Tackling Inequality

Yves Smith over at Naked Capitalism has a post with a rather spectacular statistic as a headline: "58% of Real Income Growth Since 1976 Went to the Top 1% (and why it matters)". That's a pretty devastating statistic though it clearly points to the salient development in the American economy, a widening, and dangerous in my view, social inequality.

That stat comes courtesy of the Financial Times' Martin Wolf who in turn is citing the work of the Indian born economist Raghuram Rajan, now a professor at the University of Chicago but previously the Chief Economist at the IMF. Dr. Rajan, who is a rather unorthodox economist even if he does lean right on regulatory reforms, has a new book out called Fault Lines: How Hidden Fractures Still Threaten the World Economy which is the subject of both Smith and Wolf posts.

From Martin Wolf:

In his book, Prof Rajan points to domestic political stresses within the US. Related stresses are emerging in western Europe. I think of it as the end of “the deal”. What was that deal? It was the post-second-world-war settlement: in the US, the deal centred on full employment and high individual consumption. In Europe, it centred on state-provided welfare.

In the US, soaring inequality and stagnant real incomes have long threatened this deal. Thus, Prof Rajan notes that “of every dollar of real income growth that was generated between 1976 and 2007, 58 cents went to the top 1 per cent of households”. This is surely stunning.

“The political response to rising inequality ... was to expand lending to households, especially low-income ones.” This led to the financial breakdown. As Prof Rajan notes: “[the financial sector’s] failings in the recent crisis include distorted incentives, hubris, envy, misplaced faith and herd behaviour. But the government helped make those risks look more attractive than they should have been and kept the market from exercising discipline.”

Yves Smith, in turn, points to others who have essentially been saying the same thing. She notes that that Thomas Palley, a post-Keynesian economist with a strong background on US-China issues and currently a fellow at the New America Foundation, was writing about the change in economic policy and the drivers of growth back in 2007. Smith notes that Palley argued "that policy-makers retreated from full employment as a goal, since it allows workers to demand higher wages, which in turn causes inflation" and that "reducing worker bargaining power led to disinflation, lower interest rates led to rising asset prices, which in combination with financial innovation, created an until-recently reinforcing cycle whereby rising asset prices funded consumption." Palley further contended that this was inherently a self-limiting paradigm and that we had reached the end of the gains from globalization and the easy credit road.

Smith also quotes Steve Randy Waldman who runs the insightful finance blog Interfluidity. She cites a portion of a post from Labor Day 2008. Frankly the whole post is worth reading:

It's a cliché, of course, that the 2000s are the new Gilded Age, that inequality in America is at levels not seen since the original Gilded Age, which you may recall was ended by a terrible depression.

During this decade's tiresome debates about inequality, the don't-worry-be-happy side of the argument frequently, and correctly, noted that income inequality statistics overstate the lived experience of inequality, since the poor spent more than they earn and the rich spent less.

Of course, the poor spend more than they earn primarily by taking on debt. In the halcyon days of 2006, that was no problem. Credit flowed like honey, and what could always be refinanced need never be repaid. It's a wonder we didn't do away with the whole "money" thing entirely. If you can spend all the way down to negative infinity, it hardly matters whether your starting wealth is one dollar or a billion dollars. Why keep track?

But, alas, people did keep track. They also stopped lending to people who might not be able to repay, people who, you know, spend more than they earn. Which means, even putting aside the terrible hardship of bankruptcy, or struggling to pay down old loans, all of a sudden the lived experience of inequality must come very much to resemble those unpleasant income inequality statistics. Are we cool with that?

In a way, the credit crisis comes out of a tension between the broad-middle-class America of our collective imagination and the economically polarized nation we have in fact come to be. We borrowed to finance an illusory Mayberry. The crisis won't be over until this tension is resolved. Either we modify the facts of our economic relations, or we come to terms with a new America more comfortable with distinct and enduring social classes.

