Reports from the Economic Front

by Martin Hart-Landsberg

Archive for the ‘Hunger’ Category

China and Neoliberalism

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China is widely celebrated as an economic success story.  And it is as far as GDP, investment, and export growth is concerned.   However, as we know well from our experience in the United States, such economic indicators often reveal little about the reality of people’s lives.  In China workers are subject to intense working conditions with a disproportionate share of the benefits of production going to a top few.   For example, as Bloomberg News notes 

The richest 70 members of China’s legislature added more to their wealth last year than the combined net worth of all 535 members of the U.S. Congress, the president and his Cabinet, and the nine Supreme Court justices.

The net worth of the 70 richest delegates in China’s National People’s Congress, which opens its annual session on March 5, rose to 565.8 billion yuan ($89.8 billion) in 2011, a gain of $11.5 billion from 2010, according to figures from the Hurun Report, which tracks the country’s wealthy. That compares to the $7.5 billion net worth of all 660 top officials in the three branches of the U.S. government.

The income gain by NPC members reflects the imbalances in economic growth in China, where per capita annual income in 2010 was $2,425, less than in Belarus and a fraction of the $37,527 in the U.S. The disparity points to the challenges that China’s new generation of leaders, to be named this year, faces in countering a rise in social unrest fueled by illegal land grabs and corruption.

“It is extraordinary to see this degree of a marriage of wealth and politics,” said Kenneth Liberthal, director of the John L. Thornton China Center at Washtington’s Brookings Institution.  “It certainly lends vivid texture to the widespread complaints in China about an extreme inequality of wealth in the country now.”  

Growing numbers of Chinese workers and farmers have been engaged in workplace and community struggles in opposition to corporate and government policies, especially those designed to intensify the privatization, deregulation, and liberalization of the Chinese economy.  The number and determination of participants in these struggles has forced business and government leaders on the defensive.  

Recently, the People’s Daily ran an editorial calling for renewed commitment to “reform” in an attempt to shore up support for the government’s neoliberal policies.  The editorial appears to have triggered growing discussions and debates on and off the internet among academics and activists about alternatives. 

One concrete outcome from these discussions and debates is a 16 point proposal which was developed collectively and recently published on the Red China website; it has gained significant support.  The following is an English translation of the proposal by the China Study Club at University of Massachusetts, Amherst.   Reading it provides a window into political developments in China and also highlights the similarity of struggles in China and the United States.  

A SIXTEEN-POINT PROPOSAL ON CHINA’S REFORM  

1. That the personal and family wealth of all officials be publicized and their source clarified, and all “naked bureaucrats” be expelled from the Party and the government. (“Naked bureaucrats” refer to those officials whose family lives in developed countries and whose assets have been transferred abroad, leaving nothing but him/herself in China.)  

2. That the National Congress concretely exercises its legislative and monitory function, comprehensively review the economic policies implemented by the state council, and defend our national economic security.   

3. That the existing pension plans be consolidated and retirees be treated equally regardless of sector and rank.  

4. That elementary and secondary education be provided free of charge throughout the country; compensation for rural teachers be substantially raised and educational resources be allocated on equal terms across urban and rural areas; and the state assume the responsibility of raising and educating vagrant youth.  

5. That the charges of higher education be lowered, and public higher education gradually become fully public-funded and free of charge.   

6. That the proportion of state expenditure on education be increased to and beyond international average level.   

7. That the price and charge of basic and critical medicines and medical services be managed by the state in an open and planned manner; the price of all medical services and medicines should be determined and enforced by the state in view of social demand and actual cost of production.   

8. That heavy progressive real estate taxes be levied on owners of two or more residential housings, so as to alleviate severe financial inequality and improve housing availability.

9. That a nation-wide anti-corruption online platform be established, where all PRC citizens may file report or grievance on corruption or abuse instances; the state should investigate in openly accountable manner and promptly publicized the result.   

10. That the state of national resources and environmental security be comprehensively assessed, exports of rare, strategic minerals be immediately cut down and soon stopped, and reserve of various strategic materials be established.  

11. That we pursue a self-reliant approach to economic development; any policy that serves foreign capitalists at the cost of the interest of Chinese working class should be abolished.  

12. That labor laws be concretely implemented, sweatshops be thoroughly investigated; enterprises with arrears of wage, illegal use of labor, or detrimental working condition should be closed down if they fail to meet legal requirements even after lawfully limited term for self-correction.   

13. That the coal industry be nationalized across the board, all coal mine workers receive the same level of compensation as state-owned enterprise mine workers do, and enjoy paid vacation and state-funded medical service.  

14. That the personal and family wealth of managerial personnel in state-owned enterprises be publicized; the compensation of such personnel should be determined by the corresponding level of people’s congress.   

15. That all governmental overhead expenses be restricted; purchase of automobile with state funds be restricted; all unnecessary traveling in the name of “research abroad” be suspended.   

16. That the losses of public assets during the “reforms” be thoroughly traced, responsible personnel be investigated, and those guilty of stealing public properties be apprehended and openly tried.    

