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Wednesday, January 6, 2021

AEP consideration of retiring Marshall County coal plant continues trend, rouses both sides of debate over coal's future in WV

AEP consideration of retiring Marshall County coal plant continues trend, rouses both sides of debate over coal's future in WV

There have been 10 conventional steam coal plants retired in West Virginia since 2005, and there are only nine left in the state, according to U.S. Energy Information Administration data.

At least one of the remaining nine could be retired before the decade is done, continuing a trend of dwindling coal plants across West Virginia as the coal industry fights to preserve itself amid a shift toward renewable energy that is taking shape more quickly outside the Mountain State's borders than inside them.

Appalachian Power and Wheeling Power said in a recent filing with the Public Service Commission of West Virginia that the Mitchell coal-fired generating facility in Marshall County would cease operation in 2028 if the companies choose to retire the plant rather than make an additional investment to ensure that the plant complies with federal guidelines limiting wastewater to continue operating beyond that year.

The companies say they could make modifications to comply with the wastewater rule and a federal rule regulating coal combustion residuals at the Mitchell plant, the John Amos plant in Putnam County and the Mountaineer plant in Mason County that would allow each of those plants to operate until 2040, and the filing argues that it would benefit customers to ensure compliance at the John Amos and Mountaineer plants and keep them operating until the end of their projected useful lives in 2040.

But the companies report that performing only the coal combustion residual compliance work at Mitchell and retiring the plant in 2028 has "comparable costs and benefits" to making the additional wastewater compliance investment to allow the plant to operate beyond 2028. Replacing a portion of the retired Mitchell capacity with a portion of Appalachian Power's excess capacity in 2028 would result in savings to West Virginia customers of approximately $27 million annually from 2029 to 2040, the companies said in the Dec. 23 filing.

Appalachian Power and Wheeling Power are seeking permission to perform all of the work at all of the plants, which they estimate would cost $317 million, and listed potential project-related residential, commercial and industrial rate increases of 1.59%, 1.52% and 1.72%, respectively. The proposed increased project-related rates and charges would produce $23.5 million annually in additional revenue, according to the companies.

The Mitchell plant began operating in 1971 and was West Virginia's sixth-largest plant in generation and fourth-largest in capacity, according to EIA data.

Wheeling Power and Kentucky Power Company each own 50% interest in the plant, according to the Dec. 23 filing. Those two companies and Appalachian Power are regional electric utilities of Columbus-based American Electric Power.

AEP has retired or sold nearly 13,500 megawatts of coal-fired generating capacity in the past decade, according to Nick Akins, AEP's chairman, president and CEO.

"As we look at the future of our power plant fleet, we've balanced the remaining life and economic viability of each of our coal-fueled generating units with other options for delivering power to our customers," Akins said in a November statement in which AEP said it planned to continue operating the Amos, Mountaineer and Mitchell plants while retiring two Texas plants in 2023 and 2028 as it prepared to make environmental upgrades. "We continue to add lower cost, cleaner resources, like renewables and natural gas, as we diversify our generating fleet to benefit our customers and the environment."

West Virginia's number of coal plants has steeply declined as the U.S. shifts away from coal toward renewable energy. The EIA last year reported that the nation's annual energy consumption from renewable sources in 2019 exceeded coal consumption for the first time in more than 130 years, largely reflecting the continued decline in coal used for electricity generation over the past decade, as coal consumption in the U.S. decreased nearly 15% from 2018 to 2019 as renewable energy consumption rose 1%. Electricity generation from coal in 2019 fell to its lowest level in 42 years, according to the EIA.

But in West Virginia, coal-fired power plants still account for almost all of West Virginia's electricity generation. In 2019, coal comprised the smallest share of state generation in more than 20 years, and it exceeded 90% anyway.

Less than 3% of the more than 23,000 operating generators across the U.S. are conventional steam coal facilities, but that clip remains above 20% in West Virginia, according to a Gazette-Mail analysis of EIA's operating generators as of October. Still, West Virginia's percentage of operating generators that use conventional steam coal technology has declined nearly 8% in the last five years as the national clip fell by 2.3%.

The Mitchell plant emitted just over 5 million tons of carbon dioxide, just under 1,900 tons of sulfur dioxide and just over 2,000 tons of nitrogen oxides in 2019, per EIA data.

