Archive for the ‘Inequality’ Category
The Wall Street Journal had an interesting article about income inequality.
What follows is a chart from the article which shows that average income for the bottom 90% of families actually fell by over 10% from 2002-2012 while the average income for families in all the top income groups grew. The top 0.01% of families actually saw their average yearly income grow from a bit over $12 million to over $21 million over the same period. And that is adjusted for inflation and without including capital gains.
What was most interesting about the article was its discussion of the dangers of this trend and the costs of reversing it. In brief, the article noted that many financial analysts now worry that inequality has gotten big enough to threaten the future economic and political stability of the country. At the same time, it also pointed out that doing anything about it will likely threaten profits. As the article notes:
But if inequality has risen to a point in which investors need to be worried, any reversal might also hurt.
One reason U.S. corporate profit margins are at records is the share of revenue going to wages is so low. Another is companies are paying a smaller share of profits on taxes. An economy where income and wealth disparities are smaller might be healthier. It would also leave less money flowing to the bottom line, something that will grab fund managers’ attention.
Any bets how those in the financial community will evaluate future policy choices?
The following post by the economist Michael Taft appeared in the Irish Left Review. Although Taft is addressing an Irish audience, I think his discussion of Swiss initiatives against inequality should be of interest to many Americans as well.
As the [Irish] Government does its post-mortem on the Seanad referendum [to abolish the upper house of the Irish parliament], Switzerland is gearing up for a vote in November on a referendum that is truly reforming. It’s called the 1:12 initiative. It proposes that monthly senior executive salaries cannot exceed 12 times the pay of the lowest paid in a firm. And it proposes that this be put into law. This is pretty heavy in a country which is home to major financial institutions and multinationals.
Imagine the impact here. In the Bank of Ireland, the CEO Richie Boucher has a salary of €843,000 (no, that’s not a typo). A bank clerk on starting pay is approximately €22,000. Under this law one of two things would have to happen: either Richie’s salary would have to fall by three-quarters – to €264,000 a year. Or the starting pay would have to rise to €70,250. I leave you to decide which is more likely to happen, if either.
But there is more going on in Switzerland than just a pay ratio debate. Earlier this year, the people voted on a referendum that put controls on executive pay and gave shareholders’ more rights over executive compensation. There has been growing anger over excessive salaries and the bonus culture among Swiss companies. The referendum passed overwhelmingly despite the fact that opposing business lobbies outspent the ‘yes’ side by 40-1.
Now there are three more referenda coming down the line. First, there is a proposal to increase the minimum wage to approximately €18 per hour. Even in an economy with high living costs this is a hefty rise. Proportionately, for Ireland, this would amount to somewhere between €11 and €12 per hour (using the median wage as the comparison).
There is a referendum on a basic income – guaranteeing every adult a basic income of €24,500 a year. Again, even factoring in living standard difference, this is hefty sum, designed to ensure a safety net for everyone.
And then there’s that 1:12 initiative – designed to do two things: put upward pressure on low-pay and downward pressure on excessive pay. As you can imagine, the business lobbies and the Government are predicting all manner of plagues and pestilence if this referendum succeeds. First off, there is the claim that businesses will leave Switzerland if this is passed. There is something in that. Multi-national capital can be relatively mobile and many companies can punish a people for taking democratic decisions that companies don’t like. This is not the case for all companies, though but the blackmail threat permeates the body politic.
A second argument put forward by the business lobbies is that they will just avoid the law by breaking up their companies into smaller units. In this scenario, all the low-paid will be put into one sub-company and the high-paid into another. This will mean that each sub-company can maintain the 1:12 ratio. There is no doubting that companies get up to all sorts of activities to avoid democratic interventions (the ever-vigilant WorldbyStorm highlight Ryanair’s byzantine employment contracts to prevent employees from collective bargaining). However, this threat could be easily dealt with by legislation that treats sub-companies that sell exclusively into a main company as part of the main company itself.
