Posts Tagged ‘surplus’

8-billionaires-in-the-world

Oxfam’s headline-grabbing numbers are bad enough: “Eight men are as rich as half the world.” But the international organization has presented an even more serious and severe indictment of current economic arrangements—which can’t be glossed over by merely encouraging those at the top to pay more taxes.

In the background paper, “An Economy for the 99 Percent” (a follow-up to last year’s “An Economy for the 1%“), Oxfam researchers both document the existence of grotesque levels of economic inequality in the world today and analyze the main causes of that inequality.

Regular readers of this blog will recognize the numbers indicating the obscene levels of contemporary inequality:

  • Since 2015, the richest 1% has owned more wealth than the rest of the planet.
  • The incomes of the poorest 10% of people increased by less than $3 a year between 1988 and 2011, while the incomes of the richest 1% increased 182 times as much.
  • A FTSE-100 CEO earns as much in a year as 10,000 people in working in garment factories in Bangladesh.
  • In the US, new research by economist Thomas Piketty shows that over the last 30 years the growth in the incomes of the bottom 50% has been zero, whereas incomes of the top 1% have grown 300%.
  • In Vietnam, the country’s richest man earns more in a day than the poorest person earns in 10 years.

But it’s the analysis behind those numbers that, in my view, deserves even more attention.

Oxfam starts where they should, with the key institution within global capitalism: corporations.

Businesses are the lifeblood of a market economy, and when they work to the benefit of everyone they are vital to building fair and prosperous societies. But when corporations increasingly work for the rich, the benefits of economic growth are denied to those who need them most. In pursuit of delivering high returns to those at the top, corporations are driven to squeeze their workers and producers ever harder – and to avoid paying taxes which would benefit everyone, and the poorest people in particular.

Corporations are where much of the world’s surplus (at least the surplus that is created within the bounds of capitalism) is both appropriated and distributed. In recent years, corporate profits have been rising because they’ve been able to squeeze their own workers, by forcing more of them to work not for themselves but for corporate giants and, when they do, paying them a smaller and smaller share of the value that is created. And corporations have managed to get even more of the surplus by squeezing small producers, who are forced to have the freedom to sell their goods and services to those corporations, and by using “their huge power and influence to ensure that regulations and national and international policies are shaped in ways that enable continued profitability.” Then, once they’ve managed to get more surplus, corporations have been able to keep more of it, by “paying as little tax as possible.” Finally, corporations have been “paying out an ever-greater share of these profits to the people who own them,” such that the small group of already-wealthy shareholders have been able to receive a large share of the surplus.

What we have then is a Second Gilded Age, “in which a glittering surface masks social problems and corruption.” And, of course, “once a fortune is accumulated or acquired it develops a momentum of its own.”

The huge fortunes we see at the very top of the wealth and income spectrum are clear evidence of the inequality crisis and are hindering the fight to end extreme poverty. But the super-rich are not just benign recipients of the increasing concentration of wealth. They are actively perpetuating it.

One way this happens is through their investments. As some of the biggest shareholders (particularly in private equity and hedge funds), the wealthiest members of society are huge beneficiaries of the shareholder worship that is warping the behaviour of corporations.

The end result is exactly what one would expect: “Eight men now own the same amount of wealth as the poorest half of the world.”

makers-and-takers

Like many liberal economic nationalists, who are concerned about both inequality and economic growth, Michael Lind attempts to make a distinction between “takers” and “makers.”

As against conservative economic nationalists, who blame immigrants and the welfare-dependent poor, Lind focuses his attention on the “rent-extracting, unproductive rich” for undermining the dynamism and fairness of contemporary capitalism.

The term “rent” in this context refers to more than payments to your landlords. . . “Profits” from the sale of goods or services in a free market are different from “rents” extracted from the public by monopolists in various kinds. Unlike profits, rents tend to be based on recurrent fees rather than sales to ever-changing consumers. While productive capitalists — “industrialists,” to use the old-fashioned term — need to be active and entrepreneurial in order to keep ahead of the competition, “rentiers” (the term for people whose income comes from rents, rather than profits) can enjoy a perpetual stream of income even if they are completely passive.

This is a familiar trope within economic discourse. As I’ve explained before (e.g., here and here), it relies on a distinction between productive and unproductive economic activities, which is then overlain with other dichotomies: active vs. passive, doing vs. owning, and so on. The idea is that one group—the passive, owning, recipients of rent—increasingly serve as a drag on the other group—the active, doing, recipients of profits.

