Comments Guidelines

All comments are pre-moderated. No spam, slurs, personal attacks, or foul language will be allowed.

Wednesday, July 29, 2015

Basics: Is trade zero-sum between workers in different countries? had a long, interesting interview with Senator Bernie Sanders covering a large number of political and economic issues. In this post, I want to focus on just one issue he raised: Whether rising incomes for Chinese workers have to come at the expense of U.S. workers. Here is what Sanders told Vox's Ezra Klein:
I want to see the people in China live in a democratic society with a higher standard of living. I want to see that, but I don't think that has to take place at the expense of the American worker. I don't think decent-paying jobs in this country have got to be lost as companies shut down here and move to China.
What Sanders doesn't mention is that the market, left to itself, will indeed force a tradeoff between U.S. and Chinese workers. We can see this via the Stolper-Samuelson Theorem, which says that increasing trade will raise the real incomes of a country's abundant factors of production and reduce the real incomes of the scarce factors of production. The reason is that abundant factors of production (relative to the rest of the world, of course) will find new markets abroad as trade increases, while scarce factors of production will face increased import competition. Since China is a labor-abundant country and the United States a labor-scarce one, the theorem implies that real wages will rise in China and fall in the United States as they increase trade (all trade, not just with each other). And this effect can be sped up if U.S. companies close factories in the United States and open them in China, just as we have seen happen.

To disable the tradeoff requires political intervention in the market. If you want to preserve gains from trade that are predicted by the theory of comparative advantage, and you want to not worsen income inequality in the United States, you need to find a way, as Ronald Rogowski pointed out, for  the winners to compensate the losers from trade. This isn't easy: As Rogowski also noted, the winners increase their clout in the political system while the losers see their influence decrease (look at the long-declining influence of unions here). As I've discussed before, the increased mobility of capital exacerbates this problem in the U.S., since capital is much more mobile than workers. And so we have seen a steady decrease in the tax burden paid by corporations and the rich, more trade agreements signed, and a constant drumbeat to cut Social Security (despite the coming retirement crisis) and "phase out" Medicare.

What would compensating the losers from trade look like? Most obviously, and most focused, is trade adjustment assistance, which is often criticized as inadequate. Yet it does not really make sense to compensate only those who lose their jobs directly to foreign competition, because those workers then spill into other sectors of the economy, driving down wages as they go. Thus, we need to go beyond trade adjustment assistance.

To raise wages in the economy more generally, we need broader measures. One would be to raise the minimum wage: It pushes up workers' pay, but it also reduces turnover and training costs for employers, and puts money into the hands of people with a high propensity to consume, creating multiple channels to counteract the seemingly self-evident fact that raising something's price means people will buy less of it.

Another broad-spectrum approach to raising wages is to restore the power of unions. As I have pointed out before, the United States has the fifth-lowest union density in the 34-member Organization for Economic Cooperation and Development (OECD). Senator Sanders, in the interview linked above, notes that the increased power of unions in Nevada's gambling industry has enabled house-cleaning staff in the state's casinos to earn "$35,000 or $40,000 a year and have good health-care benefits." Having a National Labor Relations Board that is not in the pocket of industry is critical for us to see this take place.

Third, less targeted still but having the political benefit of universal coverage, an expansion of the social safety net would make it possible for people to simply refuse to take crappy jobs. Yes, this is about bargaining power! It would also encourage entrepreneurship because failure would not mean the loss of one's health insurance, for example. Medicare for all has long been one of Senator Sanders' standard prescriptions, a program that benefits from having far lower overhead costs (it avoids outrageous executive salaries, the need for profit, and does not have to advertise much) than private insurance. We could do a lot worse than considering it -- and we have.

Finally, to pay for these programs, it's necessary to raise taxes on corporations and rich individuals. Thomas Piketty, in his monumental Capital in the Twenty-First Century, suggests that the top marginal income tax rate should be 82% for individuals in the top 1/2% or top 1% of income. He notes that this will not raise much money, in part because it will reduce various lucrative but economically unproductive financial shenanigans. Instead, he thinks a tax of 50-60% on the top 5% of incomes would produce substantial revenue to create what he calls a "social state" for the 21st century. One could go further, of course, by adding a financial transactions tax (I hope to write about this soon) and shutting down tax havens.

