The Precariat: Why a Basic Income is Vital [feedly]

The Precariat: Why a Basic Income is Vital
https://workingclassstudies.wordpress.com/2017/10/23/the-precariat-why-a-basic-income-is-vital/

We are in the midst of a global transformation orchestrated by powerful financial interests espousing an ideology of market liberalisation, commodification, and privatisation. The global market system they advocate increases economic and social injustice, including widespread precarity. In the face of this transformation, how can we create new systems of regulation, distribution, and social protection to achieve a more just society?

Central to the transformation has been the owners' control of physical, financial, and intellectual property from which they overwhelmingly benefit. Unlike the post-war period when shares of income going to capital and labour were roughly stable, in today's globalised economy, the income distribution system has broken down irretrievably and the share of rentier capital – that is, income from rents, trusts, and subsidies rather than production or trade — has risen sharply.

This economic transformation has enormous implications for a growing class, the precariat. I define this group as a class because it has distinctive relations of production, relations of distribution, and relations to the state. And it is the precariat that will define the counter-movement in the global transformation.

The precariat faces a life of unstable, insecure labour. As we have seen with Uber, Task Rabbit, and other new non-traditional work structures, casualization has been extended by indirect labour relations in the 'concierge economy', while online crowd labour in platform capitalism and on-call contracts has spread. Within the next decade, a majority of transactions may be of this type, as labour brokers and apps become more ubiquitous. The old relations of production, built around direct employer-employee relationships, may become the exception.

Many commentators define the precariat simply on the basis of insecure labour, but this misses an important element: the precariat lacks an occupational identity. Further, these forms of precarious work involve increasing amounts of work-for-labour – think of the time an Uber driver puts in to maintaining a car — that is neither recognised statistically nor remunerated. In addition, many do jobs that require less education than they have.

The precariat is also defined by distinctive relations of distribution, in particular exploitation that undermines social income. Precarious workers rely mostly on money wages, which have been falling in real terms while becoming more volatile and unpredictable. They are also losing non-wage benefits, such as paid leave, medical leave, and occupational pensions, which provided labour-based security for old proletariat and, at this point, still do so for salaried workers. Statistics based on money income ignore these losses, and so they understate inequality.

To compound their insecurity, the precariat has lost rights-based state benefits, which increasingly require recipients to meet means tests. This results in a poverty trap, because moving from benefits to a low-wage job often brings only marginal income increases. And if someone loses a job, they don't begin receiving benefits immediately, creating what I call a precarity trap. The combination means that taking a short-term job brings a small extra income but also raises the prospect of losing income altogether for a while after the job ends.

Yet it is the precariat's distinctive relations to the state that are most crucial to understanding this growing class. Members of the precariat are losing rights of all kinds – civil, cultural, social, economic, and political. They are reduced to supplicants, without rights, obliged to be obsequious to gain income or benefits and dependent on bureaucrats to make discretionary judgements in their favour. This is humiliating, intensifying feelings of insecurity. These rights are also forms of social income, and their loss represents extra costs of living for the precariat. This, too, adds to inequality in ways that conventional income measures ignore.

The precariat has been hard hit by the collapse of the old income distribution system. It will be even harder hit by the advance of robotization, which will bring more people into the precariat. Robots may not cause mass unemployment, as many in Silicon Valley predict, but they will be disruptive. Wages will decline, and occupational structures will become more fragmented. The salariat will become part of a growing precariat of para-legals, para-medics, fractionals, and the like. The only people who will benefit are a few elites, whose incomes come from rents and investments.

At that point – and it is coming soon – economists and politicians will either have to accept yawning inequality and all the social and political risks that this entails or build a new income distribution system in which wages will play a smaller role. The base of a new system should be a basic income, funded by taxing the rentier income of the elites.

A basic income is a modest amount paid regularly to each individual legal resident (or 'citizen'). It is a non-withdrawable economic right, without behavioural conditions. This would have several beneficial effects, including acting as an incentive to work in more ecological ways, such as in reproductive or care work rather than in resource-depleting labour, and improving mental and physical health. To afford a basic income system, governments would tax income gained through financial, physical, and intellectual property. Taxes for the majority would not rise, and public services would not be adversely affected. In a basic income system, everybody shares in the collective wealth generated in the economy.

