Americans have become increasingly critical of public policy as a means of addressing social problems. Many believe that public policies do not work but the reality is that public policies are often subverted in ways that make them ineffective or even counterproductive.
Take taxes and inequality. As Danny Vinik, writing in the New Republic explains:
The vast majority of Americans—both liberals and conservatives—believe that state and local taxes should also be progressive. That’s the finding of a new report released by WalletHub Monday. The researchers surveyed 1,050 Americans on what they thought the combined rate of state and local taxes should be at various income levels. Not surprisingly, liberals want the rate structure to be a bit more progressive than conservatives do, but their responses [as the following chart shows] were relatively similar:
However the reality is quite different. State and local taxes are actually quite regressive. The Institute for Taxation and Economic Policy studied the “fairness of state and local tax systems by measuring the state and local taxes that will be paid in 2015 by different [non-elderly] income groups as a share of their incomes.” They did this state by state and, as presented below, on an overall basis. As we can see, the lower the income, the greater the state and local tax burden.
- Virtually every state tax system is fundamentally unfair, taking a much greater share of income from low- and middle-income families than from wealthy families. The absence of a graduated personal income tax and overreliance on consumption taxes exacerbate this problem.
- In the 10 states with the most regressive tax structures (the Terrible 10) the bottom 20 percent pay up to seven times as much of their income in taxes as their wealthy counterparts. Washington State is the most regressive, followed by Florida, Texas, South Dakota, Illinois, Pennsylvania, Tennessee, Arizona, Kansas, and Indiana.
- Heavy reliance on sales and excise taxes are characteristics of the most regressive state tax systems. Six of the 10 most regressive states derive roughly half to two-thirds of their tax revenue from sales and excise taxes, compared to a national average of roughly one-third . Five of these states do not levy a broad-based personal income tax (four do not have any taxes on personal income and one state only applies its personal income tax to interest and dividends) while four have a personal income tax rate structure that is flat or virtually flat.
- States commended as “low tax” are often high tax states for low-and middle-income families. The 10 states with the highest taxes on the poor are Arizona, Arkansas, Florida, Hawaii, Illinois, Indiana, Pennsylvania, Rhode Island, Texas, and Washington. Seven of these are also among the “terrible ten” because they are not only high tax for the poorest, but low tax for the wealthiest.
In short, we know how to construct tax policies that can boost equality or at least minimize inequality. The reason the overwhelming majority of state and local governments preside over regressive tax systems is primarily explained by politics, and those who benefit from those systems are more than happy to have us believe that governments are incapable of serving the public interest.
Most economists now recognize that income and wealth inequality has significantly increased over the last few decades. Many, however, refuse to see it as a problem.
Several sessions at the January 2015 annual meeting of the American Economic Association [AEA] addressed French economist Thomas Piketty’s book Capital in the Twenty-First Century which highlighted both the growth of inequality and its negative consequences. Piketty works within the established framework of mainstream economics and his call for a global wealth tax is far from a challenge to the existing system. Yet his argument that capitalism left unchecked produces a steady and destructive growth in inequality doesn’t appear to sit well with many leading economists. [Useful reviews of the book are here and here.]
A case in point: one panel at the AEA meeting was organized by the influential Harvard economist Greg Mankiw, the author of widely used introductory and intermediate economics textbooks. Chuck Collins, from the Institute of Policy Studies, described the panel session as follows:
Three neoclassical economist critics, assembled by Mankiw, embarrassed themselves by quibbling with the incontrovertible evidence of growing concentrations of wealth and surging plutocratic trends.
As an outsider to academic economics, I was struck by just how compartmentalized and smug the field appears. At one point, Mankiw even put up a slide, “Is Wealth Inequality a Problem?” Any economist who ventures across the disciplinary ramparts will, of course, find a veritable genre of research on the dangerous impacts of extreme inequality.
We now have over two decades of powerful evidence that details how these inequalities are making us sick, undermining our democracy, slowing traditional measures of economic growth, and turning our political system into a plutocracy.
Mankiw, at another point in his presentation, had still more embarrassing comments to make. Piketty, he intoned, must “hate the rich.” Piketty’s financial success with his best-selling book, Mankiw added, just might lead to self-loathing.
