Relentlessly Progressive Political Economy

Lets hope globalisation involves a two-way transfer of ideas

Nepal ready to abolish monarchy

By Charles Haviland BBC News, kathmandu

A newly-elected assembly is set to meet in Nepal with the tasks of abolishing the monarchy and preparing a new national constitution…

UBS has told members of its former private banking team responsible for rich US clients not to travel to America.

The Swiss bank has also made lawyers available to the more than 50 bankers involved, many of whom have left UBS since it decided last November to wind down its cross-border private banking business for US ­customers.

The move follows the recent indictment of one of the unit’s former senior executives, Bradley Birkenfeld, who US authorities have accused of helping a billionaire client evade taxes. Mr Birkenfeld has pleaded not guilty and his lawyers have made no public statement on the matter.

Lawyers for Mr Birkenfeld and the US government are due to appear before a judge next Monday “to resolve pre-trial motions and discovery problems”, according to court documents….

Travis Fast

In the great labour market policy debate of the mid to late 1990s no end of explanations for persistently high levels of unemployment in the face of recovered GDP growth was trotted out. The infamous NAIRU curiously did much of the original heavy lifting. I say curiously because the NAIRU is ill suited to provide an explanation of persistently high unemployment in the face of strong GDP growth. Indeed, the NAIRU, was designed to put a gloss on the problem of stagflation–poor growth and high inflation. At a higher level of abstract policy thinking however, the NAIRU was part of broader assault on demand determined explanations of macroeconomic phenomena including unemployment. Fighting inflation and ultimately conquering it was said to be the sine qua non of renewed GDP growth.

The renewal of GDP growth was in turn said to be the cure to high unemployment (as we shall see towards the end this is the central determinate of unemployment). Yet, by the latter half of the 1990s the term “jobless recovery” had crept its way into the policy lexicon. Here the NAIRU became near useless as a supply side explanation for the persistence of high unemployment. And it was here (then) that I would argue New Keynesianism played a vital role in the continuance and ultimate dominance of supply side explanations of unemployment and what I have called the solidification of the neoliberal consensus.

To that end two explanations were put forward. The hysteresis/skill spoilage thesis maintained that prolonged periods of unemployment had caused a relative degradation in the skills of the unemployed. This degradation of skills in turn was responsible for the inability of of the unemployed to find jobs. In short, high unemployment was the cause of high unemployment (hysteresis). The insider/outsider hypothesis maintained that the persistence of unemployment was caused by the higher than marginal productivity wages of the employed. In a real bastardization of Keynes, involuntary unemployment was caused by the myopic behaviour of the employed (a refusal by existing workers to take a pay cut). If the two explanations did not readily hold together in a general theory sense they certainly held together at a higher level of abstraction: ultimately the cause of unemployment laid with the qualities of workers: employed or unemployed–on the supply side.

And although the twin New Keynesian hypotheses had a hard time dancing on the same floor they nonetheless were seemingly given credibility by inter temporal comparisons of GDP growth and rates of unemployment. In the graph below five year averages for real per capita GDP growth and unemployment rates are plotted.

If one looks at the five year averages from 65-70 through to 95-00, one cannot help but notice that during the 1980s a transition seemingly occurred whereby similar levels of GDP growth failed to produce similar rates of unemployment. The most stark comparisons can in fact be made. During 65-70, a 3.1 percent average growth in GDP produced and average unemployment rate of 4.5 percent whereas in the 95-00 period a 3 percent average growth in GDP produced an 8.5 percent average rate of unemployment–a full 4 percentage point difference. It was from such facts that, I thin,k New Keynesian hypotheses drew their succor.

Why indeed had GDP growth recovered but not employment? But there were a couple of constraints on the types of explanations that REAL economists were allowed to make . You could not blame technological change, nor could you blame free trade and you certainly could not blame employers sweating more effort out of the existing workforce. The key to a righteous explanation laid with the supply side characteristics of workers. Now I am not arguing that there was some kind of conspiracy. Far from it, I am just arguing that the the new classical victory had been so total and that the terms of war had become so solidly placed on a different terrain that New Keynesians were bound to reach for explanations that jived within the increasingly narrow confines of the debate within mainstream liberal economics. Just think of all those more classically inclined liberals who made the reluctant Keynesian Devil Shift during the Golden Age Illusion. After all, once upon a time Friedman was a Keynesian.

