Job Flight from Canada Highlights U.S. Inequality and Low Wages

The fact that middle class living standards have been falling for decades is no secret. One way to put this in sharp relief, however, is through international comparisons. Alexander Eichler at the Huffington Post reports today that Caterpillar Inc. is demanding that its locomotive manufacturing workers in Canada take a 50% pay cut to bring them more in line with what its workers in Illinois make.

How is it that the Canadian Caterpillar workers get more than twice as much in wages and benefits as their Illinois counterparts when income per capita is lower in Canada than in the U.S.? According to the 2009 UN Human Development Report (Table M, p. 195), gross domestic product per capita in the U.S. in 2007 was $45,592 but only $40,329* in Canada. The first part of the answer is inequality. The same table shows that the U.S. has a Gini coefficient (an inequality measure in which 0 equals complete equality, and 100 when one person has all the income) of 40.8, compared with Canada's 32.6. The richest 10% of Americans make 15.9 times as much as the poorest 10%, while the figure in Canada is only 9.4 times as much.

The second part of the answer is unionization and union strength. As I noted in September, the U.S. has the fifth-lowest unionization rate of the 34 industrialized democracies in the Organization for Economic Cooperation and Development. Only 11.4% of the American workforce is organized, compared with 27.5% in Canada.

As Eichler points out, a third reason wages are often higher in Canada is that its unemployment rate is lower than the U.S. rate, 7.5% vs. 8.5%. Higher unemployment means lower bargaining power for workers.

Caterpillar is not an isolated example. As I discussed in September, Electrolux actually moved from the Montreal suburbs to Memphis, saving over $4 per hour by ditching its unionized workforce for right-to-work Tennessee, and getting a free factory in the bargain.

This comparison with Canada helps us see, from another angle, just how much pressure the middle class is under in this country. The fact that Canada is very similar to the U.S. economically suggests that it is not impossible to strengthen the union movement and hence, the middle class, here.


* Technical note: The comparison of GDP per capita is not adjusted for purchasing power parity. Companies have to pay their workers in actual U.S. dollars or Canadian dollars, so the adjustment is not appropriate for this comparison.

Show Me an Emergency Room that Provides Chemotherapy

I don't usually post stuff I receive in fundraising emails, but the one I received from former Rep. Alan Grayson arrived at just the right time, emotionally, for me this afternoon. I had watched former Senator Rick Santorum's speech after the Iowa Caucus and was put out by his comparison of social welfare programs with Benito Mussolini's fascism. Indeed, Santorum specifically included Medicaid among the programs he said are making people more dependent, one element of how more government is fascism. (Yes, I know that makes no sense. He apparently doesn't.)

Grayson's email, which he also posted to Daily Kos, went after Santorum on health care. The best part, to me, was his takedown of the argument that people can always go to the emergency room if they need health care. Maybe it's an obvious retort, but it had never occurred to me before, and I try to follow this issue because it is close to my heart. Grayson said:

I remember the same response from right-wingers then as we hear from Santorum today – anyone can go to an emergency room.  I ask them to show me an emergency room that will provide chemotherapy to a cancer victim.  There isn’t one.

  If you need chemotherapy, your cancer is life-threatening, and the treatment is grossly expensive. According to the American Cancer Society, over 577,000 Americans will die of cancer this year. And as Grayson says, you can't go to the ER for treatment. So the view that all Americans can receive health care, and that lack of health insurance isn't bad for your health, is cruelly false.

Investment Incentives and the Global Competition for Capital

The Vale Columbia Center on Sustainable International Investment has just published my new article in its "FDI [foreign direct investment] Perspectives" series, "Investment Incentives and the Global Competition for Capital." This piece summarizes my book of the same name, and makes the following main points:

• Investment incentives (subsidies designed to attract investment) are widely used around the world at all levels of government.
• Incentives are expensive. As I have discussed before, the cost to U.S. state and local governments is $50-70 billion per year. In the Philippines, the cost has been estimated to equal 1% of gross domestic product.
• Investment subsidies tend to be both economically inefficient and inegalitarian (average taxpayers pay subsidies to richer owners of capital), while some incentives subsidize environmentally harmful projects.
• Companies have more information about governments than governments do about the companies with which they are bargaining ("information asymmetry"), leading to a tendency for governments to pay more for an investment than they need to.
• Developing countries sometimes pay far more in incentives than developing countries do for a similar investment. Goias state in Brazil gave Usina Canada $125 million in tax breaks for a $25 million ethanol facility, for example.
• The best control mechanism for controlling investment incentives exists in the European Union, where the "state aid" rules require advance notification of all subsidy programs and all large individual subsidies (which also provides the best transparency in the world), advance approval by the European Commission, aid limits no higher than 50% of the investment tied to specific regions' income per capita, and sharp reductions in the maximum aid available to projects over 50 million euro. As a result, large projects receive considerably less in the EU than they do in the United States.
• Outside the European Union, transparency is the first important reform needed in most of the world.

