Reports from the Economic Front

The U.S. economy continues to stagnate and our political leaders continue to embrace austerity.  One major reason for this policy stance is that stagnation has done nothing to dent the earnings of our top corporations and their owners.

The challenge for our political leaders is convincing the rest of us to accept this situation.  For sometime now their strategy has been to predict recovery right around the corner.  All we need, they say, is a bit more austerity to reassure financial markets and growth will naturally resume.

Their claims were initially buttressed by a few highly touted economic studies, but those studies have now been discredited.  See here and here.  Practice also makes clear that austerity is not the solution to our economic problems.

This strategy was tried first and most aggressively in Europe.  The chart below, taken from a blog post by the economist Ed Dolan, provides one indicator of the self-reinforcing consequences of austerity.  Half the countries in the euro zone are in recession, and several big ones are heading that way.  For example, Germany’s average annual growth fell from 0.7 percent in 2012 to 0.4 percent in the first quarter of 2013.

The European experience holds another lesson for people in this country.  It will take sustained popular organizing to get policy makers to change course.

The economist Ed Dolan sums up the current state of the U.S. economy in a recent blog post with the following headline: “Latest US GDP data show economy weak at year’s end but corporate profits near record high.”

The chart below, taken from that post, illustrates the steady rise in corporate profits.  As Dolan comments, “both before-tax and after-tax profits, stated as a percentage of GDP, reached their second highest level ever recorded, falling just short of their all-time highs of Q4 2011.”

One reason for this trend has been the ability of corporations to squeeze labor.  Fred Magdoff and John Bellamy Foster highlight this corporate success in their Monthly Review article “Class War and Labor’s Declining Share.”

The following four charts are taken from the article.  The first chart looks at total labor compensation as a percent of GDP.  The downward trend is visible but the extent of the attack on workers is somewhat masked since the data includes all workers and total benefits.  The second chart looks just at wages and salaries, again for all workers.

Chart 3 looks just at production and nonsupervisory workers.  These workers account for approximately 80 percent of all private sector workers.  We can see that while their share of total employment has remained relatively constant, their share of payroll has dramatically fallen.  Chart 4 compares wage and salary trends for production and nonsupervisory workers with trends for management, supervisory, and other nonproduction employees.

These last two charts make clear that the war on labor has been focused on production and nonsupervisory workers, and has been going on for decades.  And it doesn’t take much of a stretch of imagination to connect these trends with the growing suffering of most working people, the explosion in income inequality, and the rise in corporate profits.

But what are corporations doing with their profits?  As it turns out they are using their gains not to strengthen the economy but rather to reward their already wealthy stockholders (with dividends) and managers (with higher bonus boosting stock prices).

As the Wall Street Journal reports: “Firms Send Record Cash Back to Investors.” The article explains the headline as follows:

U.S. companies are showering investors with a record windfall in the form of dividends and share buybacks, helping to propel the stock market’s rally.  Companies in the S&P 500 index are expected to pay at least $300 billion in dividends in 2013, according to S&P Dow Jones Indices, which would top last year’s $282 billion. . . .

American corporations also announced plans to buy back $117.8 billion of their own shares in February, the highest monthly total in records dating back to 1985, according to Birinyi Associates Inc. a Westport, Conn.-based market research firm. Home Depot Inc., General Electric Co. and PepsiCo Inc. are among a number of large companies that announced plans last month to scoop up large amounts of their own shares. . . .

In returning money to shareholders, companies by and large are tapping into cash piles they have accumulated in the past few years by cutting costs or taking advantage of low interest rates to borrow funds. . . .

“Corporations are flush with cash and that cash sitting in the corporate coffers is earning next to nothing,” said Rob Leiphart, an analyst at Birinyi. “Companies have to do something with it.”

Clearly, all is well for those at the top.  And that is the problem for those of us opposing austerity.

While some austerity advocates really fear (although incorrectly) the consequences of deficit spending, the strongest proponents are actually only concerned with slashing government programs or the use of public employees to provide them.  In other words their aim is to weaken public programs and/or convert them into opportunities for private profit.

One measure of their success has been the steady decline in public employment.  Floyd Norris, writing in the New York Times notes:

For jobs, the past four years have been a wash.

The December jobs figures out today indicate that there were 725,000 more jobs in the private sector than at the end of 2008 — and 697,000 fewer government jobs. That works into a private-sector gain of 0.6 percent, and a government sector decline of 3.1 percent.

In total, the number of people with jobs is up by 28,000, or 0.02 percent.

How does that compare? It is by far the largest four-year decline in government employment since the 1944-48 term. That decline was caused by the end of World War II; this one was caused largely by budget limitations.

The chart below, taken from the same post also reveals just how weak private sector job creation has been over the past 12 years.