A basic income will be the anchor of the system, but it should also provide supplements for those who have extra costs of living, such as people with disabilities or parents of infants, and to assist those with below-average earning opportunities. The system will still include wages and insurance benefits, as well as income from normal profits from productive activity.

Sooner or later, basic income will be seen as the only sustainable course. That, in turn, will enhance social justice, freedom, and basic social and economic security.

Guy Standing

Guy Standing is a Professorial Research Associate, SOAS, University of London. He is the author of numerous books, most recently Basic Income: A Guide for the Open-Minded andThe Corruption of Capitalism: Why Rentiers Thrive and Work Does Not Pay. He will discuss the books at a seminar in Columbia University on October 26, 2017.

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China vs. the Washington Consensus [feedly]

China vs. the Washington Consensus
https://www.project-syndicate.org/commentary/china-versus-washington-consensus-by-adair-turner-2017-10

China vs. the Washington Consensus

Oct 23, 2017 ADAIR TURNER

The 2008 financial crisis was a shock to faith in entirely free financial markets. But the neoliberal assumptions underlying the previously dominant "Washington Consensus" continue to inform much Western commentary on China's economy.

EDINBURGH – In 2013, Chinese President Xi Xinping heartened many Western economists by committing to a "decisive role" for the market within China's economy. Four years on, expectations of significant market-oriented reform have been dashed, and state influence over the economy has significantly increased. Yet the Chinese economy continues to grow rapidly and will likely continue to do so. If it does, longstanding assumptions about the optimal balance of state and market mechanisms in driving economic development will be severely challenged.

The 2008 financial crisis was a shock to faith in entirely free financial markets. But the neoliberal assumptions underlying the previously dominant "Washington Consensus" continue to inform much Western commentary on China's economy. Deeper financial market liberalization, it is argued, would better discipline the real economy and lead to more efficient capital allocation. Capital account liberalization would prevent wasteful investment in low-return domestic projects. And reducing the role of dominant state-owned enterprises (SOEs) would unleash innovation and economic dynamism.

But, as Joe Studwell of the China Economic Quarterly argues persuasively in his book How Asia Works, the original East Asian success stories – Japan and South Korea – got rich by ignoring most of this policy prescription. Finance was kept on a tight leash; credit was directed or guided to support specific government-defined industrial objectives; and domestic industry was nurtured behind tariff protection, while being forced to compete aggressively for overseas markets.

China is attempting to follow Japan and South Korea's path of rapid economic catch-up. But in some ways it faces a more difficult challenge, because its sheer size makes it essential to move away from a predominantly export-driven growth model at an earlier stage of development. To meet that challenge, it seeks to use a pragmatic mix of market incentives and state direction.

Private-sector entrepreneurship plays a vital role. Huge companies such as Tencent and Alibaba are second to none in innovative flair. Chinese bicycle-sharing apps are now being copied in advanced economies. And private companies play world-leading roles in renewable energy and electric vehicles. In part, China is a vibrant capitalist economy.

But huge state-driven infrastructure investment – in excellent subway systems and high-speed rail, for example – creates a powerful platform for modern economic growth within rapidly expanding and well-connected cities. And through the "Made in China 2025" program, China's leaders are seeking to use state-defined objectives to drive Chinese industry toward higher technology and value-added.



High-priority sectors such as robotics, aerospace, electric vehicles, and advanced medical equipment have been identified; targets for increased spending on research and development have been established; and leading state-owned companies will play a major role, alongside private companies. This is a far cry from the policy prescriptions of the Washington Consensus, but not from the policy mix deployed by South Korea during its period of explosive economic growth in the 1960s and 1970s.

After 2009, meanwhile, higher investment, funded by state banks, played a vital macroeconomic role, maintaining growth in the face of the global economic slowdown. And maintaining an only partly liberalized financial sector, which channels savings to investment at below-market rates, has made it easier to maintain the high investment essential to sustained rapid growth.

The advantages of this policy mix certainly come with significant risks. If the role of the SOEs is extended too far, the private sector will be squeezed out, and the Made in China initiative could easily result in misdirected investments.

