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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, Egypt because the government mandated increase in the minimum wage has reduced the profitability of it 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.
Business has failed to create the jobs we need and our public policies are failing to protect those who are unemployed.
As an Economic Policy Institute report explains:
The drop in the official unemployment rate overstates the overall improvements made in the underlying labor market. The United States lost 7.8 million jobs between December 2007 and October 2010 but the working-age population continued to grow over that period. As a result, even with steady job growth in recent years, the current labor market is still short 5.6 million jobs needed to keep up with the growth in potential labor force (see Figure A).
And, as of December 2014, only 23.1 percent of unemployed workers received any state unemployment benefits (see Figure B). One reason is the nature of many of the recently created jobs: they are short term and low paying; this leaves workers without the work record or earnings necessary to draw benefits. Another reason:
since 2011 nine states have cut the maximum available number of weeks of regular UI benefit duration [to below the long-accepted norm of 26 weeks] : Arkansas, Florida, Georgia, Illinois, Kansas, Michigan, Missouri, North Carolina, and South Carolina. Except Illinois, all these states made other legislative changes to their programs which may have reduced benefit recipiency.
Times are not easy even for those lucky enough to receive the benefits they earned: As the Economic Policy Institute report notes:
Many states pay low benefits. There were 11 states with maximum weekly benefit levels of $350 or less in 2014, meaning that workers earning more than $700 a week (well below the median weekly earnings) do not get half their pre-layoff wages replaced by UI benefits. Average benefits overall were only $315 a week in 2014 with average weekly benefits below poverty levels in the poorly performing states.
My latest article, on capitalist globalization, appears in the current issue of the journal Critical Asian Studies. For a limited time the journal is making it freely available. Here is the abstract and below it a link to the article itself.
From the Claw to the Lion
A Critical Look at Capitalist Globalization
This article argues that capitalist globalization is largely responsible for creating or intensifying many of our most serious economic and social problems. It first describes the forces that drove core country transnational corporations to create a complex system of cross-border production networks. It then maps the resulting new international division of labor, in which Asian countries, especially China, import primary commodities from Latin American and sub-Saharan African countries to produce exports for core countries, especially the United States. In core countries, globalization has led to the destruction of higher paying jobs, financialization of economic activity, and stagnation. While the new international division of labor has boosted third world rates of growth, especially in Asia, it has also left the third world with unbalanced and inequitable economies. Moreover, contradictions in the globalization process point to the spread of core country stagnation to the third world. Capitalist globalization has increased third world dependence on core country consumption while simultaneously undermining core country purchasing power. The article ends by discussing a process and program of transformation that highlights the feasibility of an alternative to global capitalism as well as the organizational capacities and institutional arrangements that must be developed if we are to realize it.
The article can be read or downloaded for free here.
The corporate nature of the Trans-Pacific Partnership (TPP), a so called free-trade agreement, is becoming more obvious thanks to a recent leak of the investment chapter by Wikileaks.
While the U.S. government likes to promote agreements like the TPP as good because they lower restrictions on trade, the fact is that trade liberalization itself does not automatically improve worker and community well-being. In fact, most studies show negative consequences. Even more importantly, pure trade issues play only a small part in these free-trade agreements; they are primarily designed to boost corporate power and profits through multiple chapters, each of which limit public regulation or control over different aspects of corporate decision making.
The investment chapter of the TPP is a case in point. Here is what the New York Times has to say about the chapter:
The Trans-Pacific Partnership — a cornerstone of Mr. Obama’s remaining economic agenda — would grant broad powers to multinational companies operating in North America, South America and Asia. Under the accord, still under negotiation but nearing completion, companies and investors would be empowered to challenge regulations, rules, government actions and court rulings — federal, state or local — before tribunals organized under the World Bank or the United Nations. . . .
The sensitivity of the issue is reflected in the fact that the cover mandates that the chapter not be declassified until four years after the Trans-Pacific Partnership comes into force or trade negotiations end, should the agreement fail. . . .