What follows is a screen shot of a graphic in a New York Times Business Day post.  It highlights just how significant the decline in public employment has been in this business cycle compared with past ones.  Each line shows the percentage change in public sector employment for specified months after the start of a recession.  Our recent recession began December 2007 and ended June 2009.   As you can see, what is happening now is far from usual.

It is also worth noting that despite claims that most Americans want to see cuts in major federal government programs, the survey data show the opposite.  For example, see the following graphic from Catherine Rampell’s blog post.

As Rampell explains:

In every category except for “aid to world’s needy,” more than half of the respondents wanted either to keep spending levels the same or to increase them. In the “aid to world’s needy” category, less than half wanted to cut spending.

Not surprisingly, this assault on government spending and employment will have real consequences for the economy and job creation.  Binyamin Appelbaum writes in the New York Times:

The federal government, the nation’s largest consumer and investor, is cutting back at a pace exceeded in the last half-century only by the military demobilizations after the Vietnam War and the cold war.

And the turn toward austerity is set to accelerate on Friday if the mandatory federal spending cuts known as sequestration start to take effect as scheduled. Those cuts would join an earlier round of deficit reduction measures passed in 2011 and the wind-down of wars in Iraq and Afghanistan that already have reduced the federal government’s contribution to the nation’s gross domestic product by almost 7 percent in the last two years. . . .

Over the last two years, federal consumption and investment declined by 6.9 percent. Including state and local consumption, a larger category that has declined more slowly, the inflation-adjusted reduction since 2011 was 4.9 percent.

But Alec Phillips, an economist at Goldman Sachs, estimated that federal consumption could fall by another 11 percent over the next two years. Mr. Phillips also noted that those earlier rounds of cuts in the 1970s and the 1990s came primarily from the military budget. The sequester is designed to be indiscriminate, cutting everything from air traffic control to nursery schools.

That could increase the resulting pain, because economic research suggests that military cuts are less painful than other kinds of spending reductions.

“It is cutting some of the best spending that government does,” Professor Cowen said of the cuts that would fall on the domestic side of the ledger.

All of this takes us back to the starting point–we are talking policy here.  Whose interests are served by these trends?

The so-called sequester appears likely to result in $85 billion in spending cuts this fiscal year.  The cuts are ostensibly the result of a political battle over the budget deficit, with Republicans arguing that spending cuts are absolutely necessary to save the economy and the Democrats agreeing that the budget deficit does need to be reduced, but preferring a combination of tax/revenue increases and spending cuts.

The austerity drive appears back in full swing regardless of how the debate turns out.  There was a brief period when the Occupy movement turned the spotlight on inequality and jobs, but powerful forces have succeeded in regaining control over the national debate on the economy.

Sadly those powerful forces tend to fly under the radar, with the media happy to portray concern about the deficit arising from the grassroots.  In fact, nothing could be further from the truth.  The sustained focus on the deficit and the need for spending cuts is to a considerable extent the result of huge spending by wealthy individuals and corporations on campaigns which give the appearance of public support.

Exhibit 1 is the Fix the Debt campaign.  A recent New York Times article provides an interesting look into the workings and supporters of this campaign:

When Jim McCrery, a former Louisiana congressman, urged lawmakers last month to pursue entitlement cuts and tax reform, he was introduced on television as a leader of Fix the Debt, a group of business executives and onetime legislators who have become Washington’s most visible and best-financed advocates for reining in the federal deficit.

Mr. McCrery did not mention his day job: a lobbyist with Capitol Counsel L.L.C. His clients have included the Alliance for Savings and Investment, a group of large companies pushing to maintain low tax rates on dividend income, and the Win America Campaign, a coalition of multinational corporations that lobbied for a one-time “repatriation holiday” allowing them to move offshore profits back home without paying taxes. . . .

In recent days, Fix the Debt has redoubled its efforts, starting a new national advertising campaign and calling on Mr. Obama and Congress to revise the tax code and reduce long-term spending on entitlement programs. . . .

While Fix the Debt criticized the recent fiscal deal between Mr. Obama and lawmakers, saying it did not do enough to cut spending or close tax loopholes, companies and industries linked to the organization emerged with significant victories on taxes and other policies. . . .

Sam Nunn, a former Democratic senator from Georgia who is a member of Fix the Debt’s steering committee, received more than $300,000 in compensation in 2011 as a board member of General Electric. The company is among the most aggressive in the country at minimizing its tax obligations. Mr. McCrery, the Louisiana Republican, is also among G.E.’s lobbyists, according to the most recent federal disclosures, monitoring federal budget negotiations for the company.

Other board members and steering committee members have deep ties to the financial industry, including private equity, whose executives have aggressively fought efforts to alter a tax provision, known as the carried interest exception, that significantly reduces their personal income taxes.

Erskine B. Bowles, a co-founder of Fix the Debt, was paid $345,000 in stock and cash in 2011 as a board member at Morgan Stanley, while Judd Gregg, a former Republican senator from New Hampshire and a co-chairman of Fix the Debt, is a paid adviser to Goldman Sachs. Both companies have engaged in lobbying on international tax rules.

