Reports from the Economic Front

by Martin Hart-Landsberg

Minimum Wage Hikes Work

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As workers battle to raise the minimum wage it is nice to see more evidence that raising the minimum wage helps low wage workers and state economies.

Thirteen states raised their respective minimum wages in 2014:  AZ, CA, CT, FL, MO, MT, NJ, NY, OH, OR, RI, VT, and WA.  Elise Gould, an economist at the Economic Policy Institute, compared labor market changes in these thirteen states with changes in the rest of the states from the first half of 2013 to the first half of 2014.

Economic analyst Jared Bernstein summarizes the results as follows:

Elise compares the 10th percentile [lowest earners] wage growth among these thirteen states that increased their minimums with the rest that did not. The results are the first two bars in the figure below.

EG_minwg

Real wages for low-wage workers rose by just about 1% over the past year in the states that raised their minimum wages, and were flat (down 0.1%) in the other states.

OK, but did those increases bite into employment growth, as opponents typically insist must be the case? Not according to the other two sets of bars. They show that payroll employment growth was slightly faster in states that raised, and the decline in unemployment, slightly greater.

In short, raising the minimum wage did boost the earnings of those at the bottom of the income distribution.  Moreover, workers in states that raised the minimum wage also enjoyed greater employment growth and a greater decline in unemployment than did workers in states that did not.

Written by marty

September 18th, 2014 at 5:08 pm

Privatization Failure

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Swedes will be going to the polls Sunday, September 14, and according to the Guardian it appears that they will vote the ruling center-right coalition out of power.  The main reason: the privatization of public services has not produced good results.  If Americans can learn from this experience we might avoid a real disaster.

Excerpts from the Guardian article:

Over the past three years, cracks have shown in the Nordic model, most notably with last year’s riots in the suburbs of Malmö and Stockholm, and the rise of the far-right Sweden Democrats, which is polling at almost 10%. Income gaps have increased by a third, more than in any other OECD country, and unemployment benefit has fallen below the European average.

Formerly called John Bauergymnasiet, Grillska used to be one of Sweden’s publicly funded but privately run friskolor (free schools) until its owner, the Danish private equity company Axcel, filed for bankruptcy last April.

Since then, the school has been managed – and improved – by Stockholm’s Stadsmissionen, a non-profit charity. But the John Bauer scandal has made many Swedes question the pro-privatization policies of the government, led by the Moderate party’s Fredrik Reinfeldt. . . .

A series of scandals has made many Swedes question the private sector’s role in public services. Axcel was accused of trying to maximize profits by saving on teachers’ wages and lowering the teacher-student ratio below the national average; the privately run Hälsans chain of preschools was reported to serve its pupils crispbread and water for lunch, having budgeted only nine kronor (87 p) a student for food.

No other state in Europe had been as generous in allowing the private sector free access to its pupils. The proportion of employees in privately provided services rose from 5% in 1993 to 23% in 2011.

“Overnight, the debate changed,” said Roger Jakobsson, Grillska’s head of education. “For years, people had been accusing schools run by private equity of pocketing the state’s money and putting it into their offshore bank accounts. But now it looked like these companies weren’t even capable of running a business properly.”

The education changes ushered in by the conservative government in 1992 promised to improve the quality of teaching in Swedish schools. Instead, the Programme for International Student Assessment saw the homeland of the Nobel prize drop below the OECD average in maths, reading comprehension, natural science and problem solving. Grade inflation, meanwhile, was rampant.

The care sector also suffered a privatisation scandal in 2011, when the Dagens Nyheter newspaper reported that an elderly care centre in Koppargården, run by the private company Carema, was catastrophically neglecting its customers, allegedly weighing their diapers to see if they could be used for longer, thus ensuring maximum usage and lower costs. . . .

Complaints about poor service and frequent delays on the high-speed train between Malmö and Stockholm also swung the mood against rail privatisation of the railways. How was it, some asked, that information centres were closing at train stations while Sweden’s popular, 100% state-owned Systembolaget alcohol stores could afford staff who advised on which wine went best with reindeer stew?

Under prime minister Reinfeldt, Sweden for the first time discovered an appetite for tax cuts. Wealth tax, income tax and corporate tax were slashed. Tax breaks for domestic services such as cleaning or babysitting (RUT) and relief on household renovations (ROT) have been popular with the middle classes. . . .