All those numbers have pushed environmentalists in West Virginia toward embracing renewable energy as an alternative to coal-fired generation.

"The dictates of the market, along with the need to address the health and climate costs of burning coal, mean that much of the nation is taking part in the renewable energy revolution," Vivian Stockman, executive director of the Ohio Valley Environmental Coalition, said. "West Virginia would do well to embrace this change now and make every effort to shift our economy to one that can provide just transitions for former coal workers and sustainable livelihoods for all West Virginians."

The state Public Service Commission last month approved a settlement between FirstEnergy subsidiaries Mon Power and Potomac Edison and energy efficiency advocates including Solar United Neighbors that requires the utilities to justify continuing coal plant operations and provide an economic analysis of plants for which they plan major improvements.

"Renewable energy generation and energy efficiency measures are increasingly more cost-effective options for utilities and ratepayers than continuing to rely on an aging, expensive fleet of coal-fired power plants," Autumn Long, regional field director for Solar United Neighbors, said Monday.

The EIA does predict that coal-fired generation will stabilize after declining through the mid-2020s as more economically viable plants stay operational, and Chris Hamilton, president of the West Virginia Coal Association, said he sees the coal industry "stabilizing about where they are at the present time," noting the prominent role coal still plays in the Mountain State's economy.

Hamilton says the Coal Association was surprised to learn of AEP's plan to potentially close the Mitchell plant, adding that the organization plans to get involved in the PSC proceedings to lobby to keep the plant from retirement.

"We're not sure that [American Electric Power] is looking at the totality of the economics surrounding that plant," Hamilton said, noting that the Coal Association is considering an independent economic evaluation of the plant.

Hamilton estimated that the plant generates "a couple hundred million dollars" of economic support for the Ohio River valley.

"Those range from the hundreds of mining jobs that provide the base fuel, all the vendor supply jobs that support the mining industry in that area, and … the plant workers, all the maintenance workers that service that plant," Hamilton said.

American Electric Power officially retired the Kanawha River coal plant in Kanawha County in 2017 and the Philip Sporn coal plant in Mason County in 2015, while AEP Generation Resources, Inc. retired the Kammer coal plant in Marshall County in 2015.




FirstEnergy pledged in November to transition away from coal-fired power by 2050 in an effort to achieve carbon neutrality in an effort to combat climate change, and Akins noted an "aspirational" goal of zero emissions by 2050 in 2019.

Hamilton alluded to those goals with a call to action in an open letter to "Friends of Coal" last week.

"We are deeply concerned with what the future holds, and you should be as well," Hamilton wrote. " … [W]e must be prepared to stand up for coal."

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afl-cio georgia updates


via Sherry Breedon, WV AFL-CIO


 

Georgia AFL-CIO President Charlie Flemming:

Election Day Is Here

 

"It's finally here. Today is Election Day for Georgia's Senate runoff campaign—where millions of us will decide the fate of the U.S. Senate and the future of our country," said Georgia State AFL-CIO President Charlie Flemming (IAM).

 "Election Day is always an exciting time, and for me it's a testament to the incredible hard work every single union member, whether here on the ground in Georgia or across the nation, has put into these two runoff Senate races. In such a short period of time, in such unprecedented conditions, we have phone banked hundreds of thousands of voters. And thanks to major efforts from our affiliates and partner organizations, we have safely knocked on millions—yes, millions—of doors. We have hosted dozens of caravans, rallies and literature drop events. And we have welcomed both the Rev. Raphael Warnock and Jon Ossoff into our event spaces on multiple occasions. Early voting ended with a record 3 million votes. And as the rest of the votes come in today (polls close at 7 p.m.), I could not be prouder to serve Georgia's working people."

 

 

Day of Action for Union Members in Augusta

Dozens of union volunteers in Augusta, Georgia, hit the streets over the weekend for a get-out-the-vote (GOTV) day of action. Five teams of volunteers reached some 400 union household doors and made more than 100 phone calls to remind union families to get out to the polls to vote if they haven't already done so. Volunteers included members from the Painters and Allied Trades (IUPAT), the Augusta/East Georgia Central Labor Council, AFGE, Transport Workers Union (TWU) and other groups.

 A video montage of the day of action can be found here.

