25 Jul 2014

Why the Super-Rich need Governments. (from Social Europe Journal)

Dani Rodrik

The very rich, F. Scott Fitzgerald famously wrote, “are different from you and me.” Their wealth makes them “cynical where we are trustful,” and makes them think “they are better than we are.” If these words ring true today, perhaps it is because when they were written, in 1926, inequality in the United States had reached heights comparable to today.
During much of the intervening period, between the end of World War II and the 1980s, inequality in the advanced countries was moderate. The gap between the super-rich and the rest of society seemed less colossal – not just in terms of income and wealth, but also in terms of attachments and social purpose. The rich had more money, of course, but they somehow still seemed part of the same society as the poor, recognizing that geography and citizenship made them share a common fate.
As the University of Michigan’s Mark Mizruchi points out in a recent book, the American corporate elite in the postwar era had “an ethic of civic responsibility and enlightened self-interest.” They cooperated with trade unions and favored a strong government role in regulating and stabilizing markets. They understood the need for taxes to pay for important public goods such as the interstate highway and safety nets for the poor and elderly.
Business elites were not any less politically powerful back then. But they used their influence to advance an agenda that was broadly in the national interest.
By contrast, today’s super-rich are “moaning moguls,” to use James Surowiecki’s evocative term. Exhibit A for Surowiecki is Stephen Schwarzman, the chairman and CEO of the private equity firm the Blackstone Group, whose wealth now exceeds $10 billion.
The venture capitalist Tom Perkins and Kenneth Langone, the co-founder of Home Depot, both compared populist attacks on the wealthy to the Nazis’ attacks on the Jews.
Schwarzman acts as if “he’s beset by a meddlesome, tax-happy government and a whiny, envious populace.” He has suggested that “it might be good to raise income taxes on the poor so they had ‘skin in the game,’ and that proposals to repeal the carried-interest tax loophole – from which he personally benefits – were akin to the German invasion of Poland.” Other examples from Surowiecki: “the venture capitalist Tom Perkins and Kenneth Langone, the co-founder of Home Depot, both compared populist attacks on the wealthy to the Nazis’ attacks on the Jews.”
Surowiecki thinks that the change in attitudes has much to do with globalization. Large American corporations and banks now roam the globe freely, and are no longer so dependent on the US consumer. The health of the American middle class is of little interest to them these days. Moreover, Surowiecki argues, socialism has gone by the wayside, and there is no need to coopt the working class anymore.
Yet if corporate moguls think that they no longer need to rely on their national governments, they are making a huge mistake. The reality is that the stability and openness of the markets that produce their wealth have never depended more on government action.
The super rich are now more separated from the rest of society than ever before (photo: CC 4WheelsofLux Photography on Flickr)
In periods of relative calm, governments’ role in writing and upholding the rules by which markets function can become obscured. It may seem as if markets are on autopilot, with governments an inconvenience that is best avoided.
As former Bank of England Governor Mervyn King aptly put it in the context of finance, “global banks are global in life, but national in death.”
But when economic storm clouds gather on the horizon, everyone seeks shelter under their home government’s cover. It is then that the ties that bind large corporations to their native soil are fully revealed. As former Bank of England Governor Mervyn King aptly put it in the context of finance, “global banks are global in life, but national in death.”
Consider how the US government stepped in to ensure financial and economic stability during the global financial crisis of 2008-2009. If the government had not bailed out large banks, the insurance giant AIG, and the auto industry, and if the Federal Reserve had not flooded the economy with liquidity, the wealth of the super-rich would have taken a severe blow. Many argued that the government should have focused on rescuing homeowners; instead, the government chose to support the banks – a policy from which the financial elite benefited the most.
Even in normal times, the super-rich depend on government support and action. It is largely the government that has financed the fundamental research that produced the information-technology revolution and the firms (such as Apple and Microsoft) that it has spawned.
It is the government that enacts and enforces the copyright, patent, and trademark laws that protect intellectual property rights, guaranteeing successful innovators a steady stream of monopoly profits. It is the government that subsidizes the higher-education institutions that train the skilled work force. It is the government that negotiates trade agreements with other countries to ensure that domestic firms gain access to foreign markets.
If the super-rich believe that they are no longer part of society and have little need of government, it is not because this belief corresponds to objective reality. It is because the prevailing story line of our time portrays markets as self-standing entities that run on their own fuel. This is a narrative that afflicts all segments of society, the middle class no less than the rich.
There is no reason to expect that the super-rich will act less selfishly than any other group. But it is not so much their self-interest that stands in the way of greater equality and social inclusion. The more significant roadblock is the missing recognition that markets cannot produce prosperity for long – for anyone – unless they are backed by healthy societies and good governance.

