A basic income is less than meets the eye

A basic income — the concept of everybody getting a regular check from the government regardless of circumstance — is one of those ideas that sound wonderful on the surface but proves to be much less so once we examine the details.

An idea that seems to have gained more traction recently, a basic income is a liberal utopia. It even has its proponents on the Right, including Chicago School godfather Milton Friedman. That alone ought to require us to pause for thought.

A basic income, also sometimes called a universal income, can be defined as a periodic cash payment unconditionally delivered to all on an individual basis, without means-test or work requirements, paid on a regular schedule. Everybody gets this money, on top of their regular earnings.

Northern lights in Suomussalmi region, Finland (photo by Damon Beckford)

Northern lights in Suomussalmi region, Finland (photo by Damon Beckford)

That sounds good, doesn’t it? The devil, of course, is in the details. And, as just noted, a basic income has support from Friedman and hard-line libertarian outfits like the Cato Institute. Friedman gave a talk on this topic (he called his version a “negative income tax”) in 1968, in which he said:

“The proposal for a negative income tax is a proposal to help poor people by giving them money, which is what they need. Rather than as now by requiring them to come before a governmental official, detail all their assets and their liabilities and be told that you may spend x dollars on rent, y dollars on food, etc., and then be given a handout.”

Conservative economists, and certainly Friedman, who remains an icon of the hard Right, are hardly known for wanting government to help anybody (except capitalists). So what is behind this? We are talking here about the economist who helped military dictator Augusto Pinochet implement “shock therapy” in Chile, the result of which was the poverty rate skyrocketing to 40 percent while real wages declined by a third. One-third of Chileans were unemployed during the last years of the dictatorship and the privatized social security system was so bad for Chilean working people that someone retiring in 2005 received less than half of what he or she would have received had they been in the old government system.

And let us not forget the extreme violence that was required to implement Friedman’s neoliberal dreams, with the total of those killed, jailed, “disappeared” or forced into exile totaling tens if not hundreds of thousands. Friedman claimed that he gave only “technical economic advice” and that Chile’s economic and political policies were totally separate, but also wrote that people who demonstrated in favor of human rights at his speeches were “fanatics.”

A back door to cutting services and wages

A basic income is popular among some right-wing economists because such an income would replace social services and provide a subsidy to employers who pay wages below a living level. The Marxist economist Michael Roberts puts this plainly:

“[P]aying each person a ‘basic’ income rather than wages and social benefits is seen as a way of ‘saving money,’ reducing the size of the state and public services — in other words lowering the value of labour power and raising the rate of surplus value (in Marxist terms). It would be a ‘wage subsidy’ to employers with those workers who get no top-up in income from social benefits under pressure to accept wages no higher than the ‘basic income’ which would be much lower than their average salary.”

Although it would likely be difficult for capitalists to force down wages on current employees remaining in their jobs in the short term, a basic income would enable bosses to cut pay to new hires. A prospective employer could easily offer reduced wages on the basis that the prospective employee already has financial support via the basic income. Few interviewers would likely say that so blatantly, but “market pressure” would cut the price of labor, which would remain a commodity in a fully capitalist economy. With starting wages offered to new employees reduced, eventually pressure would build on longer-term employees to accept wage cuts, too.

A Wal-Mart protester is led away during a Black Friday action in Sacramento, California. (Photo via Making Change at Walmart.)

A Wal-Mart protester is led away during a Black Friday action in Sacramento, California. (Photo via Making Change at Walmart.)

Already, low-wage employers like Wal-Mart receive massive subsidies that enable it both to rack up gigantic profits and pay its workers wages below subsistence levels. The spectacle of Wal-Mart workers holding food drives so they can eat might well be replicated on a much larger scale when the basic income proves to be worth less than the value of unemployment benefits and other social-welfare programs, combined with downward pressure on wages.

The Socialist Party of Great Britain notes that unions would not be able to counteract such downward pressure on wages:

“Unions do have some power, but it is limited to working with favourable labour market forces to get higher wages and better working conditions. When, however, labour market conditions are against them the most they can do is to slow down the worsening of wages and working conditions. If all workers got a basic income from the state of £5000, let alone £10,000, a year, this would change labour market conditions in favour of employers. In pay negotiations they would point to the state payment as evidence that they did not need to pay so much in wages or salaries to maintain their employees’ accustomed standard of living. The workers and their unions would realise this and the negotiations would be about what the reduction in wages and salaries should be.”

It won’t make capitalism kinder or gentler

Bargaining over wages in the best of times is no more than negotiating the terms of your exploitation. “Market forces” — which are nothing more than the aggregate interests of the largest industrialists and financiers — will operate just as pitilessly with a basic income because neither a basic income nor collective bargaining over wages touches in any way the social relations of capitalism. A capitalist’s profit derives from paying employees a fraction of the value of what they produce; the inequality that results from that (and the relentless competitive pressure on capitalists to expand on pain of dying) will exist as long as capitalism exists. A basic income would have no effect on this.

A basic income bears some resemblance to the concept of “block grants,” a particular obsession with right-wing politicians in the United States. Block grants are money that would be handed to lower levels of government by the federal government to be dispersed as local officials wish with no accountability as a substitution for money that is ear-marked for specific social programs. These are continually proposed as a back door to dismantling social programs. Similarly, a basic income would be a cash transfer for recipients to pay for whatever services or needs they might have in a private market system, assuming they have adequate total income to obtain it, rather than having services provided for free or at subsidized cost as a public service on the basis of need, as a civilized society ought to do.

The use of the “market” to determine social outcomes would only increase. In other words, more neoliberalism! More people being unable to meet their basic needs would result as wealth would become more of a determinant of results.

Demonstration for a basic income in Berlin, November 2010 (photo by "PD")

Demonstration for a basic income in Berlin, November 2010 (photo by “PD”)

It is also argued that a basic income could disproportionally affect women. The feminist economist Barbara Bergmann countered advocates of basic income who argue that such payments would enable parents to stay home with young children by pointing out that women disproportionally are the stay-at-home parents, to the detriment of their long-term earning potential. Thus a basic income would make women more dependent, not less, she wrote:

“Many if not most employers have come to see women as likely to be continuous labor force participants, not inevitably destined to leave the work force, and therefore as people worth training, worth putting into jobs leading to promotion, worth considering for promotion. This kind of progress would be reversed if a higher proportion of women withdrew from the labor force when their first child was born. For this reason, the full-blown implementation of Basic Income schemes in the near future should not appeal to those for whom gender equality is an important goal.”

