Why Workers Are Losing To Capitalists

Maybe he had a point. Photographer: Uwe Meinhold/AFP/Getty Images

Automation and offshoring may be conspiring to reduce labor’s share of income.

On September 25, Noah Smith writes on Bloomberg:

Back in April, I wrote about one of the most troubling mysteries in economics, the falling labor share. Less of the income the economy produces is going to people who work, and more is going to people who own things.

Less of the Pie for Labor

Share of GDP received by workers.

Source: Federal Reserve Bank of St. Louis

This trend is worrying because it contributes to increased inequality — poor people own much less of the land and capital in the economy than rich people do. The devaluation of workers could also increase unemployment, social unrest and general malaise. No one would like to see capitalism transform into the kind of dystopia envisioned by Karl Marx. That’s why even though the decline in labor’s share has so far been relatively modest, economists are racing to diagnose the cause before the problem gets any worse.

Recently, a lot of attention has focused on the idea that monopoly power might be causing the shift. But the famous paper that draws this connection — by David Autor, David Dorn, Lawrence Katz, Christina Patterson and John Van Reenen — also shows that it can account for perhaps only 20 percent of the change. This means other possible explanations for labor’s decline, like increasing automation or globalization, need to be re-examined.

Economists Mai Dao, Mitali Das, Zsoka Koczan and Weicheng Lian of the International Monetary Fund argue that the culprit is not automation or offshoring alone, but the interaction between the two. As evidence, they note that the labor share has been falling not just in rich nations, but in developing countries as well. Here is a figure from their paper:

If globalization were purely to blame, this wouldn’t be happening. Standard trade theories imply that because rich countries have a lot of capital and poor countries have a lot of labor, when these countries start to trade, labor’s share of income should go down in the countries where it used to be scarce — i.e., the rich world — but should rise in the poor countries where it was previously abundant. That’s not what’s happening.

Meanwhile, if automation is just now starting to make workers obsolete, developing countries shouldn’t be experiencing the fall in labor share at the same time, because in technological terms they’re decades behind the rich countries. The authors confirm that investment goods — machines, vehicles, computers, etc. — haven’t really gotten much cheaper in poor countries, as they have in rich ones. So the puzzle really boils down to this: Why is the labor share falling in the developing world?

Dao and her co-authors offer a hypothesis. It has to do with the types of industries that exist in poor countries before and after trade gets opened up. When poor countries are isolated from the global economy, they tend to specialize in things that rely on a lot of cheap labor — farming, low-end services and simple labor-intensive manufacturing. Local landlords and other capital owners do well, but don’t have a chance to get truly rich, because any investment in machinery or technology can be undercut by a flood of low-wage workers. So they don’t bother making the investments in the first place. This dearth of capital spending is exacerbated by rudimentary or dysfunctional financial systems.

But when trade opens up, the rich countries start offshoring manufacturing jobs to the poor countries. These jobs offer better opportunities for workers, but much better opportunities for capitalists. Even as capitalists in the U.S. or Japan or France get rich cutting labor costs by shipping jobs to China, Chinese capitalists get rich because they’re finally able to amass huge business empires.

The IMF economists also predict that global financial integration should help alleviate the pressure on labor in poor countries. If American, European, Japanese and Taiwanese companies are able to invest in a developing country like China, the inflow of foreign money will boost incomes for local workers and compete down the profits of local capital owners.

So what about rich countries? Here, the argument is that automation and globalization are working together — companies in rich countries can ship labor-intensive manufacturing jobs in electronics assembly, toys and clothing to China and Bangladesh, while buying advanced machine tools and robots to do more high-end manufacturing of things like microprocessors and airplanes. As a result, workers in rich countries where routine jobs were more common were hit harder by both free trade and the advent of cheap automation.

In other words, the two most conventional explanations for rising inequality and falling wages might both be correct. A perfect storm of robots and free trade — and some monopoly power to boot — could be shifting power from the proletariat to the capitalists. With all these factors at work, maybe the real puzzle is why workers aren’t doing even worse than they are.

https://www.bloomberg.com/view/articles/2017-09-20/why-workers-are-losing-to-capitalists

 

Economist Dierdre McCloskey Promotes False Math About Inequality And Redistribution

On March 18, 2017, Adam M. Finked writes on Evonomics:

The unequal distribution of costs and benefits across society is one of the hottest topics in the regulatory arena—and one that, regretfully, has sparked fundamentally flawed arguments, threatening to distort and obscure much-needed discussion about redistributive policies.

To the extent that a regulation correcting an externality or other market failure provides total benefit in excess of total cost while particularly helping the disadvantaged subsets of society, the regulation may—and in my view, should—be seen as doubly wise. If, instead, the regulation creates positive net benefit but requires the poor to pay the costs so that the rich can reap health or environmental benefits, it may be neither just nor wise.

Although all policies have redistributive effects, some ideologies are viscerally, even militantly, opposed to government interventions that benefit the poor, whether by intention or even as a side effect of an otherwise sound policy. The economist A.O. Hirschman asserts in his book, The Rhetoric of Reaction, that both conservatives and progressives promote different flawed narratives in order to rationalize their policy preferences. But it is conservatives, according to Hirschman, who uniquely tend to argue that even when good intentions do not backfire, they simply are futile.

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In a recent New York Times op-edUniversity of Illinois at Chicago Professor Deirdre McCloskey exemplifies this type of argument, in conspicuously misguided fashion. In her column, McCloskey offers a litany of reasons as to why progressive taxation and other policies aimed at redistributing benefits to the poor are ill-advised. At the core of the essay, McCloskey makes the empirical assertion that such policies cannot actually make much of a difference in any event.

Unfortunately, the basic mathematics of McCloskey’s claim are mangled. She may not prefer that we seek progressive tax and regulatory policies, but her claim that these policies do not “uplift the poor very much” is erroneous. That the Times has decided not to correct her error—even in the face of an email exchange in which the author herself acknowledged her mistake—may be an example of how tempting it is to ascribe black-and-white factual issues to the realm of “healthy controversy.”

McCloskey states that “[a]s a matter of arithmetic, expropriating the rich to give to the poor does not uplift the poor very much. If we took every dime from the top 20 percent of the income distribution and gave it to the bottom 80 percent, the bottom folk would be only 25 percent better off.”

It was obvious to me, and I hope to others, that McCloskey’s math is only correct in the extreme and unrealistic situation where there is zero inequality—that is, no “distribution” at all—to begin with. If in a population of 1,000 people, each person had exactly the same $500,000 in wealth, then it is true that if the entire $100 million that the “top” 200 people held were transferred to the “other” 800 people and split equally among them, those 800 people would be given $125,000 each, which would indeed increase their individual wealth by 25 percent.

In the real United States, however—where $500,000 is indeed a reasonable estimate of the average individual net worth, but where the top 20 percent own85 percent of all wealth—the math is very different. Among a representative sample of 1,000 Americans, there would be $425 million to redistribute among the bottom 800 people, who would each start with only $93,750. These 800 individuals would receive $531,250 more from the rich, increasing their wealth by 570 percent—not 25 percent. Thus, the only plausible takeaway of McCloskey’s example is that soaking the rich might conceivably help the poor “not very much”—but only if the “poor” are as rich as the rich to begin with! Unfortunately, readers may have come away with the comforting and self-serving “knowledge” that the pie is not big enough to meaningfully help the poor, so why bother trying?

In reality, imposing a policy of redistribution down the economic ladder—whether through the tax code, regulation, or any other means—could help the poor immensely. So should we adopt such policies? Of the many arguments McCloskey offers as to why redistribution is wrong-headed and futile, I disagree with two in particular.