Mr. Gregg also sits on the boards of Honeywell and Intercontinental Exchange, a company that has warned investors that a tax on financial transactions would lower trading volume and curtail its profits. The two companies paid Mr. Gregg almost $750,000 in cash and stock in 2011.

In all, close to half of the members of Fix the Debt’s board and steering committee have ties to companies that have engaged in lobbying on taxes and spending, often to preserve tax breaks and other special treatment. . . .

[S]o far, at least, the companies and industries most closely linked to Fix the Debt have been aggressive in defending their narrower legislative interests.

The fiscal deal preserved the carried interest loophole, eliminated most of a large prospective increase in dividends taxes and preserved a tax break, known as the active financing exception, that allows G.E. and other multinational companies to avoid paying United States taxes on overseas profits.

The deal also forestalled large automatic cuts in military spending, a boon to contractors like Honeywell. The company’s chief executive, David M. Cote, is a co-founder of Fix the Debt; the group’s “core principles,” which call for retrenchment in entitlement programs like Social Security, make no mention of military spending, which constitutes about a fifth of the federal budget.

A recent Democracy Now broadcast examined the link between this group and Pete Peterson.  Peterson has long worked behind the scenes in an effort to dismantle earned benefit programs like Social Security and Medicare and has personally given almost $500 million to his foundation which attempts to shape popular thinking accordingly.

As John Nichols explains on the broadcast:

And at the core of this is changing the way that we look at retirement in this country, definitely undermining Social Security, Medicare and Medicaid, changing those earned benefit programs into something very different than what they’ve been and something far less reliable, but also making an awfully lot of other cuts in programs that serve the great mass of Americans, while at the same time continuing and even advancing the tax breaks for billionaires and corporations that have helped to make Pete Peterson a very, very wealthy man.

He sold this idea to around 125 other CEOs and very wealthy people. They’ve all chipped in a whole bunch of money, millions and millions, perhaps as much as $60 million for the current campaign, to this “Fix the Debt” group. And this Fix the Debt group is the primary proponent in the United States today of austerity. They want to, quote-unquote, “cut our way to progress,” as President Obama suggested, but in reality, it’s cutting the way toward progress for them and cutting the way toward a real hard hit for the average working American and potentially a slowing of the economy that begins with the sequester but does not end there.

Peterson was also a key player behind the Simpson-Bowles Commission, which was established by President Obama.  It was, in fact, President Obama that chose Simpson and Bowles to head the commission.  In other words, it was President Obama that provided these people and their ideas with a platform and legitimacy that is undeserved.  Now we are reaping the consequences—a policy debate in which the wealthy are likely to win and the people are likely to lose regardless of outcome.

See here for more on the Fix the Debt Campaign.

See here for more on Pete Peterson.

See here for a discussion on what sequestration will mean for people’s lives.

There is general agreement that the economy is not growing fast enough to boost employment.  The question: What to do about it?

The response, at all levels of government, seems to be: increase corporate subsidies and lower corporate taxes in hopes that corporations will boost investment and, by extension, employment.  Those who promote this response no doubt reason that corporations must be struggling along with workers and need additional incentives and support to become successful “job-creators.”

The chart below, taken from a Paul Krugman blog post, certainly raises questions about this rationale and response.  It shows trends in corporate profits (in red) and business investment (in blue), both measured as shares of GDP.

As you can see, profits have clearly been trending upwards over time, especially during our current recovery.  At the same time, business investment, although improving, remains historically quite low.  It is hard to see a poor profit performance as the root cause of our slow growth and job creation.

Moreover, banks are sitting on record amounts of money.  The chart below, from the St. Louis Federal Reserve, shows that banks are holding approximately $1.5 trillion in excess reserves.  In the past, excess reserves averaged roughly $20 billion.  In other words, our banks just aren’t motivated to make loans.  And, instead of taxing these excess reserves to encourage loan activity, the Federal Reserve is actually paying the banks interest on their holdings.

Now, as noted above, it would not be fair to say that governments are not actively trying to create jobs.  It is just that they are going about it in the wrong way, the wrong way that is, if their aim is to actually create jobs.

Governments continue to shovel huge subsidies and tax breaks at our major corporations.  This, despite the fact that most studies find little evidence that they help promote investment or employment.  What they do, of course, is enhance corporate profits.  They also force cutbacks in public spending, which does have negative effects on the economy and social welfare.  Ironically, these negative effects then cause corporations to shy away from investing.

The New York Times recently ran a good series on state and local tax deals and subsidies written by Louise Story.  She wrote:

A Times investigation has examined and tallied thousands of local incentives granted nationwide and has found that states, counties and cities are giving up more than $80 billion each year to companies. The beneficiaries come from virtually every corner of the corporate world, encompassing oil and coal conglomerates, technology and entertainment companies, banks and big-box retail chains.