Already, credit-fueled real-estate investment has undoubtedly resulted in massive overbuilding in some second- and third-tier cities, with properties held as speculative vehicles rather than to meet real housing needs. The very fact that the banking sector is tightly controlled has fostered dramatic growth in shadow banking activities, creating complex financial instruments and structures eerily reminiscent of those that helped create the 2008 crisis. And the huge increase in leverage – non-financial debt has grown from less than 150% of GDP in 2008 to more than 250% today – might well lead, as People's Bank Governor Zhou Xiaochuan has just warned, to a "Minsky moment" of evaporating confidence and severe financial stress.

Given these risks, any long-term growth prediction is uncertain, and a significant short-term slowdown may well occur. Indeed, with the 19th National Congress drawing to a close, the Chinese authorities may deliberately engineer a slowdown as part of a strategy to limit further leverage growth. Such a slowdown would have a major depressive impact on the global economy.

But the tools available to China to manage such a slowdown within a "hybrid socialist market economy," and thus to maintain strong medium-term growth, should not be underestimated. The very fact that most corporate debt is owed by state-owned enterprises to state-owned banks, with only limited links between the Chinese and overseas banking systems, will make it easier to implement a restructuring program for bad debt without provoking a self-reinforcing crisis. Likewise, as China's demographic profile causes the labor market to tighten sharply, rapidly rising real wages will make it easier to achieve strong growth in domestic demand without excessive credit creation.

So, whatever its short-term prospects, there is a good chance that China's economy will continue to grow toward middle- and then high-income levels, driven by a mixed market- and state-driven development model. If China had more comprehensively embraced the policy prescriptions implied by the Washington Consensus over the last ten or 20 years, its economic growth would have been considerably slower. The economic theories that underpinned those prescriptions must reckon with that fact – and with China's likely continued success.


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Teacher employment may have weathered recent storms, but schools are still short 327,000 public educators [feedly]

Teacher employment may have weathered recent storms, but schools are still short 327,000 public educators
http://www.epi.org/publication/teacher-employment-may-have-weathered-recent-storms-but-schools-are-still-short-327000-public-educators/

With the September employment data in hand, we can look at the number of teachers who are starting work or going back to school this year. The number of teachers and education staff fell dramatically during the Great Recession and has failed to get anywhere near its prerecession level, let alone the level that would be required to keep up with an expanding student population. In addition to losses from the Great Recession, the pursuit of austerity at all levels of government has meant that public education jobs are still 128,000 less than they were nine years ago.

The Teacher Gap

Over the last year, the number of teachers fell by 10,600. These losses are likely unaffected in September by the unusually stormy employment numbers because the deceleration in local public education jobs began a couple months prior. There were 6,300 fewer jobs between August 2016 and August 2017 and only 4,400 additional jobs between July 2016 and 2017—while employment in public education grew the previous year over the same period, rising 76,000 between July-September 2016 and July-September 2015. The recent slowdown in local education jobs is troubling on top of years of losses. Furthermore, if we include the number of jobs that should have been created just to keep up with enrollment, we are currently experiencing a 327,000 job shortfall in public education. The costs of a significant teacher gap are measurable: larger class sizes, fewer teacher aides, fewer extracurricular activities, and changes to the curricula. Shortsighted austerity measures at all levels of government hit children in today's classrooms. In order to get back to prerecession teacher levels, we need strong public investment in education that will help students and teachers alike

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Wages Are Growing: Contrary to What You Read in the Papers [feedly]

Wages Are Growing: Contrary to What You Read in the Papers
http://cepr.net/publications/op-eds-columns/wages-are-growing-contrary-to-what-you-read-in-the-papers

Wages Are Growing: Contrary to What You Read in the Papers

Dean Baker
Truthout, October 16, 2017

See article on original site

There is much to criticize about the US economy. There has been a massive upward redistribution of income over the last four decades. As a result, those at the top have gotten incredibly rich while the middle and bottom have seen almost nothing from the growth over this period.

The recent past has been even worse. Millions of people lost their homes in the collapse of the bubble, pushing the ownership rate to the lowest level in more than fifty years. For African Americans the ownership rate fell to the lowest level on record.

The Great Recession pushed the unemployment rate into the double digits, with the unemployment rate for African Americans exceeding 17 percent at its peak. The recovery has been long and slow. While the unemployment rate has finally fallen back to pre-recession levels, the employment rate for prime age workers (ages 25 to 54) is still 1.5 percentage points below pre-recession peaks and 3.0 percentage points below the peak reached in 2000. The weakness in the labor market led to a sharp falloff in real wages for those at the middle and bottom of the wage distribution.

