Reports from the Economic Front

by Martin Hart-Landsberg

The Way Forward

without comments

Floyd Norris, writing in the New York Times, summarizes key economic trends as follows:

Corporate profits are at their highest level in at least 85 years. Employee compensation is at the lowest level in 65 years.

The Commerce Department last week estimated that corporations earned $2.1 trillion during 2013, and paid $419 billion in corporate taxes. The after-tax profit of $1.7 trillion amounted to 10 percent of gross domestic product during the year, the first full year it has been that high. In 2012, it was 9.7 percent, itself a record….

Before taxes, corporate profits accounted for 12.5 percent of the total economy, tying the previous record that was set in 1942, when World War II pushed up profits for many companies. But in 1942, most of those profits were taxed away. The effective corporate tax rate was nearly 55 percent, in sharp contrast to last year’s figure of under 20 percent.

The Commerce Department also said total wages and salaries last year amounted to $7.1 trillion, or 42.5 percent of the entire economy. That was down from 42.6 percent in 2012 and was lower than in any year previously measured.

Including the cost of employer-paid benefits, like health insurance and pensions, as well as the employer’s share of Social Security and Medicare contributions, the total cost of compensation was $8.9 trillion, or 52.7 percent of G.D.P., down from 53 percent in 2012 and the lowest level since 1948.

Benefits were a steadily rising cost for employers for many decades, but that trend seems to have ended. In 2013, the figure was 10.2 percent, the lowest since 2000.

Norris’s article also includes the following chart which presents after-tax corporate profits, effective corporate tax rates, employee compensation, and changes in the S&P index by presidential term.   

table

Two things are worth highlighting.

First, the steady climb in the ratio of after-tax corporate profits to GDP over the Clinton, Bush, and Obama administrations.  The ratio is now at a record high.

Second, the decline in employee compensation as a share of GDP.  This ratio has tumbled to a post-Truman low.

These pre-and after-tax profit and compensation trends are no accident.  They are the result of economic policies which had as their primary goal the enhancement of corporate profitability.  These policies include:

  • Corporate tax cuts
  • Free Trade Agreements designed to promote the globalization of production and finance
  • Financial sector liberalization
  • Labor law reforms designed to weaken worker organizing and collective action
  • Privatization of government services
  • Cuts in and the tightening of eligibility standards for social programs
  • Public sector bailouts and subsidization of private sector activities.

Unfortunately, while these policies succeeded brilliantly in achieving their goal, success has come at high social cost.  They have worsened living and working conditions for growing numbers of people as well as the overall health of the economy.

The following four charts, published by Doug Henwood on his Left Business Observer blog, offer one window on the weakened state of our economy.  The charts show the real movement of GDP, Consumption, Investment, and Government Spending through the end of 2013 relative to their respective long term trends (1970-2007).

gdp-components

Henwood comments:

Note how things fell off a cliff in the recession. GDP, consumption, and government spending are all about 15% below where they’d be had they continued to grow in line with their long-term trend. (The hysteria over out-of-control government spending looks ludicrous in the light of this graph.) Investment is about 25% below where it “should” be thanks largely to the housing collapse, though it’s staging something of a recovery. The other components have yet to begin closing the gap, because the recovery’s been so weak.

The economy’s weak five year expansion has existed comfortably with record profits (and a growing concentration of income and wealth) because the policies which helped to secure the latter tend, by their nature, to weaken economic fundamentals. Think tax cuts, bailouts, free trade agreements, privatization, and the like.

In short, as long as both political parties prioritize corporate profits, we can expect bipartisan support for current policies and thus a continuation of socially negative trends.  There is no way forward for the majority of Americans without a fundamental shift in priority and policies.

Overwork And Its Costs

without comments

Americans with jobs tend to work long hours. Of course, averages can be deceiving, masking the fact that some people work too much while others work too little. 