First, McCloskey asserts that once the poor have “a roof over their heads and enough to eat,” they have no further need for any of society’s accumulated wealth. Elsewhere, she claims that all progressives seek a “forced equality” that would require brain surgeons and taxi drivers to earn the same amount. The former assertion is callous , and the latter is a strawman: even the most repressive Communist regimes in history sought equality of opportunity—not equality of outcome. Surely, somewhere within the 99 percent of the ideological distribution between dystopian Darwinism and utopian equality-for-its-own-sake, there is room for fruitful discussion about whether we should favor some modest redistribution via a progressive tax code and social programs. But McCloskey’s caricature of both positions makes any compromise impossible.

Second, McCloskey refers to taxation as “state violence,” “compelled equality,” and “envy-and-anger-satisfying extraction from the rich.” What can one say to this view of community-as-prison, other than to say that McCloskey does not speak for me, and many like-minded friends and colleagues: I have zero envy for the hardworking, lucky, or rapacious folks who are rich compared to me. I simply contribute—both voluntarily and compulsorily, and without rancor—and I expect the wealthier in society to do as much, or more, with their surpluses.

I recognize, of course, that McCloskey’s substantive views are shared by others and that reasonable people can differ on how much redistribution society should pursue. But we can have no meaningful dialogue about the costs and benefits of modestly progressive policies if that discussion is grounded in “alternative math.” It is possible to argue that the rich should not help uplift the poor, without making the claim that they cannot do so as a matter of “arithmetic.”

As with many of the toxic myths about regulation—that, for example, it is responsible for destroying countless jobs while failing to create any new ones in the process, or that it relies on gross exaggerations of risk and plays to irrational public fears—we are lost without the ability to distinguish between ideological responses to facts and ideological twisting of facts into nonsense. In recent weeks, likely in response to being tarred as “fake news” by the new Administration, the Times launched an impressive ad campaign (print ads and a Super Bowl commercial). I agree: the truth about data, algebra, and policies is indeed “more important than ever.”

Originally published at RegBlog here.

Economist Dierdre McCloskey Promotes False Math About Inequality and Redistribution

Numerous economists think that when the government redistributes wealth (from the top down)), the shifting of demand from one group (top) to another (middle to bottom) actually increases demand that is good for the economy and the culture.

Unfortunately, the way the government redistributes — through inflation — undermines the very demand aimed at stimulating the economy, and shifts purchasing power back to producers (owners) to generate savings for reinvestment. It’s an ugly, no-win scenario with the rich constantly getting richer.

The solution is to turn more people into capital owners so that consumption can keep up with production, thus economically empowering the poor and middle class simultaneously with the growth of the economy, without taking anything from those who already are producer-owners (the rich).

The government should be implementing the non-inflationary Capital Homestead Act (aka Economic Democracy Act and Economic Empowerment Act) at http://www.cesj.org/learn/capital-homesteading/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/ and http://www.cesj.org/learn/capital-homesteading/ch-vehicles/.

Study: Seattle’s Minimum-Wage Hike Didn’t Boost Supermarket Prices

Raising the minimum wage in Seattle to $13 an hour did not affect the price of food at supermarkets, according to a new study led by the University of Washington School of Public Health.

That’s good news for those earning higher wages. “Typically, criticisms of minimum wage policies have been that even if wage goes up it will be offset by increases in prices of consumer goods,” said Jennifer Otten, assistant professor of environmental and occupational health sciences and a member of the School’s nutritional sciences faculty. “This paper shows that, as of Seattle’s wage increase to $13 per hour in 2016, food prices are not going up.”

The study was published in the International Journal of Environmental Research and Public Health.

A growing number of cities in the United States are raising the minimum wage in an effort to improve the well-being of low-wage workers, but few studies have looked at the public health implications of these policies, including effects on food security, diet quality, and associated health outcomes. This is the first study of the effects of a minimum wage policy this size, and at the local level, on supermarket prices in real-time.

In Seattle, large employers, such as grocery retailers, were required to pay workers at least $11 an hour starting in April 2015, $13 an hour in January 2016, and $15 an hour in January 2017.

Otten and colleagues collected data from six supermarket chains affected by the policy in Seattle and from six others outside the city but within King County and unaffected by the policy. They looked at prices for 106 food items per store starting one month before enactment of the ordinance, one month after, and a year later.

Researchers found no significant differences in the cost of the market basket between the two locations at any point in time. A second analysis to assess the public health implications of potential differential price changes on specific items, such as fruits and vegetables, was also conducted and researchers found no evidence of price increases by food group.  Meats made up the largest share of the basket, followed by vegetables, cereal, grains and dairy.

The study was funded the City of Seattle and the Laura and John Arnold Foundation. It is part of ongoing work of the UW Minimum Wage Study Team.

Analysis of supermarket food prices collected after the Seattle policy increased to $15 per hour is forthcoming. Otten, along with Heather Hill of the Daniel J. Evans School of Public Policy and Governance and James Buszkiewicz, a doctoral student in epidemiology, are also examining the links between minimum wage and health outcomes over time.

https://newsroom.uw.edu/news/seattle%E2%80%99s-minimum-wage-hike-didnt-boost-supermarket-prices

 

Insanely Concentrated Wealth Is Strangling Our Prosperity

On September 18, 2017, Steve Roth writes on Economics:

Remember Smaug the dragon, in The Hobbit? He hoarded up a vast pile of wealth, and then he just hung out in his cave, sitting on it (with occasional forays to further pillage and immolate the local populace).

That’s what you should think of when you consider the mind-boggling hoards of wealth that the very rich have amassed in America over the last forty years. The picture at right only shows the very tippy-top of the scale. In 1976 the richest people had $35 million each (in 2014 dollars). In 2014 they had $420 million each — a twelvefold increase. You can be sure it’s gotten even more extreme since then.

Bottom (visible) pink line is the top 10%.

These people could spend $20 million every year and they’d still just keep getting richer, forever, even if they did absolutely nothing except choose some index funds, watch their balances grow, and shop for a new yacht for their eight-year-old.

If you’re thinking that they “deserve” all that wealth, and all that income just for owning stuff, because they’re “makers,” think again: between 50% and 70% of U.S. household wealth is “earned” the old-fashioned way (cue John Houseman voice): it’s inherited.

The bottom 90% of Americans aren’t even visible on this chart — and it’s a very tall chart. The scale of wealth inequality in America today makes our crazy levels of income inequality (which have also expanded vastly) look like a Marxist utopia.

American households’ total wealth is about $95 trillion. That’s more than three-quarters of a million dollars for every American household. But roughly 50% of households have zero or negative wealth.

Now of course you don’t expect 20-year-olds to have much or any wealth; there will always be households with none. But still, the environment for young households trying to build a comfortable and secure nest egg — the American dream? — has gotten wildly competitive and hostile over recent decades. (If we had a sovereign wealth fund, everyone would have a wealth share from birth.)

But here’s what’s even more egregious: that concentrated wealth is strangling our economy, our economic growth, our national prosperity. Wealth concentration drives a vicious, downward cycle, throttling the very engine of wealth creation itself.

Because: people with lots of money don’t spend it. They just sit on it, like Smaug in his cave. The more money you have, the less of it you spend every year. If you have $10,000, you might spend it this year. If you have $10 million, you’re not gonna. If you have $1,000, you’re at least somewhat likely to spend it this month.

Here’s one picture of what that looks like (data sources):

These broad quintile averages obviously don’t put across the realities of the very poor and the very rich; each quintile spans 25 million households. But the picture is clear. The bottom quintiles turn over 40% or 50% of their wealth every year. The richest quintile turns over 5%. For a given amount of wealth, wider wealth dispersion means more spending. It’s arithmetic.

Now go back to those top-.01% households. They have about $5 trillion between them. Imagine that they had half that much instead (the suffering), and the rest was spread out among all American households — about $20,000 each.

Assume that all those lower-quintile households spend about 40% of their wealth every year. They each get to spend an extra $8,000, and enjoy the results. Sounds nice. And it’s spending that simply won’t happen with concentrated wealth. The money will just sit there.

