Posts Tagged ‘workers’

growth

There is no doubt that, eight years after the crash of 2008, the world economy continues to stagnate. The problem of slow growth is confirmed by Joseph Stiglitz [ht: ja], who bases his argument on the latest report from the United Nations, World Economic Situation and Prospects 2016 (pdf). Thus, for example, the growth rate of developed economies, which averaged only 0.8 percent over the 2007-2014 period, was projected for 2015 to be 24 percent less than before the crash (and forecast to still be less than in 2007 for at least the next two years). For other groups of countries, the decline is even worse: 54 percent for developing countries and 132 percent for economies in transition.

A few days ago, I argued that slow growth was a fundamental problem for capitalism. The question is, why?

To be clear, there’s a reasonable argument to be made that we would all be better off with less or no growth. That’s certainly true for our natural environment, in terms of issues such as global warming, pollution, and so on. Fewer resources would be extracted; less energy would be needed, thus lowering the level of greenhouse gasses; and, in general, less environmental damage might be caused by our economic activities.

My argument, however, is about the predominant economic system in the world today. It is capitalism that has a slow-growth problem. And that’s because growth is both a premise and promise of a particularly capitalisy way of organizing our economic activities.

It is a premise in the sense that capitalists—the capitalist class as a whole, not necessarily individual capitalists—can collect and utilize for their own purposes more surplus-value when capitalism is growing—when productivity is high, when more commodities are being produced, when the economy as a whole is growing. There’s more surplus available, even if workers’ wages are rising, and individual capitalists can all get their aliquot share of that growing surplus.

Of course, capitalists can get more surplus even when the economy is not growing, or growing only slowly. But that requires additional measures, such as keeping wages low. If, for whatever reason, they’re able to keep workers’ wages from growing, then the difference between the value those workers produce and what they receive in income can still grow.

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And, as it turns out, capitalism has a way of keeping workers’ wages from rising: unemployment. According to the United Nations, just in the OECD countries, 44 million workers were unemployed in 2015, about 12 million more than in 2007. And one third of unemployed individuals were out of work for 12 months or more in the last quarter of 2014—a 77.2 percent increase in the number of long-term unemployed since the financial crisis hit.

One of the key premises of capitalism is that it provide sufficient jobs to employ everyone who wants to (and, of course, needs to) work. Clearly it hasn’t been able to do that in the years since the crash—and slow growth in the foreseeable future will maintain or even increase the existing “employment gap.”

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But, of course, the existence of a large number of unemployed workers has had the desired effect: real wages declined from 2008 onward and, even as they began to increase in 2015, they’re still far below what they were before the crash.

And while the decline in real wages certainly serve to increase profitability in the short run, it has also undermined the ability of workers to buy back the commodities they produce. That undercut the consumption contribution to growth. In turn, capitalists ahve been hesitant to continue to invest, which is lowering the investment component of growth.

That means we can expect little economic growth now and in the years to come. And, as I have shown, slow growth undermines both the premise and promise of capitalism.

CEOs

The typical American has no idea how much corporate CEOs make—but they still believe CEOs are making much too much.

That’s according to a new study from researchers at the Stanford Graduate School of Business (pdf):

Public frustration with CEO pay exists despite a public perception that CEOs earn only a fraction of their published compensation amounts. Disclosed CEO pay at Fortune 500 companies is 10 times what the average American believes those CEOs earn. The typical American believes a CEO earns $1 million in pay (average of $9.3 million), whereas median reported compensation for the CEOs of these companies is approximately $10.3 million (average of $12.2 million). . .

The vast majority (74 percent) of Americans believe that CEOs are not paid the correct amount relative to the average worker. Only 16 percent believe they are paid an appropriate amount.

Even more:

Nearly two-thirds (62 percent) of Americans believe that there is a maximum amount CEOs should be paid relative to the average worker, regardless of the company and its performance. . .

