Sunday, January 26, 2014

Adam Smith, Inequality and Politics

237 years ago, when our nation first declared it's independence, our understanding of economics was much different back then—different than it was in 1930 with Keynesian economics—and then again, when we had Reaganomics during the 1980s. The GOP's Starve the Beast strategy pushed for reduced government spending in a growing population, lowering taxes on the very wealthy and advocated for less government regulation (and less corporate taxes) on huge multi-national corporations.

Ever since "trickle-down economics" took effect, America can no longer afford to built a huge dam, a massive highway system, or put a man of the Moon.

By the time of the economic crash came in 2008, Americans had witnessed first hand the results of those failed conservative policies—and most had suffered because of them. By now, that's almost become common knowledge. Although, conservatives have been pushing back hard, and using think tanks and the media to reverse public awareness on the issue of low wages, inequality and their failed economic policy for America. (After all, if "trickle-down" was so great, how did we get to where we are now?)

Since the Great Recession, companies have been unable to raise prices much, because the economic "recovery" has been fragile; because with high unemployment and stagnate wages, there has been a lack (of what otherwise might have been) a greater potential demand for more products and services. But yet, corporations have still managed to boost profits beyond anything we've ever seen before. From the Economic Populist:

"The amount of cash multinational corporations are stashing is at an all time high and economists are wondering why. A recent Federal Reserve research paper examined some of the reasons. A big one is multinationals pay no taxes on profits if they park them offshore. A stash of cash is building and the miser pile is now a mountain. A large study released early last year showed corporate taxes are at a 60 year low...Federal Reserve economists tell us corporations were sitting on over $5 trillion in cash and short term investments."

Jan Hatzius, the chief U.S. economist at Goldman Sachs notes, "The strength [in profits] is directly related to the weakness in hourly wages...the weakness of wages and the resulting strength of profits are telling signs that the U.S. labor market is still far from full employment." He wass most likely only admitting to this to keep quantitative easing (cheap money) flowing from the Fed into the coffers of the big banks (as if this was going to in any way force employers to raise wages).

Compare and contrast the two charts below for profits (since 1950) and wages (from 1965) to the present. In the first chart, note the huge spike in profits after Permanent Normal Trade Relations with China (which the EPI warned about) and the Bush tax cuts after 2000—when the labor force participation rate and the employment-to-population ratio had peaked (and have both been in a steady decline ever since.)

corporate profits

And then note in the other chart below, how wages fell after 1979 (when both unionization and manufacturing had peaked)—and continued to decline ever since—after 35 years of Reaganomics, Starve the Beast and "trickle-up" economics (And yes, we can also blame automation, robots and technology— while transitioning from an industrial economy to a service economy.)

Remember how during WWII our factories were converted to building military hardware, then converted back to civilian production after the war? Because so many U.S. manufacturing jobs were offshored overseas over these last 35 years, the U.S. no longer has the manufacturing infrastructure or capacity needed to build our own big projects. A recent example of this is a massive Cape Cod wind farm, that's going to be made in Europe.

The U.S. has lost 64,087 manufacturing establishments between 2001 and 2012 with continued offshoring—as wages and unionization has declined (with an ever bigger part of corporate profits going to the very top of the income ladder).


So today in 2014, corporate profits are their highest ever, while wage growth is near its lowest in half a century. But don’t expect the transfer of that cash from businesses to workers to start any time soon, says Hatzius: "The bottom line is that the favorable environment for corporate profits should persist for some time yet, and the case for an acceleration in the near term is strong."

Adam Smith, sometimes cited as the "father of modern economics", in his magnum opus "Wealth of Nations" (first published in 1776) he describes how the wages of labor are dictated primarily by the competition among laborers and employers (which he refers to as the "masters"). When laborers bid against one another for limited opportunities for employment (such as in the current over-saturated job market with high unemployment), the wages of labor collectively fall—whereas when employers compete against one another for limited supplies of labor, the wages of labor collectively rise. When laborers combine (such as with unionization, which today, is historically low) and no longer bid against one another, their wages rise; whereas when employers combine (such as business trade groups do, and by using lobbyists), wages fall.

In Adam Smith's day, organized labor was dealt with very harshly by the law. From Book One in his Wealth of Nations:

"We rarely hear, it has been said, of the combinations of masters, though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and uniform, combination, not to raise the wages of labour above their actual rate. Masters, too, sometimes enter into particular combinations to sink the wages of labour even below this rate."