Tanta and Calculated Risk have popularized the notion that "We are all subprime now." But that simply isn't true. The vast majority may be subprime now, but not all of us. To use an old expression, as the easy money falls away, we are being left to "find our own level". For many, it may be quite a bit lower than we had imagined.

I'm sure this is a bit polemic, but I don't think it is much overstated. Credit was the means by which we reconciled the social ideals of America with an economic reality that increasingly resembles a “banana republic”. We are making a choice, in how we respond to this crisis, and so far I’d say we are making the wrong choice. We are bailing out creditors and going all personal-responsibility on debtors. We are coddling large institutions of prestige and power, despite their having made allocative errors that would put a Soviet 5-year plan to shame. We applaud the fact that “wage pressures are contained”, protecting the macroeconomy of the wealthy from the microeconomy of the middle class.

The credit crisis will end, and life in America will go on. What we have to decide now is, when the floodwaters clear, what kind of country will be revealed. Peering down through the murk, I don't like what I am seeing.

I don't like what I am seeing either and have long argued that our economic model is broken. The reality is that beginning with the crisis of the 1970s we saw a shift away from investment in productive assets towards a reliance on financial assets as the driver of economic growth especially in the United States and Britain. Productive capacity was outsourced first to Korea, Taiwan and other emerging Asian Tigers but later to Mexico and especially China but even to places like Bangladesh, Sri Lanka, Central America and the Caribbean. 

You name it and it's likely that a product once made here in the United States is now made overseas. Take the iconic brand Hanes, a clothing manufacturer. Hanes likes to boast that its brands "can be found in eight out of 10 American households." Its brands include initial Wonderbra, Hanes, Champion and L'eggs. Based in North Carolina, the company has long used North Carolina native and basketball Hall of Famer Michael Jordan as its spokesman. He may soon be the only Tar Heel that toils for Hanes.

As recently as 2006 when Hanes was spun off from its parent Sara Lee Corporation, the company had 19 plants in the US and Puerto Rico. It currently has seven with one (Forsyth, NC) more scheduled to close by year-end 2010. Hanes now manufactures its wares across 17 plants and production facilities scattered across the Caribbean and Central America (Haiti, El Salvador and Honduras) to South East Asia (Bangladesh, Thailand, Vietnam), Micronesia (Saipan, Marshall Islands), a China manufacturing hub and one plant in Mount Airy, North Carolina.

In its April 2010 financial release Hanes reported $0.37 in earnings per share versus a loss of $0.20 cents in the year ago period. The strong earnings growth was primarily a result of increased sales (which contributed $0.17 of EPS growth), improved operating margin ($0.25 of growth), and lower restructuring ($0.15 of growth). Put another way, two thirds of the growth in earnings for Hanes came as a result of moving its production offshore and from financing activities.

Who benefits? Well management certainly does as do the shareholders. Its stock closed today at $25.97 up 78.3 percent year-over-year. Its CEO, Richard Noll, was paid $5.7 million in 2009. Not bad for a manufacturer of underwear and hosiery. Meanwhile, the company's average wage in Bangladesh is $0.33 cents an hour. Of its 50,000 employees worldwide, less than ten percent work in the US. Of those Hanes employees who still work in the US most are in distribution with the balance in a managerial capacity. Only a fraction, less than 2 percent, of Hanes' employees in the US are engaged in manufacturing.

The irony in all this is that I picked Hanes at random and largely because of its iconic image. Prior to writing this post, I had little knowledge of the company; it was only a hunch that Hanes might prove illustrative of the changes afoot in the economy. I threw a dart and hit the bullseye but I suspect any dart might have hit such a target. Corporate malfeasance isn't exactly a rare commodity these days. But here's what local reporter Jim Longworth of the Triad Yes Weekly had to say about Hanes' corporate citizenship in May 2009 when the company announced it was cutting 440 jobs in Forysth County, North Carolina:

Last week Hanesbrands announced it was eliminating another 440 jobs from the local workforce, saying the move was caused by “reduced consumer spending… during a bleak economy.” If the situation wasn’t so tragic, I would be doubled over with derisive laughter. Of course consumer spending is down; that’s what happens when people lose their jobs. Of course the economy is bleak; that’s what happens when skanky companies like Hanesbrands keep moving those jobs overseas where they can pay slave wages with no benefits in order to improve the bottom line.