To return to our original question, there is no reason that Chinese workers and U.S. workers can't both prosper from trade. But to make it possible in the United States requires a great deal of rule rewriting that will not be achieved overnight.

Cross-posted at Angry Bear.

Tuesday, July 14, 2015

Like us on Facebook and Twitter!

Facebook and Twitter followers get more than just immediate notification of new posts. I also promote selected articles from around the Web that are related to middle class issues. If you would find that of interest, I hope you'll support me there.

Thanks in advance!

Monday, July 13, 2015

Impending disaster in Greece

Paul Krugman analyzes the debacle in Greece. Although Greeks voted barely a week ago to reject the bailout terms offered by the EU, which called for uninterrupted austerity, Prime Minister Alexis Tsipras proposed to the EU to accept almost all of the terms if there was some true financial relief. Instead, what the European Union, spurred by Germany, proposed today demanded all of the pain, and none of the gain that Tsipras sought. Indeed, Germany has essentially demanded regime change in Greece, even though Tsipras only came to office in January. As Krugman says, "It is, presumably, meant to be an offer Greece can’t accept."

The Germans, it would appear, have decided to push Greece from the eurozone. But demanding an end to Greek sovereignty and austerity as far as the eye can see is simply evil. Moreover, it negates the long-successful stand of European Central Bank (ECB) president Mario Draghi that the ECB would do "whatever it takes" to keep the eurozone intact. The ECB's reputation would be damaged greatly should crisis recur in Spain, Portugal, Ireland, etc., now that the world knows the ECB will not do "whatever it takes." This is a recipe for a new recession in Europe spreading from the EU periphery. The German demands are particularly "grotesque," as Krugman says, when you consider that Greece has already endured 25+% unemployment for three years (see chart). This is an unemployment rate that the United States never saw even at the height of the Great Depression in 1933, when it peaked at 24.9%.

However, I believe Krugman's argument actually overlooks an important point. He writes:
But still, let’s be clear: what we’ve learned these past couple of weeks is that being a member of the eurozone means that the creditors can destroy your economy if you step out of line.
His point is that eurozone membership has removed Greece's ability to exercise monetary policy autonomy and respond to its specific conditions, including via currency devaluation. Indeed, there can be no doubt that monetary union was flawed from the start. But Krugman overestimates the ability of devaluation to fix an economic crisis. At the same time, he underestimates the ability of creditors to destroy a government whose economic policies they disapprove of.

 The mega-example of this, of course, is the Latin American debt crisis of the 1980s. Mexico, Brazil, and all the other victims of this crisis (caused primarily by the U.S. Federal Reserve cranking up interest rates to astronomical levels in the late 1970s and early 1980s, which in turn caused an unprecedented rise in the value of the U.S. dollar and a global recession) were "bailed out" by the International Monetary Fund (IMF) in order to prevent the collapse of creditor banks in the United States, but were subject to strict austerity, with the same results we've seen in the EU. Indeed, in virtually every Latin American country income per capita was lower in 1990 than at the start of the crisis in 1982, giving rise to the term "lost decade of development" to describe these events. Supposedly, the IMF learned its lesson after the Asian financial crisis that austerity packages didn't work. Krugman has argued this many times (one example here). Indeed, the IMF has seemed to be more of a voice of sanity in the current crisis than in either the Latin American or Asian crises. Yet, in the endgame of the Greek crisis, this seems to have fallen away, with the IMF going along with the EU on Greek austerity. Something is seriously wrong here.

But there is another important example to mention, where the IMF was not involved. This, too, was a result of the Fed-caused global recession, this time in France. After Francois Mitterrand and the Socialist Party swept to power in 1981, among the government's many policy changes was an attempt at Keynesian stimulus. However, this was met by massive capital flight. The problem was that the French franc was losing so much value that the government had to reverse its policies. For example, the franc was 4.6453 to the dollar in January 1981, but fell to 8.0442 by August 1983, 9.3041 by September 1984, and 10.0933 in February 1985. The takeaway is that even having floating exchange rates does not guarantee that you can maintain your policy independence.

Events are moving very rapidly; perhaps the EU will find a way to prevent this disaster. But at the moment, things look very grim.