There can be little doubt as to the growth in inequality as the following charts demonstrate. The first chart shows that the top 1 percent of households boosted their share of all pre-tax income from 8.9 percent in 1976 to 22.46 percent in 2012.
The second shows changes in real family income between 1979 and 2012. While the top 5 percent saw their real incomes grow 74.9 percent, the bottom 40 percent suffered actual declines.
At issue is the cause of these trends and the appropriate response to them. One obstacle to clarity is the fact that most economists, even liberal ones, refuse to acknowledge the limits or perhaps better said blinders of mainstream economics. See here for an example. And Piketty’s work for all its benefits in documenting inequality trends suffers from the same limitations. As the economist Michael Roberts explains:
The real problem is that Piketty’s explanation for rising inequality is faulty and his proposals for action either utopian or ineffective. This is where the heterodox/Marxist view of inequality comes in. While the likes of Piketty and Joseph Stiglitz entertained thousands in the big halls at [the AEA meetings], heterodox economists (including me) in the Union of Radical Political Economics [URPE] presented papers to about 30-40 on Piketty exposing the flaws in his explanation. My paper argued that by deflating productive capital into a wider definition including property and financial wealth, Piketty cannot really explain rising inequality. Indeed, when housing and financial assets are stripped out, Piketty’s rate of return on assets becomes Marx’s rate of profit. And, instead of being steady and invariable as Piketty claimed, it falls.
Two main arguments have been presented by Piketty, both based on mainstream economics, to explain why the ratio of capital (wealth) to income has been rising. Piketty relies on neoclassical marginal productivity theory. This theory suggests that the more capital invested should lead to falling returns but Piketty claims there is a high rate of substitution of labor for capital in production, so the share of income going to capital rises. But as Fred Moseley showed in a paper at [the AEA], marginal productivity is logically incoherent and empirically false (Moseley-Piketty).
The other argument from Piketty is that, over the long term, as the savings ratios of households rises, it will eventually lead to a rising capital share. Well, a paper by Frank Thompson at the University of Michigan showed that, while this is theoretically possible, it is extremely unlikely to be achieved (URPE@ASSA Piketty presentation (n 9) and indeed, others calculated that it could take 200 years of balanced economic growth to explain rising capital share and inequality by rising savings rates!
As the URPE sessions showed, a simpler and clearer explanation of rising inequality in the last 30 years in most economies is increased exploitation of labor by capital. There has been a rising rate exploitation along with a huge switch of value into the financial sector which is owned and controlled by the top 1%, or even just the top 0.1%. Marx’s exploitation theory is a better explanation of inequality compared to marginal productivity or rising savings rates. The so-called neoliberal period was characterized by holding down wages, globalization, a reduction in job security and privatization of public services, all of which boosted the rate of surplus value. So we entered the world of super-managers, oligarchs and top families that Piketty describes in his book.
But suggesting that rising inequality is the result of increased exploitation of labor by capital is not comfortable for mainstream economics, including Piketty, as it suggests something nasty about the capitalist mode of production, which the likes of Piketty, Stiglitz and others still support.
As to responses, if exploitation is the key explanation, organizing working people and their communities becomes the best response. Thankfully there are signs that those suffering from capitalist dynamics well understand the situation and are beginning to challenge it.
One of the arguments against an increase in the minimum wage is that it will lead to higher unemployment. One can make theoretical arguments for and against this proposition. And, of course, the income gains from an increase in the minimum wage are likely to produce overall benefits for both low wage workers and the economy as a whole even if there is a rise in unemployment.
Economists have tried to estimate the employment effects of a rise in the minimum wage. As a Vox article describes, two of them, Hristos Doucouliagos and T.D Stanley, looked at almost 1500 estimates of the effects of minimum wage increases on employment and found that the estimates “clustered right around zero effect, but with more of those estimates showing a slight downward pressure on employment.”
They concluded, “with sixty-four studies containing approximately fifteen hundred estimates, we have reason to believe that if there is some adverse employment effect from minimum wage rises, it must be of a small and policy-irrelevant magnitude.”