But unlike Dell, which cloaks its layoffs in secrecy, Hanesbrands openly and unashamedly continues to fire Americans in broad daylight, and send their jobs to third-world countries. Last week’s announcement by Hanesbrands added particular insult to injury by not directing the layoffs to come from its foreign plants first, before further decimating the local workforce. And through it all, after two years of this unpatriotic crap, Hanesbrands management seems to be getting a free pass from just about everyone, which is very strange, given the anger most Americans feel toward greedy corporations these days. That Hanesbrands keeps profiting and pillaging in today’s post AIG environment is almost surreal. In fact, this saga has evolved into a full-blown morality play, featuring five distinct groups of actors: A-holes, apologists, apathists, academics

The A-holes are played expertly by greedy executives who have orchestrated a deliberate downsizing since the day their company split from Sara Lee. CEO Richard Noll’s oft quoted line from 2006 has become the stuff of legends, when he promised that Hanesbrands would “always be a major employer in Forsyth County, and have a strong community presence here.” But the only reason Hanesbrands is still a presence here at all is because Knoll (sic) and his minions don’t want to live in the third-world countries where the rest of their employees toil. Speaking of which, Noll has now eliminated nearly 15,000 jobs in the United States and moved those jobs to countries where he can pay slave wages for the manufacture of underwear that he can then ship back to America and sell to unemployed Hanesbrands workers at higher prices than ever before.

Among the apologists, Winston-Salem Chamber of Commerce President Gayle Anderson is the most vocal. Anderson’s best apology to date was last week when she told Richard Craver of the Winston-Salem Journal that Hanesbrands continues to support the local economy with “leadership and volunteerism.” Leadership and volunteerism? First of all, corporate greed is not leadership; stripping retirees of their subsidized medical benefits is not leadership. Second, what exactly is the economic value in having thousands of unemployed volunteers living in the community? When it comes to apathy, no one excels better than the electronic media.

TV news departments continue to broadcast whatever lame, diversionary statement is made by Hanesbrands spokespersons without even taking time to challenge those statements. Yes, I realize that corporate-owned news gatherers are short on staff these days, and that a reporter is not supposed to render opinions, but that doesn’t justify not probing the story or the source.

Hanesbrands is no longer a major employer in America — it is a major pirate who has robbed the country of highpaying jobs, and helped to contribute to our current economic downturn. That’s news. Hanesbrands executives continue to make huge salaries while laying off workers. That’s news. Hanesbrands is abusing the spirit of the Federal Trade Adjustment Assistance Act (recently renamed the Trade and Globalization Adjustment Assistance Act) by filing claims on behalf of the employees it has screwed, and expecting taxpayers to foot the bill for up to 156 weeks of cash payments and training for each affected worker. That’s news. Two years ago Hanesbrands only employed 350 people in China, but today that number has risen to over 6,000.

That’s news.

Richard Noll has shut down 30 American plants in the past two years. That’s news. Noll eliminated subsidized medical benefits for retirees, leaving thousands of families without adequate coverage.

That’s news. And it’s news when a company says it must make cuts in its workforce, but only makes those cuts here in the US, rather than in Central America or Asia. It wasn’t that long ago when the national news media launched blistering attacks on Kathy Lee Gifford for putting her name on a line of clothing made by slave-wage laborers. Today, the news media is too apathetic to investigate similar abuses by Hanesbrands.

Academics, like Michael Lord of Wake Forest University, are the least of the offenders in this play, but you’d think they could be a little less dispassionate about the damage Hanesbrands is doing.

