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There is a lot to learn from the standoff in Brussels between Syriza and the Troika (European Commission, European Central Bank, and the IMF) over whether the latter will release the last tranche of bailout funds to the former. Perhaps the most important lesson is that “politics” triumphs “economics.” Said differently, Troika leaders are determined to crush any movement, regardless of human cost, that threatens dominant capitalist interests. In this case, the threat is a popular and successful Syriza and its demonstration effect on class awareness and movements in other European countries, especially Spain, Portugal, and Ireland.
Alex Tsipras, the Greek Prime Minister, understands this. The following is from a Guardian story:
Greece’s prime minister has said the International Monetary Fund has “criminal responsibility” for the country’s debt crisis as it emerged Athens could miss a €1.6bn (£1.15bn) payment to the lender this month.
Speaking in the Greek parliament Alexis Tsipras called on creditors to reassess the IMF’s insistence on tough cuts as part of the country’s bailout.
“The time has come for the IMF’s proposals to be judged not just by us but especially by Europe,” he said. “Right now, what dominates is the IMF’s harsh views on tough measures, and Europe’s on denying any discussion over debt viability.”
He added: “The fixation on cuts … is most likely part of a political plan … to humiliate an entire people that has suffered in the past five years through no fault of its own.”
The Greek government is running big national budget and trade deficits and is deeply in debt to Troika institutions. Making these problems worse is the fact that Greece no longer prints its own money, having adopted the euro as its currency in 2001. Quite simply, as things stand, without a new infusion of funds the government will find it impossible to pay its international debts and support the country’s economic activity. It is this position of weakness that allows the Troika leadership to present Syriza with a “take it or leave it” ultimatum of more austerity, privatizations, and labor market liberalization in exchange for a new loan.
A Little History
Greece didn’t get into this mess overnight or on its own. The country joined the euro area in 2001, after finally convincing the European Commission that it met the eurozone’s requirements of a budget deficit below 3% of GDP and a national debt below 60% of GDP. In 2004, Greece finally admitted that it had fudged the figures and had continuously run a greater budget deficit than was allowed. It was later revealed that Goldman Sachs was a key player in the chicanery.
The European Commission responded to this admission by placing Greece under monitoring and requiring the Greek government to slash public spending. Greece, it is important to add, was not the only country to have busted these deficit limits—Germany and France, for example, also recorded deficits over the 3% limit–but it was, as far as we know, the only one to manipulate its data.
By 2006 Greece was growing again and in compliance with European Commission deficit rules. However, the Greek economy remained fragile despite relatively high rates of growth over much of the decade. Greek growth depended upon debt fueled housing construction and public sector spending. Its industrial base remained weak as the country experienced an ever growing trade deficit, in large part a consequence of a German export offensive built on a common eurozone currency and wage suppression. In turn, a growing share of the borrowed funds supporting Greek growth came from German and French banks who recycled export earnings back to Greece.
When the global financial crisis exploded in 2008, the Greek economy quickly collapsed. A sharp recession in 2009 pushed the country’s deficit to over 12.5% of GDP. Greek national debt also soared, leaving the country with the highest debt ratio in the eurozone, over 120% of GDP.
Greece was again put under EU supervision and its government pressed to again slash spending to reduce the public sector deficit and, by extension, its reliance on borrowed funds. However, the rapidly expanding global economic crisis froze international financial markets, and by early 2010 it was clear that the Greek government would not be able to borrow enough to meet its debt obligations. In April, after considerable delay due to German resistance, the European Commission finally agreed to establish a bailout fund for Greece with the participation of the IMF. Eurozone countries agreed to provide 30 billion euros and the IMF an additional 15 billion if Greece accepted monitoring and a tough IMF crafted austerity plan.
This was too little too late. In May, the European Commission, European Central Bank, and the IMF were forced to put together a much larger bailout package. Here is the Guardian report of the deal:
European countries stepped into uncharted territory tonight, deciding on the first bailout of a single currency member state by agreeing a three-year package worth 110bn euros (£95bn) to rescue Greece from financial meltdown in return for pledges on the most drastic overhaul of a European economy ever attempted.
Finance ministers from the 16 countries using the single currency met yesterday in Brussels to seal the pact following months of sitting on the fence and two weeks of tough negotiations in Athens involving the International Monetary Fund, the European commission, and the European central bank . . . .
With Greece’s debt relegated to junk status and the country staring at Europe’s first sovereign debt default without the bailout, European leaders sought to put the months of foot-dragging and squabbling behind them to try to shore up the euro and prevent the debt crisis rippling across to Portugal, Spain and Italy.
Of the €110bn over three years, the other 15 euro countries are to supply €80bn in bilateral loans, while the IMF puts up the remaining €30bn. Rehn said that the “systematic, specific, and rigorous” bailout plan came with strings attached tightly, including quarterly monitoring of Greek austerity measures. He revealed the deal required Greece to slash its soaring budget deficit by 6.5% this year alone, a staggering feat if it can be achieved.
The deficit is currently 14% and is to be under 3% by 2014. Several countries need to take the rescue package through parliaments. This is to be done swiftly over the next week, said Jean-Claude Juncker, the Luxembourg leader and chair of the eurogroup, so that the first funds can be released before 19 May when Greece needs to redeem debt of €8.5bn.
It is uncharted territory. The euro rulebook proscribes bailouts of profligate member states and many leaders, foremost Angela Merkel of Germany, are queasy about coming to Athens’ rescue.
In return for the lifeline, Papandreou has committed to the most ambitious and draconian reshaping of Greece’s welfare state ever attempted. Spending cuts amounting to more than €36bn or 11% of national GDP are to be made over the next three years. Wages, pensions, and benefits in Greece’s bloated public sector will be cut, and large VAT and other tax rises will be imposed. The retirement age is to be raised. The savage program will inevitably deepen Greece’s recession.
The Greek government dutifully slashed spending in response to Troika mandates but the result was self-defeating. Cutting spending in the midst of a recession only deepened the country’s decline, reducing government revenue and therefore doing little to narrow the budget deficit. Greece’s economy contracted by -0.4% in 2008, -4.4% in 2009, -5.4% in 2010, -8.9% in 2011, and -6.6% in 2012. Its budget deficit as a percent of GDP was -10.4% in 2010, -9.9% in 2011, and -9.4 in 2012.
In March 2012, the Troika was forced to extend its first bailout. As the New York Times explains:
After months of tortuous and tense negotiations, a second bailout for Greece finally became a reality . . . when euro zone nations formally approved the plan and authorized the release of the first multibillion-euro loan installment.
In a statement, Jean-Claude Juncker, who, as the president of the Eurogroup, leads the finance ministers of the 17 European Union members that use the euro, said the national governments had formally approved Greece’s second rescue, which is valued at 130 billion euros ($170 billion). “All required national and parliamentary procedures have been finalized,” he said. . . .