Still, the following chart from the Economist magazine makes one thing clear: on average, U.S. workers with jobs put in more hours per year than workers in most OECD countries. In 2012, only Greece, Hungary, Israel, Korea, and Turkey recorded a longer work year per employed person.

working_hours_picture

A long work year is nothing to celebrate. The following chart, from the same Economist article, shows there is a strong negative correlation between yearly hours worked and hourly productivity.

working_hours_picture_1_2

More importantly, the greater the number of hours worked per year, the greater the likelihood of premature death and poor quality of life.  This reality is highlighted in the following two charts taken from an article by Angus Chen titled “8 Charts to Show Your Boss to Prove That You Can Do More By Working Less.”

health

well-being

In sum, we need to pay far more attention to the organization and distribution of work, not to mention its remuneration and purpose, than we currently do.

Written by marty

April 5th, 2014 at 10:43 pm

Job Creators No More

without comments

Corporate profits as a share of GDP are way up.  This is supposed to be good for all of us—higher profits, we are told, means greater investment and job creation.

Unfortunately, this is not what is happening.  Investment as a share of GDP is down.  Job creation is anemic.

The reality is that corporations no longer appear interested in channeling their earnings into productive activities.  As the charts below highlight, they are increasingly content to use their profits to purchase stock, including their own stock.

The charts were republished by Yves Smith in her blog Naked Capitalism from the Financial Times. The first shows the growth of stock purchases by non-financial corporations.

Chart-1-US-Sector-Net-Buying-of-Equities-600x410

As Smith explains:

Notice that US corporations have been buyers in aggregate since 1985. Now admittedly, that does not mean they stopped investing, since the primary source of investment capital is retained earnings, and companies also typically prefer to borrow rather than issue stock. But as of the 1980s, they were already preferring buying stocks (then mainly of other companies rather than their own, as in acquisitions) to the harder work of expanding their business de novo. Deals are much sexier than building factories or sweating new product launches.

But by the mid 2000, companies had indeed shifted to being net savers rather than net borrowers, which was an unheard of behavior in an expansion. That is tantamount to disinvesting.

The second chart reveals the new corporate orientation even more clearly, with corporate profits increasingly channeled into stock purchases rather than productive investment.

Chart-3-US-Nonfinancial-Companies-Investment-and-Buybacks-600x413

This corporate behavior is highly beneficial for both managers whose salaries are tied to the stock prices of their respective firms and those few at the top of the income scale who own a commanding share of the country’s capital assets.  As for the rest of us . . . well, it’s a bad deal.   

Written by marty

March 28th, 2014 at 9:54 am

America: Land Of The Surveilled and Imprisoned

without comments

America stands out for the high share of its labor force that is employed in what economists Samuel Bowles and Arjun Jayadev call “guard labor.”

There are now more people working as private security guards than high school teachers.

The following graph highlights the number of “protective service workers” employed per 10,000 workers and the degree of income inequality in the year 2000 for 16 countries.  The United States is tops on both counts.

17greatdivide-img-tmagArticle-v3

Two things stand out from this graph beyond U.S. “leadership.”  The first is the relationship between the share of protective service workers and inequality.  As Bowles and Jayadev comment:

In America, growing inequality has been accompanied by a boom in gated communities and armies of doormen controlling access to upscale apartment buildings. We did not count the doormen, or those producing the gates, locks and security equipment. One could quibble about the numbers; we have elsewhere adopted a broader definition, including prisoners, work supervisors with disciplinary functions, and others.

But however one totes up guard labor in the United States, there is a lot of it, and it seems to go along with economic inequality. States with high levels of income inequality — New York and Louisiana — employ twice as many security workers (as a fraction of their labor force) as less unequal states like Idaho and New Hampshire.

When we look across advanced industrialized countries, we see the same pattern: the more inequality, the more guard labor. As the graph shows, the United States leads in both.

The second is the rapid rise in the U.S. share of guard labor and inequality from 1979 to 2000.

For those who like definitions: The category protective service workers includes those employed as Private Security Guards, Supervisors of Correctional Officers, Supervisors of Police and Detectives, Supervisors of all other Protective Service Workers, Bailiffs, Correctional Officers and Jailers, Detectives and Criminal Investigators, Fish and Game Wardens, Parking Enforcement Workers, Police and Patrol Officers, Transit and Railroad Police, Private Detectives and Investigators, Gaming Surveillance Officers, and Transportation Security Screeners.  Inequality is measured by the gini coefficient; the higher the number the greater the degree of inequality.