Nor would the weakening of health care systems that would be a likely result of cutting social services do any better in fostering equality. Professor Bergmann wrote:

“Both the welfare state and Basic Income reduce inequality of condition. But the welfare state does so with greater efficiency, because it takes better account of inequalities due to differences in needs. If I need an expensive operation and you don’t, giving both of us a Basic Income grant will not go far to make our situations more equal. Only the provision of health services has the chance of doing that.”

Would governments really increase spending?

Those who advocate for a basic or universal income do so on the basis of affordability — there would not be a strain on the treasury, presumably because a spur to consumer spending would boost the economy. But is this so? A hard look at the numbers is not encouraging.

In all types of capitalist societies, from the neoliberalism of the United States to the social democracy of Sweden, the costs of a basic income would far outstrip current spending on social welfare programs.

In the U.S. an annual figure of $10,000 is often bandied about as the appropriate level for a basic income. If this sum were paid out to every U.S. adult, it would cost about $2.4 trillion. That total vastly outstrips current spending on social programs. A Wall Street Journal analysis (hostile to a basic income for the expected conservative reasons) suggests that scrapping income support for the poor, disabled and unemployed, and eliminating veterans’ benefits, Medicaid, Medicare and other health care subsidies would save a composite $1.5 trillion — and likely be quite unpopular.

It could be argued, as the Journal wouldn’t, that money for a basic income could come instead from other sources, such as eliminating massive corporate subsidies, drastically cutting the military budget and even printing money to go toward people instead of the trillions of dollars conjured out of thin air by central banks for “quantitative easing” programs that do little other than fuel stock-market bubbles and inflate speculators’ assets. But for that to happen an immense popular movement would be required, and the enormous effort that would be poured into such a movement would better direct its energies to much more thorough-going changes.

Thus, realistically, a basic income that could hardly be lived on (likely far less than $10,000 annually for United Statesians if it actually came into existence) would be paid for by an effective elimination of the remaining social safety net. Hardly a desirable outcome.

No better prospects where the safety net is stronger

This dynamic would hold in countries with better safety nets. In Canada, a basic income of $10,000 per person would cost 17 percent of Canadian gross domestic product, more than twice what all levels of government in Canada spend on social benefits. Toby Sanger, a Canadian economist who works with unions, argues that any basic income, due to its expense, would soon cease to be universal. He writes:

“Any fiscally sustainable basic income program with an adequate level of benefits would need to be income tested or subject to relatively high clawback or tax rates and so wouldn’t end up being universal and unconditional.  While such a program would be fiscally feasible, it would be subject to many of the same problems with the existing social assistance system that many basic income advocates want to escape.”

Simply instituting a basic income, even if it were fiscally possible, in itself doesn’t address the structural causes of poverty. Mr. Sanger writes:

“While lack of financial resources is of course a primary aspect of poverty, simply providing more money won’t eliminate poverty alone. Social exclusion, inadequate access to education, public goods, opportunities, networks, lack of political influence and many other factors contribute to a persistent of poverty. Systemic racial, gender, class, and ability-based discrimination have resulted in higher rates and a persistent of poverty among women, racialized Canadians, Aboriginal peoples, differentially abled and among those whose families were poor.”

Even a country with generous social-welfare programs like Sweden would find the institution of a basic income difficult. Professor Bergmann calculated that sending a basic-income check equal to a poverty-line income to all Swedes not already recipients of government programs would require about 15 percent of gross domestic product. Doing that, while retaining current benefits, would require higher taxes. As a result:

“[I]f an extra 15 percent of GDP were added to cash payments by government to households, those extra funds would have to be taxed away from households’ wage and property income now devoted to buying consumer goods, now 32 percent of GDP, leaving households just 17 percent of GDP as their net reward for their participation in the production of the entire GDP. That could hardly be tolerated.”

A previous experiment in Canada

Advocates of a basic income often point to the experiment conducted in Dauphin, Manitoba, in the 1970s. A University of Manitoba economist, Evelyn Forget, recently studied the results (a new Conservative government ended the program and the intended government study was never performed) and found positive results. Hospitalization rates declined, more adolescents stayed in school and workforce participation remained steady.

But the experiment in Dauphin, a town of about 12,000 people, wasn’t actually a basic income. There was an income eligibility rate, meaning that only about 30 percent of the town residents actually got a check. A family of four could receive $15,000 per year on top of whatever benefits were already in place. So this was a case of living in a lucky spot.

Mount Meager volcanic complex, British Columbia (photo by Dave Steers)

Mount Meager volcanic complex, British Columbia (photo by Dave Steers)

The province of Ontario, under a Liberal administration, announced this year that it would conduct an experiment in a basic income, to be conducted in selected towns to be determined. But the provincial government has hinted this may be intended as a way of reducing benefits. Its explanation in the budget for this proposal states: “The pilot would also test whether a basic income would provide a more efficient way of delivering income support, strengthen the attachment to the labour force, and achieve savings in other areas, such as health care and housing supports.”

Finland is going forward with its own experiment. The Finnish Ministry of Social Affairs and Health is soliciting input on a program that would provide €560 per month tax-free to 2,000 people in a mandatory test case that would run in 2017 and 2018. The ministry, in a press release, first states it seeks to determine if a basic income would “promote employment,” but then hints at a desire to cut benefits:

“The basic income experiment is one of the activities aiming to reform social security so that it corresponds better to the changes of working life, to overhaul social security to encourage participation and employment, to reduce bureaucracy, and to simplify the complicated benefits system in a sustainable way regarding public finances.”

We live under capitalism, and we don’t get something for nothing, regardless of advocates issuing statements calling for a basic income without any cuts to existing benefits. The measures of democracy and social welfare that have been obtained are a direct result of social movements and the work of activists. They are not gifts handed down to us.

Liberals and social democrats ought to be careful for what they wish. Our energies can better go toward the creation of a sustainable economy that provides for human needs with jobs for all who need them, rather than begging for extra crumbs (that might turn out to be fewer crumbs) from capitalists’ tables.