Could such an initiative work here? Eventually, but as always we must treat all such initiatives as part of a process that must be rooted in today’s reality. We have an extremely poor indigenous sector and an over-reliance on foreign capital for value-added employment and participation in the global market. A 1:12 initiative would immediately become hostage to multinational blackmail (this will cost jobs, etc.) and with the economy still in a domestic-demand recession such an initiative would understandably raise fears.
However, this is not to say we put this on some shelf to be dealt with sometime in some future (like Seanad reform). A first step would be to require all companies to publish their company accounts – profits, executive pay, etc. Publicly-listed companies are already required to do this but many private unlimited companies (Dunnes Stores) and foreign branches (Tesco) don’t have to. There is no rationale why some companies are required to publish and others are not. Freedom of economic information would be a first step in creating a more informed public and efficient market relationships.
Second, we could take up the idea put forward by ICTU sometime ago – that wages that exceed a certain ratio should not be deductible for income tax purposes. If, for instance, there was a 1:12 pay ratio in a company, then the company would have to pay corporate tax on incomes that exceed the upper threshold. Taking the Richie Boucher example, Bank of Ireland would have to pay tax on that portion of his salary that exceeded €264,000. We may not be in a position now to stop excessive pay, but we certainly don’t have to subsidise it with taxpayer money.
So we could take positive concrete steps. However, let’s not lose the overall sight of what’s happening in Switzerland. There is a democratic revolt against high pay and low pay: limitations on executive pay, increased minimum wage, and a basic income. There is a lively debate about equality and inequality. There are concrete proposals and there will be votes. But even if the 1:12 initiative fails, that’s not the end of it.
Of the many issues that we will need to address on the other side of austerity (and there are many: employment, investment, indigenous enterprise development, universal public services, social protection, etc.) there is the issue of reducing inequality, creating strong social protection floors and raising income floors.
What the Swiss are debating is how to raise that floor while toppling a few golden towers. This is what we should start debating. And the sooner the better.
Interesting Note: Despite all the blackmail threats and warnings of doom about the 1:12 initiative, recent polls show it is too close to call: 36% for yes, 38% for no, with the rest undecided.
The following table reveals much about the way our economic system operates. It shows that the top 1% captured 68% of all the new income generated over the period 1993 to 2012.
Now that is a long time period, one that includes several recessions and expansions.
Looking just at our current expansion, from 2009 to 2012, we see that the top 1% captured 95% of all the real income growth. The great majority of Americans might find this expansion disappointing, but not the top earners. The current dominance of the top 1% is striking. The top 1% only captured 45% of the income growth during the Clinton expansion and 68% during the Bush expansion.
the top 10% of earners took more than half of the country’s total income in 2012, the highest level recorded since the government began collecting the relevant data a century ago . . . The top 1% took more than one-fifth of the income earned by Americans, one of the highest levels on record since 1913 when the government instituted an income tax.
We have a big economy. Slow growth isn’t such a big deal if you are in the top 1% and 22.5% of the total national income is yours and you can capture 95% of any increase. As for the rest of us . . .
One question rarely raised by those reporting on income trends: What policies are responsible for these trends?
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.
Wealth data is not easy to get. Still for three years now, Credit Suisse Research Institute has published an annual Global Wealth Databook which attempts to estimate global wealth holdings. The most recent issue includes data covering 2012. According to Credit Suisse, “The aim of the Credit Suisse Global Wealth project is to provide the best available estimates of the wealth holdings of households around the world for the period since the year 2000.”
According to the publication, global household wealth was $222.7 trillion in mid-2012, equal to $48,500 for each of the 4.6 billion adults in the world. Wealth is “defined as the marketable value of financial assets plus non-financial assets (principally housing and land) less debts.”
Not surprisingly, as the figure below shows, average global wealth varies considerably across countries and regions.
Also significant are the values of mean and median wealth in each of the countries. Mean or average wealth is calculated by dividing the total wealth of a country by its adult population. Median wealth is the wealth holdings of the adult in the middle of the wealth distribution.