The cost of the awards is certainly far higher. A full accounting, The Times discovered, is not possible because the incentives are granted by thousands of government agencies and officials, and many do not know the value of all their awards. Nor do they know if the money was worth it because they rarely track how many jobs are created. Even where officials do track incentives, they acknowledge that it is impossible to know whether the jobs would have been created without the aid. . . .

A portrait arises of mayors and governors who are desperate to create jobs, outmatched by multinational corporations and short on tools to fact-check what companies tell them. Many of the officials said they feared that companies would move jobs overseas if they did not get subsidies in the United States.

Over the years, corporations have increasingly exploited that fear, creating a high-stakes bazaar where they pit local officials against one another to get the most lucrative packages. States compete with other states, cities compete with surrounding suburbs, and even small towns have entered the race with the goal of defeating their neighbors.

These subsidies can dominate state budgets.  The Times reports that they were equal to approximately one-third the budgets of Oklahoma and West Virginia and almost one-fifth of the budget of Maine.

Here in Oregon, we continue to struggle with budget shortfalls.  And, fearful of losing corporate investment, the state legislature is doing what it can to keep corporate costs down.  In December 2012, Governor John Kitzhaber called the state legislature into special session to pass a bill specially designed to help Nike.

Nike had privately told the Governor that it planned to spend at least $150 million in an expansion which it claimed would create at least 500 jobs over a five year span.  If the state wanted that expansion and those jobs to be in Oregon, it had to reassure the company that its current favorable tax treatment would remain unchanged far into the future.

Although state legislators were not pleased to be presented with a major tax bill with little if any time to study its terms, they passed it.  The new bill guarantees Nike that the state of Oregon will not change how it calculates the company’s state taxes for the next 30 years, regardless of any future changes in the state’s tax policy.  More specifically, it gives the Governor power to offer such a deal to any major company that plans to invest at least $150 million and create at least 500 jobs over a five year span.  It just so happened that Nike is the only company, at least for the moment, receiving this benefit.

To appreciate what is at stake in this deal a little background on how Oregon taxes multi-state corporations like Nike is helpful.  Prior to 1991, Oregon taxed Nike using a formula that considered the state’s share of Nike’s total property, payroll, and sales, with each weighted equally.  In 1991, Oregon double weighted the sales component.  This greatly reduced Nike’s state tax bill, since while its property and payroll are concentrated in Oregon, only a small share of its sales are made in the state.

Then in 2001, Oregon began introducing a “single-sales factor” formula.  As Michael Leachman of the Oregon Center for Public Policy explains:

Under this formula, only in-state sales relative to all US sales matter in determining how much of a company’s profits are apportioned to and thus taxable by Oregon; it doesn’t matter how much of their property or payroll is based in Oregon. The Legislative Assembly in 2005 cut short the phase-in process and fully phased-in the “single-sales” formula for tax years starting on or after July 1, 2005.

The Oregon Department of Revenue estimates that using the single-sales factor formula instead of the double-weighted sales formula is costing Oregon $77.6 million in the current 2005-07 budget cycle, and will cost another $65.6 million in the upcoming 2007-09 budget cycle. The projected decline in the cost of “single-sales” in the upcoming budget cycle is temporary. It is due primarily to a corporate kicker that will slash corporate tax payments by two-thirds this year. In subsequent budget cycles, the revenue hit from “single-sales” will return to a higher level. . . .

Take Nike, for example. Nike lobbied for the switch to single-sales factor apportionment and it’s easy to see why. At the Oregon Center for Public Policy, we conservatively estimate that Nike’s 2006 tax cut from “single-sales” was over $16 million. Other prominent, profitable firms such as Intel also received a massive tax break from “single-sales.”

As Michael Munk points out:

The governor’s deal is also particularly cynical when at a time of declining public services desperate politicians are dragging out a regressive sales tax out of mothballs and The Oregonian’s “fact checker finds “mostly true” a finding that Oregon’s existing tax breaks (including almost $900B a year in corporate welfare) exceed tax collections.

Of course, this stance towards the needs of Oregonians is nothing new for Nike.  In 2010, Oregonians voted in favor of two measures (66 and 67) which temporarily raised taxes on the very wealthy and corporations.  Phil Knight, the Nike CEO, not only gave $100,000 to the anti-Measures campaign, he also wrote an article published in the Oregonian newspaper in which he said:

Measures 66 and 67 should be labeled Oregon’s Assisted Suicide Law II.

They will allow us to watch a state slowly killing itself.

They are anti-business, anti-success, anti-inspirational, anti-humanitarian, and most ironically, in the long run, they will deprive the state of tax revenue, not increase it.

The current state tax codes are all of those things as well. Measures 66 and 67 just take it up and over the top.

