Basics: Is trade zero-sum between workers in different countries?

Vox.com 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.

Understanding Piketty, part 3

Part 3 of Thomas Piketty's Capital in the Twenty-First Century is the longest section of the book (230 pages out of 577), providing his analysis of inequality at the level of individuals. Notably, Piketty largely avoids the use of the familiar Gini index because, in his view, it obscures the issue by combining the effects of inequality based on income with those of inequality based on wealth. He treats the two sources of inequality separately throughout this analysis.

The first point Piketty emphasizes is one regular readers will be familiar with from my previous discussions of the Crédit Suisse wealth reports: Wealth is always more unequally distributed than income. The disparity is stark (p. 244):

...the upper 10 percent of the labor income distribution generally receives 25-30 percent of total labor income, whereas the top 10 percent of the capital income distribution always owns more than 50 percent of all wealth (and in some societies as much as 90 percent). Even more strikingly, perhaps, the bottom 50 percent of the wage distribution always receives a significant share of total labor income (generally between one-quarter and one-third), or approximately as much as the top 10 percent), whereas the bottom 50 percent of the wealth distribution owns nothing at all, or almost nothing (always less than 10 percent and usually less than 5 percent of total wealth, or one-tenth as much as the wealthiest 10 percent).

 One finding from his data which impressed me is that the inequality of wealth is virtually the same in all age cohorts, refuting the view that advanced industrialized societies are riven by inter-generational warfare (pp. 245-6). In other words, Baby Boomers may be less wealthy than their parents, but their incomes are just as unequally distributed, on average, and will continue to be so after they build up a few more assets and retire.

For my American readers, it is worth noting that Piketty claims that the United States today (meaning 2010) has the highest level of wage inequality ever seen in history, with 35% going to the top 10% and only 25% going to the bottom 50%. If current trends continue, though obviously an iffy proposition, the share of the top 10% would rise to 45% vs. just 20% for the bottom 50% (Table 7.1). In terms of wealth inequality the U.S. has as of 2010 almost reached the astronomical levels only seen by Europe circa 1910, with the top 10% owning 72% of all wealth, versus a 90% share in 1910 Europe (p.257). As this is survey-based data, Piketty says that 75% is a more likely figure, since surveys understate the top income and wealth shares. The bottom 50% of Americans own just 2% of the country's wealth. As I noted before, if r>g, this concentration of wealth is likely to become even more uneven over time.

Piketty then turns to the evolution of inequality over the course of the 20th century. He takes the French case and the U.S. case as representatives of "two worlds," one where inequality is largely caused by differentials in capital income (France) and one where it is caused more by wage inequality.

In France in 1910, the top 10% received over 45% of total income from both labor and capital, whereas its share of labor income was under 30%. Over the course of World War II, the share of the top decile (10%) dropped by about 15 percentage points, which rose and fell between 1945 and 1982, but since then is on the upswing once again (Figure 8.1). Wage inequality has been much more stable for France from 1910 to 2010. The higher you go in the income hierarchy, particularly within the top 1%, income from capital becomes more and more important, fully 60% of the income of the top .01%  of the French population (Figure 8.4). Piketty points out that while the upswing in capital income since 1982 does not yet appear large (only a few percentage points), it is built on an increase of capital as a percentage of national income, of inherited wealth, that will cause capital income to explode in the near future.

In the United States, we see the same decline in the income share of the top decile after 1940 as in France, but unlike France, since 1980 the United States has seen the share of the top 10% fully restored (Figure 8.5). Moreover, the vast majority of that recovery in the wealthy's share of income is due solely to the increasing income share going to the top 1% (Figure 8.6). Behind this is an increase in what he calls "supersalaries," the vast majority (60-70%) of which come from top managers and less than 5% from superstars in sports, acting, and the arts. Of course, though the route is different from that of France, it again causes an increase in capital's share of national income, making it likely that inherited wealth will rise in importance in the United States as well.

