Posts Tagged ‘surplus’

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The economic crises that came to a head in 2008 and the massive response—by the U.S. government and corporations themselves—reshaped the world we live in.* Although sectors of the U.S. economy are still in one of their longest expansions, most people recognize that the recovery has been profoundly uneven and the economic gains have not been fairly distributed.

The question is, what has changed—and, equally significant, what hasn’t—during the past decade?

DJCA

Let’s start with U.S. stock markets, which over the course of less than 18 months, from October 2007 to March 2009, dropped by more than half. And since then? As is clear from the chart above, stocks (as measured by the Dow Jones Composite Average) have rebounded spectacularly, quadrupling in value (until the most recent sell-off). One of the reasons behind the extraordinary bull market has been monetary policy, which through normal means and extraordinary measures has transferred debt and put a great deal of inexpensive money in the hands of banks, corporations, and wealth investors.

profits

The other major reason is that corporate profits have recovered, also in spectacular fashion. As illustrated in the chart above, corporate profits (before tax, without adjustments) have climbed almost 250 percent from their low in the third quarter of 2008. Profits are, of course, a signal to investors that their stocks will likely rise in value. Moreover, increased profits allow corporations themselves to buy back a portion of their stocks. Finally, wealthy individuals, who have managed to capture a large share of the growing surplus appropriated by corporations, have had a growing mountain of cash to speculate on stocks.

Clearly, the United States has experienced a profit-led recovery during the past decade, which is both a cause and a consequence of the stock-market bubble.

banks

The crash and the Second Great Depression, characterized by the much-publicized failures of large financial institutions such as Bear Stearns and Lehman Brothers, raised a number of concerns about the rise in U.S. bank asset concentration that started in the 1990s. Today, as can be seen in the chart above, those concentration ratios (the 3-bank ratio in purple, the 5-bank ratio in green) are even higher. The top three are JPMorgan Chase (which acquired Bear Stearns and Washington Mutual), Bank of America (which purchased Merrill Lynch), and Wells Fargo (which took over Wachovia, North Coast Surety Insurance Services, and Merlin Securities), followed by Citigroup (which has managed to survive both a partial nationalization and a series of failed stress tests), and Goldman Sachs (which managed to borrow heavily, on the order of $782 billion in 2008 and 2009, from the Federal Reserve). At the end of 2015 (the last year for which data are available), the 5 largest “Too Big to Fail” banks held nearly half (46.5 percent) of the total of U.S. bank assets.

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Moreover, in the Trump administration as in the previous two, the revolving door between Wall Street and the entities in the federal government that are supposed to regulate Wall Street continues to spin. And spin. And spin.

median income

As for everyone else, they’ve barely seen a recovery. Real median household income in 2016 was only 1.5 percent higher than it was before the crash, in 2007.

workers

That’s because, even though the underemployment rate (the annual average rate of unemployed workers, marginally attached workers, and workers employed part-time for economic reasons as a percentage of the civilian labor force plus marginally attached workers, the blue line in the chart) has fallen in the past ten years, it is still very high—9.6 percent in 2016. In addition, the share of low-wage jobs (the percentage of jobs in occupations with median annual pay below the poverty threshold for a family of four, the orange line) remains stubbornly elevated (at 23.3 percent) and the wage share of national income (the green line) is still less than what it was in 2009 (at 43 percent)—and far below its postwar high (of 50.9 percent, in 1969).

Clearly, the recovery that corporations, Wall Street, and owners of stocks have engineered and enjoyed during the past 10 years has largely bypassed American workers.

income

One of the consequences of the lopsided recovery is that the distribution of income—already obscenely unequal prior to the crash—has continued to worsen. By 2014 (the last year for which data are available), the share of pretax national income going to the top 1 percent had risen to 20.2 percent (from 19.9 percent in 2007), while that of the bottom 90 percent had fallen to 53 percent (from 54.2 percent in 2007). In other words, the rising income share of the top 1 percent mirrors the declining share of the bottom 90 percent of the distribution.

wealth

The distribution of wealth in the United States is even more unequal. The top 1 percent held 38.6 percent of total household wealth in 2016, up from 33.7 percent in 2007, that of the next 9 percent more or less stable at 38.5 percent, while that of the bottom 90 percent had shrunk even further, from 28.6 percent to 22.8 percent.