But surveys show that Swedes’ willingness to pay higher taxes has risen recently. As columnist Fredrik Virtanen said in Aftonbladet newspaper: “Taxes are the price we pay for civilisation. Not only is it cool to pay taxes, it’s sexy.”

Even Reinfeldt has bowed to the polls and vowed there would not be further tax cuts until 2018. Finance minister Anders Borg is still popular, and Sweden’s public debt, at 40% of GDP, is half that of Germany, but unemployment remains a problem in spite of liberal reforms in the labour market.

“The Moderates and their allies have gradually lost the argument about the future,” said Eric Sundström, political editor of Dagens Arena website. “They have failed to recognize how even the middle class is upset with the perceived general decline of schools and welfare services.”

Written by marty

September 11th, 2014 at 4:58 pm

No Light, No Tunnel

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People are slowly but surely recognizing that there is no economic light at the end of the tunnel.  In fact, it appears that we may be looking into a cave not a tunnel.

The U.S. economy has undergone a major transformation.  Globalization, financialization, privatization, deregulation, and liberalization, to mention just a few of the developments that define this transformation, have created an economic system that rewards only a very few people.

The chart below shows these are good times for those at the top–economic profits are up and the stock market is soaring over this expansion period.  But what about for the great majority? Growth is slow and even more importantly median household (HH) income has actually fallen by 3 percent.

profits and stock gains

The following two charts highlight some of the pressures facing working people.  The first shows that the average earner, the one at the 50th percentile, has suffered a 2.7 percent real decline in hourly wages since 2007.  The decline has actually been much greater since 2009, when the recession allegedly ended and the good times began.  Even those at the 95 percentile have suffered real hourly declines since 2009.

wages

The second shows that family income has fallen for almost all income groups over the period 2007 to 2012.  We can get some idea of the transition period by comparing income trends in the three periods shown. Suppressing wages is one way to boost profits and stock prices in a period of slow growth.

Family Income

As I said above, people are beginning to recognize that current trends are no aberration.  A recent Rutgers University poll asked Americans how they viewed the Great Recession and its aftermath.  The figure below present the results.

poll

Here is what the Rugers researchers had to say:

The survey finds 71 percent saying the recession left us with “a permanent change in what are normal economic conditions in the country.”  Moreover, the belief that the economic downturn created irreversible shifts in the economy grew from 49 perent in November 2009 to 56 percent in September 2010, and to 60 percent in Janary 2013.  Now, 71 percent of Americans think the economy has changed permanently, which represents a broad consensus.

At least some people are drawing the appropriate conclusion—they are taking direct action to improve their working and living conditions.  As the Guardian reports

America’s fast food workers are planning their biggest strike to date this Thursday (September 4th), with a nationwide walkout in protest at low wages and poor healthcare.

The strike is the latest in a series of increasingly heated confrontations between fast food firms and their workers. Pressure is also mounting on McDonald’s, the largest fast food company, over its relations with its workers and franchisees. . . .

Workers from McDonald’s, Burger King, Pizza Hut and other large chains will strike on Thursday and are planning protests outside stores nationwide, in states including California, Missouri, Wisconsin and New York.

The day of disruption is being coordinated by local coalitions and Fast Food Forward and Fight for 15, union-backed pressure groups which have called for the raising of the minimum wage to $15 an hour for the nation’s four million fast-food workers.

Thursday’s strike will be the seventh since fast food workers in New York walked out on their jobs in November 2012. Each walkout has been bigger than the last and have been credited with spurring President Barack Obama to focus on an increase in the minimum wage.

USA-Global Fast Food Worker Protest

 

The No-Raise Expansion

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Our current economic expansion is now past the five year mark and the gains for most working people are hard to find.  Media attention has largely focused on the weak record of job creation.  Less attention has been given to the lack of growth in wages and benefits.

As Bloomberg News explains:

Meager improvements since 2009 have barely kept up with a similarly tepid pace of inflation, raising the real value of compensation per hour by only 0.5 percent. That marks the weakest growth since World War II, with increases averaging 9.2 percent at a similar point in past expansions, according to Bureau of Labor Statistics data compiled by Bloomberg.

The chart below looks at the inflation adjusted growth in hourly compensation (wages and benefits) for 11 different economic expansions.  The gains are for the first five years for those expansions that lasted longer. Full business cycle dating can be found here.

compensation comparisons
The following chart highlights the widening gap between the growth in compensation during the average post-war economic expansion and the current one.

compensation trends

Clearly, business feels no pressure to boost compensation—and it is worth underlining that we are talking about wages and benefits—despite the severity of the past recession and the growing length of the current recovery. It is no wonder that many workers are even reluctant to believe we are in recovery.