Globalization, Capitalism, and China

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A January 22, 2012 New York Times story, The iEconomy: How U.S. Lost Out on iPhone Work, has been getting a lot of coverage.   The article makes clear that Apple and other major multinational corporations have moved production to China not only to take advantage of low wages but also to exploit a labor environment that gives them maximum flexibility. The following quote gives a flavor for what attracts Apple to China: 

One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”

The article highlights these conditions to make the point that manufacturing is not coming back to the United States because these conditions cannot be replicated in the United States. 

One aspect not stressed in the article is that many of the labor policies described are actually against the law in China and contrary to Apple’s own claims about its labor standards.  See William K. Black’s analysis here.

If you are interested in a more detailed picture of just what goes into making Apple products so profitable you should listen to or read the transcript of a This American Life radio segment which aired in January.  The segment is based on a Mike Daisey performance in front of a small audience.  Mike is a self proclaimed technology geek who just adores Apple products.  At least that was before he visited the Foxconn (Taiwanese multinational corporation owned) factory located in China in which many Apple products are assembled.  The program discusses the labor conditions at Foxconn and other similar multinational corporations operating in China.

These multinational corporations have helped make China the world’s top exporter of manufacturers, both overall and of high technology goods more specifically.  China’s share of world exports of information and communication technology products (such as computers and office machines; and telecom, audio and video equipment) has grown from 3 percent in 1992 to 24 percent 2006, and its share of electrical goods (such as semiconductors) from 4 percent to 21 percent over the same period.  Of course, while these exports are officially recorded as Chinese exports, approximately 60 percent of all Chinese exports and 85 percent of all Chinese high technology exports are produced by foreign companies operating in China.

The issue here isn’t one of China stealing manufacturing jobs from the United States or other developed countries.  According to the U.S. Bureau of Labor Statistics, total manufacturing employment in China actually fell by over 9 million over the period 1994-2006, from 120.8 million to 111.61 million.  Total urban manufacturing employment, which would include most foreign operations, declined sharply from 54.92 million to 33.52 million. 

In fact, China’s growth has generated few decent employment opportunities for urban workers, regardless of their employment sector.  The International Labor Organization did an extensive study of urban employment over the period 1990 to 2002.  Although total urban employment increased slightly, almost all the growth was in irregular employment, meaning casual-wage or self-employment—typically in construction, cleaning and maintenance of premises, retail trade, street vending, repair services, or domestic services.  More specifically, while total urban employment over this thirteen-year period grew by 81.7 million, 80 million of that growth was in irregular employment.  As a result, irregular workers in China now comprise the largest single urban employment category. 

The issue here isn’t even one of China versus the United States.  It also isn’t one of dictatorship versus democracy.  Rather it is one of capitalism’s logic.  Said simply, large multinational corporations and their allies in both the United States and China have successfully created a global system of production and consumption that gives them maximum freedom of operation.  It is this logic that keeps pushing more free trade agreements, attempts to create more flexible labor markets, and more attractive conditions for business investment, both here and in China.   And it is this logic that needs to be challenged on both sides of the Pacific. 

The Economic Crisis: Causes And Responses

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An April 2011 Gallup poll found that 29% of Americans thought that the U.S. economy was in a depression.  Another 26% thought it was only a recession.   This is scary since according to the National Bureau of Economic Research we have been in an economic expansion since June 2009.

Why would so many Americans feel this way you might ask.  Here is one reason.  According to recent Census Bureau data, during the recession, which lasted from December 2007 to June 2009, inflation-adjusted median household income fell by 3.2%.  Between June 2009 and June 2011, a period of economic expansion, inflation-adjusted median household income fell by 6.7%.   This decline is illustrated in the New York Times chart below.

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. . .

I recently appeared on the Alliance for Democracy’s “Populist Dialogue” TV show to talk about our economic crisis and possible responses to it.  You can watch the show here or below.

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Troubling Trends

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The Census Bureau just published new data revealing trends in living standards as of 2010.  The trends are troubling to say the least.   

Median household income (adjusted for inflation) fell to $49,445 (see below).  That means that the median household now earns less than it did a decade ago.  This marks the first decade since the Great Depression without an increase in real median income.  According to Lawrence Katz, a labor expert and Harvard economist,  

“This is truly a lost decade.  We think of America as a place where every generation is dong better, but we’re looking at a period when the median family is in worse shape than it was in the late 1990s.”

The percentage of Americans living in poverty hit 15.1 percent, the highest percentage since 1993 (see below).  There are now 46.2 million people living below the poverty line, the greatest number ever recorded by the Census Bureau. Child poverty stood at 22 percent.   

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Things are unlikely to get better this year.  State and local governments are slashing employment and programs and the federal government is now moving into cutting mode itself.   

This depressing situation is not simply a recession phenomenon.  As the New York Times reports, the expansion period of 2001 to 2007 “was the first . . . on record where the level of poverty was deeper, and median income of working-age people was lower, at the end than at the beginning.”   

Of course, while the great majority of people are struggling, a small minority have been doing very well.  One consequence, as the chart below highlights, is a strong growth in inequality (as measured by the Gini coefficient with higher numbers reflecting greater inequality).  As I noted in a previous post, over the years 2002 to 2007, the top 1 percent of households captured 58 percent of all the income generated.  

