Posts Tagged ‘recovery’

T2D

Mainstream economists continue to discuss the two great crises of capitalism during the past century just like the pillars of society performed in the brothel—a “house of infinite mirrors and theaters”—in Jean Genet’s The Balcony.* The order they represent is indeed threatened by an uprising in the streets, and the only question is: can they reestablish the illusion of control?

The latest version of the absurdist economic play opens with Brad DeLong, who dons the costume of the liberal mainstream economist and argues that, while the Great Depression of the 1930s was far deeper than the Great Recession (what I have long referred to as the Second Great Depression), the recovery from the crash of 2007-08 was so mishandled that it casts a shadow over the U.S. economy in a way the first Great Depression did not.

now we are haunted by our Great Recession in a sense that our predecessors were not haunted by the Great Depression. Looking forward, it appears that we will be haunted for who knows how long. No unbiased observer projects anything other than slow growth, much slower than the years during and after World War II. Nobody is forecasting that the haunting will cease — that the shadow left from the Great Recession will lift.

Basically, DeLong blames two groups—conservative mainstream economists and policymakers (“including the decision makers at the top in the Obama administration”)—for a recovery that was both too long and too slow. The first claims the monetary and fiscal policies that were adopted were wrongheaded from the start, and fought every attempt to sustain or expand them. The second group claims they prevented a second Great Depression and refuses to acknowledge the failure of the policies they devised and adopted.

The customer who dresses up as a representative of the conservative wing of mainstream economics, Robert Samuelson, expresses his sympathy with DeLong’s analysis but considers it be overstated. Samuelson’s view is that slow growth is not caused by the shadow cast by inadequate economic policies, but is the more or less inevitable result of two exogenous events: reduced growth of the labor force and slower growth in productivity.

The retirement of baby-boom workers would have occurred without the Great Recession. The slowdown in productivity growth — reflecting technology, management and worker skills — is not well understood, but may also be independent of the Great Recession.

This is exactly what is to be expected in the high-end economic brothel. It’s a debate confined to growth rates and the degree to which economic policies or exogenous factors should ultimately shoulder the blame of the crisis of legitimacy of the current economic order. Each, it seems, wants to play the fantasy of the Chief of Police in order to create the illusion of restoring order.**

What DeLong and Samuelson choose not to talk about are the fundamental differences between the response to the 1929 crash and the most recent crisis of capitalism. As is clear from the data in the chart at the top of the post, the balance of power was fundamentally altered as a result of the New Deals (the first and especially the second), which simply didn’t occur in recent years. After 1929, the wage share (the green line) remained relatively constant, even in the face of massive unemployment—and eventually, as a result of a whole series of other policies (from regulating the financial sector through jobs programs to unleashing a wave of labor-union organizing), the shares of national income going to the bottom 90 percent (the blue line) and the top 1 percent (the red line) moved in opposite directions. The current recovery has been quite different: a declining wage share (which, admittedly, continues a decades-long slide), the bottom 90 percent losing out and the top 1 percent resuming its rise.

And the reason? As I see it, what was happening outside the brothel, in the streets, explains the different responses to the two crashes. It was the Left—in the form of political parties (Socialist, Communist, and the left-wing of the Democratic Party), but also labor unions, councils of the unemployed, academics, and so on—that pushed the administration of Franklin Delano Roosevelt and Congress to adopt policies that moved beyond restoring economic growth to fundamentally restructure the U.S. economy (which, of course, continued during and after the war years).*** Nothing similar happened in the United States after 2008. As a result, the policies that were discussed and eventually adopted only meant a recovery for large corporations and wealthy households. Everyone else has been left to battle over the scraps—attempting to get by on low-paying jobs retirement incomes based on volatile stock markets, with underwater mortgages and rising student debt, and facing out-of-control healthcare costs.****

It should come as no surprise, then, that the elites who continue to play out their fantasies in the house of mirrors have lost the trust of ordinary people. Unfortunately, in the wake of the Second Great Depression, it’s clear that new masqueraders have been willing to don the costumes and continue the fantasy that the old order can be restored.

Only a fundamental rethink, which rejects all the illusions created within the economic bordello, will chart a path that is radically different from the recoveries that followed both great crises of capitalism of the past hundred years.