Those who believe in capping CEO pay relative to the average worker would do so at a very low multiple. The typical American would limit CEO pay to no more than 6 times (17.6 times, based on average numbers) that of the average worker. These figures are significantly below current pay multiples, which are approximately 210 times based on recent compensation figures.

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Back in 1930, John Maynard Keynes (pdf) famously predicted that over the next 100 years (and therefore for his contemporaries’ grandchildren) the amount of wealth produced would make it possible for people to devote less and less time to work—such that a 15-hour workweek would be standard. The problem, Keynes thus presumed, would not be to provide adequate living standards and work for people, but instead to find adequate ways of filling the growing number of hours of nonwork.

Keynes was, of course, wrong—not in terms of increasing wealth (which has steadily increased since his time) but with the workweek (which did decline until the mid-1970s but has held pretty steady since then.

“So,” Rebecca Stone [ht: ja] asks, “what happened? Why are people working just as much today as in 1970?”

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As it turns out, Benjamin Friedman has recently published an essay in which he attempts to understand how Keynes got it so wrong—in other words, why the possibility of less work has in fact become impossible. The key reason is that Keynes failed to allow for an increasingly unequal distribution of income. With a growing gap between a tiny group at the top and everyone else, real wages and thus median income basically stopped growing in the mid-1970s, which is “roughly coincident with the leveling off of the average workweek.”

Thus, Friedman concludes,

with widening income inequality in recent decades the failure of either the incomes or the consumption of most American families to keep up with the growth of U.S. output per capita bears directly on the initial accuracy but subsequent failure of Keynes’s prediction for work. Until the 1970s, Keynes was right on both fronts: per capita output grew at the upper end of the range he predicted, most families’ incomes grew even faster (inequality was mostly narrowing during that period), and the workweek continued to decline. But with widening inequality from the early 1970s on, the growth of most families’ incomes became far slower than he had predicted, and the workweek stopped declining. The latter combination has persisted ever since.

In other words, what Keynes did not understand is that workers don’t just produce wealth, which they can then enjoy by reducing the amount of work they do. They produce wealth that stands opposed to them, wealth in the form of capital, which is then used to render part of the working population superfluous, thus dragging down the wages of other workers, who are then employed to boost the profits of their employers. The workweek of the employed population doesn’t decrease, even as they are joined to new technologies and are transferred to new sectors of the economy.

Keynes’s grandchildren are in fact producing much more wealth. But the increasingly unequal way that wealth is apportioned across society renders impossible the possibility of shortening the time they work for their employers and increasing the hours of nonwork they can enjoy in their own pursuits.

Only a fundamental change in the way wealth is produced, and thus in the way the economy is organized, will make that possibility actually possible.

*Yes, I know Keynes was gay and, although he was married to Lydia Lopokova for 21 years, he didn’t have any children, let alone grandchildren.

Addendum

And Keynes wasn’t a very good currency trader either.

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The Silicon Valley elite really should know something about inequality. By far the most unequal counties in California—especially San Mateo—are those that encompass the high-tech cities of Silicon Valley.* And San Francisco (“where a two-bedroom condo in the Mission was on the rental market a few weeks ago for $10,500 a month and alleys all over downtown are dotted with makeshift homeless encampments”) is the city with the largest growth of inequality in the country.**

So, what do members of the Silicon Valley elite say about inequality? Well, venture capitalist Paul Graham has just published a lengthy essay on the value of increasing income inequality—and Gregory Ferenstein [ht: ms], who for the past five years has been collecting data on what Silicon Valley CEOs believe, confirms they hold “a set of views that are somewhat more nuanced than Graham’s, but also in agreement with his fundamental view of the world.”

And what is that view of the world? Here are excerpts from Graham’s essay:

Since the 1970s, economic inequality in the US has increased dramatically. And in particular, the rich have gotten a lot richer. Some worry this is a sign the country is broken.

I’m interested in the topic because I am a manufacturer of economic inequality. I was one of the founders of a company called Y Combinator that helps people start startups. Almost by definition, if a startup succeeds its founders become rich. And while getting rich is not the only goal of most startup founders, few would do it if one couldn’t.