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So, in brief, there is a small minority that is doing very well and a great majority that is struggling, with a significant number in free fall.  Corporations understand what is happening and they are responding.  In brief, they are letting go of the middle class as a market and restructuring their offerings to appeal to the top and bottom of the income distribution. 

Here is an enlightening five minute discussion of this new business strategy on Daily Ticker video.    

The Wall Street Journal, highlighting Procter & Gamble, also reports on this development:

For the first time in 38 years . . . the company launched a new dish soap in the U.S. at a bargain price.

P&G’s roll out of Gain dish soap says a lot about the health of the American middle class: The world’s largest maker of consumer products is now betting that the squeeze on middle America will be long lasting. . . .

P&G isn’t the only company adjusting its business.  A wide swath of American companies is convinced that the consumer market is bifurcating into high and low ends and eroding in the middle.  They have begun to alter the way they research, develop and market their products. . . .

To monitor the evolving American consumer market, P&G executives study the Gini index, a widely accepted measure of income inequality that ranges from zero, when everyone earns the same amount, to one, when all income goes to only one person. In 2009, the most recent calculation available, the Gini coefficient totaled 0.468, a 20% rise in income disparity over the past 40 years, according to the U.S. Census Bureau.

“We now have a Gini index similar to the Philippines and Mexico—you’d never have imagined that,” says Phyllis Jackson, P&G’s vice president of consumer market knowledge for North America. “I don’t think we’ve typically thought about America as a country with big income gaps to this extent.”

Such a response may well strengthen corporate bottom lines, at least for a while.  Unfortunately for the great majority of us, it may also reinforce existing downward trends in income.

Written by marty

September 15th, 2011 at 9:53 pm

The Tragedy of Child Poverty

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Children are our most important resource.  Everyone says it, but we don’t really mean it.  Exhibit one: the percentage of children under the age of 18 that live in poverty. In 2007, at the peak of our previous economic expansion, the child poverty rate was 18 percent.  In 2009, it hit 20 percent.  The figure below provides a look at child poverty rates in each state.  New Hampshire has the lowest rate–11 percent.  Mississippi has the highest rate–31 percent.

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Children under the age of 18 are counted as poor if they live in families with income below U.S. poverty thresholds.  There are a range of poverty thresholds which are based on family size and number of children.  The thresholds are adjusted yearly using the change in the average annual Consumer Price Index for All Urban Consumers (CPI-U).  These poverty thresholds are far from generous.  The 2009 poverty threshold for a family of two adults and two children was $21,756.  Poverty thresholds for 2010 have not yet been published.   

Sadly our poverty rates understate the seriousness of our poverty problem, for children and adults.  The history of how we developed and calculate our official poverty thresholds provides perhaps the clearest proof of the inadequacy of current statistics.  In broad brush, the Johnson administration, having announced a war on poverty in January 1964, needed a measure of poverty.  In response, its newly created Office of Economic Opportunity [OEO] introduced the first poverty thresholds in 1965.

These thresholds were largely based on previous work of the Department of Agriculture [DOA].  The DOA had developed four low-cost weekly food plans, the least generous called the “economy plan.” That plan was designed for “temporary or emergency use when funds are low.” It had no allowance for eating outside the home.  The Department had also determined, based on surveys, that families of three or more persons spent approximately one-third of their after-tax income on food.  The OEO took the cost of the economy food plan for families of different sizes and multiplied the total by 52 to get a series of yearly food budgets. Then, it multiplied those food budgets by three to generate a series of poverty thresholds. 

From 1966 to 1969, these poverty thresholds were adjusted annually by the yearly change in the cost of the food items contained in the economy food plan.  After 1969 the poverty thresholds were simply adjusted by the rise in the consumer price index.

This methodology has produced a poverty standard that is deficient in several ways.  First, it does not acknowledge that our knowledge of nutrition has significantly changed since 1965.  Second, it does not acknowledge that most families now spend approximately one-fifth of their after-tax income on food, not one-third.  That correction alone would mean that the food budget should be multiplied by 5 rather than 3, thereby producing higher thresholds and poverty rates. Third, it does not acknowledge that poverty is best thought of as a relative condition.

The National Academy of Sciences Panel on Poverty and Family Assistance has played a leading role in developing one of the most promising alternative poverty measures.  A 2008 Bureau of Labor Statistics Working Paper refine and extend the Panel’s experimental methodology and use it to calculate poverty thresholds and estimates for the period 1996 to 2005.

The authors of the Working Paper start with a reference family, two adults and two children, the most common family unit in the United States.  Then, using Consumer Expenditure Surveys, they calculate the dollar amount of spending on food, clothing, shelter, utilities and medical care by all reference families in a given year. 

The poverty threshold for the reference family is set, following the work of the Panel, at the midpoint between the 30th and 35th percentile of the spending distribution for all families with two adults and two children.  Small multipliers are then used to add spending estimates for other needs, such as transportation and personal care, slightly raising the poverty threshold.  This threshold is adjusted to generate thresholds for families of other sizes and compositions.     

Poverty rates are determined by comparing family resources with these poverty thresholds.  In contrast to current poverty calculations which rely on pre-tax incomes (even though official thresholds are based on the share of after-tax income spent on food), the authors of the Working Paper define family resources as the sum of after-tax money income from all sources plus the value of near-money benefits (such as food stamps) that help the family meet its spending needs. 