To make matters worse, economists Martin Feldstein and Robert Rubin are now calling on the Federal Reserve to slow growth.  In a Wall Street Journal op-ed they expressed their fear that new asset bubbles are growing dangerously large.  However, as Dean Baker points out:

Given their enormous stature, Feldstein and Rubin undoubtedly expected their joint bubble warning to have considerable weight in economic policy circles. Of course this raises the obvious question, why couldn’t Feldstein and Rubin have joined hands to issue this sort of bubble warning ten years ago in 2004 about the housing bubble? If they used their influence to get a column about the dangers of the housing bubble in The Wall Street Journal in the summer of 2004 it might have saved the country and the world an enormous amount of pain. . . .

It would have been great if Feldstein and Rubin had used their stature to warn of the dangers of the housing bubble in 2004, but they were otherwise occupied. Feldstein was on the board of AIG (yes, that AIG), where he was pocketing several hundred thousand dollars a year for his services. Rubin was a top executive at Citigroup, which was one of the biggest actors in the securitization of subprime mortgages. He walked away with over one hundred million dollars for his work. So it was easy to see why Feldstein and Rubin could not have been bothered a decade ago to warn about the housing bubble.

Making matter worse, their current warnings are completely misplaced. The Fed has to concentrate on trying to promote growth and getting people back to work. The risk from the inflated asset prices that they identify are primarily a risk that some hedge funds and other investors may take a bath when asset prices (like junk bonds) move to levels that are more consistent with the fundamentals. . . .

So there you have it: two extremely prominent political figures who got rich off the housing bubble, now taking time from their busy schedule to call on the Fed to raise interest rates and destroy millions of jobs. In the “show no shame” contest, this looks like a real winner.

To this point, Janet Yellen, the head of the Federal Reserve Board, has wisely resisted their advice.  But the problem is that the status quo is far from satisfactory.

Written by marty

August 23rd, 2014 at 7:44 am

Almost 1/4 of U.S. Children in Poverty

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If the well-being of our children is an indicator of the health of our society we definitely should be concerned.  Almost one-fourth of all children in the U.S. live in poverty.

The Annie E. Casey Foundation publishes an annual data book on the status of American children.  Here are a few key quotes from the 2014 edition (all data refer to children 18 and under, unless otherwise specified): 

  • Nationally, 23 percent of children (16.4 million) lived in poor families in 2012, up from 19 percent in 2005 (13.4 million), representing an increase of 3 million more children in poverty.
  • In 2012, three in 10 children (23.1 million) lived in families where no parent had full-time, year-round employment. Since 2008, the number of such children climbed by 2.9 million.
  • Across the nation, 38 percent of children (27.8 million) lived in households with a high housing cost burden in 2012, compared with 37 percent in 2005 (27.4 million). The rate of families with disproportionately high housing costs has increased dramatically since 1990 and peaked in 2010 at the height of the recent housing crisis when 41 percent of children lived in families with a high housing cost burden.

As alarming as these statistics are, they hide the terrible and continuing weight of racism.  Emily Badger, writing in the Washington Post, produced the following charts based on tables from the data book. 

economics

education indicators

health

Children live in poverty because they live in families in poverty.  Sadly, despite the fact that we have been in a so-called economic expansion since 2009, most working people continue to struggle.  The Los Angeles Times reported that “four out of 10 American households were straining financially five years after the Great Recession — many struggling with tight credit, education debt and retirement issues, according to a new Federal Reserve survey of consumers.”

 

Written by marty

August 15th, 2014 at 1:17 pm

Corporations, Inequality, And Economic Stagnation

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Wealth inequality isn’t just growing among individuals.  It is also growing among corporations—and that is not good for the U.S. economy.

According to Bloomberg News:

Eighteen American businesses held 36 percent of corporate wealth in 2013, up from 27 percent in 2009, according to a report from Standard & Poor’s, a credit rating firm in New York. The bottom 80 percent have lost ground, with just 11 percent.

The top 1 percent includes all the big companies you might well imagine, including Microsoft, Google, Apple, Coca-Cola, and Ford Motor Company.

The top companies are holding ever more of their wealth as cash and outside the United States.  The wealthiest 1 percent of corporations raised the share of their assets held as cash from 20.4 percent in 2009 to 23.6 percent in 2013.  The rest of the corporate sector held cash balances that were worth less than 7 percent of their total assets.