I’ve become an expert on how to increase economic inequality, and I’ve spent the past decade working hard to do it. Not just by helping the 2500 founders YC has funded. I’ve also written essays encouraging people to increase economic inequality and giving them detailed instructions showing how.

So when I hear people saying that economic inequality is bad and should be decreased, I feel rather like a wild animal overhearing a conversation between hunters. But the thing that strikes me most about the conversations I overhear is how confused they are. They don’t even seem clear whether they want to kill me or not. . .

As a manufacturer of economic inequality, the underlying causes are something I know about. Yes, there are a lot of people who get rich through rent-seeking of various forms, and a lot who get rich by playing games that though not crooked are zero-sum. But there are also a significant number who get rich by creating wealth.

And that group presents two problems for the hunter of economic inequality. One is that variation in productivity is accelerating. The rate at which individuals can create wealth depends on the technology available to them, and that grows exponentially. The other problem with creating wealth, as a source of inequality, is that it can expand to accommodate a lot of people.

I’m all for shutting down the crooked ways to get rich. But that won’t eliminate great variations in wealth, because as long as you leave open the option of getting rich by creating wealth, people who want to get rich will do that instead.

Most people who get rich tend to be fairly driven. Whatever their other flaws, laziness is usually not one of them. Suppose new policies make it hard to make a fortune in finance. Does it seem plausible that the people who currently go into finance to make their fortunes will continue to do so but be content to work for ordinary salaries? The reason they go into finance is not because they love finance but because they want to get rich. If the only way left to get rich is to start startups, they’ll start startups. They’ll do well at it too, because determination is the main factor in the success of a startup. And while it would probably be a good thing for the world if people who wanted to get rich switched from playing zero-sum games to creating wealth, that would not only not eliminate great variations in wealth, but might even exacerbate them. In a zero-sum game there is at least a limit to the upside. Plus a lot of the new startups would create new technology that further accelerated variation in productivity. . .

While the surface manifestations change, the underlying forces are very, very old. The acceleration of productivity we see in Silicon Valley has been happening for thousands of years. If you look at the history of stone tools, technology was already accelerating in the Mesolithic. The acceleration would have been too slow to perceive in one lifetime. Such is the nature of the leftmost part of an exponential curve. But it was the same curve.

You do not want to design your society in a way that’s incompatible with this curve. The evolution of technology is one of the most powerful forces in history.

And he continues. I won’t bore you with the rest (although you’re welcome to read the essay in its entirety by following the link above). Suffice it to say, Graham believes that he and other high-tech investors and CEOs are the ones who, through their own hard work and determination, create most of the wealth and deserve the largest share of it.

It should come as no surprise that fellow investor Mark Suster, who carefully avoids denouncing Graham or his core beliefs, still felt it necessary to respond to the “social stream based on blogs written, retweets rendered and attaboys handed out” to Graham. Here are excerpts from his own post:

I found the conversation a bit disconcerting. Yes, income inequality exists and yes it’s a natural consequence of capitalism and other forms of government are decidedly worse than capitalism because they inefficiently create and allocate resources. But the celebratory nature of today’s conversation felt tone deaf and seemed to ignore the rules that get bent in favor of those with resources or born into privilege.

So instead of celebrating income inequality perhaps we would be a bit more compassionate about it.

Here are a few things on the topic worth pointing out, in no particular order. :

1. Founders start companies. They get huge tax breaks for doing so. They get to have “long-term capital gains” taxes which are much lower than short-term capital gains taxes paid by people who have stock options or income taxes paid to workers. In the old days this may have made sense since founders took huge economic risks and often refinanced houses or built companies with almost no money. These days founders often raise money with minimal time spent creating a company and often have salaries from the early days. I’m sure the tax gains of founders is dwarfed by the economic gains made by merely creating a company – but it is worth at least pointing out that this tax break exists. It is seldom ever mentioned.

