Reports from the Economic Front

by Martin Hart-Landsberg

Archive for the ‘Structural Crisis’ Category

Profits Without Social Benefit

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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.

cash flow

real investment trends

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.

Dismal Trends

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Officially our most recent recession began December 2007 and ended June 2009.  The following chart provides an important perspective on the recovery period.

1230-sub3-rattner-1

Stocks and profits have enjoyed a remarkable recovery.  While income is slightly up over the period, it is critical to remember that this is average income and the increase largely reflects gains for those at the very top of the income distribution.  Jobs and housing have yet to recover.

So, with returns to capital booming, it is easy to understand why business leaders are relatively content with current policies and, by extension, political leaders are reluctant to rock the boat.

Unfortunately, current policies are unlikely to do much to improve the job prospects or income of most workers.  In fact, the rise in business profits owes much to our depressed labor conditions.  Unless something dramatic happens, we can expect the next few years to look very much like the past few years.

Written by marty

January 15th, 2014 at 6:38 am

Goodbye Public Investment

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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.

Uspublicinvestment

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.

nondefense_public_investment

Slashing public investment is not the way to a healthy economy. 

Written by marty

November 24th, 2013 at 3:05 pm

For A Stronger Public Sector

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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.

government spending

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.

figure21

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.

Written by marty

November 9th, 2013 at 8:57 am

Profits UP, Investment DOWN

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Profits are definitely up.  In fact, as Doug Henwood reports in a post on his Left Business Observer blog, corporations are “flush with cash”:

At last count, U.S. nonfinancial corporations had nearly $16 trillion in financial assets on their balance sheets, almost as much as they have in tangible assets.  The gap between internal funds available for investment and actual capital expenditures—what’s called free cash flow—is very wide at around 2% of GDP.  That’s down from the high of 3% set a couple of years ago, but sill higher than at any point before 2005.

So, what are corporations doing with all their cash?  Well, definitely not investing in new plant or equipment.

Quoting Henwood again:

What matters for the accumulation of real capital is net investment—the gross amount invested every year less the depreciation of the existing capital stock.  We’ve just gotten numbers for 2012, and they’re remarkably low.  Private sector net nonresidential fixed investment (as a percent of net domestic product, or NDP) fell below 1% in 2009.  It’s recovered some, to just over 2% last year, but that’s half the 1950-2000 average, and lower than any year between 1945 and 2009.  We won’t have 2013 numbers until August of next year, but it looks like they’ll stay in this depressed neighborhood.

Instead of investing, “corporations are shoveling cash out to their shareholders.  Through takeovers, buybacks, and traditional dividends, nonfinancial corporations are transferring an amount equal to 5% of GDP to their shareholders these days—again, down some from recent highs, but very high by historical standards.”

These trends help explain how the top 1% of income earners were able to capture 95% of all the income gains over the period 2009 to 2012.  They also help explain why continued stagnation appears the most likely outcome for the years ahead. 

 

Written by marty

September 29th, 2013 at 6:18 am

The Deteriorating Labor Market

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Despite the declining rate of unemployment—-it fell to 7.4% in July, the lowest level since December 2008—it is clear that economic trends, especially the rate and nature of job creation, are far from desirable.

As the Wall Street Journal explains:

The U.S. labor market’s long, slow recovery slowed further in July—and many of the jobs that were created were in low-wage industries.

Employers added a seasonally adjusted 162,000 jobs in July, the fewest since March, the Labor Department said Friday, and hiring was also weaker in May and June than initially reported. Moreover, more than half the job gains were in the restaurant and retail sectors, both of which pay well under $20 an hour on average. . . .

The falling jobless rate reflects to some degree a pace of hiring that, though slow, has remained steady over the past year even as the broader economy has grown in fits and starts. The U.S. has added an average of 192,000 nonfarm jobs per month so far this year, hardly a robust pace but more than enough to keep up with population growth.

But the drop in the unemployment rate is also the result of a job market that remains too weak to draw back workers who have dropped out of the labor force. Some 6.6 million workers say they want a job but don’t count as unemployed because they aren’t actively looking, a number that has barely budged in the past year. The number of Americans working or looking for work fell by 37,000 in July; as a share of the population, the labor force remains near a three-decade low. . . .

President Barack Obama has stressed the need for good jobs, including during a visit this past week to an Amazon.com Inc. facility in Chattanooga, Tenn., where he called for “a better bargain for the middle class.”