 

*I saw my first production of “O Balcão” at Sao Paulo’s Teatro Oficina in 1970, as a young exchange student during one of the most repressive years of the Brazilian dictatorship. Staging Genet’s play at that moment represented both a searing critique of the military regime and an extraordinary act of resistance to government censorship.

**Much the same can be said of a parallel debate, between Joseph Stiglitz and Lawrence Summers.

***Even then, we need to recognize how limited the recovery from the first Great Depression was. Amidst all the changes and new regulations, leaving control of the surplus in private hands left large corporations with the interest and means to circumvent and ultimately eliminate the New Deal regulations, thus creating the conditions for the Second Great Depression.

****As Evan Horowitz has shown, roughly 14 percent of workers have seen no raise over the past year (counting only those who have stayed in the same job). That means, with inflation, their real wages have fallen. Moreover, “when a large share of workers get passed over for raises, wage growth for all workers tends to remain slow in the year ahead.”

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I have long argued (e.g., herehere, and here) that capitalism involves a kind of pact with the devil: control over the surplus is reluctantly given over to the boards of directors of corporations in return for certain promises, such as just deserts, economic stability, and wage increases for workers.

In recent years, as so often in the past, we’ve witnessed those at the top sabotaging the pact (simply because they have the means and interest to do so) and now, once again, they’ve undermined their legitimacy to run things.

First, they broke their promise of just deserts, as the distribution of income has become increasingly (and, to describe it accurately, grotesquely) unequal and the tendency toward high concentrations of wealth has returned, threatening to create a new class of plutocratic coupon-clippers. Then, they ended the Great Moderation with speculative decisions that ushered in the worst economic crisis since the First Great Depression. And, now, the promise of using the surplus to create jobs that would raise workers’ pay appears to be falling prey to directing the surplus to other uses: share buybacks and increasing CEO salaries.

According to a recent report by Goldman Sachs, stock repurchases will reach $1 trillion this year, up 46 percent from 2017 on the back of tax reform and strong corporate profits. Corporations buying back their own stocks leads to higher stock prices, which is an additional benefit to those who own the stocks—on top of the dividends they regularly receive.

As I explained earlier this year, the top 1 percent owned in 2014 almost two thirds of the financial or business wealth, while the bottom 90 percent had only six percent. That represents an enormous change from the already-unequal situation in 1978, when the shares were much closer: 28.6 percent for the top 1 percent and 23.2 percent for the bottom 90 percent). So, rising stock prices are both a condition and consequence of the obscene levels of inequality that obtain in the United States today.

And who loses? Workers, of course. A recent report from the National Employment Law Project calculated that McDonald’s could have paid each of its 1.9 million workers $4 thousand more a year if it had used the $21 billion it spent between 2015 and 2017 on stock buybacks to reward its workers instead. Starbucks could have given each of its workers a $7-thousand raise. With the money currently spent on buybacks, Lowe’s, CVS, and Home Depot could give each of their workers pay increases of at least $18 thousand a year.

But they’re not. Instead, corporations are using their enormous profits to repurchase their own stocks and, in addition, rewarding their executives with enormous pay increases.

According to Bloomberg, the median CEO-to-worker-pay ratio last year was 127 to 1 (at International Flavors & Fragrances Inc.). For U.S. corporations, the ratio ran from 0 (for Twitter, because CEO and cofounder Jack Dorsey received $0 in 2017) to 4,987-to-1 (at Mattel, where CEO compensation was $31,275,289).*

As it turns out, some of the most extreme examples of the gap between executive and median worker pay occurs at companies directly supported by federal contracts and subsidies. The latest Executive Excess report, published annually by the Institute for Policy Studies, found that at many federally funded companies the gap is far in excess of what ordinary American taxpayers find acceptable. For example, more than two-thirds of the top 50 government contractors and top 50 recipients of federal subsidies, receiving a total of $167 billion, currently pay their chief executive officer more than 100 times their median worker pay. At the top of the scale are leading military contractors, with the top bosses at Lockheed Martin, Boeing, General Dynamics, Raytheon, and Northrop Grumman each earning an average of $21 million, or between 166 and 218 times average worker pay.**

So, do Americans have any sympathy for the devil? The typical American believes CEO pay should run no more than six times average worker pay, according to the “2016 Public Perception Survey on CEO Compensation” at Stanford Business School (which mirrors a similar study by Sorapop Kiatpongsan and Michael Norton). Clearly, given the obscene ratios of CEO to average worker pay, Americans are no longer puzzled by corporations’ game. My guess is we’d see the same results if someone conducted a survey about stock repurchases. U.S. publicly traded companies across all industries spent almost 60 percent of their profits on buybacks between 2015 and 2017, while workers’ wages stagnated.

