Archive for the ‘Economic Theory’ Category
The United Nations Conference on Trade and Development (UNCTAD) recently examined the causes of rising inequality in developing and developed countries. In what follows I discuss its analysis of the developed country experience, particularly the United States.
As its 2012 Trade and Development Report (TDR) notes, economists are well aware that the post-1980 growth in inequality has been accompanied by accelerating technological change and globalization. Studies in the 1990s attempted to determine whether technological change or globalization best explained the rising inequality over the 1980s and early 1990s. The eventual consensus was that the primary cause was skill-biased technological change. In other words, as production became more complex, businesses needed workers with ever greater skill levels and were willing to pay a premium to attract them. This boosted income inequality and the only reasonable response was greater skill acquisition by lower paid workers.
Drawing on more recent work, the TDR argues that this consensus needs to be reconsidered. It finds that the post-1995 inequality explosion is best explained by globalization, or more specifically transnational corporate globalization strategies.
According to the TDR (page 83):
The new aspect of income inequality in developed countries – also termed “polarization” – concerns employment in addition to wages. The trade-inequality debate in the early 1990s focused on the divergence between the wages of high-skilled and low-skilled workers. However, the more recent period has been characterized by a very different pattern of labor demand that benefits those in both the highest-skill and the lowest- skill occupations, but not workers in moderately skilled occupations (i.e. those involved in routine operations). The moderately skilled workers have been experiencing a decline in wages and employment relative to other workers.
To highlight polarization trends, the TDR first “decomposes wage developments of earners between the 90th (top) and the 10th (bottom) percentiles” which “allows a comparison of the ratio of wages at the 90th percentile with that of the 50th percentile (the 90–50 ratio)” as well as a comparison of “the ratio of wages at the 50th percentile with that of the 10th percentile (the 50–10 ratio).”
The chart below shows that in the United States the 90-50 ratio has steadily grown, reflecting increased earnings for those at the top relative to those in the middle of the income distribution. However, beginning in the 1980s, the 50-10 ratio largely stopped growing. In other words it is the hollowing out of the income distribution that underpins current inequality trends. And, according to UNCTAD, this hollowing out is largely due to the destruction of middle income jobs.
As the next chart shows, this polarization of employment has taken place in almost every developed capitalist country, which helps to explain the almost universal growth in income inequality in the developed capitalist world.
UNCTAD argues that this development is primarily the result of the growth in transnational corporate controlled cross-border production networks. Competition between leading transnational corporations drove them to find new ways to lower costs. Their preferred strategy has been to divide their production processes into discrete segments and then locate as many segments as possible in different low-wage countries. They control their respective networks through direct ownership of the relevant foreign affiliates or increasingly through their control over the relevant technologies and/or distribution channels.
These networks have helped leading transnational corporations increase their profits. Their operation has also transformed developed country economies, reducing mid-level jobs and earnings as well as increasing dependence on imported parts and components as well as final goods and services.
The growth in production networks has boosted the share of developing countries in world exports from 25% in the 1970s and 1980s to 40% in 2010. China, of course, is the leading production platform for most transnational corporations. One way to highlight the growth in global production and its consequences for the U.S. economy is to chart the growth in merchandise imports from low-wage economies, which are defined as those countries with a per capita income less than 5% of that of the United States before 2007. “The resulting group of 82 developing and transition economies includes many small economies but also some of the large economies in Asia, especially China, as well as countries such as India, Indonesia, and the Philippines.”
As the above chart shows, most of the world has been affected by this development, although the rise in U.S. imports from low-wage countries, primarily from China, stands out. Having said that, it is worth emphasizing that most U.S. imports from China are produced by foreign owned firms operating in China–often under the direction of U.S. transnational corporations–not Chinese companies; Apple products are a good example.
This development means that the polarization in U.S. income and employment is now structurally rooted in the operation of the U.S. economy. As the TDR points out (page 91):
Sector-specific evidence for the United States for the period 1990–2000 indicates that all of the four sectors with the largest growth in productivity (computers and electronic products, wholesale trade, retail trade and manufacturing, excluding computers and electronic products) experienced positive average employment growth, adding a total of nearly 2 million new jobs. By contrast, the sectors with the largest productivity gains during the 2000s experienced a substantial decline in employment. Computers and electronic products, information, and manufacturing (excluding computers and electronic products), accounted for a sizeable share of overall productivity growth, but employment fell, with a loss of more than 6.6 million jobs, about 60 per cent of which occurred before the onset of the Great Recession of 2008.