 

 

UFCW Votes Program Offers Resources for

Georgia Voters

During Georgia's Senate runoff, the United Food and Commercial Workers Union (UFCW) utilized its UFCW Votes program to provide Georgia voters with resources such as state voting information, voting schedules, poll locations, ballot tracker links and more. In addition, UFCW Local 1996 President Steve Lomax (pictured, right) has been hosting phone banks, text banks and postcard distributions for local union members to help get out the vote.

 

National Postcard Writing Campaign

Reaches 400,000 Voters

Across the country, thousands of union members participated in the AFL-CIO's Georgia Postcard Campaign. Launched Dec. 1, the program targeted both union and nonunion voters who needed an extra push to make sure they vote early, by mail or on Election Day, Jan. 5.

 We'd like to extend a special thank you to everyone who went above and beyond in this effort. In a matter of three weeks, over the peak holidays, the AFL-CIO state and local central bodies, affiliates, constituency groups, allies and the Committee on Working Women ordered postcards in droves. The numbers speak for themselves: In total, 400,209 postcards were ordered, shipped, distributed, handwritten and then sent back out to voters. The Labor Council for Latin American Advancement sent more than 5,600 postcards, the Coalition of Black Trade Unionists sent 4,500, and all of the labor movement's allies and constituency groups stepped up in a big way.

 

Phone Banking Campaign Connects with Hundreds of Thousands of Voters

For months, AFL-CIO members from coast to coast hosted virtual phone banks to reach hundreds of thousands of union and nonunion voters in Georgia. Altogether, thanks to efforts from our affiliated unions, state federations and local labor bodies, the AFL-CIO's virtual phone banks made over 618,456 calls. Virtual events, such as the Texas AFL-CIO's "Solidary Phone Bank for Georgia en Español," Pride At Work's collaborative phone bank with the Asian Pacific American Labor Alliance and countless other events, made a real difference in this election.

 

 

 

 

Attachments area

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Wednesday, December 30, 2020

Mike Roberts: The Brexit deal [feedly]

The Brexit deal
https://thenextrecession.wordpress.com/2020/12/29/the-brexit-deal/

The UK finally leaves the European Union on 31 December, after 48 years of membership.  The initial decision to leave, made in the special referendum back in June 2016, has taken over four tortuous years to implement.  So what does the deal mean for British capital and labour?

For British manufacturers, the tariff-free regime of the EU's internal market has been maintained.  But the British government will have to renegotiate new bilateral treaties with governments across the world, whereas previously they were included within EU deals.  People will no longer be able to work freely in both economies by right, all goods will require significant additional paperwork to cross borders and some will be checked extensively to verify they comply with local regulatory standards.  Frictionless trade is over; indeed, that's even between Northern Ireland and mainland Britain with a new customs border across the Irish Sea.

And that's just goods trade, where the EU is the destination of 57% of British industrial goods.  The British government fought tooth and nail to protect the fishing industry (and failed), but it contributes only 0.04% of UK GDP, while the services sector contributes over 70%.  Of course, most of this is not exported, but still services exports contribute 30% to UK GDP.  And 40% of that services trade is with the EU directly.

Indeed, while the UK runs a huge goods trade deficit with the EU, that is in part compensated by running a surplus in services trade with the EU.  This surplus is in mainly financial and professional services where the City of London leads.  Exports of UK financial services are worth £60 billion annually compared to imports of £15 billion. And 43% of financial services exports go to the EU.

The Brexit deal with the EU has done nothing for this sector. Professional services providers will lose their ability automatically to work in the EU after the Brexit deal failed to obtain pan-EU mutual recognition of professional qualifications. This means that professions from doctors and vets to engineers and architects must have their qualifications recognised in each EU member state where they want to work.

And the deal does not cover financial services access to EU markets, which is still to be determined by a separate process under which the EU will either unilaterally grant "equivalence" to the UK and its regulated companies or leave firms to seek permissions from individual member states.  Over the next year, there may well be bit by bit agreements on trade in these areas.  But the UK service sector is bound to end up worse off for its exports than was the case within the EU.

And that's serious because the UK is a 'rentier' economy that depends heavily on its financial and business services sector.  Financial services contribute 7% of UK GDP, some 40% higher a contribution than in Germany, France or Japan.

The UK is a country of bankers, lawyers, accountants and media people, rather than engineers, builders and manufacturers.  The UK has a huge top-heavy banking sector, but a small manufacturing sector compared to other G7 economies.