So, back to my original question: what has—and has not—changed over the course of the past decade?

One area of the economy has clearly rebounded. Through their own efforts and with considerable help from the government, the stock market, corporate profits, Wall Street, and the income and wealth of the top 1 percent have all recovered from the crash. It’s certainly been their kind of recovery.

And they’ve recovered in large part because everyone else has been left behind. The vast majority of people, the American working-class, those who produce but don’t appropriate the surplus: they’ve been forced, within desperate and distressed circumstances, to shoulder the burden of a recovery they’ve had no say in directing and from which they’ve been mostly excluded.

The problem is, that makes the current recovery no different from the run-up to the crash itself—grotesque levels of inequality that fueled the bloated profits on both Main Street and Wall Street and a series of speculative asset bubbles. And the current recovery, far from correcting those tendencies, has made them even more obscene.

Thus, ten years on, U.S. capitalism has created the conditions for renewed instability and another, dramatic crash.

 

*In a post last year, I called into question any attempt to precisely date the beginning of the crises.

productivity

Everyone, it seems, now agrees that there’s a fundamental problem concerning wages and productivity in the United States: since the 1970s, productivity growth has far outpaced the growth in workers’ wages.*

Even Larry Summers—who, along with his coauthor Anna Stansbury, presented an analysis of the relationship between pay and productivity last Thursday at a conference on the “Policy Implications of Sustained Low Productivity Growth” sponsored by the Peterson Institute for International Economics.

Thus, Summers and Stansbury (pdf) concur with the emerging consensus,

After growing in tandem for nearly 30 years after the second world war, since 1973 an increasing gap has opened between the compensation of the average American worker and her/his average labor productivity.

The fact that the relationship between wages and productivity has been severed in recent decades presents a fundamental problem, both for U.S. capitalism and for mainstream economic theory. It calls into question the presumption of “just deserts” within U.S. economic institutions as well as within the theory of distribution created and disseminated by mainstream economists.

It means, in short, that much of what American workers are produced is not being distributed to them, but instead is being captured to their employers and wealthy individuals at the top, and that mainstream economic theory operates to obscure this growing problem.

It should therefore come as no surprise that Summers and Stansbury, while admitting the growing wage-productivity gap, will do whatever they can to save both current economic institutions and mainstream economic theory.

First, Summers and Stansbury conjure up a conceptual distinction between a “delinkage view,” according to which increases in productivity growth no long systematically translate into additional growth in workers’ compensation, and a “linkage view,” such that productivity growth does not translate into pay, but only because “other factors have been putting downward pressure on workers’ compensation even as productivity growth has been acting to lift it.” The latter—linkage—view maintains mainstream economists’ theory that wages correspond to workers’ productivity and that, in terms of the economy system, increasing productivity will raise workers’ wages.

Second, Summers and Stansbury compare changes in labor productivity and various time-dependent and lagged measures of the typical worker’s compensation—average compensation, median compensation, and the compensation of production and nonsupervisory workers—and find that, while compensation consistently grows more slowly than productivity since the 1970s, the series (both of them in log form) move largely together.

Their conclusion, not surprisingly, is that there is considerable evidence supporting the “linkage” view, according to which productivity growth is translated into increases in workers’ compensation and hence improving living standards throughout the postwar period. Thus, in their view, it’s not necessary—and perhaps even counter-productive—to shift attention from growth to solving the problem of inequality.

But Summers and Stansbury are still unable to dismiss the existence of an increasing wedge between productivity and compensation, which has two components: mean and median labor compensation have diverged and, at the same time, there’s been a falling labor share in the United States.

That’s where they stumble. They look for, but can’t find, a link between productivity and those two measures of growing inequality. There simply isn’t one.

What there is is a growing gap between productivity and compensation in recent decades, which has result in both a falling labor share and higher growth of labor compensation at the top. That is, more surplus is being extracted from workers and some of that surplus is in turn distributed to those at the top (e.g., industrial CEOs and financial executives).

