Reports from the Economic Front

by Martin Hart-Landsberg

Archive for October, 2010

The Inequality Mystery

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Take a good luck at the chart above.   Businessweek published it, drawing on a soon to be published study by Norton and Ariely.  

In 2005, Norton and Airely did a large scale survey of Americans to see what they knew about the actual distribution of wealth in the U.S. and to learn what they thought that distribution should look like in an “ideal world.”  Here is what they found:

First, respondents dramatically underestimated the current level of wealth inequality. Second, respondents constructed ideal wealth distributions that were far more equitable than even their erroneously low estimates of the actual distribution. Most important from a policy perspective, we observed a surprising level of consensus: All demographic groups – even those not usually associated with wealth redistribution such as Republicans and the wealthy – desired a more equal distribution of wealth than the status quo.

Ok, back to the chart—the top bar shows the existing distribution of wealth—the top 20 percent owns 84% while the bottom 80% has 16%.  The second bar shows what those surveyed thought the distribution was, with the estimated distribution having the top 20% owning “only” 59% of the nation’s wealth.  The third bar reflects what survey participants would like to see in their ideal world–here, the consensus was for a world in which the top 20% owned only 32% of the wealth.

These results are pretty amazing and raise two obvious questions.  First, why do people have such a flawed perception of the extent of wealth inequality.  Second, why do so many people support policies that end up generating greater wealth inequalities when it appears they desire a world that is far more equal in terms of wealth distribution?

One possible answer, to at least the last question, comes from Businessweek itself.  After discussing the results of the study the author added the following:

What’s more, most economists would agree that the degree of wealth equality that the study’s respondents identified as ideal would be disastrous, because it would seriously retard growth—sapping incentives to work and innovate, perhaps even requiring coercive measures mandating that the poor save rather than spend their money on necessary consumption.

“It’s probably a good thing that the public underestimates how much wealth inequality there is,” says Bryan D. Caplan of George Mason University, since “they tend not to understand the ways that wealth inequality is good.”

Wow–one wonders what indicators Caplan and others are using to support their claim that wealth inequality has been good for our economy.  More to the point, one can only marvel at the ways in which the business press seeks to spin the disaster that is our economy, encouraging us to think that it is in our own best interest to encourage the very trends that worsen our living and working lives.

Oh–and just for completeness sake: Norton and Airely focus on the top 20% and their share of total wealth.  It is worth noting that the richest 1 percent actually own 35 percent of the nation’s net wealth; subtract housing, and their share is 43 percent.    

Written by marty

October 29th, 2010 at 9:00 am

Corporate Tricks Of The Trade: Lesson On Taxes

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How do corporations escape paying taxes?  Businessweek recently ran a story on Google that helps to explain how they do it.  

The story begins by noting that: “Google has made $11.1 billion overseas since 2007.  It paid just 2.4 percent in taxes.  And that’s legal.”   This is pretty incredible because Google does business in many advanced capitalist countries with high tax rates.  For example, “The corporate tax rate in the U.K., Google’s second-largest market after the U.S., is 28 percent.”   

While the article focuses on Google, and how it avoids paying taxes, it made clear that most of the leading high-technology companies use remarkably similar techniques to achieve similar results. 

Ok, so how does Google do it?  Google’s office in Ireland is the center of the company’s international operations.  In 2009 it “was credited with 88 percent of the search juggernaut’s $12.5 billion in sales outside the U.S.”  But Google doesn’t pay taxes on that amount, because most of the profits went to Bermuda, where there is no corporate income tax.

So, how did Google get its profits to Bermuda?  Businessweek explains:

Google’s profits travel to the island’s white sands via a convoluted route known to tax lawyers as the “Double Irish” and the “Dutch Sandwich.” In Google’s case, it generally works like this: When a company in Europe, the Middle East, or Africa purchases a search ad through Google, it sends the money to Google Ireland. The Irish government taxes corporate profits at 12.5 percent, but Google mostly escapes that tax because its earnings don’t stay in the Dublin office, which reported a pretax profit of less than 1 percent of revenues in 2008. 

Irish law makes it difficult for Google to send the money directly to Bermuda without incurring a large tax hit, so the payment makes a brief detour through the Netherlands, since Ireland doesn’t tax certain payments to companies in other European Union states. Once the money is in the Netherlands, Google can take advantage of generous Dutch tax laws. Its subsidiary there, Google Netherlands Holdings, is just a shell (it has no employees) and passes on about 99.8 percent of what it collects to Bermuda. (The subsidiary managed in Bermuda is technically an Irish company, hence the “Double Irish” nickname.)