In other words, strengthening the corporate bottom line will do little to reverse income and employment polarization. As the TDR explains (page 80):
The evidence presented in the chapter indicates that, in developed countries, the effect of the forces of globalization on income inequality since the early 2000s is also largely due to behavioral changes in the corporate sector in response to greater international competition. Companies have given less attention to upgrading production technology and the product composition of output through productivity enhancing investment with a long-term perspective; instead, they have increasingly relied on offshoring production activities to low-wage locations, and on seeking to reduce domestic unit labor costs by wage compression. This trend has been associated with a polarization of incomes in developed countries. For the United States, evidence suggests that a new mode of corporate governance aimed at the maximization of shareholder value is pushing corporations to maintain external competitiveness through wage repression and offshoring, and to increase profits through, often speculative, financial investments, rather than by boosting productive capacity.
We celebrate education as the answer to almost all our economic problems. At the same time we largely ignore the enormous debt students are forced to acquire gaining a college degree and the great difficulties they face in landing a job that makes it possible for them to pay off that debt.
The Student Debt Problem
Student debt, as the Bloomberg Businessweek figure below highlights, is big and fast growing.
As the figure shows, the share of Americans that have graduated college has steadily grown to a current high of 32%. And, student debt has exploded. It now stands at approximately $1 trillion, significantly higher than credit card debt and home equity loans (which are loans secured by a second mortgage). Student debt is now second only to housing debt.
And, as Businessweek also points out, the share of young graduates suffering from debt is also on the rise. In 2003, only 25% of 25 year old graduates had student loans. In 2012, it was 43%. Moreover, “Over half of all student debt is held by households whose net worth is under $8500.”
The Employment Problem
Of course, debt is only one side of the problem. Lack of good employment is the other. As an Economic Policy Institute (EPI) report explains:
The Great Recession that began in December 2007 was so long and severe, and the government response so inadequate, that the crater it left in the labor market continues to be devastating for workers of all ages. . . . The weak labor market has been, and continues to be, very tough on young workers: At 16.2%, the March 2013 unemployment rate of workers under age 25 was slightly over twice as high as the national average. Though the labor market is now headed in the right direction, it is improving very slowly, and the prospects for young high school and college graduates remain dim.
The figure below, taken from the EPI report, highlights just how bad the labor market is for recent college graduates. It shows that the underemployment rate for college graduates that are 21-24 years old and not pursuing additional education is still over 18%.
The underemployment measure used includes those officially listed as unemployed as well as those “that either have a job but cannot attain the hours they need, or want a job but have given up looking for work.” This measure does not “include ‘skills/education–based’ underemployment (e.g., the young college graduate working as a barista).” The report cites one study that estimates that in 2000, 40% of employed college graduates under the age of 25 worked at jobs that did not require a college degree. That rose to 47% in 2007 and 53% in 2012.
The table above, also from the EPI report, gives some sense of the wage pressure that young college graduates face. It shows that their real hourly wages have significantly declined since 2000.
The Economic Consequences
If you think rising debt and poor employment opportunities cannot end well for graduates and the economy, you are right. A post from the Naked Capitalism blog makes that clear:
Now that student loans are undeniably in bubble territory, the officialdom is starting to wake up and take notice. Evidence that students were taking on so much debt as a group that it was undermining their ability to be Good American Consumers wasn’t enough. . . .Student debt is senior to all other consumer debt; unlike, say, credit card balances, Social Security payments can be garnished to pay delinquencies. As a result, it has contributed to the fall in the home ownership rate, since many young people who want to buy a house can’t because their level of student debt prevents them from getting a mortgage.