As noted above Bowles and Jayadev have explored broader measures of guard labor.  One such measure adds members of the armed forces, civilian employees of the military, and those that produce weapons to those employed as protective service workers.  The total was 5.2 million workers in 2011.

One can only wonder in what ways and for whom this large and growing dependence on guard labor represents a rational use of social resources.

Capitalism And Inequality

without comments

Thomas Piketty is an expert on income inequality.  He and Emmanuel Saez have produced some of the best work measuring its explosive growth.

Piketty has just published a massive new book on the subject called “Capital in the Twenty-First Century.”  A New York Times review of it by Eduardo Porter begins as follows:

What if inequality were to continue growing years or decades into the future? Say the richest 1 percent of the population amassed a quarter of the nation’s income, up from about a fifth today. What about half?

To believe Thomas Piketty of the Paris School of Economics, this future is not just possible. It is likely. . . .

His most startling news is that the belief that inequality will eventually stabilize and subside on its own, a long-held tenet of free market capitalism, is wrong. Rather, the economic forces concentrating more and more wealth into the hands of the fortunate few are almost sure to prevail for a very long time.

Piketty’s pessimistic view is based on his argument that income generated from capital normally grows faster than the economy or income from wages.  This means that the private owners of capital benefit disproportionately from growth, which makes it easier for them to increase their asset holdings and by extension future income.  And, since wealth and income translate into political power, we face a self-reinforcing dynamic leading to ever growing inequality.

Porter provides some charts taken from Piketty’s work illustrating the rise in private wealth as a share of national income and the growth in inequality in several countries.

Eric Toussaint, a Belgian political economist and president of the Committee for the Abolition of Third World Debt, has a longer more substantial review of the book, in which he shares the following table from Piketty.

The unequal ownership of capital in Europe and the United States

Share of different groups in the total amount of wealth Europe 2010 United States 2010
Richest 10% 60% 70%
(richest 1% alone) 25% 35%
(next 9%) 35% 35%
Middle 40% 35% 25%
The poorest 50% 5% 5%


One thing that jumps out of this work is that a serious wealth tax is capable of generating substantial funds that could be used to support public services. 

Piketty’s work also suggests that embracing a system based on maximizing the returns to private owners of capital is a mistake for the great majority of working people.

A recent study by the investment bank Credit Suisse provides more evidence for this conclusion.  As Michael Burke explains,

the study . . . shows that long-term growth rates of GDP in selected industrialized economies are negatively correlated with financial returns to shareholders.

That is, the best returns for shareholders are from countries where GDP growth has been slowest, and vice versa. Where growth has been strongest, shareholder returns are weakest. . . .

The negative correlation does not prove negative causality. But it does support the theory which suggests that the interests of shareholders are contrary to the interests of economic growth and the well-being of the population.

Here is a chart taken from the study which highlights the negative correlation found by the Credit Suisse researchers.

mb

 All this information is worth keeping in mind the next time business and political leaders tell us that the key to our well-being is boosting business confidence, the market, or private returns on investment.

Written by marty

March 12th, 2014 at 12:28 am

Tax Tricks And Globalization

without comments

Globalization offers companies many ways to boost profits at the public expense.  A case in point: they can use differences in national tax laws to slash their taxes.

Google, Apple, and Microsoft are among the most skilled at this, although they are far from alone.

For example, a recent report on Google’s tax strategy, which takes advantage of differences between U.S. and Irish tax regimes, highlights what is at stake:

The Financial Times reports that … Google Netherlands Holdings … received €8.6bn in royalties from Google Ireland Ltd and €232.8m in royalties from Google’s Singapore operation. All but €10.4m of this was paid out to Google Ireland Holdings, a company that is incorporated in Ireland but technically controlled in Bermuda, where there is no corporation tax.

The FT says that differences between the Irish and US tax codes mean that this dual-resident company is viewed as Irish for US tax purposes but Bermudan for Irish purposes. It acquired much of Google’s intellectual property in 2003, which it licensed to Google Ireland Ltd, a Dublin-based business that is at the heart of its global operation. The business, which employed 2,199 people last year, paid €17m in Irish corporation tax, having reported pre-tax profits of €153.9 on turnover of €15.5bn. . . .