Now obviously just transferring $2.5 trillion dollars, one time, is not going to achieve this imagined nirvana. Nor is it bloody well likely to happen. That example is just to illustrate the arithmetic. Absent some serious changes in our wildly skewed income distribution (plus capital gains, the overwhelmingly dominant mechanism of wealth accumulation, which don’t count as “income”), that wealth would just get sucked back up to the very rich, like it has, increasingly, for the past forty years — and really, the past several thousand years.

If wealth is consistently more widely dispersed — like it was after WW II — the extra spending that results causes more production. (Why, exactly, do you think producers produce things?) And production produces a surplus — value in, more value out. It’s the ultimate engine of wealth creation. In this little example, we’re talking a trillion dollars a year in additional spending and production. GDP would be 5.5% higher.

If you want to claim that the extra spending would just raise prices, consider the last 20 years. Or the last three decades, in Japan. And if you think concentrated wealth causes better investment and greater wealth accumulation, ask yourself: what economic theory says that $95 trillion in concentrated wealth will result in more or better investment than $95 trillion in broadly dispersed wealth? Our financial system is supposed to intermediateall that, right?

Or ask yourself: would Apple be as successful as it is if its business model was based on selling eight-million-dollar diamond-encrusted iPhones? Broad prosperity is what made Apple, Apple. Concentrated wealth distorts producers’ incentives, so they produce, for instance, a million-dollar Maserati instead of forty (40) $25,000 Toyotas — because that’s what the people with the money are buying. Which delivers more prosperity and well-being?

This little envelope calc is describing a far more prosperous, comfortable, and secure society — far richer and and one hopes far more peaceful than the one we’re facing under wildly concentrated wealth. With the possible exception of a few very rich multi-generational dynasties, everyone’s grandchildren will be far better off 50 years from now if wealth is more widely dispersed. And over that half century, hundreds of millions, even billions of people will live far richer, better lives.

Why wouldn’t we want that? Why wouldn’t we do that? (We know the answer: rich people hate the idea — even those who aren’t all that rich but foolishly buy into the whole trickle-down fantasy. And the rich people…have the power.)

By contrast to that possibility, here’s what things look like over the last seven decades:

Here are the results — growth in inflation-adjusted GDP per capita:

The last time economic growth broke 5% was in 1984. And the decline continues.

So how do we get there, given that we’ve mostly failed to do so for millennia? Start with a tax system that actually is progressive, like we had, briefly, during the postwar heyday of rampant and widespread American growth and prosperity. And greatly expand the social platform and springboard that gives tens of millions more Americans a place to stand, where they can move the world.

All of this dweebish arithmetic, of course, doesn’t put across the real crux of the thing: power. Money is power. So it is, so it has been, and so it shall be in our lifetimes and our children’s lifetimes (world without end, amen). This is especially true for minorities, who have been so thoroughly screwed by our recent Great Whatever. Money is the power to walk away from a shitty job. To hire fancy lawyers and lobbyists, maybe even buy yourself a politician or two. If we want minorities to have power, they need to have money.

Add to that dignity, and respect, which is deserved by every child born: sadly but truly, they are delivered to those who have money. You can bemoan that reality, but in the meantime, let’s concentrate on the money.

If you want to create a workers’ utopia, a better world for all, seize the wealth and income.

2017 September 18

=================

Data Sources

The data for the tall chart is from Gabriel Zucman, PSZ2016AppendixTablesII(Distrib).xlsx Table TE3. Google sheet with data and chart here.

Average wealth by quintile is from the Federal Reserve’s Survey of Consumer Finance (SCF), scf2013_tables_internal_nominal.xls, Table 4. (Top 20% wealth in the table above is an average of the means for 80-90% and 90-100%.) The most recent triannual SCF release, covering 1989-2013, determined the year chosen for the table. The next release, through 2016, should be out imminently.

Spending by quintile is from the BLS Consumer Expenditure Survey (CEX; earlier years here), Table 1101 (adjusted; see below): https://www.bls.gov/cex/2013/combined/quintile.xlsx. All annual expenditure-by-quintile tables 1984-2016 in one spreadsheet here.

Note: Measuring expenditures is very difficult, especially the spending of the very rich. They’re not keen to answer lengthy surveys like the CEX, given that they don’t even want their housekeepers to know that they paid $6 for a loaf of bread. As a result, CEX — which breaks out spending by quintile — missesabout 40% (xlsx) of the spending tallied in the BEA’s Personal Consumption Expenditures (PCE) — which doesn’t. As a rough corrective for that discrepancy, the spending-by-quintile figures in the table above are CEX measures multiplied by 1.66. This “PCE correction” results in far more plausible spending figures, especially for the top 20%: Average $165,000 in 2103 annual spending versus CEX’s $100,000.

Insanely Concentrated Wealth Is Strangling Our Prosperity

 

The Science Of Flow Says Extreme Inequality Causes Economic Collapse

On February 9, 2017, Dr. Sally J. Goerner writes on Evonomics:

According to a recent study by Oxfam International, in 2010 the top 388 richest people owned as much wealth as the poorest half of the world’s population– a whopping 3.6 billion people. By 2014, this number was down to 85 people. Oxfam claims that, if this trend continues, by the end of 2016 the top 1% will own more wealth than everyone else in the world combined. At the same time, according to Oxfam, the extremely wealthy are also extremely efficient in dodging taxes, now hiding an estimated $7.6 trillion in offshore tax-havens.[3]

Why should we care about such gross economic inequality?[4] After all, isn’t it natural? The science of flow says: yes, some degree of inequality is natural, but extreme inequality violates two core principles of systemic health: circulation and balance. 

Circulation represents the lifeblood of all flow-systems, be they economies, ecosystems, or living organisms. In living organisms, poor circulation of blood causes necrosis that can kill. In the biosphere, poor circulation of carbon, oxygen, nitrogen, etc. strangles life and would cause every living system, from bacteria to the biosphere, to collapse. Similarly, poor circulation of money, goods, resources, and services leads to economic necrosis – the dying off of large swaths of economic tissue that ultimately undermines the health of the economy as a whole.

In flow systems, balance is not simply a nice way to be, but a set of complementary factors – such as big and little; efficiency and resilience; flexibility and constraint – whose optimal balance is critical to maintaining circulation across scales. For example, the familiar branching structure seen in lungs, trees, circulatory systems, river deltas, and banking systems (Fig. 1) connects a geometrically constant ratio of a few large, a few more medium-sized, and a great many small entities. This arrangement, which mathematicians call a fractal, is extremely common because it’s particular balance of small, medium, and large helps optimize circulation across different levels of the whole. Just as too many large animals and too few small ones creates an unstable ecosystem, so financial systems with too many big banks and too few small ones tend towards poor circulation, poor health, and high instability.

In his documentary film, Inequality for All , Robert Reich uses virtuous cycles to clarify how robust circulation of money serves systemic health. In virtuous cycles, each step of money movement makes things better. For example, when wages go up, workers have more money to buy things, which should increase demand, expand the economy, stimulate hiring, and boost tax revenues. In theory, government will then spend more money on education which will increase worker skills, productivity and hopefully wages. This stimulates even more circulation, which starts the virtuous cycle over again. In flow terms, all of this represents robust constructive flow, the kind that develops human and network capital and enhances well-being for all.

Of course, economies also sometimes exhibit vicious cycles, in which weaker circulation makes everything go downhill – i.e., falling wages, consumption, demand, hiring, tax revenues, government spending, etc. These are destructive flows, ones that erode system health.