The chart below shows national poverty rates for the years 1996 to 2005.  We see that the rates produced by this experimental methodology are significantly higher than the official rates.  Strikingly, while the official 2005 poverty rate is lower than the 1996 official poverty rate, the 2005 experimental poverty rate is the highest in the period.   

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Returning to the issue of child poverty, the table below highlights the difference between the two measures for specific demographic groups over the same period.  Notice that the child poverty rate calculated using the experimental measure is always higher than the official rate.  As previously stated, the official 2009 child poverty rate is 20 percent.  The experimental rate would no doubt be several percentage points higher, closing in on 25 percent.

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What can one say about a situation where between one-fifth and one-fourth of all children in the United States live in poverty?  And all signs point to a higher rate for 2010.  Words like outrageous, unacceptable, an indicator of a flawed economic system all come to mind.  What also comes to mind is the fact these poverty statistics rarely get the attention they deserve.  So does the question of why that is so.

Written by marty

September 11th, 2011 at 10:35 am

The Deficit Deal: We Got Taken

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Congress has finally agreed on a deficit reduction plan that President Obama supports.  As a result, the debt ceiling is being lifted, which means that the Treasury can once again borrow to meet its financial obligations. 

Avoiding a debt default is a good thing.  However, the agreement is bad and even more importantly the debate itself has reinforced understandings of our economy that are destructive of majority interests.

The media presented the deficit reduction negotiations as a battle between two opposing sides.  President Obama, who wanted to achieve deficit reduction through a combination of public spending cuts and tax increases, anchored one side.  The House Republicans, who would only accept spending cuts, anchored the other.  We were encouraged to cheer for the side that we thought best represented our interests. 

Unfortunately, there was actually little difference between the two sides in terms of the way they engaged and debated the relevant issues. Both sides agreed that we face a major debt crisis.  Both sides agreed that out-of-control social programs are the main driver of our deficit and debt problems.  And both sides agreed that the less government involvement in the economy the better.

The unanimity is especially striking since all three positions are wrong.  We do not face a major debt crisis, social spending is not driving our deficits and debt, and we need more active government intervention in the economy not less to solve our economic problems.

Before discussing these issues it is important to highlight the broad terms of the deficit reduction agreement. The first step is limited to spending cuts. More specifically, discretionary spending is to be reduced by $900 billion over the next ten years.  Approximately 35% of the reduction will come from security related budgets (military and homeland security), with the rest coming from non-security discretionary budgets (infrastructure, clean energy, research, education, as well as programs that help low income people with child care, housing, community service etc.).  In exchange for these budget cuts the Congress has agreed to raise the debt ceiling by $1 trillion. 

The agreement also established a 12 person committee (with 6 Democrats and 6 Republicans) to recommend ways to reduce future deficits by another $1.2-1.5 trillion.  Its recommendations must be made by November 23, 2011 and they can include cuts to every social program (including Social Security, Medicare and Medicaid), as well as tax increases.    

Congress has to vote on the committee’s package of recommendations by December 23, 2011, up or down.  If Congress approves them they will be implemented.  If Congress does not approve them, automatic cuts of $1.2 trillion will be made; 50% of the cuts must come from security budgets and the other 50% must come from non-security discretionary budgets and Medicare.  Regardless of how Congress votes on the recommendations, it must also vote on whether to approve a Balanced Budget Amendment to the Constitution.  Once this vote is taken, the debt ceiling will be raised again by an amount slightly smaller than the deficit reduction.  

Check out the following flowchart from the New York Times if you want a more complete picture of the process.  If you are content with the above summary skip to the text below the flowchart for some analysis.

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Many commentators, trying to explain why President Obama embraced an agreement so heavily weighted towards spending cuts (potentially including cuts in Social Security benefits), claim that he was outmaneuvered by Republicans.  In reality, President Obama has long supported deficit reduction along the lines of this agreement. 

As early as March 2009, his staff told David Brooks, a columnist for the New York Times, that the President was “extremely committed to entitlement reform and is plotting politically feasible ways to reduce Social Security as well as health spending.”  In fact, according to Brooks:  

The White House has produced a chart showing nondefense discretionary spending as a share of GDP.  That’s spending for education, welfare, and all the stuff that Democrats love.  Since 1985, this spending as hovered around 3.7% of GDP. . . . The White House claims that it is going to reduce this spending to 3.1%, lower than at any time in any recent Republican administration.  I was invited to hang this chart on my wall and judge them by how well they meet these targets.

The White House Fact Sheet issued to explain why the President supports the recently negotiated deficit reduction agreement reveals the consistency in Obama’s position.  It notes favorably that this agreement “puts us on track to reduce non-defense discretionary spending to its lowest level since Dwight Eisenhower was President.”

Those who favor reducing spending on government programs generally argue that we have no choice because our public spending and national debt are out of control, threatening our economic future.  But, the data says otherwise.   