A first installment of 39.4 billion euros ($51.4 billion) in loans will be disbursed from the euro zone’s temporary bailout fund, the European Financial Stability Facility.
The board of the International Monetary Fund is scheduled to meet on Thursday and is expected to agree to contribute 28 billion euros ($37 billion) to the package.
Greece will not be handed a blank check. The bailout loans will be paid in installments, and each tranche of aid will be conditional on the government in Athens hitting goals and completing structural changes to its economy, including the privatization of state-owned assets.
If the reform program is successful, Greece’s debt level by 2020 could be slightly lower than once expected, according to the latest projections, though it would still equal 116.5 percent of gross domestic product.
In all, Greece is expected to receive almost 173 billion euros ($226 billion) from international lenders, taking into account the new bailout and loans from its first rescue package, granted in 2010.
This program was supposed to run through the end of 2014 but was extended again after the election of Syriza in January 2015. It is the last payment from the 2012 bailout that is at the center of current talks between the Troika and Syriza. The Troika is withholding this payment until Syriza agrees to abide by the same policies approved by the previous Greek government, which means that Syriza must agree to more budget cuts, privatizations, and labor market liberalization. Without the money, Syriza will be unable to make its June payment to the IMF and July payment to the European Commission, an outcome that would likely force the country out of the eurozone and into uncharted waters.
Syriza, for its part, having been elected to office on its anti-austerity platform, has refused these terms, proposing instead a different plan of action, one which includes permission to increase both its public spending and taxes on the wealthy, strengthen labor rights, and support re-industrialization. It also seeks an actual debt reduction to lighten the load that the sizeable debt payments place on the country’s recovery. It argues that agreeing to continue with the same Troika policies that have been in place since 2010 will only produce the same result: economic decline and unsustainable budget and debt loads, necessitating yet more borrowing.
Germany and the IMF have taken leadership in demanding that Syriza toe the line. Angela Merkel and Christine Lagarde argue that their demand for austerity is based on sound economics, but history has shown the folly of their position. In fact, even IMF staff acknowledge that Troika demands are counterproductive. As the economic journalist Ambrose Evans-Pritchard explains:
The IMF knows that Greece cannot possibly pay [down its debts] by draconian austerity – the policy already implemented for five years with such self-defeating effects – and the longer it pretends otherwise, the more its authority drains away. . . .
The IMF enforced brute liquidation without compensating stimulus or relief. It claimed that its policies would lead to a 2.6pc contraction of GDP in 2010 followed by brisk recovery.
What in fact happened was six years of depression, a deflationary spiral, a 26pc fall in GDP, 60pc youth unemployment, mass exodus of the young and the brightest, chronic hysteresis that will blight Greece’s prospects for a decade to come, and to cap it all the debt ratio exploded because of the mathematical – and predictable – denominator effect of shrinking nominal GDP.
It is a public policy scandal of the first order. One part of the IMF has issued a mea culpa admitting that its own analysts misjudged the fiscal multiplier badly. Plaudits to them.
Another part of the Fund continues to push new variants of the same indefensible policies, demanding a combined fiscal squeeze from pension cuts and VAT rises equal to 1pc of GDP this year and 2pc next year even as the economy lurches back into recession.
Ashoka Mody, former chief of the IMF’s bail-out in Ireland, refuses to criticize his former colleagues on the European desk, but the meaning of [his] words are clear enough.
“Everything that we have learned over the last five years is that it is stunningly bad economics to enforce austerity on a country when it is in a deflationary cycle. Trauma patients have to heal their wounds before they can train for the 10K.”
“I am frankly shocked that we are even having a discussion about raising VAT at all in these circumstances. We have just seen a premature rise in VAT knock the wind out of a country as strong as Japan.”
“Syriza should recruit the IMF’s research department to be their spokesman because they are saying almost exactly the same thing as Syriza on the economics of this. The entire strategy of the creditors is wrong and the longer this goes on, the more is its going to cost them.”
The IMF’s Original Sin in Greece was to allow the urbane Parisian Dominique Strauss-Kahn to hijack the institution to prop up Europe’s monetary union and the European banking system when the crisis erupted in 2010.
The Fund’s mission is to save countries, not currencies or banks, and it certainly should not be doing dirty work for a rich currency union that is fully capable of sorting out its own affairs, but refuses to do so for political reasons.
It was of course a difficult moment in May 2010. The eurozone was spinning out of control. There were no backstop defences – due to the criminal negligence of Europe’s leaders and banking regulators – and fears of a euro-Lehman were all too real.
Yet leaked minutes from the IMF board meetings showed that all the emerging market members (and Switzerland) opposed the terms of the first loan package for Greece. They protested that it was intended to save the euro, not Greece.
It loaded yet more debt onto the crushed shoulders of an already bankrupt country, and further complicated the picture by allowing one large French bank and one German bank – no names please – to offload much of their €25bn combined exposure onto EMU taxpayers.
“Debt restructuring should have been on the table,” said Brazil’s member. The loans “may be seen not as a rescue of Greece, which will have to undergo a wrenching adjustment, but as a bailout of Greece’s private debt holders, mainly European financial institutions”.
Arvind Virmani, India’s member, was prophetic. “The scale of the fiscal reduction without any monetary policy offset is unprecedented. It is a mammoth burden that the economy could hardly bear,” he said.
“Even if, arguably, the program is successfully implemented, it could trigger a deflationary spiral of falling prices, falling employment and falling fiscal revenues that could eventually undermine the program itself.” This is exactly what has happened.
The Troika have taken direct aim at Greek pensions, well-aware that Syriza has said that it will not accept any agreement that requires them to further reduce payouts, especially to those at the bottom of the income distribution. The situation is well described by the economist Michael Roberts:
The callous disregard of the poverty of Greeks, particularly the old, is shown in the statement of IMF chief economist Olivier Blanchard in a blog post. Blanchard blithely pontificates “we believe that even the lower new [deficit] target cannot be credibly achieved without a comprehensive reform of the value-added tax (VAT) – involving a widening of its base – and a further adjustment of pensions. Why insist on pensions? Pensions and wages account for about 75% of primary spending; the other 25% have already been cut to the bone. Pension expenditures account for over 16% of GDP, and transfers from the budget to the pension system are close to 10% of GDP. We believe a reduction of pension expenditures of 1% of GDP (out of 16%) is needed, and that it can be done while protecting the poorest pensioners”.
But Blanchard’s demand will not protect the ‘poorest’ pensioners as it involves a cut in EKAS, the pension fund for those on lower incomes. A recent poll revealed that 52% of Greek households claimed their main source of income is pensions. This is not because so many people are ‘gaming’ the system and drawing on pensions; it is more because so many Greeks are unemployed without qualifying for benefits or employed but not being paid. If pensions are cut further, a lot of Greek households will really suffer at a time when the economy will likely continue to shrink. 10,000 Greeks have taken their own lives over the past five years of crisis, according to Theodoros Giannaros, a public hospital governor, whose own son committed suicide after losing his job.