The International Labor Organization recently published its Global Wage Report 2014/15. The report looks at global trends in wages and income inequality and its findings are far from positive for working people in the developed world.
The ILO summarizes its findings as follows:
Wage growth around the world slowed in 2013 to 2.0 per cent, compared to 2.2 per cent in 2012, and has yet to catch up to the pre-crisis rates of about 3.0 per cent . . . .
Even this modest growth in global wages was driven almost entirely by emerging G20 economies, where wages increased by 6.7 per cent in 2012 and 5.9 per cent in 2013.
By contrast, average wage growth in developed economies had fluctuated around 1 per cent per year since 2006 and then slowed further in 2012 and 2013 to only 0.1 per cent and 0.2 per cent respectively.
“Wage growth has slowed to almost zero for the developed economies as a group in the last two years, with actual declines in wages in some,” said Sandra Polaski, the ILO’s Deputy Director-General for Policy. “This has weighed on overall economic performance, leading to sluggish household demand in most of these economies and the increasing risk of deflation in the Eurozone,” she added.
As Figure 7 from the report makes clear, the wage slowdown in the developed world is not due to a slowdown in productivity, or output per worker. The fact is that workers contribute far more in production than they receive in compensation. The growing gap between the two helps to explain the recent explosion in corporate profits.
Figure 9 lets us look at productivity-compensation trends in several different individual developed countries. The figure includes two different ways of measuring compensation. The blue dots measure worker compensation adjusted for changes in consumer prices. The red dots measure worker compensation adjusted for changes in the prices of both consumer and non-consumer goods and services. In general, the blue dots provide a more accurate picture of worker purchasing power and well-being.
If earnings and productivity grew at the same rate, the different national blue dots would all be on the 45 degree line. If a nation’s productivity grew faster then its compensation over the period then its blue dot would fall below the 45 degree line. If its compensation grew faster than its productivity, then its blue dot would be above the line.
Looking just at the big-3–the U.S., Japan, and Germany–we see that the U.S. recorded the highest rate of productivity growth over the period, followed by Japan, with Germany last. But the rise in worker compensation fell short of the growth in productivity in all three countries, with the largest gap in Japan.
The gap between productivity and compensation in most of the developed world also helps to explain the decline in labor’s share of national income. As illustrated in Figure 10 below, the share of GDP going to workers in the form of wages and benefits, despite some fluctuations, declined in all the selected countries over the period 1991 to 2013. In the U.S., the adjusted labor income share fell from approximately 61% to 56% over the period.
The ILO report does offer suggestions for improving worker well-being, including higher minimum wage and stronger union protection laws, as well as better funded social programs. These all deserve our support. However, there are real forces opposing these reforms and ongoing initiatives to promote greater freedom of movement for large corporations, such as the Transpacific Partnership free trade agreement, only strengthen these forces. Said differently we need a broader agenda for change if we are to defend majority living and working conditions, one that directly challenges contemporary globalization dynamics.
An important victory, as reported by Fortune magazine, a business-oriented publication.
San Francisco Passes First-Ever Retail Worker ‘Bill of Rights’
Just in time for Black Friday and the holiday shopping season, the measure —aimed at giving retail staffers more predictable schedules and access to extra hours —will make the worker-friendly city even friendlier.
|Hours before retail employees punch in for their stores’ hectic Thanksgiving and Black Friday shifts, the San Francisco Board of Supervisors approved new protections for the city’s retail workers.
The supervisors voted unanimously on Tuesday afternoon in favor of measures aimed at giving retail staffers more predictable schedules and access to extra hours. The ordinances will require businesses to post workers’ schedules at least two weeks in advance. Workers will receive compensation for last-minute schedule changes, “on-call” hours, and instances in which they’re sent home before completing their assigned shifts.
Businesses must also offer existing part-time workers additional hours before hiring new employees, and they are required to give part-timers and full-timers equal access to scheduling and time-off requests. The legislation will apply to retail chains with 20 or more locations nationally or worldwide and that have at least 20 employees in San Francisco under one management system. David Chiu, president of the Board of Supervisors, told Fortune on Tuesday that the proposal will affect approximately 5% of the city’s workforce.