If one or more of the sectors providing inputs or infrastructure to productive industry charges excessive rents, then industry can be strangled.  Industry cannot flourish if too much rent is paid to landlords, if credit is too expensive, if excessive copyright protections stifle the diffusion of technology. . .

All of this suggests that, if we want a technology-driven, highly productive economy, we should encourage profit-making productive enterprises while cracking down on rent-extracting monopolies, whether they are natural products of geography and geology (real estate and energy and energy and mineral deposits) or artificial (chartered banks, professional licensing associations, labor unions, patents and copyrights). This is a valid distinction between “makers” and “takers.”

fredgraph

Basically, Lind is privileging the profits that are received by productive capitalists from their supposed doing activities (the blue line in the chart above) and calling into question the profits that are received through the rent-seeking activities of financial capitalists (the red line in the chart above).

It’s a powerful idea, and one that—after the spectacular crash of 2007-08, the subsequent bailout of Wall Street, and the uneven recovery since then—stands to garner a great deal of attention and sympathy.

There are, however, two fundamental problems with Lind’s distinction between profit-oriented makers and rent-seeking takers.

First, Lind presumes that industrial capitalists would do more—more investing, and thus more job creating, more growth, and so on—if they had to pay lower rents to others, including rent-taking financial capitalists. While it is certainly the case that “industrialists” would have higher retained earnings if they distributed less of their profits in the form of rents (not only financial charges but also, as Lind explains, taxes, union wages, oil rents, healthcare premia, and so on), there’s no guarantee they would actually invest or accumulate more capital with those profits.

That is precisely the specter that is created when, as I explained the other day, the capitalist machine is broken. In recent decades, investment has increased much less than profits, thus calling into question the pact with the devil that historically has stood at the center of capitalism. Lind may be an economic nationalist but the industrialists he champions are not, and never have been.

The second problem is that Lind never offers an adequate explanation of where the profits of those industrial capitalists come from. He merely presumes they are the fair return to entrepreneurial, making activities.

But who is doing all that making—and who are the ones getting the profits? Non-financial corporate profits represent the extra value workers create during the course of producing commodities (both goods and services). The workers receive wages (more or less equal to the value of their labor power) and their employers receive the extra or surplus value those workers create (above and beyond the value of labor power). In other words, the profits of industrial capitalists stem from the exploitation of productive workers.

The surplus appropriated by the boards of directors of industrial capitalist enterprises is, in turn, distributed. One portion remains within those enterprises (in the form of retained earnings, executive and supervisory salaries, expenditures on new equipment and software, the hiring of additional workers, and so on), while another portion is distributed outside them (to shareholders, finance capitalists, merchants, the government, and so on). All of those payments—some of which Lind characterizes as profits, others as rents—represent distributions of the surplus.

In the end, then, there is no valid distinction between makers and takers. The appropriators of the surplus make nothing—and everyone who gets a cut of the surplus, in both industrial and financial enterprises, is a taker.

They are all, in Lind’s language, rich moochers who hurt America.

notwork1

Mainstream economists and economic commentators continue to invoke the so-called “dignity of work” to criticize the idea of a universal basic income.

It’s an argument I’ve dealt with before (e.g., here and here). As I see it, there’s nothing necessarily dignified about most people being forced to have the freedom to sell their ability to work to a tiny group of employers. The idea may be intrinsic to capitalism—but that doesn’t mean it contributes to the dignity of people who work for a living, especially when they have no control over how they work or what they produce when they work.

Matt Bruenig, to his credit, suggests an alternative argument against the critics of a universal basic income:

these writers dislike the fact that a UBI would deliver individuals income in a way that is divorced from working. Such an income arrangement would, it is argued, lead to meaninglessness, social dysfunction, and resentment.

One obvious problem with this analysis is that passive income — income divorced from work — already exists.

Bruenig is making a distinction between income related to work and income that comes from other sources—passive or not-work—which represents a fundamental divide within contemporary society.

As is clear from the data in the chart above, very little of the income (15 percent in 2014) of the bottom 90 percent of Americans stems from not-work (and, even then, most of their apparently not-work income is actually related to previous work, in the form of pension incomes). However, for the tiny group at the top, most of their income (59 percent for the top 1 percent, 75 percent for the top 0.01 percent) is related to not-working (and, of course, most of their work-related income is based on sole proprietorships and elevated executive salaries). In other words, most of their income represents a claim on the extra work performed by others.