The book, of course, goes into much greater detail on these and many more points I could not cover in the 850-word format of the Perspectives series. Thanks to Editor-in-Chief Karl P. Sauvant and Managing Editor Jennifer Reimer for their help in bringing this article to completion. You can browse the entire Perspectives series here.

U.S. Health Not #1: Deconstructing Legatum Part 1

As I reported on December 9, the Legatum Prosperity Index claims that the U.S. ranks #1 in the world in health. Like Aaron Carroll, I find this to be a dubious proposition. In the meantime, Nathan Gamester of the Legatum Institute was kind enough to help me learn my way around the website and find the data I wanted. He is not responsible for my conclusions, which still view the idea that the U.S. has the best health in the world as unsupported by the evidence.

To review, Legatum ranks the U.S. #1 largely based on the fact that it has by far the highest level of health care spending per capita in the world. In a defense of this outcome, the report states (p. 46):

Furthermore, the health expenditure variable is only one of the 17 variables in our Health sub-index and one of modest importance in comparison to the others....To further explore the importance of the healthcare expenditure on the overall performance of the United States, we conducted a simple exercise in which we substituted US expenditure with that of Norway. The result is that United States would rank 7th, still among the top 10 best performing countries in the Health sub index.

 This is more confusing than illuminating. While some variables are more highly weighted than health spending, for example, individuals' satisfaction with their health, the difference in scores are tiny; by contrast, the differences in health care spending are gigantic. As the report states, the U.S. spends "66% more than the next country (Norway), 84% more than Canada, 133% more than the UK, and 205% more than New Zealand." Let's take a look at the actual values for the 17 variables, which I will divide up between objective measures of health care outcomes, subjective measures of satisfaction with aspects of health, and health care inputs. I will compare the U.S. (health sub-index score of 3.54) with France (7th ranked with a health sub-index score of 2.77, but once ranked best in the world by the World Health Organization.

 

Variable			France	U.S.	Measure
Infant mortality			3.2	6.8	Per 1000 live births
Life expectancy			81.07	78.66	Years
HALE*			73	70	Years
Death from respiratory disease			26	66	Per 100,000 population
Tuberculosis incidence			6.1	4.1	Per 100,000 population
Undernourishment			5	5	Percent
DPT immunization rate			99	95	Percent
Measles immunization rate			90	92	Percent
Water quality satisfaction			85.72	89.65	Percent
Health satisfaction			86.49	85.81	Percent
Level of worrying			30.04	33	Percent
Well rested			67.07	71.72	Percent
Health problems			22.86	21.26	Percent
Environmental beauty satisfaction			90.57	89.91	Percent
Health expend per capita			3778	7536	PPP USD
Hospital beds			7.11	3.1	Per 1000 population
Sanitation 100% 100%			100	100	Percent
Health sub-index score			2.77	3.54
* Health-adjusted life expectancy

France has substantial edges on all but one of the objective measures (infant mortality is less than half the U.S. rate), is essentially tied on the satisfaction measures, provides more than twice as many hospital beds per thousand population, and only trails - by a huge margin, of course - in spending on health care. Spending almost exactly half what the U.S. spends, the French get an extra 3 years of healthy life, fewer than half the deaths from respiratory diseases, and less than half the infant mortality. As Carroll asked, how is spending a measure of health? This is a more methodological question I'll take up in a future post.

Why am I taking the time to show the weakness in this analysis? The short answer is that Legatum will not be going away anytime in the near future. It is funded by a Dubai-based investment firm that has founded, in addition to the Legatum Institute in London, the Legatum Center for Development and Entrepreneurship at MIT. We will be seeing a lot more of this report in the future.