Both vicious and virtuous cycles have occurred in various economies at various times and under various economic theories and policy pressures. But, for the last 30 years, the global economy in general and the American economy in particular has witnessed a strange combination pattern in which prosperity is booming for CEOs and Wall Street speculators, while the rest of the economy – particularly workers, the middle class, and small businesses – have undergone a particularly vicious cycle. Productivity has grown massively, but wages have stagnated. Consumption has remained reasonably high because, in an effort to maintain their standard of living, working people have: 1) added hours, becoming two-income families, often with two and even three jobs per person; and 2) increased household debt. Inequality has skyrocketed because effective tax rates on the 1% have dropped (notwithstanding a partial reversal under Obama), while their income and profits have risen steeply.

We should care about this kind of inequality because history shows that too much concentration of wealth at the top, and too much stagnation everywhere else indicate an economy nearing collapse. For example, as Reich shows (Figure 1a & b), both the crashes of 1928 and 2007 followed on the heels of peaks in which the top 1% owned 25% of the country’s total wealth.

Fig. 3a Income Share of U.S. Top 1% (Reich, 2013) & 3b Reich notes that the two peaks look like suspension bridge, with highs followed by precipitous drops. (Original Source: Piketty & Saez, 2003)

What accounts for this strange mix of increasing concentration at the top and increasing malaise everywhere else? Putting aside the parallels to 1929 for a moment, most common explanations for today’s situation include: the rise of technology which makes many jobs obsolete; and globalization which puts incredible pressures on companies to lower wages and outsource jobs to compete against low-wage workers around the world.

But, while technology and globalization are clearly creating transformative pressures, neither of these factors completely explains our current situation. Yes, technology makes many jobs obsolete, but it also creates many new jobs. Yet, where the German, South Korean and Norwegian governments invest in educating their workforce to fill those new jobs, the American government has been cutting back on education for decades. A similar thought holds for globalization. Yes, high-volume industrialism – that is, head-to-head competition over price of mass-produced, uniform goods – leads to a race to the bottom; that’s been known for a long time. But in The Work of Nations (2010), Robert Reich also points out that the companies that are flourishing through globalization and technology are ones pursuing what he calls high-value capitalism, the high-quality customization of goods and services that can’t be duplicated by mass-produced uniformity at cheap places around the world.

So, while the impacts of globalization and technology are profound, the real explanation for inequality lies primarily with an economic belief that, intentionally or not, serves to concentrate wealth at the top by extracting it from everywhere else. This belief system is called variously neoliberalism, Reaganomics, the Chicago School, and trickle-down economics. It is easily recognized by its signature ideas: deregulation; privatization; cut taxes on the rich; roll back environmental protections; eliminate unions; and impose austerity on the public. The idea was that liberating market forces would cause a rising tide that lifted all boats, but the only boat that actually rose was that of the .01%. Meanwhile, instability has grown.

The impact this belief system has had on the American economy and its capacities can be seen in American education. Trickle-down theories are all about cutting taxes on the wealthy, which means less money for public education, more young people burdened with huge college debt, and fewer American workers who can fill the new high-tech jobs.

To be fair, this process is not just about greed. Most of the people who participate in this economic debacle do not realize its danger because they believed what they were told by the saints and sages of economics, and many are rewarded for following its principles. So, what really causes the kind of inequality that drives economies toward collapse? The basic answer from the science of flow is: economic necrosis. But, let me flesh out the story.

Institutional economists talk about two main types of economic strategies: extractive and solution-seeking. (Hopefully, these names are self-explanatory.) Most economies contain both. But, if the extractive forces become too powerful, they begin to use their power to rig the rules of the economic game to favor themselves. This creates what scientists call a positive feedback loop, one in which “the more you have, the more you get.” Seen in many kinds of systems, this loop creates a powerful pull that sucks resources to the top, and drains it away from the rest of the system causing necrosis. For example, chemical runoff into the Gulf of Mexico accelerates algae growth. This creates an escalating, “the more you have, the more you get” process, in which massive algae growth sucks up all the oxygen in the surrounding area, killing all of the nearby sea life (fish, shrimp, etc.) and creating a large “dead zone.”

Screen Shot 2016-02-14 at 9.43.56 PM

Neoliberal economics set up a parallel situation by allowing the wealthy to use their money to extract ever more money from the overall economy. The uber-wealthy grow wealthier by:

  • Paying for policy favors – big corporate bailouts and subsidies; lobbying; etc.
  • Removing constraints on dangerous behavior – removing environmental protections; not prosecuting financial fraud offenders; ending Glass-Steagall, etc.
  • Increasing the public’s vulnerability – increasing monopolistic power by diminishing antitrust regulations; limiting the public’s ability to sue big corporations; limiting Medicare’s ability to negotiate for lower pharmaceutical rates; limiting bankruptcy for student loans, etc.
  • Increasing their own intake – rising CEO salaries and escalating Wall Street gambling; and limiting their own outflows – externalizing costs, cutting worker wages and lowering their own taxes.

All of these processes help the already rich concentrate more, and circulate less. In flow terms, therefore, gross inequality indicates a system that has: 1) too much concentration and too little circulation; and 2) an imbalance of wealth and power that is likely to create ever more extraction, concentration, unaccountability, and abuse. This process accelerates until the underlying human network becomes exhausted and/or the ongoing necrosis reaches a point of collapse. When this point is reached, the society will have three choices: learn, regress, or collapse.

What then shall we do? Obviously, we need to improve our “solution seeking” behavior in realms from business and finance to politics and media. Much of this is already taking place. From socially-responsible business and alternative forms of ownership, to democratic reform groups, alternative media, and the new economy movement – reforms are arising on all sides.

But, the solutions we need are also often blocked by the forces we are trying to overcome, and impeded by the massive merry-go-round momentum of “business as usual.” Today’s reforms also lack power because they are taking place piecemeal, in a million separate spots with very little cross-group unity.

How do we overcome these obstacles? The science of flow offers not so much a specific strategy, as an empowering change of perspective. In essence, it provides a more effective way to think about the processes we see every day.

The dynamics explained above are very well known; they are basic physics, just like the law of gravity. Applying them to today’s economic debates can be extremely helpful because the latter have devolved into ideological debates devoid of any scientific foundation.

We believe Regenerative Economics can provide a unifying framework capable of galvanizing a wide array of reform groups by clarifying the picture of what makes societies healthy. But, this framework will only serve if it is backed by accurate theory and effective measures and practice. This soundness is part of what Capital Institute and RARE are trying to develop.

John Fullerton’s white paper, Regenerative Capitalism, lists eight principles critical to systemic economic health. The Capital Institute’s research group, RARE[1], uses recent scientific advances – specifically, the physics of flow[2]– to create a logical and measurable explanation of how these principles work to make or break vitality in the human networks of which economies are built. 

 

[1] RARE = Research Alliance for Regenerative Economics

[2] The “physics of flow” refers to the study of flow-networksmeaning any system whose existence arises from and depends on the circulation of critical resources and/or information throughout the entirety of their being. Living organisms depend on the circulation of nutrients and oxygen. Ecosystems depend on the circulation of carbon, oxygen, water, etc. Economic systems depend on the circulation of money, information and resources. The physics of flow uses universal principles and patterns of flow to clarify what makes economies healthy over long periods of time. While “living systems” are flow networks, the advantage of using the broader-case principles is that there is no question about whether the results are merely a metaphoric extrapolation from ecosystems.

[3]https://www.oxfam.org/sites/www.oxfam.org/files/file_attachments/ib-wealth-having-all-wanting-more-190115-en.pdfhttps://www.oxfam.org/en/pressroom/pressreleases/2015-01-19/richest-1-will-own-more-all-rest-2016

[4] 2013 Documentary film, http://inequalityforall.com

The Science of Flow Says Extreme Inequality Causes Economic Collapse


 

The Myths Of Recovery: Why American Households Aren’t Better Off

Getty Images

Workers pack and ship customer orders at the 750,000-square-foot Amazon fulfillment center on August 1, 2017 in Romeoville, Illinois.

