Posts Tagged ‘productivity’



As it turns out, crows are even smarter than we thought possible.

And CEOs at large U.S. companies have collectively captured more in compensation than we thought possible.

According to Reuters [ht: ja], 300 CEOs who served throughout the 2009-2013 period at S&P 500 companies together realized about $22 billion in compensation—that’s $6 billion more in compensation than initially estimated in annual disclosures—in the form of pay, bonuses and share and option grants, or an average of $73 million each.

To put those numbers in perspective, the AFL-CIO estimates that, in 2013, the CEO-to-worker pay ratio was 331:1.* That ratio was 46:1 in 1983, 195:1 in 1993, 301: 1 in 2003.

Like any ratio, the result depends on both the denominator and the numerator. The CEO-to-worker pay ratio has grown because, during the 2009-2013 recovery, workers’ wages have remained roughly unchanged while CEO compensation has soared. Thus, the combination of falling unemployment, growing productivity, and higher corporate profits and stock prices we’ve seen in recent years hasn’t helped workers but only the owners and executives of the corporations where they work.

“The numbers can be obscene, particularly when you look at the general challenges we face as an economy and society,” said Matthew Benkendorf, a portfolio manager at Vontobel Asset Management, which oversees about $50 billion.

We’ve long known that crows are pretty clever. Remember Aesop’s famous fable “The Crow and the Pitcher”? The thirsty crow drops pebbles into a pitcher with water near the bottom, thus raising the fluid level high enough to permit the bird to drink.

Do we really need to be any more clever to figure out that—as CEO compensation continues to grow, leaving workers and everyone else further and further behind—existing economic institutions have failed us and need to be replaced?

*The CEO-to-minimum-wage-worker pay ratio in 2013 was, of course, much higher—774:1


As I have explained to generations of students, Americans like to think that education is the solution to all economic and social problems. Including, of course, growing inequality.

Why? Because focusing on education—encouraging people to get more higher education—involves no particular tradeoffs. More education for some doesn’t mean less education for others (at least in principle). And providing more education doesn’t involve any structural changes in society—just more funding. (Of course, suggesting more education under current conditions—when public financing of higher education continues to decline, and students and their families are forced to take on more and more debt—is itself disingenuous).

As a result, there’s a broad consensus in the middle—among conservatives and liberals alike—that encouraging more young people who have yet to enter the labor market and existing workers who want to get ahead to obtain a college education will solve the problem of inequality.

Uh, no. That’s because, as Paul Krugman points out, focusing on education is an elaborate dodge from the real issues.

the reason this is an evasion is that whatever serious people may want to believe, soaring inequality isn’t about education; it’s about power. . .

The education-centric story of our problems runs like this: We live in a period of unprecedented technological change, and too many American workers lack the skills to cope with that change. This “skills gap” is holding back growth, because businesses can’t find the workers they need. It also feeds inequality, as wages soar for workers with the right skills but stagnate or decline for the less educated. So what we need is more and better education. . .

As for wages and salaries, never mind college degrees — all the big gains are going to a tiny group of individuals holding strategic positions in corporate suites or astride the crossroads of finance. Rising inequality isn’t about who has the knowledge; it’s about who has the power.

There are two ways to look at this. One, using the chart above (from the Economic Policy Institute), is to see how workers with different levels of education have fared since 2007. It is clear that those in every education category experienced falling or, at best, stagnant wages since 2007. And while the data do show that college graduates have fared slightly better than high school graduates since 2007, this is not because of spectacular gains in the wages of college graduates, but because their wages fell more slowly than the wages of high school graduates.


The other way is to look at changes in average incomes within the top 10 percent, most of whom have college and advanced degrees. As we can see, the top 1 percent (blue line) has been pulling away from everyone below them (such that, between 1976 and 2012, the ratio of the average incomes of the top 1 percent to the bottom 90 percent rose from 10.5 to 33.5). But the top .01 percent (bright green line) has been pulling away even faster—from the bottom 90 percent (the ratio of their incomes to the bottom 90 percent increased over the same period from 80 to 661) and from their fellow college graduates in the top 1 percent (that ratio increased from 7 to 21).

In other words, the wages of college graduates haven’t been faring all that well in recent years and, over the longer term, inequality has been growing among college graduates. Thus, the lack of education is not the problem, and more education is not the solution.

The fact is, in recent years and since the mid-1970s, wages of most workers have been stagnant, while productivity has continued to grow. As a result, corporate profits have soared to new record highs and a tiny minority at the top has been able to capture a share of those profits in the form of spectacularly high earnings and capital gains. That’s not because they have more education; it’s because they happen to be at the right place at the right time.

The “very serious people” at the top may try to convince the rest of us that obtaining more education will make us “worthy” of more income, thus leading to less inequality. But that’s just an attempt to deflect attention from the real causes.

And, to be honest, it doesn’t take a college education to understand the real causes of growing inequality in the United States.

