Why the Rich Love High Unemployment

Tuesday 24 May 2011

by: Mark Provost, Truthout
http://www.truthout.org/why-rich-love-high-unemployment/1305061465
Mark Provost

Mark Provost is a freelance writer from Manchester, New Hampshire. He

can be reached at [email protected].

In the last installment of this three-part series, Mark Provost again

examines the myths perpetuated by the ruling class to frame massive
transfers of wealth to the rich as well-intentioned economic "recovery"
policies. Parts 1 and 2 appeared on Truthout in December 2010 and
January 2011. - TO
Christina Romer, former member of President Obama's Council of
Economic Advisors, accuses the administration of "shamefully ignoring"
the unemployed. Paul Krugman echoes her concerns, observing that
Washington has lost interest in "the forgotten millions." America's
unemployed have been ignored and forgotten, but they are far from
superfluous. Over the last two years, out-of-work Americans have played
a critical role in helping the richest one percent recover trillions in
financial wealth.
Obama's advisers often congratulate themselves for avoiding another
Great Depression - an assertion not amenable to serious analysis or
debate. A better way to evaluate their claims is to compare the US
economy to other rich countries over the last few years.
On the basis of sustaining economic growth, the United States is doing
better than nearly all advanced economies. From the first quarter of 2008
to the end of 2010, US gross domestic product (GDP) growth
outperformed every G-7 country except Canada.
But when it comes to jobs, US policymakers fall short of their rosy self-
evaluations. Despite the second-highest economic growth, Paul Wiseman
of the Associated Press (AP) reports: "the U.S. job market remains the
group's weakest. U.S. employment bottomed and started growing again a
year ago, but there are still 5.4 percent fewer American jobs than in
December 2007. That's a much sharper drop than in any other G-7
country." According to an important study by Andrew Sum and Joseph
McLaughlin, the US boasted one of the lowest unemployment rates in the
rich world before the housing crash - now, it's the highest.[1]
The gap between economic growth and job creation reflects three
separate but mutually reinforcing factors: US corporate governance,
Obama's economic policies and the deregulation of US labor markets.
Old economic models assume that companies merely react to external
changes in demand - lacking independent agency or power. While
executives must adapt to falling demand, they retain a fair amount of
discretion in how they will respond and who will bear the brunt of the
pain. Corporate culture and organization vary from country to country.
In the boardrooms of corporate America, profits aren't everything - they
are the only thing. A JPMorgan research report concludes that the current
corporate profit recovery is more dependent on falling unit-labor costs
than during any previous expansion. At some level, corporate executives
are aware that they are lowering workers' living standards, but their
decisions are neither coordinated nor intentionally harmful. Call it the
"paradox of profitability." Executives are acting in their own and their
shareholders' best interest: maximizing profit margins in the face of weak
demand by extensive layoffs and pay cuts. But what has been good for
every company's income statement has been a disaster for working
families and their communities.
Obama's lopsided recovery also reflects lopsided government
intervention. Apart from all the talk about jobs, the Obama administration
never supported a concrete employment plan. The stimulus provided
relief, but it was too small and did not focus on job creation.
The administration's problem is not a question of economics, but a matter
of values and priorities. In the first Great Depression, President Roosevelt
created an alphabet soup of institutions - the Works Progress
Administration (WPA), the Tennessee Valley Authority (TVA) and the
Civilian Conservation Corps (CCC) - to directly relieve the unemployment
problem, a crisis the private sector was unable and unwilling to solve. In
the current crisis, banks were handed bottomless bowls of alphabet soup
- the Troubled Asset Relief Program (TARP), the Public-Private Investment
Program (PPIP) and the Term Asset-Backed Securities Loan Facility (TALF)
- while politicians dithered over extending inadequate unemployment
benefits.
The unemployment crisis has its origins in the housing crash, but the
prior deregulation of the labor market made the fallout more severe. Like
other changes to economic policy in recent decades, the deregulation of
the labor market tilts the balance of power in favor of business and
against workers. Unlike financial system reform, the deregulation of the
labor market is not on President Obama's agenda and has escaped much
commentary.
Labor-market deregulation boils down to three things: weak unions, weak
worker protection laws and weak overall employment. In addition to
protecting wages and benefits, unions also protect jobs. Union contracts
prevent management from indiscriminately firing workers and shifting the
burden onto remaining employees. After decades of imposed decline, the
United States currently has the fourth-lowest private sector union
membership in the Organization for Economic Cooperation and
Development (OECD).
America's low rate of union membership partly explains why
unemployment rose so fast and, - thanks to hectic productivity growth -