Some highlights:

  • Apple is holding 78 percent of its $40.7 billion in cash overseas.
  • Cisco is holding 93 percent of its $47.1 billion in cash overseas.

Among other things this behavior means that corporations are dramatically cutting their tax obligations to the U.S. government. The congressional Joint Committee on Taxation estimates that this corporate strategy cost the U.S. Treasury over $83 billion dollars in revenue this fiscal year.

Corporations, fearful that the government might take steps to force them to invest this money in the United States economy, are exploring new strategies. For example, some are merging with foreign companies so that they can legally establish themselves in lower tax countries.

Bloomberg News ends its story as follows:

“You could argue that companies that make a billion dollars and don’t pay taxes are freeloaders,” said Mitch Rofsky, president of the Better World Club, an insurer based in Portland, Oregon, and member of the American Sustainable Business Council, a group of small employers.

“It’s basically an issue of do our economic models work, is infrastructure supported, does government have the money it needs,” Rofsky said. “It’s unfair.”

Unfortunately under capitalism fairness is besides the point.  What matters is power and our challenge is to build popular support for effective policies that privilege the public interest over the private.

 

Written by marty

August 9th, 2014 at 3:32 am

The Impoverishment Of The Average Household

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According to a June 2014 Russell Sage Foundation report, the average U.S. household experienced a real wealth decline of more than one-third over the 10 years ending in 2013.

Table 1 below shows that the net worth of the median household fell from $87,992 in 2003 to $56,335 in 2013, for a decline of 36%.  In fact, the last ten years were hard on the overwhelming majority of American households.  Only the top 2 groups enjoyed wealth gains over the period.  Also noteworthy is the tiny net worth of households below the median.

wealth table

Figure 1 below provides a longer term perspective on wealth movements.  We can see that most households enjoyed growing wealth from 1984 to the 2007 crisis, with wealth falling across the board since.  However, the median household is now significantly poorer than it was in 1984.  Only the richer households managed to maintain most of their earlier gains in wealth.

chart image

These trends highlight the fact that we have a growing inequality of wealth as well as of income, trends not likely to reverse on their own.

 

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July 28th, 2014 at 1:06 pm

Posted in Inequality

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Still The World’s Top Military Spender

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According to the Stockholm International Peace Institute, the United States remains the world’s top military spender. In fact, U.S. military spending equals the combined military spending of the next ten countries.  And most of those are U.S. allies.

Top 15

Although declining in real terms, the U.S. military budget remains substantial and a huge drain on our public resources.  As the following chart shows, military spending absorbs 57% of our federal discretionary budget.

discretionary spending

 Notice that many so-called non-military discretionary budget categories also include military related spending. For example: Veteran’s Benefits, International Affairs, Energy and the Environment, and Science.   We certainly seem focused on a certain kind of security.

 

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July 17th, 2014 at 1:04 pm

Africa And Globalization

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Economists continue to celebrate the free movement of goods, services, and capital.  However, faced with slowing economic conditions in core countries, it is now third world growth that is highlighted as proof of the gains from unregulated globalization.

As the United Nations Conference on Trade and Development points out:

The crisis and its fallout have accelerated the trend towards a greater role of developing countries in the world economy. Between 2006 and 2012, 74 per cent of world GDP growth was generated in developing countries and only 22 per cent in developed countries. This is in sharp contrast to their respective contributions to global growth in previous decades: developed countries accounted for 75 per cent of global growth in the 1980s and 1990s, but this fell to a little over 50 per cent between 2000 and 2006.

Africa, in particular, has become the new toast of investors.  A 2011 African Development Bank report celebrating the rise of the African middle class offers the following reason:

Strong economic growth in Africa over the past two decades has been accompanied by the emergence of a sizeable middle class and a significant reduction in poverty. Also rising strongly has been a robust growth in consumption expenditures as a result of this growing middle class.

The report estimates that Africa’s middle class reached “nearly 350 million people” in 2010.  And, as Jacques Enaudeau comments:

Since then the estimated number of middle class Africans has been arbitrarily set at 350 million, sometimes delivered as the more dramatic sound bite “one in three Africans”. The African Development Bank goes on to explain that, given their higher revenues from salaried jobs or small business ownership, and the ensuing economic security, “Africa’s emerging consumers are likely to assume the traditional role of the US and European middle classes as global consumers”.

Marketing is everything, well almost everything.  There are two big problems with this growing celebration of African progress and the free trade process said to be responsible.

