Disparate Models, Desperate Measures: The Convergence of Limits ∗

This chapter was originally written back in 2003 and published in 2005 in the volume edited by David Coates (god father to a Miliband son I think) Varieties of Capitalism, Varieties of Approaches.  The data contained inter alia is by now stale in one sense.  However in another sense the document holds up for its time and place in the early Anglo-American debates on neoliberalism.  The trends I analyzed–rising income inequality, reduced welfare state effort, eroding quality and conditions of work, and a secular decline in productivity growth–across the rich OECD zone regardless of which model of capitalism was being pursued were in fact, as I noted at the time, secular trends.  At the time, 2003, most academics still had their heads in the ground about inequality and the punitive dynamics of neoliberal labour market policies.   Indeed the  hegemony of neoliberalism was so complete at that time most social democratic intellectuals refused or were incapable of acknowledging the state of affairs.  Even worse many were actively crafting and implementing neoliberal policies.

In the above sense I think the chapter still holds up.  Moreover, it also holds up in terms of its main hypothesis that the advanced capitalist zone, despite being populated by nation states with very different institutions and public policy regimes, was producing increasingly poor outcomes for workers and citizens. For A version of the chapter “Disparate Models, Desperate Measures: The Convergence of Limits,” leave a comment to request the document.

∗This article was originally published in David Coates (ed.) Varieties of Capitalism, Varieties of Approaches. New York: Palgrave Macmillan, (2005). The version of the article reproduced herein may be reproduced on a not for profit basis subject to the GNU Free Documentation License and provided proper citation is provided.

The rich get substitution effects and the poor get income effects

*This post has been popular so imma top post it here.

It is pretty much understood that the basic orthodox labour market model is agnostic insofar as income and substitution effects are concerned. If for example real wages increase workers may choose to work less because they can consume more leisure with less hours of work or workers may work more hours because the opportunity cost of leisure has gone up. Which effects dominate workers’ incentives are not predetermined by the standard labour market model.

Implicitly, however, we can glean what mainstream economics tends to think are the incentives facing different classes (economic classes that is) of workers. In Mankiw’s recently ridiculed here, here, here and here article in the NYT, he argued the impact of a tax increase on the economic class of ‘workers’ at the top of remuneration scale was a decrease in the real wage which would be met by a substitution of more leisure for less work as the opportunity cost of leisure had been cheapened by the tax increase. Simply stated this class of workers would respond to a decline in their real wage with a union strike like reaction.

So far so good. I do not imagine it inconceivable that those workers with compensation packages that put them in the top 1% of income earners could choose to work less hours if they were faced with a wage cut with one important caveat. They would have to have the type of job which allowed them to control their hours of work and or have sufficient means to withdrawal from the labour market altogether aka independently wealthy. For example, an NHL hockey player cannot say to his coach I am playing one less game a year because of the increase in marginal tax rates; although he might try to make the team offset the tax increase with a higher salary. Thank god for salary caps.

However, when we turn to lower classes of workers we find that Mankiw argues that income effects dominate their incentives. In his introductory textbook he has the following to say about unemployment insurance:

So here Mankiw argues that workers respond according to income effects. Lowering unemployment insurance replacement rates would decrease unemployment because workers would have a greater income incentive to take a job.

What, therefore, accounts for the different reactions between these two classes of workers? Why that is will increased taxes on the rich (a decrease in the real wage) lead to a withdrawal from the labour market but a decrease in unemployment benefits (again a decrease in the real wage) increase the supply of labour. The answer of course is that most classes of workers are not independently wealthy and do not meaningfully control their hours of work. Workers have to work and outside of access to unemployment benefits they do not have the option of defecting from paid labour markets. Therefore whether income or substitution effects predominate is largely a function of class. Most classes of workers save for those at the very top respond to a decreased real wage either by seeking more hours of work through one of three ways: overtime, a second job or telling their teenager to go get a job and pay their own cell phone bill.

It is interesting that Karl Marx (well Smith too in some respects) were the first to recognize the differences between classes of workers what we once called proletarians and the bourgeoisie. But that is for another post.

Returns to education: from a sure thing to a trip to vegas

Paul Krugman has pointed out, here and here that the meme that most of the inequality we have been experiencing of late has much to do with differences in educational attainment is bogus.  Mankiw responds in typical fashion by changing the standards by which that claim is judged.  Krugman presented solid evidence that the returns to education have been declining.  To which one should add that if we did a real ROI calculation the returns have gone negative.  Mankiw counters by saying that may be true but if you do not have an education you are less likely to get a chance to become the top 1%.