What about the impact on working people?  On leaving the EU, what little British labour has gained from EU regulations will be in jeopardy within a country which is already the most deregulated in the OECD.  The EU rules included a 48-hour week maximum (riddled with exemptions); health and safety regulations; regional and social subsidies; science funding; environmental checks; and of course, above all, free movement of labour.  All that is going or being minimised.

Around 3.7% of the total EU workforce – 3 million people – now work in a member state other than their own. Since 1987, over 3.3 million students and 470,000 teaching staff have taken part in the EU's Erasmus programme.  That programme will exclude Britons from now on.  Immigration into the UK from EU countries has been significant; but it also works the other way; with many Brits working and living in continental Europe. With the UK out of the EU, Britons will be subject to work visas and other costs that will be greater than the total money per person saved from contributions to the EU.

On balance, EU immigrants (indeed all immigrants) have contributed more to the UK economy in taxes (income and VAT), in filling low-paid jobs (hospitals, hotels, restaurants, farming, transport) than they have taken up (in extra cost of schools, public services etc).  That's because most are young (often single) and help pay pension contributions for those Brits who are retired.  The Brexit referendum has already brought about a sharp drop in net immigration into the UK from the EU, down 50-100,000 and still falling.  That can only add to the loss of national income and tax revenues down the road.

Most sober estimates of the impact of leaving the EU suggest that the UK economy will grow more slowly in real terms than it would have done if it had remained a member.  Mainstream economic institutes, including the Bank of England, reckon that there would be a cumulative loss in real GDP for the UK over the next ten to 15 years of between 4-10% of GDP from leaving the EU; or about 0.4% points off annual GDP growth. That's a cumulative 3% of GDP loss per person, equivalent to about £1000 per person per year.

The UK's Office for Budget Responsibility reckons that one third of this relative loss has already taken place because of the reduction in the pace of business investment since the referendum as domestic businesses stopped investing much, due to uncertainty about the Brexit deal along with a sharp drop in foreign inward investment.

And then of course, the COVID pandemic has decimated business activity.  In 2020., the UK will suffer the largest fall in GDP among major economies apart from Spain and recover more slowly than others in 2021.

British capitalism was already slipping badly before the pandemic hit.  Its trade deficit with the rest of the world had widened to around 6% of GDP; and real GDP growth had slid back from over 2% a year to below 1.5%, with industrial production crawling along at 1%.  The UK economy already had weak investment and productivity growth compared with the 1990s and with other OECD countries.

Investment in technology and R&D has been poor, more than one-third less than the OECD average.

And the reason for this is clear. The average profitability of British capital has been falling.  Even before the pandemic hit in 2020, average profitability (according to official statistics) was 30% below the level of the late 1990s and, excluding the Great Recession, was at an all-time low.

Since the referendum of 2016, UK profitability has fallen by nearly 9%, compared to small rises in the Eurozone and the US.  And the Eurozone AMECO forecast for profitability will leave the UK 18% below 2015 levels by 2022!

As a result, investment by British capital is set to plunge and is forecast to be down a staggering 60% by 2022 compared to the referendum year of 2016.

But maybe the UK can confound these dismal forecasts, as the government claims, because UK industry and the City of London can now expand across the world 'free from the shackles' of EU regulation.  And it is increasingly clear how it thinks it can do this – by turning Britain into a tax and regulation-free base for foreign multinationals.  The government is planning 'free ports' or zones; areas with little to no tax in order to encourage economic activity. While located geographically within a country, they essentially exist outside its borders for tax purposes.  Companies operating within free ports can benefit from deferring the payment of taxes until their products are moved elsewhere or can avoid them altogether if they bring in goods to store or manufacture on site before exporting them again.

Unfortunately, for the government, studies show that free ports might simply defer the point when taxes are paid, as imports would still need to reach final customers across the country. And the incentives may also promote the relocation of activity that would have taken place anyway, from one part of the UK to another. Moreover, tax breaks could mean a loss of revenue for the Treasury. And free ports risk facilitating money laundering and tax evasion, as goods are usually not subject to checks that are standard elsewhere.  A deregulated Britain will not restore economic growth, let alone good, well-paid jobs for an educated and skilled workforce.  It will only boost the profits of multi-nationals, using cheap, unskilled labour.