Instead we are treated to analysis of numbers and trends which concludes that job losses are the result of a competitive global market. These guys should know better. They of all people should know that Hanesbrands management isn’t just reacting to depressed global conditions, they are creating those conditions themselves.

Finally, there are the antagonists. Unfortunately, this is the smallest group of actors in the Hanesbrands drama. Only Richard Craver, Journal columnist Scott Sexton and myself offer any substantive challenge to the economic terrorism that Richard Noll is perpetrating on our homeland.

The antagonists are also struck by the irony of Noll’s words versus his actions, and that includes language on the Hanesbrands website stating, “Hanesbrands strives to attract and retain great people with a passion to do their best, guided by the high ethical standards fitting one of the world’s apparel leaders.”

And then there’s the website of Syrus Global, the leading provider of ethics and compliance solutions, which is headed by Hanesbrands board member Alice Peterson. Its corporate slogan comes from ancient philosopher Publilius Syrus who said, “A good reputation is more valuable than money.” Old Publilius must be spinning in his tomb. And I wonder what he would have said about the irony and juxtaposition of last week’s media coverage. That’s when the announcement by Hansebrands was overshadowed by news of the swine flu. If I were a philosopher, my observation of this saga would suffice for two-legged and four-legged swine alike: Diseased pigs do harm when people fail to stop them. Translation: Don’t buy pork, and don’t buy Hanes underwear.

Eventually the curtain will come down on this long-running morality play, but by then the A-hole producers will have profited handsomely. And when that curtain does finally fall, it will fall hardest on those who sweated blood for a oncegreat production. In the meantime, it’s up to each of us to decide to which category of actors we belong.

Returning to Raghuram Rajan's disturbing finding that $0.58 cents out of every dollar in real income growth has accrued to the top one percent, I wondered what his proposals might be. Back in June, Dywer Gunn of the NYT's blog Freakonomics sat down with Professor Rajan and asked him about tackling inequality.

 

Income inequality has been on the rise in the U.S. for some time, but it’s not often identified as a contributor to the financial crisis. What’s the link between income inequality and the crisis? What kind of reforms would you suggest to address this problem?

Rajan's Answer: The housing boom and bust was at the center of the crisis. This was an atypical boom and bust in that the up-and-down movement of house prices for the poorest people was much more than the movement for people at the top. Why did the “greedy” bankers suddenly develop a social conscience and start lending to poor people? The answer is that they were guided to lending to the poor by the money directed into low-income housing, much as sharks are drawn to blood. And why did so much money flow to the low-income housing? Because the government was trying to solve a deeper problem — growing income inequality.

Since the 1970s, the wages of workers at the 90th percentile of the wage distribution in the United States — such as office managers—have grown much faster than the wages of the 50th percentile worker (the median worker) — typically factory workers and office assistants. A number of factors are responsible for the growth in the 90/50 differential. Perhaps the most important is that although in the U.S. technological progress requires the labor force to have ever greater skills — a high school diploma was sufficient for our parents, whereas an undergraduate degree is barely sufficient for the office worker today — the education system has been unable to provide enough of the labor force with the necessary education. The reasons range from indifferent nutrition, socialization, and learning in early childhood to dysfunctional primary and secondary schools that leave too many Americans unprepared for college.

The everyday consequence for the middle class is a stagnant paycheck as well as growing job insecurity. Politicians feel their constituents’ pain, but it is very hard to improve the quality of education, for improvement requires real and effective policy change in an area where too many vested interests favor the status quo. Moreover, any change will require years to take effect and therefore will not address the current anxiety of the electorate. Thus politicians have looked for other, quicker ways to mollify their constituents. We have long understood that it is not income that matters, but consumption. A smart or cynical politician knows that if somehow the consumption of middle-class householders keeps up, if they can afford a new car every few years and the occasional exotic holiday, perhaps they will pay less attention to their stagnant monthly paychecks.