Democrats' Continued Caves Threaten Middle Class

Via Mark Thoma, David Graham points out that Senate Democrats are caving in on an issue that looked won a week ago, the millionaire's tax.

 [Democrats] were calling for a tax cut, after all, and they had Republicans tying themselves in knots explaining why the party of Reagan and Tea didn't want lower taxes. All the Democrats wanted in exchange for extending the reduction was a small increase in how much the wealthy paid -- a position that was widely popular among voters.

And then Senate Democrats caved, without a peep from the President, despite his "big speech" in Kansas last week on economic inequality.

So what did Democrats get from the apparent deal to avert a government shutdown? A measly two months' extension of unemployment benefits and the payroll tax cut with the extraneous inclusion of language to force a decision within 60 days on the Keystone XL pipeline. No millionaire's tax. And it's not like tax cuts are the most effective form of economic stimulus anyway -- and this one takes money from Social Security.

Let's get a little historical perspective here. Political scientist Sven Steinmo, in his book Taxation and Democracy (1996), wrote that polls had long showed that Americans thought a major problem with the tax system was that the wealthy didn't pay enough tax. Yet the political system then, and in the 15 years since, has been delivering "tax reform" that has done exactly the opposite, reducing taxes on the rich. One has to question exactly how democratic a political system is that cannot deliver a reform favored by a large majority for at least 30 years.

So, here we stood on the verge of getting at least a little movement in the direction favored by a big majority, and Senate Democrats pull the rug out from under us again. As the Occupy movement has pointed out, something is very rotten in the state of American democracy.

As I wrote earlier, we face lots of hostage-taking opportunities in the future, especially if we are getting shutdown-averting deals that only last two months. If the Democrats keep caving in at this rate, they could give away most of the welfare state by election day.

Good story at Atlantic Cities on Job Piracy

Julie Irwin Zimmerman has a story at Atlantic Cities on job piracy, "The Folly or Corporate Relocation Incentives." She tells the story of Sears and other job blackmailers in Illinois in detail and quotes me on the failure of previous no-raiding agreements by states in the past. She points out that there are multiple reasons for opposing these subsidies, an equity argument that attracts liberals and an efficiency argument that brings conservatives and libertarians to the issue of investment subsidies.

Zimmerman does a great job; go read it.

FYI, when she quotes me as saying the cost of location incentives is almost $50 billion a year, that's correct. My other frequently quoted estimate of $70 billion annually includes all subsidies to business, including those which do not require an investment to receive them. Many sales tax subsidies don't require an investment, for example.

Whatever Happened to John Kasich?

Back in the 1990s, there was a Republican Congressman from Ohio named John Kasich who was a scourge on corporate subsidies. He even ran a "Stop Corporate Welfare Coalition" and had a joint news conference with Ralph Nader, Grover Norquist, and others to oppose it on January 29, 1997. "We've reformed welfare for those who don't have money or powerful Washington lobbyists," he said there. "Now it's time we did the same for those corporate welfare programs that aid the rich and powerful." (Newark Star-Ledger, Jan. 29, 1997, no link).

Interestingly, a guy with a similar name was elected governor of Ohio last year. But this Kasich indulges in the worst kind of subsidy abuse, offering incentives to companies to move existing facilities. Governor Kasich is offering Sears $400 million to move its headquarters, with 6100 jobs, from the Chicago suburbs to Columbus. At a time when the state is engaging in substantial budget cuts including, according to the linked story, funds for local governments and school districts, it's hard to justify $400 million subsidies that create zero net jobs for the country. Moreover, by dangling these subsidies in front of Sears, Kasich (and others like him in other states) is enabling the company to extort retention subsidies out of Illinois, just like it did in 1989 when it left the Sears Tower for Hoffman Estates.

Yet this Kasich has no shame. After poaching 500 jobs from Kentucky in September, he told Sean Hannity, "I was accused in the front page of the Cincinnati Enquirer by people in Kentucky of wanting to steal all their jobs. And guess what? They're right."

The John Kasich I remember would have seen that since the states can't help themselves (two voluntary no-raiding agreements between states have collapsed in the past), there is a need for federal action. Only the federal government can pass laws to prevent subsidies from being given for relocations, or tax them so heavily a company would have no incentive to accept such inducements. If he were still in Congress, maybe he could even be persuaded to author a bill like that.

I wonder whatever happened to that guy.