The San Francisco Chamber of Commerce has opposed the bill, arguing that it is too onerous for business owners. In particular, the Chamber has taken issue with the limits the new requirements will impose on employers’ staffing decisions.
Now that it has board approval, the proposal just needs the signature of Mayor Ed Lee, a Democrat, to become law. Even if the mayor rejects the legislation, which is unlikely, the measure has enough support among the city’s supervisors to override a veto.
While the action San Francisco is set to take on workers’ behalf is the first of its kind, one aspect of the legislation has precedent. Last year, voters in SeaTac, Wash. approved a measure that requires companies to offer more hours to part-time workers before they hire new employees. They voted for it as part of a ballot initiative to increase the minimum wage to $15 per hour, one of the nation’s highest rates.
If San Francisco’s retail worker bill becomes law, it will make a city already known as worker-friendly even more so. Earlier this month, 59% of voters cast ballots in favor of increasing San Francisco’s current minimum wage of $10.74 to $15 by 2017.
San Francisco’s proposal takes sharp aim at employers’ tendency to schedule workers’ hours with little notice—a practice especially prevalent in retail. Earlier this year, University of Chicago professors found that employers determined the work schedules of about half of young adults without employee input, which resulted in part-time schedules that fluctuated between 17 and 28 hours per week. Forty-seven percent of employees ages 26 to 32 who work part time receive one week or less in advance notice of the hours they’re expected to work, according to the Bureau of Labor Statistics.
Congress attempted to tackle this issue at the federal level in July when they proposed legislation that would give retail workers more predictable hours. “Workers need scheduling predictability so they can arrange for child care, pick up kids from school, or take an elderly parent to the doctor,” co-sponsor Representative George Miller, a Democrat from California, said at the time. But the “Schedules that Work” bill has gone nowhere since it was introduced.
Government tax and spending programs can help reduce inequality—unfortunately US policies leave a lot to be desired.
One of the most common measures of income inequality is the gini index. The index runs from zero to one, with higher values signifying greater inequality.
The following two charts come from a Christian Science Monitor infographic on myths about inequality. The first shows that while income inequality, as measured by the gini coefficient, is high in the US, it is higher in nine other countries.
The second shows the degree to which tax and assistance programs do actually lower rates of income inequality. It also shows that U.S. programs perform relatively poorly; using this adjusted measure, the U.S. trails only Chile for the dubious distinction of having the highest rate of income inequality.
President Obama had hoped that recent signs of economic strength would benefit Democrats in the recently completed election. While it is true that job creation has picked up, the unemployment rate is falling, and growth is stronger, the reality is that most Americans have not enjoyed any real gains during this so-called expansionary period.
The following two charts highlight this on the national level. The first shows how income gains made during the expansion period have been divided between the top 1% and everyone else. There is not a lot to say except that there is not a lot of sharing going on.
The second shows trends in real median household net worth. While declines in median net worth are not surprising in a recession, what is noteworthy is that median net worth has continued to decline during this expansion. Adjusted for inflation the average household is poorer now than in 1989.
Oregon provides a good example of state trends. The chart below shows that the poverty rate in Oregon is actually higher now than it was during the recession.
The poverty rate for children is even higher. In 2013, 21.6 percent of all Oregon children lived in families in poverty.
And, not surprisingly, communities of color experience poverty rates far higher than non-hispanic whites.
Electing Republicans will certainly not improve things, but it is hard to blame people for feeling that the Democratic Party has abandoned them.
More promising is movement building to directly advance community interests. One example: voters in five states passed measures to boost minimum wages. Another was the successful effort in Richmond, California to elect progressives to the city council over candidates heavily supported by Chevron, which hoped to dominate the council and overcome popular opposition to its environmental and health and safety policies.
You know things are serious when leading mainstream economists and established international organizations continually revise downward their estimates for future growth.
The chart below shows successive Congressional Budget Committee estimates of the U.S. growth potential beginning in 2007 and the actual growth trend. Every year the estimates have been reduced and actual growth remains far below the estimated potential.
The following chart comes from the IMF. It shows a steady downward revision in predicted growth for so-called emerging market countries.