In sum, the Brexit deal is another obstacle to sustained economic growth for Britain. But the COVID pandemic slump and the underlying weakness of British capital are much more damaging to the UK's economic future than Brexit. Brexit is just an extra burden for British capital to face; as it also will be for British households.


 -- via my feedly newsfeed

End of the Year Thoughts on Inequality and Its Remedies [feedly]

Lots to discuss here -- Dean's year end reflections would be a great topic for educationals on real political economy in the coming period. Certainly more useful and productive than the phrasemongering, feet planted in mid-air rants, that at times masquerade as political economy on the Left. I do not concur with parts of  his analysis, but it has two great virtues: 1) It is concrete in its analysis of the US inequality -- it deals in real, not dogmatic or categorical choices in policy; 2) He affirms that among the several approaches one may take toward inequality, you cannot run away from its class character. You cannot raise the incomes of middle and lower working class people, unless you take it from the rich. 


If you are having dinner with a billionaire, or a CEO, it is not going to be a win win situation

Dean Baker: End of the Year Thoughts on Inequality and Its Remedies

http://feedproxy.google.com/~r/beat_the_press/~3/KwG6EY98SRE/

The approach of the end of the year seems a good time to sum up thoughts. My comments here will not be news to regular readers, but may be to others. Also, this exercise is helpful for me to keep my thoughts clear. (I also expect to take next week off, so you won't be hearing from me for a while.)

Most of my work for the last several years has been focused on ways to reduce before tax inequality by reducing the amount of before-tax income that goes to those at the top of the income distribution. For better or worse, there don't seem to be a lot of progressives that share this beat. There are a few points that are worth making.

First, my focus on reducing income at the top doesn't mean for a second that I don't see efforts at raising income for those at the bottom (and middle) as being important. I have long been involved with or worked alongside people trying to raise minimum wages, protect or increase Social Security benefits, and increase unionization rates.

These are very important efforts, but at the end of the day, our ability to raise incomes at the middle and bottom will depend on reducing incomes at the top. This gets to the old pie-cutting story. If we want those at the middle and bottom to have much bigger slices of the pie, the folks at the top will have to get by with smaller slices.

To see how skewed the pie eating has gotten, if the federal minimum wage had kept pace with productivity growth since 1968, as it did from its establishment in 1938 until 1968, it would be $24 an hour today. That means a single full-time minimum wage earner would have an income of $48,000 a year. A two-earner couple getting the minimum wage would have an income of $96,000 a year.

This is a striking counter-factual, but we can't just go from here to there. In order for the economy to allow for this sort income and consumption by those at the middle and bottom, we have to reduce income and consumption at the top.

We can talk about expanding the pie, but I don't think that I, or anyone else, has a magical formula to hugely expand the size of the pie.  There are areas where better policy can lead to a more productive economy, but we are more likely talking about one to two percent rather than ten to twenty percent, and even these gains are likely to be a long-term story, not gains we can see in two or three years.

It is also worth focusing on what pie-eating among the top means. There are many progressives who have made a sport of highlighting the enormous wealth that Jeff Bezos, Mark Zuckerberg, and other super-rich types have accrued from recent stock market gains. While the wealth of the super-rich is obscene, reducing these fortunes will actually not free up much room for more income lower down the ladder.

As a practical matter, Jeff Bezos and Mark Zuckerberg probably don't consume much more in a given year than your average single-digit billionaire. This means that if we took away $100 billion from each of them, it would not free up much consumption for those at the bottom. If we want to create the economic space to substantially expand incomes at the middle and the bottom, we will have to substantially reduce the consumption of not just some tiny segment of super-rich people, but also the rest of the top one percent and even the top five percent. (That gets us a cutoff in household income of around $300,000.) We might even have to knock down the income a bit of the next five percent (cutoff of household income around $200,000).   

There is the political issue of the enormous influence that the super-rich can buy with their wealth. This is a huge problem, but it is best addressed in the near-term by increasing the opportunities for ordinary people to have a voice.

I know many on the left want to use taxes to reduce the income, and therefore consumption, of those at the top. While we can and should make our tax system more progressive, there are real limits on how far we can push progressive taxation. Rich people don't like to pay taxes. They can and do find ways to avoid and evade taxes. Insofar as they are successful in these efforts, we fail to reduce their income in the way intended, we create a huge tax-gaming industry, which is a source of economic waste and itself a generator of inequality, and we undermine faith in the system.