But whatever the cause, those observed facts are not sufficient to explain the seeming disparities between the two epochs. In fact, the same disparities can be witnessed within the same epochs! Notice for example that in the period form 60-65 GDP growth was 4.3 percent but unemployment averaged 5.7 percent–GDP growth and the rate of unemployment being 1.2 percent higher than the proceeding period. Were insiders really more active in the 60-65 period than in the 65-70 period? Were workers skills duller in the 60-65 period than in the proceeding period? The sober answer is of course not. And one could beg the same question of the 95-00 and the 00-06 averages. How is it that within such a short period of time we could move from a 3 percent rate of GDP growth and a corresponding 8.5 percent of unemployment to a 2.1 percent average rate of GDP growth and a corresponding 6.8 percent of unemployment? I suppose if one takes the hysteresis hypothesis at face value we could get to a plausible explanation of the present period but that dog won’t hunt for the initial periods under consideration. And it is not much of hunter in the two most recent periods either.

In the graph below I have hyper-trended the data by superimposing a trend on the five year averages. What becomes apparent is the the close relationship between GDP growth and unemployment. But beyond this shocking truth is the more subtle observation that the early 1990s seemingly marked the end of the long secular slowdown in real GDP growth which began in the mid 1960s (for further confirmation see the last graph for long term trends in GDP growth and Unemployment). This slowdown in turn produced a Natural Accelerating Rate of Employment Destruction (NARED).

It would be perverse in this respect to employ hysteresis effects in skill (de)formation to explain increasing unemployment. Notice, however, that hysteresis effects in the degradation of business sentiment might be a plausible explanation of the duration of the long slowdown. Although I have serious doubts about a 40 year long hysteresis effect on sentiment and rather think that some version of the Brenner/Shaikh/Marxian thesis is necessary.

However, leaving the cause(s) of the structural decline in GDP growth to one side, the other observation that can be made from the two graphs presented above is that it seems as though during the early 1990s a reverse process was initiated whereby increasing levels of GDP growth began to have a cascading effect on the level of unemployment so that by the early 2000s the brief drop in GDP growth was not sufficient to change the momentum in employment creation; or, what I have identified as a Natural Accelerating Rate of Employment Creation (NAREC).

On this reading, the present conjuncture is quite significant. Should GDP growth become stuck at low stagnant levels for a period of time the acceleration effects could revert back to a NARED dynamic whereby high unemployment begets even higher unemployment irrespective of the supply qualities of workers.

This analysis and scenario poses serious challenges to the dominant neoliberal policy paradigm. No amount of retraining, mobility or cuts to the reservation wage can remedy a situation in which the creation of employment is weak. Focusing on the skill set or psychological attitudes towards work on the part of workers simply serves to blame the victim and ignores the cause: weak GDP growth overtime creates higher levels of unemployment. Workers do not retreat from the labour market on mass, as any graph of participation rates can demonstrate, because most workers have no alternative but to seek employment. And I suppose in that last regard unemployment is caused by the unemployed.

Note: Sources

Table 282-0002 - Labour force survey estimates (LFS), by sex and detailed age group, annual.

Data prior to 1976 is from Statistics Canada 11-516-XIE (FREE!) Historical statistics of Canada.

GDP data prior to 1961 is from Madison The World Economy: A Millennial Perspective

Travis Fast

The leadership at the CAW can call it whatever it wants but it already has a name and it is called concession bargaining. And the problem with concession bargaining is that it does not work if the desired goal is to preserve the health of the company and above all jobs. Workers do not control the means of production they tend to them and they do so in terms dictated by management. All the concessions in the world will not fix the problems at the Big Three auto makers. Those are larger structural problems of which the union has no control.