But that was the past. In the last couple of years we actually have been seeing some reasonably good economic news. The tightening labor market has narrowed the gap between the unemployment rates for African Americans and Hispanics compared with whites. In 2014 the gap between the African American unemployment rate and the white rate was 6.0 percentage points. For the first nine months of the 2017 it has averaged 3.7 percentage points. For Hispanics the gap was 2.2 percentage points in 2014 compared with 1.3 percentages so far this year.

Tighter labor markets have also meant that wages are actually rising for those at the middle and bottom of the wage ladder. There had been essentially no change in average weekly earnings between 2008 and 2014 for the median worker. (Weekly earnings can rise both because of higher hourly wages and also more hours of work.) Wages had just kept even with prices over this six year period. For workers at the 25th percentile cutoff (25 percent of workers earn less), real wages had actually fallen by 3.0 percent over this period.

However things have turned around and are now moving in the right direction. Weekly earnings, adjusted for inflation, of the median worker have risen by roughly 5.0 percent since 2014. They have gone up about by almost 8.0 percent for workers at the 25th percentile of the wage distribution.

For African Americans weekly earnings for the median worker were still at their 2008 level as late as 2015. Earnings for workers at the 25th percentile were down by almost 4.0 percent. In the last two years earnings for median worker have risen by almost 5.0 percent, while they have risen by close to 9.0 percent for African Americans at the 25th percentile of the wage distribution. In the last three years, weekly earnings for the median Hispanic worker have risen by more than 10.0 percent.

This period of two or three good years does not come close to making up for the suffering of the Great Recession, much less the prior three decades of stagnate wages, but it is important to recognize that things are finally moving in the right direction. Workers are getting their share of the gains from growth and workers at the bottom are actually gaining ground at the expense of those at the top.

Getting this recent history right is important for two reasons. First, it means that the economy can deliver the goods for the bulk of the working population, if the unemployment gets low enough and the labor market tight enough. All the economy's problems will not be fixed by a low unemployment rate, but it does make a huge difference, especially for those at the middle and bottom of the income distribution.

The other reason we need to get this history right is that the progress of the last two years is threatened by the actions of the Federal Reserve Board in raising interest rates. The Federal Reserve Board has raised interest rates five times in the last two years. Its goal has been to slow the economy and reduce the pace of job creation. This limits workers' bargaining power and the risk of higher wages setting off an inflationary spiral.

While these rate hikes were arguably unnecessary, they were relatively modest given that the Fed was starting from a position of a zero interest rate. This could change if the Fed gets a new chair. The current chair, Janet Yellen, was the architect of this sequence of modest rate hikes. One person who is widely mentioned as a possible replacement is Kevin Warsh. Warsh is a former member of the Federal Reserve Board of Governors. In that position he repeatedly expressed concerns about inflation even as the economy was collapsing and the inflation rate was near zero.

If Yellen is not reappointed and Warsh is picked in his place, his imaginary fears of inflation may lead him to push the Fed to raise interest rates much further. If this happens, the period in which most workers are in a position to share in the gains from growth may quickly come to an end.

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Dean Baker: Canada’s NAFTA Labor Plank [feedly]

Canada's NAFTA Labor Plank
http://cepr.net/publications/op-eds-columns/canada-s-nafta-labor-plank

Canada's NAFTA Labor Plank

Dean Baker
Democracy, October 10, 2017

See article on original site

Donald Trump made renegotiating NAFTA—an agreement he has also threatened, including again this week, to "terminate" altogether—a central theme of his campaign, which, as most of you probably remember, he dubbed the worst trade deal ever. While it was never all that clear what exactly he planned to do with a renegotiated pact, and it still isn't, we are now in the middle of the renegotiation process nonetheless.Yet, likely to the surprise of the Trump Administration, Canada's government has proposed a progressive labor plank for inclusion in this renegotiated agreement. While the Trump Administration will probably not embrace it, the proposal does provide an example of the sort of labor conditions that progressives can seek to have included in future trade deals.

The proposal includes items that appear targeted toward both the United States and Mexico. On the top of the list on the U.S. side is banning so-called "right-to-work" laws. These laws prohibit union contracts requiring all workers who benefit from a union to pay their share of the union's expenses. They are used to weaken unions since it means that workers can receive all the benefits from a union without actually having to chip in to support it. Employers have long pushed for these laws at the state level; as a result, they are now in place in 28 states. There is also a Supreme Court case pending that may ban such "agency shop" contracts in the public sector nationwide.

