Corporate tax dodging another capitalist innovation

Competition takes many forms in capitalism. Financial engineering by corporations to avoid paying taxes is one aspect of this competition — under the rigors of market competition, evading responsibility is an innovation to be emulated.

The magnitude of tax evasion on the part of multi-national corporations through one channel — the shifting of profits to countries and territories with low or nonexistent taxes — was quantified earlier this month by the U.S. Public Interest Research Group Education Fund and Citizens for Tax Justice. Their study, “Offshore Shell Games 2014,” reports that the 500 largest U.S.-based multi-national corporations have squirreled away almost US$2 trillion in profits that lie untouched.

An estimated $90 billion a year in federal income taxes are not paid through the creative use of subsidiaries set up in offshore tax havens.

The Cayman Islands and Bermuda are favored locations, although other tax havens such as Hong Kong, Ireland and Switzerland are frequently used. The report illustrated the preposterous number of corporations with sham “offices” in the Cayman Islands:

“Ugland House is a modest five-story office building in the Cayman Islands, yet it is the registered address for 18,857 companies. … Simply by registering subsidiaries in the Cayman Islands, U.S. companies can use legal accounting gimmicks to make much of their U.S.-earned profits appear to be earned in the Caymans and pay no taxes on them. The vast majority of subsidiaries registered at Ugland House have no physical presence in the Caymans other than a post office box. About half of these companies have their billing address in the U.S., even while they are officially registered in the Caymans.” [page 4]

Ugland House in the Cayman Islands. Almost 19,000 companies are located in this building.

Ugland House in the Cayman Islands. Almost 19,000 companies are located in this building.

The Cayman Islands has a corporate tax rate of zero. Not a cent. The government there raises revenue through taxes on imports (thus a consumption tax for the people who live there as virtually everything must be imported), but, as an added bonus should any corporate executive stop by to visit the company post office box, luxury goods such as diamonds are exempted. Bermuda also has no corporate tax.

U.S. tax laws allow profits earned abroad to remain untouched until the money is brought into the country. Profits booked in other countries are instead subject to the local tax rate, even if zero. Accounting, rather than geography, often controls what constitutes “offshore” profits, however. The “Offshore Shell Games 2014” study reports that:

“Many of the profits kept ‘offshore’ are actually housed in U.S. banks or invested in American assets, but registered in the name of foreign subsidiaries. A Senate investigation of 27 large multinationals with substantial amounts of cash supposedly ‘trapped’ offshore found that more than half of the offshore funds were invested in U.S. banks, bonds, and other assets.” [page 5]

Corporate money is “off shore” if the corporation says it is

A 2013 report in The Wall Street Journal revealed that many corporations, including Microsoft Corp. and Google Inc., “keep more than three-quarters of the cash owned by their foreign subsidiaries at U.S. banks, held in U.S. dollars or parked in U.S. government and corporate securities.” Under federal tax law, those funds are “offshore” and thus exempt from taxation.

Microsoft, in its fiscal year 2013 filing with the U.S. Securities and Exchange Commission, said its funds held by its foreign subsidiaries are “deemed to be permanently reinvested in foreign jurisdictions.” It said, “We currently do not intend nor foresee a need to repatriate these funds.” It pays to be a monopoly in more ways than one.

A sampling of corporate highlights, according to “Offshore Shell Games 2014”:

  • Bank of America reports 264 subsidiaries in offshore tax havens, more than any other company. The bank would otherwise owe $4.3 billion in U.S. taxes on the $17 billion it keeps offshore.
  • Nike officially holds $6.7 billion offshore for tax purposes, on which it would otherwise owe $2.2 billion in U.S. taxes. Nike is believed to pay a 2.2 percent tax rate to foreign governments on those offshore profits.
  • Apple holds more money offshore than any other company — $111.3 billion. It would owe $36.4 billion in U.S. taxes if these profits were they not offshore for tax purposes. Two of Apple’s Irish subsidiaries are structured to be tax residents of neither the U.S. (where they are managed and controlled) nor Ireland (where they are incorporated), ensuring no taxes are paid to any government.
  • Google increased the amount of cash it reported offshore from $7.7 billion in 2009 to $38.9 billion. An analysis found that, as of 2012, the company has 23 tax-haven subsidiaries that it no longer discloses but continues to operate.
  • Microsoft increased the amount of money it held offshore from $6.1 billion to $76.4 billion from 2007 to 2013, on which it would otherwise owe $19.4 billion in U.S. taxes. The company is believed to pay a tax rate of three percent to foreign governments on those profits.

You pay when corporations don’t

These arrangements don’t benefit working people in the tax havens. After Ireland’s then prime minister, Brian Cowen, announced that the government would assume all the debts of Ireland’s three biggest banks, he negotiated for what became an €85 billion bailout. In doing so, he demanded, and received, only one concession: There would be no increase in corporate tax rates, which are less than half the level of Ireland’s sales taxes. Taxes on incomes, cars, homes and fuel, however, did rise to pay for the bailout.

Critics, the authors of the “Offshore Shell Games 2014” study not excepted, propose various reforms and tend to discuss this issue in terms of morality. That massive corporate tax dodging is odious from any reasonable ethical standard is indisputable, but reducing it to immorality completely obscures the larger structural problems.

In the relentless competition fostered by capitalism, any successful innovation must be matched by competitors. Such an innovation could be a new production technique but also includes measures to lower costs. If production is moved to a location with low wages and little or no safety and environmental regulations, the boost to profits for the company that does this has to be matched by competitors that otherwise would become uncompetitive and/or fall into disfavor with financiers.

Financial engineering to avoid paying taxes is another boost to profits, and thus a competitive advantage. Other corporations, under the rigors of competition and the ceaseless necessity of expansion and pressure to increase profits, are compelled to copy these innovations.

However much we might wish to morally condemn such behavior, the personality of corporate executives is irrelevant. Expand or die is the remorseless logic of capitalism, and the executive who doesn’t do everything possible to maximize profits will soon be replaced by someone who will.