Here is Sam Gindin on the problem with concession bargaining as outlined in his article:

The CAW and Panic Bargaining….As many CAW members know from experience and the union’s educational programs, concessions don’t guarantee jobs. Jobs depend on so much else beyond the control of workers – from the economy, trade policy, exchange rates and the chaos in financial markets, to the age of plants, technologies used, and especially the models placed in the showrooms. Currently, jobs also depend on the extent to which the new vehicles are sensitive to the implications of escalating oil prices and environmental concerns. At the end of the 1970s, when the concessions period began to unfold, UAW Big Three membership totalled some 760,000 in the USA. In spite of the concessions, the UAW repeatedly accepted over the following years, that membership is now down to about 165,000 – almost 80% of the jobs gone.

What concessions do guarantee is more of the same: why would any company that found this golden egg, not keep coming back for more? They also tend to confirm the belief that workers are the problem: if workers are making concessions to save jobs, aren’t they essentially admitting that the gains they won earlier were the problem? So, aren’t more concessions, rather than other policies, the answer? Most dangerously, concessions leave workers cynical about the worth of their union: why get active if unions aren’t in fact fighting back? This concern with the potential cynicism of a new generation of workers was one of the reasons that Hargrove rightly opposed the UAW permanent two-tier system with its discrimination against young workers coming into the factories.

And if you find Gindin too left for your taste here is a comment from the right, Stephen Gordon

Travis Fast

Some mornings I wake up hoping that my capacity to predict the “robust” findings of liberal economists will have dissipated and that something counter intuitive and not part of the conventional liberal economic wisdom will appear. To that end I started reading through IMF reports this morning, hoping that I could not pre-scribe the predictable findings on central questions like the degree of labour mobility and its relationship to unemployment. To wit, I came across a working paper entitled Shocking Aspects of Canadian Labor Markets. Imagine my thrill. However, right from the summary I realized that the economists who wrote the paper fancied themselves as persons plain with whit and irony. The conclusion reads :

Labor markets within Canada seem to become more flexible as one moves to the
west. Migration plays a much more important role in labor market adjustment in the western
provinces than the Atlantic ones. Turning to the central provinces of Ontario and Québec, the
evidence suggests that Ontario has a significantly more flexible labor market than its
neighbor, consistent with microeconomic evidence on migration. Further analysis indicates
that migration appears to be the main process through which labor markets adjust over time,
with real wage differentials being a minor factor. Finally, the adjustment process appears
relatively similar across macroeconomic disturbances. In short, labor adjustment appears
very different east and west of the Ottawa river.

Shocking hey. The paper not only confirms liberal economists predeliction for blaming the victim but also the long held stereo-types in the Canadian body politic. And just how do they derive such a bold conclusion? Easy they construct their metric of labour mobility by dividing total net regional migration by total regional population. Eh voila, those bloody Eastern Canadians are a bunch of sedentary hillbillies who refuse to move to where the jobs are .

I have long been a skeptic of conventional economic wisdom; and even more so of conventional regional stereotypes so I decided to check the data. As far as the authors’ constructed metric of mobility goes it is correct. ‘Correct’ as in they got the numerator and the denominator right. But the metric is flawed. Why net migration? Surely the question concerning mobility is one of an individual’s willingness to leave the province or region . That is, what we want to know is how many persons as a percent of the total population are willing to leave their province of origin. How many persons who arrive in that region are of no consequence to the question of mobility because mobility is a question of the incidence of out migration. Net migration is therefore a lousy metric.

Let me hammer home this point with a little more force. Why should BC gain points on the mobility meter because there are more individuals entering the province than leaving? What do the truck-loads of senior citizens fleeing the Prairie winters have to do with labour mobility? ‘Nothing’ is the reasonable answer unless of course one is plumbing for a confirmation of the conventional wisdom.

The only reliable semi reliable statistic for mobility is out migration; flawed as it is. Why flawed you ask? for the reason just outlined above. Why should Saskatchewan gain points for labour mobility if the bulk of out migration is from the retirees moving to the relatively balmy lower mainland of British Columbia. Indeed, for these reasons we should be more skeptical of central and prairie province out migration figures as they do not distinguish between workers and retirees.

But let me run the the out-migration as a percent of total population for the regions as a metric of labour mobility. Below the regional statistics mirroring the IMF working paper on regional aggregations are presented.