A provision in NAFTA banning right-to-work laws would hugely facilitate union organizing, although it won't override a Supreme Court ruling that prohibits agency shops in the public sector. It is worth noting, on this point, that while the United States has seen a plunge in union membership over the last four decades, from over 20 percent in the late 1970s to less than 12 percent today, there has been only a modest decline in Canada over this period. The unionization rate there is still almost 30 percent.

Given the similarities in the economies and culture, this difference is probably best explained by an institutional structure that is more supportive of unions in Canada. The two biggest differences are that in most provinces workers can organize a union if a majority sign cards in support of it. This avoids a long election process during which the company can try to intimidate workers. The other difference is mandatory first contract arbitration. This prevents a company from stalling in negotiations and in that way undermining confidence in the union.

Trump is obviously not going to buy rules that give labor unions more power. But it is helpful to at least give this issue some attention, and perhaps to remind people in the United States that it is not crazy to envision a country in which unions have more influence. It is not clear what Canada's response will be, assuming that Trump refuses to give any ground on these points. It seems unlikely that they will just walk away from NAFTA, but it also seems unlikely that Canada's Prime Minister, Justin Trudeau, can agree to a deal that has nothing by way of improved labor rights.

The plank also includes rules prohibiting gender discrimination and ensuring workplace safety. These would be largely duplicative of what already exists in law in the United States, but having guarantees in a trade agreement can be helpful in reaffirming such a commitment. This might be the case, for example, on occasions where clever lawyers can take advantage of the wording in an agreement to press a case that might be difficult to pursue under current law.

The proposal has several provisions that could be especially important for Mexican workers. One of these would ban company unions. In many cases, Mexican businesses have effectively established employer-friendly unions as a way of heading off organizing drives by their workers. Such a provision, if it were enforceable, would make it easier for Mexican workers to organize unions that actually represent them.

Notably, another provision being promoted by the Canadian government would require countries to have a minimum wage. Mexico is considerably poorer than the United States and Canada, so no one would expect it to have a minimum wage as high as its richer neighbors. However, its current minimum of $1 an hour is ridiculously out of line, even given its relative poverty. It is not hard to design formulas for a minimum wage that would be based on the wealth of the economy. For example, if we used the U.S. minimum wage of $7.25 an hour as a base, given Mexico's per capita GDP relative to ours, their minimum wage would have to be at least $2.70 an hour.

There is also the issue of enforcement of wage and hour laws, health and safety laws, and the right to organize. This has been an ongoing matter of debate with regard to trade, as U.S. deals have established a mechanism in that investors can directly take complaints under the agreement to an extra-judicial tribunal, also known as the investor-state dispute settlement mechanism. By contrast, labor has to persuade governments to raise complaints over abuses of labor with our trading partners. Good luck doing that under the Trump Administration.

It is worth noting, though, that even if labor were to get its dream conditions, including these planks and more, they would still will not eliminate the downward pressure that trade puts on the wages of large segments of the workforce, at least as trade deals are currently structured. (While manufacturing workers are forced to compete; doctors and other highly paid professionals are largely protected.)

Workers in Mexico, China, and other developing countries are paid much less than workers in the United States, first and foremost because these countries are much poorer than the United States. Guarantees of labor rights can ensure that workers get their fair share of the pie, but in a country that is one-third (e.g. Mexico) or one-tenth (e.g. Bangladesh) as rich as the United States, this will still leave them with far lower pay than their U.S. counterparts.

It can be hoped that trade will increase growth and thereby raise living standards in our trading partners, so that they are more comparable to living standards in the United States. In some cases, this textbook story describes the situation reasonably well. South Korea and Taiwan went from Sub-Saharan living standards at the start of the 1960s to Western European levels of living standards today. China is making this jump even more rapidly. Trade was not the only factor in the extraordinary growth in these countries, but clearly it was an important part of the story.

However, trade does not necessarily lead to such a convergence in living standards between trading partners. Since Mexico joined NAFTA in 1994, despite what Trump's rhetoric might insinuate, its per capita income has actually fallen relative to the United States. In this case, the main issue is not ensuring that Mexico's workers get their share of the pie, the issue is getting the Mexican pie to grow at a respectable rate to begin with.