Nike, to provide an example, proudly announced that, in the past 10 years, it had “returned over $15 billion to shareholders through dividend payments and share repurchases” and assured it would provide more in the future. Nike’s shareholders’ report made no mention of what the company does to extract that money — through brutally exploitative sweatshop labor, paying workers less than a minimum wage set well below subsistence level in places where complaining leads to beatings or firings and striking lands you in prison. And by not paying taxes.

As a second example, Bank of America reported that it paid $3.2 billion to buy back its stock in 2013, money spent to boost its stock price and give extra profits to speculators. (Stock bought for this purpose is paid for at a price higher than the current stock-market value.) That money was available thanks to the billions of dollars it didn’t pay in taxes.

Reforms are good, but reforms can and are taken back when the pressure for them relents, and ultimately leaves the system that rewards such behavior untouched.

How long will Europeans accept austerity?

Europe is not ready to revolt. Or, possibly more accurately, given the 43 percent participation rate, Europeans simply see the European Parliament as irrelevant. Given the little power it has, and the anti-democratic structure of European Union institutions, many saw the election as simply as an opportunity to cast a protest vote.

Yet despite the hand-wringing over the advance of far Right parties (and I am not suggesting that is not worrisome), Europeans continued the general pattern of voters in the global North of alternating between their mainstream parties. The two main blocs, the E.U.’s center-right and center-left groupings, comprising almost all of the major parties, combined for almost 54 percent of the vote, and if we throw in the more than eight percent won by the third-place liberal grouping (for North American readers, European liberals are roughly equivalent to libertarians), the parties of austerity won a solid majority.

The combined total is about ten percentage points less than than won by the three largest groupings in the previous election in 2009, but still a comfortable majority.

Strasbourg, France

Strasbourg, France

The Left made some advances, too, albeit falling short of some expectations.

The fourth-place Green alliance and sixth-place European United Left combined for 13 percent of the vote, considerably more than far Right parties garnered, despite the strong showings of the United Kingdom Independence Party, France’s National Front and the Danish People’s Party. In Greece, Syriza (the Coalition of the Radical Left) came in first place. In Spain the United Left and Podemos — a four-month-old party organized by the “Indignados,” Spain’s Occupy movement — combined for 18 percent of the vote, and Left parties in Portugal did about as well.

Keeping the devil you know

Nonetheless, those who did not bother to vote formed a majority of the E.U. electorate. And those who did vote voted for more of the same, even if in most countries the one major party was swapped for the other major party. More of the same surely isn’t appealing, as the E.U. unemployment rate is 11.8 percent, barely off the 12 percent peak of March 2013. Inequality, although less severe than in the United States, has been rising for three decades. Moreover, the three largest blocs, plus a small right-wing bloc that includes Britain’s Conservative Party, are committed to the Transatlantic Trade and Investment Partnership, a “free trade” agreement being negotiated in secret between the U.S. and the E.U. with the warm approval of multi-national corporations on both sides of the Atlantic.

The lack of democracy in E.U. institutions is not a happenstance; the intention of them is imposition of a U.S.-style régime. There was and is no vote on the mandatory budget constraints national governments must abide by nor the policies of the European Central Bank. When loans are made to Greece by E.U. institutions, the money does not go to Greeks, it passes right through the Greek government and into the hands of French and German banks.

Thus it is no surprise to hear that of E.U. negotiators’ 127 closed meetings concerning the Transatlantic Partnership talks, at least 119 were with large corporations and their lobbyists, information known only because of investigatory work done by a public-interest group, Corporate Europe Observatory.

European food safety and privacy laws are squarely in the crosshairs of U.S.-based multinational corporations. European capitalists are one with their U.S. counterparts that trade rules should be “harmonized” — which means “harmonized” with the lowest standards. This is only one aspect of the larger project of neoliberal austerity to which Europe’s center-left parties are as committed as its center-right parties, as the French voters who put François Hollande into office have found. In Germany it was none other than the Social Democratic Party, through its “Agenda 2010” legislation, that instituted austerity there. The so-called German “miracle” rests on a decade of wage cuts for German workers.

You can only do so much in a voting booth

The large number of abstentions and decreased vote totals for major parties are symptomatic of Europeans becoming fed up with economic stagnation, high unemployment and the relentless austerity being imposed on them by unaccountable, undemocratic supranational institutions. But only in a handful of countries, where austerity has pushed down the hardest, have sizable opposition movements coalesced.

Those voters who could be bothered to vote for the European Parliament are not yet exhausted with their political and economic systems, mostly remaining content to alternate between major parties. Although the vote totals for the extreme Right were, overall, not as dramatic as press reports have portrayed them, nonetheless the strong increase in those votes is cause for concern, especially as Britain’s Conservative leadership increasingly appears inclined to adopt UKIP talking points and France’s Union for a Popular Movement does the same with National Front talking points.

When there is not an active Left to provide an alternative to institutional decay, the Right will fill the vacuum with scapegoating, programs to weaken anything that counters corporate power, paeans for a return to a mythological past, and the potential for nationalistic violence, a threshold already trampled by Greece’s Golden Dawn. But change in capitalist systems does not derive from parliamentary maneuvers, it comes from organized, militant popular movements.

We do not yet live in dictatorships; there remain cracks, seams and fissures in political systems that enable reforms. These can be significant reforms such as those won in the 1960s and, in the United States, in the 1930s. But those democratic spaces are closing — the ever more powerful spying apparatuses, militarized police, top-down rules imposed through “free trade” agreements and subsidies lavished on the already wealthy do not fall out of the sky. Moreover, reforms can and are taken back and are better seen as means to larger goals, not ends in themselves.

An intensified race to the bottom is all that is on offer by the governments and institutions of the world’s mature capitalist countries. There is no tweak of policy, nor exchange of one corporate party for another corporate party, that can solve the structural crisis of the global economic system. The European Parliament elections are interesting as a barometer of public opinion, but not for much else. An increasing number of people (although hardly a decisive number as yet) are signaling discontent but also that while they are beginning to decide what they don’t want, what they do want is much more inchoate. Nature abhors a vacuum.

Staying in the environmental frying pan only gets us hotter

Green capitalism is destined to fail: You can’t keep doing the same thing and expect different results. We can’t shop our way out of global warming nor are there technological magic wands that will save us. There is no alternative to a dramatic change in the organization of the global economy and consumption patterns.