As the IMF says: ” This feature of repeated downward revisions to future growth is unique to the current downturn. In the past, we expected growth to bounce back (and it did). This time seems different.”
The lack of serious policy discussions by leading political and business leaders about causes and responses is far from reassuring.
Iceland continues to experiment with new ways to promote majority living standards. See here for a discussion of the country’s unorthodox response to the 2008 global financial collapse.
According to the Icelandic Grapevine, a bill has been submitted to the Icelandic parliament that would shorten the workweek. More specifically, it would change the definition of a full time workweek to 35 hours instead of the current 40 and the full workday to 7 hours rather than the current 8.
As the Grapevine reports:
The bill points out that other countries which have shorter full time work weeks, such as Denmark, Spain, Belgium, Holland and Norway, actually experience higher levels of productivity. At the same time, Iceland ranked poorly in a recent OECD report on the balance between work and rest, with Iceland coming out in 27th place out of 36 countries.
The bill also points out that a recent Swedish initiative to shorten the full time work day to six hours has been going well, with some Icelanders calling for the idea to be taken up here. In addition, the bill also cites gender studies expert Thomas Brorsen Smidt’s proposal to shorten it even further, to four hours.
Although it is not easy to establish a clear relationship between work hours and productivity, as noted above there is reason to believe that the relationship may be inverse. In other words, the shorter the workweek the more productive we are.
There is certainly a significant variation among countries in the length of the workweek as the following information from the U.S. Bureau of Labor Statistics shows:
In 2011 the average annual hours worked per employed person in the U.S. was 1758. The number for French workers was 1476. It was 1411 for German workers. Assuming a 40 hour workweek, the average US worker had a work year more than two months longer than the average German worker. It is also worth noting that while all the countries that reported data for the entire period 1979 to 2011 showed reductions in work time, the reduction was the smallest in the U.S.
It would certainly be nice, for many reasons, if someone in the U.S. Congress followed the lead of Iceland and introduced a bill to reduce work time in the U.S.
Our media celebrates the dynamism of our leading technology companies. The message is that our world would be better if only other businesses could replicate their practices.
Not surprisingly, it is their products not their labor practices that draws the most attention. Unfortunately, many of the firms on the cutting edge of technology also tend to be leaders in fashioning the most alienating and exploitative labor practices.
Samsung, the leading Korean technology company and Apple’s main competitor, is no better. Samsung has used all means possible to keep its operations non-union.
The following is the beginning of an interview with Sunyoung Kim, the chair of the Samsung Electronics Service Union, about the union’s recent victory, becoming the first recognized union in the company’s 76 year history. The interviewer is Dae-Han Song, the International Strategy Center’s Policy and Research Coordinator.
Sunyoung Kim: We started the union because of the harsh working conditions. Sometimes, we might work twelve to thirteen hours a day, and still not make the minimum wage. You might come to work on Saturday or Sunday from 8:00 to 6:00 PM and come out on the minus. Why? Because you didn’t get paid, but you still had to pay for lunch and gas. You even had to pay for your own training from Samsung. In addition, our work is dangerous, whether it is installing air-conditioning, or climbing a wall, or working with live electricity. Despite these dangers, the company doesn’t provide any safety equipment. We have to wear neckties even when working with moving parts. They force us to wear dress shoes even when working on a roof in the rain, just for the sake of maintaining a clean and professional image.
Dae-Han Song: How can a person work 12 to 13 hours a day and not even get paid the minimum wage?
Sunyoung Kim: It’s a system based on commission. There is no base pay. You are basically a freelancer. You come in to work, and if there is work you work if there is not then you just stay in the office. However, while a real freelancer can decide whether or not to show up to the office, we have a specified clock in and clock out time. When there is work, we just keep working. In the summer, there’s a lot of work: air conditioning, refrigerators. So, we just keep on working until everything is done. Not only is working such long hours exhausting, it is also exhausting doing so in the summer heat. Sometimes you don’t get home until 12:00 AM and can’t even rest on the weekends. That’s when we make our money that carry us through the fall, winter, spring when there is little work. In these off seasons we might sometimes just get one or two calls in a day and since we get paid by commission, if we don’t work, we don’t get paid.