Knight even threatened to leave the state.  He didn’t, but I guess the last laugh is his, now that his company’s tax situation is secure for the next 30 years.

So—what lies ahead—more counterproductive state policies and head scratching about why things are going poorly for working people, or a change in strategy?

The good economic news, which got plenty of attention, is that the U.S. economy added over 170,000 new jobs in October.  The largely unreported negative news is that average real hourly wages in the private sector declined that month, and have been in decline for most of the past year.

It is hard to remember that the economy has been in expansion since June 2009.

Jeffrey Sparshott, in a Wall Street Journal blog post, offered the following chart of the trend in hourly earnings in private industry, with each point showing the change from a year earlier.

Citing a Labor Department report, Sparshott noted that:

hours worked were flat [in October] for the fourth straight month. Meanwhile, average hourly earnings for all employees on private payrolls fell by 1 cent to $23.58 in October. Over the past 12 months, earnings have risen a scant 1.6%. That’s not enough to keep up with inflation. The consumer price index was up 2% in September from a year earlier.

It’s even worse for blue-collar workers. Average hourly earnings of private-sector production and nonsupervisory employees edged down by 1 cent to $19.79, only a 1.1% increase over the past year.

The blog post quoted the HSBC’s chief U.S. economist who said:

This is the smallest increase in wages on record for the data going back to 1964. The persistently high level of unemployment over the past few years is clearly restraining wage gains and suppressing any inflationary pressures that might have possibly emanated from the labor market.

It also quoted the chief U.S. economist at J.P. Morgan Chase who said:

This pace of labor income growth may be quite acceptable for corporate profits, but it does pose headwinds for consumer spending growth.

Consumer spending did rise last quarter, helping to boost third quarter U.S. GDP, but this was largely because of a decline in the personal savings rate, which fell from 4.0% in the second quarter to 3.7% in the third.

We clearly don’t have a foundation for a sustained economic recovery, certainly not one that brings benefits to the majority of workers.  Instead of talk about austerity we need a real debate about the best way to strength worker bargaining power.

A big debate is underway about fiscal multipliers.  Sounds esoteric but it is not—it reveals that economics is far from an exact science and the outcome appears to confirm what most working people thought, which is that government spending can help an economy grow.

A fiscal multiplier is an estimate of the economic impact of a change in government spending.  The debate was triggered, surprisingly enough, by a small box in the International Monetary Fund’s annual publication, World Economic Outlook.  There, the International Monetary Fund (IMF) admitted that its previous estimates of fiscal multipliers were too low.

Here is what the IMF chief economist Olivier Blanchard wrote:

The main finding, based on data for 28 economies, is that the multipliers used in generating growth forecasts have been systematically too low since the start of the Great Recession, by 0.4 to 1.2, depending on the forecast source and the specifics of the estimation approach. Informal evidence suggests that the multipliers implicitly used to generate these forecasts are about 0.5. So actual multipliers may be higher, in the range of 0.9 to 1.7.

As part of the attack on the role of government in the economy, many economists, prior to the Great Recession, argued that fiscal multipliers were roughly equal to 1.  That meant a 1% reduction in government spending would likely cause a 1% decline in GDP, and a 1% increase in government spending would likely generate a 1% increase in GDP.

As the Great Recession got under way, many economists, including those at the IMF, began arguing for substantially lower multipliers, on the order of 0.5%.  On the basis of this reduced value, many forecasters argued for the benefits of austerity.  Debt was seen as a major problem and if fiscal multipliers were only 0.5%, a $1 cut in government spending would reduce debt by $1 but GDP by only 50 cents.

Well, after watching how austerity policies collapsed many economies around the world, especially in Europe, the IMF acknowledged that it had badly misjudged the size of the fiscal multiplier.  As Cornel Ban explains:

In contrast [to its previous low estimates], the October 2012 WEO found that in fact [fiscal multipliers] ranged between .9 to 1.7 (the Eurozone periphery is closer to the higher end of the range), an error that explained the IMF’s extremely optimistic growth projections for countries who front-loaded fiscal consolidation.  Assuming the multiplier was 1.5, a fiscal adjustment of 3 percent of GDP-as much as Spain has to do next year- would lead to a GDP contraction of 4.5 percent. It was momentous finding and those who had been skeptical of the virtues of austerity felt vindicated.

Barry Eichengreen and Kevin H O’Rourke provide additional evidence for large fiscal multipliers, in fact for larger multipliers than those proposed by the IMF.  According to them:

The problem is that standard theory doesn’t tell us much about the precise magnitude of the multiplier under [current] conditions. The IMF’s analysis, moreover, relies on observations for only a handful of national experiences. It is limited to the post-2009 period. And it has been criticized for its sensitivity to the inclusion of influential outliers.

Fortunately, history provides more evidence on the relevant magnitudes. In a paper written together with Miguel Almunia, Agustin Bénétrix and Gisela Rua, we considered the experience of 27 countries in the 1930s, the last time when interest rates were at or near the zero lower bound, and when post-2009-like monetary conditions therefore applied (Almunia et al. 2010).