The myth that Greeks are all living off the state and sunning themselves on the beaches with their early retirement pensions – something peddled by the Troika and politicians in northern Europe to their electorates – is just that, a Greek myth. Yes, pensions amount to 16% of GDP, making Greece appear to have the most expensive pension system in Europe. But this is partly because Greek GDP has dropped so much in the last five years. Moreover, Greece’s high spending is largely the result of bad demographics: 20% of Greeks are over age 65, one of the highest percentages in the Eurozone. If you adjust for this by looking at pension spending per person over 65, then Greek pension outlays are below the Euro average.
But the facts don’t matter. The Troika continues to reject a series of compromises offered by Syriza, pushing the Greek government to the wall on pensions, taxes, privatization, labor policy and more.
A Test Of Power
Alexis Tsipras, the Greek Prime Minister, voiced his frustration with the talks and determination to keep his party’s election promises in a recent Le Monde article. The main points of the piece are summarized by the economic journalist Paul Mason:
The key passage is Mr Tsipras’ claim that the tax and spending changes Syriza wants “will increase revenues, and will do so without having recessionary effects since they do not further reduce active demand or place more burdens on the low and middle social strata”. –
Basically the Greek government believes there can be non-austerity fiscal discipline and the lenders do not. And that is why Greece remains, for all the emollience in Tsipras article, on a collision course with its lenders.
And here is where Tsipras’ article gets interesting. He accuses that faction among the lenders that is blocking progress – implicitly the German finance ministry and its hardline allies on the ECB – of wanting to create a “two-speed Europe”: “where the ‘core’ will set tough rules regarding austerity and adaptation and will appoint a ‘super’ Finance Minister of the EZ with unlimited power, and with the ability to even reject budgets of sovereign states that are not aligned with the doctrines of extreme neoliberalism. For those countries that refuse to bow to the new authority, the solution will be simple: Harsh punishment. Mandatory austerity. And even worse, more restrictions on the movement of capital, disciplinary sanctions, fines and even a parallel currency”.
In other words, what is taking place in Brussels is not about economics, it is about politics, or better said domination. The Troika want a different regime in power in Greece, one subservient to their interests. Its leaders hope that the economic pressure they are applying during a period of renewed recession will cause the Greek people to abandon Syriza, or as a second best, that Syriza will break and discredit itself by agreeing to Troika demands.
How this ends isn’t clear. If Syriza holds firm the Troika have to weigh the gains and losses from having its bluff called. A bankrupt Greece cut free from the euro could cause international investors to become fearful about the stability of Spain or Italy, leading to capital flight from those countries and the eventual unraveling of the entire eurozone project. The survival of Syriza and the revitalization of the Greek economy will depend heavily on how well its supporters understand what is at stake.
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The Greek drama continues to play out. Greece is supposed to make a 1.6 billion euro loan payment to the IMF by June 30. The Syriza-led government says unless the Troika—The European Commission, European Central Bank, and International Monetary Fund (IMF)—releases the 7.2 billion euros authorized as part of the 2012 Greek bailout agreement it won’t have enough money to pay the IMF. And it also won’t be able to make a July loan payment to the European Central Bank.
The Troika is adamant that the money will only be transferred to the Greek government if Syriza agrees to abide by the terms set by the past bailout, which was itself an extension of a 2010 bailout. Those terms include further rounds of austerity, privatization, and labor market liberalization. But that is the problem. As the Levy Institute explains, these bailout terms are largely responsible for years of economic crisis (see Figures 1 and 2):
Estimates of real output for the Greek economy, published by the Hellenic Statistical Authority (ElStat), showed some signs of recovery up to 2014Q3, after six long years of uninterrupted fall in output, even though the fourth quarter of 2014 and preliminary estimates for the first quarter of this year show a reversal that, if it continues in the second quarter, will indicate the economy has slipped back into recession. Real output, at the end of 2014, was below its 2000 level, marking a more than 26 percent drop from its peak in 2007, while an even larger fall—30 percent—in employment has been recorded. More than one million workers have lost their jobs relative to the previous peak in 2008, with an increase of 800,000 unemployed—the total now stands above 1.2 million—while the active population is shrinking, as workers leave the country in search of better opportunities abroad.
The Los Angeles Times provides a more ground level view of the devastation:
Estimates vary, but some experts peg the number of new homeless as high as 20,000. Moreover, nearly 20% of Greeks no longer have enough money to cover daily food expenses, according to a recent study by the Organization for Economic Cooperation and Development. The nation’s unemployment rate is 26%, the highest among 28 European Union members.
At Athens’ many apartment buildings, stories are rampant of people delinquent on so many months of rent that they simply leave behind keys and furniture, sneaking out in the middle of the night.
Until five years ago, it was hard to imagine masses of people living on the streets here; homelessness was so negligible that almost no one even bothered to measure. At the time, this was a strong welfare state with a rich tradition of family bonds. But austerity has eroded the former, and economic recession has frayed the latter.
The crisis has played out in a kind of domino effect. What might begin as a hard-luck case or two soon cascades through families and social groups. At some point there are too few roofs for too many relatives or friends.
The Greek people elected Syriza precisely because the austerity policies promoted by the Troika have left their country devastated. See the video below for a five minute history of the forces propelling Syriza’s January 2015 election victory. To this point, Syriza has offered several proposals involving compromises of its initial position. However, these have all been rejected. Syriza, for its part, continues to reject the Troika’s “take it or leave it” demand.
Experts claim that if Greece defaults on its loan to the IMF the government will be unable to sustain the country’s economic activity; Greece no longer prints its own currency so the government would not have the funds to pay salaries or support services. It will be forced to put capital controls into place, nationalize the banking system, leave the euro area, and reintroduce its own currency.
Everyone agrees that the Greek economy and people will suffer in the short run regardless of whether it leaves the Euro Area or accepts Troika dictates and gets the money. However, it is the long run view of future events that is up for debate.
The Troika argues that without a deal the Greek economy will enter a downward spiral leading to total collapse. In contrast, some in Syriza argue that the above policy steps are precisely what the country needs to lay the ground work for a sustained recovery. They point to Iceland’s use of similar policies to rapidly overcome its own devastating collapse after the great financial crisis of 2008.
One thing is clear, euro membership has not produced the benefits promised for Greece and the other weaker euro area countries. In fact, these countries actually did better before they adopted the euro, during the period when they had their own respective currencies which gave them some control over their interest rates and exchange rates.
As Brett Arends points out:
There’s a secret fear gripping the powerful across Europe.
It has policy honchos lying awake at nights in Brussels. It has bankers in Berlin tossing feverishly on their silken sheets. It has eurocrats muttering into their claret.
It isn’t that if Greece leaves the euro, the Greeks will then suffer a terrible economic meltdown.