“This is really troubling,” said Senator Charles E. Schumer of New York, the Senate’s No. 3 Democrat. “It seems to indicate that savvy, deep-pocketed foreign conglomerates could challenge a broad range of laws we pass at every level of government, such as made-in-America laws or anti-tobacco laws. I think people on both sides of the aisle will have trouble with this.”. . .
Under the terms of the Pacific trade chapter, foreign investors could demand cash compensation if member nations “expropriate or nationalize a covered investment either directly or indirectly.” Opponents fear “indirect expropriation” will be interpreted broadly, especially by deep-pocketed multinational companies opposing regulatory or legal changes that diminish the value of their investments.
Included in the definition of “indirect expropriation” is government action that “interferes with distinct, reasonable investment-backed expectations,” according to the leaked document.
Critics say the text’s definition of an investment is so broad that it could open enormous avenues of legal challenge. An investment includes “every asset that an investor owns or controls, directly or indirectly, that has the characteristic of an investment,” including “regulatory permits; intellectual property rights; financial instruments such as stocks and derivatives”; construction, management, production, concession, revenue-sharing and other similar contracts; and “licenses, authorizations, permits and similar rights conferred pursuant to domestic law.” . . .
All of those disputes would be adjudicated under rules set by either the International Centre for Settlement of Investment Disputes or the United Nations Commission on International Trade Law. . . .
There are . . . mitigating provisions, but many have catches. For instance, one article states that “nothing in this chapter” should prevent a member country from regulating investment activity for “environmental, health or other regulatory objectives.” But that safety valve says such regulation must be “consistent” with the other strictures of the chapter, a provision even administration officials said rendered the clause more political than legal.
One of the chapter’s annexes states that regulatory actions meant “to protect legitimate public welfare objectives, such as public health, safety and the environment” do not constitute indirect expropriation, “except in rare circumstances.” That final exception could open such regulations to legal second-guessing, critics say.
There are many other chapters in the TPP, most of which are tailored to promote specific corporate interests—for example, there is a chapter that strengthens patent protection and monopoly profits for drug companies—an outcome that flies in the face of liberalization claims.
The corporate bias in these agreements is not surprising given that corporate leaders and lobby groups are the main advisers to the U.S. trade representative.
The media’s recent attention to the TPP’s investment chapter and the growing cries of alarm by politicians is somewhat surprising given that such chapters have been part of all recent trade agreements involving the U.S., for example the Korea-U.S. Free Trade Agreement.
Corporate use of these investment chapters and their associated investor state dispute settlement mechanisms [ISDS] is intensifying as the charts below highlight.
And, since the tribunals that rule on corporate initiated suits against governments are heard by corporate lawyers, it should not be surprising that most rulings go against governments. In one of the largest, the tribunal agreed with Ecuador that Occidental Oil had violated its contract with the government but still ruled in Occidental’s favor to the tune of $2.4 billion.
Regardless of the reason, it is positive that the terms of the TPP are now sparking outrage. However, since its investment and other chapters have been regularly included in past agreements with little fanfare or Congressional opposition, we need to recognize that current cries of alarm by politicians are more the result of unexpected public disclosure than real disapproval.
If we want to defend our interests we need to take advantage of the moment and strengthen our opposition to this and other free trade agreements. But we shouldn’t stop there. After all corporate dominance of public policy is not limited to international trade and investment agreements.
President Obama continues to press for a form of fast track approval to ensure Congressional support for two major trade agreements, the Trans-Pacific Trade Partnership Agreement with 11 other countries (Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam) and the Trans-Atlantic Trade and Investment Partnership Agreement with the entire European Union.
Both agreements, based on leaks of current negotiating positions, have been structured to promote business interests and will have negative consequences for working people relative to their wages and working conditions, access to public services, and the environment.
These agreements are being negotiated in secret: even members of Congress are locked out of the negotiating process. The only people that know what is happening and are in a position to shape the end result are the U.S. trade representative and a select group of 566 advisory group members selected by the U.S. trade representative.
Thanks to a recent Washington Post blog we can see who these advisory group members are and, by extension, whose interests are served by the negotiations. According to the blog post, 480 or 85% of the members are from either industry or trade association groups. The remaining 15% are academics or members of unions, civil society organizations, or government committees. The blog post includes actual names and affiliations.