Today we call this union busting, corporate lobbying to weaken labor laws (like minimum wage laws), and campaign contributions to promote "right to work" states.

Among many, one of these corporate lobbying groups is The United States Chamber of Commerce, which was misleadingly named to sound like an official government office. This business group strictly promotes the interests of (mostly) big businesses. Politically and ideologically, it is a conservative organization and usually supports Republican political candidates. The U.S. Chamber of Commerce is one of the largest lobbying groups in the U.S., spending more money than any other lobbying organization on a yearly basis.

The U.S. Chamber of Commerce is also pushing for the new TPP trade agreement (described as NAFTA on steroids). A study from the Center for Economic and Policy Research (CEPR) shows that the vast majority of U.S. workers would see wage losses as a result of the pending "free" trade agreement that Obama wants to fast-track.

Not only would the Trans-Pacific Partnership (TPP) trade agreement create more job losses and further decimate American wages, it would also further widen the gap in income inequality. Although, to their credit, there are some sensible Republicans in Congress and conservatives (e.g. Paul Craig Roberts, Pat Buchanan) who are against these devastating trades deals, and favor raising the minimum wage as well. (And lest we forget, it was Bill Clinton who signed on to NAFTA.)

A new national survey by the Pew Research Center and USA TODAY finds that 73% of the public favors raising the federal minimum wage to $10.10 an hour—and a Quinnipiac University poll also found 71% supported raising the minimum wage (including a slight majority of Republicans).

But the USA TODAY survey also highlights a fundamental difference in how Republicans and Democrats see economic inequality and poverty: Republicans actually believe that rich people are rich because they worked harder—and poor people are poor because they didn't work hard enough (But yet, they can't explain why so many hard-working Americans are still poor. Trickle-up economic perhaps?)

Conservative groups and conservative media (wanting to appear as though they are representing middle-class Americans) claim that 96% of the U.S. Chamber of Commerce's members are small businesses. But what they also deliberately fail to mention is that only 11% of all small American businesses actually belongs to the U.S. Chamber of Commerce. This is why over 6,200 businesses, many of them small (and 53 local chambers of commerce) have signed on to the "U.S. Chamber Doesn’t Speak for Me" campaign.

In a recent article, economist Paul Krugman writes:

"Jobs and inequality are closely linked, if not identical issues. There’s a pretty good, although not ironclad, case that soaring inequality helped set the stage for our economic crisis, and that the highly unequal distribution of income since the crisis has perpetuated the slump, especially by making it hard for families in debt to work their way out. Moreover, there’s an even stronger case to be made that high unemployment — by destroying workers’ bargaining power — has become a major source of rising inequality and stagnating incomes even for those lucky enough to have jobs."

The conservative/libertarian Cato Institute (founded by the Koch brothers) wrote of Krugman's piece:

"Krugman and company have a point. For the quarter century or so after World War II, incomes were much more compressed than they are today. Since then, American society has experienced major changes in both political economy and cultural values. And both economic logic and empirical evidence provide reasons for concluding that those changes have helped to restrain low-end income growth while accelerating growth at the top of the income scale."

But then the author at Cato goes on to write:

"Krugman and his colleagues offer a highly selective and misleading account of the relevant changes...The political economy of the early postwar decades, while it generated impressive results under the peculiar conditions of the time, is totally unsuited to serve as a model for 21st-century policymakers." (But he doesn't say why.)

In 1776 Adam Smith also addressed inequality—and the economist Robert Reich accredited him with the notion of a "progressive tax". In Adam Smith's 1776 Wealth of Nations (in Book Five):

"The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion."

In other words, as of now in 2014, America needs a minimum wage that pays (at the very least) a "living wage"; a greater share of taxation on the ultra-wealthy to help pay for the needs of the common good (rather than hoarding untaxed wealth in offshore banks), and a lot less of Milton Friedman's "trickle-up" economics. A vast majority of Americans have already been deprived of their right to pursue happiness, and instead, many have been forced into a lifetime of poverty and drudgery.

That was Occupy Wall Street's message to the top 0.01% — "Don't tread on me!" — They were demanding the economic "freedom" to survive.

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