2. VCs also get large tax breaks. Everybody knows this. We invest large sums of our after-tax money into our funds and this gets a long-term capital gain tax rate when we make a profit. Most people think this is fair. I dunno. To me it favors people like me with capital over those that are purely labor. I’m certainly not a socialist – but pointing out that tax rates favor me over somebody else I guess is just a fact. VCs also get capital gains tax rates on “carried interest,” which is what irritates the masses. Carried interest is the upside that VCs get after returning the money they raised – it is the VC “profit” if you will. The arguments against a lower tax rate is that this money isn’t really “at risk” and I tend to agree with that. On the other hand, I’m not convinced many founders have the same “at risk” capital as they once did. It seems to me that these are both forms of tax breaks that favor a small number of elite people. Of course “carried interest” tax breaks are more at risk than founder tax breaks. Maybe that’s as it should be. But what I really wanted to point out is what happens to the 99% of people who work in the startup industry – they get neither of these benefits …

3. Both of these privileged, very small group of people in 1 & 2, have much better tax rates than say, the third employee at a startup who might have joined 3 months after the founders. That employee was given “stock options,” which pay the exact same rate of taxes as income. In California considering state, federal and local taxes that can be as high as 56%. Think about it – if the first two employees work 6 years and sell a company while employee 3 works 5 years and 9 months … should they really pay grossly different tax rates? Of course if an employee “exercises” his or her options AND holds the stock more than one year then they are eligible to earn long-term capital gains. But this often requires relatively large sums of money and it implies writing a check in a company whose future is uncertain. That might actually seem fair. But ask yourself why employee three (and four and four hundred) has to write the check while employees 1 & 2 do not?

I wish founders, startup employees and VCs all paid the same rate of taxes. I also wish we paid the same amount of taxes as nearly any employee earning above-average income. But we all don’t and we’re not likely to fix any of that.

4. Luckily many, not all, tech employees in Silicon Valley earn good wages as a result of educations from top schools that allowed them access to this talent market. So if one works for several years at startups one can acquire wealth afforded to accomplished individuals. As a free-market capitalist this is as it should be and of course this in its own right creates a degree of income inequality that is tolerable. So these people invest some of their income in stocks. If they choose companies who pay high dividend rates they can accumulate wealth with lower taxes because dividends pay lower taxes than income. If they keep their hard-earned money in the stock market they can one day sell their stock and pay much lower taxes because – again – long-term capital gains pay lower tax rates.

5. Finally, if one is lucky enough to leave ones money in the stock market over the long-term this tends to yield better results than many other investment types. But. The system can be juiced in favor of capital over labor. How? Well, when corporations make profits they have lots of decisions about what to do with those profits. They can expand operations and hire more people creating more wealth for a larger pool of people. They can increase worker wages and hire more employees, which benefits labor. They can pay dividends as outlined above, which is paid a lower tax rate to people who have investment dollars. And they can buy back stock. With fewer shares in a company the price per share goes up and those that own stock in the company own a larger, usually more valuable stake. It’s a form of compensation from company to shareholders. And you guessed it – it benefits both people with large amounts of capital and those pay smaller tax rates than secretaries or any average worker in the company.

For Suster, it’s not just hard work and determination. Those at the top also enjoy a series of tax breaks the rest of us don’t have access to. And he’s worried that glibly celebrating inequality might have adverse consequences for their own place at the top.

Here’s what I find interesting in this exchange: while Graham celebrates the increase in inequality and Suster reveals some of the tax advantages those at the top are able to avail themselves of, neither seems to be able to imagine that workers—whether in the Silicon Valley companies they own or manage or in the outsourced companies where the coding and the production of high-tech gadgets take place—actually create the extra value investors, CEOs, and others manage to rake in.