The crises of neoliberalism won’t be solved by more neoliberalism

We’re in a world of trouble if we are unable to conceive of alternative economic models. We need not linger on the details of rising inequality, political instability, tightening corporate control of governments, looming environmental crisis, increasingly precarious employment (if even available) and the inability to meet the basic needs of billions of people around the world to see that capitalism is failing humanity.

To put this in a nutshell, on a global basis, about 200 million people are unemployed among 2.4 billion who have no stable employment.

Neoliberalism is not a virus foisted on the world by some secret cabal; it is merely the latest phase of capitalism, one that, from the standpoint of capitalists, is the logical outgrowth of the breakdown of mid-20th century Keynesianism. We’re not going back to Keynesianism, because that was a brief period dependent on an industrial base and market expansion. 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 into which the capitalist system can expand.

What happens to rain forests when the market is allowed to decide. (Photo of Montane Rainforest in Ecuador by Gunnar Brehm)

What happens to rain forests when the market is allowed to decide. (Photo of Montane Rainforest in Ecuador by Gunnar Brehm)

So when I saw a paper titled “Industrial policy in the 21st century: merits, demerits and how can we make it work” in the latest issue of Real-World Economic Review, I was intrigued. As its title implies, Real-World Economic Review specializes in papers by economists who think far outside the orthodox box that serves industrial and financial elites very well; the very fact that a field requires a publication with such a title speaks for itself.

The disappointing prescriptions offered in the paper, however, might at best be described as “neoliberal lite.” The author of “Industrial policy in the 21st century,” Mohammad Muaz Jalil of the NGO Swiss Foundation for Technical Cooperation, is well-intentioned, but advocates the same export-oriented policies that have led to sweatshops and dangerous working conditions across the developing world. It also implies endless growth, a dangerous illusion.

More of the same hardly seems a likely escape, and that is before we contemplate the mathematical impossibility of every country exporting its way out of economic difficulty. For every country that achieves an trade surplus, some other country has to have a trade deficit.

What works for a few doesn’t work for all

Mr. Jalil begins by noting that East Asian countries used industrial policies, including protectionist policies, to build their economies, most notably Japan, South Korea, Taiwan and Singapore. He uses the Organisation for Economic Co-operation and Development (OECD) definition of industrial policy:

“Industrial Policy is any type of intervention or government policy that attempts to improve the business environment or to alter the structure of economic activity toward sectors, technologies or tasks that are expected to offer better prospects for economic growth or societal welfare than would occur in the absence of such intervention.”

The above East Asian countries used various mixes of export-oriented growth strategies and protection for young industries. Favored corporations received export subsidies, reduced interest rates and preferential allocation of foreign exchange with the goal of these enterprises becoming competitive globally. Manufacturing in these countries started at a low level but steadily moved up the “value chain” — that is, they were able to produce increasingly sophisticated products.

Mr. Jalil does acknowledge some criticisms of this type of policy, noting the difficulty in foreseeing who or what will be the winners in the future, the much stiffer international competition of today, that international supply chains have become dominant, and that today’s severe global trade regime restricts the ability of governments to intervene. Governments today nonetheless use industrial policies, albeit within the so-called “Washington consensus” (which is really the “Washington diktat”) that imposes neoliberal policies around the world through the World Trade Organization and international lending banks controlled by the United States and to a lesser degree the European Union.

When we get to specific examples, the paper’s prescriptions rapidly break down. Mr. Jalil presents Brazil and South Africa as examples. Brazil is one of the world’s most unequal societies, and one with severe economic problems not likely to improve in the wake of the Brazilian Right’s soft coup against former President Dilma Rousseff. A weak currency, lack of growth, continuing inflation, huge piles of debt owed in dollars and euros, and local corporations saddled with debt and low credit ratings seems not a rosy picture. Poverty is widespread, and activists who challenge land owners who clear-cut rain forests are not infrequently killed.

South Africa has the most inequality of any country in the world. The African National Congress threw away its moral authority to implement its “Freedom Charter” upon taking power by negotiating away its economic control. The ANC took office handcuffed, and having tied themselves to financial markets, those markets applied further “discipline” by attacking the South African economy at the first sign of anything that displeased them.

South African workers, especially miners, are subjected to violence at the hands of the ANC government, abetted by ANC-aligned unions. More than half of South Africans live in poverty and the unemployment rate is 26.6 percent. This is an example to emulate?

Sweatshop advocates don’t have to work in them

Next up, the author promotes the Bangladesh garment industry as a success story! Well, for Wal-Mart and other global retailers who rack up enormous profits on the backs of sweatshop workers being paid starvation wages this is undoubtedly a success. But as a development strategy beneficial to working people? Let’s look at the evidence.

Bangladeshi garment workers can work 14 to 16 hours a day, some seven days a week. The minimum wage is little more than half of the minimum required to provide a family with shelter, food and education, according to the activist group War on Want. The Institute for Global Labour and Human Rights estimates that a worker in Bangladesh would have to labor 15 1/2 hours to buy a gallon of milk. In 2014, the Wal-Mart chief executive officer earned 24,500 times more than a Bangladeshi sweatshop worker. Yet despite repeated accidents resulting in mass deaths, little has changed.

The shipbuilding industry is also promoted as a route to prosperity for Bangladeshis. A key component of this industry is “ship-breaking,” whereby ships are driven onto land to be disassembled. The Institute for Global Labour and Human Rights reports that ship-breakers work 12-hour shifts, seven days a week, and are paid 30 to 45 cents an hour to perform a job “in which it is common for workers to be maimed or killed.” The ship-breakers are reported to live in crowded hovels, sleeping on concrete floors.

Ship-breaking in Chittagong, Bangladesh (photo by Naquib Hossain)

Ship-breaking in Chittagong, Bangladesh (photo by Naquib Hossain)

Nobody would choose to do such things except under the most dire deprivation. That such work is a route to sustainable development is a common trope of neoliberal apologists, but defies common sense in any humanistic context.

The author points to the increasing number of developing-country corporations among the world’s biggest, but those numbers are nonetheless still minuscule. In fact, the corporations of the Global North remain overwhelmingly dominant. A study by Sean Starrs in New Left Review found that, when the world’s industries are grouped into 25 broad categories, U.S. firms led in 18 and in 10 of those U.S. corporations hauled in at least 40 percent of the aggregate profits. Germany and Japan hold the lead in two other sectors.