Take a look at the chart, above.
As you can see, Greece with the bad old drachma had double the economic growth of Greece under the euro. Double. And it wasn’t alone.
Italy, Spain and Portugal tell similar stories. Their economic growth back in the 1980s and 1990s, when they were “struggling” with the lira, the peseta, and the escudo, makes a mockery of their performance under the German-dominated euro.
Of course nothing is certain. To this point a majority of Greeks want their country to remain in the Euro Area and Syriza is hoping that the Troika will modify their demands for austerity, accept Syriza’s program which includes a moderate increase in spending for social programs and employment creation, and release the funds.
In the meantime, Syriza has taken a number of steps in respond to popular demands. One on-the-ground commentator, Quincey, offers the following summary of some of them:
What the hell has the SYRIZA-ANEL government been doing all this time, apart from negotiating with its creditors?
The answer may be found below, through a list I compiled from various sources. The list is not exhaustive, I focused on issues which I consider interesting for an international audience.
So, here it goes:
The SYRIZA-ANEL government initiatives’ list, as of today.
1. The government passed the humanitarian crisis bill, which will provide some 300,000 families with food stamps, free electricity, and a rent supplement.
2. It confirmed universal, free access to uninsured Greeks (not migrants) to the public health system.
3. Abolished the 5 euro public hospital entrance fee/ticket.
4. Abolished pension cuts (which were scheduled to take place automatically in February 2015).
5. Reopened the Public TV/radio broadcaster (ERT). ERT had been shut down 2 years ago, by the right-wing Samaras government.
6. Re-hired some 4,000 public officers who had been sacked by the previous government, among which the cleaning ladies of Finance Ministry (who achieved nation-wide fame thanks to their long and consistent struggle).
7. Canceled the “hood law”, under which dozens, perhaps hundreds of people arrested during protests, were risking up to 7 years imprisonment.
8. Theoretically speaking, the government abolished the new maximum security prison where political prisoners were held (not all prisoners have been transferred to normal facilities).
9. Non-regularized migrants held in detention camps are –supposedly- gradually released (the extent to which this process is actually taking place is debatable); police controls on migrants are significantly milder.
10. Generally speaking, police repression of protest is significantly milder (compared to the previous governments, one could say non-existent).
11. The Greek Parliament introduced an Odious Debt Committee to control for the legitimacy of the public debt (a mostly symbolic move).
12. The Greek Parliament founded the German War Reparations Committee (Greece has not been repaid the obligatory “loan” Nazi occupiers extracted during WWII, nor any war reparations).
13. The government introduced installments and discounts to help citizens and companies pay their debts to the state and pension funds.
14. A new bill will grant Greek citizenship to second generation migrants.
15. A bill is about to be voted, which will expand civil union to cover homosexual couples, granting them equal rights to the ones married couples enjoy.
16. An educational reform has been announced. The reform re-establishes academic asylum (abolished in 2011), reduces high-school students’ workload and allows for the so-called “perpetual students” (those who failed to get their degree on time) to retain their university student status.
17. The Minister of Labour, Panos Skourletis, has just announced that a (most-needed) labor reform, which would re-establish collective bargaining and collective agreements (practically abolished in 2012) will be introduced in the forthcoming days. The legislative proposal should – logically – include another major SYRIZA electoral promise, the gradual increase of the minimum monthly wage from approximately 550 euros (gross) to 750 euros (gross), during a period of 18 months. But we have to wait and see for that, as the reform has already been announced a couple of times, only to be blocked the day after by the country’s creditors.
So far, Syriza maintains majority support despite Troika efforts to discredit it as reckless and incompetent for rejecting the status quo.
More to follow in another post.
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The drive for $15 continues throughout the country. Not surprisingly, gains have generated resistance, with opponents raising fears of economic chaos. The experience of the city of SeaTac, Washington, population just under 28,000 and home of the Seattle-Tacoma airport, helps to illustrate how unfounded those fears are and the importance of labor-community organizing in securing victories.
Late 2013 SeaTac became the first city to pass a $15 an hour minimum wage. Perhaps even more noteworthy, its law mandated immediate implementation; there was no phase in period. The measure also included an inflation index, ensuring that the new minimum would maintain its real value.
The victory was a narrow one. One compromise that may well have tipped the balance is that not all employees in the city are covered. The beneficiaries are, as explained by a Huffington Post story,
transportation and hospitality workers at large businesses tied to Seattle-Tacoma International Airport, rather than to all private employers within the city. Among those exempted from the law: free-standing restaurants not tied to hotels; unionized hotels that already have a collective bargaining agreement with workers; hotels with fewer than 30 employees or 100 guest rooms; and “park and fly” lots with fewer than 100 parking spaces or 25 employees.
Workers at SeaTac airport were supposed to be covered, but a business coalition, led by Alaska Airlines, argued that because the airport is owned and operated by the Port of Seattle, not the city of SeaTac, it should be exempt. The issue is still being fought in the courts. Approximately 6500 workers would benefit if the law is upheld.
Regardless, approximately 1,500 workers have already benefited, some 400 of who live in the city. The Huffington Post article offers this story to highlight the importance of the victory:
When the new law went into effect last year , Sammi Babakrkhil got a whopping 57 percent raise.
A valet attendant and shuttle driver at a parking company called MasterPark, Babakrkhil saw his base wage jump from $9.55 per hour, before tips, up to $15. Having scraped by in America since immigrating from Afghanistan 11 years ago, he suddenly faced the pleasant predicament as his co-workers: What to do with the windfall?
For the overworked father of three, it wasn’t a hard question. Babakrkhil decided to quit his other full-time job driving shuttles at a hotel down the road. Though he’d take home less money overall, the pay hike at MasterPark would allow him to work 40 hours a week instead of a brutal 80 — and to actually spend time with his wife and three young girls.
As for predictions of doom from the business community, the Puget Sound Business Journal reports:
In the run-up to the contentious vote, the owners of some companies bemoaned the impact the proposal would have on their businesses, telling Mia Gregerson – then the deputy mayor of the suburb south of Seattle – that the law would force them out of business. Other opponents said passage would create an implementation nightmare for the city. . . .
“I’m not aware of any business closing because of Prop. 1,” Gregerson said.
City Manager Todd Cutts said he has not heard of any businesses closing due to Prop. 1 either. City Hall has not spent an inordinate amount of time enforcing the law or implementing it for that matter, he said. . . .
Roger McCracken, a representative of one affected business, the airport parking lot MasterPark, which opposed Prop. 1 and contributed $31,890 to the group that tried to defeat it, declined to comment Monday. But on its website, the company posted that it had raised the wages of all employees, resulting in a 63 percent cost of labor increase, or $1.4 million a year. To absorb this, the company added a 99 cent a day surcharge to customer parking fees.