Our results depart from the earlier historical literature. Generalizing from the experience of the US it is frequently said, echoing E Cary Brown, that fiscal policy didn’t work in the 1930s because it wasn’t tried. In fact it was tried, in Japan, Italy, and Germany, for rearmament- and military-related reasons, and even in the US, where a Veterans’ Bonus amounting to 2% of GDP was paid out in 1936. Fiscal policy could have been used more actively, as Keynes was later to lament, but there was at least enough variation across countries and over time to permit systematic quantitative analysis of its effects.

We analyze the size of fiscal multipliers in several ways. First, we estimate panel vector regressions, relying on recursive ordering to identify shocks and using defense spending as our fiscal policy variable. The idea is that levels of defense spending are typically chosen for reasons unrelated to the current state of the economy, so defense spending can thus be placed before output in the recursive ordering. We also let interest rates and government revenues respond to output fluctuations. We find defense-spending multipliers in this 1930s setting as large as 2.5 on impact and 1.2 after the initial year.

Second, we estimate the response of output to government spending using a panel of annual data and defense spending as an instrument for the fiscal stance.

Here too we control for the level of interest rates, although these were low virtually everywhere, reflecting the prevalence of economic slack and ongoing deflation. Using this approach, our estimate of the multiplier is 1.6 when evaluated at the median values of the independent variables.

These estimates based on 1930s data are at the higher end of those in the literature, consistent with the idea that the multiplier will be greater when interest rates do not respond to the fiscal impulse, whether because they are at the lower bound or for other reasons. The 1930s experience thus suggests that the IMF’s new estimates are, if anything, on the conservative side.

 Some economists remain unconvinced—in fact, some actually argue that government spending is incapable of creating jobs.  The economist Robert J. Samuelson was so upset to read a New York Times editorial which claimed that government spending creates jobs that he had to respond:

In 35 years, I can’t recall ever writing a column refuting an editorial. But this one warrants special treatment because the Times’ argument is so simplistic, the subject is so important and the Times is such an influential institution.

Here is the nub of his argument:

it’s true that, legally, government does expand employment. But economically, it doesn’t — and that’s what people usually mean when they say “government doesn’t create jobs.”

What the Times omits is the money to support all these government jobs. It must come from somewhere — generally, taxes or loans (bonds, bills). But if the people whose money is taken via taxation or borrowing had kept the money, they would have spent most or all of it on something — and that spending would have boosted employment.

In other words, because the government relies on the private sector for the money it spends, the jobs created by its spending cannot be a net addition to the economy.  Said differently, jobs supported by public spending are not real jobs.  There is a lot that can be said, but here is Dean Baker’s response:

Samuelson tells us that if the government didn’t tax or borrow or the money to pay its workers (he makes a recession exception later in the piece) people “would have spent most or all of it on something — and that spending would have boosted employment.”

Again, this is true, but how does it differ from the private sector? If the new iPhone wasn’t released last month people would have spent most or all of that money on something — and that spending would have boosted employment. Does this mean that workers at Apple don’t have real jobs either?

The confusion gets even greater when we start to consider the range of services that can be provided by either the public or private sector. In Robert Samuelson’s world we know that public school teachers don’t have real jobs, but what about teachers at private schools? Presumably the jobs held by professors at major public universities, like Berkeley or the University of Michigan are not real, but the jobs held at for-profit universities, like Phoenix or the Washington Post’s own Kaplan Inc., are real.

How about health care? Currently the vast majority of workers in the health care industry are employed by the private sector. Presumably these are real jobs according to Samuelson. Suppose that we replace our private health care system with a national health care service like the one they have in the U.K. Would the jobs in the health care no longer be real? . . .

How about when the government finances an industry by granting it a state sanctioned monopoly as when it grants patent monopolies on prescription drugs. Do the researchers at Pfizer have real jobs even though their income is dependent on a government granted monopoly? Would they have real jobs if the government instead paid for research out of tax revenue and let drugs be sold in a free market, saving consumers $250 billion a year?

Robert Samuelson obviously thinks there is something very important about the difference between working for the government and working in the private sector. Unfortunately his column does not do a very good job of explaining why. It would probably be best if he waited another 35 years before again attacking a newspaper editorial.

If people are confused about how our economy works, or doesn’t work, it is no wonder.

Market advocates have had their way for years now—one of the consequences has been the growing dominance of industry after industry by a select few powerful corporations.  In short, unchecked competition can and does produce its opposite.

As John Bellamy Foster, Robert W. McChesney, and R. Jamil Jonna explain:

This [development] is anything but an academic concern. The economic defense of capitalism is premised on the ubiquity of competitive markets, providing for the rational allocation of scarce resources and justifying the existing distribution of incomes. The political defense of capitalism is that economic power is diffuse and cannot be aggregated in such a manner as to have undue influence over the democratic state. Both of these core claims for capitalism are demolished if monopoly, rather than competition, is the rule.