The difference between the two as near as I can tell is that Krugman demonstrates that buying a lottery ticket has worse odds of paying out than ever before and Mankiw’s master stroke is apparently that if you don’t buy a lottery ticket you have no chance at winning.

Sad, really.

A without prejudice rejoinder to the Minister of Finance

On Wednesday of last week the Minister of Finance for Newfoundland and Labrador Thomas Marshall was interviewed by CBC Central Morning about a report I did for the Newfoundland and Labrador Federation of Labour (NLFL).  In one respect, the fact that the minister was willing to go on the radio and respond to the report is a remarkable testimony to the health of the democratic debate in that province.  In what other province would the Minister of Finance get out of bed to respond to what he/she viewed (wrongly) as criticism coming from an out of province expert on behalf of organized labour in their province?  Few, if any I should think.  Thus the Honourable Minister is to be commended for his efforts.  That however is where the praise stops.

Politics is, of course, partly a game of perception and all too often that is all it is about.  And in this respect the minister’s interview amounted to little more than perception management via deflection and deception.  Now before I take up each of these in reverse order I should note that ministers rarely read policy briefs and reports.  Rather they are read by the experts in their department and then summaries are produced for them from which the minister may take notes.  I will therefore assume that the minister’s remarks are based on those summaries and I will further assume that any factual errors, distortions or deceptions were the product of some invisible technocrat(s) (in this case economists) working in the DoF.  Nevertheless, Canada and its provinces enjoy responsible government which ultimately means the buck stops with the minister.

To say that the minister came swaggering out of the gates would be to use a colourful style of prose that does not at all do a disservice to accurate description.  The minister made the rather shocking claim that my report– its observation and conclusions– were not based in fact—data or otherwise.  To be clear he did not merely claim that he disagreed with the data or the conclusions drawn; he said the report was absent of data and facts and a mere assertion of opinion.  Apparently Statistics Canada data, studies by the Conference Board of Canada, experts such as Paul Krugman (Nobel prize in economics), Robert Shiller, Ken Rogoff, Carmen Reinhart, Armine Yalnizyan, and indeed data collected from the minister’s own budget publications do not count as solid data and analyses.  Further where the minister does tacitly concede that I used data, he says that it is Canadian data and those facts and trends do not apply to Newfoundland and Labrador.

Let me take up each of these claims in turn.  First, the minister is of course at liberty to disagree with the data and the conclusions drawn from it, but it is an abuse of his liberty to claim that the conclusions and opinions offered are not based on data.  In the first section of my report I focussed on what I called the primary distribution of income (that between profits and wages) and the secondary distribution of income (that between different classes of salary earners).  As to the first, the minister initially dismissed my argument, substantiated by statistics Canada data I should add, that Newfoundland and Labrador have an exceptionally high inequality in the distribution of income when viewed from the division of profits and wages (these measures were all drawn from StatsCan data).  Indeed, what I showed in Graph 3 of my report was that Newfoundland and Labrador had the highest level of inequality in the primary distribution of income of any Canadian province including the other resource intensive provinces.  It is also exceptional in sense that it is not just a little bit higher but higher by over a third than Alberta.

However, when the minister was pressed on the primary distribution of income between wages and profits by the host of Central Morning Leigh-Anne Power (13m35s), the minister’s started to shuffle and argued that the profits of the oil and gas sector should be taken out of the GDP because the profits were exceptionally high in this sector and not in the others (14m45s).

This is a truly bizarre approach to my mind.  If we took oil and gas out of Alberta’s aggregate profit data I suspect they too would fall in line with the Canadian average; if we took potash out of Saskatchewan’s aggregate profits I would guess that Saskatchewan profits would be lower than the average; and I suppose we could do the same exercise and take the FIRE (Finance, Insurance and Real Estate) profits out of Ontario’s profits and then we would see a much different (lower) share of profits in GDP.  There are two problems with this approach.

If we do as the minister suggests and take the most profitable sectors out of the calculation of profits as a share of GDP or wages then the Canadian average will also be lower.  What the minister, or perhaps rather his advisers, seem to want to do is take their big profit centre out of the profit calculation and then compare that average to the unadjusted Canadian average thus sending the national average up and the Newfoundland and Labrador average way down.  I can think of several reasons why the minister would want to do this but none of them have anything to do with making systematic scientific comparisons.

Second, I will take my approach over his: profits are profits and there is nothing exceptional about the profits generated out of natural resources.  Save for the fact that the sector directly employs relatively few workers because it is a capital intensive sector.  That I should have thought was rather the point.  Even if you paid every worker in the sector two times what they were earning now it would not solve problem of the incredible amount of value being extracted from the oil and gas sector and how little of it stays in the hands of the citizens of the province.