This set-up (as Businessweek describes it) also helps Google lower its tax bill in the U.S.  Google Ireland licenses its search and advertizing technology from Google’s headquarters in Mountain View, California.  Obviously this technology is worth a lot—but Google headquarters keeps the licensing fee to Google Ireland low.  Doing so means that Google headquarters can minimize its U.S. earnings and thus its tax obligations to the U.S. government.  And of course, Google Ireland knows how to move its profits around to minimize its tax liabilities. 

Not surprisingly, corporations are always eager to learn from each other.  Thus, “Facebook is preparing a structure similar to Google’s that will send earnings from Ireland to the Cayman Islands, according to company filings and a person familiar with the arrangement.”  Microsoft already has one in place.

According to one study cited by Businessweek (done by Kimberly A Clausing, an economics professor at Reed College), these kinds of profit shifting arrangements cost the U.S. government as much as $60 billion a year.  And of course Ireland also loses plenty.  Too bad that the governments of Ireland and the U.S. are suffering from large federal deficits and under immense pressure to slash spending.   Collateral damage I guess to the profit-making drive.

What is being done to change this apparently legal racket?  According to Businessweek:

The government has made halting steps to change the rules that let multinationals shift income overseas. In 2009 the Treasury Dept. proposed levying taxes on certain payments between U.S. companies’ foreign subsidiaries, potentially including Google’s transfers from Ireland to Bermuda. The idea was dropped after Congress and Treasury officials were lobbied by companies including General Electric, Hewlett-Packard, and Starbucks, according to federal disclosures compiled by the nonprofit Center for Responsive Politics. In February the Obama Administration proposed measures to curb companies’ ability to shift profits offshore, but they’ve largely stalled.  

A nice cozy system, isn’t it. 

Written by marty

October 25th, 2010 at 9:06 am

The Battle In France

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What is going on in France?  The media has basically presented the story as one of typical out-of-control French strike activity caused by the unwillingness of French workers to accept a modest increase in the retirement age from 60 to 62.   What are they complaining about, you might ask, since here in the US, the retirement age has been pushed back from 65 to 67 with political pressures mounting to push it back still further–perhaps to 70.  

Well, the struggle by French workers involves a lot more than the media explains.  This is not surprising, since labor struggles in most countries get little coverage and what there is normally distorts rather than clarifies the issues. So, what is at stake in France?

Diana Johnstone, in an article published in Counterpunch offers the following explanation (and I recommend reading the entire article):

 The retirement issue [in France] is far more complex than “the age of retirement”. The legal age of retirement means the age at which one may retire. But the pension depends on the number of years worked, or to be more precise, on the number of cotisations (payments) into the joint pension scheme. On the grounds of “saving the system from bankruptcy”, the government is gradually raising the number of years of cotisations from 40 to 43 years, with indications that this will be stretched out further in the future.

As education is prolonged, and employment begins later, to get a full pension most people will have to work until 65 or 67. A “full pension” comes to about 40 per cent of wages at the time of retirement.

But even so, that may not be possible. Full time jobs are harder and harder to get, and employers do not necessarily want to retain older employees. Or the enterprise goes out of business and the 58-year old employee finds himself permanently out of work. It is becoming harder and harder to work full-time in a salaried job for over 40 years, however much one may want to. Thus in practice, the Sarkozy-Woerth reform simply means reducing pensions. That, in fact, is what the European Union has recommended to all member states as an economy measure, intended, as with most current reforms, to reduce social costs in the name of “competitivity” – meaning competition to attract investment capital.

Less qualified workers, who instead of pursuing studies may have entered the work force young, say at age eighteen, will have subscribed to the scheme for forty-two years at age 60 if indeed they manage to be employed all that time. Statistics show that their life expectancy is relatively short, so they need to leave early in order to enjoy any retirement at all.

The French system is based on solidarity between generations, in that the cotisations of today’s workers go to pay today’s retired people’s pensions. The government has subtly tried to pit one generation against another, by claiming that it is necessary to protect the future of today’s youth, who are paying for the “baby boom” pensioners. It is therefore extremely significant that this week, high school and university students massively began to enter the protest strike movement. This solidarity between generations is a major blow to the government.

The youth are even much more radical than the older trade unionists. They are very aware of the increasing difficulty of building a career. The trend is for qualified personnel to enter the work force later and later, having spent years getting an education. With the difficulty of finding a stable, full-time job, many depend on their parents until age 30. It is simple arithmetic to see that in this case, there will be no full retirement until after age 70.

