2010 and 2013. The total share with stockholdings declined by 4.4 percentage points. That’s the equivalent of 5.4 million households selling stocks, even as the market rebounded. Only households in the top 10% have been increasingly likely to own stocks.

In other words, the ownership of stocks both reflects and contributes to the profound inequalities of U.S. capitalism.

“We haven’t come up with the solution to prevent people from doing it yet,” said Shai Akabas, an economist at the Bipartisan Policy Center in Washington who works on the center’s Personal Savings Initiative.

“But there certainly is a widening gap there in terms of the return that higher-income people are receiving in the market,” said Mr. Akabas. “Lower- to middle-income people aren’t privy to those gains. That’s exacerbated by the fact that many of them have taken their money out of the stock market.”

“Keep calm and carry on investing” is really only a rule those at the top can follow. The rest of us are caught between the Scylla of investing in the stock market (in order, someday, to be able to retire) and the Charybdis of getting out (so as to limit our losses on days like today).

Update

You have to appreciate the language of some stock market observers, such as Valentijn van Nieuwenhuijzen, head of multiasset strategy at NN Investment Partners:

The selloff has developed a momentum of its own, says Mr. van Nieuwenhuijzen. “It comes against the backdrop of some fundamental reasons. Most obviously this is about China and the risk of a financial system crisis there. But sometimes the market organism takes over and develops a logic of its own,” he says. “We are at our most cautious positioning in the last few years,” with more cash in the firm’s portfolios that at any time in roughly the last four years, Mr. van Nieuwenhuijzen adds. [emphasis added]

And Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management LLC:

“Investors need to decide whether the recent moves are a sickness unto death, or just a bad hangover,” says Mr. Jacobsen. He says that he personally think that this is “just a hangover and requires time, perhaps in the form of a nap, to work-off.”

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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 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.

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As the Economic Policy Institute explains,

U.S. CEOs of major companies earned 20 times more than a typical worker in 1965; this ratio grew to 29.9-to-1 in 1978 and 58.7-to-1 by 1989, and then it surged in the 1990s to hit 376.1-to-1 by the end of the 1990s recovery in 2000. The fall in the stock market after 2000 reduced CEO stock-related pay (e.g., options) and caused CEO compensation to tumble until 2002 and 2003. CEO compensation recovered to a level of 345.3 times worker pay by 2007, almost back to its 2000 level. The financial crisis in 2008 and accompanying stock market decline reduced CEO compensation after 2007–2008, as discussed above, and the CEO-to-worker compensation ratio fell in tandem. By 2014, the stock market had recouped all of the value it lost following the financial crisis. Similarly, CEO compensation had grown from its 2009 low, and the CEO-to-worker compensation ratio in 2014 had recovered to 303.4-to-1, a rise of 107.6 since 2009. Though the CEO-to-worker compensation ratio remains below the peak values achieved earlier in the 2000s, it is far higher than what prevailed through the 1960s, 1970s, 1980s, and 1990s.

Manhattan

As the New York Times explains,

not every neighborhood in Manhattan has a million-dollar entry fee. The median price — what 50 percent of people paid less than — was just $910,000 over the last 12 months, and there are still places where the average residence sells for less than half a million. There are also some areas where prices declined.

But the “lower” end of the Manhattan market is shrinking. The proportion of the market that sells for less than $500,000 (again, after adjusting 2009 prices for inflation) dropped about 3 percent during the recovery.

Still, the sales of eight and nine-figure apartments are”yet another indicator that the richest of the rich have had the best recession recovery.”