Such a change will not come without costs — but the costs of doing nothing, of allowing global warming to precede is far greater. Therefore it is healthy to approach with a dose of skepticism the Intergovernmental Panel on Climate Change (IPCC) report that concludes the annual reduction in “consumption growth” on a global basis would be only 0.06 percent during the course of the 21st century. Almost nothing!

Wahiba Sands, Oman (Photo by Andries Oudshoorn)

Wahiba Sands, Oman (Photo by Andries Oudshoorn)

The “Summary for Policymakers” supplement of the IPCC’s Climate Change 2014: Mitigation of Climate Change report, a dense 33-page document, estimates that the annualized reduction in consumption growth would be 0.04 to 0.16 percent, with the median value of various models at 0.06 percent. This estimate is based on projected global annual growth of 1.6 to 3.0 percent per year during the full course of the 21st century. [page 15]

This estimated cost is what the IPCC believes is what would be required to hold the atmospheric concentration of carbon dioxide equivalent to 450 parts per million, the level at which the IPCC believes total global warming would be 2 degrees Celsius by the year 2100, which in turn is seen as the maximum temperature rise to avoid catastrophic damage to Earth.

Let’s unpack those last two paragraphs. In sum, what the IPCC panel is asserting is that the cost of bringing global warming under control will be negligible, no more than a blip noticed only by statisticians. And, best of all, there need be no fundamental change to the world’s economic structures — we can remain on the path of endless growth. We can have our cake and not only eat it but make more cakes and eat them, too.

Alas, there are no free lunches nor limitless cakes.

On the current path, you’ll need scuba gear to get around

Hundreds of climate scientists from around the world (collectively, the “IPCC Working Group III”) contributed to the report, but it does appear to have been watered down to some extent for political reasons. Indeed, the Mitigation 2014 web site’s front page says the Summary for Policymakers “has been approved line by line by member governments.” Since most of the world’s governments are reluctant to do very little more than talk about global warming, a note of caution is surely warranted.

Nonetheless, the summary does acknowledge that greenhouse-gas emissions accelerated during the 2000-2010 decade as compared to the 1970-2000 period. It declares, with “high confidence,” that half of all anthropogenic carbon dioxide emissions since 1750 (the dawn of the Industrial Revolution) have been discharged in the past 40 years. Worse, population and economic growth has outstripped gains in efficiency, thus greenhouse-gas emissions have increased despite increased efficiency in, and conservation of, energy usage. Continuing on this trajectory will have potentially catastrophic consequences, the summary says:

“Without additional efforts to reduce [greenhouse-gas] emissions beyond those in place today, emissions growth is expected to persist driven by growth in global population and economic activities. Baseline scenarios, those without additional mitigation, result in global mean surface temperature increases in 2100 from 3.7 °C to 4.8 °C compared to pre-industrial levels (median values; the range is 2.5 °C to 7.8 °C when including climate uncertainty) (high confidence).” [page 9]

Many of the world’s cities would be underwater, or well on their way to being underwater, should such heating occur. The temperature range of the preceding paragraph represents atmospheric concentrations of 750 to 1,300 parts per million of carbon dioxide equivalent. To instead hold that concentration to 450 parts per million will require a monumental undertaking — the concentration is already 400 ppm. The IPCC thus concludes that the level of greenhouse-gas gases will actually rise above the 450 mark, then brought down to that level under its scenario for capping the concentration at 450 ppm in 2100.

To achieve a goal of 450 ppm in 2100 would require that greenhouse-gas emissions be “40 to 70 percent lower globally” in 2050 than in 2010 and “near zero” in 2100. How to achieve this? The report makes these recommendations:

  • Further rapid improvements of energy efficiency.
  • Reduce the carbon intensity of electricity generation.
  • Increase the use of renewable energy technologies, which would require subsidies.
  • Increased use of nuclear energy.
  • The development of carbon dioxide capture and storage technology, in particular “bioenergy with carbon dioxide capture and storage” (BECCS) by the year 2050.

The last of these, in particular BECCS, is the key to the IPCC’s belief that techno-fixes are the way to save the day. But there is ample reason to throw cold water on this optimism.

Bioenergy likely to increase global warming

BECCS is defined as the capture and sequestration of the carbon produced by bioenergy processes. The carbon dioxide would be “captured” before it escapes into the atmosphere and “permanently” stored underground or underwater, thereby removing it from the air and negating its greenhouse effects. One problem with BECCS is that the technology is not yet viable. Another is that the very idea that BECCS would lead to reduced atmospheric carbon dioxide is a false premise.

A Biofuelwatch study prepared by Rachel Smolker and Almuth Ernsting reports that there are significant costs associated with carbon-capture technologies. They write:

“High costs are associated with capturing … compressing and transporting [carbon] (including building new CO2 pipelines) and pumping it underground, and major technical challenges are associated with the majority of [carbon dioxide capture and storage] proposals. Storing CO2 below ground requires access to underground spaces, beneath both ocean and land areas. Current mapping of geological formations, with the expectation that these spaces will be accessed, is setting the stage for a new form of ‘underground’ land grab. Resistance has already begun with communities opposing the injection of CO2 into the ground beneath them.” [page 2]

The Biofuelwatch study reports that the IPCC, among others, counts flooding oil reservoirs with carbon dioxide, to extract otherwise inaccessible oil out of the ground, as BECCS. Hardly “carbon neutral”! The authors write:

“Crucially, the promotion of [carbon dioxide capture and storage], including BECCS for climate change mitigation and geo-engineering, coincides with the oil industry’s fast-growing demand for cheap continuous supplies of CO2. … [F]looding oil reservoirs with CO2 allows for the recovery of a far higher proportion of oil than would be possible with conventional means.” [page 2]

In a separate report, Ms. Smolker, writing in Truthout, challenges the science behind assumptions that BECCS projects will reduce greenhouse-gas emissions:

“Virtually nobody still contends that corn ethanol is ‘carbon neutral.’ Yet the premier BECCS project that is often referred to is an ADM corn ethanol refinery in Decatur, Illinois. In fact, when emissions from indirect impacts are included in analyses, along with a complete assessment of the impacts from growing, harvesting, fertilizer and chemical use etc., most bioenergy processes actually cause more emissions even than the fossil fuels they are meant to replace. … [W]e know already from the current scale of biofuel and biomass demand — just look at the current corn ethanol debacle — that it is driving loss of biodiversity, higher food prices, land grabs and other damages. Scaling up bioenergy to the extent that would be required to supposedly reduce global CO2 levels would be a disastrous backfire.”