hiring has been so slow.
Proponents of labor-market flexibility argue that it's easier for the private
sector to create jobs when the transactional costs associated with hiring
and firing are reduced. Perhaps fortunately, legal protections for American
workers cannot get any lower: US labor laws make it the easiest place in
the word to fire or replace employees, according to the OECD.
Another consequence of labor-market flexibility has been the shift from
full-time jobs to temporary positions. In 2010, 26 percent of all news jobs
were temporary - compared with less than 11 percent in the early 1990's
recovery and just 7.1 percent in the early 2000's.
The American model of high productivity and low pay has friends in high
places. Former Obama adviser and General Motors (GM) car czar Steven
Rattner argues that America's unemployment crisis is a sign of strength:
Perversely, the nagging high jobless rate reflects two of the most
promising attributes of the American economy: its flexibility and its
productivity. Eliminating jobs - with all the wrenching human costs -
raises productivity and, thereby, competitiveness.
Unusually, US productivity grew right through the recession; normally,
companies can't reduce costs fast enough to keep productivity from
falling.
That kind of efficiency is perhaps our most precious economic asset.
However tempting it may be, we need to resist tinkering with the labor
market. Policy proposals aimed too directly at raising employment may
well collaterally end up dragging on productivity.
Rattner comes dangerously close to articulating a full-unemployment
policy. He suggests unemployed workers don't merit the same massive
government intervention that served GM and the banks so well. When
Wall Street was on the ropes, both administrations sensibly argued,
"doing nothing is not an option." For the long-term unemployed, doing
nothing appears to be Washington's preferred policy.
The unemployment crisis has been a godsend for America's superrich,
who own the vast majority of financial assets - stocks, bonds, currency
and commodities.
Persistent unemployment and weak unions have changed the American
workforce into a buyers' market - job seekers and workers are now "price
takers" rather than "price makers." Obama's recovery shares with
Reagan's early years the distinction of being the only two post-war
expansions where wage concessions have been the rule rather than the
exception. The year 2009 marked the slowest wage growth on record,
followed by the second slowest in 2010.[2]
America's labor market depression propels asset price appreciation. In
the last two years, US corporate profits and share prices rose at the
fastest pace in history - and the fastest in the G-7. Considering the
source of profits, the soaring stock market appears less a beacon of
prosperity than a reliable proxy for America's new misery index. Mark
Whitehouse of The Wall Street Journal describes Obama's hamster wheel
recovery:
From mid-2009 through the end of 2010, output per hour at U.S.
nonfarm businesses rose 5.2% as companies found ways to squeeze
more from their existing workers. But the lion's share of that gain went to
shareholders in the form of record profits, rather than to workers in the
form of raises. Hourly wages, adjusted for inflation, rose only 0.3%,
according to the Labor Department. In other words, companies shared
only 6% of productivity gains with their workers. That compares to 58%
since records began in 1947.
Workers' wages and salaries represent roughly two-thirds of production
costs and drive inflation. High inflation is a bondholders' worst enemy
because bonds are fixed-income securities. For example, if a bond yields
a fixed five percent and inflation is running at four percent, the bond's
real return is reduced to one percent. High unemployment constrains
labor costs and, thus, also functions as an anchor on inflation and
inflation expectations - protecting bondholders' real return and principal.
Thanks to the absence of real wage growth and inflation over the last two
years, bond funds have attracted record inflows and investors have
profited immensely.
The Federal Reserve has played the leading role in sustaining the
recovery, but monetary policies work indirectly and disproportionately
favor the wealthy. Low interest rates have helped banks recapitalize,
allowed businesses and households to refinance debt and provided Wall
Street with a tsunami of liquidity - but its impact on employment and
wage growth has been negligible.
CNBC's Jim Cramer provides insight into the counterintuitive link between
a rotten economy and soaring asset prices: "We are and have been in the
longest 'bad news is good news' moment that I have ever come across in
my 31 years of trading. That means the bad news keeps producing the
low interest rates that make stocks, particularly stocks with decent
dividend protection, more attractive than their fixed income alternatives."
In other words, the longer Ben Bernanke's policies fail to lower
unemployment, the longer Wall Street enjoys a free ride.
Out-of-work Americans deserve more than unemployment checks - they
deserve dividends. The rich would never have recovered without them.
1. "The Massive Shedding of Jobs in America." Andrew Sum and Joseph
McLaughlin. Challenge, 2010, vol. 53, issue 6, pages 62-76.
2. David Wessel, Wall Street Journal, January 30, 2010. "Wage and
Benefit Growth Hits Historic Low"; Chris Farrell, Bloomberg Businessweek,
February 5, 2010. " US Wage Growth: The Downward Spiral."