It is far better if we change economic structures in ways that don't allow people to get so rich in the first place. As a political matter, it is hard to defend an institutional structure that is both inefficient and a large generator inequality. As a practical matter, it is much easier to design systems that don't give rich people billions of dollars in the first place, than to try to impose taxes that pull most of their billions back after the fact.

This is the basis of my thinking in much of my work. I lay out the case most completely in Rigged (it's free), but I am constantly looking for new areas where altering rules can lead to less inequality, without jeopardizing efficiency.   

 

 

Patent and Copyright Monopolies

I like to begin with patent and copyright monopolies both because this is the clearest case, and also because the most money is at stake. The basic point is painfully simple: patent and copyright monopolies are not intrinsic to the market, they are government policies designed to promote innovation and creative work.

As policies, they can be altered as we choose. They can be shorter or longer, stronger or weaker. We also can use other mechanisms to promote innovation and creative work.

These policies transfer an enormous amount of income from the bulk of the population to those in a position to benefit from patent and copyright monopolies. I calculated that these policies may transfer over $1 trillion a year from the rest of us to the beneficiaries of patent and copyright monopolies. This is an amount that is larger than the military budget, it is close to half of all before-tax corporate profits. In other words, it is real money.

Prescription drugs are the largest single chunk of this sum. Drugs are important, not only because of the money involved, but also because people's lives and health are at stake. The drugs that sell for tens, or even hundreds, of thousands of dollars would almost invariably be cheap in a world without patent monopolies and related protections. While any price is expensive for the poor, for most people, paying for drugs would not be a big problem if they sold for ten or fifteen dollars per prescription. Doctors could freely prescribe what they view as the best drug for their patients, without regard to price. (We need to make sure that government programs pick up the tab for the poor.)

There is also the issue of the perverse incentives created by patent monopolies. Drug companies routinely misrepresent the safety and effectiveness of their drugs to maximize their sales and therefore the benefit of monopoly pricing. The most extreme case (which no one ever talks about) is the opioid crisis, which was worsened as a result of drug companies widely pushing drugs that they knew to be more addictive than claimed.

The inequality story is also straightforward. Dishwashers and custodians don't benefit from patent monopolies. A very limited group of workers are in a position to get big gains from these policies. Bill Gates would likely still be working for a living if not for the patent and copyright monopolies on Microsoft software. When economists say that "technology" has increased the returns to education and inequality, they actually mean that patent and copyright monopolies have increased the returns to education and inequality, but it sounds much better to blame inequality on an abstract force than government policy.

 

The Corruption of Corporate Governance

There is a simple point here that seems to largely escape people on the left. CEOs are not worth their $20 million paychecks. That is not a moral assessment of the value of their work, that is a dollar and cents calculation about their value to the companies that employ them.

At this point there is a considerable body of research that shows the pay of CEOs is not closely related to the returns they provide to shareholders. Bebchek and Fried have a somewhat dated collection of research on the topic. I reference some more recent material in chapter 6 of Rigged. A couple of years ago, Jessica Schieder and I also contributed a piece to this literature.

The fact that CEOs are not worth their pay matters because it means that they are effectively ripping off the companies for which they work. There is a widely held view, that in recent decades, companies have been run to maximize returns to shareholders. However, if CEOs have been earning huge paychecks at the expense of the companies they work for, then it is not the case that companies are being run to maximize returns to shareholders.

The fact that returns to shareholders have not been high by historical standards over the last two decades supports the view that CEOs are not maximizing returns to shareholders. It is also worth noting that the shift of income from labor to capital only explains about 10 percent of the upward redistribution of the last four decades.

The fact that CEOs might be gaining at the expense of shareholders is not just a question of which group of rich people get the money. At the most basic level, there is reason to prefer the marginal dollar goes to shareholders, since even with the enormous skewing stock ownership, a substantial portion of shares are owned by middle class people in their 401(k)s and pension funds. By contrast, every dollar going to a CEO is going to someone in the top 0.001 percent of the income distribution.