Moreover, one can argue, in a manner not even envisioned by Summers and Stansbury, that the increasing gap between productivity and workers’ compensation is at least in part responsible for the productivity slowdown. Changes in the U.S. economy that emphasize capturing an increasing share of the surplus from around the world have translated into slower productivity growth in the United States.

The only conclusion, contra Summers and Stansbury, is that even if productivity growth accelerates, there is no evidence that suggests “the likely impact will be increased pay growth for the typical worker.”

More likely, at least for the foreseeable future, is the increasing inequality and the (relative) immiseration of American workers. Those are the problems neither existing economic institutions nor mainstream economic theory are prepared to acknowledge or solve.

*Actually, the argument is about productivity and compensation, not wages. In fact, Summers and Stansbury assert that “the definition of ‘compensation’ should incorporate both wages and non-wage benefits such as health insurance.” Their view is that, since the share of compensation provided in non-wage benefits significantly rose over the postwar period, comparing productivity against wages alone exaggerates the divergence between pay and productivity. An alternative approach distinguishes what employers have to pay to workers, wages (the value of labor power, in the Marxian tradition), from what employers have to pay to others, such as health insurance companies, in the form of non-wage benefits (which, again in the Marxian tradition, is a distribution of surplus-value).

profits abroad

Thanks to the release of the so-called Paradise Papers, and the additional research conducted by Gabriel Zucman, Thomas Tørsløv, and Ludvig Wier, we know that a large share of the surplus captured by corporations is artificially shifted to tax havens all over the world. This, of course, is on top of the conspicuous tax evasion practiced by the individual holders of a large portion of the world’s wealth.

Thus, for example, U.S. multinational corporations now claim to generate 63 percent of all their foreign profits in six tax havens, the most prominent being the Netherlands, Bermuda and the Caribbean, and Ireland. This is 20 points more than in 2006.*

What this means is that, in the tax havens themselves, low tax rates can generate large tax revenues relative to the size of the economies. But it also means large multinational corporations can play off one tax have against others, and shift their profits to those with the most generous laws and regulations—as Apple has recently done, by relocating tens of billions of dollars from Ireland to the small island of Jersey (which typically does not tax corporate income and is largely exempt from European Union tax regulations).

tax loss

It also means that the putative home countries of the multinational corporations lose potential tax revenues, which means a larger tax burden is imposed on others, especially individuals and small businesses.

In the case of the United States, Zucman and his colleagues estimate that the United States loses almost 60 billion euros to tax havens (about three quarters from European Union tax havens and the rest from tax havens elsewhere), which amounts to about 25 percent of the corporate tax revenue it currently collects.

As Zucman explains,

Tax havens are a key driver of global inequality, because the main beneficiaries are the shareholders of the companies that use them to dodge taxes.

Clearly, the existing rules are such that large multinational corporations win twice: first, by capturing more and more surplus from their workers, whose wages have barely budged in recent decades; and second, by using tax havens to avoid paying taxes on a large portion of that surplus, thus shifting the tax burden onto workers at home.

 

*I created the charts in this post based on data that have been made publicly available by Zucman, Tørsløv, and Wier.

income  wealth

Inequality in the United States is now so obscene that it’s impossible, even for mainstream economists, to avoid the issue of surplus.

Consider the two charts at the top of the post. On the left, income inequality is illustrated by the shares of pre-tax national income going to the top 1 percent (the blue line) and the bottom 90 percent (the red line). Between 1976 and 2014 (the last year for which data are available), the share of income at the top soared, from 10.4 percent to 20.2 percent, while for most everyone else the share has dropped precipitously, from 53.6 percent to 39.7 percent.

The distribution of wealth in the United States is even more unequal, as illustrated in the chart on the right. From 1976 to 2014, the share of wealth owned by the top 1 percent (the purple line) rose dramatically, from 22.9 percent to 38.6 percent, while that of the bottom 90 percent (the green line) tumbled from 34.2 percent to only 27 percent.

The obvious explanation, at least for some of us, is surplus-value. More surplus has been squeezed out of workers, which has been appropriated by their employers and then distributed to those at the top. They, in turn, have managed to use their ability to capture a share of the growing surplus to purchase more wealth, which has generated returns that lead to even more income and wealth—while the shares of income and wealth of those at the bottom have continued to decline.