The median figure is generally considered a far more reliable indicator of representative wealth because it is less sensitive to extremes at the top or bottom of the wealth distribution. The greater the divergence of mean and median wealth, the greater is the wealth inequality.
The table below, Table 7.1 in the study, provides mean and median wealth estimates for those countries with generally reliable data. As you can see, the U.S. ranks high in terms of mean wealth, trailing only 5 countries. Things are quite different when it comes to median wealth; the U.S. trails 26 countries! The U.S. is number 1 when it comes to the mean/median wealth ratio.
We clearly dominate in the number of millionaires and the upper global wealth categories. Are we a wealthy country? Definitely. Is that wealth concentrated in relatively few hands? Definitely.
The economist Ed Dolan sums up the current state of the U.S. economy in a recent blog post with the following headline: “Latest US GDP data show economy weak at year’s end but corporate profits near record high.”
The chart below, taken from that post, illustrates the steady rise in corporate profits. As Dolan comments, “both before-tax and after-tax profits, stated as a percentage of GDP, reached their second highest level ever recorded, falling just short of their all-time highs of Q4 2011.”
One reason for this trend has been the ability of corporations to squeeze labor. Fred Magdoff and John Bellamy Foster highlight this corporate success in their Monthly Review article “Class War and Labor’s Declining Share.”
The following four charts are taken from the article. The first chart looks at total labor compensation as a percent of GDP. The downward trend is visible but the extent of the attack on workers is somewhat masked since the data includes all workers and total benefits. The second chart looks just at wages and salaries, again for all workers.
Chart 3 looks just at production and nonsupervisory workers. These workers account for approximately 80 percent of all private sector workers. We can see that while their share of total employment has remained relatively constant, their share of payroll has dramatically fallen. Chart 4 compares wage and salary trends for production and nonsupervisory workers with trends for management, supervisory, and other nonproduction employees.
These last two charts make clear that the war on labor has been focused on production and nonsupervisory workers, and has been going on for decades. And it doesn’t take much of a stretch of imagination to connect these trends with the growing suffering of most working people, the explosion in income inequality, and the rise in corporate profits.
But what are corporations doing with their profits? As it turns out they are using their gains not to strengthen the economy but rather to reward their already wealthy stockholders (with dividends) and managers (with higher bonus boosting stock prices).
As the Wall Street Journal reports: “Firms Send Record Cash Back to Investors.” The article explains the headline as follows:
U.S. companies are showering investors with a record windfall in the form of dividends and share buybacks, helping to propel the stock market’s rally. Companies in the S&P 500 index are expected to pay at least $300 billion in dividends in 2013, according to S&P Dow Jones Indices, which would top last year’s $282 billion. . . .
American corporations also announced plans to buy back $117.8 billion of their own shares in February, the highest monthly total in records dating back to 1985, according to Birinyi Associates Inc. a Westport, Conn.-based market research firm. Home Depot Inc., General Electric Co. and PepsiCo Inc. are among a number of large companies that announced plans last month to scoop up large amounts of their own shares. . . .
In returning money to shareholders, companies by and large are tapping into cash piles they have accumulated in the past few years by cutting costs or taking advantage of low interest rates to borrow funds. . . .
“Corporations are flush with cash and that cash sitting in the corporate coffers is earning next to nothing,” said Rob Leiphart, an analyst at Birinyi. “Companies have to do something with it.”
Clearly, all is well for those at the top. And that is the problem for those of us opposing austerity.
While 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.
Many expected that the severity of the Great Recession, recognition that the prior expansion was largely based on unsustainable bubbles, and an anemic post-crisis recovery, would lead to serious discussion about the need to transform our economy. Yet, it hasn’t happened.
One important reason is that not everyone has experienced the Great Recession and its aftermath the same. Jordan Weissmann, writing in the Atlantic, published the following figure from the work of Edward Wolff. As of 2010, median household net worth was back to levels last seen in the early 1960s. In contrast, mean household net worth had only retreated some ten years.