The day before the president’s visit, the Internet retail giant said it was adding more than 5,000 full-time jobs in its distribution centers across the country. Many of the jobs pay $11 an hour or less, although the company said workers will qualify for health insurance and other benefits, including stock grants and tuition subsidies.

“In our viewpoint these are great jobs,” Amazon spokeswoman Kelly Cheeseman said.

But the proliferation of low-wage jobs is leading to anemic growth in incomes. Average hourly wages were up by less than 2% in July from a year earlier, continuing a pattern of weak wage growth in the recovery. A broader measure of income released by the Commerce Department on Friday showed that inflation-adjusted incomes actually fell slightly in June.

The following chart, from a Washington Post article, helps highlight the problematic nature of U.S. job growth. By far the greatest number of jobs lost during the recession were mid-wage jobs.  And by far the greatest number of jobs created during the recovery have been low-wage jobs.

job losses gains

Even worse, almost all the jobs created over the last six months have been part-time.  According to a McClatchy report:

The unemployment rate is measured by the separate Household Survey, and it fell two-tenths of a percentage point to 7.4 percent, its lowest level since December 2008. That’s due in part to slow growth in the labor force. The jobless rate is based on a sample of self-reporting from ordinary people across the nation, and it’s the Labor Department measure that shows a very troubling trend in hiring.

“Over the last six months, of the net job creation, 97 percent of that is part-time work,” said Keith Hall, a senior researcher at George Mason University’s Mercatus Center. “That is really remarkable.”

Hall is no ordinary academic. He ran the Bureau of Labor Statistics, the agency that puts out the monthly jobs report, from 2008 to 2012. Over the past six months, he said, the Household Survey shows 963,000 more people reporting that they were employed, and 936,000 of them reported they’re in part-time jobs.

“That is a really high number for a six-month period,” Hall said. “I’m not sure that has ever happened over six months before.”

No wonder workers are struggling to make ends meet—job creation is weak and most of the jobs being created are low paying and part time.  But it is not like corporations don’t care.  For example, McDonald’s Corporation teamed with Visa to offer its workers a helping hand: a web page with advice about how to budget better.  This must be a great help to workers that earn on average about $8.25 an hour.

The McDonald’s working budget, shown below, is a bit hard to interpret.  What is clear however is that the company expects workers to have two jobs, pay $20 a month for health care, nothing for heat, $600 a month for rent, and . . .

For insight into what it is like to live on a McDonald’s wage, check out the Bloomberg story on Tyree Johnson, a 20 year employee still making minimum wage.  Corporations like McDonalds don’t pay these low wages because they are hurting but rather because they help their bottom line, as the following graphic from the Bloomberg story shows.

Corporate apologists often argue that these jobs are just “starter” jobs for high school students seeking to earn money for some extra like a smart phone.  But as the New York Times notes, only 14% of those earning between the minimum wage and $10 an hour are less than 20 years old.

As Steven Greenhouse reports, fast food and other low wage workers have begun organizing and striking to improve their working conditions; they are demanding a $15 hourly wage:

In recent weeks, workers from McDonald’s, Taco Bell and other fast-food restaurants — many of them part-time employees — have staged one-day walkouts in New York, Chicago, Detroit and Seattle to protest their earnings, typically just $150 to $350 a week, often too little to support themselves and their families. More walkouts are expected at fast-food restaurants in seven cities on Monday. Earlier this month hundreds of low-wage employees working for federal contractors in Washington walked out and picketed along Pennsylvania Avenue to urge President Obama to press their employers to raise wages.

These workers are taking real risks and if successful their gains would likely boost living and working conditions for most U.S. workers.  They deserve our strong support.

Written by marty

August 4th, 2013 at 2:39 pm

A Bleak Future

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Any improvement in living and working conditions in the United States is going to require far more than tinkering at the margins.  The fact is that U.S. economic dynamics have undergone a major transformation.

As Figure 1, taken from a Dollars and Sense article by Gerald Friedman, shows, profits and investment are no longer positively related.  Since the early 2000s, profits have soared as a percent of GDP and net private investment has plummeted.  Even during the 1990s, when high-technology was celebrated as the engine of never-ending growth, net investment as a share of GDP remained below 1970s and 1980s highs.

Figure 1: Net Private Investment and Profits, 1970-2011

Our leading companies, the ones that shape government policy, are now able to make healthy profits without spending on plant and equipment much beyond replacement.  Their profits are now largely secured by globalizing manufacturing production, financialization, intensification of work, wage suppression, and government tax-breaks and subsidies.  Of course, that means that their quest for profits will continue to lead to policies likely to undermine progress in reversing negative trends in majority living and working conditions.

