Reports from the Economic Front

The following is an Economic Policy Institute [EPI] “snapshot” written by Algernon Austin:

Many of the 8.1 million jobs lost during the current recession, have been good jobs. EPI defines a good job as one that pays at least 60% of the median household income and also provides health care and retirement benefits. By that measure, American men are losing ground. The figure shows that the share of male workers employed in good jobs dropped from 46.5% in 1979 to 31.3% in 2008. Of the major racial and ethnic groups, Hispanic men experienced the largest percentage-point decline although in 1979, they already had the lowest rate of employment in good jobs. In 1979, 30.8% of Hispanic men were employed in a good job. By 2008, only 15.3% were in good jobs.

As policymakers consider ways to create more jobs to reverse the longstanding rise in unemployment, which stands at 10.2% nationwide, they should also focus on creating the kinds of jobs that pay more than poverty level wages. The federal minimum wage is currently $7.25 per hour and pays $15,080 annually, based on a 2,080-hour work year. That wage is below the poverty level for a family of four. By contrast, the 2008 “good job” wage was $14.51 per hour, or $30,180 a year – twice as much.  Without a national agenda to create good jobs, more fulltime workers will struggle to pay for basic necessities.

A recent article by economist Rick Wolff highlights one of the many serious challenges facing the country–the growing fiscal crises that are hitting our states and municipalities.  He presents the following table from the work of the Center on Budget and Policy Priorities, which shows the gap between the fifty states’ tax revenues and expenditures during the last (2001) and current (2007-?) recessionary periods.

As the chart makes clear, while a recession generates a budgetary shortfall, the shortfall extends for years after the recession is over.   In particular, the expected shortfall over the next two years will be very large–some $360 billion.   This shortfall will have to be closed through some combination of revenue increases or expenditure cuts.

The CBPP has studied state responses to current budget shortfalls and reports the following:

• 27 states have reduced health benefits for low-income children and families

• 25 states are cutting aid to K-12 schools and other educational programs

• 34 states have cut assistance to state colleges and universities

• 26 states have instituted hiring freezes

• 13 states have announced layoffs

• 22 states have reduced state workers’ wages

With fiscal problems set to grow we need bold action.   If we do nothing budget cuts will only further weaken our economy (by reducing demand)  and worsen living and working conditions for the great majority of citizens.

Oregon is no exception.  In fact, according to a story in the Oregonian, a Pew Center on the States report “names Oregon as one of 10 states at greatest peril of following California over a state budget cliff.  Even though the national economy has started to rebound, Oregon is likely to have a harder time coming up with enough money to pay for schools and other public services — or finding enough places it can cut back its spending — than it did when patching together a balanced budget for 2009-10 said Susan Urahn, managing director of the Pew Center.”

One part of any rational response to this situation has to be increasing revenue by raising taxes on the wealthy and our large corporations.  Oregon is trying to do just that with Measures 66 and 67.  These measures–passed by the legislature but put on the January ballot by opponents–deserve our support.

Obviously significant national action is also needed to address what is a major structural problem.  One obvious response: cut military spending (which continues to grow) and channel some of the savings to state and local governments.

More generally, we need a government-directed, integrated industrial and employment program.  For example, our government owns large holdings in major auto and finance enterprises.  Rather than remain passive owners, we should take control over the firms we own and redirect their activity.  We should start producing mass transit vehicles and require that the banks direct needed funds at reasonable rates to support that production.  And we should direct federal transportation spending to state and local governments so that the new vehicles can be purchased.

We should do the same for the production of needed technology and equipment to develop and expand alternative energy sources like wind and solar power.

At present, federal stimulus money is being used to encourage private firms to retrofit buildings to improve energy efficiency.  Instead, we should encourage the establishment of local publicly owned enterprises to carry out this work, with the profit earned from the work redirected back to local government budgets to support desired social programs.  And all publicly organized production should guarantee living wages and encourage democratic unionization.

Much more could be done—including the cancellation of so called free trade agreements which encourage capital flight and the pitting of workers in one country against another.

The point is that we need a dramatic rethinking and reorganization of how our economy works.  There are plenty of good ideas available—at issue is the political organization and will.

We are in quite the fix.  According to some experts the 3.5% growth in GDP last quarter (July-September) is proof that all is now well.  Unfortunately most of that growth was driven by very temporary government spending.