In support of these prescriptions, Mr. Jalil argues that as countries move up the value chain, the next country can “take over” “entry” industries and begin its own ascent. But there is only so much productive capacity that the world can absorb — the idea that every country can become a manufacturer of the same high-end electronics equipment, for example, defies reality. It also ignores, again, that every country can’t be a net exporter. It also sidesteps the fact that China’s growth threatens to “crowd out” other competitors due to its massive size.

Minqi Li, in his book The Rise of China and the Demise of the Capitalist World Economy, argues that the huge mass of low-wage Chinese workers will drag down wage levels globally; the increase of industrialization in developing countries will lead to exhaustion of energy sources; and that ecological limits will force a halt to growth, fatal to a system dependent on growth. Professor Li argues that an upward convergence of wages around the world in present-day low-wage havens would significantly reduce capitalists’ profits.

In this scenario, capitalists would seek to cut wages in core countries to make up the difference, which in turn would trigger reductions in demand. Reduced demand would spell trouble for any export-oriented economy, especially as the ultra-low wages suppress domestic consumption.

Nor can sufficient jobs be created for the expanding population of farmers and others dispossessed from the countryside — Samir Amin calculates that even with an increase of seven percent in gross domestic product for the next 50 years, no more than a third of this population could find regular work. No such growth has ever occurred for such sustained periods.

Where is the second Earth going to come from?

Finally, all this imagined explosion of industry is predicated on endless growth. We live on a finite planet, and thus infinite growth is impossible. Consumption is already growing beyond Earth’s carrying capacity and the anthropogenic changes to the atmosphere have us dangerously close to the point of no return in terms of global warming. Humanity is currently consuming the equivalent of 1.6 Earths, and at current rates of consumption trends, that will rise to two Earths by the 2030s.

Not a substitute for Earth (Image created by NASA via Hubble Space Telescope)

Not a substitute for Earth (Image created by NASA via Hubble Space Telescope)

Ramping up ever more production, even assuming that markets could be found for it, can not be a long-term solution for poverty. Managers of corporations are answerable to private owners and shareholders, not to society, and thus do all they can to externalize environmental and other costs onto society. Alas, renewable energy is not a short cut to reversing global warming. Renewable energy is not necessarily clean nor without contributions to climate change (the production of wind turbines and electric cars lead to plenty of pollution), and the limits that living on a finite planet with finite resources presents are all the more acute in an economic system that requires endless growth.

Finally, the belief that industrial policy can create prosperity is predicated on developing countries having the independence to implement protectionist measures. Mr. Jalil argues that the poorest countries have temporary reprieves from World Trade Organization rules until the end of this decade, but that they have room for maneuver is questionable at best. Not only WTO rules, but the bilateral and multilateral “free trade” agreements render such protections illegal. The Trans-Pacific Partnership, which includes several developing countries, would further restrict any ability to protect local industries — and the TPP is intended to be a model for other countries. (Although wounded, TPP is not dead yet because a two-year window has yet to expire.)

In a world where “free trade” agreements strongly constrict the ability of governments to enact laws and regulations, and which grant multi-national corporations the right to sue to eliminate any law they don’t like — in essence, a requirement that corporate profits trump any labor, safety, environmental or health measure — the road to becoming a net exporter will begin and end with sweatshops for most countries.

Low wages and a lack of enforceable regulations are precisely why multi-national capital is invested in developing countries like Bangladesh. The global “free trade” regime is nothing more than a mechanism for the most powerful industrialists and financiers of the Global North to accelerate a race to the bottom and increase their exploitation to the maximum humanly possible. That developing countries can win at this — or that the advanced capitalist countries will allow more competitors to arise — is fantasy. A neoliberal fantasy.

Mr. Jalil concludes with a call for private-sector funding able to “respond to diversity and dynamism inherent in markets.” Huh? Markets in the capitalist world are nothing more than the aggregate interests of the largest industrialists and financiers — allowing markets to make an ever wider range of social decisions is what has led the world to its impasse and ever harsher austerity for working people. Neoliberal capitalism may teach that people exist to serve markets, but we don’t have to accept that.

The belief that private funding — which, after all, is done to extract profit regardless of social or environmental cost — will make us live happily ever after should be left to the realm of fairy tales. As the saying goes, insanity is believing that doing the same thing over and over again will produce different results.

Work harder so speculators can get more

Class warfare is poised to reach a new milestone as this year’s combined total of dividends and stock buybacks by 500 of the world’s largest corporations will exceed US$1 trillion.

So large is that figure that, for the second year in a row, the companies comprising the S&P 500 Index (a list of many of the world’s biggest corporations) will pay out more money in dividends and stock buybacks than the total of their profits. Yes, times are indeed good for speculators. Not so good for employees — you know, the people who do the actual work — whose pay is stagnant or declining so that those at the top can scoop up still more.

Although dividends, a quarterly payment to holders of stock, are steadily increasing, the increase in stock buybacks has been steeper. The total of these has tripled since 2009 as financiers and industrialists feverishly extract as much wealth as they can. This is part of why the “recovery” since the 2008 economic collapse has been a recovery only for those at the top.

Times have not changed as much as we think they have ("Baskaks" by Sergei Vasilyevich Ivanov)

Times have not changed as much as we think they have (“Baskaks” by Sergei Vasilyevich Ivanov)

In short, a buyback is when a corporation buys its own stock from its shareholders at a premium to the current price. Speculators love buybacks because it means extra profits for them. Corporate executives love them because, with fewer shares outstanding following a buyback program, their company’s “earnings per share” figure will rise for the same net income, making them look good in the eyes of Wall Street. Remaining shareholders love buybacks because the profits will now be shared among fewer shareholders.

Wall Street and corporate executives both win! Hurrah! Who could by hurt by this? Oh, yes, the employees. They’ll have to suffer through pay freezes, work speedups and layoffs because the money shoveled into executive pay and financial industry profits has to come from somewhere. This sort of activity helps buoy stock prices. So does the trillions of dollars the world’s central banks have printed to sustain their “quantitative easing” programs.