The former manager of another SeaTac business, an upscale hotel called Cedarbrook Lodge, said Prop 1 would “destroy this community.” Cedarbrook undertook a $16 million expansion that added 63 rooms and a spa that started in December 2013.
While the lawsuit blocked implementation of Prop. 1 at the airport, the Port of Seattle Commission this summer voted to mandate increases for some employees to $11.22 an hour in January 2015 and $13 an hour in January 2017, affecting about 3,000 workers.
These workers’ wages, however, could be boosted to $15 an hour depending on how the state Supreme Court rules on an appeal of the judge’s decision that Prop. 1 does not apply to workers at the airport.
Victories like the one in the city of SeaTac are based on organizing. The following long excerpt from a Labor Notes article provides important insight into some of the organizing challenges faced and overcome:
When organizers from the Service Employees (SEIU) and the Teamsters first began reaching out to airport workers in 2011, we faced a big challenge. The single largest group of low-wage airport workers hailed from Somalia. While their conditions were lousy, they weren’t quite ready to trust us.
In the past, unions weren’t seen as particularly responsive to African workers, especially Muslim workers. For instance, in 2003 Hertz Rent-a-Car had suspended a group of Somali rental car shuttle drivers when they went to pray during Ramadan.
But the workers didn’t get the help they needed from their union, the Teamsters. Instead, an immigrant rights group filed a discrimination complaint on their behalf, got their jobs back, and secured their right to religious expression.
Eight years later, a nearly identical incident erupted. Hertz suspended 34 Somali workers for taking a brief break to go pray.
THE RIGHT TO PRAY
For Muslims daily prayer is obligatory—it’s one of the five pillars of Islam. Ritual prayers last but a few minutes, hardly causing a blip in operations.
After the 2003 suspensions and legal action, Hertz management had agreed to accommodate the workers, treating prayer breaks like smoke or bathroom breaks: just take it and then come back to work. In bargaining with the Teamsters, they agreed that no clock-out was necessary. They even provided a spare room for prayer.
But when workers went to pray on the last Friday in September 2011, the manager told them to clock out. Shuttle driver Zainab Aweis recalled her manager standing with his arms extended, blocking workers who were trying to get into the prayer room. “If you guys pray, you go home,” he declared.
For Aweis, it was an easy choice: she went to pray. “I like the job,” she said. “But if I can’t pray, I don’t see the benefit.” While money mattered, faith was not negotiable.
Again the workers appealed to their union, Teamsters Local 117. Given the anti-Muslim hysteria in this country, Teamsters leaders might just have responded with low-profile activities, like filing a grievance.
But instead, the Teamsters took a stand. They organized a multi-faith pray-in at the Hertz counter and invited the media. Muslims, Christians, and Jews joined union and community activists, praying while holding signs that read, “Respect me, respect my religion.” Union officers and the Hertz shop steward went on national news shows. They brought in lawyers.
Hertz fought back, conceding the workers’ right to pray but insisting on maintaining the suspensions. But union leaders held the line, arguing that the company had violated a principle of collective bargaining. If Hertz wanted to change the break policy, it would have to bargain with union members first.
Essentially the union leaders said that Muslims’ right to pray to Allah isn’t just a Muslim issue. It’s a labor movement issue, because it’s about workers’ right to honor their cultures and traditions—and to have some say over break time.
DOORS BEGAN TO OPEN
You can imagine the negative blowback the Teamsters got—locally, from some of their members, and also in the national blogosphere. But their willingness to take on this fight proved to be a turning point in the relationship between the unions at the airport and the East African community.
After the pray-in, community doors began to open. We were invited to conduct union meetings in the mosques. Imams delivered Friday sermons exhorting people to get civically involved.
Workers warmed up to organizers at the airport, saying, “I heard you were at the mosque,” or “the imam told us about the union.” The airport campaign gained momentum.
When the union organizers and faith leaders both started telling the airport workers, “We are here with you, fight with us,” community leader Mohamed Sheikh Hassan said, it made workers realize “that you can make a change, that you can stand up, that everything’s possible collectively.”
Other airport workers—largely new immigrants—saw what happened at Hertz, and concluded that the union would fight for their broader interests.
Two years later, as the union organizing campaign pivoted to the $15 ballot initiative, we registered more than 900 new voters in SeaTac, almost all new immigrants or the children of immigrants—boosting the voting population in this small city by 9 percent. Probably more than 200 were registered outside Friday prayers.
We won the ballot initiative by 77 votes.
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Opposition within the United States to approval of a fast track mechanism and its use to ensure passage of new trade agreements has, appropriately enough, focused on the negative consequences of these agreements for U.S. workers. However, it is important to remember that third world workers also pay a heavy price for contemporary capitalist globalization dynamics. The experience of workers in the Central American countries of El Salvador, Guatemala, and Hondoras are a case in point.
As a Americas Blog post notes, approximately 350,000 workers are employed in the maquiladora industry in these three countries: 80,000 in El Salvador, 150,729 in Guatemala and 120,000 in Honduras.
The maquiladora industry, is by definition, export oriented, and these workers are largely employed by multinationals such as Fruit of the Loom and Hanes to produce apparel for the U.S. market. In fact, Central America trails only China and Vietnam as an exporter of apparel goods to the the United States.
As the following chart shows, the daily minimum wage for these maquila workers is quite low, averaging only 13 percent of the U.S. federal minimum wage.
Because of the intense competition generated by the logic of corporate globalization the governments in countries like Honduras, Guatemala and El Salvador are continually pressed to offer leading multinational corporations ever lower business costs. For labor-intensive industries like apparel, that means wages. As the three following graphs show, national policies in these countries is producing a widening gap between daily minimum wages in the maquiladora sector and in the non-maquila manufacturing sector.
A study done by the Maquila Solidarity Network highlights the inadequacy of maquiladora minimum wages. As the following chart shows, the average maquila minimum wage paid in these three countries is only 37 percent of the cost of a basic basket of consumer goods and services (MBCG).
New trade agreements designed to further integrate other low wage countries into the corporate structured globalization process will only intensify this national competition for foreign investment, leading to worsening living and working conditions for most workers.
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It is often said that “money makes the world go round.” It is certainly true when it comes to passing legislation in Congress. A case in point: the Senate’s recent approval of the Ryan-Hatch Fast Track bill.
The President and U.S. multinational corporations want Congress to pass the Ryan-Hatch Fast Track bill because they know they need it to ensure passage of the Transpacific Partnership agreement. The bill not only grandfathers in fast track for the TPP but will set the terms for approval of other similar agreements such as the Trans-Atlantic Trade and Investment Partnership.
