Posts Tagged ‘profits’


Special mention

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Capitalism, I’ve often argued, is not natural. It requires a lot of work. It required a lot of work to get it going in the first place. And it requires a lot of work to keep it going today.

A lot of that work involves getting people to work for someone else.

The problem of getting people to work is the foundation of the recent discussion (or, better, revival of the discussion, if we trace it back to Alvin Hansen) of “secular stagnation” [pdf]. Central to the current framing of the question—at least among mainstream economists—is the decrease in the number of available workers, created by declines in the rate of population growth and the labor force participation rate. The worry is that, looking forward, there simply won’t be enough workers to sustain the rates of potential economic growth we saw in the years leading up to the most recent crisis of capitalism.

It shouldn’t be surprising, then, to witness the spectacle of economists such as Regis Barnichon and Andrew Figura [pdf] claiming that the decline in the labor force participation rate in the United States is “a decline in desire to work among individuals outside the labor force, with a particularly strong decline during the second half of the 90s.” For them, it’s not a decline in the number of decent, high-paying jobs, but instead the unwillingness on the part of individuals who are currently not counted as part of the labor force to enter the labor force in order to work for someone else. And the reason?

Looking across different sub-groups, the decline in the number of nonparticipants who want to work is due mainly to prime-age females, and, to a lesser extent, young individuals. Moreover, the decline is mainly a low-income and non-single household phenomenon, and is stronger for families with children than without.

Precisely in order to overcome that supposed aversion to work, Laura Tach and Kathryn Edin praise the earned-income tax credit, because, as the nation’s largest cash anti-poverty program, it goes mostly to parents of children who are willing to work. And working for someone else is, for Tach and Edin, “tantamount to a badge of citizenship.” To which they add:

The dignity-building nature of this cash transfer is reinforced by the way it is administered, through tax preparation offices. Here, low-wage workers are customers served with a smile, not supplicants seeking a handout.

That, of course, is the proverbial carrot for the poor. And then there’s the incentive for employers themselves: the enormous subsidies provided by the government so that employers will hire and keep low-wage workers. As Ken Jacobs explains,

After decades of wage cuts and health benefit rollbacks, more than half of all state and federal spending on public assistance programs goes to working families who need food stamps, Medicaid, or other support to meet basic needs. Let that sink in — American taxpayers are subsidizing people who work — most of them full-time  (in some case more than full-time) because businesses do not pay a living wage.

But if poor people are still unwilling to take one of the low-wage, deadend jobs available, there’s always the stick of Kansas-style welfare reforms.

The measure — called the HOPE Act by supporters — “provides an opportunity for success,” Brownback said in a statement after signing the bill. “It’s about the dignity of work and helping families move from reliance on a government pittance to becoming self-sufficient by developing the skills to find a well-paying job and build a career.”

All of that, both theoretically and in terms of policy, is meant to force people to have the freedom to participate in the labor force. But that still doesn’t mean they’re going to do the requisite amount of work, even after they’ve landed one of those jobs.

According to Ronald Aslop [ht: ja], the problem is particularly acute among young people, who in his view are engaged in a constant struggle to keep their minds focused on the matter at hand and block out email and other digital distractions.

These distractions are shortening attention spans and making it difficult for young people to concentrate and stick with demanding assignments at school and work. In fact, researchers have found that millennials are more likely than Gen Xers or baby boomers to report that their productivity suffers at work because of smartphone distractions and “cyberslacking” on the Internet.

That means employers have to step in “to eliminate some of technology’s temptations” (which apparently involves limiting the use of digital technology and, my favorite, suggesting that distracted employees learn meditation and yoga).

What we’re learning is that it takes a lot of work to keep capitalism going. But notice that all that effort is directed at the masses of people who actually do the work, not at the tiny minority at the top who actually make the decisions about if, when, and how the jobs people are expected to do are actually created.

Apparently, focusing on those decisions—especially as corporate profits soar and economic inequality continues to grow—would require too much work.


Now, according to the New York Times, workers are using stimulants like Adderall, Vyvanse, and Concerta to improve work performance: “many young workers insist that using the drugs to increase productivity is on the rise — and that these are drugs used not to get high, but hired.”