Therefore, the political response to rising inequality — whether carefully planned or the path of least resistance — was to expand lending to households, especially low-income ones. The benefits — growing consumption and more jobs — were immediate, whereas paying the inevitable bill could be postponed into the future. Cynical as it may seem, easy credit has been used as a palliative throughout history by governments that are unable to address the deeper anxieties of the middle class directly.

Politicians, however, prefer to couch the objective in more uplifting and persuasive terms than that of crassly increasing consumption. In the United States, the expansion of home ownership — a key element of the American dream — to low- and middle-income households was the defensible linchpin for the broader aims of expanding credit and consumption.

More low-income housing credit has been one of the few issues that both the Clinton administration, with its affordable housing mandate, and the Bush administration, with its push for an “ownership” society, agreed on. Before the recent crisis, politicians on both sides of the aisle egged Fannie Mae and Freddie Mac, the giant mortgage agencies, to support low-income lending in their constituencies. The wall of money flowing into low income housing helped create the easy money that drew the bankers in until it consumed them. The bankers were not blameless, of course, but they did what they do naturally – follow the money.

Why did the United States not follow the more direct path of redistribution, of taxing or borrowing and spending on the anxious middle class? In the United States, there have been strong political forces arrayed against direct redistribution in recent years. Directed housing credit was a policy with broader support, because each political group thought it would benefit. The Left favored flows to their natural constituency, the Right welcomed new property owners who could, perhaps, be convinced to switch allegiance. In the end, though, the misguided attempt to push home ownership through credit, to lessen the pain of stagnant wages, has left the United States with houses that no one can afford and households drowning in debt.

The broader implication is that we need to look beyond greedy bankers and spineless regulators (and there were plenty of both) for the root causes of this crisis. And the problems are not solved with a financial regulatory bill entrusting more powers to those regulators.

We need to tackle inequality at its root, by giving more Americans the ability to compete in the global marketplace. This is much harder than doling out credit — we need to reform the education that people get, which involves tackling such difficult issues as dysfunctional schools, broken communities, and unsupportive families — but more effective in the long run.

When we lasted tackled inequality at its root beginning in the 1930s and through the 1960s, we had a progressive tax scheme that allowed for funding such altruistic endeavours as education. Today, we don't have that. We essentially have a flat tax but mention a progressive tax scheme and this is the reaction you get:

Thankfully Rick Barber lost his bid to win the GOP nomination in the Alabama Second Congressional District but clearly we need to do a better job of explaining why a progressive tax scheme affords a better and more egalitarian lifestyle for most Americans.

Tags: US Economy, Corporate Issues, US Industrial Policy, globalization, Social Inequality (all tags)

Comments

5 Comments

And the working man is still not getting it.

The genius of the Republicans is that they are still able to sell the poor and working folk the notion that it is the liberals who are sending them to the poor house. It is also just unbelievable that the Democrats can't spell it out for them.

by MainStreet 2010-07-14 10:00PM | 0 recs
Maybe this is part of it

Why can't the Dems get their message through to the American People?

From Krugman:

My Obama Problem

John Boehner, March 2009:

It’s time for government to tighten their belts and show the American people that we ‘get’ it

Barack Obama, yesterday:

“At a time when so many families are tightening their belts, he’s going to make sure that the government continues to tighten its own,” Obama said. “

We’ll never know how differently the politics would have played if Obama, instead of systematically echoing and giving credibility to all the arguments of the people who want to destroy him, had actually stood up for a different economic philosophy.

But we do know how his actual strategy has worked, and it hasn’t been a success.

by jeopardy 2010-07-15 12:43PM | 0 recs
Education is not a solution: power must be shifted
Education is a solution only if there are a lot of jobs for educated people. White-collar jobs are beginning to be outsourced to India now and that will probably continue unless challenged.