The chart below highlights the rise, especially since the 1980s, in both the number and percentage of U.S. manufacturing industries in which four firms account for more than 50% of sales.

Number and Percentage of U.S. Manufacturing Industries in which Largest Four Companies Accounted for at Least 50 Percent of Shipment Value in Their Industries, 1947-2007

As the table below shows, the concentration of market power is not confined to manufacturing.

Percentage of Sales for Four Largest Firms in Selected U.S. Retail Industries

As impressive as these concentration trends may be, they actually understate the market power exercised by leading U.S. firms.  The reason is that many of these firms are conglomerates and active in more than one industry.  The next chart provides some flavor for overall concentration trends by showing the growing share of total business revenue captured by the top two hundred U.S. corporations.  Notice the sharp rise since the 1990s.

 Revenue of Top 200 U.S. Corporations as Percentage of Total Business Revenue, U.S. Economy, 1950–2008

These are general trends.  Here, thanks to Zocalo (which draws on the work of Barry Lynn), we get a picture of the market dominance of just one corporation–Procter and Gamble.  This corporation controls:

• More than 75 percent of men’s razors
• About 60 percent of laundry detergent
• Nearly 60 percent of dishwasher detergent
• More than 50 percent of feminine pads
• About 50 percent of toothbrushes
• Nearly 50 percent of batteries
• Nearly 45 percent of paper towels, just through the Bounty brand
• Nearly 40 percent of toothpaste
• Nearly 40 percent of over-the-counter heartburn medicines
• Nearly 40 percent of diapers.
• About 33 percent of shampoo, coffee, and toilet paper

A recent Huffington Post blog post, which includes the following infographic from the Frence blog Convergence Alimentaire, makes clear that Procter and Gamble, as big as it is, is just one member of a small but powerful group of multinationals that dominate many consumer markets.   The blog post states: “A ginormous number of brands are controlled by just 10 multinationals . . . Now we can see just how many products are owned by Kraft, Coca-Cola, General Mills, Kellogg’s, Mars, Unilever, Johnson & Johnson, P&G and Nestlé. ”   See here for a bigger version of the infographic.

And, it is not just the consumer goods industry that’s highly concentrated.  As the Huffington Post also noted: “Ninety percent of the media is now controlled by just six companies, down from 50 in 1983 . . . Likewise, 37 banks merged to become JPMorgan Chase, Bank of America, Wells Fargo and CitiGroup in a little over two decades, as seen in this 2010 graphic from Mother Jones.”

Not surprisingly, there are complex interactions and struggles between these dominant companies.  Unfortunately, most end up strengthening monopoly power at the public expense.  For example, as Zocalo reports, Wal-Mart, Target, and other major retailers have adopted a new control strategy in which:

these retailers name a single supplier to serve as a category captain. This supplier is expected to manage all the shelving and marketing decisions for an entire family of products, such as dental care.

The retailer then requires all the other producers of this class of products — these days, usually no more than one or two other firms — to cooperate with the captain. The consciously intended result of this tight cartelization is a growing specialization of production and pricing among the few big suppliers who are still in business. . . .

It’s not that Wal-Mart and category copycats like Target cede all control over shelving and hence production decisions to these captains. The trading firms use the process mainly to gain more insight into the operations of the manufacturers and hence more leverage over them, their suppliers, and even their other clients. . . . Wal-Mart, for instance, has told Coca-Cola what artificial sweetener to use in a diet soda, it has told Disney what scenes to cut from a DVD, it has told Levi’s what grade of cotton to use in its jeans, and it has told lawn mower makers what grade of steel to buy.

And don’t think that such consolidation within the Wal-Mart system makes it easier for new small manufacturers and retailers to rise up and compete. The exact opposite tends to be true. . . . This [system] boils down to presenting the owners of midsized and smaller companies, like Oakley or Tom’s of Maine, with the “option” of selling their business to the monopolist in exchange for a “reasonable” sum determined by the monopolist.

This was the message delivered to many of the companies that in recent decades managed to develop big businesses seemingly outside the reach of the Procter & Gambles, Krafts, and Gillettes of the world. Consider the following:

• Ben & Jerry’s, the Vermont ice cream company that reshaped the industry, was swallowed by Unilever in 2000.
• Cascadian Farm, one of the most successful organic food companies, sold out to General Mills and was promptly transformed into what its founder calls a “PR farm.”
• Stonyfield Farm and Brown Cow, organic dairy companies from New Hampshire and California, respectively, separately sold con-trol to the French food giant Groupe Danone in February 2003 and were blended into a single operation.
• Glaceau, the company behind the brightly colored Vitamin Water and one of the last independent success stories, sold out to Coca-Cola in 2007.