In short, workers are trying to halt a clear assault on their ability to live decent lives.  We face similar challenges here in the United States.  As previously discussed, most older workers are employed in highly demanding jobs making it unlikely that they can stay employed until full retirement age.  And our government is busy debating reforms that would slash benefits or further delay the age at which full benefits are paid.  Most importantly, the rational for these attacks on our social security system–that the system is heading for collapse–is easily challenged; our system remains solid

We need to be studying the French experience closely–to better appreciate the universality of attacks on social programs and to better appreciate strategies of resistance.  In terms of the latter–did you know that (as the New York Times reports) “credible polls showed that a majority of French supported the strike”?

For more pictures of events in France visit here.

Written by marty

October 21st, 2010 at 11:19 am

A Teachable Moment: Capitalism And State Policy

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We often hear about teachable moments.  Well, we are definitely at such a moment now when it comes to understanding the ways in which the logic of capitalism places structural limits on state policy that work to the detriment of the majority of working people.

Here is one example of the one-sided nature of capitalism: if workers decide that their wages and working conditions are unacceptable and strike, the media and government officials talk about the harm that these workers are doing to the economy and demand that they return to work.  If business leaders decide that the business climate is not favorable for profits and decide to strike (by shutting down production at their offices and factories), the media and government officials declare the result to be a recession and race to propose tax cuts and subsidies.

Think about the current period.  We generally tend to vote for those people or parties that we believe are capable of promoting a healthy economy, especially one that generates lots of jobs.  Governments, of course, depend on business leaders for the necessary investment and production.  However, if these leaders decide not to invest or produce and the economy slumps–who do we blame?  Well, the government, not business.  This is what is happening right now.  

Our banks and large corporations are holding trillions of dollars in reserve but making few loans or investments.  Yet, there is little public outrage directed at their decisions, only calls for more tax cuts and subsidies to create a more attractive business environment.  As a consequence, governments committed to a capitalist economy are always under pressure to be responsive to business interests.

So, what about the current teachable moment?  The Obama administration has been incredibly business-friendly.  Just think about it—it responded to the financial collapse by pouring trillions into recapitalizing the very same financial institutions that generated the crisis.  It responded to the health care crisis by promoting a health care reform that promises to further enrich insurance companies.  It is responding to trade problems by advocating ratification of a number of free trade agreements that will enhance corporate power.  At the same time, it has all but shelved any action on the Employee Free Choice Act. 

The outcome of all this has been a significant increase in profits.  For example: “Financial institutions on Wall Street are preparing to pay a record 144 billion dollars in compensation and benefits, according to a study published Tuesday in the Wall Street Journal.“  Oh, and working people?  They get more cuts in social programs, a stagnating labor market, and continued downward pressure on wages and working conditions.

Yet, is business happy?  Apparently not—they continue to claim that President Obama is anti-business.  And why not—an organized business community has the ability to blackmail a compliant president into making ever greater concessions.  So, not surprisingly, the President has voiced his willingness to try harder to make the owners and managers of large businesses happy. 

Don’t believe me?  Read the following Business Week article.  It illustrates that relying on business to serve the public interest has put us on a slippery slope heading downward. 

Obama Wants a Detente with Business
Once the midterm elections are over, the President plans to make up with business

 

Last fall, JPMorgan Chase Chief Executive Officer Jamie Dimon showed White House staff a chart comparing the percentage of Cabinet Secretaries and top aides with business experience under Administrations going back to Teddy Roosevelt. President Barack Obama had the fewest by far. The President’s sometime adversarial relationship with business wasn’t helped by the departures of Chief of Staff Rahm Emanuel and National Economic Council Chairman Lawrence H. Summers. Exasperated executives often consulted the two aides, even if the lines of communication weren’t always clear. “The fundamental problem,” says Steve Reinemund, former PepsiCo CEO and now dean of the Wake Forest University School of Business, “is the sense the President doesn’t consider business a noble profession.”

Democrats close to the Administration say the White House wants to make amends and will make its relationship with business a priority after the midterm elections. “I have every expectation as we go through the next several months that we are going to see a greater involvement with business than we have seen in some time,” says Tom Daschle, the former Senate Democratic leader and an Obama ally.

The changes could include Obama’s backing of proposals to cut payroll taxes temporarily, which could save companies billions, according to company executives, economic advisers, and White House aides. If his deficit commission in December recommends a debt-shrinking package of spending cuts and tax code changes, including corporate tax reform, Obama may support it, the people say. The White House may also consider naming a CEO to a Cabinet job if one opens up or may give someone business finds credible the role of counselor, with a wide-ranging portfolio, they say.