So, when critics of a universal basic income rely on the “dignity of work” argument, what they’re really doing is reinforcing the idea that most people can and should derive dignity from working for a small group of employers. At the same time, critics are presuming there’s no loss of dignity for the tiny group at the top, those who have managed to capture most of their income from sources related not to their own work, but the work of everyone else.*

Where’s the dignity in that?

*Now, it’s true, as Noah Smith observes, “many rich people believe that investing constitutes work.” But spending a few minutes a day reading the business press and examining alternative investments does not constitute work—at least as most people understand what it means to work. Or are those rich people referring to the fact that they hire a whole host of other people, from financial advisors to accountants, to do the actual work of managing their not-work investments?

top1

Where does all the surplus in the U.S. economy go?

Well, a large chunk of it is captured by the top 1 percent, whose share of national income almost doubled between 1970 and 2014—from 11 percent to 20.2 percent.

Equally interesting is the composition of that growing share of national income, which we can decompose thanks to new data from Thomas Piketty, Emmanuel Saez, and Gabriel Zucman.

top1-lk

One way of making sense of the way the top 1 percent manages to capture a portion of the surplus is by distinguishing between a labor component (in shades of red in the chart above) and a capital component (in shades of green). Together, when calculated in terms of shares of national income, they represent the total share of national income that goes to the top 1 percent. (Thus, the top lines in the two charts are equal.)

The labor component comprises two categories: employee compensation (e.g., payments to CEOs and executives in finance) and the labor part of noncorporate business profits (e.g, partnerships and sole proprietorships). Capital income can be similarly decomposed into various categories: interest paid to pension and insurance funds, net interest, corporate profits, noncorporate profits, and housing rents (net of mortgages).

As can be seen in the chart above, by 2014 the top 1 percent derived over half of their incomes from capital-related sources. In earlier decades, from the late-1970s to the late-1990s, a much larger share of their income came from labor sources. They were the so-called “working rich.” This process culminated in 2000 when the capital share in top 1 percent incomes reached a low point of 49.4 percent. Since then, however, it has bounced back—to 58.6 percent in 2014. Thus, the “working rich” of the late-twentieth century may increasingly be living off their capital income, or are in the process of being replaced by their offspring who are living off their inheritances.

What this means, in general terms, is the growth of inequality over decades is due to the ability of the 1 percent to capture a large portion of the growing surplus. But there has also been a change in the nature of that inequality in recent years—which is not due to escalating wages at the top, but to a boom in income from the ownership of stocks and bonds. The high incomes of the “working rich,” it seems, have increasingly been used to purchase financial assets.

It looks then as if the working rich are either turning into or being replaced by rentiers—thus mirroring, after a short interruption, the structure of inequality last seen during the first Gilded Age.

and161202c_590_444

President-elect Donald Trump’s decision to bribe Carrier into keeping 800 manufacturing jobs in Indiana, instead of moving them to one of its Mexican plants, has met with opposition from mainstream economists, both liberal and conservative.

Clearly, it’s not about the size of the deal (although $7 million in incentives to keep less than one thousand jobs is a big deal). Carrier corporate parent United Technologies is still planning to outsource production that will eliminate 1300 jobs in Indiana. And 900 jobs make up a minuscule portion (0.17 percent, to be exact) of the total number of manufacturing jobs in that Midwestern state.*

No, mainstream economists’ opposition rests on other grounds. Justin Wolfers, for example, uses the silly analogy of a parking garage to defend the process of “creative destruction” and the idea that a “fluid labor market. . .is the secret of American dynamism.”

Think of the American economy as a 10-level parking structure or garage, where each car represents an active firm, and the seats in the car are the jobs available. A well-managed business like this is usually pretty full. But it’s also in a state of constant flux, with new cars entering as some people arrive, and previously parked cars leaving as others head home. Every hour, around a tenth of the cars leave the lot, just as a tenth of existing business establishments close each year and leave the labor market.

The deal at Carrier is akin to Mr. Trump’s intercepting a driver on his way to his car, and trying to persuade him to stay parked a little longer — perhaps by pointing to the enticing Christmas specials at the nearby stores.

Tyler Cowen, for his part, is worried that under a Trump administration, a kind of “crony capitalism”—where companies that are good to a presidency are rewarded—will prevail.