For example, key to last quarter’s growth was a 22.4% increase in car sales, a consequence of the government’s temporary Cash for Clunkers program.  This increase in car sales accounted for 42.0% of the entire quarter’s growth!

Consumption as a whole (which includes auto sales) grew at a 3.4 percent annual rate.  Take out the auto sector and consumption grew at only a 1.0 percent annual rate.  For more details see here.

Since the Cash for Clunkers program is now over, and disposable income continues to fall (because of continued job losses and declining wages and hours), next quarter is bound to show quite limited growth at best.

The sad reality is that the government’s response to this crisis has been far from adequate.  Most of its direct stimulus spending, hundreds of billions of dollars,  has been designed to be short-term in nature.  It has spent far more, trillions of dollars in fact, to save the financial system.  But again it has made no attempt to ensure that the money would be used to promote a fundamental restructuring of our economy.

It might be comforting to know that Lloyd Blankfein, Goldman Sach’s chairman and chief executive, believes that he is doing “God’s work,” but the fact is that the financial system we saved with our tax dollars continues to refuse to make loans.

Look at the following two tables taken from a blog post on Mish’s Global Economic Trend Analysis.  The first table shows that “Total bank credit is in uncharted territory at -5%. The series has never gone below 0 before.”

So what are banks doing with the money?  The second table shows that that the money is piling up as excess reserves.

Why aren’t banks lending?  Mish’s blog post provides the following four answers:

1) There are no credit-worthy businesses that want to borrow.

2) Consumers are tapped out and do not want to borrow.

3) Banks are scared to death of pending commercial real estate losses, credit card losses, residential real estate losses, home equity lines of credit losses, and losses in general.

4) Asset prices are simply too high (and banks know it) and the securitization market has dried up

While all of the above are probably true, the post concludes that “Number three above is the most critical one.”

The “bottom line” here is that our economy remains weak and far from any serious recovery.  And it will remain that way unless we get far more aggressive government action to ensure a meaningful increase in jobs that pay a living wage and produce needed goods and services.

The chart below comes from “The full extent of executive pay” by Daniel Christopher Jones, Business Management US, September 15, 2009.  It shows how many years it would take a minimum wage worker, an average worker, or the president of the United States to make the same amount that top CEOs make in a year.  [Click on the article link for a bigger and clearer view of the chart.]

All the talk about the need to restructure our economy and end our dependence on debt financed growth has tended to overlook a critical issue—declining worker earnings.  The downward pressure on wages helped to boost profits but only because worker consumption could be sustained by ever greater debt.  If we are going to change the way our economy functions we need to address the forces that have been driving down wages.

The blog Angry Bear recently had an interesting post dealing with this issue.  Among other things it offered data illustrating the fact that labor’s share of income has been declining for decades.  In other words, we are dealing with a long term structural problem.  And unless you hear policy makers address this reality you can be pretty sure that what they propose to do will not be of much help to the great majority of working people.

Here is the relevant part of the post:

This shift to an environment of stronger productivity and weaker real growth generated an interesting development that has received little attention among economists or in the business press.

This development was a secular decline in labor’s share of the pie. [See chart below.] Prior to the 1982 recession there was a strong cyclical pattern of labor’s but it was around a long term or secular flat trend. But since the early 1980s labor’s share of the pie has fallen sharply by about ten percentage points. Note that the chart is of labor compensation divided by nominal output indexed to 1992 = 100. That is because the data for each series is reported as an index number at 1992=100 rather than in dollar terms. So the scale is set to 1992 =100 rather than in percentage points. But it still shows that labor payments as a share of nonfarm business total ouput has declined sharply over the last 20 years and prior to the latest cycle we did not even see the normal late cycle uptick in labor’s share.

If this chart gets a lot of attention it will be interesting to see how the libertarian and/or conservative analysts who keep coming up with all types of excuses to explain away the weakness in real labor compensation in recent years explain this away. If you really want to raise a stink you could look at this as a great example of the Marxist immiseration of labor that Marx believed was one of the internal contradictions of capitalism that would eventually lead to its self destruction.

[click on chart for easier viewing]

Oregon faces a severe fiscal crisis.  In short, the state is just not taking in enough money to fund all the services needed by people.  In response the 2009 Legislature passed two measures (66 and 67) that will raise $733 million in new revenue in the 2009-11 biennium.  While not a solution to the crisis, this extra money will help reduce cuts in spending on education, health and public safety.  These measures also help produce a more equitable tax structure.