The chart below, from the economist Menzie Chinn at Econbrowser, shows the movement in the ratio of publically held debt to GDP over the period 1970 to 2011; the area in yellow marks the Obama administration. While this ratio has indeed grown rapidly, it remains well below the 100% level that most economists take to be the warning level.  In fact, according to Congressional Budget Office predictions, we are unlikely to reach such a level for decades even if we maintain our current spending and revenue patterns.

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The sharp growth in the ratio over the last few years strongly suggests that our current high deficits are largely due to recent developments, in particular the 2001 and 2003 Bush tax cuts, the wars in Iraq and Afghanistan, and the Great Recession. Their contribution can be seen in the chart below from the New York Times.

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The effects of the tax cuts and economic crisis on our deficits (and by extension debt) are especially visible in the following chart (again from Menzie Chinn), which plots yearly changes in federal spending and federal revenue as a percentage of GDP (the shaded areas mark periods of recession).   As we can see, the recent deficit explosion was initially driven more by declining revenues than out of control spending.  Attempts to close the budget gap solely or even primarily through spending cuts, especially of social programs, is bound to fail.

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Tragically, the debate over how best to reduce the deficit has encouraged people to blame social spending for our large deficits and those large deficits for our current economic problems.  As a result, demands for real structural change in the way our economy operates are largely dismissed as irrelevant.

Recent economic data should be focusing our attention on the dangers of a new recession.  According to the Commerce Department our economy grew at an annual rate of just 1.3% in second quarter of this year, following a first quarter in which the economy grew by only 0.3%.  These are incredibly slow rates of growth for an economy recovering from a major recession.  To put these numbers in perspective, Dean Baker notes that we need growth of over 2.5% to keep our already high unemployment rate from growing.

Cutting spending during a period of economic stagnation, especially on infrastructure, research, and social programs, is a recipe for greater hardship.  In fact, such a policy will likely further weaken our economy, leading to greater deficits.  This is what happened in the UK, Ireland, and Greece—countries with weak economies that tried to solve their deficit problems by slashing public spending.

We need more active government intervention, which means more spending to redirect and restructure the economy; a new, more progressive tax structure; and a major change in our foreign policy, if we are going to solve our economic problems.  Unfortunately for now we don’t have a movement powerful enough to ensure our side has a player in the struggles that set our political agenda. 

The Challenges Ahead

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On May 6, 2011, I spoke at the First Unitarian Church in Portland along with Chuck Collins (from the Institute for Policy Studies) as part of a program sponsored by the church’s Real Wealth of Portland group.  We both addressed the following theme: “Economic Insecurity Continues…and Communities Respond.”   

Chuck talked about a very important initiative: Common Security Clubs.  The First Unitarian Church has sponsored similar clubs for approximately one year.  

What follows is the talk I gave:

The Challenges Ahead

I want to begin by summarizing my three main points—

First, our economic problems are serious and structural, and a long time in the making.  They did not start with the 2007 collapse of the housing bubble, which means that we should not assume that so called “normal market forces” will eventually return us to an acceptable economic state.  In other words, without major structural changes in the way our economy works we face a future of stagnation with ever worsening conditions for growing numbers of people.  

Second, business and political leaders are not committed to making any serious changes in our economic structure.  That is not because they are stupid.  Rather it reflects a real class interest in maintaining the status quo.  It is not that they are unaware of or unconcerned with our current social problems but rather that they view the cost of making necessary changes to our economy as too high.

Third, meaningful solutions will require building a movement that challenges our current reliance on profit driven market outcomes.  This movement has to be built by organizing strong social and community institutions, ones that give people the chance to develop in common a correct understanding of the causes of our problems and the organizational weight and confidence to promote the needed transformation of our economy.

Structural Crisis

The National Bureau of Economic Research, the official designator of recessions and expansions, declared that our economy went into recession in December 2007 and that this recession ended and an expansion began in June 2009.  In other words we have been in an expansion for almost two years.  Normally, the deeper the recession, the stronger the recovery.  However, as I am sure you are aware, the recession was very deep and to this point the recovery has been extremely weak.

The federal government has poured trillions of dollars into the economy to end the recession and boost the recovery.  The government’s great accomplishment has been a strong recovery of profits.  In fact, total domestic corporate profits are now about as high as they were in 2006 before the start of the crisis, and financial profits as a share of total profits are pushing 35%, which is close to the pre-crisis high of 40%.

But beyond this restoration of corporate profitability, and the recovery of finance as our leading economic sector, little has happened to generate sustained and beneficial growth for the great majority of us.  For example, total bank excess reserves averaged around $10 billion a year in the decades prior to the crisis.  Now they are pushing $1.4 trillion.  The banks are just holding this money.  One reason is that since October 2008 the Federal Reserve Board is paying them interest on those reserves.  Similarly non-financial corporations now have the highest ratio of cash to assets in post-war history; they are not using that money to invest in new plant and equipment.

What this means is that our leading financial and non-financial corporations have plenty of money, but see no privately profitable productive investment opportunities.  At the same time, they are in no hurry to pursue policy changes because despite the slow recovery they are doing quite well.  Thus, as things stand, there is little reason to believe that this government supported expansion will be long lasting or beneficial for working people. 