The Greatest Recovery, Part I

Tuesday 14 December 2010
by: Mark Provost Dollars & Sense | Op-Ed
http://archive.truthout.org/the-greatest-recovery-part-i66040
According to a recent CNN poll, three out of four Americans believe the
recession is not over. Unemployment has not been this high for this long
in most Americans’ lifetime. By every measure, the U.S. economy is
failing to recover from the Great Recession.
Every measure except one.
In the last 18-20 months, corporate profits climbed at the fastest pace on
record. Non-financial companies are reporting the highest free cash flow
(profits after dividends and capital expenditures) in a half-century. Profit
margins at S&P 500 companies are now above 9%, approaching
uncharted territory. Joseph Lavorgna, chief U.S. economist of Deutsche
Bank, stresses, “Not only are we seeing a tremendous V-shaped recovery
in corporate profits, but we are in fact seeing the biggest corporate profit
recovery ever.”
The Obama recovery is turning the traditional formula on its head;
corporate profits have not been a leading indicator of economic recovery,
but a lagging indicator of Main St. impoverishment. The Greatest
Recovery in corporate profits and the Great Recession are two sides of the
same coin.
Worker-advocacy group Change to Win released the results of a recent
survey which found that wage stagnation ranks as the most common
impact of the Great Recession. Workers will believe in the recovery
narrative when they see a raise in their paychecks. For now, productivity
gains are going straight to their employers’ bottom line. Andrew Sum,
professor of economics at Northeastern University, concludes that the
current expansion “has seen the most lopsided gains in corporate profits
relative to real wages in our history.”
The Greatest Recovery marks corporate executives’ latest triumph in their
decades-long campaign against labor. Since the Reagan expansion, U.S.
corporate profits exhibited a permanent tendency to soar at the expense
of wages. The top one percent of income earners accrued nearly two-
thirds of all economic growth. Profit margins expanded in an
unprecedented super-cycle while workers struggled through increasingly
lopsided, jobless recoveries. The last three expansions presaged the
Greatest Recovery and defined its precise shape.
The unequal distribution of income between profits and wages is
ultimately reflective of an unequal distribution of power between business
and labor—at the workplace and in Washington.
President Obama signaled his commitment to continuity early on. Despite
underestimating the rise of unemployment in late 2008 and early 2009,
Obama’s advisors rejected the public employment option swifter than its
counterpart in healthcare reform. President Obama initially defended the
stimulus on the specific grounds that the private sector would create 95%
of the jobs.
Some critics of the plan correctly argued that, given the decline in
demand, the stimulus should have been larger. Size was not the only
problem. Larry Summers, Obama’s former chair of economic advisors,
designed the stimulus to maximize GDP rather than employment—job
creation, private sector included, was at best an incidental goal.
Twenty-six million Americans are presently unemployed or
underemployed. According to Economic Policy Institute’s Heidi Schierholz,
“If the rate of job growth were to continue at October’s rate, the economy
would achieve prerecession unemployment rates (5% in 2007) in roughly
20 years.”
The Obama administration’s laissez-faire attitude towards the reeling
labor market contrasts sharply with the direct assistance it provided to
the financial industry. The two-dozen Treasury and Federal Reserve
policies implemented during the financial crisis shared one overriding
goal: prevent prices from falling in the real estate, bond, and equity
markets. Yet, the Obama administration ignored the Employee Free
Choice Act even as the price of labor (wages and salaries) suffered the
sharpest decline in 50 years. The administration’s economic policy regime
compels workers to the free market while protecting banks from its
ruinous fallout.
President Obama’s refusal to resolve the unemployment crisis provides
the corporate sector with a crucial, often overlooked, subsidy. High
unemployment permits management to extort wage concessions and
productivity gains from their anxious employees. An article in the
December issue of The Economist explains, “Since the end of 2008
business-sector productivity has grown at an impressive annualized rate
of 4.2% while hourly compensation has crept ahead by just 2.1%. Unit
labor costs have fallen at an annualized 2% rate, the steepest cumulative
decline since the 1950s. Profits owe their V-shape in great part to
employment’s L-shape.”
The unemployment crisis qualifies as a national emergency; it’s also the
foundation of the Greatest Recovery.
Mark Provost is a freelance writer from Manchester, NH. He can be
reached at [email protected] This article originally appeared
online at Dissident Voice.