That’s what the members of the Silicon Valley elite—and, for that matter, the economic elite in the country as a whole—ignore or overlook in their discussion of inequality. They really do believe that they create jobs through innovation and deserve to be rich (Graham), and in addition benefit from enormous tax breaks others don’t (Suster)—but, either way, they want to hang onto what they see as a libertarian high-tech startup environment that serves to “unleash our societal potential.” And they steadfastly refuse to see the role played by all the others, the workers who are forced to have the freedom to work directly or indirectly for one of their startups and are left behind as the value captured at the top continues to grow. What they reveal, and what Ferenstein confirms, is that the Silicon Valley investors and CEOs really do believe they alone are responsible for the growth of wealth attached to their companies. And if the gap between the top and bottom is growing, it’s because those at the top are that much more productive.

They all get what they deserve.

So, yes, the members of the elite do in fact see the growing inequality, in their own counties and cities as well as in the country as a whole, but they can’t see that the current set of economic arrangements systematically rewards a few at the top based on the work performed by everyone else.

As Ferenstein explains,

fundamentally, Paul Graham is not much of an outlier among Silicon Valley’s elites when it comes to the relationship between ability and financial rewards. Most successful technology moguls know better than to be as blunt as Graham, but deep down a lot of them believe that a small minority — like them — create a hugely disproportionate share of the world’s wealth.

 

*In San Mateo the top 3.6 percent claimed over $18 billion in income, or 48 percent of the county’s total income pie. Meanwhile the bottom 48 percent made by with only $3.6 billion in income split among themselves. For the bottom 48 percent the mean income level was $22,000. The top 3.6 percent had a mean income of $1.5 million.

**San Francisco comes out on top when comparing the 2012 ratio between what the rich and poor earn (16.6) to the same ratio from 2007 (12.7). No other city saw the gap grow that much.

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Special mention

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Special mention

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How could you design a fundamentally unhealthy healthcare system? On one hand, have healthcare and health insurance provided by private, for-profit companies; on the other hand, make sure the rest of the private economy keeps workers’ wages and salaries from increasing.

The result of such a system would be that healthcare costs and insurance premiums continue to increase and workers can’t pay their medical bills.

And, of course, as a new study by the Kaiser Family Foundation and the New York Times confirms, that’s exactly what has happened in the U.S. healthcare system.

Overall, about a quarter (26 percent) of U.S. adults ages 18-64 say they or someone in their household had problems paying or were unable to pay medical bills in the past 12 months.

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Not surprisingly, problems paying medical bills are more common among people with lower or moderate incomes, with high deductibles, and with some kind of disability.

Insurance status also has a strong association with medical bill difficulties, with over half (53 percent) of the uninsured saying they had problems paying household medical bills in the past year. However, as previous surveys have shown, insurance is not a panacea against these problems. Roughly one in five of those with health insurance through an employer (19 percent), Medicaid (18 percent), or purchased on their own (22 percent) also report problems paying medical bills. In fact, overall among all people with household medical bill problems, more than six in ten (62 percent) say the person who incurred the bills was covered by health insurance, while a third (34 percent) say that person was uninsured.

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In fact, many of those with medical bill problems report struggling with bills less than $5000, including 24 percent of the insured and 22 percent of the uninsured who say their bills amounted to less than $1,000. While these lower amounts may seem small, even a bill of $500 or less can present a major problem for someone who is living paycheck to paycheck. In fact, when asked to describe their financial situation, about six in ten (61 percent) of those who’ve had problems paying medical bills say they either just meet their basic expenses (43 percent) or don’t have enough to meet basic expenses (18 percent).

The survey also shows that medical bill problems can have real and lasting impacts on individuals and families in terms of their standard of living, their financial stability, and their ability to access needed health care. While insurance provides some protection against incurring medical bill problems in the first place, once these problems occur, the effects on individuals and families are often as serious for the insured as they are for the uninsured.

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The problem of affordability stems from the combination of rapidly rising healthcare and insurance costs and slowly rising incomes, both of them a product of the way our economy is currently organized.

Clearly, we need a much better prescription for our unhealthy healthcare system.