I cannot emphasize enough the fact that we are in an expansion; these are the good times—the period of recovery, when our income is supposed to go up, when unemployment is supposed to significantly decline, when we have money to rebuild our infrastructure, fund our health care and other social programs, and build a solid collective nest egg to cover the hard times which will of course come.  The fact that this is not happening—that we continue to struggle during this period of economic expansion—is indicative of the fact that our economic system as presently structured is not one we can count on; in other words it is a flawed system. 

With this perspective, you can see why the small increases in employment and production that are cheered by policy makers mean little—of course we are going to see some increases.  But for how long and with what effect?  Given the lack of corporate interest in investment or lending I think that there is little reason to be optimistic.  And now, there is even an increasingly strong movement to slash government spending.  Those who support that policy claim that we just have to put the collapse of the bubble economy behind us, tighten our fiscal belts, and let market forces return our economy to normal—but what is normal?

Let us consider the previous economic expansion.  That expansion lasted from 2001 to 2007.  If we compare it to the nine other post-war expansions, it ranks dead last in terms of the growth in GDP, investment, employment, wage and salary income, and compensation.  It ranks highly in only one category—and that was the growth in profits.  In fact, median household income actually fell over this period of economic expansion.  And it is important to recall that this expansion was long lasting only because it was supported by a debt-driven housing bubble.  We no longer have that bubble to support growth.  Therefore, the new normal appears to be ever weaker growth and deteriorating living and working conditions for the great majority of us.  I don’t find that to be acceptable. 

Class Struggle

Significantly, more and more people are arguing that our current problems are caused by government deficits that are too big, taxes that are too high, and unions that are too strong,.  They are therefore pushing for a major reduction and privatization of government social programs, tax cuts for the wealthy and corporations, and a weakening of unions, especially those in the public sector. 

This would be a recipe for disaster.  Where these policies have been implemented, in places like Ireland, Greece, and the UK, the result has been only more problems: lower growth, greater deficits, and of course worsening social conditions.  That is not a surprising outcome.  If you have an economy where there is weak domestic demand because banks will not lend and corporations will not invest, workers are deep in debt, unemployment is high, and exports are limited, and then you cut government spending—it should not surprise anyone that things go from bad to worse.

And, it is not like we haven’t tried similar policies here in the United States.  We have been cutting taxes, government programs, and union strength for more than two decades, and we can see the effects—ever weaker growth, greater inequality, and worsening living and working conditions for the great majority.

The fact is that government spending is one of the main reasons that we still have an economic expansion.  Debt fears are being hyped to scare us. 

So, why are there powerful social forces arguing for these policies?  I think there are two main reasons.  The first is to ensure that our anger is not directed at the corporate sector.  When this crisis broke in 2008 people were angry, and they were angry at our corporations.  There were demands for nationalization of the banks and auto industry and calls for greater government intervention in the economy to save homes, employ people, in short, chart a new economic course for the country. 

What happened was quite different.  The president immediately made clear that he was not going to interfere with market processes—in finance, in auto production, in the housing market, in health care, or in job creation.  Rather he did all he could to bail out those corporations that were in trouble because of their own reckless pursuit of profit.  And his efforts succeeded.  Profits are back up and finance continues to dominate.  Unfortunately for us, those efforts did little to address our needs. 

I think that the corporate sector is getting nervous.  They are fearful that their large profits in the face of our deteriorating social conditions might lead to a renewal of demands for social change.  And lets be clear—any significant social change is going to require a significant change in government policy.  For example, strengthening our economy will require an end to free trade agreements; rebuilding our infrastructure; a new green industrial policy directed at retrofitting our buildings, developing solar and wind power and mass transit; and a shrinking and redirection of finance.  Rebuilding our communities will require new labor laws to support unionization and higher minimum wages; support for education, health care, and transportation rather than military activity; and an increase in taxes on corporations and the wealthy to help pay for many of the needed initiatives. 

This is not what the corporate sector wants.  Therefore, they are trying to steer us in a different direction—to encourage us to believe that the reason our economy is not doing better is that our government deficits are too great and workers have too much power.  It is ironic.  We have government deficits not because of runaway social programs but because the government had to bail out the private sector.  It was this spending that kept us out of depression and enriched our corporations.  And now the leading lights of the private sector are trying to convince us that the main cause of our slow growth is this very same deficit spending.  So, the first reason for this anti-government offensive is to keep us from focusing on corporate behavior and the contradictions of market processes by encouraging us to blame the government and unions for our problems. 

The second reason is that the push for marginalizing government programs will likely open up new private profit making opportunities for our large corporations.  For example, the privatization of our military, our education system, our health care system, our retirement and social insurance systems all mean public dollars flowing into private coffers.  And as a bonus corporations would likely get new tax breaks.

To state the obvious: corporations are defending policies that help them make profits at majority expense.  I think the best way to grasp this reality is to focus on General Electric.  GE is not only one of our nation’s largest corporation, its head, Jeffrey Immelt, was picked by President Obama to head his President’s Council on Jobs and Competitiveness.  President Obama said he picked him because “He understands what it takes for America to compete in the global economy.”

That may be true, but what is GE’s competitiveness strategy? 

First, it is to avoid taxes. GE reported worldwide profits of $14.2 billion in 2010, including $5.1 billion from its operations in the United States.  Yet, it paid no US taxes; in fact it claimed a tax benefit of $3.2 billion.