The great disparity between median and mean wealth declines is a reflection of the ability of those at the top of the wealth distribution to maintain most of their past gains. And the lack of discussion about the need for change in our economic system is largely a reflection of the ability of those very same people to influence our political leaders and shape our policy choices.
One of the subthemes of current discussions about how best to reduce our national debt is that we must reign in out-of-control spending on federal safety net programs. The reality is quite different.
The chart below shows spending trends in terms of GDP for the ten major needs-tested benefit programs that make-up our federal social safety net. The programs, in the order listed on the chart, are:
- The refundable portion of the health insurance tax credit enacted in the 2010 health care reform law
- Medicaid and the Children’s Health Insurance Program (CHIP)
- The Supplemental Nutrition Assistance Program (SNAP)
- Financial assistance for post-secondary students (Pell Grants)
- Compensatory Education Grants to school districts
- Assisted Housing
- The Earned Income Tax Credit (EITC)
- The Additional Child Tax Credit (ACTC)
- Supplemental Security Income (SSI)
- Family Support Payments
As Jared Bernstein explains:
for all the popular wisdom that programs to help low-income people are swallowing the economy, the truth is that like so much else that plagues our fiscal future, it’s all about health care spending. The figure shows that as a share of GDP, prior to the Great Recession, non-health care spending was cruising along at around 1.5% for decades. It was Medicaid/CHIP (Medicaid expansion for kids) that did most of the growing.
Regardless, the recent explosion in the ratio of Medicare/CHIP spending to GDP is largely due to the severity of the Great Recession, not the generosity of the programs. The recession increased poverty and thus eligibility for the programs, thereby pushing up the numerator, while simultaneously lowering GDP, the denominator. Moreover, spending on all non-health care safety net programs is on course to dramatically decline as a share of GDP. Even Medicare/Chip spending is projected to stabilize as a share of GDP.
These programs are essential given the poor performance of the economy and in most cases poorly funded. Cutting their budgets will not only deny people access to health care, housing, education, and food, it will also further weaken the economy, in both the short and long run.
The good economic news, which got plenty of attention, is that the U.S. economy added over 170,000 new jobs in October. The largely unreported negative news is that average real hourly wages in the private sector declined that month, and have been in decline for most of the past year.
It is hard to remember that the economy has been in expansion since June 2009.
Jeffrey Sparshott, in a Wall Street Journal blog post, offered the following chart of the trend in hourly earnings in private industry, with each point showing the change from a year earlier.
Citing a Labor Department report, Sparshott noted that:
hours worked were flat [in October] for the fourth straight month. Meanwhile, average hourly earnings for all employees on private payrolls fell by 1 cent to $23.58 in October. Over the past 12 months, earnings have risen a scant 1.6%. That’s not enough to keep up with inflation. The consumer price index was up 2% in September from a year earlier.
It’s even worse for blue-collar workers. Average hourly earnings of private-sector production and nonsupervisory employees edged down by 1 cent to $19.79, only a 1.1% increase over the past year.
The blog post quoted the HSBC’s chief U.S. economist who said:
This is the smallest increase in wages on record for the data going back to 1964. The persistently high level of unemployment over the past few years is clearly restraining wage gains and suppressing any inflationary pressures that might have possibly emanated from the labor market.
It also quoted the chief U.S. economist at J.P. Morgan Chase who said:
This pace of labor income growth may be quite acceptable for corporate profits, but it does pose headwinds for consumer spending growth.
Consumer spending did rise last quarter, helping to boost third quarter U.S. GDP, but this was largely because of a decline in the personal savings rate, which fell from 4.0% in the second quarter to 3.7% in the third.
We clearly don’t have a foundation for a sustained economic recovery, certainly not one that brings benefits to the majority of workers. Instead of talk about austerity we need a real debate about the best way to strength worker bargaining power.