Posts Tagged ‘profits’

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Recovery: New Job, Day One

wages-education

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.

education-top

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.

Milanovic

This chart, devised by Branko Milanovic, illustrates the remarkable economic recovery that has taken place in the United States beginning in 2010—a recovery, that is, not for the vast majority of people, but for a tiny minority at the top.

Consider the first period (blue line). It is remarkable that real income of all groups declined. But the hardest hit were the rich, with percentage losses increasing as we move toward to right portion of the graph, and the very poor.  I am not an expert on US welfare system, but it seems to me that the system failed to protect the poorest people from substantial income losses between 2007 and 2010. But for the bulk of the population, the years of the Great Recession meant a modest real income decline. The median person’s real income went down by a little over 3 percent. The upper middle class (the people between the 80th and 90th percentiles) did not see much change in their real income. But the top 10% clearly lost out: notice how the blue line starts decreasing ever more steeply as you move toward the top 1%. The Gini coefficient decreased by less than 1 point.

Now, look at the red line which shows the real change in the second period. It is almost a mirror-image of what happened in the first. The growth was zero or positive along the entire distribution, the strongest among the very poor (around the lowest 5th percentile) and among the rich (the top 10%). Median inflation-adjusted per capita income decreased by just under 1%. For the two top percentiles, which got clobbered by the recession, real income growth was in excess of 10%.

In other words, those at the very bottom lost a great deal during and immediately after the crash and, as a result of special measures (like an expansion of the food stamp program and increases in state minimum wages), they’ve managed to claw back some of what they lost—and they’re still poor. For pretty much everyone else, they lost out (as a result of growing unemployment and stagnant wages) and they still haven’t recovered (even though the unemployment rate has declined but their wages are still pretty much where they were before the crash). And those at the top? They lost a great deal (because of the initial decline in corporate profits and the stock market crash) and, as a result of the nature of the recovery (which has successfully restored the profits of large corporations and Wall Street equities), have now recovered most of what they lost—and they’re still rich.

So, after a brief hiatus (in 2009), the United States is back to having the most unequal distribution of income of all the rich countries on the planet.

And, unless things change (and I don’t mean the Fed’s tinkering with interest rates or one or another corporation raising wages above the federal minimum), that obscenely unequal distribution of income is only going to continue to get worse.

human-capital-main

Like the capital controversy of the 1960s, the current controversy over human capital pits neoclassical economics against its critics.

The capital controversy (also known as the Cambridge controversy, because it was staged between neoclassical economists at MIT, and thus of Cambridge, Massachusetts, and non-neoclassical economists at Cambridge University, and thus of Cambridge, England), which actually took place between the mid-1950s and mid-1970s, was narrowly about the internal consistency of neoclassical economics and more generally about the role of capital in economic theory. The basic idea is that, in a world of heterogeneous capital goods (e.g., a shovel and an automobile assembly-line), you need to know the price of capital (the interest rate or rate of return on capital) in order to determine the quantity of capital (i.e., in order to add up all those different kinds of physical capital). But, in neoclassical economics, you need to use the quantity of capital in order to determine the price of capital (via supply and demand in the “capital market”), which creates a fundamental problem for the neoclassical theory of capital.

Hence, Joan Robinson’s famous question, “What is capital?” To which neoclassical economists responded with gobbledy-gook. And so Robinson repeated her question, the neoclassicals withgobbledy-gook, and the controversy continued without resolution. Neoclassical economists, like Robert Solow, resorted to an aggregate production function (where the problem of heterogenous goods is simply defined away), while Robinson and the other anti-neoclassical economists on the other side of the pond entered into increasingly arcane areas of dispute, such as reswitching and capital-reversing.*

As I have long explained to students, the theory of capital is the most controversial topic in the history of economic thought because the theory of capital is the theory of profits—and therefore an answer to the question, do the capitalists deserve the profits they get?

The original capital controversy was never resolved. But now there’s a new capital controversy, a debate about human capital. It was launched by Branko Milanovic, based on Thomas Piketty’s refusal to include human capital in the other forms of capital he measures in his inquiry about the history and future prospects of wealth inequality.** Basically, Milanovic argues that labor is not a form of capital because labor involves a “doing” (work has to be performed in order for skills to be used and wages to be paid) while other forms of capital are characterized not by work but by nonwork, that is, ownership (financial capital generates a return based on owning some of financial claim, and no work is involved in making such a claim).

why is “human capital” such a disastrous turn of phrase? There are two reasons. First, it obfuscates the crucial difference between labor and capital by terminologically conflating the two. Labor now seems to be just a subspecies of capital. Second and more important, it leads to a perception — and sometimes to the argument used by insufficiently careful economists — that all individuals, whether owners of real capital or not, are basically capitalists. Even if you have human capital and I have financial capital, we are fundamentally the same. Entirely lost is the key distinction that for you to get an income from your human capital, you have to work. For me to get an income from my financial capital, I do not.