On September 14, 2017, Constantin Gurdgiey writes on Market Watch:

Off the top, the figures published by the U.S. Census Bureau on Tuesday are encouraging:

• Median household income rose to $59,039, the second straight gain;

• The percentage of people in poverty fell to 12.7%, returning to around pre-recession levels;

• The supplementary poverty measure also fell, to 13.9%;

• The percentage of people without health insurance coverage fell to 8.8%.

The excitement of some analysts reporting these as a major breakthrough along the trend is understandable, as notionally, 2016 U.S. median household income has finally surpassed the previous peak, recorded in 1999. Back then, median household income (adjusted for official inflation) stood at $58,665 and at the end of 2016 it registered $59,039.

As this chart clearly illustrates, notionally, we are in the “new historical peak” territory.

Alas, notional is not the same as tangible. And here are the reason why the tangible matters probably more than the notional:

1) Consider the following simple timing observation: real incomes took 17 years to recover from the 2000-2012 collapse. And the Great Recession, officially, accounted for only $4,031 in total decline of the total peak-to-trough drop of $5,334. Which puts things into a different framework altogether: the stagnation of real incomes from 1999 through today is structural, not cyclical. The “good news” are really of little consolation for people who endured almost two decades of zero growth in real incomes: their life-cycle incomes, pensions, wealth are permanently damaged and cannot be repaired within their lifetimes.

2) The Census Bureau data shows that bulk of the gains in real income in 2016 has been down to one factor: higher employment. In other words, hours worked rose, but wages did not. American median householders are working harder at more jobs to earn an increase in wages. Which would be OK, were it not down to the fact that working harder means higher expenditure on income-related necessities, such as commuting costs, child-care costs, costs for caring for the dependents, etc. In other words, to earn that extra income, households today have to spend more money than they did back in the 1990s. Now, I don’t know about you, but for my household, if we have to spend more money to earn more money, I would be looking at net increases from that spending, not gross. Census Bureau does not adjust for this. There is an added caveat to this: caring for children and dependents has become excruciatingly more expensive over the years, since 1999. Inflation figures reflect that, but the real income deflator takes the average/median basket of consumers in calculating inflation adjustment. However, households gaining new additional jobs are not average/median households to begin with — and most certainly not in 2016, when labor markets were tight. In other words, the median household today is more impacted by higher inflation costs pertaining to necessary non-discretionary expenditures than the median household in 1999. Without adjusting for this, notional Census Bureau figures misstate (to the upside) current income gains.

3) In 1999, the Census Bureau data on household incomes used a different methodology than it does today. The methodology changed in 2013, at which point in time, the Census Bureau estimated that 2013 median income was about $1,700 higher based on new methodology than under pre-2013 methodology. Since then, we had no updates on this adjustment, so the gap could have actually increased. Tuesday’s numbers show that median household income at the end of 2016 was only $374 higher than in 1999. In other words, it was most likely around $1,330 or so lower, not higher, under the pre-2013 methodology. Taking a very simplistic (most likely inaccurate, but somewhat indicative) adjustment for 2013-pre-post differences in methodologies, the current 2016 reading is roughly 1.6% lower than the 2007 local peak, and roughly 2.3% lower than the 1999-2000 level.

4) Costs and taxes do matter, but they do not figure in the Census Bureau statistic. Quite frankly, it is idiotic to assume that gross median income matters to anyone. What matters is after-tax income net of the cost of necessities required to earn that income. Now, consider a simple fact: in 1999, a majority of jobs in the U.S. were normal working-hours contracts. Today, a huge number are zero-hours and gig-economy jobs. The former implied regular and often subsidized demand for transport, childcare, food associated with work etc. The latter implies irregular (including peak hours) transport, childcare, food and other services demand. The former was cheaper. The latter is costlier. To earn the same dollar in traditional employment is not the same as to earn a dollar in the gig economy. Worse, taxes are asymmetric across two types of jobs too. The gig economy adds to this problem yet another dimension. Many gig-economy earners (e.g. Uber drivers, delivery & messenger services workers, or AirBnB hosts) use income to purchase assets they use in generating income. These are not reflected in the Census Bureau earnings, as the official figures do not net out cost of employment.

5) Finally, related to the above, there is higher degree of volatility in job-related earnings today than in 1999. And there are longer duration of unemployment spells in today’s economy than in the 1990s. Which means that the risk-adjusted dollar earned today requires more unadjusted dollars earned than in 1999. Guess what: Census Bureau statistics show not-risk-adjusted earnings. You might think of this as an academic argument, but we routinely accept (require) risk-adjusted returns in analyzing investment prospects. Why do we ignore tangible risk costs in labor income?

The key point here is that any direct comparison between 1999 and 2016 in terms of median incomes is problematic at best. It is problematic in technical terms (methodological changes and CPI deflator changes), and it is problematic in incidence terms (composition of work earnings, risks, incidences of costs and taxes). My advice: don’t ever do it without thinking about all important caveats.

Materially, U.S. households’ disposable risk-adjusted incomes are lower today than they were in 1999. That explains why American households are drowning in debt: the demand for income vastly exceeds the supply of income, even as the official median household size shrinks and cost of housing is being deflated by children staying in parents’ homes for decades after college. The rosy times are not upon us, folks.

http://www.marketwatch.com/story/the-myths-of-recovery-why-american-households-arent-better-off-2017-09-13

 

 

The Rock-Star Appeal Of Modern Monetary Theory

(Illustration by Victor Juhasz)

On May , 2017, Atossa Araxia Abrahamian writes in The Nation:

In early 2013, Congress entered a death
 struggle—or a debt struggle, if you will—over the future of the US economy. A spate of old tax cuts and spending programs were due to expire almost simultaneously, and Congress couldn’t agree on a budget, nor on how much the government could borrow to keep its engines running. Cue the predictable partisan chaos: House Republicans were staunchly opposed to raising the debt ceiling without corresponding cuts to spending, and Democrats, while plenty weary of running up debt, too, wouldn’t sign on to the Republicans’ proposed austerity.

In the absence of political consensus, and with time running out, a curious solution bubbled up from the depths of the economic blogosphere. What if the Treasury minted a $1 trillion coin, deposited it in the government’s account at the Federal Reserve, and continued on with business as usual? The workaround was technically authorized by an obscure law that applies to commemorative platinum coins, and it didn’t require congressional approval, so the GOP couldn’t get in the way. What’s more, the cash would not be circulated, so it wouldn’t cause inflation.

The thought experiment was catnip for wonks and bloggers, who described it as “ludicrous but perfectly legal” (Slate); “a monetary parlor trick” (Wired); “really thrilling” (Business Insider); “a large-scale trolling project” (The Guardian). The idea made its way onto late-night TV, political talk shows, White House press conferences, and lived on as a hashtag: #mintthecoin. At the heart of the attention was an acknowledgement that money wasn’t the problem here—politics was.

For a small but committed group of economists, academics, and activists who adhere to a doctrine called Modern Monetary Theory (MMT), though, #mintthecoin was the tip of the economic iceberg. The possibility of a $1 trillion coin represented more than mere monetary sophistry: It drove home their foundational point that fiat currency is a social construct, and that there are therefore no fiscal limits on how much a sovereign currency-issuing nation can spend.

According to this small but increasingly vocal cohort of economists, including Bernie Sanders’s former chief economic adviser, once we change the way we think about money, we can provide for everyone: We don’t have to “find” the money to “pay” for universal health care by “cutting” the budget elsewhere. In fact, our government already works that way: Spending must precede taxation, or there would be no dollars in the economy to tax. It’s the political will to spend on certain things, not the money to afford it, that’s lacking.

“The idea that you can’t feed hungry kids and build a bridge is a huge problem,” says Stephanie Kelton, an economist at the University of Missouri, Kansas City. “It’s cruel to say we want more money for education and food but have to wait for legislation.”