Google’s provision of €17m in corporate tax in 2012 to Ireland on the foreign net income of $8.1bn it booked in Ireland, gave an effective tax rate of 0.21%.

Google’s foreign-paid tax rate in 2012 was 4.4%.

Pretty complex stuff—but that isn’t surprising.  A lot of money is at stake and the companies can afford to hire the best legal and financial help.

What is critical to understand is that governments are well aware of these corporate maneuvers and have done nothing to end them while simultaneously demanding cuts in public services because of a lack of tax revenue.

These maneuvers are so widely employed that the IMF decided to provide the following explanation of one of the most popular–the “Double Irish Dutch Sandwich” tax avoidance strategy–in its October 2013 Fiscal Monitor:

tax tricks

  • Here’s how it works (Figure 5.1 above): Multinational Firm X, headquartered in the United States, has an opportunity to make profit in (say) the United Kingdom from a product that it can for the most part deliver remotely. But the tax rate in the United Kingdom is fairly high. So . . .
  • It sells the product directly from Ireland through Firm B, with a United Kingdom firm Y providing services to customers and being reimbursed on a cost basis by B. This leaves little taxable profit in the United Kingdom.

Now the multinational’s problem is to get taxable profit out of Ireland and into a still-lower-tax jurisdiction.

  • For this, the first step is to transfer the patent from which the value of the service is derived to Firm H in (say) Bermuda, where the tax rate is zero. This transfer of intellectual property is made at an early stage in development, when its value is very low (so that no taxable gain arises in the United States).
  • Two problems must be overcome in getting the money from B to H. First, the United States might use its CFC rules to bring H immediately into tax*.
  • To avoid this, another company, A, is created in Ireland, managed by H, and headquarters “checks the box” on A and B for U.S. tax purposes. This means that, if properly arranged, the United States will treat A and B as a single Irish company, not subject to CFC (controlled foreign corporation) rules, while Ireland will treat A as resident in Bermuda, so that it will pay no corporation tax. The next problem is to get the money from B to H, while avoiding paying cross-border withholding taxes. This is fixed by setting up a conduit company S in the Netherlands: payments from B to S and from S to A benefit from the absence of withholding on nonportfolio payments between EU companies, and those from A to H benefit from the absence of withholding under domestic Dutch law.

This clever arrangement combines several of the tricks of the trade: direct sales, contract production, treaty shopping, hybrid mismatch, and transfer pricing rules.

*The United States will charge tax when the money is paid as dividends to the parent—but that can be delayed by simply not paying any such dividends. At present, one estimate (cited in Kleinbard, 2013) is that nearly US$2tn is left overseas by US companies.

In considering the financial significance of these types of tax maneuvers, Finfacts Ireland notes:

The IMF says that assessing how much revenue is at stake is hard. For the United States (where the issue has been most closely studied), an upper estimate of the loss from tax planning by multinationals is about US$60 billion each year – - about one-quarter of all revenue from the corporate income tax (Gravelle, 2013). In some cases, the revenue at stake is very substantial: IMF technical assistance has come across cases in developing countries in which revenue lost through such devices is about 20% of all tax revenue.

In short, globalization dynamics tend to boost profits at the public expense.  We need to be resisting rather than strengthening them.

The Art Of Research

without comments

There is serious research and then there is obfuscation that poses as serious research.

I am spending time in Dublin, Ireland, learning about developments here.  One thing that is obvious is that the Irish government remains committed to a growth strategy based on using low taxes and low wages to attract foreign investment.

Other European governments are not pleased with Ireland’s low tax strategy.  They accuse the Irish government of promoting a tax race to the bottom.  Interestingly, no one seems to object to the low wage part of the country’s policy.

During a recent visit to Paris, the Irish prime minister, in the words of the Irish Times:

faced repeated questions over the decision of US internet giant Yahoo to transfer its finance operations from France to Ireland.

Mr Kenny [the Irish Prime Minister] quoted a report by consultants PwC [PricewaterhouseCoopers] and the World Bank Group which found Ireland’s effective corporate tax rate was about 11.9 per cent, higher than France’s effective rate of 8.2 per cent.