8 Jul 2014

YESTERDAY'S RUBBISH..why is a minimum wage different from Free Trade?

Andrew Watt
Andrew Watt
Germany’s first post-war Chancellor Konrad Adenauer is usually held to be the origin of an often-quoted phrase „Was kümmert mich mein Geschwätz von gestern?“. Roughly: why should I be concerned about the rubbish I talked yesterday? Whatever the rights and wrongs of this attribution, the phrase – used to draw attention to someone who places political flexibility over intellectual consistency – has occurred to me numerous times over recent months in the context of Germany’s debate over the introduction of a statutory minimum wage.

The statutory minimum wage in Germany

The decision was finally taken yesterday in the Bundestag. Germany will, for the first time in its history, apply a statutory minimum wage of EUR 8.50 to almost all workers from the start of 2015. It is estimated that up to 3.7 million workers will benefit, and given very pronounced wage inequality at the bottom of the German labour market, the wage rises for some workers will be substantial. There is a two-year transition phase for pre-existing sectoral collective agreements. A number of groups of workers have been excluded, some permanently the majority for a transition period, from the minimum wage requirement, which has given rise to an intense debate in the country.
This debate about exemptions, as with the battle over the minimum wage more generally, has centred, unsurprisingly, on possible negative employment effects. Once the minimum wage has been introduced it will be possible to analyse its employment effects, even if this will be difficult because its impact will not be easy to disentangle from that of other factors happening at the same time. For the moment, one has to rely on studies focusing on past minimum wage introductions and increases in other countries. The thrust of that literature is that, provided the minimum wage is at a “reasonable rate”, it is very hard to identify negative employment effects in the aggregate. (For a discussion of whether EUR 8.50 is “reasonable” in the German context see here.)
What we will see though is a lot of “argument by anecdote”. Firm A in region B has been forced into bankruptcy by wage increases necessitated by the minimum wage. Worker C in city D was happy about the minimum wage when it was being discussed, but now he is furious because instead of a job paying EUR 6.50 he is unemployed. Indeed, we are already seeing this argument being deployed in the form of threats and predictions. Handelsblatt, the German business daily, recently had a piece whose title asks whether the minimum wage will lead to bankruptcies (“Pleiten dank Mindestlohn?”, Handelsblatt, 15.05.14). The article answers the rhetorical question in the affirmative, based on the opinions of the director of the hotel and catering lobby organisation, the board chairman of a chain of hairdressers, and the president of the German employers association BDA. And this concern has been expressed by many liberal economists, by employer-linked think tanks such as the Initiative Neue Soziale Marktwirtschaft[1], and, not least, by the German Council of Economic Advisers.[2]

Political flexibility or intellectual consistency?