A case in point is their aggressive push, supported by the Obama administration, for new free trade agreements—the Trans-Pacific Partnership Free Trade Agreement and the Trans-Atlantic Free Trade Agreement. President Obama took the lead in securing passage of the Korea-U.S. Free Trade Agreement, arguing that it would improve our trade balance with Korea and by extension U.S. jobs.  Well, the returns are in, and in line with the record of past agreements, the outcome is the exact opposite.

The Eyes on Trade blog offers the following summary:

April [2013] was another record-breaking month for U.S. trade with Korea under the U.S.-Korea Free Trade Agreement (FTA).  The monthly U.S. trade deficit with Korea soared to its highest point in history, topping $2.5 billion for the month of April alone.

According to a ratio used by the Obama administration, the unprecedented deficit surge implies 13,500 U.S. jobs lost to trade with Korea in just thirty days.  April’s trade deficit with Korea was 30% higher than in April 2012 — the first full month of FTA implementation — and 90% higher than in April 2011, before the FTA took effect.

The deficit increase owes largely to a dramatic drop in U.S. exports to Korea since enactment of the FTA.  U.S. exports to Korea in April once again fell below the levels seen in any given month in the year before the FTA took effect.  The sorry track record defies the promise (FTA = more exports) that the Obama administration used to pass the FTA.  Undeterred by the facts, today the administration is using the same worn-out promise to sell the Trans-Pacific Partnership.

April 2013

 

Unwilling to pursue policies that directly threaten corporate interests, the Obama administration has relied on monetary policy, or more specifically lower interest rates, to boost investment and employment.  As Figure 2 from the Dollars and Sense article makes clear, while lower rates generally boost investment, data points for 2009, 2010, and 2011 strongly suggest that monetary policy has lost its effectiveness.

Figure 2: Net Private Investment and Interest Rates, 1946-2011

President Obama can talk all he wants about the need for more investment and better jobs, but unless he is pushed to pursue dramatically different policies, it is hard to see any real gains for working people over the next decades.

 

Written by marty

July 28th, 2013 at 3:50 pm

The Continuing Unsatisfactory Economic Expansion

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Media and policy-makers seem anxious to convince us that the economy is in strong recovery mode.  Therefore no further significant policy interventions are needed.

Their optimism appears to rest heavily on the recent acceleration in consumer spending.  After all, there are strong reasons for concern with the other major sources of growth:  government spending on all levels is being cut, exports face a weakening world economy, and business investment remains largely stagnate.

But there are also strong reasons to challenge this optimistic view of consumer spending as a growth engine.  The charts below, from a Wall Street Journal article, highlight some of the most important.

As we see below, while consumption spending is indeed accelerating, after tax personal income is falling.  In other words, there appears little reason to believe that there is a solid foundation for sustaining this trend.

consumption

Additionally, after four years of recovery we still have 2.4 million fewer jobs than we had at the start of the recession.  Moreover, as we see below, there has been no real wage growth.  In fact, real average wages have fallen for most of the so-called expansionary period.

Wages

Yes, housing values are finally starting to rise and household debt payments as a share of after-tax income are declining.  But to a large extent the new burst in consumption spending has more to do with renewed borrowing than solid gains in job creation and income.

Unfortunately, there is little reason for us to have confidence that the economy is gathering strength in ways that will be sustainable or benefit the great majority of working people.

Written by marty

June 26th, 2013 at 10:49 am

Beyond Growth

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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.

Cay J

 

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.

 

Written by marty

March 7th, 2013 at 8:01 pm

The Distressed Labor Market

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The following two charts taken from a Center for Economic Policy and Research Center study by John Schmitt and Janelle Jones highlight the distressed nature of the U.S. labor market and the need for raising the minimum wage and strengthening union organizing.

 

Schmitt and Jones define low wage work as that work paying $10.00 an hour or less in 2011 dollars.  As the charts show, low wage workers are far more educated and older in 2011 than in 1979.    Said differently, education and experience are not sufficient to ensure a living wage.

Not surprisingly, growing numbers of low wage workers at Walmart and at chain fast food restaurants have begun engaging in direct action for higher wages and better working conditions.   They deserve our support.

Written by marty

December 7th, 2012 at 10:00 am