This is all well and good, except it appears that the report is based on some strange assumptions.  As the Irish Times article goes on to note:

A research paper by Prof James Stewart, professor in finance at Trinity College Dublin, . . . challenges Government claims that effective corporate tax rates in Ireland are just below the headline rate of  12.5 percent.

Instead, [Stewart’s] study suggests Ireland’s effective tax rate for American firms is similar to jurisdictions regarded as tax havens such as Bermuda, based on latest US Bureau of Economic Analysis statistics.

Stewart found that the PwC/World Bank study based its analysis of Irish tax policy on a “hypothetical Irish company that sells ceramic flower pots and has no imports or exports.”  Such a company is hardly the best starting point for an investigation of Ireland’s tax treatment of multinational corporations.

Another Irish Times article discusses Stewart’s research results in more detail:

“It is surprising that this [PwC/World Bank] study is frequently cited by Irish Government sources to the effect that effective tax rates in Ireland are not that different or even higher than in other EU countries,” Prof Stewart’s research paper states.

Publicly available data which shows corporate tax payments and profits on a consistent basis across countries is not widely available, according to the paper. However, one such data source is the US Bureau of Economic Analysis which, Prof Stewart maintains, provides a more accurate estimate of effective tax rates for US subsidiaries.

This indicates that effective tax rates for US subsidiaries in Ireland fell from 5.5 per cent in 2006 to 2.2 per cent in 2011.

This reduction is likely to be linked to wider use of tax write-offs – such as tax credits for research and development activity – and profit-shifting measures such as the “double Irish”.

Google is one of the most high-profile beneficiaries. Latest figures indicate that its Irish operation had revenues of €15.5 billion during 2012. However, it ended up paying Irish corporation taxes of just €17 million.

That’s because it charged “administrative expenses” of almost €11 billion to other Google entities abroad, some of which are ultimately controlled from tax havens such as Bermuda. . . .

By contrast, effective rates were many times higher for US firms in the UK (18.5 per cent), Germany (20 per cent) and France (35.9 per cent).

I guess one cannot blame the Irish government for trying to have it both ways—offer low rates while denying it.  But what is one to make of the research done by PwC/World Bank?  The study’s core deceptive assumption brings to mind all the World Bank and U.S. government studies of free trade agreements which find that free trade benefits all.  They obtain this result in large part because their researchers begin their work assuming full employment, balanced trade, and no capital mobility both before and after the agreements.

 

Written by marty

February 14th, 2014 at 3:45 am

Inequality and Capitalism

without comments

Capitalism is a dynamic system, driven above all by the private pursuit of profit.  Contemporary business decisions, supported by government polices, have been very successful in generating high rates of profit. They have also led to slow and unstable growth.  One consequence is the now widely recognized problem of income inequality.

Significantly, this income inequality is reshaping our economy in ways likely to be self-reinforcing.  This is highlighted by the concentration of consumer spending in ever fewer hands and the business response.

According to a study discussed in a recent New York Times article,

The top 5 percent of earners accounted for almost 40 percent of personal consumption expenditures in 2012, up from 27 percent in 1992. Largely driven by this increase, consumption among the top 20 percent grew to more than 60 percent over the same period.

Thus, by 2012 the top 5 percent of earners were responsible for approximately the same share of personal consumption expenditure as the bottom 80 percent.

If we focus on the post-recession period, the spending dominance of those at the top is even more striking.  As the article notes, “Since 2009, the year the recession ended, inflation-adjusted spending by this top echelon has risen 17 percent, compared with just 1 percent among the bottom 95 percent.”  More broadly, the top 20% of households accounted for approximately 90% of the total increase in real consumption spending over the years 2009 to 2012.

Not surprisingly, this trend has triggered major changes in the economy.  In particular, businesses that cater to “middle-income” earners are in decline while those selling to high and low income earners are rapidly expanding:

In Manhattan, the upscale clothing retailer Barneys will replace the bankrupt discounter Loehmann’s, whose Chelsea store closes in a few weeks. Across the country, Olive Garden and Red Lobster restaurants are struggling, while fine-dining chains like Capital Grille are thriving. And at General Electric, the increase in demand for high-end dishwashers and refrigerators dwarfs sales growth of mass-market models. . . .