What caused this explosion of labor income inequality in the United States? Piketty cites several factors. First, he highlights the findings of Claudia Goldin and Lawrence Katz that wage inequality began to grow in the 1980s, "at precisely the moment when for the first time the number of college graduates stops growing, or at any rate grows much more slowly than before" (p. 306). Second, institutions matter in the labor market. The biggest factor holding down the low end of wages in the United States is the low level of the minimum wage, which peaked in 1969 at $10.10 in 2013 dollars (p. 309).

However, these factors do not explain what is going on at the very top of the wage distribution, according to Piketty. One piece of evidence is that the supermanager phenomenon is a characteristic of the Anglo-Saxon countries after 1980, whereas there are only very small increases for the top 1% in Continental European countries or Japan (Figures 9.2-9.4). But another important point is that, among the English-speaking countries, the United States has the largest increase in the income of the top 1%, and the same is true for the income share of the top 0.1% of incomes (Figures 9.5-9.6). So, something is going on specifically in the United States. It is not, however, that there is some fantastically higher level of productivity growth in the U.S. All of the countries considered are at the world's technological frontier; indeed, the evidence suggests that telecommunications infrastructure and cost are worse in the United States than many other industrialized countries.

Instead, what appears to account for the sharply divergent incomes of supermanagers are the difficulty of determining the marginal productivity of top managers (Piketty cites evidence that firms with the highest-paid executives do not perform better than those with lower-paid executives); the ability of top managers to "set their own salaries," for example by appointing the compensation committees that will judge them; and, as Part 4 will show, the decrease in top marginal tax rates and the change in compensation norms related to that (pp. 334-5).

Piketty then turns to inequality in capital ownership, beginning with the treasure trove of data compiled in France since 1790. One of his most amazing findings is that in France, despite the 1789 Revolution, the inequality of wealth increased throughout the 19th century, to the point where the top 1% owned 60% of all wealth on the eve of World War I (Figure 10.1). As noted before, the World Wars, the Great Depression, and higher taxation brought about a dramatic fall by 1970 in the share of of both the top 10% (to 60%) and the top 1% (20%). Here, too, the data yield a striking finding: essentially none of this went to the bottom 50% of the wealth distribution, but was redistributed downward only to those below the top 10% but in the top 50% (p. 342). This "patrimonial middle class," as Piketty calls it, has largely maintained its wealth share, with the top 10% and top 1% gaining a few percentage points from their 1970 low point.

Contrasting with France and other European countries for which there is reasonable wealth inequality data, the United States has seen a stronger recovery of the top shares of wealth holders, and in fact U.S. wealth inequality passed European wealth inequality in the mid-1950s, and has been higher ever since. In none of these countries, however, has wealth inequality returned to its highest levels. Piketty has three main explanations for why we have not (yet) seen a return to 1910 levels of wealth inequality. First, there simply hasn't been enough time to rebuild from the 1945 low point; indeed, wealth inequality did not even start increasing again until the 1970s in most industrialized countries. Second, the decline in wealth inequality was accompanied and intensified by a sharp increase in taxation on capital. Third, there was a high rate of economic growth for thirty years after 1945. However, all these factors may reverse in this century. 1945, obviously, is steadily receding from view. Tax competition may well spell the end of capital taxation. Finally the slowdown of demographic growth will reduce economic growth as well, exacerbating the key r>g relationship.

Piketty then turns to inheritance, again with data going back to 1790. Here his foil is economist Franco Modigliani, who posited that people save in order to finance their retirement, but bequeath essentially 0 wealth. Piketty finds that "the desire to perpetuate a family fortune has always played a central role" in savings decisions (p. 392). As evidence, he points out that "annuitized wealth" (non-heritable, such as Social Security but not a 401-k account) makes up a tiny fraction of private wealth (under 5% in France, and 15-20% in "English-speaking countries, where pension funds are more developed"). In other words, the desire to leave a bequest to one's heirs is the predominant fact behind large-scale savings behavior.