In brief, Measure 66 raises taxes on high income Oregonians—couples earning over $250,000 a year and individuals earning over $125,000 a year.  Measure 67 raises taxes on profitable corporations. (More details on both measures here).

Perhaps not surprisingly, there are those that oppose any tax changes, even ones as important, needed, and justifiable as these.  They succeeded in putting these measures on the January ballot, hoping to get voters to reject them.

One of their arguments is that the tax increases are unfair.  But really what is unfair is the unbalanced nature of our existing tax system (see table below).  For example, as the Oregon Center for Public Policy explains:

Today, low-income Oregonians pay a larger share of their income in state and local taxes than wealthy Oregonians. In fact, the highest-income Oregonians pay the lowest share of their income in state and local taxes. . . . After accounting for the deduction of state income taxes on federal tax returns, the lowest-income Oregonians currently pay 8.7 percent of their income in taxes, the highest share among all income groups. Middle-income Oregonians pay 7.9 percent. The wealthiest 1 percent — households with income in excess of $410,000 and averaging over $1 million — pay only 6.1 percent of their income toward state and local taxes.

The passage of Measure 66 will help move things in a more equitable direction:

The lowest-income Oregonians will still pay the same 8.7 percent of their income in state and local taxes, but the share will increase for those at the highest levels of the income scale. For the wealthiest 1 percent, for example, state and local taxes will increase from 6.1 to 6.6 percent of their income. For the next highest 4 percent of taxpayers, taxes will increase from 7.0 to 7.1 percent of income. These slight changes for those at the top 5 percent of the income scale constitute a small but important step toward making our tax system better based on ability to pay.

Other opponents are calling these measures “job-killer tax increases,” especially Measure 67.  The recently established Oregonians Against Job-Killing Taxes (OAJKT) argues that “Oregon government doesn’t even need the new taxes. They already have the money sitting in bank accounts.”  Their website says that if the measures are defeated “no services have to suffer.”

In a recent Oregonian column, Steve Duin examines those behind the OAJKT effort to overturn Measures 66 and 67.  He concludes as follows:

As Chuck Sheketoff at the Oregon Center for Public Policy noted, these riffs are necessary because only 3 percent of Oregonians will pay higher taxes if Measures 66 and 67 pass. . . .

Tis the season. I’ll end with this. The OAJKT website insists that “the most damaging” tax increase for business would require that a C-corporation with $25 million-$50 million in Oregon sales will now pay a gross sales tax of $30,000.

That’s all? Less than one-tenth of 1 percent? For many companies that, for years, have paid the $10 minimum? Who in the world considers that unreasonable?

A number of economists teaching and working in Oregon have recently published a statement in defense of Measures 66 and 67.   You can read it here.

A new product is about to hit the market—well not really.  Called B’eau Pal water, it is designed to remind us of the Bhopal disaster.  As the Yes Men, promoters of the new product, explain:

The launch of “B’eau-Pal” water came as Bhopal prepares to mark the 25th anniversary of the Bhopal catastrophe, and coincides with the release of an official report by the Sambhavna Trust showing that local groundwater, vegetables, and breast milk are contaminated by toxic quantities of nickel, chromium, mercury, lead, and volatile organic compounds. The report describes how a majority of children in one nearby community are born with serious medical problems traceable to the contamination.

Beyond the tragic humor, the Yes Men’s activities teach an important lesson about capitalism.  As explained by Foreign Policy in Focus:

The bottle looks beautiful. It sports an old-fashioned spring-top stopper. The red, diamond-shaped label features an elegant font. From a distance, the silhouetted landscape on the label looks exotic. It is, like all fine gourmet water, “bottled at source.” Even the French name of the water suggests elegance: B’eau Pal.

But wait: B’eau Pal? That sounds rather familiar. You look at the label more carefully. The top of the label reads: “25 years of pollution.” The picture on the label isn’t an exotic location after all. It’s…the Union Carbide plant in Bhopal, India that poisoned a half a million people and killed thousands back in 1984 when it accidentally released tons of methyl isocyanate.

B’eau Pal is the work of the Yes Men, the dynamic duo of disinformation. Five years ago, one of the pair, Andy Bichlbaum, appeared on BBC as a spokesman for Dow Chemical, which now owns Union Carbide, to announce that his company would provide $12 billion in medical care for the 120,000 victims of the Bhopal calamity and fully clean up the site. Dow lost $2 billion in market value in 20 minutes. That’s how long it took before the hoax was exposed.