Sure, the tiny group at the top may present themselves as people of wealth and taste. But they’ve also shown they can lay waste to the economy they alone control, and they are clearly in need of some restraint. So, now, almost a decade into the current lopsided recovery—as they watch with glee their growing profits and an increasing gap between those who receive the surplus and everyone else—they deserve no sympathy whatsoever.

They’ve broken the pact and now their game is up.

 

*But Dorsey still owns a bundle of equity in Twitter, whose stock has increased in value 20 percent since the beginning of 2018. As of April 2 Dorsey owned 18 million shares of Twitter, currently worth $627 million as of Tuesday’s closing price. Dorsey also is the CEO of payments company Square, in which he owns 65.5 million shares, which currently would be worth $6 billion.

**The Geo Group, one of the primary contractors for the notorious immigrant family detention centers, took in $663 million in Justice Department and Homeland Security contracts in 2017. Geo CEO George Zoley pocketed $9.6 million that year, 271 times more than his company’s median worker pay of $35,630.

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Back in June, Neil Irwin wrote that he couldn’t find enough synonyms for “good”  to adequately describe the jobs numbers.

I have the opposite problem. I’ve tried every word I could come up with—including “lopsided,” “highly skewed,” and “grotesquely unequal“—to describe how “bad” this recovery has been, especially for workers.

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Maybe readers can come up with better adjectives to illustrate the sorry plight of Americans workers since the Second Great Depression began—something that captures, for example, the precipitous decline in the labor share during the past decade (from 103.3 in the first quarter of 2008 to 97.1 in the first quarter of 2018, with 2009 equal to 100).*

But perhaps there’s a different approach. Just run the numbers and report the results. That’s what the Directorate for Employment, Labour, and Social Affairs seem to have done in compiling the latest OECD Employment Outlook 2018. Here’s their summary:

For the first time since the onset of the global financial crisis in 2008, there are more people with a job in the OECD area than before the crisis. Unemployment rates are below, or close to, pre-crisis levels in almost all countries. . .

Yet, wage growth is still missing in action. . .

Even more worrisome, this unprecedented wage stagnation is not evenly distributed across workers. Real labour incomes of the top 1% of income earners have increased much faster than those of median full-time workers in recent years, reinforcing a long-standing trend. This, in turn, is contributing to a growing dissatisfaction by many about the nature, if not the strength, of the recovery: while jobs are finally back, only some fortunate few at the top are also enjoying improvements in earnings and job quality.

Exactly! The number of jobs has gone up and unemployment rates have fallen—and workers are still being left behind. That’s because wage growth “is still missing in action.”

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source

Workers’ wages have been stagnant for the past decade across the 36 countries that make up the Organisation for Economic Cooperation and Development. But the problem has been particularly acute in the United States, where the “low-income rate” is high (only surpassed by two countries, Greece and Spain) and “income inequality” even worse (following only Israel).

The causes are clear: workers suffer when many of the new jobs they’re forced to have the freedom to take are on the low end of the wage scale, unemployed and at-risk workers are getting very little support from the government, and employed workers are impeded by a weak collective-bargaining system.

That’s exactly what we’ve seen in the United State ever since the crisis broke out—which has continued during the entire recovery.

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But we also have to look at the opposite pole: the growth of corporate profits is both a condition and consequence of the stagnation of workers’ wages. Employers have been able to use those profits not to increase worker pay (except for CEOs and other corporate executives whose pay is actually a distribution of those profits), but to purchase new technologies and take advantage of national and global patterns of production and trade to keep both unemployed and employed workers in a precarious position.

That precarity, even as employment has expanded, serves to keep wages low—and profits growing.

What we’re seeing then, especially in the United States, is a self-reinforcing cycle of high profits, low wages, and even higher profits.