Kelton, who spoke about the coin on MSNBC, is MMT’s most mediagenic expert. She’s 48 years old, whip-smart, impeccably coiffed, and brims with enthusiasm—important for someone who spends half her time telling Wall Street types to rethink their basic approach to economics. When San-
ders ran for the Democratic nomination, Kelton became his chief economic adviser at the recommendation of several prominent left-wing economists, including Dean Baker and Jamie Galbraith. Before that, she served as chief economist on the Senate Budget Committee and moonlighted as the editor of a blog called New Economic Perspectives.

Kelton sees the fundamentals of her work as “a descriptive analysis that could be exploited by either side: Democrats and Republicans can use the insight to push tax cuts or increase spending.” Indeed, the idea of a big-spending economic stimulus to fix the country’s infrastructure served as a common ground for Trump and Sanders voters who liked the idea of jobs perhaps more than they disliked the idea of national indebtedness. If that’s what voters want, then MMT is a rare bird: an economic theory that not only validates their hunches, but contends that they’re the key to a healthy, stable, prosperous economy for all.

Modern Monetary Theory emerged as a 
distinct school of economic thought in the 1990s, when Kelton and her colleagues—mainly professors with homes in heterodox economics departments like the University of Missouri, Kansas City, and Bard’s Levy Institute—published research and discussed their theories, albeit mainly among themselves on a now-defunct listserv called “Post-Keynesian Thought” and at an annual conference that started in 2003.

The various strains of thought that make up MMT have their roots in Adam Smith and John Maynard Keynes, along with more contemporary thinkers like Hyman Minsky and Abba Lerner, but only recently have researchers connected the dots in quite this way. “We’ve rediscovered old ideas,” Kelton said, “and assembled them into a complete macroeconomic frame.”

To a layperson, MMT can seem dizzyingly complex, but at its core is the belief that most of us have the economy backward. Conventional wisdom holds that the government taxes individuals and companies in order to fund its own spending. But the government—which is ultimately the source of all dollars, taxed or untaxed—pays or spends first and taxes later. When it funds programs, it literally spends money into existence, injecting cash into the economy. Taxes exist in order to control inflation by reducing the money supply, and to ensure that dollars, as the only currency accepted for tax payments, remain in demand.

It follows that currency-issuing governments could (and, depending on how you lean politically, should) spend as much as they need to in order to guarantee full employment and other social goods. MMT’s adherents like to point out that the federal government never “runs out” of money to fund the military, but routinely invokes budget constraints to justify defunding social programs. Money, in other words, isn’t a scarce commodity like silver or gold. “To people who’ve worked in financial markets, who work at the Fed, this isn’t controversial at all,” says Galbraith, who, while not an adherent, can certainly be described as “MMT-friendly.”

The decisions about how to issue, lend, and spend money come down to politics, values, and convention, whether the goal is reducing inequality or boosting entrepreneurship. Inflation, MMT’s proponents contend, can be controlled through taxation, and only becomes a problem at full employment—and we’re a long way off from that, particularly if we include people who have given up looking for jobs or aren’t working as much as they’d like to among the officially “unemployed.” The point is that, once you shake off notions of artificial scarcity, MMT’s possibilities are endless. The state can guarantee a job to anyone who wants one, lowering unemployment and competing with the private sector for workers, raising standards and wages across the board.

MMT didn’t get much traction outside of academia at first. In fact, it was (and remains) on the fringes of the economics profession itself. “We all had offices in the same alley at the Levy Institute,” Kelton recalls.

Then along came Warren Mosler, a wealthy financier who, as a result of his banking work, had come to some unorthodox and complementary ideas about money. Eager to share his views, Mosler finagled a meeting with Donald Rumsfeld in the steam room of the Chicago Racquet Club. Rumsfeld led him to Arthur Laffer, the right-wing economist who came up with the “Laffer curve” theory promoting low taxes, and Laffer, in turn, connected Mosler with his future collaborator, the economist Mark McNary. In an independently published paper titled “Soft-Currency Economics,” Mosler, drawing on McNary’s research, argued that taxes are what create a demand for federal spending and that deficits don’t cause countries to default on their debt.

Mosler sought comments on his work from academic departments, too. He didn’t have any luck with Ivy League institutions, but the man made it on Wall Street for at least one reason: He won’t take no for an answer. So Mosler sent his paper to the “Post-Keynesian Thought” listserv and found a group of kindred spirits willing to engage.

Stephanie Kelton recalls initially disagreeing with some of Mosler’s theories about taxes; then her colleague L. Randall Wray told her to do her own work and show how he was mistaken. “I wrote it up in the Cambridge Journal of Economics and set out to prove he was wrong,” Kelton recalls, “but I arrived at the same place he did.”

From then on, Mosler became something like the movement’s sugar daddy, funding graduate research, making donations to the Center for Full Employment and Price Stability at the University of Missouri, even opening a research center in Switzerland. He was an unlikely addition to the gang: He lives in St. Croix for the taxes, has a thing for fancy cars, made a nice chunk of money investing, and has run for office in St. Croix and in his home state of Connecticut. Mosler isn’t particularly ideological, but after some hesitation, he describes himself over the phone as “basically progressive.” Still, he insists that he is simply opening the public’s eyes to basic math. “It’s a theory insofar as arithmetic is a theory,” Mosler tells me.

“If you eliminate the tax on people working for a living and [let them] keep more money, the average family would have $625 of payroll pay. Why won’t politicians do that? Because they believe the tax money is used to make Social Security payments. But that’s a mistake.” Even so, Mosler notes, “if anyone would propose that, it’s not a big-spending liberal—it’s something the Tea Party might propose.”

Early in his foray into MMT, Mosler hired Bard economist Pavlina Tcherneva to help him with the research. Tcherneva had her 15 minutes of fame in 2015, when Bernie Sanders held up a graph she’d made showing how few gains in income American workers have seen since the Reagan years. (It went viral online under the Vox headline “The Most Important Chart About the American Economy You’ll See This Year.”) Today, Tcherneva’s research is focused on how MMT can provide jobs.

“There is no reason why society should tolerate unemployment,” she tells me in her office at Bard on an unseasonably warm day in February. “It’s a basic human right. By pegging a dollar amount to one hour of labor by having full employment, money will mean something in socially useful terms, and we can design a system to support and tighten the labor market and let people opt out of shitty jobs. Trump has his finger on the pulse of joblessness,” she adds. “It’s a direct recognition, a precise recognition, of their plight. But we need something concrete to offer.”

In Europe, where a generation of young people 
remain under- or unemployed, more spending, better social welfare, and a guaranteed job are a particularly attractive combination. But eurozone countries share a common currency, so the European Union would have to allow all of its members to borrow more, not less, to stimulate the economies of its more beleaguered states. There is some, if limited, buy-in from governments, though probably nowhere near enough to change the policy. In Greece, for example, Rania Antonopoulos, who runs Bard’s “Gender Equality and the Economy” program, serves as the alternate minister of labor in the Syriza government; she’s proposed pushing the government to be the employer of last resort.

Despite the lack of official interest, austerity has given these MMT economists rock-star status. Kelton recalls a conference a few years back in Rimini, Italy, where her group sold out their initial venue and had to move the event to a basketball stadium. “When we were driving there, the parking lot was packed,” she says. “We asked the driver what was happening, and he said it was for us.” She thought he was kidding—until she saw the MMT signs in the background.

On this side of the Atlantic, the financial crisis, the tepid recovery, and the Occupy movement have paved the way for alternative ways of thinking about the economy, and the events of 2008–12 have made it clear that the US government had the money—it just chose to bail out the banking sector, not spend it on social welfare. This all served to validate many of the points that Kelton and her colleagues have been making for decades.

“We built credibility,” Kelton says, “and that helped us get established as a school of thought. The [New Economic Perspectives] blog helped us get a voice. It also gave us a historical record about being right about things like how the US downgrade wouldn’t make interest rates go up; that quantitative easing wasn’t inflationary; and that the eurozone would run into trouble. We were saying that in 1998!”