In response to the upward shift in spending, PricewaterhouseCoopers clients like big stores and restaurants are chasing richer customers with a wider offering of high-end goods and services, or focusing on rock-bottom prices to attract the expanding ranks of penny-pinching consumers.

“As a retailer or restaurant chain, if you’re not at the really high level or the low level, that’s a tough place to be,” Mr. Maxwell [head of the global retail and consumer practice at PricewaterhouseCoopers] said. “You don’t want to be stuck in the middle.” . . .

The effects of this phenomenon are now rippling through one sector after another in the American economy, from retailers and restaurants to hotels, casinos and even appliance makers.

As for the self-reinforcing nature of this development: luxury spending tends to have the highest profit mark-up, thereby boosting the incomes of those at the top.  And low-end businesses prosper only because they underpin their low prices with ever lower wages.  In sum, structural changes are well underway that, if not opposed, are likely to lock-in this growing income inequality to the detriment of most working people.

Written by marty

February 5th, 2014 at 1:34 am

Posted in Uncategorized

Profits Without Social Benefit

without comments

The conventional explanation for our economic problems seems to be that our businesses are strapped for funds.  Greater business earnings, it is said, will translate into needed investment, employment, consumption and, finally, sustained economic recovery.  Thus, the preferred policy response: provide business with greater regulatory freedom and relief from high taxes and wages. 

It is this view that underpins current business and government support for new corporate tax cuts and trade agreements designed to reduce government regulation of business activity, attacks on unions, and opposition to extending unemployment benefits and increasing the minimum wage.

One problem with this story is that businesses are already swimming in money and they haven’t shown the slightest inclination to use their funds for investment or employment.

The first chart below highlights the trend in free cash flow as a percentage of GDP.  Free cash flow is one way to represent business profits.  More specifically, it is a pretax measure of the money firms have after spending on wages and salaries, depreciation charges, amortization of past loans, and new investment.  As you can see that ratio remains at historic highs.  In short, business is certainly not short of money.

So what are businesses doing with their funds?  The second chart looks at the ratio of net private nonresidential fixed investment to net domestic product.  I use “net” rather than “gross” variables in order to focus on investment that goes beyond simply replacing worn out plant and equipment.  The ratio makes clear that one reason for the large cash flow is that businesses are not committed to new investment.  Indeed quite the opposite is true.

cash flow

real investment trends

Rather than invest in plant and equipment, businesses are primarily using their funds to repurchase their own stocks in order to boost management earnings and ward off hostile take-overs, pay dividends to stockholders, and accumulate large cash and bond holdings.

Cutting taxes, deregulation, attacking unions and slashing social programs will only intensify these very trends.  Time for a new understanding of our problems and a very new response to them.

The Free Trade Myth

without comments

The US government, on behalf of our largest corporations, continues to push for approval of the Transpacific Trade Partnership (TPP), a new “so-called” free trade agreement.

It is striking how political and business leaders rally around the virtues of free trade.  The WTO, NAFTA, TPP, the Korea-U.S. Free Trade Agreement, etc. are all presented as vehicles for freeing trade and thus boosting efficiency and majority living conditions.  Notice—it is the World Trade Organization, the North American Free Trade Association, etc.

Two problems—first free trade does not automatically lead to benefits for working people.  Second, these agreements do far more than reduce trade barriers.

The theory of comparative advantage, which underpins most arguments for free trade, is based on numerous assumptions, including full employment, full mobility of labor and capital within a country, complete lack of mobility of labor and capital across national borders, perfect competition, automatic currency movements to balance trade, a lack of externalities . . . the list goes on.  The fact is that if any one of these assumptions is violated there is no assurance that dropping tariffs and other trade barriers will benefit working people; in fact, quite the opposite is likely to result.  (For more see my recent book, Capitalist Globalization: Consequences, Resistance, and Alternatives.)

Moreover, while lowering barriers to trade gets all the attention, these agreements generally have more than twenty chapters that are designed to restrict the ability of governments to regulate the production, investment, and employment activity of foreign investors as well as more directly promote the power of transnational corporations to freely pursue profits.  See here, here, and here for the Korea-U.S. Free Trade Agreement and here and here for the TPP.