It accomplished this through a very aggressive working of our tax policy. Here is what the New York Times said:

G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax law firm. Indeed, the company’s slogan “Imagination at Work” fits this department well. The team includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress.

Second, it is to shift operations from production to finance.  According to the New York Times:

General Electric has been a household name for generations, with light bulbs, electric fans, refrigerators and other appliances in millions of American homes. But today the consumer appliance division accounts for less than 6 percent of revenue, while lending accounts for more than 30 percent. . . . Because its lending division, GE Capital, has provided more than half of the company’s profit in some recent years, many Wall Street analysts view G.E. not as a manufacturer but as an unregulated lender that also makes dishwashers and M.R.I. machines.

Third, it is to move its operations and profits outside the US.  Since 2002, the company has eliminated a fifth of its work force in the United States while increasing overseas employment.  Over that same period G.E.’s accumulated offshore profits have risen from $15 billion to $92 billion.

GE is far from unique in employing this strategy.  For example, the Wall Street Journal reports that U.S. MNCs cut their work forces in the United States by 2.9 million during the 2000s while increasing employment overseas by 2.4 million.

So, we are in a battle over the nature and direction of our economy.  Successive governments, in response to corporate demands, have worked to promote more mobility for corporations, lower taxes for corporations, and the growing power of finance—all at our expense.  And despite our current economic problems, our government continues to push for more of the same.  In sum, while we might be experiencing a crisis caused by capitalism it is not a crisis for capitalism.

Movement Building 

So, what shall we do?  In fact, we are not short of ideas.  We have all sorts of progressive policy suggestions.  The problem is that those with power are not interested in our suggestions.  This means that we need to organize if we are to succeed in making a real change.  Here are a few of my suggestions about next steps.

First, we need to make sure that people understand the structural nature of the problems we face.  We have to make sure that unions, neighborhood associations, and places of worship become venues where people can talk, learn, develop their understandings and most importantly connections. 

Second, we need to build alliances around critical demands—changes in government priorities, for example, such as cutting military spending in favor of social programs, raising taxes on the wealthy and corporations, and defending Medicare and Social Security.  These alliances shouldn’t be hard to build.

Third, we need to be creative in who and how we organize.  We need organizations where people can produce themselves more fully as actors.  In the 1930s, for example, we had councils of the unemployed.  They fought for greater government spending, unemployment insurance, and in support of unionization for workers with jobs.  Now, we have large numbers of homeless and hungry.  We need to do more that take food to food banks—we need to help the hungry and homeless organize themselves into powerful social movements. 

We also need to help students, for example, see that their likely future of job insecurity, low wages, and lack of health care can be changed if they join with others, including unions, and health care advocates, and perhaps their parents, to demand a change in the direction of the economy.  And we need our unions to recognize that many of our young workers will be moving from job to job, and company to company, in temporary positions, which means that unions will have to develop new forms of organization.   

Fourth, we need to focus our attention on the public sector.  I think that one of our key challenges is to develop new coalitions between public sector unions and those who use public services.  While I believe that we need to fight against spending cuts for important programs I also know that our existing programs are far from perfect.  Moreover, just maintaining the same level of spending is not the same as transforming our economy.  We need more accountable and responsive public programs and I think the key to that, to the democratizing of the state, is a community-public sector worker alliance.

For example, imagine if those that cared about the environment; worker rights; an end to militarization; and gay, lesbian, transgender rights could engage public school teachers who were responsive to these views and collectively develop curriculum that advanced those views, thereby producing young people able and eager to contribute to making a better society.  And also imagine that in return, those in the community committed to working to ensure good funding for schools and political protection and decent salaries for our teachers.  We would not only help to improve the school system but also develop a new and positive understanding of the benefits of public services.  The same process can be encouraged around transportation by finding ways to bring bus riders and bus drivers together.  The same for social workers and their clients.  You get the idea.  Public sector workers could become our defenders—blowing the whistle if our money is not being property spent and helping us find ways to play a meaningful role in determining the actual nature and delivery of the services we want and pay for. 

We really have little choice but to help build resistance to current political tendencies and shape more positive visions.  There are very few of us that can avoid the consequences of failure.

The Big Squeeze

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Understandably, jobs, or the lack of them, is a big topic of conversation.  But, times are hard even for those with jobs.  Simply put, more and more working people are finding it increasingly difficult to make ends meet.

Thanks to a study commissioned by the non-profit group Wider Opportunities for Women, we now have a new set of income standards that are far more useful than the poverty line or minimum wage for gauging how well working people are faring.  The authors of the study created “thresholds for economic stability.”  In other words they actually estimated how much different households needed to secure a minimum but meaningful standard of living, one that included some savings for retirement and emergencies.   A summary of their work is highlighted in the table below.

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As the New York Times explains:

According to the report, a single worker needs an income of $30,012 a year — or just above $14 an hour — to cover basic expenses and save for retirement and emergencies. That is close to three times the 2010 national poverty level of $10,830 for a single person, and nearly twice the federal minimum wage of $7.25 an hour.