To hear mainstream economics and financial journalists, the ongoing economic recovery means that unemployment is falling, leading to rising wages, which in turn will to an increase in the price level. Therefore, the Fed should raise interest rates before the situation gets out of control.


Let’s see if we can’t unpack the connections between wages and prices, and to introduce an element the economists and journalists don’t ever mention: corporate profits.


First, as we can see in this first graph, there is in fact a correlation between unemployment (not the official measure but, instead, total or U6 unemployment) and wages (the year over year change in hourly earnings of production and nonsupervisory employees): in general, since the early-1990s, as unemployment falls (and workers have more bargaining power), wages have a tendency to rise.* But the correlation is not perfect; especially in recent months, the unemployment is continuing to fall but the rate of wage gains is also falling.


Second, as demonstrated in the second graph, there is no correlation between wage gains and inflation. Nominal wage gains have been very low for decades now but inflation has been all over the map, from a low of negative 4 percent to a high of about 11.5 percent and pretty much every level in between. The economists and pundits may claim wage increases threaten to provoke inflation but they’re hard-pressed to show that relationship empirically.


It is clear from the third and final graph that there’s a missing element in the usual story: profits. Again the correlation is not perfect but there is a clear relationship between the change in profits and the change in the price level. How do we interpret that relationship? Basically, corporations attempt to set the prices of the commodities they sell in order to realize profits. In general, a surge in profits is accompanied by an increase in prices while a slowdown in the growth of profits leads to a lessening of inflation.**

The conclusion? Workers’ wages certainly depend on the amount of unemployment but inflation is caused not by wage increases but by the rise in corporate profits.


*Except in the usual neoclassical story, the direction is in reverse: wages cause unemployment.

**Corporations, of course, don’t have absolute power in setting output prices. Their ability to set prices and realize profits depends on a whole host of conditions over which they don’t have control. My point is only that prices go up when corporations do have the ability to raise prices and realize higher profits.


Now that was a silly mistake, fortunately caught by careful readers.

The second graph above (which compared apples to oranges, the change in an index with a change in dollar amounts) should be replaced by the one below (with both series, of prices and wages, expressed in terms of percentage increases from a year ago).


Clearly, there’s a close—but by no means perfect—association between prices and wages in the U.S. economy.

But it is still the case that correlation is not causation. We still need a theory of price determination, and to include the role of profits. If price changes closely follow wage changes, then it can still be the case that corporations—in order to realize and protect profits—set output prices as a markup over costs (including wages).

What that means is that, when economists and pundits blame tight labor markets and subsequent wage increases for provoking inflation, they are choosing not to focus on the role of corporate profits.


Special mention

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According to the Wall Street Journal,

Takeovers are booming as companies gain more confidence about the economy, use stockpiles of cash to reach for future growth and get boosts from low interest rates and the surging stock market.

At the current pace, mergers-and-acquisitions volume for the full year would exceed $3.7 trillion, making it the second-biggest year in history after 2007. Among the deals proposed or announced so far this year, 15 are valued at more than $10 billion, the highest such number on record, says Dealogic.

As we know, these deals may boost corporate profits but will do nothing to create new jobs, much less stem the rise in inequality in the United States. They’re likely, in fact, to have the exact opposite effect.


Special mention

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The largest university in the United States—the University of Phoenix, part of the Apollo Education Group [ht: ja]—has been given an F by Wall Street investors. Its stock tumbled almost 30 percent in today’s trading.

A key problem is that, while for-profit colleges only enroll roughly 12 percent of the nation’s students, students at those colleges accounted for about half of student loan defaults in 2013. And, as we know, the quality of education continues to be dismal.


Student enrollments and revenues have thus been falling in recent years. Degreed enrollment in the Apollo Education Group was most recently 227,400 students, less than half its own peak five years ago and down 13.5 percent from the first quarter of fiscal 2014. This year it will be lucky to take in $2.7 billion, although it had revenues close to $5 billion in 2010.

This would be the perfect time for public colleges and universities to attract many of the students who are leaving the for-profit sector of higher education. The problem is, public institutions are behaving more and more like their for-profit counterparts, being forced to rely more and more on tuition payments from students, who are taking on increasing levels of debt, instead of public financing.

In that sense, the country as a whole deserves an F for its failure to provide high-quality, affordable higher education to its citizens.