That’s why the labor share of business income has been falling throughout the so-called recovery. And why, in the end, Eric Levitz was forced to find the right words:

American Workers Are Getting Ripped Off

 

*And, of course, even longer: from 114 in 1960 or 112 in 1970 or even 110.2 in 2001.

unemployment-wages

Does anyone really need any additional evidence of the lopsided nature of the current recovery?

Employers certainly don’t. They’re managing to hire additional workers, thus lowering the unemployment rate. But they don’t have to pay the workers they hire much more than they were getting before, with wages barely staying ahead of the rate of inflation. As a result, corporate profits continue to grow.

Clearly, what we’re seeing remains a one-sided recovery: employers are getting ahead—and their workers are still being left behind.

According to the latest report from the Bureau of Labor Statistics, total nonfarm payroll employment increased by 164,000 in April, thus reducing the headline unemployment rate to 3.9 percent and the expanded or U6 unemployment rate (which includes, in addition, marginally attached workers and those who are working part-time for economic reasons) to 7.4 percent.* Meanwhile, average hourly earnings of private-sector production and nonsupervisory employees increased by only 5 cents in April—an annual rate of just 2.7 percent (just a bit more than the current inflation rate of 2.5 percent).

Sure, employers complain that they can’t hire the workers they need—persistent gripes that are dutifully reported in the business press. They may even be paying one-time bonuses. But they’re certainly not increasing wages in order to attract the kinds of workers they say they want.

That’s because they don’t have to. Most of the new jobs are being created in sectors—like professional and technical services (an additional 25.8 thousand jobs in April), temporary help services (10.3 thousand), health care (24.4 thousand), machinery (8.4 thousand), and accommodation and food services (18.9 thousand)—where there are plenty of still-underemployed workers to go around. In addition, most of those workers are not represented by unions, and therefore aren’t in a position to negotiate for higher wages.** The decline in government jobs means there’s little competition for the nation’s workers. And employers continue to have the option of automation and offshoring, which also keeps workers’ wages in check.

So, employers in the United States are able to advertise jobs that pay $10, $12, or $20 an hour, which desperate workers are forced to have the freedom to take—because, within the existing set of economic institutions, the alternatives are even worse.

American employers, with their higher profits and new tax cuts, could be paying higher wages. But they’re choosing not to.***

For them, it’s certainly been a beautiful recovery.

 

*After revisions, job gains in the United States have averaged 208,000 over the last 3 months.

**However, one group of workers without union representation—teachers—have decided to initiate strikes and other work stoppages to respond to cuts in their wages and education budgets. As North Caroline kindergarten teacher Kristin Beller explained, “We are done being the frog that is being boiled.”

***Except, of course, the portion of the surplus they have been distributing to their CEOs.

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Special mention

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labor share

The United States is now more than eight years out from the end of the Great Recession and the one-sided nature of the recovery is, or at least should be, clear for all to see.

Even as unemployment has dipped below the so-called “natural rate,” workers are far from recovering all they’ve last in the past decade.

According to the official data illustrated in the chart above, the labor share of national income remains just above the lowest level it reached in the entire postwar period. Using 100 in 2009 as the index value, the current labor share has fallen to 96.5—down from 110.24 in 2001 and 114 in 1960.

The question is, how low can the labor share go?

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If you read the business press in the United States (e.g., the Wall Street Journal), you’ll find something along the lines of the following argument: the fact that U.S. worker productivity rebounded in the third quarter while hourly wages rose moderately is a sign “the economy is strengthening.”

But look at the numbers. Nonfarm business sector productivity (the blue line in the chart above) rose 1.5 percent (from the same quarter a year ago) while real hourly compensation (the green line) fell 1.1 percent.* The result is that unit labor costs (the red line) fell 0.7 percent.

According to Stephen Stanley of Amherst Pierpont Securities,

lighter regulation under the Trump administration and the prospect of a $1.4 trillion tax-cut package being passed by Congress are likely factors that have led companies to boost investment and become more productive.

Corporations may have chosen to boost investment and become more productive—but they have also chosen not to compensate their workers.

The only possible conclusion is that the Trump recovery is a recovery for employers but not for their employees.

Let’s see if Trump or someone in his administration will tweet that!

 

*Hours worked rose 1.5 percent and hourly compensation only 0.8 percent in the third quarter. As a result, real hourly compensation was -1.1 percent.