But more importantly, the bloated pay of CEOs has a huge impact on pays scales throughout the economy. If the CEO is getting $20 million then it is likely the chief financial officer and other top tier executives are getting close to $10 million. And the third tier can be getting $2 or $3 million. By contrast, if we had the pay scales of forty years ago, the CEO would be getting $2 to $3 million. The second tier would be correspondingly lower, and the third tier may not even crack $1 million. The excess pay at the top in the corporate sector also leads to bloated pay for top executives in universities and private charities. And, with all this money going to the top, there is less for everyone else.  

Anyhow, it should be apparent both that lowering the pay for CEOs will be a huge step in reducing income inequality, and that shareholders should be allies in this battle. Changing the rules of corporate governance (these are set by the government) to give shareholders more control over CEO pay can lead to lower pay at the top and therefore less inequality.

 

Globalization is a Policy, not an Exogenous Event

A popular story among elite types is that we can't have good-paying factory jobs that can support a family because of globalization. The deal is that workers earning $30 an hour, plus benefits, can't compete with workers in places like Mexico and China, who can do the same work for less than one-tenth as much. 

This is true. But the fact that our factory workers were put in direct competition with low paid workers in the developing world was not just something that happened, it was the result of deliberate policy. Our trade deals were designed to make it as easy as possible for U.S. corporations to outsource work to developing countries and bring manufactured goods back into the United States. The massive loss of manufacturing jobs in the years from 2000 to 2007 (pre-Great Recession) was not an accident, that was the point of our trade deals.

We could have constructed our trade deals differently. Instead of putting manufacturing workers in competition with their counterparts in the developing world, we could have designed our trade deals to put doctors, dentists and other highly paid professionals in direct competition with their counterparts in the developing world. This would have meant standardizing licensing requirements in ways that ensured safety standards, while making it as easy as possible for foreign professionals to train to meet these standards and then practice freely in the United States.

While doctors are not among the super-rich, their average pay is close to $280,000a year, putting them in the top two percent of wage earners.  They also earn roughly $100,000 more annually than their counterparts in other wealthy countries. If we got doctors' pay down to the levels in Germany or France, it would save us close to $100 billion a year. That comes to $700 per year per household.

When I have raised this issue with other progressives, many first dispute the idea that we could get foreign doctors that meet our standards. When I convince them of the absurdity of this position (there are plenty of very smart people in places like Mexico and India who would be happy to train to our standards for the opportunity to practice medicine here), they often respond with comments like people like their doctors or that they personally like their doctor.

I get that, but there is some serious logic missing. I like the person who cuts my hair; she doesn't earn $280,000 a year. Essentially, these progressive types are expressing class solidarity with very highly paid professionals. They are welcome to do so, although it is an odd position for people who consider themselves progressive, but there is a more fundamental and simple point at stake.

The fact that autoworkers have to compete with low-paid workers in the developing world, and doctors don't, is a political choice. This was not the result of an exorable process of globalization, it was the result of how policy types chose to structure globalization. No one should be surprised if manufacturing workers, and workers without college degrees more generally, who have been hurt by the loss of good-paying manufacturing jobs, are resentful of this decision. 

 

The Financial Sector: Economic Bloat and the Bloated

The financial sector is the source of many of the country's great fortunes, it is also a source of enormous waste. Finance is an intermediate good, like trucking. It is very important to the economy; we need an industry that allocates capital and makes payments. But just as we want as few resources as possible involved in shipping our goods from Point A to Point B, we also want as few resources as possible tied up in the financial sector. 

In fact, the financial sector has exploded in size relative to the rest of the economy over the last five decades. We have seen a massive increase in financial transactions, as new financial assets are being constantly created and the existing ones are being traded more frequently. It is difficult to see much gain to the real economy from this explosion in the size and complexity of the financial sector, even if it has meant big fortunes for many people in the sector.

My favorite remedy is a financial transactions tax, which can be thought of as equivalent to the sales tax we impose on most of the goods we buy. A modest tax could easily raise $100 billion a year (0.5 percent of GDP), which would come almost entirely at the expense of the industry.

I find that many people have difficulty understanding how the tax would come at the expense of the industry and not investors. They insist that that banks and brokerage houses will just pass on the tax to investors. This is largely true but it misses the point.

There is considerable research showing that the volume of trading falls roughly in proportion to the increase in the cost of trading. This means that if the cost of trading rises by 40 percent, then the number of shares bought and sold will fall by roughly 40 percent. This means that, for a typical investor, the increase in the cost per trade due to the tax will be offset by the reduction in the number of trades they or their fund manager make.