In the words of Public Citizen, the Ryan-Hatch Fast Track bill would empower the President to:
- Unilaterally select U.S. trade agreement partners and initiate new negotiations;
- Determine the contents of trade agreements and sign and enter into them before Congress votes to accept or reject the terms, regardless of whether a pact meets Congress’ negotiating objectives;
- Write implementing legislation containing any terms the President unilaterally decides are “necessary or appropriate” that can change wide swathes of existing U.S. law, and then circumvent ordinary committee review and submit the legislation for a vote;
- Obtain a mandatory vote in both chambers of Congress within 90 days, overriding congressional leaders’ control of House and Senate floor schedules regardless of whether a pact meets Congress’ negotiating objectives;
- Override normal voting procedures, including a ban on all amendments and limits on debate time regardless of whether a pact meets Congress’ negotiating objectives.
Supporters of the bill tout its special provisions allegedly designed to ensure accountability and transparency. For example, the bill makes it possible for Congress to strip fast track authority from a trade agreement. But as Public Citizen explains:
Instead of establishing a new “exit ramp,” the bill literally replicates the same impossible conditions from past Fast Track bills that make the “procedural disapproval” mechanism to remove an agreement from Fast Track unusable. A resolution to do so must be approved by both the Senate Finance and the House Ways and Means committees and then be passed by both chambers within 60 days. The bill’s only new feature in this respect is a new “consultation and compliance” procedure that would only be usable after an agreement was already signed and entered into, at which point changes to the pact could be made only if all other negotiating parties agreed to reopen negotiations and then agreed to the changes (likely after extracting further concessions from the United States). That process would require approval by 60 Senators to take a pact off of Fast Track consideration, even though a simple majority “no” vote in the Senate would have the same effect on an agreement. In contrast, the 1988 Fast Track empowered either the House Ways and Means or the Senate Finance committees to vote by simple majority to remove a pact from Fast Track consideration, with no additional floor votes required. And, such a disapproval action was authorized before a president could sign and enter into a trade agreement.
Another example of the bill’s limitations: it allows congressional viewing of draft texts, something that Obama fought in the case of the TPP, but members of congress would still not be allowed to share what they learned with the press or public. And their congressional staff would need security clearance to view any draft text.
But on to the main point. Initially it appeared that there was enough opposition among leading Democrats and a few Republicans in the Senate to block passage of the bill. Then suddenly the opposition disappeared. A story in the Guardian newspaper explains what happened:
Fast-tracking the TPP, meaning its passage through Congress without having its contents available for debate or amendments, was only possible after lots of corporate money exchanged hands with senators. The US Senate passed Trade Promotion Authority (TPA) – the fast-tracking bill – by a 65-33 margin on 14 May. Last Thursday, the Senate voted 62-38 to bring the debate on TPA to a close.
Those impressive majorities follow months of behind-the-scenes wheeling and dealing by the world’s most well-heeled multinational corporations with just a handful of holdouts. . . .
Two days before the fast-track vote, Obama was a few votes shy of having the filibuster-proof majority he needed. Ron Wyden and seven other Senate Democrats announced they were on the fence on 12 May, distinguishing themselves from the Senate’s 54 Republicans and handful of Democrats as the votes to sway.
- In just 24 hours, Wyden and five of those Democratic holdouts – Michael Bennet of Colorado, Dianne Feinstein of California, Claire McCaskill of Missouri, Patty Murray of Washington, and Bill Nelson of Florida – caved and voted for fast-track.
- Bennet, Murray, and Wyden – all running for re-election in 2016 – received $105,900 between the three of them. Bennet, who comes from the more purple state of Colorado, got $53,700 in corporate campaign donations between January and March 2015 . . .
- Senator Rob Portman of Ohio, who is the former US trade representative, has been one of the loudest proponents of the TPP. (In a comment to the Guardian Portman’s office said: “Senator Portman is not a vocal proponent of TPP – he has said it’s still being negotiated and if and when an agreement is reached he will review it carefully.”) He received $119,700 from 14 different corporations between January and March, most of which comes from donations from Goldman Sachs ($70,600), Pfizer ($15,700), and Procter & Gamble ($12,900). Portman is expected to run against former Ohio governor Ted Strickland in 2016 in one of the most politically competitive states in the country.
- Seven Republicans who voted “yea” to fast-track and are also running for re-election next year cleaned up between January and March. Senator Johnny Isakson of Georgia received $102,500 in corporate contributions. Senator Roy Blunt of Missouri, best known for proposing a Monsanto-written bill in 2013 that became known as the Monsanto Protection Act, received $77,900 – $13,500 of which came from Monsanto.
- Arizona senator and former presidential candidate John McCain received $51,700 in the first quarter of 2015. Senator Richard Burr of North Carolina received $60,000 in corporate donations. Eighty-one-year-old senator Chuck Grassley of Iowa, who is running for his seventh Senate term, received $35,000. Senator Tim Scott of South Carolina, who will be running for his first full six-year term in 2016, received $67,500 from pro-TPP corporations.
“It’s a rare thing for members of Congress to go against the money these days,” said Mansur Gidfar, spokesman for the anti-corruption group Represent.Us. “They know exactly which special interests they need to keep happy if they want to fund their reelection campaigns or secure a future job as a lobbyist.
Now we are on to the House where opposition to the bill also exists. Lots of Representatives are no doubt licking their chops, waiting for the U.S. Business Coalition for the TPP to unlock its vault once again.
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It is looking increasing likely that the U.S. Congress is going to approve a Fast Track mechanism which will be used to pass the Transpacific Partnership (TPP) agreement. This is not good. What follows is the text of a talk I gave at an April 2015 Oregon AFL-CIO sponsored event on the TPP.
I don’t have much time so I am going to try and make my points as quickly but as clearly as I can.
First, globalization is a process that is shaped by power and current globalization dynamics reflect corporate interests. Sadly, these dynamics have produced a globalization process that is harmful to workers in all the countries involved.
Many U.S. companies have globalized their production because it enables them to lower labor and environmental costs and greatly increase their profits. Since they no longer need to engage in production in this country they have not used their profits to fund investment or job creation in this country. Rather they have channeled them into dividends or stock by-backs, both of which enrich their owners and managers. The consequence for working people is quite different. The resulting low growth and intensified competition between workers for jobs has left us with weak job creation and employment conditions that are increasingly precarious.
Second, the essence of these globalization dynamics is perhaps best revealed through an examination of our various free trade agreements. These agreements, and the Transpacific Partnership agreement (TPP) is no different, are called free trade agreements because the government believes that we all think free trade is good and so by calling them free trade agreements it hopes we will uncritically support them.
The fact is that these agreements are about far more than trade. For example, they normally have some 20 chapters, most having nothing to do with trade as we understand it. The US-Korea agreement had 24 chapters, for example. The TPP apparently has 29 chapters. Now, we don’t know precisely what the TPP or the Trans-Atlantic Trade and Investment Partnership, another agreement being pushed by the current government, will include because they are being negotiated primarily in secret. But we have seen enough agreements signed that we know the US trade negotiator’s play book and there have been enough leaks about the TPP that we can be confident of what many of the chapters will include.