As more and more U.S. workers have come to see how globalization has led to a hollowing out of manufacturing, growing downward pressure on wages and working conditions, corporate tax avoidance, and enhanced political power for large corporations, they are often lectured that they are part of the global wealthy and therefore should support these agreements to help workers in other countries.

Well, 2014 marks that twentieth anniversary of NAFTA and Mark Weisbrot, writing in the Guardian newspaper, provides a useful summary of how things worked out for Mexico.

Here is an excerpt:

But what about Mexico? Didn’t Mexico at least benefit from the agreement? Well if we look at the past 20 years, it’s not a pretty picture. The most basic measure of economic progress, especially for a developing country like Mexico, is the growth of income (or GDP) per person. Out of 20 Latin American countries (South and Central America plus Mexico), Mexico ranks 18, with growth of less than 1 percent annually since 1994. It is of course possible to argue that Mexico would have done even worse without NAFTA, but then the question would be, why?

From 1960-1980 Mexico’s GDP per capita nearly doubled. This amounted to huge increases in living standards for the vast majority of Mexicans. If the country had continued to grow at this rate, it would have European living standards today. And there was no natural barrier to this kind of growth: this is what happened in South Korea, for example. But Mexico, like the rest of the region, began a long period of neoliberal policy changes that, beginning with its handling of the early 1980s debt crisis, got rid of industrial and development policies, gave a bigger role to de-regulated international trade and investment, and prioritized tighter fiscal and monetary policies (sometimes even in recessions). These policies put an end to the prior period of growth and development. The region as a whole grew just 6 percent per capita from 1980-2000; and Mexico grew by 16 percent – a far cry from the 99 percent of the previous 20 years.

For Mexico, NAFTA helped to consolidate the neoliberal, anti-development economic policies that had already been implemented in the prior decade, enshrining them in an international treaty. It also tied Mexico even further to the U.S. economy, which was especially unlucky in the two decades that followed: the Fed’s interest rate increases in 1994, the U.S. stock market bust (2000-2002) and recession (2001), and especially the housing bubble collapse and Great Recession of 2008-9 had a bigger impact on Mexico than almost anywhere else in the region.

Since 2000, the Latin American region as a whole has increased its growth rate to about 1.9 percent annually per capita – not like the pre-1980 era, but a serious improvement over the prior two decades when it was just 0.3 percent. As a result of this growth rebound, and also the anti-poverty policies implemented by the left governments that were elected in most of South America over the past 15 years, the poverty rate in the region has fallen considerably. It declined from 43.9 percent in 2002 to 27.9 percent in 2013, after two decades of no progress whatsoever.

But Mexico has not joined in this long-awaited rebound: its growth has remained below 1 percent, less than half the regional average, since 2000. And not surprisingly, Mexico’s national poverty rate was 52.3 percent in 2012, basically the same as it was in 1994 (52.4 percent). Without economic growth, it is difficult to reduce poverty in a developing country. The statistics would probably look even worse if not for the migration that took place during this period. Millions of Mexicans were displaced from farming, for example, after being forced into competition with subsidized and high-productivity agribusiness in the United States, thanks to NAFTA’s rules.

It’s tough to imagine Mexico doing worse without NAFTA. Perhaps this is part of the reason why Washington’s proposed “Free Trade Area of the Americas” was roundly rejected by the region in 2005 and the proposed Trans-Pacific Partnership is running into trouble. Interestingly, when economists who have promoted NAFTA from the beginning are called upon to defend the agreement, the best that they can offer is that it increased trade. But trade is not, to most humans, an end in itself. And neither are the blatantly mis-named “free trade agreements.”

In sum, we don’t help workers here or anywhere else by falling for government and business pronouncements surrounding the TPP or other similar agreements.

Unfortunately, far too many people remain confused about what these agreements really do and that has weakened our ability to defeat them.  One reason is that far too many people see them as disconnected from on-going domestic policies and struggles, as separate initiatives that are too complex to understand.  In reality, these agreements are simply another way for corporate interests to advance current domestic attacks on the public sector and unions and efforts to promote privatization, tax cuts, corporate mobility, and financialization.  We need to see that we are up against a coherent set of political and economic interests and organize accordingly.

Written by marty

January 19th, 2014 at 10:45 pm