Archive for the ‘Progressive Strategies’ Category
America stands out for the high share of its labor force that is employed in what economists Samuel Bowles and Arjun Jayadev call “guard labor.”
There are now more people working as private security guards than high school teachers.
The following graph highlights the number of “protective service workers” employed per 10,000 workers and the degree of income inequality in the year 2000 for 16 countries. The United States is tops on both counts.
Two things stand out from this graph beyond U.S. “leadership.” The first is the relationship between the share of protective service workers and inequality. As Bowles and Jayadev comment:
In America, growing inequality has been accompanied by a boom in gated communities and armies of doormen controlling access to upscale apartment buildings. We did not count the doormen, or those producing the gates, locks and security equipment. One could quibble about the numbers; we have elsewhere adopted a broader definition, including prisoners, work supervisors with disciplinary functions, and others.
But however one totes up guard labor in the United States, there is a lot of it, and it seems to go along with economic inequality. States with high levels of income inequality — New York and Louisiana — employ twice as many security workers (as a fraction of their labor force) as less unequal states like Idaho and New Hampshire.
When we look across advanced industrialized countries, we see the same pattern: the more inequality, the more guard labor. As the graph shows, the United States leads in both.
The second is the rapid rise in the U.S. share of guard labor and inequality from 1979 to 2000.
For those who like definitions: The category protective service workers includes those employed as Private Security Guards, Supervisors of Correctional Officers, Supervisors of Police and Detectives, Supervisors of all other Protective Service Workers, Bailiffs, Correctional Officers and Jailers, Detectives and Criminal Investigators, Fish and Game Wardens, Parking Enforcement Workers, Police and Patrol Officers, Transit and Railroad Police, Private Detectives and Investigators, Gaming Surveillance Officers, and Transportation Security Screeners. Inequality is measured by the gini coefficient; the higher the number the greater the degree of inequality.
As noted above Bowles and Jayadev have explored broader measures of guard labor. One such measure adds members of the armed forces, civilian employees of the military, and those that produce weapons to those employed as protective service workers. The total was 5.2 million workers in 2011.
One can only wonder in what ways and for whom this large and growing dependence on guard labor represents a rational use of social resources.
The conventional explanation for our economic problems seems to be that our businesses are strapped for funds. Greater business earnings, it is said, will translate into needed investment, employment, consumption and, finally, sustained economic recovery. Thus, the preferred policy response: provide business with greater regulatory freedom and relief from high taxes and wages.
It is this view that underpins current business and government support for new corporate tax cuts and trade agreements designed to reduce government regulation of business activity, attacks on unions, and opposition to extending unemployment benefits and increasing the minimum wage.
One problem with this story is that businesses are already swimming in money and they haven’t shown the slightest inclination to use their funds for investment or employment.
The first chart below highlights the trend in free cash flow as a percentage of GDP. Free cash flow is one way to represent business profits. More specifically, it is a pretax measure of the money firms have after spending on wages and salaries, depreciation charges, amortization of past loans, and new investment. As you can see that ratio remains at historic highs. In short, business is certainly not short of money.
So what are businesses doing with their funds? The second chart looks at the ratio of net private nonresidential fixed investment to net domestic product. I use “net” rather than “gross” variables in order to focus on investment that goes beyond simply replacing worn out plant and equipment. The ratio makes clear that one reason for the large cash flow is that businesses are not committed to new investment. Indeed quite the opposite is true.
Rather than invest in plant and equipment, businesses are primarily using their funds to repurchase their own stocks in order to boost management earnings and ward off hostile take-overs, pay dividends to stockholders, and accumulate large cash and bond holdings.
Cutting taxes, deregulation, attacking unions and slashing social programs will only intensify these very trends. Time for a new understanding of our problems and a very new response to them.
The federal minimum wage is $7.25 an hour. Several states mandate a higher minimum wage; the state of Washington has the highest, at $9.19.
President Obama recently voiced his support for efforts to increase the minimum wage to $10.10. The federal minimum wage was last raised in 2009 and certainly needs to be increased again. The fact is that the federal minimum wage has not kept up with inflation.
As the New York Times graphic below shows, the current minimum wage is, when adjusted for inflation, 32% below what it was in 1968. It is 8% below what it was in 2010. In other words, those earning the minimum wage are suffering a real decline in income.