The practical result is a hierarchy of power in which a few immense trading companies — in control of and to some degree in cahoots with a few dominant supply conglomerates — govern almost all the industrial activities on which we depend, and they back their efforts with what amounts to police power. This tiny confederation of private corporate governments determines who wins and who loses in this country, at least within our consumer economy.

Of course the growing concentration nationally is matched by a growing concentration of power globally, with large transnational corporations from different nations battling each other and, in many cases, uniting through mergers and acquisitions.  We cannot hope to understand and overcome our current problems and the structural pressures limiting our responses to them without first acknowledging the extent of corporate dominance over our economic lives.

Presidential candidate Mitt Romney’s low federal tax rate—14.1%—has called attention to the fact that our tax code favors people who make their money from investments rather than labor.  According to the conventional wisdom, this is as it should be.  It encourages people, like our job creators, to invest their money, thereby boosting growth and the well-being of all working people.  Sounds plausible but the facts don’t support the policy.

BusinessWeek lays out the background and political context for our current low taxation rates on investment income as follows:  

Since 1950 capital gains have generally been taxed at a lower rate than income, to spur investment. The rate under President George W. Bush went from 20 percent to 15—the lowest ever—and was billed as a way to stimulate the economy. (If nothing’s done by Jan. 1 to change tax and budget provisions already passed by Congress, the rate will snap back to 20 percent, a scenario both parties hope to avoid.) Mitt Romney wants to ditch capital gains tax altogether for people earning less than $250,000. President Barack Obama, in his Affordable Care Act, increased the rate by 3.8 percent for high earners beginning in 2013, and has proposed the so-called Buffett Rule, which would among other things end an accounting interpretation that allows private equity and hedge fund managers (and Romney) to save money by paying tax on their earnings at the capital gains rate. Neither candidate, though, contests the Bush administration’s basic logic: that a lower capital gains rate encourages investment, which creates jobs and helps the economy grow. That doesn’t mean they’re right.

Leonard E. Burman, a tax expert, took on this issue in recent testimony before the House Committee on Ways and Means and the Senate Committee on Finance.   A good place to start is with who benefits from lower capital gains taxes.  

Not surprisingly, as the figure below (which is taken from Burman’s testimony) shows, the benefits are extremely concentrated.  As Burman noted:

In 2010, the highest-income 20 percent realized more than 90 percent of long-term capital gains according to the TaxPolicyCenter.  The top 1 percent realized almost 70 percent of gains and the richest 1 in 1,000 households accrued about 47 percent. It is hard to think of another form of income that is more concentrated by income.

Moreover, as the next figure shows, the concentration of capital gains has grown over time.  Given that the rich fund political campaigns, this certainly helps to explain why both political parties are so determined to keep the rate low.

But, to the main question—do lower capital gains taxes actually boost growth? This is what Burman had to say in his testimony:

The heated rhetoric notwithstanding, there is no obvious relationship between tax rates on capital gains and economic growth. Figure 4 [below] shows top tax rates on long-term capital gains and real economic growth (measured as the percentage change in real GDP) from 1950 to 2011. If low capital gains tax rates catalyzed economic growth, we’d expect to see a negative relationship–high gains rates, low growth, and vice versa–but there is no apparent relationship between the two time series. The correlation is 0.12, the opposite sign from what capital gains tax cut advocates would expect, and not statistically different from zero. Although not shown, I’ve tried lags up to five years and using moving averages, but there is never a larger or statistically significant relationship.

Burman notes that he posted this figure on his blog and offered the data to anyone interested, challenging readers to find support for lower rates.  “A half dozen or so people, including at least one outspoken critic of taxing capital gains, took me up on the offer, but nobody to my knowledge has been able to tease a meaningful relationship between capital gains tax rates and the GDP out of the data.”

As reported in a previous post, Thomes L. Hungerford, writing for the Congressional Research Service, came to the same conclusion about the lack of any relationship between the capital gains tax and GDP.  In fact, he concluded raising the top income and capital gains tax rates would likely reduce income inequality without causing harm to the economy.  

So, if we are really concerned with the budget deficit, rather than slashing spending on social programs lets raise the top tax rates.  Wonder if this will come up during our presidential debates?

The stock market looms large in our understanding of the economy.  The business news is often little more than a report on the movement of the market.  High school economics classes often introduce the study of the economy to students by encouraging them to pick and follow a favorite stock.  Managers of corporations are judged by how well their actions result in higher stock prices.

All this could easily lead one to think that the great majority of Americans are stockholders.  In fact, as the chart below shows, very few Americans own significant shares of stock and therefore directly benefit from the market’s rise.  

It is easy to understand why the top earners are happy with this identification of the economy with the stock market.  It ensures that economic activity is largely organized and outcomes evaluated with their interests in mind.  What is not so easy to understand is why the great majority of working people continue to accept this identification.