Piketty contends that a society dominated by inherited wealth becomes less democratic over time. Not only do the wealthy have increased mechanisms to influence political outcomes, but unearned income is an "affront" to the meritocratic story we tell ourselves. If high incomes are not based on merit, an important justification for this inequality disappears. He goes on to note that "rent" is not originally a pejorative term (as in, for example, "monopoly rent"). If capital is used in production, it yields income, and this is not due to monopoly and cannot be "solved" by greater competition. As Piketty says, universal suffrage [which in the 19th century had often been posed as fatal to the economy - KT] "ended the legal domination of politics by the wealthy. But it did not abolish the economic forces capable of producing a society of rentiers" (p. 424).

I have left out some of the technical detail of Piketty's argument, but one more point here needs emphasizing. As he shows (Figure 11.12), inheritance flows are increasing in Europe, and have been since 1980. The situation is not quite as bad in the United States, because the U.S. population is still growing, while Europe's is stagnating. However, long-term forecasts point to an eventual slowdown in population growth in the United States as well, in which case inherited wealth would emerge just as strongly as it already has in Europe.

Piketty's final points refer to global dimensions of inequality of wealth. His argument here is that while most people's instinct is to object less to entrepreneurial fortunes than to inherited ones, in fact there is less difference between the two that meets the eye. This is because, he argues, the largest fortunes are able to command the highest rates of return. He gives the example of the fortunes of Bill Gates, who obviously worked to build Microsoft, and that of Lillian Bettencourt, the heir of the L'Oréal fortune, "who never worked a day in her life" (p. 440). As it turns out, from 1990 to 2010, both saw their wealth increase by a factor of 12.5 times in that period. Large fortunes command the highest rate of return. However, the data Piketty presents do not fully support this. Gates' fortune was twice that of Bettencourt in 1990 and 2010, yet his rate of return was no more than hers. Furthermore, when Piketty reports on the returns made by sovereign wealth funds, we can see that Abu Dhabi's, the world's largest, worth more than all U.S. university endowments combined, nonetheless had lower earnings than did Harvard, Princeton, and Yale on their endowments. I think there is much merit to his overall claim, but it would appear to be a little more complicated than he lets on.

Last but not least, a couple of international wealth quick hits. First, will sovereign wealth funds own the world? No, but they could wind up amassing 10-20% of global capital by 2030 or 2040, which would be a much greater percentage of liquid global assets. Second, will China own the world? The short answer is no. Third, why do rich countries so frequently have negative asset positions? Are these counterbalanced by positive asset positions in poorer countries overall? The answer to this last question is no, so the answer to the previous question is that so much wealth has been diverted to tax havens, it makes the rich countries look poor, even though they aren't. Indeed, even the relatively low estimate of tax haven assets by Piketty's colleague Gabriel Zucman comes to more than twice the negative asset position of the rich countries.

This long section of the book is the necessary set-up for Part Four, where Piketty takes on still more received theories, and proposes his own recommendations for what can be done about inequality. I will turn to those questions in my next post.

UPDATE: Thanks to jack for catching a couple of typos.

Cross-posted at Angry Bear.

Illinois' next governor may make Romney look like a saint UPDATED

Does the name Bruce Rauner ring a bell? No, me neither. It turns out he's the Republican nominee for governor in Illinois, which under normal circumstances would mean he's a nobody. But he's been leading incumbent Democrat Pat Quinn in polls all summer, and could actually end up as the state's next governor.

This is a problem, because he is even more out of touch with the middle class than Mitt Romney (Rauner is a private equity near-billionaire) whose idea of transparency is to release the first two pages of his 1040 tax return for 2010-12, and nothing else. Romney at least released his full tax return for each of two years. As Think Progress points out, Rauner is also a big fan of the Cayman Islands as a tax haven, just like Romney. In fact, Rauner is invested in at least five funds there. Also like Romney, Rauner takes full advantage of the "carried interest" tax break that lets him treat his fees, which should be ordinary income taxed at 35 39.6%, as capital gains, subject only to a 15 20% tax rate.

Rauner's agenda is insistent on the need to spur job growth, but somehow misses the fact that Illinois' unemployment rate has fallen from 9.2% (seasonally adjusted) in June 2013 to 7.5% in May 2013 (the figure Rauner used) and even more since the agenda was published, to 7.1% in June, the third-largest drop in the country year-over-year. Still a full point worse than the June national unemployment rate, but a lot better than it was.