As for the appropriate value, why not $22.62? That, as the graphic illustrates, is what the minimum wage would be if it grew at the same rate as the income of the top 1%. As Alan Pyke explains:
[Such a large increase] may seem outlandish, but previous research indicates American workers have just about earned it. Worker productivity has more than doubled since 1968, and if the minimum wage had kept pace with productivity gains it would have been $21.72 last year. From 2000 to 2012 alone workers boosted their productivity by 25 percent yet saw their earnings fall rather than rise, leading some economists to label the early 21st century a lost decade for American workers.
Looked at from that perspective the current movement for a $15 hourly wage at fast food restaurants sounds reasonable.
As the following chart from the Financial Times shows, public sector gross capital investment–which includes government spending on infrastructure, scientific research, education, and other long-term priorities–is now at its lowest level since 1950 as a percent of GDP.
Perhaps even more worrying, net government investment, which takes depreciation into account, is heading towards zero.
Removing spending on defense from the total leaves an even more depressing picture. The Financial Times evaluated all the major budget proposals currently being considered by Congress, and finds, as illustrated in the next chart, that all of them involve significant reductions in non-defense public investment over the next decade.
Slashing public investment is not the way to a healthy economy.
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 current economic recovery officially began June 2009 and is one of the weakest in the post-World War II period by almost every indicator except growth in profits.
One reason it has offered working people so little is the contraction of government spending and employment. This may sound strange given the steady drumbeat of articles and speeches demanding a further retrenchment of government involvement in the economy, but the fact is that this drumbeat is masking the reality of the situation.
The figure below shows the growth in real spending by federal, state and local governments in the years before and after recessions. The black line shows the average change in public spending over the six business cycles between 1948 and 1980. Each blue line shows government spending for a different recent business cycle and the red line does the same for our current cycle. As you can see, this expansionary period stands out for having the slowest growth in public spending. In fact, in contrast to other recovery periods, public spending is actually declining.
According to Josh Bivens:
public spending following the Great Recession is the slowest on record, and as of the second quarter of 2013 stood roughly 15 percent below what it would have been had it simply matched historical averages. . . . if public spending since 2009 had matched typical business cycles, this spending would be roughly $550 billion higher today, and more than 5 million additional people would have jobs (and most of these would be in the private sector).
The basic stagnation in government spending has actually translated into a significant contraction in public employment. The figure below highlights just how serious the trend is by comparing public sector job growth in the current recovery to the three prior recovery periods.
As Josh Bivens and Heidi Shierholz explain:
the public sector has shed 737,000 jobs since June 2009. However, this raw job-loss figure radically understates the drag of public-sector employment relative to how this sector has normally performed during economic recoveries . . . . (P)ublic-sector employment should naturally grow as the overall population grows. Between 1989 and 2007, for example, the ratio of public employment to overall population was remarkably stable at roughly 7.3 public sector workers for each 100 members of the population. Today’s ratio is 6.9, and if it stood at the historic average of 7.3 instead, we would have 1.3 million more public sector jobs today.
In short, the challenge we face is not deciding between alternative ways to further shrink the public sector but rather of designing and building support for well financed public programs to restructure our economy and generate living wage jobs.
As the Wall Street Journal reports:
Four years into the economic recovery, U.S. workers’ pay still isn’t even keeping up with inflation. The average hourly pay for a nongovernment, non-supervisory worker, adjusted for price increases, declined to $8.77 last month from $8.85 at the end of the recession in June 2009, Labor Department data show.
In other words, as the chart below illustrates, the great majority of workers are experiencing real wage declines over this expansion.
Growth also remains sluggish, increasing “at a seasonally adjusted annual pace of less than 2% for three straight quarters—below the prerecession average of 3.5%.” But by intensifying the pace of work and reducing the pay of their employees, corporations have been able to boost their profits despite the slow growth.
The following chart from an Economic Policy Institute study shows the continuing and growing disconnect between productivity and private sector worker compensation (which includes wages and benefits) using two different measures of compensation.
As the Economic Policy Institute study explains, “there has been no sustained growth in average compensation since 2004. The stagnation began even earlier, in 2003, when considering wages alone. Since 2003, wages as measured by both the ECI and the ECEC (not shown) have not grown at all—a lost decade for wages.”
The point then is that we need a real jobs program, one that is designed to create new meaningful jobs and boost the well-being of those employed. Government efforts to sustain the existing expansion have certainly been responsive to corporate interests. It should now be obvious that such efforts offer workers very little.
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.”
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?
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.