Student loan delinquencies are getting into nosebleed territory. The Wall Street Journal, citing New York Fed data, tells us that student debt outstanding increased 4.6% in the last quarter [third quarter 2012]. Repeat: in the last quarter. Annualized, that’s a 19.7% rate of increase during a period when other consumer borrowings were on the decline. And this growth is taking place while borrower distress is becoming acute. 11% of the loans were 90+ days delinquent, up from 8.9% at the close of last quarter. The underlying credit picture is certain to be worse, since many borrowers aren’t even required to service loans (as in they are still in school or have gotten a postponement, which is available to the unemployed for a short period). And it was the only type of consumer debt to show rising delinquency rates.
This is the new subprime: escalating borrowing taking place as loan quality is lousy and getting worse.
The following chart, from the Wall Street Journal, illustrates the trends noted above.
If the situation wasn’t serious enough, because of a lack of Congressional action, the interest rate on new, subsidized Stafford loans—the loans that the federal government gives to college and university students with financial need—doubled on July 1, from 3.4% to 6.8%. These loans account for more than a quarter of all new federal student loans.
It sure seems like we need to stop stressing individualistic solutions to our economic problems and start talking about making broader structural changes to our economic system.
The recent International Labor Organization (ILO) Global Wage Report examines trends in the distribution of income between labor and capital. It finds that:
An outpouring of literature has provided consistent new empirical evidence indicating that recent decades have seen a downward trend for the labor share in a majority of countries for which data are available.
The OECD has observed, for example, that over the period from 1990 to 2009 the share of labor compensation in national income declined in 26 out of 30 developed economies for which data were available, and calculated that the median labor share of national income across these countries fell considerably from 66.1 percent to 61.7 percent.
This trend comes at real cost to working people. Tali Kristal, in an article published in the June issue of the American Sociological Review, provides an estimate of the cost to U.S. workers. Over the years 1979 to 2007, labor’s share of national income in the U.S. private sector fell by six percentage points. If labor’s share had stayed at its 1979 level (about 64 percent of national income), the 120 million American workers employed in the private sector in 2007 would have earned an additional $600 billion, or an average of more than $5,000 per worker. However, as Kristal noted: “this huge amount of money did not go to the workers. Instead, it went to corporate profits, mostly benefiting very wealthy individuals.”
The following three figures, taken from the ILO report, highlight the global nature of this trend. Figure 31 shows the decline in labor’s share of income for 16 advanced capitalist countries taken as a group and then separately for the U.S., Germany, and Japan.
As the ILO explains:
(W)e observe that the simple average of labor shares in 16 developed countries for which data are available for this long period declined from about 75 percent of national income in the mid-1970s to about 65 percent in the years just before the global economic and financial crisis. . . . The global economic crisis seems to have reversed the decreasing trend only briefly. . . . The OECD, for example, observed: “In times of economic recession, this decline [in the wage share] has typically paused, but then subsequently resumed with a recovery. The recent economic and financial crisis and subsequent sluggish recovery have not deviated from this general pattern.”
Figure 32 examines developing and emerging economies and reveals similar labor income trends for different groups of countries. For example, DVP3, the diamond symbol, represents the unweighted average of Mexico, Korea, and Turkey. DVP5, the square symbol, adds China and Kenya.
Figure 33 highlights labor’s declining share of national income in China.
The downward pressure on living conditions for workers is far worse than the above trends would suggest. These trends just capture the division of income between workers and owners of capital. Wage inequality has also grown substantially. As the ILO explains, “If the labor compensation of the top 1 percent of income earners was excluded from the computation, the drop of the labor share would appear even greater.”
One important take away from the above is that capital’s growing profitability is increasingly based on its ability to depress worker earnings. Figure 36 shows the growing gap between the growth in labor productivity and average wages in 36 developed capitalist countries. Since the data is based on a weighted average, the trends are largely dominated by developments in the United States, Germany, and Japan.
Another take away is that we cannot understand the weakening of labor’s power simply in national terms. In other words, it appears that every nation is being restructured by a global accumulation process that has enabled transnational capital to use its mobility to undermine the social institutions and solidarity that previously supported labor’s bargaining strength. And, national states have greatly contributed to this outcome by aggressively promoting free trade agreements.
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.
If you were one of those people who were not persuaded that the U.S. debt level was reaching growth-threatening levels, pat yourself on the back.