Will Our Economy Ever Recover From the "Greatest

Recovery"?, Part II
Saturday 08 January 2011
by: Mark Provost, t r u t h o u t | News Analysis
http://archive.truthout.org/will-our-economy-ever-recover-from-greatest-
recovery66628

In a January 2009 ABC interview with George Stephanopoulos, then

President-elect Barack Obama said fixing the economy required shared
sacrifice: "Everybody's going to have to give. Everybody's going to have
to have some skin in the game." [1]
For the past two years, American workers submitted to the president's
appeal - taking steep paycuts despite hectic productivity growth. By
contrast, corporate executives have extracted record profits by
sabotaging the recovery on every front - eliminating employees,
repressing wages, withholding investment and shirking federal taxes.
The global recession increased unemployment in every country, but the
American experience is unparalleled. According to a July Organization for
Economic Cooperation and Development (OECD) report, the US
accounted for half of all job losses among the 31 richest countries from
2007 to mid-2010.[2] The rise of US unemployment greatly exceeded the
fall in economic output. Aside from Canada, US Gross Domestic Product
(GDP) actually declined less than any other rich country from mid-2008 to
mid-2010.[3]
Washington's embrace of labor market flexibility ensured companies
encountered little resistance when they launched their brutal recovery
plans. Leading into the recession, the US had the weakest worker
protections against individual and collective dismissals in the world,
according to a 2008 OECD study.[4] Blackrock's Robert Doll explains,
"When the markets faltered in 2008 and revenue growth stalled, US
companies moved decisively to cut costs - unlike their European and
Japanese counterparts." [5] The US now has the highest unemployment
rate among the ten major developed countries.[6]
The private sector has not only been the chief source of massive
dislocation in the labor market, but has also been a beneficiary. Over the
past two years, productivity has soared while unit labor costs have
plummeted. By imposing layoffs and wage concessions, US companies are
supplying their own demand for a tractable labor market. Private sector
union membership is the lowest on record.[7] Deutsche Bank Chief
Economist Joseph LaVorgna notes that profits-per-employee are the
highest on record, adding, "I think what investors are missing - and even
the Federal Reserve - is the phenomenal health of the corporate sector."
[8]
Due to falling tax revenues, state and local government layoffs are
accelerating. In contrast, US companies increased their headcounts in
November at the fastest pace in three years, marking the tenth
consecutive month of private sector job creation. The headline numbers
conceal a dismal reality; after a lost decade of employment growth, the
private sector cannot keep pace with new entrants into the workforce.
The few new jobs are unlikely to satisfy Americans who lost careers. In
November, temporary labor represented an astonishing 80 percent of
private sector job growth. Companies are transforming temporary labor
into a permanent feature of the American workforce. United Press
International (UPI) reports that, "This year, 26.2 percent of new private
sector jobs are temporary, compared to 10.9 percent in the recovery after
the 1990s recession and 7.1 percent in previous recoveries." [9] The
remainder of 2010 private sector job growth has consisted mainly of low-
wage, scant-benefit service sector jobs, especially bars and restaurants,
which added 143,000 jobs, growing at four times the rate of the rest of
the economy.[10]
Aside from job fairs, large corporations have been conspicuously absent
from the tepid jobs recovery - but they are leading the profit recovery.
Part of the reason is the expansion of overseas sales, but the profit
recovery is primarily coming off the backs of American workers. After
decades of globalization, US multinationals still employ two-thirds of their
global workforce from the US (21.1 million workers out of a total 31.2
million).[11] Corporate executives are hammering American workers
precisely because they are so dependent on them.
An annual study by USA Today found that private sector paychecks as a
share of Americans' total income fell to 41.9 percent earlier this year, a
record low. [12] Conservative analysts seized on the report as proof of
President Obama's agenda to redistribute wealth from, in their words,
those "pulling the cart" to those "simply riding in it." Their accusation
withstands the evidence - only it's corporate executives and wealthy
investors enjoying the free ride. Corporate executives have found a
simple formula: the less they contribute to the economy, the more they
keep for themselves and shareholders. A Federal Reserve flow of funds
report reveals corporate profits represented a near-record 11.2 percent of
national income in the second quarter.[13]
Nonfinancial companies have amassed nearly $2 trillion in cash,
representing 11 percent of total assets, a sixty-year high. Companies