We’re not talking loose change here. The U.S. Federal Reserve pumped $4.1 trillion into its three rounds of quantitative easing; the Bank of England spent £375 billion; the European Central Bank has spent about €1.34 trillion; and the Bank of Japan has spent ¥220 trillion so far. That’s a total of US$8 trillion or €7.4 trillion. And the last two programs are ongoing.

Encouraging investment or inflating bubbles?

The supposed purpose of quantitative-easing programs is to stimulate the economy by encouraging investment. Under this theory, a reduction in long-term interest rates would encourage working people to buy or refinance homes; encourage businesses to invest because they could borrow cheaply; and push down the value of the currency, thereby boosting exports by making locally made products more competitive.

In actuality, quantitative-easing programs cause the interest rates on bonds to fall because a central bank buying bonds in bulk significantly increases demand for them, enabling bond sellers to offer lower interest rates. Seeking assets with a better potential payoff, speculators buy stock instead, driving up stock prices and inflating a stock-market bubble. Money not used in speculation ends up parked in bank coffers, boosting bank profits, or is borrowed by businesses to buy back more of their stock, another method of driving up stock prices without making any investments.

The practical effects of all this is to re-distribute income upward. That is the raison d’être of the financial industry.

What else could be done with the vast sums of money thrown at the financial industry? In the U.S. alone, home to a steadily crumbling infrastructure, the money needed to eliminate all student debt, fix all schools, rebuild aging water and sewer systems, clean up contaminated industrial sites and repair dams is estimated to be $3.4 trillion — in other words, $700 billion less than the Federal Reserve spent on its quantitative-easing program.

The British think tank Policy Exchange estimates Britain’s needs for investment in transportation, communication and water infrastructure to be a minimum of £170 billion, or less than half of what the Bank of England spent on its QE scheme.

Borrowing to give more to speculators

To return to the $1 trillion in dividends and buybacks, a research report by Barclays estimates that those payouts by S&P 500 corporations will total about $115 billion more than their combined net income. As a Zero Hedge analysis puts it:

“[C]ompanies will promptly send every single dollar in cash they create back to their shareholders, and then use up an additional $115 billion from cash on the balance sheet, sell equity or issue new debt, to fund the difference.”

Near-zero interest rates, another central bank policy that favors the financial industry, have enabled this accumulation of debt. Debt not for investment, but simply to shovel more money into the pockets of financiers and executives. But debt can’t increase forever, and someday, perhaps in the not too distant future, central banks will raise interest rates, making debt much less attractive. The Barclays report calculates that 2015 also saw buybacks and dividends total more than net income; the last time there was consecutive years in which this happened were 2007 and 2008.

payouts-of-divdends-and-buybacksIt would of course be too simplistic to interpret this metric as a signal that an economic collapse on the scale of 2008 is imminent, but is perhaps a sign that the latest stock market bubble may be close to bursting.

Another signal that trouble may be looming is that money is now being shoveled into bonds, a sign that confidence in the stock market is waning. A New York Times report suggests that European and Asian investors (the Times of course is much too genteel to use the word “speculator”) are pouring so much capital into U.S. bond markets that a bubble is being inflated there as well. These speculators are seeking higher returns from bonds floated by U.S. corporations than they can get at home. The Times reports:

“The surge in flows echoes a wave of investment in the years right before the financial crisis, when mostly European investors snapped up billions of dollars of mortgage-backed securities before the American housing market imploded.

The current numbers are also arresting. According to [former Treasury Department official Brad W.] Setser’s figures, about $750 billion of private money has poured into the United States in the last two years alone.”

Starved for investment

Setting aside the touch of xenophobia in it, the Times report does at least broach the subject of under-investment. And wealthy investors possessing far more money than can possibly be invested is hardly an unknown phenomenon. As an example, let us examine Wal-Mart, which racked up more than $16 billion in net income for 2015 and seems poised to better that this year.

The Walton family, heirs to founder Sam Walton, owns about half of Wal-Mart’s stock and receive a corresponding share of the billions of dollars in dividends the company pays yearly. It also spends billions more buying back stock annually, an indirect help to the Waltons. This is a company notorious for dodging taxes while paying its employees so little they require government assistance, and is the recipient of vast amounts of government handouts.

The Waltons make tens of thousands times what their ill-paid employees earn. They certainly don’t work tens of thousands harder — or even work at all, as the billions roll in just for being born into the right family. Wal-Mart is far from alone, but does provide an exemplary example of class warfare. An estimated $1 trillion a year goes to corporate profits that once went to wages, according to a PBS Newshour report.

The harder you work, the more the boss, and financiers, make. What sort of system is this?

Wages are so stagnant even the Federal Reserve has begun to notice

You are working harder while not making more. It isn’t your imagination. The latest research demonstrating this comes, interestingly, from the St. Louis branch of the United States Federal Reserve.

Perhaps the researchers examining the relation between wages and productivity hoped this work wouldn’t be noticed by the public, as it was published in an obscure publication, Economic Synopses, produced by the St. Louis Fed. Regardless, it is of interest. The two authors, B. Ravikumar and Lin Shao, not only found a divergence between rising productivity and stagnant wages in the current “recovery” from last decade’s economic collapse, but that this has been a consistent pattern.

The Economic Synopses paper found that labor productivity for U.S. workers has increased six percent since 2009, while wages have declined 0.5 percent. (The authors measure labor productivity as real total output divided by total hours worked and labor compensation as real total labor compensation divided by total hours worked.)

Looking back to the previous officially designated recession in the U.S., declared to have ended in 2001, the authors found that over the following five years productivity increased about 13 percent, while wages increased by about five percent. Overall, the authors summarize by demonstrating that wages have lagged productivity by a wide margin since 1950, with the gap beginning to widen in the 1970s. Productivity in 2016 is 3.8 times higher than it was in 1950, while wages are only 2.7 times greater.

Wages and productivity in the United States since 1950 (Graphic by the St. Louis Fed, based on Bureau of Labor Statistics data)

Wages and productivity in the United States since 1950 (Graphic by the St. Louis Fed, based on Bureau of Labor Statistics data)

We are talking about the Federal Reserve here, so Dr. Ravikumar and Mr. Shao are not offering any analysis. In about a tepid a conclusion as possible, they write:

“In conclusion, labor compensation failed to catch up with labor productivity after the 2007-09 recession. However, the driving force behind it is not unique to the recent recession but is part of a long-term trend of a widening productivity-compensation gap.”