One of the major studies supporting the austerity position was a 2010 paper titled Growth in a Time of Debt by two well-known economists, Carmen Reinhardt and Kenneth Rogoff (R & R). As Mike Konczal reports:
Their “main result is that…median growth rates for countries with public debt over 90 percent of GDP are roughly one percent lower than otherwise; average (mean) growth rates are several percent lower.” Countries with debt-to-GDP ratios above 90 percent have a slightly negative average growth rate, in fact.
This conclusion, that countries with debt-to-GDP ratios over 90 percent actually suffer negative growth, quickly became a staple in the arguments of those pushing for cuts in government spending.
Well, it turns out that R & R’s work was seriously flawed. Once the flaws are corrected, the conclusion no longer holds; growth remains positive even at debt ratios over 90 percent and the difference in growth rates for countries below and above that level is not statistically significant.
R & R finally agreed to share their data with three professors from the University of Massachusetts at Amherst, Thomas Herndon, Michael Ash, and Robert Pollin (HAP). HAP published their evaluation of R & R’s work in their recently published paper titled Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff.” As Konczal summarizes, HAP found three serious problems with R & R’s work:
First, Reinhart and Rogoff selectively exclude years of high debt and average growth. Second, they use a debatable method to weight the countries. Third, there also appears to be a coding error that excludes high-debt and average-growth countries. All three bias in favor of their result, and without them you don’t get their controversial result.
You can read Konczal or Michael Roberts for a fuller discussion of these points. However, just to give you a flavor of how poor R & R’s methodology was, let me briefly summarize the second point. R & R divided up each individual country’s data into several selected debt-to-GDP groupings, and then calculated an average real growth for all the years in the specific debt grouping. Then they determined a global average rate of growth for a given debt-to-GDP level by averaging all the growth rates across countries at that specific debt level.
Konczal gives the following example to illustrate how sloppy this approach is:
The U.K. has 19 years (1946-1964) above 90 percent debt-to-GDP with an average 2.4 percent growth rate. New Zealand has one year in their sample above 90 percent debt-to-GDP with a growth rate of -7.6. These two numbers, 2.4 and -7.6 percent, are given equal weight in the final calculation, as they average the countries equally. Even though there are 19 times as many data points for the U.K.
Now maybe you don’t want to give equal weighting to years (technical aside: Herndon-Ash-Pollin bring up serial correlation as a possibility). Perhaps you want to take episodes. But this weighting significantly reduces the average; if you weight by the number of years you find a higher growth rate above 90 percent. Reinhart-Rogoff don’t discuss this methodology, either the fact that they are weighing this way or the justification for it, in their paper.
As noted above, after HAP adjust for the errors they found, which include an Excel spread sheet error, R & R’s conclusion of negative growth at debt levels over 90 percent goes away. More specifically, they found that “the average real GDP growth rate for countries carrying a public debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0.1 percent as [R & R claim].”
Now, have R & R backed off from their conclusion? Well, they admit the mistakes but still claim that the basic point is true. But as Dean Baker notes: “If R&R had produced the correct table in their initial paper no one would have taken seriously their claim that the 90 percent debt-to-GDP ratio presents some sort of cliff. The corrected table in no way supports that view.”
What we have here is politics in command. R & R, as well as other advocates of austerity, continue to argue for cutting government spending despite having based their position largely on a study that is now shown to be wanting. So, it goes.
David Broockman and Christopher Skovron, the authors of the paper, “surveyed every candidate for state legislative ofﬁce in the United States in 2012 [shortly before the November election] and probed candidates’ own positions and their perceptions of their constituents’ positions on universal health care, same-sex marriage, and federal welfare programs, three of the most publicly salient issues in both national-level and state-level American politics during the past several years.” They then matched the results with estimates of the actual district- and issue-speciﬁc opinions of those residing in the candidates’ districts using a data set of almost 100,000 Americans.
Here is what they found:
Politicians consistently and substantially overestimate support for conservative positions among their constituents on these issues. The differences we discover in this regard are exceptionally large among conservative politicians: across both issues we examine, conservative politicians appear to overestimate support for conservative policy views among their constituents by over 20 percentage points on average. . . . Comparable ﬁgures for liberal politicians also show a slight conservative bias: in fact, about 70% of liberal ofﬁce holders typically underestimate support for liberal positions on these issues among their constituents.