But the idea of surplus-value is anathema to mainstream economists. They literally can’t see it, because they assume (at least within free markets) workers are paid according to their productivity. Mainstream economic theory excludes any distinction between labor and labor power. Therefore, in their view, the only thing that matters is the price of labor and, in their models, workers are paid their full value. Mainstream economists assume we live in the land of freedom, equality, and just deserts. Thus, everyone gets what they deserve.

Even if mainstream economists can’t see surplus-value, they’re still haunted by the idea of surplus. Their cherished models of perfect competition simply can’t generate the grotesque levels of inequality in the distribution of income and wealth we are seeing in the United States.

That’s why in recent years some of them have turned to the idea of rent-seeking behavior, which is associated with exceptions to perfect competition. They may not be able to conceptualize surplus-value but they can see—at least some of them—the existence of surplus wealth.

The latest is Mordecai Kurz, who has shown that modern information technology—the “source of most improvements in our living standards”—has also been the “cause of rising income and wealth inequality” since the 1970s.

For Kurz, it’s all about monopoly power. High-tech firms, characterized by highly concentrated ownership, have managed to use technical innovations and debt to erect barriers to entry and, once created, to restrain competition.

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Thus, in his view, a small group of U.S. corporations have accumulated “surplus wealth”—defined as the difference between wealth created (measured as the market value of the firm’s ownership securities) and their capital (measured as the market value of assets employed by the firm in production)—totaling $24 trillion in 2015.

Here’s Kurz’s explanation:

One part of the answer is that rising monopoly power increased corporate profits and sharply boosted stock prices, which produced gains that were enjoyed by a small population of stockholders and corporate management. . .

Since the 1980s, IT innovations have largely been software-based, giving young innovators an advantage. Additionally, “proof of concept” studies are typically inexpensive for software innovations (except in pharmaceuticals); with modest capital, IT innovators can test ideas without surrendering a major share of their stock. As a result, successful IT innovations have concentrated wealth in fewer – and often younger – hands.

In the end, Kurz wants to tell a story about wealth accumulation based on the rapid rise of individual wealth enabled by information-based innovations (together with the rapid decline of wealth created in older industries such as railroads, automobiles, and steel), which differs from Thomas Piketty’s view of wealth accumulation as taking place through a lengthy intergenerational process where the rate of return on family assets exceeds the growth rate of the economy.

The problem is, neither Kurz nor Piketty can tell a convincing story about where that surplus comes from in the first place, before it is captured by monopoly firms and transformed into the wealth of families.

Kurz, Piketty, and an increasing number of mainstream economists are concerned about obscene and still-growing levels of inequality, and thus remained haunted by the idea of a surplus. But they can’t see—or choose not to see—the surplus-value that is created in the process of extracting labor from labor power.

In other words, mainstream economists don’t see the surplus that arises, in language uniquely appropriate for Halloween, from capitalists’ “vampire thirst for the living blood of labour.”

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Lots of folks have been asking me about the significance of the so-called Nobel Prize in economics that was awarded yesterday to Richard Thaler.

They’re interested because they’ve read or heard about the large catalog of exceptions to the usual neoclassical rule of rational decision-making that has been compiled by Thaler and other behavioral economists.

One of my favorites is the “ultimatum game,” in which a player proposes an allocation of an endowment (say $5) and the second player can accept or reject the proposal. If the proposal is accepted, both players get paid according to the proposal; if the proposal is rejected, both players get nothing. What Thaler and his coauthors found is that most of the second players would reject proposals that would give them less than 25 percent of the endowment—even though, rationally, they’d be better off with even one penny in the initial offer. In other words, many individuals are willing to pay a cost (i.e., get nothing) in order to punish individuals who make an “unfair” proposal to them. Such a notion of fairness is anathema to the kind of self-interested, rational decision-making that is central to neoclassical economic theory.

Other exceptions include the “endowment effect” (for the tendency of individuals to value items more just because they own them), the theory of “mental accounting” (according to which individuals can overcome cognitive limitations by simplifying the economic environment in systematic ways, such as using separate funds for different household expenditures), the planner-doer model (in which individuals are both myopic doers for short-term decisions and farsighted planners for decisions that have long-run implications), and so on—all of which have implications for a wide variety of economic behavior and institutions, from consumption to financial markets.