Here we can see the general picture of corporate domination of U.S. trade policy as illustrated by the Washington Post.
In short, corporate interests are well placed to directly shape our trade policies. No wonder drafts of these treaties include chapters that, among other things, lengthen patent protection for drugs, promote capital mobility and privatization of public enterprises, and allow corporations to sue governments in supra-national secret tribunals if public policies reduce expected profits.
Officially, the U.S. economy has been in expansion since June 2009. Many people find this hard to believe. One reason is that wages have either been flat or falling for much of the period.
A recent study of real hourly wage trends over the period 2007 to 2014 by the Economic Policy Institute (EPI) documents this reality. The 2007 period marks the end of the previous expansion; the recession started in December 2007. The charts below highlight the results of their study.
This first chart shows that only those in the top wage percentile have enjoyed an increase in real hourly wages since 2007. Moreover, almost all groups are currently experiencing real declines in earnings. The exception is the bottom percentile and, according to the EPI, “a series of state-level minimum wage increases” is the main reason for their recent gains.
The following two charts separate the labor force by gender. Again, we see gains only for the top percentile. Men have experienced steeper declines in hourly earnings than women, although male wages remain higher than female wages.
As the EPI study explains:
It is clear that those in every education category experienced falling or stagnant wages since 2007. In fact, real hourly wages have declined for 90 percent of the workforce with four-year college degrees since 2007 (not shown). From 2000 to 2014, real wages of the 90th percentile of this group only increased 4.0 percent cumulatively.
The data do show that college graduates have fared slightly better than high school graduates since 2007. This is not because of spectacular gains in the wages of college graduates, but because college-graduate wages fell more slowly than the wages of high school graduates. Notably, despite wage declines in both 2013 and 2014, those with advanced degrees are the only ones who have returned to their 2007 real wage levels.
These trends only highlight the mean spirited nature of current attacks on unions and resistance to raising minimum wages.
The conventional wisdom is clear—our economic policies should aim at boosting profits. Success will translate into investment and jobs. Unfortunately for us, the conventional wisdom is wrong.
Profits are up and so is the stock market, but investment, job creation, and wages all remain flat. Corporate managers are just not interested in investing firm profits in new plant and equipment. They have a better use for them, one that more directly speaks to their interests as well as those of the stock holders they represent.
William Lazonick, writing in the Harvard Business Review, offers one important explanation for what is happening and why:
The allocation of corporate profits to stock buybacks deserves much of the blame [for the trends noted above]. Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees.
Why are such massive resources being devoted to stock repurchases? . . . . Stock-based instruments make up the majority of [corporate executive] pay, and in the short term buybacks drive up stock prices. In 2012 the 500 highest-paid executives named in proxy statements of U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock awards. By increasing the demand for a company’s shares, open-market buybacks automatically lift its stock price, even if only temporarily, and can enable the company to hit quarterly earnings per share (EPS) targets.
As a result, the very people we rely on to make investments in the productive capabilities that will increase our shared prosperity are instead devoting most of their companies’ profits to uses that will increase their own prosperity—with unsurprising results. Even when adjusted for inflation, the compensation of top U.S. executives has doubled or tripled since the first half of the 1990s, when it was already widely viewed as excessive. Meanwhile, overall U.S. economic performance has faltered.
The Pharmaceutical industry is a case in point.
In response to complaints that U.S. drug prices are at least twice those in any other country, Pfizer and other U.S. pharmaceutical companies have argued that the profits from these high prices—enabled by a generous intellectual-property regime and lax price regulation—permit more R&D to be done in the United States than elsewhere. Yet from 2003 through 2012, Pfizer funneled an amount equal to 71% of its profits into buybacks, and an amount equal to 75% of its profits into dividends. In other words, it spent more on buybacks and dividends than it earned and tapped its capital reserves to help fund them. The reality is, Americans pay high drug prices so that major pharmaceutical companies can boost their stock prices and pad executive pay.
The takeaway here is that boosting profits is not the means to promote the general interest. If we want more and better jobs we need appropriate public sector investments to stimulate and restructure our economy as well as new labor supporting workplace and wage policies.