Ideology in the service of inequality

Hmm, something mysterious? Or as natural as the tides of the ocean? Well, no, if we think for even a moment about the asymmetric class warfare that has raged for decades. Yet neoclassic economic ideology (and not only its extreme Chicago School variant) continues to insist that we get what we deserve and that labor is compensated for what it produces.

Neoclassical economics is an ideologically driven belief system based on mathematical formulae, divorced from the conditions of the actual, physical world, and which seeks to put human beings at the service of markets rather than using markets to provide for human needs. Economic activity is treated as a simple exchange of freely acting, mutually benefitting, 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.

The real world does not actually work this way — the executives and financiers who reap fortunes from the huge multi-national corporations they control and who can bend governments to their will have rather more power than you do. Neoclassical economics does not adjust to the real world because it is, at bottom, an ideological construct to justify massive inequality, which is why two other Federal Reserve researchers declared that the reason for economic difficulty in recent years is that wages have not fallen enough!

Productivity gains outstrip wages around the world

Stagnant or declining wages, however, are quite noticeable in the real world. Independent studies have found that the lag of wages as compared to productivity costs the average U.S. and Canadian employee hundreds of dollars per week. That is by no means a trend limited to North America — employees in Britain, France, Germany, Italy and Japan have experienced differentials between wages and productivity, albeit not as severe as what is endured by U.S. workers.

Where is the extra money taken out of employees’ pockets going? Not necessarily to the bosses at the point of production — financiers are taking an increasingly large share of profits. Financialization is a response to declining rates of profits and that the one percent have more money flowing into their bank accounts than they can find useful outlets for investment. During periods of bubbles, financial speculation becomes more profitable than production, drawing still more money and thus increasing the already bloated size of the financial industry.

In turn, ultra-low interest rates help inflate stock-market bubbles, in effect acting as a subsidy for financial profits. The world’s central banks have flooded financial markets with more than US$6.5 trillion (€6 trillion) in “quantitative easing” programs, and all that has been accomplished is the inflation of a stock-market bubble because speculators have poured money into stock markets in the wake of low bond returns resulting from the quantitative easing. Concomitantly, corporate executives have borrowed money at low interest to fuel a binge of buying back stocks, adding to speculative fevers.

In an interesting article in the July-August 2016 issue of Monthly Review, “The Profits of Financialization,” Costas Lapavitsas and Ivan Mendieta-Muñoz calculate that the profits earned by the financial industry as a percentage of overall U.S. corporate profits increased steadily throughout the second half of the 20th century, more than tripling from 1950 to the early 2000s. Although now below the early 2000s peak, financial profits remain at historically high levels.

U.S. financial profits as percentage of corporate profits of domestic industries, 1955–2015 (Graphic by Monthly Review, based on U.S. Bureau of Economic Analysis data)

U.S. financial profits as percentage of corporate profits of domestic industries, 1955–2015 (Graphic by Monthly Review, based on U.S. Bureau of Economic Analysis data)

Because central banks have kept interest rates at extraordinarily low levels for years, the authors argue that high financial profits represent a “vast public subsidy to the financial system” and thus an “expropriation” that is “a hallmark of financialization.”

Federal Reserve researchers may have just discovered what has long been apparent to working people and “heterodox” economists, but aren’t going to offer any solutions, must less formulate critiques of the system that produces such results.

The harder you work, the richer the executives and bankers get. What if, instead, those who did the work reaped the rewards? That, however, will require a different system.

CETA’s specter of corporate dictatorship still haunts Canada, EU

The most tepid of blows for democracy was struck this week when the president of the European Commission, Jean-Claude Juncker, reversed himself and declared that the parliaments of the EU member states will vote on the “free trade” deal with Canada after all. Only a week earlier, President Juncker had dismissed the idea of any democratic input, insisting that the deal would be unilaterally approved by EU ministers.

The earlier intended diktat was no aberration, and the hasty reversal is much more a cosmetic exercise in public relations than a new-found respect for public opinion. The public has been excluded from the Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union from the start. There are reasons for that, centering on CETA being indistinguishable from the various “free trade” deals under way and, like the Trans-Pacific Partnership, one that goes beyond even the North American Free Trade Agreement.

President Juncker first said on June 28 that there was no need for ratification by European parliaments — although he graciously conceded that EU governments  could “scrutinize” the CETA text. The problem, he said, was that “allowing national parliaments to have a say in the agreement will paralyze the process and put the bloc’s credibility at stake,” reported Deutsche Welle. Well, we can’t have messy democracy get in the way of corporate wish lists, can we?

Ottawa from the McKenzie Bridge (photo by Siqbal)

Ottawa from the McKenzie Bridge (photo by Siqbal)

Deutsche Welle reported on July 5 that Germany and France had insisted parliamentary votes be taken, with the German economy minister, Sigmar Gabriel, saying publicly that President Juncker’s comment was “incredibly stupid” and “would stoke opposition to other free trade deals.” No opposition to CETA here; merely discomfort that the lack of democracy had become too blatant. So it would be unrealistic to expect the Bundestag or any other parliamentary body to vote in the interest of their citizens without much more popular pressure being applied.

On the other side of the Atlantic, the Canadian government is putting a happy face on what will be a longer process than expected, saying the European reversal was “expected.” International Trade Minister Chrystia Freeland has has gone so far as to declare CETA a “gold-plated trade deal.” The government of Prime Minister Justin Trudeau has followed a path very similar to that of U.S. President Barack Obama, quickly making a couple of easy gestures, such as installing a gender-equal cabinet, but allowing almost all of Stephen Harper’s draconian laws to stay in place. Pushing for CETA’s passage, despite its being negotiated in secret by the Harper régime, is consistent with that path.

Consultation process is window-dressing

The European Commission’s antipathy to democracy is also par for the course. The EU trade office, the European Commission Directorate General for Trade, set up a process of public consultation, but seems to have not paid any attention to it. A spokesman for the watchdog group Corporate Europe Observatory said of this window-dressing “consultation”:

“The Commission is not really serious about its own consultation. It’s more about image than substance. … I think those who chose to respond to the Commission’s consultation are being ridiculed.”