Chart of the day

Posted: 21 February 2015 in Uncategorized
Tags: , , ,


As the Economic Policy Institute explains,

Figure A depicts some of the data presented in Table 1 by showing the cumulative change in real hourly wages for the 10th, 30th, 50th, 70th, and 95th percentiles between 2007 and 2014. After a sharp increase in real wages between 2008 and 2009, due primarily to negative inflation, wages for most groups fell through 2012. While there was an increase between 2012 and 2013, the increase was short-lived, and wages for most groups have fallen again over the last year. Wages for nearly all groups are lower in 2014 than they were at the end of the recession in 2009.

The only exceptions? Real wages for the top 5 percent have risen (by 2.2 percent) since 2007. And real wages for the bottom 10 percent of workers have increased since 2012, mostly because inflation has been low and many states enacted increases in the minimum wage.

Overall, real wages for the bottom 80 percent of workers were lower at the end of 2014 than they were in 2007.


To get a sense of how far workers are falling behind, productivity in the U.S. economy increased by about 12.6 percent over that same period.

Cartoon by David Simonds. Angela Merkel's hard line on debt threatens the euro project.

Most of the commentary on the ongoing euro crisis, especially the current Greek debt negotiations, has been couched in terms of a conflict between nations. This is particularly true of mainstream economists, whose nation-state-based models downplay or ignore class, even as the policies they advocate have tremendous class implications.

So, it’s fallen to—however ironically—financial strategist and professor of finance Michael Pettis to remind us the current conflict is not between nations, but between classes.

The whole piece, beginning with the French indemnity of 1871-73, is worth a careful read. But I want to focus here on what Pettis writes about the class conditions that led to and follow on from the current crisis.

First, Pettis makes the important point that the capital flows from north to south within the euro zone were based on important class changes within Germany (he uses his native Spain throughout as his example in the south but most of his analysis follows for Greece and other countries):

It was not the German people who lent money to the Spanish people. The policies implemented by Berlin that resulted in the huge swing in Germany’s current account from deficit in the 1990s to surplus in the 2000s were imposed at a cost to German workers, and have been at least partly responsible for Germany’s extremely low productivity growth — most of Germany’s growth before the crisis can be explained by the change in its current account — rather than by rising productivity.

Moreover because German capital flows to Spain ensured that Spanish inflation exceeded German inflation, lending rates that may have been “reasonable” in Germany were extremely low in Spain, perhaps even negative in real terms. With German, Spanish, and other banks offering nearly unlimited amounts of extremely cheap credit to all takers in Spain, the fact that some of these borrowers were terribly irresponsible was not a Spanish “choice.” I am hesitant to introduce what may seem like class warfare, but if you separate those who benefitted the most from European policies before the crisis from those who befitted the least, and are now expected to pay the bulk of the adjustment costs, rather than posit a conflict between Germans and Spaniards, it might be far more accurate to posit a conflict between the business and financial elite on one side (along with EU officials) and workers and middle class savers on the other.

This is a  conflict among economic groups, in other words, and not a national conflict, although it is increasingly hard to prevent it from becoming a national conflict.

Here, we can see that, while relative productivity in Germany was pretty constant, relative real wages were falling and corporate profits (in absolute terms) rose dramatically in the run-up to the crash of 2008:


In other words, German banks managed to capture a large portion of the growing surplus created by German workers and, instead of seeing it invested domestically, lent it abroad (to a broad array of Spanish, Greek and other borrowers)—which was the flip side of Germany’s positive current account balance (since German capitalists, benefiting from lower unit labor costs, could easily outcompete potential exporters in the European south, while German demand for European goods dropped as wages fell).

Pettis’s second point is that countries don’t lend or borrow; different classes within countries create the conditions for and engage in large-scale capital flows between countries.

But didn’t Spain have a choice? After all it seems that Spain could have refused to accept the cheap credit, and so would not have suffered from speculative market excesses, poor investment, and the collapse in the savings rate. This might be true, of course, if there were such a decision-maker as “Spain”. There wasn’t. As long as a country has a large number of individuals, households, and business entities, it does not require uniform irresponsibility, or even majority irresponsibility, for the economy to misuse unlimited credit at excessively low interest rates. Every country under those conditions has done the same. . .

And this is a point that’s often missed in the popular debate. Over and over we hear — often, ironically, from those most committed to the idea of a Europe that transcends national boundaries — that Spain must bear responsibility for its actions and must repay what it owes to Germany. But there is no “Spain” and there is no “Germany” in this story. At the turn of the century Berlin, with the agreement of businesses and labor unions, put into place agreements to restrain wage growth relative to GDP growth. By holding back consumption, those policies forced up German savings rate. Because Germany was unable to invest these savings domestically, and in fact even lowered its investment rate, German banks exported the excess of savings over investment abroad to countries like Spain. . .

Above all this is not a story about nations. Before the crisis German workers were forced to pay to inflate the Spanish bubble by accepting very low wage growth, even as the European economy boomed. After the crisis Spanish workers were forced to absorb the cost of deflating the bubble in the form of soaring unemployment. But the story doesn’t end there. Before the crisis, German and Spanish lenders eagerly sought out Spanish borrowers and offered them unlimited amounts of extremely cheap loans — somewhere in the fine print I suppose the lenders suggested that it would be better if these loans were used to fund only highly productive investments.