Kelton’s work with Sanders further boosted the gang’s legitimacy. She didn’t transform him into a “deficit owl,” but observers note that during his run, Sanders did make moves to refocus the conversation around social goods, speaking of education, health care, and infrastructure deficits instead of obsessing over abstract negatives on a balance sheet. “He didn’t ‘go there,’” Tcherneva says, “but it was a teachable moment. The frame was useful because it concerns concrete things. People don’t lose sleep over government deficits.”

MMT has something else that most obscure economic doctrines don’t have: a band of devoted bloggers and commenters, and a “street team” of young, politically engaged people who learned about these theories online and have taken it upon themselves to spread the gospel wherever they go with an almost religious fervor.

During the recession, the popular economics blog Naked Capitalism began publishing articles about the movement; economists Tyler Cowen and Paul Krugman, though not particularly sympathetic to MMT (in part because of their concerns about inflation), at least responded to them. In 2012, a Columbia Law School student, Rohan Grey, started a group called the Modern Money Network, which has hosted a series of symposiums with big-name speakers like the former Greek finance minister, Yanis Varoufakis. On YouTube, videos of MMT lectures, seminars, and tutorials abound. “I’ve been amazed by the activism,” Tcherneva says. “We’ve always wanted to democratize our ideas, and we now can thanks to the magic of social media.”

It’s hard to imagine radical changes being made to the way politicians talk about money. It could take decades, even centuries, to make a dent in entrenched ideas about debt, scarcity, and supply. Even so, the time seems ripe for MMT: There is, particularly among young people, an enormous appetite for new solutions to the problems that modern economies face, from automation to offshoring. And the financial crisis has shaken the public’s trust in established ways of thinking. Take the universal basic income: A few years ago, it seemed unrealistic and utopian, but today, versions of the UBI have been embraced by Silicon Valley moguls, economists on the left and the right, and politicians around the world.

MMT is less prescriptive: It describes the way that money works in a way that an 8-year-old can grasp more readily than a PhD, which in itself is unnerving. “The contribution of MMT is not the discovery of new facts,” Galbraith says. “It’s a teaching core of things which are factually uncontroversial.” But its implications can be radically humane. What’s threatening to the establishment, Galbraith adds, “is that the narrative is very compelling.”

The Rock-Star Appeal of Modern Monetary Theory

 

US Has Regressed To Developing Nation Status, MIT Economist Warns

american-homeless-2.jpgSkid Row in downtown Los Angeles. Skid Row has LA’s largest concentration of homeless people who regularly camp on the sidewalks in tents and cardboard boxes Getty Images

On April 21, 2017, Chloe Farad writes on Independent:

Peter Temin says 80 per cent of the population is burdened with debt and anxious about job security.

America is regressing to have the economic and political structure of a developing nation, an MIT economist has warned.

Peter Temin says the world’s’ largest economy has roads and bridges that look more like those in Thailand and Venezuela than those in parts of Europe.

In his new book, “The Vanishing Middle Class”, reviewed by the Institute for New Economic Thinking, Mr Temin says the fracture of US society is leading the middle class to disappear.

american-feeding.jpg
Volunteers from the Midnight Mission help feed the homeless and poor during its annual Easter/Passover celebration at Skid Row in Los Angeles, California (GettyImages)

The economist describes a two-track economy with on the one hand 20 per cent of the population that is educated and enjoys good jobs and supportive social networks.

On the other hand, the remaining 80 per cent, he said, are part of the US’ low-wage sector, where the world of possibility has shrunk and people are burdened with debts and anxious about job security.

Mr Temin used a model, which was created by Nobel Prize winner Arthur Lewis and designed to understand developing nations, to describe how far inequalities have progressed in the US.

When applied to the US, Mr Temin said that “the Lewis model actually works”.

american-homeless.jpg
Homeless men try to stay warm in a Manhattan church on an unseasonably cold day in New York City (Getty Images)

He found that much of the low-wage sector had little influence over public policy, the high-income sector was keeping wages down to provide cheap labour, social control was used to prevent subsistence workers from challenging existing policies and social mobility was low.

Mr Temin also claims that this dual-economy has a “racist” undertone.

“The desire to preserve the inferior status of blacks has motivated policies against all members of the low-wage sector.

“We have a structure that predetermines winners and losers. We are not getting the benefits of all the people who could contribute to the growth of the economy, to advances in medicine or science which could improve the quality of life for everyone — including some of the rich people,” he writes.

Commenting on Mr Temin’s findings, Lynn Parramore, senior research analyst at the Institute for New Economic Thinking, writes: “Without a robust middle class, America is not only reverting to developing-country status, it is increasingly ripe for serious social turmoil that has not been seen in generations.”

american-inmates.jpg
Female jail inmates are chained together as they bury cadavers at Maricopa County’s pauper’s graveyard in Phoenix, Arizona (Joe Raedle/Liaison)

Mr Temin says that education is the solution to offer everyone in society better opportunities and calls for investments in public schools and public universities.

He says: “Knowing how to think, how to get on with people, how to cooperate. All the social skills and social capital … [are] going to be critically important for kids in this environment.”

http://www.independent.co.uk/news/world/americas/us-developing-nation-regressing-economy-poverty-donald-trump-mit-economist-peter-temin-a7694726.html

 

 

Some Labor Day Thoughts On Income Inequality

On September 4, 2017, Alexander Green, Chief Investment Strategist, The Oxford Club writes in Investment U:

“Our sense of happiness tends to be based on positional and relative rankings compared to what others have.” – Michael Shermer
Politicians and the media pour fuel on the fire by continually insisting that we live in an era of “grotesque economic inequality.”
Of all our weaknesses, surely none is more menial than envy. It denies us contentment. It wastes our time.

Editor’s Note: Monday is Labor Day, a public holiday that not only marks the unofficial end of summer but also honors the American laborer. We often forget that the labor movement gave us much to be thankful for: child labor laws, the eight-hour workday, workplace safety standards, weekends without work, paid vacation, unemployment insurance, overtime pay, employer healthcare, military leave and wrongful termination laws. That’s why Alex is mystified that the modern labor movement is so focused on the abstract issue of income inequality. Below is a classic essay from his Beyond Wealth series. It’s worth pondering on this important holiday.


Alexander Green

A few years ago, economists Sara Solnick and David Hemenway conducted a survey where they asked participants if they would rather earn $50,000 a year while other people made $25,000, or earn $100,000 a year while other people got $250,000.

Sit down for this one.

The majority of folks selected the first option. They would rather make twice as much as others – even if that meant earning half as much as they could have.

This is completely nuts, of course. Yet other findings in the study confirmed the envious nature of contemporary culture.

People said, for instance, they would rather be average-looking in a community where no one is considered attractive than merely good-looking in the company of stunners.

When it came to education, parents said they would rather have an average child in a crowd of dunces than a smart child in a class full of brilliant students.

What is going on here?

In his book The Mind of the MarketScientific American columnist Michael Shermer argues, “Our sense of happiness tends to be based on positional and relative rankings compared to what others have.”

The problem is this doesn’t make anyone happier.

Yet politicians and the media pour fuel on the fire by continually insisting that we live in an era of “grotesque economic inequality.”

If you are envious that the top 1% earn such a large percentage of total income, perhaps you should get angry… with the face in the mirror.

According to the Global Rich List, you need wages of just $32,400 a year to make it into the top 1% globally. (According to the World Bank, more than 2.8 billion people live on less than $2 a day.)

That means the average U.S. schoolteacher, accountant, registered nurse or police officer is a global one-percenter.

Even the poor today are rich by historical standards. Most Americans living under the poverty line live in larger accommodations than the average European.

Historically, being poor meant having to struggle to get enough calories to survive. But today, we have the opposite problem. Obesity – indeed, morbid obesity – has created a healthcare crisis among the poor.