I’m with Milanovic on this. There is a fundamental difference between doing and owning, between doing labor and owning capital. But I also think the human capital controversy has even larger implications.

First, a bit of history: the idea of human capital was invented in the early 1960s by neoclassical economist Theodore Schultz [pdf] as part of a more general attack on Marxian-inspired notions of capital (capital that is connected to profits and therefore exploitation), an extension of Adam Smith’s theory of the causes of the wealth of nations (which now, Schultz argued, should include the accumulation of all prior investments in education, on-the-job training, health, migration, and other factors that increase individual productivity), and an attempt to depict all economic agents, including laborers, as capitalists (who “invest” in and “manage a portfolio” of skills and abilities). Human capital can thus be seen as, simultaneously, a blunting of the critical dimension of capital (broadening it to matters other than profits and thus a particular set of claims on the surplus) and a step in the creation of the neoliberal subject (who seeks a “return” on its “investments” in itself).

Second, the problems associated with the notion of human capital, which Piketty’s correctly does not include in his definition of wealth (since, for Piketty, “capital is defined as the sum total of nonhuman assets that can be owned and exchanged on some market”), also serve to undermine at least part of Piketty’s project. One of the elements missing from Piketty’s approach to capital as wealth is any kind of “doing.” It’s all about owning (of “real property” as well as of “financial and professional capital”), without any discussion of the labor that has to be performed in order to generate some kind of extra value and thus a return on capital.

And so, as it alway does in economics, it comes down to a theory of value. In neoclassical theory, all factors of production get, in the form of income, an amount equal to their marginal contributions to production. Everyone contributes and everyone, within free markets, gets their “just deserts.” In Piketty’s world, the owners of capital manage to capture a larger and larger portion of the national income if the rate of economic growth is less than the rate of return on capital (which exacerbates the already-unequal distribution of income, based largely on CEO salaries). In a Marxian world, capital is a social relationship that both generates a surplus (because “industrial capital” exploits “productive labor”) and represents a distributed claim on one or another portion of the surplus (in the form of “financial capital,” the ownership of land, and so on), based on the idea that the “doing” of labor occurs simultaneously—as both cause and effect—with the “owning” of capital. Three different theories of value and thus three very different theories of capital.

But it doesn’t stop there. In recent years, we have seen a dreary expansion of the idea of capital beyond even physical/financial capital and human capital. It now includes—in the hands of business professors, economists, and other social scientists—intellectual, organizational, social, and other forms of capital. Somehow, if they call it capital, they think it deserves to be taken more seriously.

As I see it, all these new forms of capital, like human capital, are ways of expanding Smith’s wealth of nations; they all seen as contributing to the production of more “stuff”—more use-values, the “immense accumulation of commodities.” But the expanding universe of capital also serves to hide the extent to which all that stuff, which is in reality socially produced, is then privately appropriated—leading to a growing gap between a tiny minority at the top and everyone else. In other words, it’s a pattern of private capitalist appropriation that creates a more and more unequal distribution of income and wealth.

The capital controversy will remain with us, then, as long as we refuse to solve the problem of capital.

 

*Avi J. Cohen and G. C. Harcourt [pdf] provide a useful overview of the capital controversy.

**Nick Rowe and Tim Worstall have since criticized Milanovic and his call to junk the notion of human capital, and he in turn has responded to their criticisms.

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HSBC-Too-Big-to-Jail Pipe-XL

Food swamp rats

Posted: 11 February 2015 in Uncategorized
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dollartree

We’ve known about food deserts and swamps for years. But now we’ve learned that big food brands are boosting their profits by targeting the poor:

Packaged food sales were flat in 2014 as people increasingly avoided the brands typically found in the center aisles of grocery stores in favor of the fresher food found on the perimeter. But in other types of stores, such as dollar, drug and club, sales are growing faster than grocery store sales, prompting companies to expand distribution. . .

Kraft operates an in-house kitchen, where it tests recipes that it hopes will appeal to budget conscious consumers and tries to figure out how families stock their pantries, said Robin Ross, director of Kraft Kitchens.

“There is no room for waste,” she said. “There is no room to choose products and recipes that won’t go over well in our families. We know that in some of these households there might be higher propensity to buy canned foods or vegetables because there is more of a guarantee that those products won’t go bad before it’s time for use.”

Shrinking package sizes allows Kraft to reach higher profit margins on products, though it won’t sell as many as it would in a larger store. For instance, a 12-ounce package of Velveeta Shells & Cheese cost $2.50 at the a Dollar Tree store in New York City. Meanwhile, a 2.4 ounce cup cost $1.25. That’s 21 cents an ounce versus 52 cents an ounce.