I like Robert Reich's solutions a lot better:

Government could have given employees more bargaining power to get higher wages, especially in industries sheltered from global competition and requiring personal service: big-box retail stores, restaurants and hotel chains, and child- and eldercare, for instance. Safety nets could have been enlarged to compensate for increasing anxieties about job loss: unemployment insurance covering part-time work, wage insurance if pay drops, transition assistance to move to new jobs in new locations, insurance for communities that lose a major employer so they can lure other employers. With the gains from economic growth the nation could have provided Medicare for all, better schools, early childhood education, more affordable public universities, more extensive public transportation. And if more money was needed, taxes could have been raised on the rich.

Big, profitable companies could have been barred from laying off a large number of workers all at once, and could have been required to pay severance--say, a year of wages--to anyone they let go. Corporations whose research was subsidized by taxpayers could have been required to create jobs in the United States. The minimum wage could have been linked to inflation. And America's trading partners could have been pushed to establish minimum wages pegged to half their countries' median wages--thereby ensuring that all citizens shared in gains from trade and creating a new global middle class that would buy more of our exports.

by RandomNonviolence 2010-07-14 10:28PM | 0 recs
I generally like Prof. Rajan's diagnosis

But I think he has missed the point here.  His point (or one of his points) is that the govt. deliberately fed the credit bubble beast as a matter of social policy.  He argues that this was done, in part to assuage the growing income disparity between rich and poor.  In other places, he has (and others have as well) argued that Fannie and Freddie were the ones that did this lending.

This is not true.  First of all, most of the lending done to the poor was done by perfectly capitalistic banks, while ignoring govt. regulations (such as documentation on individual loans, and overall leveraging etc.) that should have prevented them from doing so.  The share of bad loans made by Fannie and Freddie was relatively small, and was made late in the game.  Second, most of the bad loans were not "sub-prime"; a good chunk wre made to people with perfect credit.

Thirdly, and most importantly, I would very much doubt that any government could deliberately set out to create such havoc in such a manner.  Indeed, I would be very afraid if any govt. could have such power.  Historically speaking, governments have had very little understanding of economics, and consequently have had little success in creating an economic impact that they have directly desired.  The Roman Diocletian, for instance, minted lots of coins when he needed money to expand his army...not realizing that this would create inflation.  Even in recent times, you have perfectly good, intelligent people, who ramble on complete blather about laffer curves and perpetual motion machines.  Given this general incompetence, it would be well near impossible for anyone to have deliberately set out to create our current crisis, adn to then have achieved it.

It is true that inequalities have risen.  But there is a simpler explanation for it...inequalities rise when the masses do not pay attention (or when they can be distracted by nice shiny objects...such as gladiators in a circus, or on a color TV).  Inequalities continue to rise, up until the masses can take it no longer.  At that point, the inequalities fall either because there is a wise leader in charge who seeks to redistribute some wealth, or because there is a revolution adn the rich lose more than the poor.

There is a very fundamental dynamic at play here...money creates money.  So, if you have money, you will generally dominate the wealth creation process.  The exceptions to that rule have been due to possessions of guns (prime example: the Mongol Hulagu locking the last Caliph of Baghdad in his treasury, so that the Caliph could starve amongst his gold), or some other very outstanding talent.  If money did not create money, then we would all be rich.  This is why inequalities rise.  History has played out that way ever since money was first minted, and it will probably play out that way for a good deal longer.

by Ravi Verma 2010-07-15 02:11AM | 1 recs
I think this is a better indicator of what lies at the heart of the trouble in the US

If we are willing to put up with, and in some cases whole-heartedly endorse, this behavior, among others, then it explains the idea that there really are class divides that run deeper than many people see or think.

http://www.cnbc.com/id/38260141

When they start "eating their own/young" then the real pain starts to happen.  This level of Legal adherance without ethical/moral adherance has always gotten us in trouble, and always will.  Should be an interesting ride to the bottom.

by Hammer1001 2010-07-15 01:32PM | 0 recs

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