One place where Rauner is worse than Romney is the minimum wage. Romney, rather surprisingly, supports an increase in the minimum wage, though he did not specify a number. Rauner, in both December and January, called for Illinois to lower its minimum from $8.25 to $7.25, the national rate. After getting a tremendous amount of blowback, he now claims to support an increase.

His agenda says the state "should implement a phased-in minimum wage increase, coupled with workers' compensation and lawsuit reforms to bring down employer costs." No mention of what the rate would be, or the period over which it would be phased it. He references an op-ed he wrote in the January 9th Chicago Tribune (now only available through the Nexis subscription service), where he clearly buys into the "job-killer" meme and drops a reference to the futility of a "$20 per hour" minimum wage, for good measure. Somehow I don't think he really supports an increase.

Not only that, but Rauner proposes turning the Illinois Department of Commerce and Economic Opportunity, the state's investment promotion agency, into what he calls a "public-private partnership." He doesn't say it, but this means there will be less public oversight into the agency's affairs. As Good Jobs First has shown, such privatized agencies have exhibited high levels of abuse in recent years.

Rauner is a living, breathing example of how we have one tax system for the 1%, and another one for the rest of us. His flip-flop on the minimum wage is as phony as the concern he professes for the middle class. Yet there's a very good chance he will be the next governor of Illinois.

UPDATE: Crooks and Liars links to a brief video where Rauner says it may be necessary to go through a period in Illinois like that when President Ronald Reagan fired the air traffic controllers.

Argyrios at Daily Kos reminds me that the tax brackets have increased. Thanks.

Cross-posted at Angry Bear.

Piketty on the minimum wage

A lot going on with the minimum wage lately, but I will contextualize it first with Thomas Piketty's analysis in Capital in the Twenty-First Century, pp. 308-313. I'll have more to say about other parts of the book later, but for now it's important to remember that one of the keys to the book's success is that it is built on a gigantic trove of long-term data. His French wealth data, for example, goes all the way back to the immediate aftermath of the French Revolution! (Speaking of which, it's Bastille Day as I write this.)

Piketty writes in this section about increasing labor income inequality in the United States and the importance of labor market institutions in affecting wages in the medium term even as education (though see Jeff Faux's dissent in The Servant Economy) and technology are the keys to the long-run wage possibilities. He counterposes the steady increase in the real (i.e., inflation-adjusted) value of the French minimum wage since 1950 to the decline of the real U.S. minimum wage since it peaked in 1969 at $10.10 in 2013 dollars. At $7.25 today, it is a full 28% below its peak, and 1/3 less than the current French minimum wage at purchasing power parity in 2013 (see stats.oecd.org, search "data by theme" and select "labour," then "earnings," then "real minimum wages," and set the series to "US$PPP" and the pay period to "hourly.")

This decline of the real value of the minimum wage is why Piketty argues that an increase in the U.S. would make sense, much more so than in France. At this low level, there is much less danger of a negative impact on the number of jobs. His key insight is that if wages are too low, that itself causes economic inefficiencies and can even create inefficiencies for the firm. In particular, if wages are too low, it can cause workers to acquire fewer firm-specific skills than would be optimal for the employer. This would seem to hold economy-wide as well: if the general wage level is too low, workers have less incentive to acquire skills that would make them and the economy as a whole more productive. Additionally, Piketty argues that employers' superior bargaining position and the absence of "pure and perfect" competition in labor markets justifies the limits on companies' power embodied in the minimum wage.

The minimum wage has also been in the news this month. The biggest story is that for the first time Germany has adopted a minimum wage effective in 2015, set at €8.50 ($11.60) an hour. This was the price Angela Merkel had to pay to bring the Social Democratic Party into her governing coalition. In addition, the minimum wage in the future will be set by a national commission made up of labor and business representatives.

Finally, a new study by the Center for Economic Policy Research finds that the 13 states that raised their minimum wage on January 1 had higher rates of job growth (0.99% vs. 0.68%) through May 31 than the 37 states that did not raise their minimum wage. While the study does not claim to be definitive, it is one further piece of evidence that the minimum wage is not a job killer at the levels seen currently in the United States.