have not deployed the cash on hiring as weak demand and excess
capacity plague most industries. Companies have found better use for the
cash. As Robert Doll explains, "High cash levels are already generating
dividend increases, share buybacks, capital investments and M&A
[mergers and acquisitions] activity - all extremely shareholder-friendly."
Companies invested $262 billion in equipment and software investment in
the third quarter;[14] that compares with nearly $80 billion in share
buybacks.[15] The paradox of substantial liquid assets accompanying a
shortfall in investment validates Keynes's idea that slumps are caused by
excess savings. Three decades of lopsided expansions have hampered
demand by clotting the circulation of national income in corporate balance
sheets. An article in the July issue of The Economist observes that,
"business investment is as low as it has ever been as a share of GDP."
[16]
The decades-long shift in the tax burden from corporations to working
Americans has accelerated under President Obama. For the past two
years, executives have reported record profits to their shareholders,
partially because they are paying a pittance in federal taxes. Corporate
taxes as a percentage of GDP in 2009 and 2010 are the lowest on record
at just over 1 percent.[17]
Corporate executives complain that the US has the highest corporate tax
rate in the world, but there's a considerable difference between the
statutory 35 percent rate and what companies actually pay (the effective
rate). Here again, large corporations lead the charge in tax arbitrage. US
tax law allows multinationals to indefinitely defer their tax obligations on
foreign earned profits until they "repatriate" (send back) the profits to the
US. US corporations have increased their overseas stash by 70 percent in
four years, now over $1 trillion - largely by dodging US taxes through a
practice known as "transfer pricing." Transfer pricing allows companies to
allocate costs in countries with high tax rates and book profits in low-tax
jurisdictions and tax havens - regardless of the origin of sale. US
companies are using transfer pricing to avoid US tax obligations to the
tune of $60 billion dollars annually, according to a study by Kimberly A.
Clausing, an economics professor at Reed College in Portland, Oregon.
[18]
The corporate cash glut has become a point of recurrent contention
between the Obama administration and corporate executives. In mid-
December, a group of 20 corporate executives met with the Obama
administration and pleaded for a tax holiday on the $1 trillion stashed
overseas, claiming the money will spur jobs and investment. In 2004,
corporate executives convinced President Bush and Congress to include a
similar amnesty provision in the American Jobs Creation Act; 842
companies participated in the program, repatriating $312 billion back to
the US at 5.25 percent rather than at 35 percent.[19] In 2009, the
Congressional Research Service concluded that most of the money went
to stock buybacks and dividends - in direct violation of the Act.[20]
The Obama administration and corporate executives saved American
capitalism. The US economy may never recover.
1. "This Week," ABC News with George Stephanopoulos, January 2009.
2. "OECD report, U.S. lost most jobs among rich countries," ABC News.
July 7, 2010.
3. "Five Surprises of the Great Recession," Carnegie Endowment for
International Peace, Policy Brief 89, Uri Dadush and Vera Eidelman.
November, 2010.
4. OECD Indicators of Employment Protection.
5. "The Bullish Case for U.S. Equities." Robert Doll, The Wall Street
Journal, June 8, 2010.
6. Bureau of Labor Statistics. International Labor Comparisons. Updated
December 2, 2010.
7. "Union membership in the private sector declines to record low," Holly
Rosenkrantz, Bloomberg Businessweek. January 22, 2010.
8. "When will profits translate into jobs?" CNBC, Joseph Lavorgna quote.
9. "Temp work becomes a fixture," UPI. December 20th, 2010.
10. "Restaurant industry's hiring helping to revive economy," Dayton
Daily News - McClatchy-Tribune Information Services via COMTEX,
November 28, 2010.
11. "U.S. Multinationals Cut U.S. Jobs While Expanding Abroad," Martin A.
Sullivan, Tax Notes.
12. "Private pay shrinks to historic lows as gov't payouts rise," USA
Today, May 26, 2010.
13. "Visualizing Booming Profits," Catherine Rampell, New York Times
Economix blog, November 23, 2010.
14. $262 billion in equipment and software investment, calculated from
EconStats.
15. "S&P 500 Companies More Than Double Buybacks in 3Q," Mark
Jewell, ABC News. December 20, 2010.
16. "Show us the money," The Economist.
17. Corporate Income Tax as a Share of GDP, 1946-2009.
18. "U.S. Companies Dodge $60 Billion in Taxes with Global Odyssey,"
Bloomberg, May 13, 2010.
19. "Dodging Repatriation Tax Lets U.S. Companies Bring Home Cash,"
Jesse Drucker, Bloomberg. December 29, 2010.
20. "Proposed Tax Break For Multinationals Would Be Poor Stimulus,"
Robert Greenstein and Chye-Ching Huang, Center for Budget and Policy
Priorities. February 2009.