But it’s the response by Larry Summers that interests me the most, since he sees the “the negotiation with Carrier is a small thing that is actually a very big thing—a change very much for the worse with regards to the operating assumptions of American capitalism.”

Central to Summers’s argument is the distinction between two kinds of capitalism. One is “rule and law based,” which he believes is how American capitalism operates now.

Courts enforce contracts and property rights in ways that are largely independent of just who it is who is before them. Taxes are calculable on the basis of an arithmetic algorithm. Companies and governments buy from the cheapest bidder. Regulation follows previously promulgated rules. In the economic arena, the state’s monopoly on the use of force is used to enforce contract and property rights and to enforce previously promulgated laws.

The other is “deals based,” which is the world of New York City under Tammany Hall, of Suharto’s Indonesia, and of Putin’s Russia—and, it seems, under Trump.

Economic actors assume that they have to protect their property and do their own contract enforcement.  Tax collectors use discretion in assessing taxes.  Companies and governments buy from their friends rather than seek low cost bids.  Regulators abuse their power. The state’s monopoly on the use of force is used to enrich and satisfy the desires of those who control the apparatus of the state.

So, what’s the difference? Clearly, Summers is referring to variations on a theme: both are forms of capitalism.

As I see it, the difference between “rule and law based” capitalism and “deals based” capitalism comes down to whether the capitalist class as a whole or individual capitalists are the beneficiaries of state policies. In the former, the rules and laws, backed with the state’s monopoly on the use of force, are such that the capitalist class as a whole—although not necessarily any individual capitalist—has the right to appropriate the surplus and decide privately how to distribute it. They, as a class, are the winners (even when some of the individual capitalists lose out in competitive battles with other capitalists). In the latter, when deals are made with the government, once again backed by the state’s monopoly on the use of force, individual capitalists are picked out to be winners (or, if they’re on the wrong side of the deals, losers). But it’s still the case, even when ad hoc decisions are made, that the capitalist class as a whole is allowed to capture and distribute the surplus.**

In the end, maybe Justin Wolfers’s parking-garage analogy is the appropriate one. Under “rule and law based” capitalism, garage owners compete with one another under a general set of rules and regulations—and some will win while others lose. Under a “deals based” system, individual owners find themselves negotiating concessions with the government, which can decide who the individual winners and losers will be.

So, there are differences. But in both cases, the rest of us are forced to have the freedom to park our cars in garages that we neither own nor have any say in operating.

 

*As it turns out, Indiana is the state with the highest percentage of manufacturing jobs, at 16.8 percent. But the share of those jobs has fallen dramatically since 1990, when it was 24 percent.

in

**Another difference between the two systems is how the surplus is distributed and then spent. Under a “rule and law based” system, the state captures a portion of the surplus via taxes and then spends it to create the conditions under which the capitalism system as a whole is reproduced, while under a “deals based” system, individual capitalists can bribe the state with a portion of the surplus they appropriate from their workers and then receive concessions that pertain to them but not to other capitalists. In both cases, however, the surplus is used to protect capitalists’ property and enforce contracts—all the while backed by the state’s monopoly on the use of force.

alec

Alec Monopoly, “Flying Monopoly” (2015)

In the second installment of this series on “class before Trumponomics,” I argued that, in recent decades, while American workers have created enormous wealth, most of the increase in that wealth has been captured by their employers and a tiny group at the top—as workers have been forced to compete with one another for new kinds of jobs, with fewer protections, at lower wages, and with less security than they once expected. And the period of recovery from the Second Great Depression has done nothing to change that fundamental dynamic.

In this post, I want to focus on a more detailed analysis of the other side of the class relationship—capital.

fire

It should come as no surprise that one of the major changes in U.S. capital over the past few decades is the growing importance of financial activities. Since 1980, FIRE (finance, insurance, and real estate) has almost doubled, expanding from roughly 12 percent of the gross output of private industries to over 20 percent.

finance

And the rise in the share of corporate profits from financial activities was even more spectacular—from 10.8 percent in 1984 to a whopping 37.4 percent in 2002—and then falling during the crash, but still at a historically high 26.6 percent in 2015.

By any measure, U.S. capital became increasingly oriented toward finance beginning in the early 1980s—as traditional banks (deposit-gathering commercial banks), non-bank financial entities (especially shadow banking, such as investment banks, hedge funds, insurers and other non-bank financial institutions), and even the financial arm of industrial corporations (such as the General Motors Acceptance Corporation, now Ally Financial) absorbed and then profited by creating new claims on the surplus.

