Posts Tagged ‘wages’

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.”

The historically low black unemployment rate is one of Donald Trump’s favorite applause lines. Even Reuters [ht: ja] declares that Trump is right.

It doesn’t seem to matter that most of the decline in the unemployment rate for African American workers (from a high of 16.5 percent in the beginning of 2010 to a low of 6.3 percent today) occurred before Trump was ever elected.

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What does matter is that, even as the rate has dropped (the purple line in the chart above), black workers’ pay (the green line) has barely changed. After falling precipitously (by 10 percent, from the end of 2009 to the middle of 2015), it has only increased slightly (by 3.8 percent). Overall, the real wages of black workers have actually declined (by 6.5 percent, between the end of 2009 to today).

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White workers have suffered much the same fate. While the unemployment rate (the red line in the chart above) has declined dramatically (from a high of 9.1 percent at the end of 2009 to 3.4 percent today), white workers’ real wages (the blue line) have been stagnant—rising by only 1.4 percent (from the beginning of 2009 to today).

Today, black workers are earning $19 less per week (compared to their peak at the end of 2009), while white workers take home only $5 more per week (from their peak in the beginning of 2009)—even though the unemployment rate for both groups of workers has reached historically low levels.

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Meanwhile, the real beneficiaries of the current recovery—under both Trump and his predecessor—have been the employers of those workers, black as well as white. U.S. corporate profits continue to reach new historical records (soaring 172 percent from their low at the end of 2008, and 35.8 percent overall since the end of 2006).

American corporations are only too happy to hire workers, regardless of race or ethnicity, as long as their profits grow.*

That’s how the U.S. economy works today: the unemployment rates fall to record lows but workers’ pay barely budges. And an increasing portion of the value workers create fills corporate coffers.

In the end, that’s Trump’s real gift—to use everything in his power to direct attention away from the fact that all workers are being left behind.

 

*And when corporations decide they can’t make enough profits by hiring American workers, they lay them off and relocate production elsewhere. That’s what General Motors just did, eliminating 15 percent of its salaried workforce—destroying some 14,000 jobs—and halting production at five of its North American auto plants. As Christopher Ingraham explains,

That combination of unemployed workers and happy investors underscores a key point about the modern American economy: What’s good for corporate profits isn’t necessarily good for workers.

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Those aren’t my words. The quotation that forms the title of this post is from a recent Federal Reserve Bank of St. Louis blog post.

And they’re important to keep in mind in light of the news coverage (e.g., by the New York Times) of last week’s Labor Department report on hiring and unemployment. Yes, 250 thousand jobs were added in the U.S. economy last month and average earnings did rise by 0.2 percent and are up 3.1 percent over the past year.

But. . .

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The rate of growth of American workers’ wages (the blue line in the chart above) is only a hair above the increase in consumer prices (the red line). So, for all intents and purposes, real wages remain stagnant.

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Meanwhile, the profits captured by American corporations continue to grow, reaching new record highs.

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It should come as no surprise, then, that the labor share of national income (the light blue line in the chart above) remains below its pre-crash level (and much lower than any earlier year in postwar history), while the share of national income that is distributed to wealthy households in the form of dividends (the light green line) is still much higher than it’s been throughout the postwar period.

Never have corporate profits and dividends outgrown workers’ wages so clearly and for so long. And the political party dominating all three branches of the U.S. government is doing everything in its power to make sure that trend continues.

That’s the proper context for the latest jobs report—and for tomorrow’s elections across America.

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No, the stock market is not predictable. And no one knows the exact causes of last week’s carnage on Wall Street—with the Dow down 4.2 percent, the S&P 4.1 percent and the Nasdaq 3.7 percent, representing their worst weekly performances since March.

But the precipitous fall in all major indices, which many analysts blamed at least in part on the earnings blackout period, did serve to highlight one of the factors that has been driving the bull market: corporations purchasing their own stock.

As Matt Phillips explained,

When companies have more cash than they believe they can use productively, they typically return it to shareholders either with cash payments—known as dividends—or by repurchasing shares in the market. Buybacks raise demand, putting upward pressure on share prices.

Such repurchases have boomed this year as the strong economy—and steep cuts in corporate tax rates—have left American companies flush with profits. Companies including Apple, Cisco Systems and Amgen have returned billions in cash to shareholders by buying back shares. Apple is responsible for the largest sum, spending nearly $64 billion on buybacks in the 12 months ending in June 2018, the last period for which full data is available, according to data from S&P Dow Jones Indices.

Generally, around earnings reporting season, corporations avoid repurchasing their own stocks, to avoid the appearance of insider trading. And, without those corporate buybacks, it seems the stock market has fallen off a cliff various times already this year.

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But the overall trend is for U.S. corporations to spend (or to leverage, via debt) a large portion of their profits on buying their own stocks—with plans to spend $770 billion on share buybacks in 2018, and even more next year.*

And when they cut back on those purchases, as they seem to have done last week, a large part of the demand for stocks collapses.

The fact is, corporations have three major ways of goosing their golden goose, which they and a small group of wealthy households in the United States benefit from.

First, employers endeavor to keep workers’ wages low, even as productivity increases, thereby boosting their pretax profits (of which they then distribute a portion in the form of salaries to their CEOs and dividends to stockowners).

Second, corporations lobby for tax breaks on their profits, an effort that once Donald Trump was elected delivered a slashing of the tax rate, from 35 percent to 21 percent.

Third, businesses use a portion of those higher post-tax profits to purchase their own stocks, which tends to boost the price of shares, producing additional wealth for shareholders who hang onto their stock. It also improves per-share performance on key metrics like earnings, which in turn attracts more stock purchases from other institutional and noninstitutional investors with their own growing share of the surplus.**

The result, of course, is an increase in the already-obscene degree of income and wealth inequality in the United States.

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According to my calculations (illustrated in the chart above), the top 1 percent in the United States owns (as of 2014, the last year for which data are available) 62 percent of equities, which has been climbing since the late 1970s. Meanwhile, the share of the entire bottom 90 percent has been falling, and is now only 11 percent.

So, it’s really only the small group at the top that is in a position to receive a cut of corporate profits in the form of dividends and to increase their wealth as corporate buybacks boost the prices of the stocks they keep in their portfolios.

Everyone else is forced to have the freedom to try to get by on their stagnant wages—and to watch with both fascination and horror the ongoing spectacle in the Trump White House.

 

*For most of the twentieth century, stock buybacks were deemed illegal because they were thought to be a form of stock market manipulation. But since 1982, when they were essentially legalized by the Securities and Exchange Commission, buybacks have become perhaps the most popular financial engineering tool in the American corporate tool shed.

*According to the S&P Dow Jones Indices, the top 100 stocks with the highest buyback ratios in the S&P 500 have regularly outperformed the overall S&P 500 index (as seen in the chart below).

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