It is possible to envision trade pacts as part of a larger process of economic integration, as is the case with the European Union. EU rules are designed not only to remove barriers to trade; they also open borders between member states and include provisions for explicit transfers from richer countries to poorer countries to facilitate the convergence process. It would be quite a leap to go from even Canada's progressive labor plank to a process of economic and political union for the three countries along the lines of the EU, but it could still be useful to hold this up as a pole in the debate. In any case, our neighbors to the north deserve a big "thank you" for a provocative response to Donald Trump's challenge.

It's not clear where this renegotiation process ends up, but Canada's proposal is at least a step in the right direction. These are the sort of planks that progressives in the United States should try to have included in future trade deals. They may not get very far in the Trump-Pence Administration, but the next Democrat in the White House should be pressed to embrace them.

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Dani Rodrik talks straight on trade [feedly]

Dani Rodrik talks straight on trade
http://mainlymacro.blogspot.com/2017/10/dani-rodrik-talks-straight-on-trade.html

Dani Rodrik's new book is a challenging read (in the good sense) for any liberal in the UK living through Brexit, or in the US contemplating whether Trump will destroy NAFTA. For example Chapter 2 starts with Theresa May's statement about a citizen of the world is a citizen of nowhere, and the rest of the chapter is about how that statement contains an essential truth. Although Rodrik admits he himself looks like the perfect specimen of a global citizen, he argues convincingly that for most people the nation state represents their feelings of identity, of economic inequality, and provides their security (or not) after global shocks. Furthermore, he argues, that is how it should be.

His enemy in this Chapter is what he calls hyperglobalisation. To quote:

"We push markets beyond what their governance can support. We set global rules that defy the underlying diversity in needs and preferences. We downgrade the nation-state without compensating improvements in governance elsewhere. The failure lies at the heart of globalisation's unaddressed ills as well as the decline in our democracies' health"

The next chapter considers the Eurozone as a case study of failing to appreciate these points. He argues, as many economists do, that this means either a much fuller political union or abandoning the monetary union. My own view is that the latter will not happen, and the former should not happen for all the reasons he gives in the previous chapter. What I think needs to be explored is combining a monetary union with national autonomy over fiscal policy in such a way that both prevents bailouts, by allowing default when inevitable, and otherwise allows the ECB to act as a sovereign lender of last resort. Only if that fails can we conclude that that the Eurozone has to go to political union or different currencies.

Returning to this reader being challenged, in a chapter entitled 'The Perils of Economic Consensus' he writes:

"Even in the case of Brexit, where the weight of both evidence and theory predicts adverse economic results, economists would have been well advised to emphasize their uncertainty over their confidence."

If we mean 'well advised' in the sense of being more convincing, I doubt very much if this is true. Here I am always reminded of debates I have often seen on TV between a climate change scientist and a climate change skeptic. The scientist typically expresses exactly the uncertainties in the way Rodrik suggests they should, while the skeptic on the other hand, who is normally not a scientist, seem totally confident in the views they express. Unfortunately most viewers of this debate are not scientists, and we know people are attracted to those who are confident and self assured. The contrast is between scientific and political discourse: hereis another example. But given this, doesn't the 'be modest' imperative need to be modified by context?

Of course one of the things Rodrik is best known for is in challenging the economists' consensus that trade agreements are always good, which I mentioned hereand which he discusses in the book. As more and more economists are now realising, he was right to make that challenge. Perhaps the two perspectives can be reconciled as follows. The problem with the free trade advocates is that they were keeping quiet about known issues with their analysis because they thought it would give ammunition to 'the other side'. As far as academic analysis of Brexit is concerned, and confining ourselves to the economic impact alone, I do not think the same applies.

There are plenty more challenges in the book to what often goes as established economic wisdom. For example he argues against the idea that development would be hindered by worrying about workers rights in developing countries. He argues that state or crony capitalism has in many cases been a successful route to economic development. But mainly there is a wealth of intelligent, informed and often enlightening discussion about routes to economic development, the power of ideas over interests, why current unrest has generally not benefited the left and so on and so on.