Monday, June 29, 2015

Will the U.S. keep winning indefinitely? ISDS, that is

Now that Congress has given the President fast-track Trade Promotion Authority, the first agreement to be considered under these rules (no amendments allowed, up or down vote in 90 days) will be the Trans-Pacific Partnership (TPP). As you know from previous columns, one of the most worrying aspects of the TPP is its expansion of investor-state dispute settlement (ISDS), wherein private firms can bring their disputes with governments not to courts, but to international arbitration (usually through units of the World Bank or the United Nations), where legal precedent doesn't matter and appeal is all but non-existent. Moreover, as the Consumers Union has long argued (recent example here), arbitration has a well-known pro-business bias. That's why so many of your agreements with cable TV providers, financial services companies, and many more have fine print requiring mandatory arbitration, keeping you from getting your day in court if something goes wrong.

The response from the U.S. Trade Representative's (USTR) office has been, "Not to worry! The United States has never lost an ISDS case." The linked document goes on to claim that worldwide, only 1/4 of corporate plaintiffs have won cases against governments. But a new analysis by the International Institute for Sustainable Development (IISD),* using the same data source the USTR cites, comes to a very different conclusion based on its most recent update, the 2015 World Investment Report from the United Nations Conference on Trade and Development (UNCTAD). Moreover, we can see that countries with even more trustworthy court systems than that in the U.S. have lost ISDS cases. The Rule of Law Project, an initiative of the American Bar Association, has ranked 102 countries on the administration of justice and freedom from corruption, and puts the United States at #19 with a score of 0.73. Yet #14 Canada (0.78) has already lost ISDS cases, and both Canada and #10 Australia (0.80) are currently on the hook for major new cases (Eli Lilly and Philip Morris, respectively), that would overrule decisions by the countries' respective Supreme Courts. So, even if governments have only lost 25% of ISDS cases, it's unlikely U.S. luck will hold out indefinitely, if countries with better court systems are losing.

But it's worse than that. UNCTAD's database of known ISDS cases and their outcomes shows that in all cases decided through the end of 2014, the investor won 27% of the cases compared to 36% won by the state (see Figure III.10, p. 116). But another 26% of the cases are listed as "settled," which often (but not always) means the respondent agrees to make some payment to the plaintiff to keep the case from going to arbitration. Public Citizen has a list of ISDS cases under prior U.S. trade agreements with examples of settlements that do and do not contain payments (see, for instance, NAFTA cases against Canada).

Moreover, as IISD attorney Howard Mann argues, if we separate out cases between jurisdictional determinations and determinations on the merits of the case, things look even worse for states. While only 71 of 255 cases (this excludes the "settled" cases) were concluded by a decision of the tribunal having no jurisdiction, Mann points out that all 255 cases effectively had decisions on jurisdiction, i.e., cases with final decisions had to have rulings that the arbitrators had jurisdiction. In that case, Mann says, "Investors, therefore, have won 72 per cent [184/255] of jurisdictional determinations." And of the decisions on the merits of the cases, investors won 111, or 60%, of the remaining 184 cases. This calculation suggests that states are losing ISDS disputes at a much higher rate than normally portrayed. As if that's not bad enough, the new World Investment Report finds that in 2014, of the 15 ISDS cases decided on their merits, states lost 10 (2/3) of them. In 2013, it was even worse for states, with investors winning 7 of the 8 cases decided that year (p. 126). If these higher proportions continue, obviously the proportion of investor victories will increase beyond the current 60% total.

Bottom line: The threat to regulation, democracy, and the rule of law posed by investor-state dispute settlement is very real. The U.S. Trade Rep's  reassurances that the U.S. has never lost in ISDS don't even make it likely that will continue into the future. We need to pressure Congress to vote down the TPP when negotiations conclude.

* Important disclosure: I have consulted for IISD several times since 2007 on investment incentive issues.

Cross-posted at Angry Bear.

Saturday, June 13, 2015

Elon Musk has received billions in subsidies

While receiving subsidies is nothing new for the Forbes 400 or even multi-hundred millionaire pikers like Mitt Romney, a recent story in the Los Angeles Times (via Good Jobs First) shows that Elon Musk (#34 in the Forbes 400) is a champion at getting subsidies for his companies. According to the Times article, Musk's three companies, Tesla, Solar City, and SpaceX, have received a total of $4.9 billion (nominal value) in subsidies over the years. The article says that Tesla and Solar City stand out in the importance of the subsidies relative to the size of the company.