A Partnership for Policy Integrity study found that biomass electricity generation, which relies primarily on the burning of wood, is “more polluting and worse for the climate than coal, according to a new analysis of 88 pollution permits for biomass power plants in 25 states.” The partnership’s director, Mary Booth, wrote:

“The biomass power industry portrays their facilities as ‘clean.’ But we found that even the newest biomass plants are allowed to pollute more than modern coal- and gas-fired plants, and that pollution from bioenergy is increasingly unregulated.”

The problem here is far deeper than wishful thinking. Optimistic scenarios such as the IPCC report rest on assumptions that the world can reduce its greenhouse-gas emissions, cut pollution and enjoy another century of consumer-fueled economic growth while business as usual goes on. But that is not possible.

Short-term scramble for survival trumps the long term

The capitalist system requires continual growth, which means expansion of production. Its internal logic also means that its incentives are to use more energy and inputs when more efficiency is achieved — the paradox that more energy is consumed instead of less when the cost drops. Because production is for private profit, growth is necessary to maintain profitability — and continually increasing profitability is the actual goal. If a corporation doesn’t expand, its competitor will and put it out of business.

Because of the built-in pressure to maintain profits in the face of relentless competition, corporations continually must reduce costs, employee wages not excepted. Production is moved to low-wage countries with fewer regulations, enabling not only more pollution but driving up energy and carbon-dioxide costs with the need for transportation across greater distances. Economic growth of 2.5 percent is necessary simply to maintain the unemployment rate where it is and “substantially stronger growth than that” is necessary for a rapid decrease, according to a former White House Council of Economic Advisers chair, Christina Romer.

Under capitalism, all the incentives are to continue business as usual, no matter the dire future that business as usual is leading humanity. Richard Smith, in a tour de force paper published in the Real-World Economics Review, “Green capitalism: the god that failed,” summed up the dilemma:

“[T]he problem is not just special interests, lobbyists and corruption. … [Under] capitalism, it is, perversely, in the general interest, in everyone’s immediate interests to do all we can to maximize growth right now, therefore, unavoidably, to maximize fossil fuel consumption right now — because practically every job in the country is, in one way or another, dependent upon fossil fuel consumption. … There is no way to cut CO2 emissions by anything like 80 percent without imposing drastic cuts across the board in industrial production. But since we live under capitalism, not socialism, no one is promising new jobs to all those … whose jobs would be at risk if fossil fuel use were really seriously curtailed. … Given capitalism, they have little choice but to focus on the short-term, to prioritize saving their jobs in the here and now to feed their kids today — and worry about tomorrow, tomorrow.” [page 121, March 2011]

“Green” enterprises will not be granted an exemption. They, too, will be pushed by market forces the same as any other enterprise. Dr. Smith writes:

“Biofuels, windpower and organic crops — all might be environmentally rational here or there, but not necessarily in every case or forever. But once investments are sunk, green industries have no choice but to seek to maximize profits and grow forever regardless of social need and scientific rationality, just like any other for-profit business.” [page 142]

All the more is that so for the capitalist system as a whole. Fred Magdoff and John Bellamy Foster, in their book What Every Environmentalist Needs to Know About Capitalism, write:

“ ‘Green capitalism,’ even if products are produced using the utmost environmental care and designed for easy reuse, offers no way out of a system that must expand exponentially and thus continue to ratchet up its use of natural resources, its chemical pollution, its contaminated sewage sludge, its garbage, and its many other toxic substances. Some of these ‘fixes’ will probably slow down the rate of environmental destruction, but the magnitude of the needed changes dwarfs these approaches.” [page 120]

A duty to shareholders, not humanity

The structural necessity of continual expansion is expressed in the mandate of corporations with stock traded on exchanges to maximize profits on behalf of their shareholders above all other considerations. There are well-meaning people who wag their fingers at “excesses” of corporate plunder and claim that the focus on shareholders is not necessary, but in reply one need only observe how swiftly financiers punish companies that fail to meet expectations and the frequency with which “enhancing shareholder value” is listed by corporations as their reason for existence.

None other than the high priest of orthodox economics, Milton Friedman, put it plainly in an interview with Joel Bakan recounted in the latter’s book, The Corporation: The Pathological Pursuit of Profit and Power. John Browne, then the chief executive officer of BP, launched a public-relations offensive claiming that environmental stewardship would now be a primary goal for BP. Setting aside the nonsense of this, given BP’s dreadful record even by the standards of oil majors, Mr. Friedman had this to say, according to the author:

“Not surprisingly, Milton Friedman said ‘no’ when I asked him how far John Browne could go with his green convictions. … ‘He can do it with his own money. If he pursues those environmental interests in such a way as to run the corporation less effectively for its stockholders, then I think he’s being immoral. He’s an employee of the stockholders, however elevated his position may appear to be. As such, he has a very strong moral responsibility to them.’ ”

Putting the environment first in a capitalist economy is not realistic, and doing so anyway would be very costly due to capitalist dynamics. The IPCC is taking a head-in-the-sand approach with its claim that reversing global warming will be nearly cost-free. The more honest approach would be to acknowledge the high cost of saving the planet — and that the cost of not doing so, of continuing business as usual, will be far greater.

The European Commission estimates the cost of global warming in Europe could reach four percent of gross domestic product and estimates that almost 350,000 people per year will be displaced by flooding by mid-century. The National Resources Defense Council estimated that the U.S. government spent about $100 billion cleaning up natural disasters in 2012 — one-sixth of the federal budget’s non-defense discretionary spending and three times what private insurers paid out. Fifty billion tons of carbon dioxide equivalent is being thrown into the atmosphere yearly, and a U.S. government working group estimates each ton will cause $37 in future harms in today’s dollars.