So, what is the significance of Thaler’s approach to economics?

As I see it, there are three stories that can be told about behavioral economics. The first one is the official story, as related by the Nobel committee, which starts from the proposition that “economics involves understanding human behaviour in economic decision-making situations and in markets.” But, since “people are complicated beings,” and even though the neoclassical model “provided solutions to important and complicated economic problems,” Thaler’s work (alone and with his coauthors) has contributed to expanding and refining economic analysis by considering psychological traits that systematically influence economic decisions—thus creating a “a flourishing area of research” and providing “economists with a richer set of analytical and experimental tools for understanding and predicting human behavior.”

A second story is provided by Yahya Madra (in Contending Economic Theories, with Richard Wolff and Stephen Resnick): behavioral economics forms part of what he calls “late neoclassical theory” that both poses critical questions about neoclassical homo economicus and threatens to overrun the limits of neoclassical theory by offering “a completely new vision of how to specify the economic behavior of individuals.” Thus,

Based on its psychological explorations, behavioral economics confronts a choice: will it remain a research field that merely catalogs various shortcomings of the traditional neoclassical model and account of human behavior or will it break from neoclassical theory to formulate a new theory of human behavior?

A third story stems from a recognition that behavioral economics challenges some aspects of neoclassical economics—by pointing out many of the ways individuals are guided by forms of decisionmaking that violate the rule of self-interested rationality presumed by traditional neoclassical economists—and yet remains within the strictures of neoclassical economics—by focusing on individual behavior and using rational decision-making as the goal.

Thus, Thaler’s work and the work of most behavioral economists focuses on the limits to individual rationality and not on the perverse incentives and structures that plague contemporary capitalism. There’s no mention of the ways wealthy individuals and large corporations, precisely because of their high incomes and profits, are able to make individually rational decisions that—as in the crash of 2007-08—have negative social ramifications for everyone else. Nor is there a discussion of the different kinds of rationalities that are implicit in different ways of organizing the economy. As I wrote back in 2011, “is there a difference between how capitalists (who appropriate the surplus for doing nothing) and workers (who actually produce the surplus) might decide to distribute the surplus to others?”

Moreover, while behavioral economics have compiled a long list of exceptions to neoclassical rationality, they still use the neoclassical ideal as the horizon of their work. This can be seen in what is probably the best known of Thaler’s writings (with coauthor Cass Sunstein), the idea of “libertarian paternalism.” According to this view, “beneficial changes in behavior can be achieved by minimally invasive policies that nudge people to make the right decisions for themselves.” Thus, for example, Thaler proposed changing the default option in defined-contribution pension plans from having to actively sign up for the plan (which leads to suboptimal outcomes) to automatically joining the plan at some default savings rate and in some default investment strategy (which approximates rational decision-making).

The problem is, there’s no discussion of the idea that workers would benefit from an alternative to defined-contribution plans—whether defined-benefit plans or the expansion of Social Security. It’s all about taking the institutional structure as given and “nudging” individuals, via the appropriate design of mechanisms, to make the kinds of rational decisions that are presumed within neoclassical economics.

Paraphrasing that nineteenth-century critic of political economy, we can say that economic decision-making appears, at first sight, a very trivial thing, and easily understood. Its analysis shows that it is, in reality, a very queer thing, abounding in metaphysical subtleties and theological niceties. We might credit Thaler and other behavioral economists, then, for having taken a first step in challenging the traditional neoclassical account of rational decision-making. But they stop far short of examining the perverse incentives that are built into the current economic system or the alternative rationalities that could serve as the basis for a different way of organizing economic and social life. And, in terms of economic theory, they appear not to be able to imagine another way of thinking about the economy, as a process without an individual subject.

However, taking any of those steps would never be recognized with a Nobel Prize in economics.

wage-inequality

Apologists for mainstream economics (such as Noah Smith) like to claim that things are OK because good empirical research is crowding out bad theory.

I have no doubt about the fact that the theory of mainstream economics has been bad. But is the empirical research any better?