Cross-posted with Angry Bear.

The CBO Whiffs on the Minimum Wage

The Congressional Budget Office has just issued a report on the minimum wage that is a real head-scratcher. Analyzing proposals to raise the minimum wage to $9.00 or $10.10 per hour, it concludes in the latter case that there would be 500,000 fewer jobs in the second half of 2016 than there would be under current law (100,000 fewer for $9.00/hr.).

Predictably, conservatives have seized on this number as proof that the minimum wage is a "job killer." Even liberal media, such as Talking Points Memo in this paragraph's link, seem to think that number is a big problem, going on to say, "It's not all bad, though, for one of the centerpieces of Democrats' middle-class agenda ahead of the November congressional elections," as if the CBO report were mostly bad news for Democrats.

There are two problems with these claims. First, the CBO's calculations undervalue the best research on the minimum wage. Second, even in the CBO's estimated world, low wage workers are much better off as a whole than under the current $7.25/hr. minimum wage.

As I've discussed before, a relatively crude cross-national comparison of rich countries' minimum wages and unemployment rates does nothing to suggest any job-killing is going on. But the CBO's estimation procedure has serious flaws. It begins (p. 6) with what it calls "conventional economic analysis," which is already a big mistake. Simple Econ 101 reasoning (when the price of something goes up, the quantity purchased goes down) has had only sketchy empirical support, something that has been especially clear from meta-analysis of minimum wage studies (ungated version of Doucouliagos and Stanley 2009 here).

The CBO, of course, has heard of these studies, but it remains with a non-transparent explanation of how it weighted different studies (p. 22), saying it gave the most weight to contiguous state comparison studies. The only thing is, according to Arindajit Dube, these are the studies least likely to find a negative employment effect. Thus, how CBO ends up with a baseline of job loss remains mystifying.

Okay, so 500,000 fewer jobs isn't entirely plausible then, but what if we accept for the moment that it is? As Jared Bernstein and Dean Baker point out, there are still far more winners (16.5 million direct, another 8 million indirect--the latter being workers just above $10.10 who would probably see raises) than losers (0.5 million among low-wage workers; the rest are people with high incomes) in this scenario. And as Baker emphasizes, "...we are not going to see 500,000 designated losers who are permanently unemployed as a result of this policy." Instead, what will happen is people will work 2% fewer hours at an hourly rate that is 39.3% higher.

The math is simple: 0.98 X 1.393 = 1.365. In other words, low-wage workers will see their income increase, on average 36.5%. And this is the worst-case scenario!

I've said it before, and I'll say it again: the minimum wage is a winner both economically and politically.

Cross-posted at Angry Bear.

Minimum Wage a Winner Both Politically and Economically

President Obama's proposal to raise the minimum wage to $9.00 per hour puts the Republicans between a rock and a hard place politically. Paul Krugman echoes the point that a big majority of the population supports a minimum wage increase, including a majority of Republicans (his linking to the original poll source appears to have crashed that website, but I will update later). Yet the Republican leadership remains trapped because it opposes this increase as well as any alternative policy that might make the poor better off, such as increasing the Earned Income Tax Credit or endorsing a Guaranteed Minimum Income (points Matthew Yglesias makes in the link above). As further evidence, the minimum wage increase Proposition B in Missouri in 2006 passed 76-24, probably helping Senator Claire McCaskill to her first Senate victory with under 50% of the vote.

 Moreover, much recent research (via Think Progress) shows no "job killing" effects from raising the minimum wage. As originally shown by David Card and Alan Krueger, there was strong evidence of "publication bias" in the studies underlying the former economists' consensus that the minimum wage reduced jobs. That is, economics journals tended to prefer to publish studies with statistically significant results and not publish those showing no effect from the minimum wage. Researchers thus adjusted their statistical specifications until they achieved statistical significance, thereby generating a mass of studies that all barely reached statistical significance despite larger volumes of data which should have produced stronger results. As the Schmitt paper emphasizes, more recent studies of studies ("meta-analysis") continues to support the conclusion that the purported job killing effect was a mirage.