And what would the cost be of abandoning many of the world’s cities if the ice caps melt? Of the world’s bread baskets turning into deserts? Of dead oceans? Such costs are not calculated by the IPCC.

The IPCC’s flawed approach does not derive from whatever political pressures have been exerted on it. The fundamental issue is that it can’t imagine a world without capitalism. It has much company in that. But a future in which we live in harmony with nature, rather than destroying nature for profit, can only be a very different world.

Labor rights respected nowhere on Earth

If labor rights were a test, the entire world would flunk. Basic labor rights are under sustained assault, but just how badly is quantified in a just released report by the International Trade Union Confederation in which every country scored below 50 percent.

To better summarize these results, the ITUC grouped the world’s countries into five rankings, with a ranking of one signifying the countries with the (relatively) best conditions for working people and a ranking of five signifying those with the most repressive conditions. Most of those countries with a ranking of one were in the European Union, but this group also included Togo and Uruguay. Those with a ranking of five include some of the world’s most repressive countries, including China and Saudi Arabia, but also Greece, Turkey and South Korea. The United States has a ranking of four. So much for the home of the free.

The ITUC describes itself as “a confederation of national trade union centres” that includes 325 affiliated organizations in 161 countries and territories. Its Global Rights Index summarizes data on the abuse of trade union rights around the world. The report’s introduction states:

“The increase in precarious employment relationships has further deepened the vulnerability of workers to discrimination at the workplace. Governments in the vast majority of countries have been convinced to alter their labour legislation to encourage various forms of precarious work. In virtually all countries, temporary work, agency work, subcontracting and other types of informal work are expanding rapidly. Given their unstable employment situation and the high risk of dismissal, precarious workers are discouraged from joining unions and being covered by collective bargaining. This means that workers in precarious forms of employment do not have the necessary support to improve their work situation.”

The report collects information on each country for 97 indicators derived from International Labour Organization standards. These indicators relate to one of five categories: Fundamental civil liberties; the right to establish or join unions; trade union activities; the right to collective bargaining; and the right to strike. It assigns a simple yes or no to each of the 97 questions rather than a more gradated system to eliminate any potential bias and because each is a “universally binding obligation” that all countries should respect.

Therefore, 97 is the highest possible score for any country. The highest score attained, however, was 43. The lowest was zero. Therefore, the study grouped the world’s countries into the five rankings, with each ranking containing roughly one-fifth of the total. The ITUC’s map of workers’ rights is below, with the brightest yellow those countries with a ranking of one (those with the most respect for rights) and the deepest orange and red those with a ranking of five (those with the least respect for rights).

ITUC map of workers' rights

ITUC map of workers’ rights

Countries with a ranking of four, such as the United States, Honduras, Indonesia and Kuwait, “have reported systematic violations. The government and/or companies are engaged in serious efforts to crush the collective voice of workers putting fundamental rights under continuous threat.” Only somewhat better are those with a ranking of three, such as Australia, Canada, Singapore and the United Kingdom, where “Government and/or companies are regularly interfering in collective labour rights or are failing to fully guarantee important aspects of these rights. There are deficiencies in laws and/or certain practices which make frequent violations possible.”

Those conditions are reflected in the dwindling number of strikes. During the 1970s, an average of During the 1970s, an average of 289 work stoppages involving 1,000 or more workers took place annually in the United States. In 2009, there were no more than five. Lockouts, in which management bars employees from working, have become more common, reaching record levels this decade.

That is a worldwide phenomenon, of course, in no way limited to any one country, including the one imposes its will on the rest of the world through a misguided ideology of “exceptionalism.” The ITUC notes in its report:

“[W]orkers are struggling everywhere for their right to collective representation and decent work deficits exist in varying degrees in most countries. Abuses of rights are getting worse not better and too many countries take no responsibility for protecting workers rights in a national context or through corporate supply chains. Based on reports from affiliates, workers in at least 53 countries have either been dismissed or suspended from their jobs for attempting to negotiate better working conditions. In the vast majority of these cases the national legislation offered either no protection or did not provide dissuasive sanctions in order to hold abusive employers accountable. Indeed, employers and governments are complicit in silencing workers’ voices against exploitation.”

A continuing race to the bottom is all that is on offer. Capitalists are well organized, across borders. Working people had better do the same.

“Fighting” low pay by distributing crumbs

Two state-level legislative bills seeking to reign in bloated executive pay have the effect of applying a band-aid to a broken leg, but whatever their effect should they become law, perhaps they might stimulate debate. The Rhode Island state Senate is considering a law that would provide an incentive for companies to adopt a maximum wage and a bill in the California state Senate would introduce variable corporate tax rates based on pay ratios.

Although corporate interests are likely to be successful in defeating these bills (both of which are in early stages of the legislative process), they represent at best a tentative attempt to bring about a small reform. But symbols can sometimes be important, and the symbolic value of these bills is what is likely to be distressing to the one percent.

The Rhode Island bill, S. 2796, is under consideration by the state Senate’s Finance Committee, which has recommended it be “held for further study.” Here is the official commentary explaining the bill, which is sponsored by 14 of the state Senate’s 38 members:

“This act would establish a preference in the awarding of contracts for any person or business doing business with the state whose highest paid executive receives compensation and/or a salary equal to or less than thirty-two (32) times the compensation and/or salary paid to its lowest paid full-time employee. This act would take effect on July 1, 2014.”

It would not be mandatory for a contractor doing business with the Rhode Island state government to have this pay ratio; it would merely give such a company an advantage when bidding.

Newport, Rhode Island (photo by Šarūnas Burdulis)

Newport, Rhode Island (photo by Šarūnas Burdulis)

The California bill, S.B. 1372, would replace that state’s current 8.8 percent corporate tax rate with a sliding scale of seven to thirteen percent based on a company’s pay ratio. The highest rate would be paid by corporations in which the chief executive officer makes 400 or more times than the average worker. The bill would also raise by 50 percent the tax rate of any corporation that moves more than 10 percent of its workforce offshore in a given year.