The average person living below the poverty line in the U.S. today has a phone, a car, a TV, indoor plumbing, and central heat and air. A century and a half ago, the richest robber barons could never have dreamed of such wealth.

Yet we still manage to make ourselves unhappy by comparing our lot to the richest 1%. Or, better still, the richest one-tenth of 1%.

Yes, Bill Gates has a 66,000-square-foot mansion that overlooks Lake Washington. Warren Buffett flies around the country in his Bombardier Challenger 6000. Oracle founder Larry Ellison recently traded his 453-foot, 82-room yacht for ownership of Hawaii’s sixth-largest island.

But so what?

Of all our weaknesses, surely none is more menial than envy. It denies us contentment. It wastes our time. And it is an insult to our own sense of dignity.

Worst of all, it is completely self-imposed.

“Envy is the most stupid of vices,” wrote the novelist Honoré de Balzac, “for there is no single advantage to be gained from it.”

We all know people who are smarter, fitter, richer, funnier, more talented or better-looking. But what of it?

Thinking this way only keeps you from appreciating your own uniqueness and self-worth: things that, not incidentally, do lead to greater happiness – especially when combined with a strong sense of purpose.

Shermer notes that there are four means by which we can bootstrap ourselves away from envy and toward happiness through purposeful action. These include…

  1. Deep love and family commitment

  2. Meaningful work and career

  3. Social and political involvement

  4. Transcendence and spirituality.

Note that psychologists have yet to discover the route to happiness by comparing ourselves to others. (Although it doesn’t hurt to occasionally measure yourself against your own ideals.)

Concentrating on your own fortunes – and improving those of others – is guaranteed to generate more satisfaction than sizing up the Joneses next door.

Besides, if you knew what the other guy was dealing with, you might prefer your own circumstances.

Recall Richard Cory from E.A. Robinson’s famous poem:

“Whenever Richard Cory went down town,

We people on the pavement looked at him:He was a gentleman from sole to crown,Clean favored, and imperially slim. “

And he was always quietly arrayed,

And he was always human when he talked;

But still he fluttered pulses when he said,

“Good-morning,” and he glittered when he walked.

“And he was rich – yes, richer than a king –

And admirably schooled in every grace:In fine, we thought that he was everything

To make us wish that we were in his place.

“So on we worked, and waited for the light,

 And went without the meat, and cursed the bread;

And Richard Cory, one calm summer night, Went home and put a bullet through his head.”

It’s easy to begrudge the other guy his blessings. But does it not make more sense to count your own instead?

Good investing,

Alex

https://mail.google.com/mail/u/0/#inbox/15e4d880af478391

 

‘X’ Marks The Spot Where Inequality Took Root: Dig Here

On August 5, 2017, Stan Sorscher writes on Economic Opportunity Institute:

In 2002, I heard an economist characterizing this figure as containing a valuable economic insight. He wasn’t sure what the insight was. I have my own answer.

The economist talked of the figure as a sort of treasure map, which would lead us to the insight. “X” marks the spot. Dig here.

The graphic below tells three stories.

First, we see two distinct historic periods since World War II. In the first period, workers shared the gains from productivity. In the later period, a generation of workers gained little, even as productivity continued to rise.

Figure 1: The X marks the spot where something happened.

Figure 1: The ‘X’ marks the spot where something happened in the mid-1970’s. (Click to embiggen)

The second message is the very abrupt transition from the post-war historic period to the current one. Something happened in the mid-70’s to de-couple wages from productivity gains.

The third message is that workers’ wages – accounting for inflation and all the lower prices from cheap imported goods – would be double what they are now, if workers still took their share of gains in productivity.

A second version of the figure is equally provocative.

Figure 2

Figure 2: Follow the money (or the lack of it).

This graphic shows the same distinct historic periods, and the same sharp break around 1975. Each colored line represents the growth in family income, relative to 1975, for different income percentiles. Pre-1975, families at all levels of income benefited proportionately. Post-1975, The top 5% did well, and we know the top 1% did very well. Gains from productivity were redistributed upward to the top income percentiles.

This de-coupling of wages from productivity has drawn a trillion dollars out of the labor share of GDP.

Economics does not explain what happened in the mid-70s.

It was not the oil shock. Not interest rates. Not the Fed, or monetary policy. Not robots, or the decline of the Soviet Union, or globalization, or the internet.

The sharp break in the mid-70’s marks a shift in our country’s values. Our moral, social, political and economic values changed in the mid-70’s.

Let’s go back before World War II to the Great Depression. Speculative unregulated policies ruined the economy. Capitalism was discredited. Powerful and wealthy elites feared the legitimate threat of Communism. The public demanded that government solve our problems.

The Depression and World War II defined that generation’s collective identity. Our national heroes were the millions of workers, soldiers, families and communities who sacrificed. We owed a national debt to those who had saved Democracy and restored prosperity. The New Deal policies reflected that national purpose, honoring a social safety net, increasing bargaining power for workers and bringing public interest into balance with corporate power.

In that period, the prevailing social contract said, “We all do better when we all do better.” My prosperity depends on your well-being. In that period of history, you were my co-worker, neighbor or customer. Opportunity and fairness drove the upward spiral (with some glaring exceptions). Work had dignity. Workers earned a share of the wealth they created. We built Detroit (for instance) by hard work and productivity.

Our popular media father-figures were Walter Cronkite, Chet Huntley, David Brinkley, and others, liberal and conservative, who were devoted to an America of opportunity and fair play.

The sudden change in the mid-70’s was not economic. First it was moral, then social, then political, ….. then economic.

In the mid-70’s, we traded in our post-World War II social contract for a new one, where “greed is good.” In the new moral narrative I can succeed at your expense. I will take a bigger piece of a smaller pie. Our new heroes are billionaires, hedge fund managers, and CEO’s.

In this narrative, they deserve more wealth so they can create more jobs, even as they lay off workers, close factories and invest new capital in low-wage countries. Their values and their interests come first in education, retirement security, and certainly in labor law.

We express these same distorted moral, social and political priorities in our trade policies. As bad as these priorities are for our domestic policies, they are worse if they define the way we manage globalization.

The key to the treasure buried in Figure 1 is power relationships. To understand what happened, ask, “Who has the power to take 93% of all new wealth and how did they get that power? The new moral and social values give legitimacy to policies that favor those at the top of our economy.

We give more bargaining power and influence to the wealthy, who already have plenty of both, while reducing bargaining power for workers. In this new narrative, workers and unions destroyed Detroit (for instance) by not lowering our living standards fast enough.

In the new moral view, anyone making “poor choices” is responsible for his or her own ruin. The unfortunate are seen as unworthy moochers and parasites. We disparage teachers, government workers, the long-term unemployed, and immigrants.

In this era, popular media figures are spiteful and divisive.

Our policies have made all workers feel contingent, at risk, and powerless. Millions of part-time workers must please their employer to get hours. Millions more in the gig economy work without benefits and have no job security at all. Recent college graduates carry so much debt that they cannot invest, take risk on a new career, or rock the boat. Millions of undocumented workers are completely powerless in the labor market, and subject to wage theft. They have negative power in the labor market!

We are creating a new American aristocracy, with less opportunity – less social mobility and weaker social cohesion than any other advanced country. We are falling behind in many measures of well-being.

The dysfunctions of our post-1970 moral, social, political and economic system make it incapable of dealing with climate change or inequality, arguably the two greatest challenges of our time. We are failing our children and the next generations.

X marks the spot. In this case, “X” is our choice of national values. We abandoned traditional American values that built a great and prosperous nation. Our power relationships are sour.

We can start rebuilding our social cohesion when we say all work has dignity. Workers earn a share of the wealth we create. We all do better, when we all do better. My prosperity depends on a prosperous community with opportunity and fairness.

Dig there.

‘X’ Marks the Spot Where Inequality Took Root: Dig Here