In that sense the title of the book is rather misleading. Although it is discussed a lot, this is hardly just a book about trade. Indeed the subtitle "Ideas for a sane world economy" conveys a better picture of what it is about. The book is based on a collection of articles written for Project Syndicate and elsewhere, and occasionally the joins show. But that feeling quickly gets lost in a wealth of stimulating arguments and ideas that I defy anyone to find dull. This is a fascinating book to read, and I cannot think of anyone who would not learn a great deal from reading it.

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Jared Bernstein: I got issues with the new CEA report [feedly]

I got issues with the new CEA report
http://jaredbernsteinblog.com/i-got-issues-with-the-new-cea-report/

First, full disclosure: Kevin Hassett, the chair of Trump's CEA, is an old friend, a good dude, and a guy I'm happy to see in this prominent post. But even as I endorsed him for the job, I publically worried about one area of his research where his claims go way beyond the evidence and ignore the counter-evidence. That area is the impact of tax cuts on growth, jobs, and particularly wages and incomes.

Thus, CEA's new report on the wage-boosting effects of the proposed cut in the corporate rate from 35 to 20 percent looks fatally flawed to me. It is a literature review that picks only the ripest of cherries, ignoring the large body of literature that goes hard in the other direction.

A particularly notable example of this problem is a citation of one study by tax analyst Jane Gravelle (et al) that CEA uses to support their thumb-on-the-scale results, while ignoring another Gravelle (et al) study that directly debunks CEAs main thesis that corporate rate reductions boost workers wages.

Worse, the Gravelle (et al) study that CEA ignores specifically and critically reviews the papers upon which CEAs work depends, including one by Hassett (et al) himself:

Cross-country studies to provide direct evidence showing that the burden of the corporate tax actually falls on labor yield unreasonable results and prove to suffer from econometric flaws that also lead to a disappearance of the results when corrected, in those cases where data were obtained and the results replicated.

One of those cases, as noted, was the Hassett study. As CEA notes, this is a study that tracks many countries over many years, and such studies are always sensitive to how the analysis is specified. That doesn't mean they're wrong, but it does mean you have to check as many of the model's assumptions you can to ensure that your findings are robust. When Gravelle et al do so, they quickly find the wage effect to disappear:

In every case, the coefficient estimates are close to zero and are not statistically significant at conventional confidence levels. In using annual data, we can find no evidence that changes in the top corporate tax rate affects wage rates in manufacturing.

This is also why you want to heavily discount CEA's Figure 1, which compares wage growth across very different countries with no controls (I'm not moved by Latvia's faster wage growth and lower corporate rate). CBPPs Huang and DeBot go through these issues in readable detail here.

Other problems with the CEA report:

–The analysis assumes average impacts are similar to median ones. This is a very big deal, because, as I argue here, even if the trickle-down chain they tout is operative (and the empirical data suggests it is not), there's still a big slip twixt cup and lip in the last step: the idea that faster productivity growth lifts median, vs. average, compensation. I wish it were so, but as per the figure below, it is not. Essentially, CEA assumes away wage inequality.

 

–To CEA's credit, though they argue that the proposal, including the shift to a territorial system that exempts foreign earnings by US companies from US taxation, reduces profit shifting (booking profits in places with lower rates), they don't directly add that effect to wages.

–They do, however, suggest this effect would be "additive" to workers' incomes. This suggests that CEA is conflating tax avoidance with actual job and wage creating economic activity, as Howard Gleckman points out here.

–This one's important too: CEA ignores the "excess profits" problem. That is, while economists argue about who benefits from a reduction in the corporate tax, we agree that it purely benefits firms with profits beyond normal returns on investment. So, for big firms that dominate in their industries–Apple, Alphabet/Google, Amazon, etc.–the corporate cut clearly boosts profits far more than wages.

–CEA is clear that their analysis only covers the corporate part of the tax change, and that's reasonable. Except for when we're talking about distributional results, we must consider the impact of the tax cuts as we understand them in their entirety. Otherwise, we risk overlooking aspects that hurt middle and low-income households. We at CBPP have stressed these impacts, particularly the losses at the low end if the tax cuts are eventually paid for by spending cuts (see figure below).

Gussy it up any way you want, this is just the latest example of non-credible, trickle-down fairy dust. Corporate tax cuts will merely boost the profits of a sector that's already highly profitable at the expense of the working class. Given its trillions in retained earnings and low capital costs, the corporate sector could already raise investments and worker pay if it wanted to do so.

Thanks again, Donald and co.

 -- via my feedly newsfeed