This process of “financialization” was the flip side of the decreasing labor share in the U.S. economy: On one hand, stagnant wages meant both an increasing surplus, which could be recycled via the financial sector, and a growing market for loans, as workers sought to maintain their customary level of consumption via increasing indebtedness. On the other hand, the production of commodities (both goods and services) became less important than capturing a portion of the surplus from around the world, and utilizing it via issuing loans and selling derivatives to receive even more.

international

Not only did finance become increasingly internationalized, so did the U.S. economy as a whole. As a result of employers’ decisions to outsource the production of commodities that had previously been manufactured in the United States and to find external markets for the sale of other commodities (especially services), and with the assistance of the lowering of tariffs and the signing of new trade agreements, the U.S. economy was increasingly opened up from the early-1970s onward. One indicator of this globalization is the increase in the weight of international trade (the sum of exports and imports) in relation to U.S. GDP—more than tripling between 1970 (9.33 percent) to 2014 (29.1 percent).

bank-concentration

The third major change in U.S. capital in recent decades is a rise in the degree of corporate concentration and centralization—to such an extent even the President’s Council of Economic Advisers (pdf) has taken notice. A wave of mergers and acquisitions has made firms larger and has increased the degree of market concentration within a broad range of industries. In finance, for example, the market share of the five largest banks (measured in terms of their assets as a share of total commercial banking assets) more than doubled between 1996 and 2014—rising from 23.2 percent to 47.9 percent.

airlines

The U.S. airline industry also experienced considerable merger and acquisition activity, especially following deregulation in 1978. The figure above (from a report by the U.S. Government Accountability Office [pdf]) provides a timeline of mergers and acquisitions for the four largest surviving domestic airlines—American, Delta, Southwest, and United—based on the number of passengers served. These four airlines accounted for approximately 85 percent of total passenger traffic in the United States in 2013.

profits-interest

Another piece of evidence that concentration and centralization have increased within the U.S. economy is (following Jason Furmanthe growing gap between corporate profits and interest-rates. The fact that corporate profits (as a share of national income, the top line in the chart above) have risen while interest-rates (the nominal constant-maturity 1-year rate estimated by the Federal Reserve, less inflation defined by the Consumer Price Index, the bottom line in the chart above) indicates that the portion of profits created by oligopoly rents has grown in recent decades.*

fire-mfg

Together, the three main tendencies I have highlighted—financialization, internationalization, and corporate rents—indicate a fundamental change in U.S. capital since the 1980s, which has continued during the current recovery. One of the effects of those changes is a decline in the importance of manufacturing, especially in relation to FIRE, as can be seen in the chart above. Manufacturing (as measured by value added as a percentage of GDP) has declined from 22.9 percent (in 1970) to 12 percent (in 2015), while FIRE moved in the opposite direction—from 14.2 percent to 20.3 percent. Quantitatively, the two sectors have traded places, which qualitatively signifies a change in how U.S. capital manages to capture the surplus. While it still appropriates surplus from its own workers (although now more in the production and export of services than in manufacturing), it now captures the surplus, from workers inside and outside the United States, via financial activities. On top of that, the largest firms are capturing additional portions of the surplus from other, smaller corporations via oligopoly rents.

13205

source

What we’ve witnessed then is a fundamental transformation of U.S. capital and thus the U.S. economy, which begins to explain a whole host of recent trends—from the decrease in rates of economic growth (since capital is engaged less in investment than in other activities, such as stock buybacks, hoarding profits in the form of cash, and mergers and acquisitions) to the rise in corporate executive pay in relation to average worker pay (which has ballooned, from 29.9 in 1978 to 275.6 in 2015).

What is clear is that the decisions of U.S. capital as it changed over the course of recent decades created the conditions for the crash of 2007-08 and the unevenness of the subsequent recovery, which culminated in the victory of Donald Trump in November 2016.

 

*Another way to get at these oligopoly rents is to distinguish between the capital share and the profit share. According to Simcha Barkai (pdf), the decline in the labor share over the last 30 years was not offset by an increase in the capital share, which actually declined. But it was accompanied by an increase in the profit share, due to a rise in mark-ups.

tumblr_njlqauv7dv1slixf5o1_1280

Special mention

188000_600 187968_600