The first problem concerns the African Development Bank’s definition of middle class.  The Bank defines the middle class as those with a daily consumption of between $2 and $20 in 2005 PPP (purchasing power parity) dollars.  At the lower end we are talking about a U.S. life style based on a yearly expenditure of $730!  It takes quite a stretch of imagination to see that as a middle class life style.

It turns out, according to Bank statistics, that 61% of Africans still live below the $2 a day poverty line.  Approximately 21% more live just above that amount, between $2 and $4 a day.  The Bank, while including them in the middle class, also calls them a “floating class.”  If we are being honest we would have to acknowledge that after decades of growth, more than 80% of Africa’s population still struggles with poverty.

Moreover, as Enaudeau also points out:

Also sobering is the geographical dispersion of the African Development Bank’s middle class: most of the African upper middle class (spending $10-$20 per day) lives in North Africa, which does not bode well with all the talk of frontier markets stimulated by a new white collar generation south of the Sahara.

The second problem concerns the forces driving Africa’s recent growth.  Africa remains highly dependent on the export of primary commodities.  China’s massive drive to export manufacturers has turned the country into a major consumer of primary commodities, pushing up their prices and serving as Africa’s main source of growth.  As the Asian Development Bank explains:

Developing Asia became a major commodity-consuming region during the last decade, turning the region into a net commodity importer. Its relative importance has increased even more since the 2008–2009 global financial crisis started, as the economies of the major industrial countries slowed significantly. . . .

The PRC [People's Republic of China] is Asia’s largest commodity consumer by far. It even overtook the US in the consumption of major metals and agricultural commodities in the late 2000s, making it the world’s largest consumer of many commodities. The PRC consumed in 2011 about 20% of nonrenewable energy resources, 23% of major agricultural crops, and 40% of base metals.

The PRC’s share of consumption of agricultural products, such as oilseed soybeans, doubled over the past decade, driven by a change in diet to foods richer in oil.

Unfortunately, growth based on the export of primary commodities tends to create few jobs.  Take Nigeria as an example.  As Jumoke explains

While the last decade was marked by higher economic growth, the unemployment rate actually increased from 5.8% in December 2006 to 23.9% in January 2012. Note that this number measures the percentage of workers actively looking for work, and does not include the rate of the chronically unemployed who have stopped looking, and the underemployed working poor. Tellingly, the poverty rate actually doubled over the last five years and now affects 112 million Nigerians, meaning that 112 million Nigerians are consistently without food, clean water, sanitation, clothing, shelter, healthcare and education.

Moreover, the steady decline in U.S. growth has meant a decline in Chinese exports to the United States and a fall in key commodity prices (see chart below).  Thus, Africa’s boom, such as it was, appears nearing the end.

commodity prices

Relying on market forces is not going to do it for Africa, or for that matter Latin America, whose growth was also fueled by primary commodity exports to Asia and is now declining, quickly undermining the economic gains of the past decade.  As the Wall Street Journal reports:

A decade long commodity boom in Latin America that lifted millions out of poverty is showing signs of fatigue, as fading demand in China hits consumers and corporate earnings from Bogotá to Brasilia.

If economists are looking to the third world to lead the way growth-wise, we are all going to be disappointed.

 

Written by marty

July 8th, 2014 at 3:42 am

A Four Day Work Week to Combat Stress

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Now here is an idea worth serious consideration—a four day work week to combat stress.

The Guardian newspaper reports:

One of Britain’s leading doctors has called for the country to switch to a four-day week to help combat high levels of work-related stress, let people spend more time with their families or exercising, and reduce unemployment.

Bringing the standard working week down from five to four days would also help address medical conditions, such as high blood pressure and the mental ill-health associated with overwork or lack of work, Prof John Ashton said.

The president of the UK Faculty of Public Health said the five-day week should be phased out to end what he called “a maldistribution of work” that is damaging many people’s health.

“When you look at the way we lead our lives, the stress that people are under, the pressure on time and sickness absence, [work-related] mental health is clearly a major issue. We should be moving towards a four-day week because the problem we have in the world of work is you’ve got a proportion of the population who are working too hard and a proportion that haven’t got jobs”,  Ashton said.

“We’ve got a maldistribution of work. The lunch-hour has gone; people just have a sandwich at their desk and carry on working,” added the leader of the UK’s 3,300 public-health experts working in the NHS, local government and academia.

Full article here.

Written by marty

July 2nd, 2014 at 11:13 am