The following two charts illustrate this bias when it comes to universal health care and same sex marriage.
As Matthews explain:
The X axis is the district’s actual views, and the Y axis their legislators’ estimates of their views. The thin black line is perfect accuracy, the response you’d get from a legislator totally in tune with his constituents. Lines above it would signify the politicians think the district more liberal than it actually is; if they’re below it, that means the legislators are overestimating their constituents’ conservatism. Liberal legislators consistently overestimate opposition to same-sex marriage and universal health care, but only mildly. Conservative politicians are not even in the right ballpark.
The authors found a similar bias regarding support for welfare programs. Perhaps even more unsettling, the authors found no correlation between the amount of time candidates spent meeting and talking to people in their districts while campaigning for office and the accuracy of their perceptions of the political positions of those living in their districts.
One consequence of this disconnect is that office holders, even those with progressive views, are reluctant to take progressive positions. More generally, these results speak to a real breakdown in “the ability of constituencies to control the laws that their representatives make on their behalf.”
While newspapers give a lot of ink to arguments about whether reducing the budget deficit will boost or reduce growth, they seem to have little interest in the related issue of whether economic growth really benefits the great majority.
David Cay Johnston, the Pulitzer Prize winning financial journalist, recently addressed this issue drawing on the work of economists Emmanuel Saez and Thomas Piketty:
In 2011 entry into the top 10 percent . . . required an adjusted gross income of at least $110,651. The top 1 percent started at $366,623.
The top 1 percent enjoyed 81 percent of all the increased income since 2009. Just over half of the gains went to the top one-tenth of 1 percent, and 39 percent of the gains went to the top 1 percent of the top 1 percent.
Ponder that last fact for a moment — the top 1 percent of the top 1 percent, those making at least $7.97 million in 2011, enjoyed 39 percent of all the income gains in America.
So, 81 percent of all the new income generated from 2009 to 2011 was captured by the top 1 percent income earners, where income is defined as adjusted gross income, which refers to income minus deductions or taxable income. In other words growth, even accelerated growth, is not going to do the majority much good if the economic structure remains the same.
Johnston highlights the problem with our existing economic model with perhaps an even more shocking example. He compares the average income growth of the bottom 90 percent with the average income growth of the top 10 percent, 1 percent, and top 1 percent of the top 1 percent over the period 1966 to 2011.
It turns out that the average income of the bottom 90 percent rose by a miniscule $59 over the period (as measured in 2011 dollars). By comparison, the average income of the top 10 percent rose by $116,071, the average income of the top 1 percent rose by $628,817, and the average income of the top 1 percent of the top 1 percent increased by a whopping $18,362,740. In short, growth alone means little if the great majority of people are structurally excluded from the benefits.
In an effort to highlight this extreme disparity in adjusted income growth rates, Johnston suggests plotting the numbers on a chart, with $59, the amount gained by the bottom 90 percent, represented by a bar one inch high. As the chart below shows, the bar representing average gains for the top 10 percent would be 163 feet high, that for the top 1 percent would be 884 feet high, and that for the top 1 percent of the top 1 percent would be 4.9 miles high.
In sum, the real challenge facing the great majority of Americans is not figuring out how to make the economy growth faster. Rather, it is figuring out how to create space for a real debate about how to transform our economy so that growth will actually satisfy majority needs.
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 media continues to direct out attention to deficits and debt as our main problems. Yet, it does little to really highlight the causes of these deficits and debts.
The following two figures from the Center on Budget and Policy Priorities help to clarify the causes. It is important to note that the projections underlying both figures were made before the recent vote making permanent most of the Bush-era tax cuts.
Figure 1, below, shows the main drivers of our large national deficits: the Bush-era tax cuts, the wars in Iraq and Afghanistan, and our economic crisis and responses to it. Without those drivers our national deficits would have remained quite small.
Figure 2, below, shows the main drivers of our national debt. Not surprisingly they are the same as the drivers of our deficits.