The “consultation” that counted during negotiations was that of multi-national corporations. As is standard with “free trade” agreements, laws and regulations that protect health, workplace standards and the environment will be considered barriers to trade, and ordered removed by secret tribunals with no accountability. Here again we have a farce. Following the conclusion of CETA negotiations, the German and French governments wanted changes made to the investor-state dispute settlement mechanism that enables corporations to challenge governments (but not the other way around).

Grand Place, Brussels (photo by Wouter Hagens)

Grand Place, Brussels (photo by Wouter Hagens)

Did Berlin and Paris suddenly decide that ceding their sovereignty to secret tribunals, in which corporate lawyers who specialize in representing multi-national corporations sit in judgment, was maybe a bad idea? Not really. This was, like the entire process, a public relations problem. So instead of the traditional three-member tribunal picked from a roster created by an established corporate-aligned arbitration body, as is the case with complaints filed under NAFTA rules, CETA would have its own 15-member permanent tribunal. And, as an added bonus, there will even be an appeals tribunal. But who will sit on these two bodies? None other than the same corporate lawyers who would otherwise hear such cases.

Here’s the relevant passage, buried deep in the CETA text, at Article 8.26:

“The Members of the Tribunal … shall have demonstrated expertise in public international law. It is desirable that they have expertise in particular, in international investment law, in international trade law and the resolution of disputes arising under international investment or international trade agreements.”

Building on NAFTA’s anti-democratic principles

No different from the qualifications deemed necessary in existing “free trade” agreements or those proposed in the Trans-Pacific and Transatlantic partnerships. The wording guarantees that corporate lawyers or academics who specialize in existing tribunals and who have adopted the mindsets of their clients will adjudicate these decisions — in other words, a steady stream of decisions elevating the right of a corporation to make the maximum possible profit above all other human considerations. This dynamic has to led to NAFTA becoming a lose-lose-lose proposition for working people in Canada, the U.S. and Mexico, and CETA will accelerate this trend.

A report on the ramifications of CETA, prepared by Maude Barlow, says:

“With CETA and TTIP, for the first time, subnational governments (municipalities, provinces and states) will be subject to local procurement commitments that bar them from favouring local companies and local economic development. According to an analysis from the Canadian Centre for Policy Alternatives, this will substantially restrict the vast majority of local governments in North America and Europe from using public spending as a catalyst for achieving other societal goals — from creating good jobs, to supporting local farmers, to addressing the climate crisis.”

Regulations would be “harmonized,” meaning reduced to the lowest level of protection that can be found, and likely lower than that. Ms. Barlow writes:

“CETA commits to a process whereby any differences in regulations between Europe and Canada, be they labour rights, environmental protection standards, food safety rules or tax laws, could be considered an obstacle to trade and suppressed. Both parties agree to share information of contemplated or proposed future regulations with one another even before they share them with their own elected parliaments in order to ensure they are not trade distorting. That means the other party could make changes to a piece of legislation before it has been seen by its own elected officials or the public.”

Pressure will be brought to bear to privatize water systems and other public utilities, and pharmaceutical prices for Canadians will rise significantly — costing as much as C$1.6 billion per year. As is customary with “free trade” agreements, there are no limitations on who or what constitutes an “investor.” The rights of corporations are delineated over hundreds of pages, but the chapters that deal with labor, health, safety and environmental standards use the usual provisional language. For example, in Chapter 21.7, “The Parties endeavour to cooperate and to share information on a voluntary basis in the area of non-food product safety.” When it comes to corporate demands, however, “must” and “shall” are the words used.

CETA, like its cousins TTP and TTIP, would cement into place the right of multi-national corporations to dictate to governments without any democratic input. This would be irreversible. Worse, the approval of CETA would provide fresh momentum for TPP and TTIP. We have no time to waste.

Millions for the boss, cuts for you

More is never enough. By now we really don’t need yet another statement of inequality, but here goes anyway: The average ratio of chief executive pay to employee pay has reached 335-to-1 in the United States.

And some of the highest paid CEOs were at the companies that stash the most money in overseas tax havens. Among the giant corporations that comprise the Standard & Poor’s 500, the 25 at the companies with the most unrepatriated profits hauled in 79 percent more than other S&P 500 chief executive officers, reports the AFL-CIO union federation’s Paywatch 2016 report. Just 10 corporations — Apple, Pfizer, Microsoft, General Electric, IBM, Merck, Cisco Systems, Johnson & Johnson, Exxon Mobil, and Hewlett-Packard successor HP Inc.  — are believed to be holding about $948 billion in accounts outside the reach of tax authorities.

Being at the top of the corporate pyramid certainly pays — the average S&P 500 chief executive officer hauled in $12.4 million in 2015, while the average non-supervisory worker earned $36,875. That average worker would have to work 335 hours to earn what the CEO makes in one hour. For a worker earning the federal minimum wage, the pay ratio is 819-to-1.

CEO-to-worker ratioThe Paywatch 2016 report illustrated this stark inequality with the example of Mondelez International Inc., where Chief Executive Officer Irene Rosenfeld earned close to $20 million last year, or 534 times the average worker’s pay. At the same time, Mondelez asked workers at a Nabisco cookie and cracker plant in Chicago to take a permanent 60 percent cut in wages and benefits, or their jobs would be moved to Mexico. As nobody could agree to such conditions, hundreds of people were laid off. Ms. Rosenfeld, incidentally, received a $7 million raise for her troubles, likely comparable to the combined pay of the laid-off workers.

Lest we fret that Mondelez may be undergoing tough times, please don’t lose any sleep — the company reported net income of $7.3 billion in 2015 and $15 billion for the past five years. Nor should sleep be lost worrying about Mondelez’s tax “burden” as it paid all of $49 million in U.S. taxes in 2015. That’s a tax rate of less than one percent.

That company is not unique, of course. Workers at Verizon Communications Inc. have been on strike since April 13 as Verizon seeks to move call-center jobs overseas, outsource instillation work to low-wage, non-unionized contractors, and reduce benefits. Verizon wants to stick it to its workers despite racking up $45 billion in net income over the past five years, at the same time paid no taxes and has stashed $1.3 billion in offshore accounts.