“We demonstrated what would happen if Dow did do the right thing in Bhopal,” Bichlbaum told Foreign Policy In Focus (FPIF) senior analyst Mark Engler in Pranksters Fixing the World. “What happened? The stock market punished Dow. And if it had really happened, the stock market would have kept punishing Dow. The guy who made the decision would have lost his job. Or he would have been sued by the shareholders, which happens.”

The Yes Men’s point: The heads of major corporations won’t suddenly do the right thing even if someone - somehow, somewhere, some day - manages to reveal to them the errors of their ways. Now five years later, Dow blathers on about the importance of clean water even as it does nothing for the residents of Bhopal, who are suffering from a drought. To catch the attention of all those who have forgotten about Bhopal - virtually everyone except the people of Bhopal and a handful of dedicated activists - the Yes Men created B’eau Pal, a critique wrapped in a jest and shrouded in faux-corporate hype.

The 2007–2009 recession has been an employment disaster.  In the twenty months from December 2007 (the start of the recession) to August 2009, we have lost more than 7.0 million private-sector jobs.

What makes this even more serious (suggesting deep structural problems) is that this recession follows an economic expansion (November 2001–December 2007) that was one of the weakest in terms of private sector job creation; annual average private sector employment grew by approximately 1 million jobs a year.  By comparison, annual average private sector employment grew by 2.4 million jobs a year during the 1982-1990 expansion and by 2.2 million a year during the 1991-2001 expansion.

As a consequence we are set to experience what economists are calling a lost employment decade.  “As of August 2009, the nation had 1.3 million (1,256,000) fewer private sector jobs than in December 1999. This is the first time since the Great Depression of the 1930s that America will have an absolute loss of jobs over the course of a decade.”

While the media and the government talk about economic recovery because the stock market and profits are up—the employment crisis continues and can be expected to continue for years.  And of course these statistics do not take into account the worsening of employment conditions (including the growing number of part-time and temporary positions, intensity of work, and employment insecurity).  Real recovery is going to require real structural change and so far that remains off the mainstream political agenda.

At one time economists argued that our shift to a service oriented economy would encourage employment stability.  The argument was that since firms could not build up a big inventory of services (like they could with parts and components), private sector service employment could be expected to be relatively recession proof. Well that seems to be changing.

The table below shows “the total private-sector employment loss in each of the last four recessions, the decline in jobs in the goods-producing and in the private service-providing sectors, and the share of each in the total loss.”  In contrast to past recessions, service sector employment has taken a big hit this recession; in fact this sector accounts for more than fifty percent of total private sector job losses.

Is it safe anywhere?

[Click on table for easier view]

It may seem puzzling—the stock market and profits are recovering while living and working conditions for the majority continue to decline.  Well, it is not so puzzling. In fact, worker losses are an important reason (along with government bailouts) for capitalist gains.  Yes, it is that kind of world.

Here is what a Business Week article had to say:

The signs [for corporate earnings] look good, and last month’s employment data are part of the reason. Through the third quarter, businesses continued to slash labor costs at rates not usually seen even in past severe recessions. In fact, for the past six quarters, companies have cut employees’ overall hours worked by far more than they have pared output. The result: a striking 2.8% annual rate of growth in productivity, a rare pace during a recession. Productivity gains averaged only 0.8% annually during the previous nine downturns. . . .

The September payroll numbers showed that overall hours worked in the third quarter fell at a 3% annual rate from the second quarter. If economists are correct in expecting about 3% growth in real gross domestic product for the quarter, then productivity may well post its second consecutive quarterly advance of about 6%. That would mean unit labor costs, or pay adjusted for productivity, are set to plunge for the third quarter in a row. In fact, unit labor costs, which are a key factor in determining profit margins, appear to have posted the largest three-quarter decline since quarterly data began in 1947 [see chart below].

Said differently, businesses have been able to boost profits in the face of poor demand conditions by slashing labor costs.  The profit rise was weak in the first and second quarters of this year because sales actually fell in both quarters.

The third quarter (July-September) was different.  Overall demand rose (thanks in large part to the stimulus) while labor costs continued to fall (which means fewer people worked harder for less).  The result: significant gains for business and a stock market rally.

However, as Business Week also noted: “Of course, these are not long-run productivity gains: Businesses cannot slash and burn their way to prosperity.”

One wonders if they have a different long term plan?  And if not, whether workers do?