As the minister quite rightly points out (inadvertently), when resource extraction is done by large corporations (given the capital to labour ratios) the only significant place to recover that wealth is at the level of corporate taxes and royalties.  The problem is that in Newfoundland and Labrador the extraction agreements were written in such a way that specific changes to the existing royalty regime are militated against leaving the general level of corporate taxes (and or new deals) to do the heavy lifting.  As an aside, I actually think if the political will was there they could design the corporate tax regime to get at the super profits being derived out of the natural resource sector without actually raising the general level and remain well within the remit of previous agreements.

The minister will then go on to say if you look a the Statistics Canada data that workers in the province were doing quite well as total labour compensation had increased by 87 % between 1997 and 2010.  That figure seems a little high as the Statistics Canada Data I have (Table 384-0001) shows total labour compensation increasing by 81% between over the 1997-2009 period.  But let us assume that  we are simply working off two different Statistics Canada time series so that it may be possible that his figure is correct: wages may indeed have increased by 6% in the subsequent year.  However, what the minister fails to note is that although total labour compensation increased by 81% between 1997-2009 profits increased by…wait for it…765%.  No, that was not a typo.  If ever there was a scientifically appropriate time to deploy the word “gobsmacking” now surely is that time.  If we look at the same time span GDP grew by about 137%.  So yes workers wages have increased but not nearly as fast as GDP growth and at around 10% of the rate of growth of profits.  Again that was the central finding of the report: prosperity has not been equally distributed.

As to the more narrow claim by the minister that income inequality had actually gone down in Newfoundland and Labrador over the last decade he is technically right both in absolute in comparative terms.  The only problem is that in my report I actually noted that, but also noted that was in the context of increasing income inequality so the Newfoundland and Labrador record was not that great. And further I noted that because of the last recession poverty rates had gone up in the province.  I doubt very much his data disputes my data; it is just that he wants some credit where credit is due: granted.

If the minister had actually bothered to read my report or listen to the interview I had done a week earlier he would have known that I went out of my way to point out that oil and gas were skewing the numbers. That is, relative to the total provincial economy the sector was over-sized.  And that was a problem because there was a limit to how much the primary redistribution could be altered through wage gains and because of the precariousness of relying too heavily on a non renewable resource from a revenue point view.  In combination it creates a compelling argument about why the government needs to capture more of that surplus and aggressively diversify the economy.  Moreover, I also went out of my way in the radio interview to congratulate the government on a couple of things I thought they had got right.  True I did not spend 4 of 10 minutes listing their accomplishments but that was not what my report was about.

I do not know why the minister thought he needed to argue that the report I authored was not based on facts and serious arguments.  Anyone who spent 2 minutes with the end notes would know that for a policy brief it exceeds the usual standards.  Given that Statistics Canada data, studies by the Conference Board of Canada, arguments made by experts such as Paul Krugman (Nobel prize in economics), Robert Shiller, Ken Rogoff, Carmen Reinhart, Armine Yalnizyan, and indeed data collected from the minister’s own budget publications failed to impress Tom or the economists working for the Department of Finance it might just suggest that they are merely partisans.  The question is, partisans in what war?

That the minister felt it necessary to take up valuable airspace with a rehearsal of the well worn and by now totally discredited supply side dogma is a bit of a tell.  The supply side dogma says that profits rule all, and profits are all that matter.  This Dogma reached its zenith in the great financial crisis of 2007-2008 from which the global economy has yet to recover.  That Canada skipped over the most egregious effects of the crisis was a fortuitous twist of fate.  That Tom still clings to this dogma is a shame.

All is not lost: from what I understand Tom has an ongoing gig with Department of Finance.  I look forward to hearing what he has to say in the future as this was a “without prejudice” rejoinder.

Interview on CBC Central Morning

CBC Radio Central Newfoundland Morning aired an interview they did with me about inequality and the future of development in Newfoundland and Labrador.  The pod cast can be found here.  It is the last of the three interviews on the podcast (16min 38sec mark).  The first interview is about the salmon festival and KISS.  I always thought I should do a project with Gene Simmons.

Occupy Movement: Inequality in Newfoundland and Labrador

Apparently the policy brief I wrote for the Newfoundland and Labrador Federation of Labour has been picked up by the Occupy Wall Street movement.  The brief can be found here.  The money shot from that brief would be the graph below.

Hats off to the Newfoundland Federation of Labour for broadening the conversation about economic inequality and development.