This bill, which has two sponsors, will be difficult to pass due to a California law requiring a two-thirds majority of both houses of the state Legislature to enact a change to the tax code. It is currently in the state Senate’s Appropriations Committee.

Executive pay rises into the stratosphere

There certainly is reason to reign in executive pay. The ratio of chief executive pay to that of an average worker in the U.S. rose from 42-to-1 in 1960 to 531-to-1 in 2000, when stock options were being cashed in at the height of the stock market bubble. Growing inequality is also demonstrated by these changes from 1990 to 2005, as calculated in a study by the Institute for Policy Studies and United for a Fair Economy:

  • Chief executive officers’ pay increased 298 percent.
  • Production workers pay increased 4.3 percent.
  • The purchasing power of the federal minimum wage declined 9.3 percent, adjusted for inflation.

To bring these statistics further up to date, the U.S. labor federation AFL-CIO calculates that the chief executive-to-worker pay ratio was 331-to-1 in 2013, up from 50-to-1 in 1983 — a more than sixfold increase in three decades. The AFL-CIO also reports that in 2013 the companies comprising the S&P 500 stock-market index earned $41,249 in profits per employee. So, yes, they can afford to give employees a raise.

The standard argument given for bloated executive compensation is that the recipients “add shareholder value” — that is, they justifiably receive millions or tens of millions of dollars per year because their genius drives up the price of their companies’ stock, thereby creating wealth for stockholders. Although buying stock is, in theory, a bet on a company’s future earnings and therefore its price should rise and fall in concert with a corporation’s financial performance, bubbles fueled by speculation and larger macroeconomic conditions often account for how a stock does.

During the 1990s stock-market bubble, when valuations of publicly traded corporations were historically the most out of line in relation to actual profits, only unusually poorly managed corporations failed to have stock that significantly rose in price. More recently, the run-up in U.S. stock prices that has taken place over the past couple of years is a product of the Federal Reserve’s “quantitative easing” program, whereby it buys U.S. government debt and mortgage-backed securities in massive amounts. As of the end of December 2013, the Fed had spent a total of $3.7 trillion over five years on this program.

Therefore, it is no shock to discover that actual chief executive officer pay bears little or no relation to the financial results of their corporations. A 2013 report by the Institute for Policy Studies found that of the 241 chief executive officers who have been ranked among the 25 highest-paid U.S. chief executives at least once in the past 20 years, almost one-quarter of them headed corporations that either have ceased to exist or received taxpayer bailouts after the 2008 financial crash.

The Institute reports:

“[O]ur analysis reveals widespread poor performance within America’s elite CEO circles. Chief executives performing poorly — and blatantly so — have consistently populated the ranks of our nation’s top-paid CEOs over the last two decades. … In reality, [the] most highly paid executives over the past two decades have added remarkably little ‘value’ to anything except their own personal portfolios.”

And despite the one percent’s prevailing ideology that government only gets in their way, one of out eight of these highest-paid chief executive officers were among the biggest recipients of government contracts — a composite $255 billion in taxpayer-funded government largesse.

Hedge funders get billions for poor results

As the financial industry has swollen in relation to the rest of the economy, pay there is even more out of line with contribution. Speculation pays in fabulous ways: The 25 highest-paid hedge-fund managers of 2013 raked in a total of $21.15 billion. Yes, you read that correctly — almost $1 billion apiece in one year. Four hedge-fund managers made more than $2 billion each.

What magic do hedge funders perform that attracts such sums of money? Getting others to believe in their “magic,” it would seem. Bloomberg News reported that, as 2013 was drawing to a close, the composite gains of hedge funds for the year was 7.1 percent, as compared to the 29.1 percent gain of the S&P 500 stock index. In other words, they did worse than random chance. Nonetheless, hedge funds grabbed $50 billion in management fees for this below-average performance.

The Rhode Island legislative bill seeks to define a ratio of 32-to-1 as a “fair standard” for chief executive pay as compared to  employee pay. But isn’t that still an absurdly high ratio by any reasonable standard? By contemporary capitalist standards, such a proposal seems dramatic and has an uphill, at best, chance of passing. But if we were to design an economy that works for everybody, would you propose something anywhere near that lopsided?

Radical activists have been known to summarize the demands of liberals as “longer chains, bigger cages.” Here we have a classic case of that. If you start by asking for crumbs, at best you’ll get small crumbs. Given the immensity of problems the world faces, including declining living standards, surely we deserve much more.

Economics students begin to revolt

Economics students of the world have nothing to lose but their ideological chains. A revolt appears to be brewing — an international coalition of economics students has issued a public call for the teaching of a variety of schools of thought so that the field might actually find solutions to the world’s problems.

This is a radical departure. Orthodox economics, dominated thoroughly by Chicago School ideology, exists to justify extreme inequality and class dominance, which is why its adherents, who occupy critical financial posts around the world, continue to implement ruinous policies. At universities, the teaching of economics is similarly dominated by the Chicago School.

University of Chicago

University of Chicago

Not all students are content with this state of affairs. The international coalition International Student Initiative for Pluralism in Economics has issued a manifesto taking direct aim at the extraordinarily narrow curriculum. What makes this especially noteworthy is that this coalition comprises 42 student associations in 19 countries — and has a web site in seven languages. The manifesto says:

“This lack of intellectual diversity does not only restrain education and research. It limits our ability to contend with the multidimensional challenges of the 21st century — from financial stability, to food security and climate change. The real world should be brought back into the classroom, as well as debate and a pluralism of theories and methods. … [P]luralism carries the promise to bring economics back into the service of society.”

The very need to drag economics “into the real world” speaks for itself. The ideological narrowness of the field leaves students unprepared, the manifesto says:

“Where other disciplines embrace diversity and teach competing theories even when they are mutually incompatible, economics is often presented as a unified body of knowledge. … This is unheard of in other fields. … An inclusive and comprehensive economics education should promote balanced exposure to a variety of theoretical perspectives, from the commonly taught neoclassically-based approaches to the largely excluded classical, post-Keynesian, Institutional, ecological, feminist, Marxist and Austrian traditions — among others. Most economics students graduate without ever encountering such diverse perspectives in the classroom.”