While SpaceX has received only $20 million, both Tesla and Solar City have received over $2 billion each, if you count the value of the subsidies their customers have received for buying Tesla vehicles and Solar City installations. This is more significant in the case of Solar City (about $1 billion) than for Tesla (about $321 million). Even without these sums, the companies have directly received about $3.5 billion, most notably for the new Gigafactory in Nevada and for a solar panel facility in Buffalo, New York.

Regular readers will remember that I have long argued in my books and elsewhere that these subsidies represent a transfer from average taxpayers to the much wealthier owners of the companies involved, worsening the already substantial inequality in the United States. These investment incentives have to be offset by higher taxes on others, reduced government services, or higher levels of government debt. While they are not the biggest driver of inequality, they do their part. Moreover, location subsidies reduce the country's economic efficiency: It may well have made more economic sense to locate the battery Gigafactory as close as possible to Tesla's assembly plant in Fremont, California.

While Musk refused to be interviewed for the Times story, he responded the next day on CNBC. Among other things, he argued that it was wrong to report a single figure for subsidies, which makes it seem like he received one big check. This is right as far as it goes. However, I think it would make more sense to give a single present value for the subsidies rather than the nominal value, which overstates the value of multi-year subsidies such as those for Tesla. Moreover, as Good Jobs First points out, it is perfectly necessary for taxpayers to know what their long-term liabilities are for multi-year subsidies in order to properly assess the impact on government finances.

Musk also defended the Tesla subsidies as merely necessary to make the project happen faster, rather than necessary to happen at all. Yet it conducted a multi-state auction in an all-too-common use of its location decision for rent-seeking. As I analyzed at the time, the deal was below average in terms of cost per job and aid intensity compared to other automobile facilities, and it is 13 times larger than Nevada's previously largest incentive package.

Ultimately, the Musk story is far too familiar on a number of dimensions. Most importantly, it is a tale of rent-seeking and the policy/political drivers of inequality.

Cross-posted at Angry Bear.

Friday, June 5, 2015

GE threatens to leave Connecticut UPDATED

A non-blogging friend has brought to my attention the fact that General Electric is threatening to move its corporate headquarters out of Connecticut in response to proposed tax increases in the state budget. The company, based in Fairfield, objects to increases in the taxes for data processing and corporate headquarters. Insurance companies Aetna and Travelers have also issued similar threats.

In GE's case in particular, this is pretty rich. The New York Times reports that GE made $14.2 billion in 2010 and received a federal tax refund of $3 billion. It is a company that touts bringing manufacturing jobs back from China but conveniently omits mentioning that the new jobs, in Louisville, pay $13/hour rather than the $22/hour they paid before they left for China. A model of corporate virtue it ain't, yet President Obama sees fit to lean on chief executive officer Jeffrey Immelt as one of his top business advisers.

Regular readers no doubt recall that every time a threat like this is made, vultures start to swoop in to attract the potential relocator to their state with a long list of goodies. So it should come as no surprise that a mere three days after GE first floated this idea, Tampa, Florida, has put GE in in its sights. We've seen this story many times before: Boeing and Sears immediately spring to mind. As always, the possibility of receiving relocation subsidies makes relocation less expensive and makes it more likely that a company's current home will have to give concessions to make it stay. Job piracy and job blackmail are intimately related.

As my friend points out, it's not surprising that Connecticut is running a big budget deficit. In just the past few years, according to the Good Jobs First Megadeals database (March 2015 spreadsheet update), the state gave $313.75 million to Schupp & Grochmal (2007), $89.5 million to Starwood Hotels (2009), $291 million to Jackson Laboratory (2011), $115 million to Bridgewater Associates (2012), and a whopping $400 million to United Technologies (2014). This last deal is fully 20% of the entire 2-year budget deficit facing the state, $2 billion.

A showdown is looming in this newest case of raw corporate power. Yesterday, the Connecticut legislature passed the budget, though leaders signaled a willingness to consider small changes when it comes back for a special session. The same day, however, Immelt emailed employees to let them know a task force had been set up to look into relocation.

Stay tuned!

Update: More evidence that GE is a whiny, hyper-aggressive tax avoider:

Friday, May 22, 2015

May Tax-Cast is Out!

The May Tax-Cast from the Tax Justice Network is just out. Highlights include tax transparency from politicians in Pakistan and around the world, as well as an analysis of the recent UK general election.