Daschle says Peter M. Rouse, Obama’s new chief of staff, who has few business connections after spending most of his career managing the staffs of Democratic lawmakers, plans to be more accessible to corporate executives. “I don’t think there’s any question that he’s aware of that criticism and aware of the need to be more interactive and engaged with the business community,” says Daschle, Rouse’s former boss. “I would not be surprised at all if you saw evidence of that quite soon.”

There is a lot more—I highly recommend reading the entire article.  If you don’t have time, here is my summary: without a movement capable of challenging the logic of the market and the purusit of private profit, we are in real trouble.

The Unending Employment Crisis

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Employment trends highlight just how bad the current economic situation remains. 

Overall, the U.S. economy lost 95,000 nonfarm jobs in September.  The private sector added 64,000 jobs (which was down from a 93,000 increase in August), but this gain was overwhelmed by the loss of 159,000 public sector jobs, a little over half of which came from cuts to state and local payrolls.

As the New York Times reports, “Local governments in particular cut jobs at the fastest rate in almost 30 years.”  And given budget pressures and a lack of political will to boost federal aid to states and local governments, we can expect continuing bad news in the months ahead.

The chart below puts our current employment problems in some historical perspective.  The horizontal axis shows how long, in months, it takes the economy to regain its previous peak employment total after the start of a recession.  The vertical axis shows the percentage decline in employment relative to the peak number of jobs that existed at the start of the recession.  

As the chart reveals, with the exception of the unusually short 1980 recession (which lasted only 6 months), employment recovery has been slower in each succeeding recession.  And as for our current “recovery”—well we have lost far more jobs in percentage terms than during past recessions and it will clearly take far longer to return to peak employment totals than in past recessions.

There is no getting around the fact that we have a serious structural problem here–and it is not going to solve itself.

 

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Written by marty

October 12th, 2010 at 7:34 am

Chinese and U.S. Labor Activism

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As previously discussed, Chinese workers are becoming increasingly organized and militant in demanding (and often winning) better pay.  Not much improvement yet in working conditions, however.

Here is a recent video on labor activism and strike coordination in China.

[youtube] http://www.youtube.com/watch?v=-3UY6oaKPRg [/youtube]

. . . .  

As a point of contrast, here, thanks to Left Business Observer, is the picture of U.S. strike activity.  

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As Doug Henwood explains:

The graph above shows the annual number of major strikes, as tallied by the Bureau of Labor Statistics. The figure for 2010 annualizes what we’ve experienced so far this year. The little uptick, from a total of 5 in 2009 to 20 in 2010, was boosted by a strike by 15,000 public sector construction workers in Chicago in July. Their strike produced 180,000 lost workdays last month, the highest total since 600,000 in October 2008. These numbers are nothing when compared to the peak of labor’s power, from the 1950s through the 1970s, when we saw as much as 60 million lost workdays a year, or 0.4% of the total number worked economy-wide (the record, set in 1959). Heck, it’s nothing compared even to 2000’s 20 million lost days, or 0.06% of the total. 

Written by marty

October 7th, 2010 at 10:21 am

Say No To The U.S-South Korea FTA

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Christine Ahn and I have just published a piece at Foreign Policy in Focus on the signed, but not ratified, U.S.-South Korea Free Trade Agreement (FTA).  We argue for rejecting the agreement.  

Forget the FTA Fix, Just Say No

The free trade push has begun again. Both U.S. President Barack Obama and South Korean President Lee Myung-bak are calling for ratification of the U.S.-Korea Free Trade Agreement, which was signed by the two countries’ trade representatives in April 2007 but has yet to be approved by either the U.S. Congress or the South Korean parliament. Aware of how unpopular the agreement remains, President Obama wants the U.S. Congress to delay the approval vote until after the mid-term elections in early November but before the mid-November G-20 meeting in Seoul.

The Great Recession has left the U.S. economy in a mess. Slowly but surely people are coming to understand that we are in this mess because of a number of inter-related trends, all driven by increasingly unchecked corporate power: wage suppression, deregulation and globalization of production, and financialization.

It is therefore dismaying to hear President Obama announce that the U.S.-Korea Free Trade Agreement, which is designed to further enhance corporate power, will somehow “create new jobs and opportunity for people in both our countries.”

. . . .  

The entire piece can be read here.