Nor should economics wall itself off from other disciplines, as if the economy is independent of the rest of human activity:

“[E]conomics education should include interdisciplinary approaches and allow students to engage with other social sciences and the humanities. Economics is a social science; complex economic phenomena can seldom be understood if presented in a vacuum, removed from their sociological, political, and historical contexts. To properly discuss economic policy, students should understand the broader social impacts and moral implications of economic decisions.”

That such things need to be said, once again, speaks for itself.

How can a science call itself “sacred”?

Orthodox economists — or “neoclassical” as they are called in the field — like to present themselves as hard-headed realists who dispassionately crunch numbers. Yet consider that one of the most important Chicago School economists, Frank Knight, wrote in a leading academic economic journal that professors should “inculcate” in their students that these theories are not debatable hypotheses, but rather are “sacred feature[s] of the system.”

Under this “sacred” system, economic activity is treated as a simple exchange of freely acting, mutually benefiting, equal firms and households in a market that automatically, through an “invisible hand,” self-adjusts and self-regulates to equilibrium. Households and firms are considered only as market agents, never as part of a social system, and because the system is assumed to consistently revert to equilibrium, there is no conflict. Production is alleged to be independent of all social factors, the employees who do the work of production are in their jobs due to personal choice, and wages are based only on individual achievement independent of race, gender and other differences.

Underlying these assumptions is a concept known as “perfect competition,” a model that assumes that all prices automatically calibrate to optimum levels, and that there are so many buyers and sellers that none possesses sufficient power to affect the market. The economist Robert Kuttner, in a 1985 Atlantic Monthly article, summarized the unreality of this concept:

“Perfect competition requires ‘perfect information.’ Consumers must know enough to compare products astutely; workers must be aware of alternative jobs; and capitalists of competing investment opportunities. … Moreover, perfect competition requires ‘perfect mobility of factors.’ Workers must be free to get the highest available wage, and capitalists to shift their capital to get the highest available return; otherwise identical factors of production would command different prices, and the result would be deviation from the model.”

The real world bears no resemblance to that artificial ideological construct. Rather than question their dogma, adherents instead insist government regulations get in the way, sullying what would otherwise be a pristine market. This is where “magic” comes in, as in the “magic of the market” that is routinely invoked. Because orthodox economists often treat Adam Smith’s works as sacred books, it is not inappropriate to note that Smith himself wrote that “Providence” guarantees that everyone, including the poor, has enough to eat:

“When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition.”

A couple of centuries of refutation

Although Smith’s writings tend to be cherry-picked by his epigones — inconveniently, Smith acknowledged that capitalists have advantages over employees and believed that labor should be fairly compensated — he drew conclusions that long ago showed themselves unsustainable. Smith believed that capital accumulation inevitably leads to increases in employment and wages, that commercial exchange leads automatically to moral behavior, and that a free market without restrictions would restrain big merchants and manufacturers while benefiting employees and consumers.

Smith wrote in the 18th century at the dawn of the Industrial Revolution before his ideas could be put to the test; today’s orthodox economists who repeat them in the face of massive evidence to the contrary are motivated by something other than scientific rigor. Keep this mind the next time Karl Marx is dismissed as irrelevant because he wrote in the 19th century. At least Marx based his works on rigorous analysis of the actual workings of capitalism.

One of the “sacred” features of capitalism verboten to question is its alleged high levels of efficiency. Were we to examine this question from, for example, an Institutionalist perspective, we might find that is not so. Institutional economics is a school that believes economic and social behaviors are cultural phenomenon, conditioned by cultural parameters, and incorporates a focus on the deployment and concentration of power, in particular the role of institutions in shaping economic behavior.

This is one of the neglected traditions the International Student Initiative for Pluralism in Economics manifesto said should be added to economics curriculums. A leading Institutionalist economist, Marc Tool, argues that competitive market economies are inefficient because they provide no way for wants and preferences to be appraised, leaving it instead to media advertising to create demand artificially, and that markets fail to address the problems of gross income inequality. As a result, many people have their choices in life constrained

“to the point where intellect, creativity, compassion, and commitment are stunted or destroyed for those denied. We then live in a layered or tiered community suffering from elitism and privation alike. This would appear to be inefficiency of really monumental proportions.”

More idle capacity, more unemployment

Unemployment is high at the same time that plants sit idle. Total U.S. industrial capacity utilization as of January 2014 is only 78 percent, and although that is higher than the figure was in the years following the onset of the global economic downturn, there has been a persistent decline in capacity usage since the 1960s. European industrial capacity is 79 percent. Despite this unused capacity, unemployment remains high in both regions.

Another way of looking at this inefficiency is that shrinking numbers of people, in all parts of the world, who have steady employment that pays a living wage. John Bellamy Foster and Robert W. McChesney in their 2013 book The Endless Crisis calculate that the “global reserve army” — workers who are underemployed, unemployed or “vulnerably employed” (including informal workers) — totals 2.4 billion. In contrast, the world’s wage workers total 1.4 billion.

The mystery surrounding orthodox economists continuing to insist on policies that have brought such ruinous results vanishes when we realize that they are promulgating ideology for the benefit of industrialists and financiers and not science on behalf of humanity. Lately is has become fashionable to advocate for a return to the Keynesian policies of the mid-20th century — even these, safely within capitalist bounds, are marginalized within the economics profession.

Keynesianism is the belief that capitalism is unstable and requires government intervention in the economy when private enterprise is unable or unwilling to spend enough to lift it out of a slump. Alas, we are not living in the mid-20th century. Keynesianism depended on an industrial base and the availability of new markets into which capitalism could expand. A repeat of history isn’t possible because the industrial base of the advanced capitalist countries has been hollowed out, transferred to low-wage developing countries, and there is almost no place remaining to which to expand.

Moreover, capitalists who are saved by Keynesian spending programs amass enough power to later impose their preferred neoliberal policies, as they began to do by the late 1970s. The “Keynesian consensus” was a temporary phenomenon tolerated by capitalists because their profits were rising despite the higher wages they were paying. If the world is undergoing a structural crisis of capitalism, then policies intended to stabilize capitalism can’t provide a long-term solution.