As I have pointed out before, cross-national comparisons of the minimum wage and unemployment rates also do not support the view that the minimum wage is the job killer Republicans claim it is. Indeed,  as in my September 2011 post, nine OECD countries have higher minimum wages rates than the U.S. does on a purchasing power parity basis that adjusts for the cost of living, yet only two have higher unemployment rates (France and Ireland), while the U.K.'s unemployment rate is the same. The table below illustrates this and underscores the point that the minimum wage is a winner for the middle class.

Country 2011 Min Wage (PPP$) Unemployment Rate % Dec. 2012 Australia 9.54 5.4 Belgium 9.52 7.5 Canada 8.04 7.1 France 10.02 10.6 Ireland 10.81 14.7 Luxembourg 11.36 5.3 Netherlands 10.23 5.8 New Zealand 8.63 6.9 (Q4) United Kingdom 8.53 7.8 (Oct 2012) United States 7.25 7.8

Source: http://stats.oecd.org/index.aspx

For 2011 real minimum wage at PPP, click on "statistics by theme," then "labour," then "Real hourly minimum wages," then adjust the series to "In US$ PPP." For unemployment, click on "statistics by theme," then "general statistics," then "key short-term indicators," then "harmonized unemployment rates."

Cross-posted at Angry Bear.

It's the Middle Class, Stupid! (Review)

When I saw that James Carville and Stan Greenberg had just published It's the Middle Class, Stupid! (Blue Rider Press), I knew that I would want to read it. I had always liked Carville's We're Right, They're Wrong and wanted to know his take on approaching the declining fortunes of the middle class.

While this book includes some diagnosis of the problems and has a very detailed and very good set of policy proposals, primarily it is a work on political strategy. Based on polling and focus groups the authors have conducted over the last several years (as well as their long experience running campaigns and polling), Carville and Greenberg analyze what they consider some of the political failures of the Obama Administration, particularly with regards to messaging.

For example, they argue that Americans are not persuaded by Team Obama's continuing emphasis on the fact that the President inherited a mess from the Bush Administration (Chapter 11). Although voters place much of the blame for the Great Recession on President Bush, Greenberg reports that his focus groups reacted very negatively to President Obama's car-in-the-ditch metaphor ("I'm still in the ditch!" many told Greenberg) and the participants expressed strong opinions that we needed to look forward, not backward.

As one said, "[Obama] is trying to say things are turning around, but the numbers are still bad." The premature declaration of victory by the Administration described here has been strongly criticized by Paul Krugman, among others. Economically effective policy is the best talking point. Carville and Greenberg also give a compelling litany of sophisticated responses to even "good" job creation news on pp. 103-7.

The second big, non-obvious, point is that Americans really are concerned about the deficit and debt (Chapter 8). Again, even though they recognize the role of the Bush tax cuts and unfunded wars in creating that debt, they are still leery about the possibility of spending our way to more economic growth, though not by huge majorities. Too many of them are convinced of the false analogy between households and governments, although Paul Krugman is doing his best to convince them with his new book, End This Depression Now! The framing the authors found most persuasive to middle class voters was an emphasis on "investments that will get our country back on track." Tellingly, as Carville and Greenberg note, their respondents did not see the debt as a reason to cut Social Security or Medicare.

Third, but more obvious, middle class voters don't see government as the solution because they consider it to be captured by elite interests. The focus groups showed that this view led to some tendency to paralysis and disengagement from politics. It is from this point that Carville and Greenberg pivot to their most important policy recommendation: Amend the Constitution or obtain a Supreme Court that will overturn Citizens United and end corporate personhood. In addition, they call for public financing of elections, disclosure of campaign contributions, requiring broadcasters to cut the price of political ads, and ending the revolving door of office holders and lobbyists. All this is in support of a politics that makes rebuilding the middle class Job 1 for government, and for a consistent framing of all issues (including foreign policy) in terms of their impact on the middle class.