What a difference a metric can make! By this metric labour mobility is higher in the East, lowest in Central Canada and middling in the West. All this of course makes very good sense to a Marxist or heterodox political economists. Labour is a special kind of commodity which is doubly free. Workers are free to contract with whichever employer they so chose but chose they must because they are ‘freed’ from the means of production at the same time. So within this frame one would be led to predict that even though the bonds of family, community and culture be strong there is simply no substitute for a job. That is, that individuals leave their place of origin at all is a testimony to the relative power of labour markets to “make all that is holy profane.” Thus, it is no surprise to Marxist economist that mobility should be greatest in the areas of relative economic stagnation and less so in those regions of relative economic stability. Indeed, it is but the history of immigration to Canada.

If we disaggregate the regions into their constituent parts the picture remains, by and large the same, although it is curious that central Canadian mobility rates, i.e., Ontario and Quebec, should be declining given that in the 2000s the hot labour markets are decidedly in the West. What then are the results of this brief study of mobility? The exact opposite of the conclusions drawn in the IMF working paper study. Labour mobility has tended to be highest in the provinces with stagnant economies and lowest in the provinces with stable employment. As the relative economic fortunes of the regions has shifted so too has the degree of mobility. Although this result is tempered by the most recent data. As labour mobility is highest in East despite the oil induced boom in GDP growth and lowest in the central Canadian provinces despite the decline of the manufacturing sector and aggregate unemployment rates. The east can be excused owing to the fact that an oil price led boom has not translated into a white hot labour market. That is, relatively high unemployment remains and that, as any Marxist political economist would predict, is a good determinate of outward-migration. That the Western provinces still place second despite white hot labour markets and central Canada still places third in the new millennium, is a plague upon all theoretical houses. So indeed there are, after all, some shocking aspects of Canadian labour markets to be explained.

Update

One possible explanation for the low mobility in Ontario could be its history of relatively high levels of employment which means that when workers are laid off they tend to be able to both qualify for EI and eventually find new employment in the province.  In any case, we would need better data to see what internal provincial migration looks like.  It could simply be the case, given the size and diversity of both Quebec and Ontario’s economy, that workers do not relocate to other provinces but relocate to to other regions within their respective provinces.  That is, surely moving from the Sioux to Toronto ought to count as mobile labour.

Travis Fast

If the facts are anything to go by there is not much good that can be said in favour of corporate tax cuts. The facts in no particular order are something like this.

First, corporate taxes as a percent of corporate profits have never been so low. Just click on the graph below.

Second, corporate profits before and after taxes in 2006 as a percent of GDP were already at historic 45 year highs. And notice just how much profits after taxes improved in the 2000s. Clearly corporate Canada has been doing just fine–smashing historical record without the aid of further tax cuts. Click on the image below.

But surely you ask: “Who cares about corporate profits because ultimately they get returned to Canadian shareholders . ” Nope. well some. In fact two things have happened with dividends. On the one hand corporations are retaining their earnings what Statistics Canada calls undistributed corporate profits. By-and-large corporations are hoarding cash. Click on the image below. In that graph three metrics are provided. Undistributed corporate profits (UCP) before and after taxes as a percent of total profits (TP) and UCP as a percent of TP retained in Canada. Lots of cash on hand it seems.

On the other hand, the total amount of Canadian equity owned by Canadians has been steadily decreasing over time so that by 2006 dividends as a percent of total profits paid to Canadians were a poultry 7.7 %. Again click on image below.

So what is the rational for corporate tax cuts given the facts.  Fact one, corporations are flush with retained earnings and were already so prior to 2006.  Fact two, corporate after tax profits were already at an all time high by 2006.  Fact three, for every dollar of corporate profits only 26 cents are distributed to shareholders.  Fact four, for every dollar of profits distributed to shareholders only 42 cents are distributed to Canadian shareholders –which means corporate tax cuts in the majority benefit foreigners.

Travis Fast

Yesterday I posted on the subject of corporate profits and their relationship to total labour income. Today I am simply throwing up this graph with the OHPs removed from the series in response to a little debate that seemed to be is unfolding over at the PEF blog.