Let me highlight two of its chapters:
We know the TPP has an investment chapter because of a recent leak. Ostensibly this chapter is supposed to protect foreign investors, defined broadly, from nationalization or expropriation, but it does much more. For example, the chapter blocks governments from putting performance requirements on foreign investment. More problematic, it also grants foreign corporations protection from direct or – and here is the kicker – indirect expropriation or nationalization.
So, what is an indirect expropriation or nationalization you might ask? According to the leaked chapter, one of the factors that might signal an indirect expropriation is “the extent to which the government action interferes with distinct, reasonable investment-backed expectations.” Another is “the character of the government action.” This last factor becomes clearer from a reading of the terms of the Investment Chapter in the U.S.-Korea Free Trade Agreement. There it is stated that one of the factors to be considered in determining whether a foreign investor has suffered an indirect expropriation is “whether the government action imposes a special sacrifice on the particular investor or investment that exceeds what the investor or investment should be expected to endure for the public interest.”
Moreover, the chapter also allows an investor that feels like it has been wronged to sue the offending level of government in a special tribunal, whose judges are primarily corporate lawyers who will earn millions of dollars regardless of who wins. In fact many of these lawyers actively encourage corporations to sue in one period, making millions representing them, and then sit on a tribunal judging a government in another time period and again making millions.
The number of corporations suing governments under investment chapters, which are in most FTAs, is rising sharply. Here are a few cases:
- Philip Morris is suing Uruguay and Australia, because these countries want tobacco products sold in plain packaging with large health warnings. The company is suing Uruguay for $2 billion.
- Vatterfall, a Swiss company, is suing Germany because the country has decided to decommission nuclear power plants.
- Lone Star, a U.S. based company, is suing Canada because the province of Quebec has decided to ban fracking.
- Veolia, a French company, is suing Egypt because the government mandated increase in the minimum wage has reduced the profitability of its waste management operation.
Another leaked chapter, this one designed to protect the intellectual property rights of our large companies, seeks, among other things, to extend the length of patents enjoyed by big drug makers. It does that in several ways. For example, it protects “evergreening” in which drug companies can obtain patent extensions by making minor changes to their patented formula or by promoting a secondary use for the drug. It also limits the criteria a product must fulfill in order to be eligible for a patent, thereby making it easier for companies to patent new products. An earlier version of the chapter—it is not sure where things currently stand—even tried to secure patents for particular methods of performing surgery.
I could go on but you get the idea—these and other chapters are designed to promote corporate power and profits by limiting public policies that might regulate their investment or production decisions. This freedom would come at our expense and, I would add, the overall health of our economy.
Third, what about the trade part. We hear over and over again from economists how wonderful free trade is for all countries involved. However, realize that this conclusion is largely based on Ricardo’s theory of comparative advantage, a theory which rested on a few key assumptions. The most important were: full employment, balanced trade, and a lack of capital mobility. Now you might think that this theory and its assumptions is just another example of the fantasy world that economists live in, and no one, especially policy-makers, would take its conclusions seriously. Well, every time you read or hear an economist or government official tell you how much such and such free trade agreement is going to raise GDP or boost trade you can be sure that they got that number from something called a Computable General Equilibrium Model. And those models, believe it or not, use the very same assumptions. They have to make those assumptions if their models are to produce numerical estimates. But think of what that means. We worry about unemployment, trade deficits, and capital flight. Economists, the ones that our government relies on, assume those worries away, by assumption.
Even granting them their assumptions, their predictions for gains are still incredibly small. The most common estimates, using the method noted above, find that the TPP will boost U.S. GDP by 0.38 percent in 2025. That is a predicted gain of approximately $80 billion, really a rounding error in a $18 trillion economy. And then remember all the chapters that we know will do us harm. For example, the extra cost for medical care from extending and promoting patients will clearly swamp predicted benefits from trade.
Nevertheless U.S. officials have been endlessly quoting that the agreement will boost jobs—most often they cite a gain of 650,000 jobs. However, it is unclear where this number comes from. The studies themselves do no actual job forecasting. All they do is predict, subject to the assumptions noted, growth in GDP and exports and imports.
So, where does the administration get its estimate? No one knows for certain, but here is a good guess: The model predicts that the TPP will increase exports by $124 billion by 2025. The Commerce Department estimates that about 5,500 jobs are supported by every $1 billion in exports, so, if you do the math you get an increase of approximately 650,000 jobs. There is one big problem with this calculation—it leaves out imports. The model actually predicts an increase of approximately the same dollar value of imports—so there goes the increase in jobs.
In short, we are being lied to—about the nature of this and other agreements.
The fact is that the government doesn’t have the slightest idea of what this agreement will do for our GDP or employment. What it knows is that it will greatly increase corporate profits and power and that is what it cares most about. The rest is all salesmanship.
So, the takeaway: these agreements have been harmful—we have the history of past agreements to show us that. We need to oppose them. The government knows that the more people know about these agreements the less they will like them so they want to fast track them. They want a procedure that will allow a simple and quick up or down vote. Unfortunately many of our politicians depend on corporate funds and so they also want fast track because it allows them to do what they want without drawing too much public heat. We cannot let that happen. We need to educate others about what these agreements are really about and we need to pressure Congress not to approve a fast track procedure for approving them.
Things are bad enough in this economy we certainly don’t need to implement agreements that will only worsen them.
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Growth is not development. The Chinese labor experience is a good example of this. In brief, despite record rates of growth, the Chinese economy has failed to generate formal sector jobs. In fact, there were fewer formal sector urban workers employed in 2010 than in 1990. All the job growth has been outside the formal sector, which means that a growing percentage of Chinese workers are not covered by the country’s labor law, and their wages, benefits, and working conditions are not captured by official Chinese labor statistics.
From 1979 until 2010, China recorded an average annual GDP growth rate of approximately 10%, a thirty year growth rate unmatched by any other country. The country’s rate of growth is now slowing, from 10.6% in 2010, to 7.7% in 2012, and 7.4% in 2014. Of course those are official rates of growth. According to most analysts, Chinese growth was probably closer to 5% in 2014 and, despite government efforts, likely to continue to slow.
But what about the labor experience? In “Misleading Chinese Legal and Statistical Categories: Labor, Individual Entities, and Private Enterprises,” a 2013 article published in the journal Modern China, Philip C.C. Huang describes the evolution and application of Chinese labor law, highlighting its relevance for and growth of different categories of labor. As he explains, Chinese statistical categories recognize four main types of labor activity based on the legal standing of the employing firm: labor by “employee-workers,” labor by workers employed by legally registered “private enterprises,” labor by people in legally registered “individual entities,” and “unregistered” labor.
Only “employee-workers” are considered formal sector workers and covered by the country’s labor law. The following table, with numbers expressed in units of 10,000, shows that there were almost 128 million urban formal sector workers employed in China in 2010.