Not, as I see it, in the academy, in the departments that are dominated by mainstream economics. But there is interesting empirical work going on elsewhere, including of all places in the International Monetary Fund (as I have noted before, e.g., here and here).

The latest, from Mai Dao, Mitali Das, Zsoka Koczan, and Weicheng Lian, documents two important facts: the decline in labor’s share of income—in both developed and developing economies—and the relationship between the fall in the labor share and the rise in inequality.

I demonstrate both facts for the United States in the chart above: the labor share (the red line, measured on the left) has been falling since 1970, while the share of income captured by those in the top 1 percent (the blue line, measured on the right) has been rising.

labor shares

Dao et al. make the same argument, both across countries and within countries over time: declining labor shares are associated with rising inequality.

And they’re clearly concerned about these facts, because inequality can fuel social tension and harm economic growth. It can also lead to a backlash against economic integration and outward-looking policies, which the IMF has a clear stake in defending:

the benefits of trade and financial integration to emerging market and developing economies—where they have fostered convergence, raised incomes, expanded access to goods and services, and lifted millions from poverty—are well documented.

But, of course, there are no facts without theories. What is missing from the IMF facts is a theory of how a falling labor share fuels inequality—and, in turn, has created such a reaction against capitalist globalization.

Let me see if I can help them. When the labor share of national income falls—the result of the forces Dao et al. document, such as outsourcing and new labor-saving technologies—the surplus appropriated from those workers rises. Then, when a share of that growing surplus is distributed to those at the top—for example, to those in the top 1 percent, via high salaries and returns on capital ownership—income inequality rises. Moreover, the ability of those at the top to capture the surplus means they are able to shape economic and political decisions that serve to keep workers’ share of national income on its downward slide.

The problem is mainstream economists are not particularly interested in those facts. Or, for that matter, the theory that can make sense of those facts.

www.usnews

There’s nothing that gets mainstream economists going like a proposal to raise workers’ wages.

Except the idea of raising workers’ wages in other countries.

Then you’re screwing with both wages and international trade. And mainstream thinkers just won’t allow that.

That’s why Eduardo Porter considers the AFL-CIO’s proposal that the North American Free Trade Agreement guarantee that “all workers — regardless of sector — have the right to receive wages sufficient for them to afford, in the region of the signatory country where the worker resides, a decent standard of living for the worker and her or his family” a “fairly loopy idea.”

As I see it, the only thing loopy about the proposal is the idea that the Trump administration would actually take it seriously.

Then there’s MIT’s David Autor:

Stipulating that countries must pay above-market wages when producing export goods for the U.S. feels like outrageous economic imperialism.

And finally Harvard’s Dani Rodrik, according to whom the idea of a living wage

is very difficult to define and can be harmful to employment if enforced too strictly.

So, there you have it: according to mainstream economists, attempting to raise workers’ wages, especially wages in Mexico and elsewhere, is “loopy,” an example of “economic imperialism,” and “harmful to employment” if actually enforced.

Now, to be clear, as I showed earlier this year, workers on both sides of the border have lost out, and their losses are mostly not due to NAFTA. The wage share of national income was declining in both the United States and Mexico before the free-trade agreement was implemented—and it’s continued its slide since then.

Why then are mainstream economists so opposed to raising Mexican workers’ wages—which, after all, is merely an example of leveling-up as against a race-to-the-bottom?

It’s because mainstream economists actually believe workers are paid according to their productivity. They get what they’re worth. In other words, “just deserts.”

But that’s the problem: there’s nothing necessarily just about the prices set in markets, whether for labor power or any another commodity. Raising workers’ wages above current rates—on both sides of the border—represents a different kind of economic justice. It may not be neoclassical justice, which is the only thing Porter, Autor, Rodrik, and other mainstream economists recognize.

It’s a justice based on the idea that workers lose out when they’re paid a wage but create more value than what they receive in the form of wages. They produce a surplus, which their employers appropriate. Both their Mexican employers and their U.S. employers.

Raising workers’ wages would mean there would be somewhat less surplus available to their employers in the form of profits. And that’s a kind of economic justice mainstream economists simply won’t accept.