BC along with Manitoba lead the non-oil having provinces (NOHPs) in the ratio of corporate profits to labour income (see graph below).

The Canadian average is higher than the other provinces owing to the massive ratios registered in the the OHPs. What is interesting, however, is that the ratios climb the steepest in Manitoba and BC. What needs to be kept in mind is that the trend in profits as a percent of labour income closely track profits as a percent of GDP. That is, the higher profits are as a percent of GDP; the higher profits tend to be as a percent of total labour income. However, the spread between the two metrics was at historical highs in 2006 both for the country as a whole and BC in particular. And if averages for the decades are taken one finds that the 2000s are without precedent in the previous five decades (see graph below). Although mention should be made that CIT as a percent of GDP seems to split the difference between 60-70 and 80-90 years in the 2000s. So it seems that the tax man is doing ok. That leaves labour income as the other major source of after tax profits.

Travis Fast

Much attention has been recently paid to the absurd levels of profit growth in the Oil Having Provinces (OHPs *tm) compared with wage growth. In what follows I will present a couple of the comparative macro-economic charts on this topic.

As the first graph clearly demonstrates the dizzying heights profits, as a percent of labour income, have reached in the OHPs. However, this trend, although not as perverse, is persistent for the country in the aggregate. At the provincial level, corporate profits in New Brunswick, Québec, Prince Edward Island and Nova Scotia performed well under the national average and Ontario, Manitoba and British Columbia performed just under the national average. Note that the national average is by construction a weighted average.

From this it is often concluded that what we are witnessing is the perverse effects of a resource inspired boom in oil resource profits. And while this is undoubtedly true, such an analysis misses a couple of important points. First, as already mentioned the rise in the ratio of corporate profits to labour income has been the general trend of the last eighteen or so years.

Second, from a historical perspective these general levels are not without precedent as the second graph above shows. Indeed, a similar (profits to labour income) ratio was achieved back in 1974. What is novel is that the trend and level has, if averaged, been relatively stable over the past eight years whereas in 74 it was quite novel and short lived. Moreover, the correlation with the price of oil is rather weak (see graph below). In 1974 the inflation adjusted average cost of oil was $39.77. In 1980, the price of oil peaked at $99.50. And here is the kicker, in inflation adjusted dollars the price of oil over the last 7 years was $42.52 ($64.92 in 1997).

So clearly there is something more than the price or quantity of oil at work here. That is even if one concedes there has been a resource boom driven by the price of oil this does not explain why the revenue earned is divided as it is between employees, shareholders and government. That is a political question as is the national ratio of profits to total labour income. The oil boom only exaggerates the consequences of an existing economic structure.

Travis Fast

When I originally wrote this post I predicted that the debate on income inequality would switch to consumption (see the end of that post). As it turns out those Little Ideological Beavers (LIBs *tm) over at Chicago were already constructing the damn. See this paper. And the debate is now taking its predictable turn with even moderate lefties suckering for the line. See this blog post over at economists view for a rundown.

I do so tire of this debate. Neoliberals lost, it was predictable at the time; the left was right; the right and right moderates were wrong: now go back to defending inequality as an economic good in and of itself or if you are Clintonite/Blarite liberal prattle on about individual responsibility.

You simply can’t argue that the path of relative price differentials between luxury and mundane, cheap and quasi perishable consumer goods makes up for income inequality. First, income and consumption inequality are two separate issues. Second, if I have to buy the same good twice in a year because it is of dubious quality then my actual price is double. Third there are these uncomfortable facts: Fourth, even if we disregard the latter three points it seems absurd to argue that cheap-shit bought on credit somehow vindicates the neoliberal policy paradigm especially when we are in the middle of a consumer credit crisis.

But crisis or no crisis in the credit markets “Cheap Shit Bought on Credit” was not the political slogan of neoliberals although it is perhaps a fitting epitaph for the policy paradigm.

That seems to be the central message of REAL economics.  In a world of mobile capital and immobile labour this is all the more the case.

In response all I can say is this:

There is always the problem that those who control the means of production can, within limits, pass on the misery to those who don’t.  Sounds dogmatic I know.  But I have always experienced the effects of power as a kind of dogma.