A single worker with two young children needs an annual income of $57,756, or just over $27 an hour, to attain economic stability, and a family with two working parents and two young children needs to earn $67,920 a year, or about $16 an hour per worker.

That compares with the national poverty level of $22,050 for a family of four. The most recent data from the Census Bureau found that 14.3 percent of Americans were living below the poverty line in 2009. 

To develop its thresholds, the authors of the study used a variety of public data.  For example:

For housing, which along with utilities is usually a family’s largest expense, the authors came up with “a decent standard of shelter which is accessible to those with limited income” by averaging data from the Department of Housing and Urban Developmentthat identified a monthly cost equivalent for rent at the fortieth percentile among all rents paid in each metropolitan area across the country.

They chose a “low cost” food plan from the nutritional guidelines of the Department of Agriculture, and calculated commuting costs “assuming the ownership of a small sedan.” For health care, they calculated expenses for workers both with and without employer-based benefits.

Given that the poverty lines fall far short of the thresholds established by the report, and these thresholds are themselves bare-bones, there can be little doubt that the actual U.S. poverty rate far exceeds the official estimate of 14.3 percent.     

Faced with this reality, the current moves to cut social programs and break unions seems down right criminal. 

Written by marty

April 5th, 2011 at 1:53 am

Egypt And The United States

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Perhaps like me, you are watching the events in Egypt wondering if the popular forces in the streets and squares can develop the organizational force and political clarity needed to push out the existing regime and remake Egyptian society.  Initially, it seemed that their number and determination would be enough.  Now, it is less certain.

The elites within Egypt are showing great staying power and appear to have secured the support of elites in the U.S. and Europe.  Increasingly, it appears that they are willing to sacrifice some of their own, in a civilized manner of course, and implement some reforms, to ensure the survival of the regime.  Will that be enough to demobilize the people?   How should the movement for change respond?

We in the United States faced our own moment of possibilities, although it passed so quickly and so quietly few remember.  We had a huge economic crisis, a crisis brought on by an economic system that generated ever growing profits at ever greater social cost.  People came out into the streets demanding change. There were calls for restructuring the financial system, the tax system, labor markets, trade policies, government spending priorities, foreign policy,  . . . the list goes on. 

But U.S. elites held strong and we never managed to develop the force and clarity necessary to move events in a progressive direction.   The government quickly came to the rescue of the banks and other corporations, bailing them out at a cost of trillions of dollars of public money.  As a consequence, the economy has stabilized (at least for the present), a few reforms have been made, and . . . well, the same economic structure remains in place. 

The government tells us that thanks to its intervention things will soon return to “normal.”  In short, there is no need for major change.  Such a message conveniently overlooks the fact that this normal, marked by the period 2001-2007, was not very good for the great majority of people.  Real income declined, economic insecurity grew, poverty increased, investment stagnated, debt exploded—the only positive was the rapid increase in profits captured by the top 1-5 percent.  Should this really be our standard?

Given how little change has taken place, it should not surprise us that the economy is performing pretty much as it did before the crisis.   The following three charts come from the Michael Roberts Blog.  As the first chart shows, profits have recovered quite nicely since the crisis.  Although the ratio of profits to GDP has not quite reached its pre-crisis peak, it is definitely on the way.  

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Unfortunately, much as in the pre-crisis period, this profit recovery has done little to support healthy economic growth.  One indictator: The chart below shows that non-residential private investment remains at relatively depressed levels. 

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Another indicator: The chart below shows that labor conditions also remain depressed.  The pink line shows the employment to population ratio.  In many ways it is a better indicator of the employment creation potential of the economy than the unemployment rate.  Despite the so-called economic recovery, this ratio has yet to show any meaningful improvement.  The male participation rate, illustrated by the green line, continues to hit record lows.  

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The recent crisis was trigger by the collapse of the debt driven housing bubble.   It was overcome largely because of massive government spending.  Elites are now pressing for cutbacks in this spending.  If they succeed, we will likely face a new downturn–and a new moment of possibilities.

While contemplating the options facing the Egyptian people, we would do well to begin thinking about how best to prepare ourselves for what lies ahead in this country.

The State Of Working America

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The Economic Policy Institute has, for many years, published a very useful annual volume detailing “The State of Working America.” 

This year, it has created a State of Working America web page to make it easier for people to access its many (more than 200) charts on various economic and social trends, including income, jobs, poverty, productivity, unionization, access to health care, economic mobility, wealth, and more.   It is well worth checking out.

There is also an interactive chart, When Income Grows, Who Gains, that “tracks income trends from 1917 through 2008 and lets users compare patterns of income distribution for any period within that 91-year time frame. Between 1986 and 2000, for example, the richest 10% of Americans saw 77% of the country’s average income growth, but in recent years they have captured much more. Between 2000 and 2007, all of the country’s income growth went to the top 10%, while average incomes for the lower 90% actually declined.” 

If current policies remain in place one can only imagine a continuation, if not sharpening, of these income trends.  And given that President Obama has appointed William Daley, a former banker for JP Morgan Chase, as his chief of staff, and Jeffery Immelt, CEO of General Electric, as head of his outside panel of economic advisers, there is little reason to expect anything else.

Written by marty

February 4th, 2011 at 4:16 am