Not everything in the book is persuasive. At one point Greenberg says the popularity of raising taxes on the rich "is as close to an absolute truth you can have in polling" (p. 144). I have two problems with this. First, you could say the same thing for other industrialized democracies. Sven Steinmo, writing in the mid-1990s, has cited polling results for the U.S., U.K., and Sweden, all of which showed publics that thought the rich should pay more taxes, yet in none of these cases has that been the direction of policy over the last 30 years. To me, this suggests there is an international dimension that helped make government capture possible, but the book does not address globalization very much at all.

Second, the book devotes relatively little attention to another issue that also is overwhelmingly supported in poll after poll: raising the minimum wage. Yes, making work pay is an important theme in the book and the authors acknowledge that increasing the minimum wage is part of that, but they say nothing about how putting the issue on many state ballots helped increase Democratic turnout in 2006. In Missouri, for example, the minimum wage Proposition B passed by a 76-24 margin, helping Claire McCaskill squeak out a U.S. Senate win with less than 50% of the vote.

The other weakness of the book is that the authors are too close to President Clinton to give a completely objective view of his Presidency. While they make a single parenthetical reference about how NAFTA may not have been such a great idea for the middle class after all, they say nothing about how "ending welfare as we know it" was bad for the middle class. This can best be seen by thinking about income determination as a massive bargaining situation. Anything that takes away one side's options reduces its bargaining power, and the 1996 welfare reform did just that. In addition, they seem blind to the fact that income inequality (top 1% vs. the 20th-80th percentiles) took off during the Clinton Administration far in excess of what had been seen under President Reagan, as a glance at their chart on p. 52 shows.

Finally, the book has no index, which is very annoying when you have 296 pages of text and 25 pages of endnotes.

Those caveats aside, this is a very good book that deserves a careful reading by progressive activists. I certainly learned something from it, and I'm sure you will, too.

Cross-posted at Angry Bear.

Living Wage Law Passes in New York City

On Monday, New York's City Council passed a living wage ordinance, reports Good Jobs New York's Bettina Damiani. The 45-5 vote means the Council can easily override a threatened veto by Mayor Michael Bloomberg (New York Post, May 1, via Nexis subscription service).

As I analyzed in Competing for Capital, the Living Wage movement attempts to reform, rather than abolish, economic development subsidies. The basic idea is the same as performance requirements in international investment negotiations, i.e., that a company that receives subsidies has to provide additional benefits to the city providing those incentives. As its name suggest, the most common demand is that subsidized firms have to pay a specified wage that is higher than the usual minimum wage. According to Living Wage NYC, over 140 cities in the U.S. have living wage ordinances, and the idea has spread to the U.K., Canada, and New Zealand.

In New York's case, the law specifies that companies receiving at least $1 million in subsidies must pay $10/hour if they provide health benefits, or $11.50/hour otherwise. This is not a lot of money in New York City, yet a study by the Fiscal Policy Institute, Good Jobs New York, and the National Employment Law Project found multiple cases where subsidized projects paid even less, such as the Bronx Gateway Mall, which the study found had starting wages of $8.80 per hour. According to the study, the city spends over $2 billion annually on economic development incentives.

Mayor Bloomberg blasted the measure as a "jobs killer," language reminiscent of minimum wage critics. We should remember that, according to Paul Krugman (Conscience of a Liberal) recent studies of the minimum wage do not uphold the long-claimed negative effects of the minimum wage on jobs. In fact, work beginning with that of David Card and Alan Krueger (now the chair of the Council of Economic Advisers) deftly picked apart previous studies in a process known as meta-analysis.

The biggest drawback to the New York law is that it was narrowly drawn by Council Speaker (and probable mayoral candidate) Christine Quinn in order to appease business interests. In fact, according to the Post story, it would affect "at least 600 employees a year," which is hardly a big number in New York. But we can count on advocates to try to expand its scope in the next few years.

Labor Day: Of Nine OECD Members with a Higher Minimum Wage than U.S., Seven Have Lower Unemployment Rates

When Michele Bachmann says she would “consider” lowering the minimum wage, she tapped into the long-standing theme of conservative economists that the minimum wage is a job-killer. The only problem is, careful statistical research has shown that this simply isn't true. In the 1990s, economists David Card and Alan Krueger demolished the methodologies of prior statistical studies showing a negative impact as well as conducting original research comparing low-wage employment within a two-state metropolitan area when one state raised its minimum wage, finding no negative impact. (A useful summary of Card and Krueger's long-run influence on the debate can be found in a post by Arindrajit Dube at Rortybomb [h/t Mark Thoma].)