Study of the widest reasonable range of economic ideas is not simply a matter of healthy debate but necessary to finding a path to a better, more humane world.

Bringing alternative economic ideas back into the mainstream, especially those critical of capitalism, is part of a larger social struggle. The one percent’s preferred ideas that dominate did not fall out of the sky. As Karl Marx once wrote: “The ideas of the ruling class are in every epoch the ruling ideas, i.e. the class which is the ruling material force of society, is at the same time its ruling intellectual force.”

“Ruling” ideas create priesthoods, which are best left outside of economics departments and central banks.

Scapegoating the unemployed for being at the mercy of a global phenomenon

People are out of work longer and the jobs that become available pay less. These developments of the past several years of economic downturn are not your imagination, no matter how many times individualist ideology is invoked to falsely point fingers at the “downsized.”

A flurry of studies and papers demonstrate these patterns are found across the mature capitalist economies. The latest of these, “The Low-Wage Recovery” issued by the National Employment Law Project, found that nearly half of the jobs created in the United States since unemployment peaked in February 2010 are low-wage jobs.

March against inflation and unemployment, Chicago 1973 (Photo by John H. White)

March against inflation and unemployment, Chicago 1973 (Photo by John H. White)

Two million more low-wage jobs, defined as those paying $13.33 per hour or less, have been created in the past four years than were lost between January 2008 and February 2010. By contrast, the deficit in jobs paying more is about two million. Although the number of jobs in the U.S. has rebounded to what it was at the end of 2007, that means more people are unemployed since the population has grown. The Employment Project’s breakdown:

• Lower-wage industries ($9.48 per hour to $13.33) constituted 22 percent of the 2008-2010 losses, but 44 percent of jobs gained since then.
• Mid-wage industries ($13.73 to $20.00) constituted 37 percent of the 2008-2010 losses, but 26 percent of jobs gained since then.
• Higher-wage industries ($20.03 to $32.62) constituted 41 percent of the 2008-2010 losses, but 30 percent of jobs gained since then.

The National Employment Law Project notes that:

“Job growth is still heavily concentrated in lower-wage industries. As a result of unbalanced employment growth, the types of jobs available to unemployed workers, new labor market entrants, and individuals looking to move up the career ladder are distinctly different today than they were prior to the recession.”

More people are out of work for longer periods

At the same time, the Economic Policy Institute reports, the number of long-term unemployed in the United States has risen sharply. This is true for all age, education, occupation, industry, gender, and racial and ethnic groups. The author of the EPI report, Heidi Shierholz, wrote:

“Today’s long-term unemployment crisis is not at all confined to unlucky or inflexible workers who happen to be looking for work in specific occupations or industries where jobs aren’t available. Long-term unemployment is elevated in every group, in every occupation, in every industry, at all levels of education.”

The overall rate of those who were unemployed for six months or longer in 2013 was 3.4 times the rate in 2007. There is little variation in this ratio based on educational attainment. In fact, the two categories of “some college” and holders of four-year college degrees showed the highest increases in long-term unemployment. That pattern has been persistent, rendering nonsense the frequent claims of right-wing economists and those intellectually dependent on them that higher or longer-term unemployment is a result of a supposed “mismatch” between worker skills and job requirements.

The picture is not different when we look at other countries. In Canada, the number of people who have been unemployed for 27 to 51 weeks, although down from its peak, is nonetheless close to double what it was in 2008. The number of Canadians who today have been out of work for at least one year is more than double those in the same position in 2008.

In the European Union, where total unemployment has barely declined from its 2013 peak, the number of long-term unemployed has yet to retreat. The long-term unemployment rate, defined by the European Commission as those out of work 12 months or longer, was about two-thirds higher in the third quarter of 2013 than it was in the first quarter of 2009. (The third quarter of 2013 is the latest for which figures are available.) The commission reports that:

“[O]ver the last five years, full-time employment has decreased dramatically — by 9.8 million (–5.4%). On the other hand, at EU aggregate level, the number of employees working part-time has grown by 1.2% (or 480,000 part-timers) in the year to 2013 Q3. There has been steady growth in this type of work in recent years, with 2.9 million more part-time jobs since the third quarter of 2008, a rise of 7.8%. Consequently, the share of part-time workers (of total EU employees) has risen consistently in recent years, reaching 19.3% in the third quarter of 2013.”

Less work, and less of it for those who do have it. The E.U.’s unemployment rate of 10.8 percent climbs to almost 20 percent when the underemployed and discouraged are added to the officially unemployed.

So it is elsewhere. The percentage of Australians unemployed for more than 52 weeks constituted 21 percent of the country’s unemployed in February 2014, in comparison to 13 percent in February 2009. Similarly, New Zealand’s long-term unemployed have more than doubled since 2009.

The race to the bottom

What we have here is something much bigger than any individual or single country. Market forces are at work, which undergirds the “race to the bottom” capitalism has foisted on the world. It is demand that creates jobs and if wages are declining and more are unemployed, demand will naturally decline, leaving less incentive to hire. Eventually, corporate profit margins will be squeezed, with the result that production is moved to locations with ever lower wage, safety and environmental standards.

(Graphic by the Economic Policy Institute)

(Graphic by the Economic Policy Institute)

Although the future will see occasional periods of growth, with temporary rises in employment and wages, the trend toward more austerity, lower wages and more inequality — concomitant with increasing concentration of power in corporate hands as more money leads to more coercive power over governments — is not only firmly in place but accelerating. This is the inevitable result of allowing “market forces” to make ever more social decisions.

Market forces are nothing more than the aggregate interests of the most powerful industrialists and financiers. Blaming sacked employees for being caught in this flow as lacking adequate personal characteristics is not simply an abuse of individualist ideology but is scapegoating.

Capitalism is a system that produces for the private profit of a few by paying employees far less than the value of what they produce. Meeting human need, when it does occur, is an accident of this system. The only long-term escape is the imposition of a different system designed to meet human needs that provides work for all who need it under democratic control.

Ask yourself: Why is is that massive numbers of people are unemployed at the same time that factories and offices sit empty in large numbers? Is it really true that a system that produces such results is the best the world can do?