Significantly, the same political leaders that scream the loudest about our deficits and debt have little to say about stopping the wars or reducing military spending and are the most adamant about maintaining the Bush-era tax cuts. That is because, at root, their interest is in reducing spending on non-security programs rather than reducing the deficit or debt.
Some of these leaders argue that the tax cuts will help correct our economic problems and thereby help reduce the deficit and debt. However, multiple studies have shown that tax cuts are among the least effective ways to stimulate employment and growth. In contrast, the most effective are sustained and targeted government efforts to refashion economic activity by spending on green conversion, infrastructure, health care, education and the like.
While Republicans and Democrats debate the extent to which taxes should be raised, both sides appear to agree on the need to reign in federal government spending in order to achieve deficit reduction. In fact, federal government spending has been declining both absolutely and, as the following figure from the St. Louis Federal Reserve shows, as a share of GDP.
In reality, our main challenge is not reducing our deficit or debt but rather strengthening our economy, and cutting government spending is not going to help us overcome that challenge. As Peter Coy, writing in BusinessWeek explains:
It pains deficit hawks to hear this, but ever since the 2008 financial crisis, government red ink has been an elixir for the U.S. economy. After the crisis, households strove to pay down debt and businesses hoarded profits while skimping on investment. If the federal government had tried to run balanced budgets, there would have been an enormous economy wide deficit of demand and the economic slump would have been far worse. In 2009 fiscal policy added about 2.7 percentage points to what the economy’s growth rate would have been, according to calculations by Mark Zandi of Moody’s Analytics. But since then the U.S. has underutilized fiscal policy as a recession-fighting tool. The economic boost dropped to just half a percentage point in 2010. Fiscal policy subtracted from growth in 2011 and 2012 and will do so again in 2013, to the tune of about 1 percentage point, Zandi estimates.
If we were serious about tackling our economic problems we would raise tax rates and close tax loopholes on the wealthy and corporations and reduce military spending, and then use a significant portion of the revenue generated to fund a meaningful government stimulus program. That would be a win-win proposition as far as the economy and budget is concerned.
There is growing talk that the economy is finally on its way to recovery—“A Steady, Slo-Mo Recovery”—in the words of Businessweek.
Here is how Peter Coy, writing in Businessweek, explains the growing consensus:
Job growth is poised to continue increasing tax revenue, which will make it easier to shrink the budget deficit while keeping taxes low and preserving essential spending. All this will occur without any magic emanating from the Oval Office. It would have occurred if Mitt Romney had been elected president. “The economy’s operating well below potential, and there’s a lot of room for growth” regardless of who’s in office, says Mark Zandi, chief economist of forecaster Moody’s Analytics.
Something could still go wrong, but the median prediction of 37 economists surveyed by Blue Chip Economic Indicators is that during the next four years, economic growth will gather momentum as jobless people go back to work and unused machinery is put back into service. “The self-correcting forces in the economy will prevail,” predicts Ben Herzon, senior economist at Macroeconomic Advisers, a forecasting firm in St. Louis.
Before we get lulled to sleep, we need some perspective about the challenges ahead. How about this: we face a 9 million jobs gap, and this doesn’t even address the low quality of the jobs being created.
The chart below, taken from an Economic Policy Institute blog post, illustrates the gap.
As Heidi Shierholz, the author of the post, explains:
The labor market has added nearly 5 million jobs since the post-Great Recession low in Feb. 2010. Because of the historic job loss of the Great Recession, however, the labor market still has 3.8 million fewer jobs than it had before the recession began in Dec. 2007. Furthermore, because the potential labor force grows as the population expands, in the nearly five years since the recession started we should have added 5.2 million jobs just to keep the unemployment rate stable. Putting these numbers together means the current gap in the labor market is 9.0 million jobs. To put that number in context: filling the 9 million jobs gap in three years—by fall 2015—while still keeping up with the growth in the potential labor force, would require adding around 330,000 jobs every single month between now and then.
Unfortunately, our “job creators” only created 171,000 net jobs in October. And that was considered a relatively good month. The chart below, from the Center on Budget and Policy Priorities, gives a sense of what we are up against.
Of course, weak job growth in the past doesn’t mean that we cannot have strong job growth in the future. On the other hand, such a change would require consensus on radically different policies than those currently being discussed and debated by those in power.