 

But another way of showing the lack of a negative effect, following my “Labor Day” theme of international comparisons, is to look at the minimum wage and unemployment rates among the industrialized democracies of the Organization for Economic Cooperation and Development (OECD). Only 21 of the OECD's 34 members have economy-wide minimum wage rates, as shown in the table below. This shows the “real” (inflation-adjusted) hourly minimum wage for each of the 21 countries, expressed in 2005 U.S. dollars and adjusted for each country's price level in a measure called “purchasing power parity” or PPP. (Under straight exchange rates, Belgium, France, Ireland, Luxembourg, and the Netherlands all have minimum wages above $10 per hour in 2005 dollars.) The data are for 2008, the most recent year available. Unemployment data are for June 2011, the most recent month available for most of the countries (exceptions are noted in the table).

In this list, the United States comes in with only the 10^th highest minimum wage of the 21 countries. This is true even after the increase to $7.25 in 2009, which comes to $6.26 in 2005 dollars. In addition to the five countries mentioned above, Australia, Canada, New Zealand, and the United Kingdom have a higher minimum wage than the U.S. If the story told by Michele Bachmann and conservative economists were true, we would expect that they would all have higher unemployment rates than the U.S. In fact, however, only France (9.8%) and Ireland (14.3%) are higher, while the other seven have lower unemployment rates, ranging from 1.4 points lower (UK) to 5.1 points lower (Netherlands). We should remember from my last two posts in this series that all of these countries have stronger employment protections than does the United States, and that only France has lower union density.

Real hourly minimum wages

Data extracted on 09 Sep 2011 00:21 UTC (GMT) from OECD.Stat

Frequency		Annual
Series		In US$PPP
Time		2008
Country
Australia		8.59   4.9%
Belgium		8.23   7.4%
Canada		6.43   7.4%
Czech Republic		2.99    6.5%
France		8.79   9.8%
Greece		4.86   15.0% (March 2011)
Hungary		2.61   9.9%
Ireland		7.55   14.3%
Japan		5.22   4.6%
Korea		4.36   3.3%
Luxembourg		8.95   4.3%
Mexico		0.79   5.8%
Netherlands		8.22   4.1%
New Zealand		6.99   6.5% (Q2 2011)
Poland		3.21    9.5%
Portugal		3.31   12.5%
Slovak Republic		..        13.4%
Spain		4.07   21.0%
Turkey		2.96   9.3% (May 2011)
United Kingdom		8.06   7.8% (May 2011)
United States		5.59   9.2%

Notes: Unemployment rate is for June 2011 unless otherwise noted. U.S. minimum wage rose to $6.26 in 2005 dollars with the 2009 increase to $7.25 in nominal dollars. The Slovak Republic's minimum wage was $1.36 in 2006, the most recent year available.

Source: http://stats.oecd.org/Index.aspx

For 2008 real minimum wage in US$ purchasing power parity, click on “Labour,” then “Earnings,” then “Real hourly minimum wages,” then adjust the “Series” to “In US$PPP.”

For June 2011 unemployment rates, click on “Labour,” then “Labour Force Statistics,” then “Labour Statistics (MEI),” then “Labour Force Statistics (MEI),” then “Harmonized Unemployment Rates and Levels (HURs),” then adjust the “Subject” to “Harmonized Unemployment Rate (HUR).”

 

Raising the minimum wage would add to the purchasing power of many people who will spend their money at a time when the economy sorely needs demand, as economist Heidi Shierholz of the Economic Policy Institute points out. Meanwhile, the best research shows that a higher minimum wage does not destroy jobs as economists generally thought before Card and Krueger's work. The data presented here shows that American workers at the bottom of the wage scale earn less than their counterparts in a number of other countries, and overall those countries do not see more unemployment as a result. We should, therefore, resist any calls to lower our minimum wage.