Significantly, as the next table illustrates, both the number and percentage of workers employed in the formal urban economy are shrinking. The number employed in the formal economy in 2010 was less than the number employed in 1990. As of 2010, only 36.8% of all workers in the urban economy were employed in formal sector jobs. In short, all the growth in urban employment over recent decades has been in categories not covered by Chinese labor law, which means that those workers are not covered by legally established minimum wage, overtime regulations, and social benefit requirements.
Who are the workers employed outside the formal sector? “Private enterprises” are mainly legally registered small-scale businesses averaging 13-15 people. As Huang describes: “They are also as a rule not formally incorporated as a limited liability entity with separate ‘legal person’ status and are therefore not considered legal ‘employing units’ that are involved in ‘labor relations’. . . . These small businesses rely mainly on the cheapest labor available, the majority of them on disemployed workers and peasant-workers, who are considered to be only in a casual work relationship with them and for whom they need provide no benefits.”
“Individual entities” include legally registered small scale operations employing one or perhaps two people, usually the owner and a family member or friend. In the largest cities, these workers are “largely engaged in wholesale and retail trade (mainly of daily necessities and clothing), followed by small and modest eateries and hostels, domestic and other services, and transport work. . . .Regardless, the great majority of the people operating the individual entities come from the ranks of the disemployed urban workers and the migrant peasant-workers.”
“Unregistered” workers are those, as the category name implies, whose work is unregistered and therefore largely illegal or extralegal. They are primarily “newer and less established peasants-workers working in the lowest levels of the informal economy, as temporary construction workers, janitors, itinerant peddlers or stall keepers, guards standing outside residential compounds and commercial buildings the help in eateries and hostels domestic servants manual transport and loading-unloading workers, and the like, many of whom work in the shadow of the law without permits, truly members of the so-called floating population.”
Unregistered workers “appear in the official state statistical tallies only as the difference between those who have registered with the official state administrative entities and the actual numbers of laborers counted up by the decennial population censuses (which have made every effort to enumerate every person living and working in the cities).” As we can see from the table above, the number of unregistered urban workers are quickly catching up to the number of formal sector urban workers.
The critical point here is that despite record rates of growth few formal sector jobs have been created in urban areas. That means that official Chinese labor laws and regulations cover a relatively small and declining share of Chinese urban sector workers. As a consequence, the great majority of urban workers suffer from conditions far worse than do formal sector workers.
At the same time, things are far from rosy for most formal sector workers. For example, many companies, especially foreign owned companies, have been actively seeking to weaken formal sector job rights by employing so-called dispatched workers and student interns to avoid paying the wages and benefits mandated by Chinese labor law. It is therefore not surprising, as recent labor struggles make clear, that even workers in the formal sector have been forced to take direct action to ensure compliance with their country’s labor laws and improve their working conditions.
Tax day has come and gone. And there is indeed a lot to complain about: our corporations and the wealthy have successfully minimized their own tax responsibilities, leaving us to support a powerful and profitable military-national-security-industrial complex at the expense of needed public services and social programs.
Let’s start with who pays taxes. Individuals and corporations pay income taxes to the federal government. However, as the chart below shows, corporations have been able to take advantage of increasingly lenient income tax laws and a corporate friendly globalization process to significantly lower their tax obligations. If we add payroll taxes which are paid to support specific programs like Social Security and Medicare, the overall individual contribution is approximately 80% and the corporate share about 11%.
Lower corporate taxes were supposed to unleash the power of the market and make us all better off. Unfortunately, but not surprisingly, all they have done is boost corporate profits at the public expense.
Of course, income tax burdens are not equally divided among individuals. In fact, our federal income tax code has become increasingly favorable to higher income earners. As the next chart shows, the top marginal income tax rate has been dramatically reduced. The top marginal tax rate was 50 percent in the mid-1980s and even higher in the 1950s. Currently, the top rate is 39.6 percent; it is paid by individuals making more than $406,750 and couples making more than $457,600. And then there are tax breaks that disproportionately benefit top income earners.
The combination of more income going to top earners, lower top marginal tax rates, and specially crafted tax breaks cannot help but reduce federal tax revenues and drive up our federal deficits.
The payment of income taxes is one thing—how the federal government uses the money it receives is another. As we see next, military related activities absorb a heavy share of federal spending.
Direct spending on the military accounts for 27 cents of every federal tax dollar spent. Including spending for veterans benefits and approximately two-thirds of the interest on the federal debt adds another 16.05 cents, which brings the overall military total to 43.05 cents out of every dollar spent. This is a conservative estimate because it does not include spending on activities that fall under the broader heading of national security such as homeland security and certain “foreign aid” expenditures. No wonder our infrastructure and social programs are starved for funds.
Federal spending can be divided into non-discretionary and discretionary items. In the case of the former, spending is mandated by law, such as payment of the national debt. In the case of the latter, the federal government has discretion in how it spends our tax money. Looking just at discretionary spending reveals even more clearly the dominant position of the military in our budget priorities.
Moreover, political pressure keeps working to push the military share higher. Both House and Senate budget proposals call for spending some $530 billion on defense in Fiscal Year (FY) 2016. That is the most that can be spent without triggering automatic spending cuts due to sequestration. But – happily for the military – there is an exception to the sequestration process.
This exception allows Congress to authorize unlimited spending for current military operations or what is officially known as Overseas Contingency Operations. House and Senate proposals include more than $90 billion under this heading. Significantly, there is no similar exception when it comes to spending on non-military, discretionary items. Apparently our non-military needs don’t rise to the same level of urgency as our military ones.
A few key changes in the tax code and federal spending priorities and a better 2016 tax day is not hard to imagine.
The dominance of the 1% is now widely accepted. What is often missed is the fact that their dominance was built on a major transformation of the U.S. economy beginning in the early 1980s and that U.S. policy, which helped to usher in that transformation, has largely been committed to reinforcing it. An NPR Planet Money post includes two charts that vividly highlight this transformation.
The chart below shows trends in the average inflation-adjusted pre-tax income for both the bottom 90% and the top 1% of the U.S. population. From the early 1940s to the early 1970s, the bottom 90%—the great majority of the population—enjoyed a steady growth in their average real income while the top 1% saw little growth (to their already substantial total).
However, beginning in the early 1980s, thanks to the intensification of globalization, privatization, deregulation, and attacks on unions and social programs, things dramatically changed. Now it was the top 1% that saw all the income gains. In fact, as the chart makes clear, the real average income of the bottom 90% has actually been in decline.
The following chart offers an even more dramatic way to see this change in relative “fortunes.” Each data point represents the average real pre-tax income of the bottom 90% and the top 1% for the given year. The vertical greenish line illustrates the fact that between the early 1930s and 1970s only the bottom 90% saw income gains. The horizontal red line illustrates how beginning in the early 1980s all the income growth went to the top 1%.
One take away: no change in policy, no change in income distribution.