This means that the total amount that they spend on trading will be little changed, but money they used to pay to the industry for carrying through trades will instead be paid to the government in taxes. Since trades are on net a wash (every trade has a winner and loser, this averages out for all but the most astute investors), investors will not be hurt by a reduction in trading volume.

This one often leaves people baffled, since if they aren't gaining from trading now, they could reduce their volume of trading and save money. That view is correct, they could save money with fewer trades, but nonetheless many people choose to bet that they, or a fund manager will be able to beat the market.

Anyhow, the point here is that if we just applied similar tax treatment to the financial sector as we apply to most goods and services we buy, we would have a radically downsized sector and many fewer great fortunes being earned there.

The other simple quick fix would be to crack down on private equity funds, which are a source of great fortunes for fund partners. My colleague Eileen Appelbaum, along with Rose Batt, has documented many of the abuses the industry has developed to maximize their returns.

In addition to cracking down on abuses, which can get complicated, a simpler issue is that private equity is no longer giving above market returns. In the 1980s and 1990s private equity companies were able to find many underpriced companies, turn them around and make large profits reselling them when they took the company public. This no longer seems to be the case as their returns have largely followed the market since 2006. This means that there is no reason for pension funds, the major source of private equity funding, to be tying up their assets with them.

Even though pension funds may not be gaining by investing with private equity, many of their managers are convinced that they do. There is an easy remedy here. Just require the terms of all contracts of public pension funds with investment managers, including private equity, be posted on the fund's website, showing in clear terms what the managers get paid and the return on the investment. It is likely that the mediocre returns on private equity funds, coupled with the large payments to the private equity managers, would soon discourage pensions from continuing to turn over large amounts of money to these funds.

There are other areas where we can both make the economy more efficient and reduce the opportunities for large fortunes in the financial sector. The most obvious is cleaning up the room for abusive credit practices that the Consumer Financial Protection Bureau was designed to target. There is no economic reason to give clever lawyers and accountants incentives to design ways to rip-off their customers. If these practices are blocked, by regulation or law, it a pure gain for the economy.

As a general rule when it comes to the financial sector, we want it small and we want it simple. If we see lots of resources being devoted to the sector, it is clear indication we have a problem.

 

Fixing Facebook and Social Media: Treat Them Like Other Media

The battle over Section 230 of the 1996 Communications Decency Act has taken a bizarre turn in recent months because Donald Trump seems to have been convinced that repealing it would mean that Twitter and Facebook couldn't comment on or take down his posts. Actually, the opposite is true. In their current form, without Section 230 protection, Twitter and Facebook would probably be more likely to remove material posted by Donald Trump because it could be libelous and make them subject to legal actions.

But ignoring the Trump confusion, the issue with Section 230 protection is why should Internet outlets be protected from damages, when the exact same material in a traditional print or broadcast outlet could lead to a lawsuit costing millions? Just to be clear, the issue is not directly posted material. If Facebook itself were to post libelous material it would face the same legal liability as the New York Times or CNN. The issue is third party content, where social media companies are completely protected.

If we applied the same rules to Facebook, Twitter, and other social media companies as we do to traditional news outlets (I describe how this could be done in more detail here), we would likely see a radically downsized Facebook and Twitter. There would still be considerable opportunities to make money in this sector, but likely much less than Mark Zuckerberg has made to date.

Even more important than downsizing Mark Zuckerberg's fortune is the issue of democratic control. In both the 2016 and 2020 elections, the public was in the position of begging Mark Zuckerberg to be responsible in the material he was allowing to be spread across his network. We should never be in the position of hoping some billionaire media mogul acts responsibly, with enormous consequences for democracy if they don't. This is a very good argument for breaking up Facebook, so that Mr. Zuckerberg's decisions do not have so much impact on our political process, but repealing Section 230 may get us to the same place through a much simpler mechanism.

 

Wishing You a Happy and More Egalitarian New Year

 

Well, that's the list for now. I have other schemes, as my regular readers know, but these are the big ones. The point is that we should never take market outcomes as simple givens. We can structure the market in an infinite number of different ways. Any political strategy that doesn't acknowledge this basic point is doomed to failure.

The post End of the Year Thoughts on Inequality and Its Remedies appeared first on Center for Economic and Policy Research.


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