But many of them didn’t, and because they didn’t, German and Spanish banks — mainly the German banks who originally exported excess German savings — must take very large losses as these foolish investments, funded by foolish loans, fail to generate the necessary returns. It is no great secret that banking systems resolve losses with the cooperation of their governments by passing them on to middle class savers, either directly, in the form of failed deposits or higher taxes, or indirectly, in the form of financial repression. Both German and Spanish banks must be recapitalized in order that they can eventually recognize the inevitable losses, and this means either many years of artificially boosted profits on the back of middle class savers, or the direct transfer of losses onto the government balance sheets, with German and Spanish household taxpayers covering the debt repayments.

Finally, Pettis reminds us that the winners and losers in the current crisis are not nations but classes within nations.

The “losers” in this system have been German and Spanish workers, until now, and German and Spanish middle class savers and taxpayers in the future as European banks are directly or indirectly bailed out. The winners have been banks, owners of assets, and business owners, mainly in Germany, whose profits were much higher during the last decade than they could possibly have been otherwise.

In fact, the current European crisis is boringly similar to nearly every currency and sovereign debt crisis in modern history, in that it pits the interests of workers and small producers against the interests of bankers. The former want higher wages and rapid economic growth. The latter want to protect the value of the currency and the sanctity of debt.

The lesson, as I see it, is that focusing on the conflict between nations, and ignoring the conflict between classes, only serves to postpone a resolution of the crisis and to invigorate right-wing nationalist sentiments across Europe. It also means that, even if and when the debt crisis is resolved (for example, by revising the terms of debt repayment for Greece, Spain, and other countries), the problem of class conflict within the existing system—in both the north and the south—will still have to be addressed.


Production, productivity, and corporate profits are up, the official unemployment rate is down, and yet still workers can’t get a break: employers just won’t increase their wages.

This just doesn’t make any sense to mainstream economists, whose model of the labor market means that workers get in the form of wages what they contribute to production. According to those economists (and their friends in the media, like Robert Samuelson), wages should be rising. And they’re not.*


So, they’re fishing around for alternative explanations—like delayed pay cuts and a decline in labor market fluidity.

Other economists are on firmer ground, since they’re looking at things like shadow unemployment and a general weakening of workers’ bargaining power.

What it comes down to, as I’ve argued many times on this blog, is a growth in the Reserve Army of the Unemployed and Underemployed.

It’s not, as in the mainstream model, that wages determine the level of unemployment. It’s exactly the opposite: the existence of a large number of unemployed and underemployed workers regulates the level of wages.

Add to that a whole host of other factors (that are themselves in part the result of the Reserve Army)—the decline in unionization rates, the falling value of the minimum wage, new technologies that make outsourcing easier and displace domestic jobs, and so on—and what we’re seeing is the Great Wage Stagnation that characterizes the current economic recovery.


*Workers’ wages have actually declined—and more or less stayed there. According to Payscale, nominal wages have risen 7.5 percent overall in the United States since 2006. But when you factor in inflation, “real wages” have actually fallen 7.5 percent.


Is 2015 going to be the year of class?

It certainly seems so, to judge by the widening gap between the wage and profit shares (the wage share in blue on the right scale of the chart above, the profit share in red on the left scale) and the worries recently expressed by politicians, economists, and journalists.

There is, of course, Mitt Romney on income inequality and the “scourge of poverty” (because Republicans have nowhere else to go, having been boxed in by Barack Obama on most other issues, but they’re going to have a hard time going against their pro-business agenda, especially with Romney as the standard-bearer).

And Obama himself, who apparently is going to propose closing the multibillion-dollar tax loopholes used by the wealthiest Americans, imposing a fee on big financial firms, and then using the revenue to benefit the middle-class (but he’s unlikely to get much bipartisan support in Congress for any kind of serious moves on those issues).

Plus we have the spectacle of Larry Summers (together with Shadow Chancellor of the Exchequer Ed Balls) openly expressing his concern for the future of democracy if capitalism cannot deliver broad-based prosperity, which may give rise to “political alienation, a loss of social trust, and increasing conflict across the lines of race, class, and ethnicity.”


But, as Mike Whitney [ht: ja] reminds us, the problem of class war is not a recent phenomenon: the most recent chapter started in the mid-1970s, when “everything started going down the plughole.” Once wages became detached from productivity,

the rich progressively got richer. They used their wealth to reduce taxes on capital, roll back critical regulations, break up the unions, install their own lapdog politicians, push through trade agreements that pitted US workers against low-paid labor in the developing world, and induce their shady Central Bank buddies to keep interest rates locked below the rate of inflation so they could cream hefty profits off gigantic asset bubbles. Now, 40 years later, they own the whole shooting match, lock, stock and barrel. And it’s all because management decided to take the lion’s share of productivity gains which threw the whole system off-kilter undermining the basic pillars of democratic government.

That’s where we stand today, in the midst of a class war. And, as everyone now acknowledges, only one side—a tiny minority at the top—is winning.


Special mention

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