Avoiding taxes has become an art form for U.S. corporations, especially those who operate as multi-nationals. Dodging taxes is simply another “capitalist innovation,” and so common that a single small building in the Cayman Islands (where the corporate tax rate is zero percent) is the registered address for almost 19,000 corporations. Tax dodging also means higher pay for top executives — yet another corporate subsidy.

tax burden chartThis goes beyond simple unfairness, although corporate tax collection in the U.S. has declined drastically, falling from about one-third of U.S. government tax receipts in the 1950s to 10 percent in 2015; it was as low as 6.6 percent in 2009. Nor is it simply that less taxes collected reduces the ability of governments to effectively provide an adequate social safety net. Higher taxes actually lead to more jobs. Countries that provide more subsidies toward services that are complementary to work — such as child care, elder care and transportation — have higher workforce participation rates. Yes, contrary to orthodox economics, higher rates of taxation lead to more employment.

Let’s not reduce all this to simply greed. The relentless competition endemic to capitalism mandates that corporations engage in an endless race to the bottom. “Grow or die” is an inescapable mandate — if you don’t grow, your competitor will and put you out of business.

That’s a war that working people can never win. Class warfare rages hotter than ever, but there is only one class that is waging it.

We all pay for low wages

When you are paid starvation wages, it’s up to public-assistance programs to make up the difference. That government assistance, costing treasuries billions of dollars per year, is part of the high cost of low wages.

Raising the federal minimum wage to $12 an hour would save an estimated $17 billion per year for U.S. taxpayers, according to a study by the Economic Policy Institute. The EPI’s study, “Balancing paychecks and public assistance,” found that, not surprisingly, low wages equal government help. A majority of United Statesians who earn less than $10 an hour receive public assistance, either directly or through a family member.

The study’s author, David Cooper, examined participation in eight federal and state means-tested programs for low-income families — the earned income tax credit; the refundable portion of the Child Tax Credit; the Supplemental Nutrition Assistance Program (what used to be known as food stamps); the Low Income Home Energy Assistance Program; the Supplemental Nutrition Program for Women, Infants and Children, commonly known as WIC; Section 8 housing vouchers; Medicaid; and the Temporary Assistance for Needy Families program and its state and local equivalents.

Protestors outside a McDonald's in Minneapolis demand a $15 hourly wage and paid sick days (photo by Fibonacci Blue)

Protestors outside a McDonald’s in Minneapolis demand a $15 hourly wage and paid sick days (photo by Fibonacci Blue)

Working people with low wages use these programs heavily. One-third of Supplemental Nutrition Assistance Program recipients are full-time workers and one-half of WIC recipients are full-time workers.

Contrary to right-wing propaganda, most recipients of public assistance work, a large number of them full time. The EPI study reports:

  • Among families or individuals receiving public assistance, two-thirds (67 percent) work or are members of working families (families in which at least one adult works). When focusing on non-elderly recipient families and individuals under age 65, this percentage is 72 percent.
  • About 69 percent of all public-assistance benefits received by non-elderly families or individuals go to those who work.
  • About 47 percent of all working recipients of public assistance work full time (at least 1,990 hours per year).

Nearly $53 billion of public-assistance money is paid annually to people who work full time, the EPI study reports. And, full- or part-time, money going to working people is concentrated in specific industries. More than half goes to workers in three sectors: educational, health and social services; arts, entertainment, recreation, accommodation and food services; and retail trade.

Privatizing profits, socializing costs

Although not addressed in the EPI study, a big conclusion to be drawn from this data is that these billions of dollars of public-assistance money constitutes a massive subsidy of business. Often highly profitable businesses. Take War-Mart, for example. Wal-Mart reported net income of $14.7 billion for 2015 and nearly $80 billion for its last five fiscal years. Yet the company pays it employees so little that employees organize food drives for themselves while it dodges billions of dollars of taxes and receives further billions of dollars in government subsidies.

Currently, the federal minimum wage is $7.25 an hour. Adjusted for inflation, the U.S. minimum wage peaked in 1968 when the then $1.60 rate would be worth $10.95 in 2016 money. So although that peak total is itself low, the federal minimum wage has lost more than one-third of its value.

Or, to put this in another perspective, one of the demands of the March on Washington in 1963 was a minimum wage of $2 an hour. Adjusted for inflation, $2 an hour in 1963 would be worth $15.56 today. So today’s activists demanding a $15 minimum wage are simply asking for the same thing that was asked a half-century ago. Nothing outlandish.

It is no secret that wages have badly lagged productivity, nowhere more in the global North than in the United States. Wages for U.S. workers have fallen behind productivity gains since the 1970s, to the point that the average U.S. household receives $18,000 per year less than it would had wages kept pace. Canadian households are about $10,000 behind. Differentials between wages and productivity are also found, albeit in less drastic form, across Europe and in Japan.

We can’t order a return to Keynesianism

So what conclusion should we draw from all this? Unfortunately, the EPI study concludes with what can only be termed weak-tea liberalism. Wishing for a return to Keynesianism, the author writes:

“[W]e can raise wages by eliminating the lower subminimum wage for for tipped workers, updating overtime protections, strengthening workers’ ability to organize and negotiate with employers collectively, improving enforcement of labor laws, providing undocumented immigrant workers a path to citizenship, and ensuring monetary policy prioritizes full employment.”

There is nothing wrong with any of these prescriptions. Such reforms would be quite welcome. But these goals can not simply be conjured into existence. Nobody decreed we shall now have neoliberalism and nobody can decree we shall now go back to Keynesianism. We haven’t gotten to the disastrous state we are in by accident or simply because of the personal decisions of corporate executives and financiers.

Rather, the neoliberalism we experience today is the logical result of capitalist development; “logical” in the sense that the relentless scramble to survive competition eventually closed the brief window when rising wages were tolerated and government investment encouraged. The Keynesian policies of the mid-20th century were a product of a specific set of circumstances that no longer exist and can’t be replicated.

Intensified competition over private profits, and that “markets” should determine social outcomes, inexorably leads to a consolidation in which industries are dominated by a handful of giant corporations, and those corporations gain decisive power over governments and relentlessly reduce overhead (especially wages and benefits) in a scramble for survival.

Fighting back is surely what working people around the world need to do. But restoring a “golden age” of capitalism that never really existed (and definitely didn’t if you were a woman confined by limited options or an African-American facing officially sanctioned discrimination and/or state-endorsed terrorism) is a quixotic goal. Better to drive our energies into creating a better world, one in which the economy is geared toward human need rather than private profit.