What I find interesting here is less the specific arguments put forward (which are rather weak) than the fact that the basis for the arguments is completely at odds with the way that employers’ representatives[3], and certainly liberal economists, normally position themselves. It is as if, on the issue of the minimum wage they are collectively saying: why should I be concerned about the rubbish I talked yesterday?
Consider the debate on free trade. A country has tariffs that protect a sector of its economy. They are removed, leading to job losses and bankruptcies in the least productive firms in that sector. Do employer representatives and liberal economists favour an anecdotal approach here and call for the reimposition of tariffs in order to protect jobs and companies? On the whole they take a very different line. The production and employment protected by the tariffs is “inefficient”. Free trade brings a welcome does of competition. It enables higher incomes and a shift of production to areas in which the country has a comparative advantage. Workers who lose their jobs move to more productive occupations or regions and everyone is better off. (At least, the more sophisticated would add, this is the case after an intervening adjustment period.) Focusing on protecting “old” jobs is a barrier to productivity and progress. One cannot judge from individual job losses that the overall employment level must fall.
A similar argument is put forward with respect to technological change. Yes, some workers are thrown out of work when new, more efficient machinery and production processes are introduced. Others have to adjust through training. But here, too, the overall impact is beneficial (after a lag), because lost employment can be recouped elsewhere in the economy, as higher-productivity jobs pay higher wages that in turn expand employment opportunities for workers in other parts of the economy. If you are against technological change you are a Luddite and economically illiterate.
This begs the question why different standards seemingly apply in the case of the minimum wage. Firms facing a rise in labour costs in the wake of its introduction have a number of ways to adjust. (These are not mutually exclusive in practice but can be separated for expositional purposes.) They can increase prices. Given that the minimum wage applies across the whole economy (i.e. will not just affect individual firms) this is likely to happen. Relative prices will adjust: the prices of goods and services produced with the use of large quantities of low-skilled labour will increase relative to those using more high-skill labour and capital. The economic (not technical) productivity of the low-wage workers will rise, thanks to higher product and service prices, to match the increase in their wages. Or firms can raise their productivity (in the technical sense), through innovation and reorganisation, just like a firm facing a dose of wholesome foreign competition because tariffs have been cut. Companies may also accept a lower profitability, and the wage share would rise somewhat. (If nothing else, this would make Thomas Picketty happy).
But, undoubtedly, in some firms these adjustment strategies may not be practicable or sufficient. Some may lay off workers and others be forced to close. This is the basis for the anecdotal argument. But surely, given their normal argumentative pattern, business representatives and liberal economists should be vociferously pointing out that this is actually not a problem, certainly not an inevitable one. For as we have seen a minimum wage has very similar effects to a bracing dose of foreign competition or the “creative destruction” associated with technology. Induced productivity gains and higher wages generate additional income that sustains employment in firms across the whole economy. Those employers that cannot keep up are forced out of business. And the labour that is displaced will, or at least should[4], be rapidly deployed to other regions or sectors where it can be put to more productive use.

Yesterday’s rubbish?

From the macroeconomic point of view it makes no sense at all to lock a large proportion of the workforce into low-paid, low-productivity jobs. If they were consistent, liberal economists and employers’ front organisations should be making that point. But they are not. It could be that they have suddenly abandoned liberal views as yesterday’s rubbish. This is implausible, however. The argument still applies in other areas; see for example the salutatory effects that such commentators ascribe to the TTIP (Transtlantic Trade and Investment Partnership).
Rather the discrepancy is presumably because the same effect is produced by two different causes: trade or technological change, on the one hand, which are seen as market outcomes, and the minimum wage, on the other, which is perceived as an market intervention. This dichotomy is wrong, or at least oversimplistic, of course. Trade and technology are also highly regulated, while many economists argue that the minimum wage (at a reasonable level) is correcting a market imperfection that gives undue power to employers. But even those who believe in it should be aware of the inconsistency of using anecdotal argument from individual companies as a stick with which to beat the minimum wage.
It will be quite some time before careful studies, with all the required controls, are made of the employment impacts of the introduction of the statutory minimum wage in Germany. Until they are done, expect a lot of heart-rending anecdotal argument about job losses and bankruptcies. And when you hear or read them, remember to confront those making such arguments with Konrad Adenauer, or whoever it was who said: Was kümmert mich mein Geschwätz von gestern?

[1] In its „eight facts about the minimum wage“ the INSM states baldly (translation mine) „ The introduction of a minimum wage, whatever ist level, destroys all those jobs that no longer pay. And a job no longer pays when the employer gets less from it than he pays the worker. And so it is clear: the higher the minimum wgae, the greater the job losses.“
[2] In their annual report 2013/2014. It is worth emphasising that one of the „Five wise persons“, Peter Bofinger, dissented from the majority view on the minimum wage issue.
[3] The following may not apply to heads of individual companies, who can be very protectionist, but it usually does to those representing employer interests at national level.
[4] The word “should” here can be understood in the sense that redeployment will happen if appropriate measures are in place to maintain aggregate demand and smooth the adjustment process through active labour market policies. And of course provided the increase in the minimum wage is “reasonable” so that the employment reallocation system is not completely overwhelmed.

7 Jul 2014

Robert Reich on the 7 big lies told by neo-liberal politicians.

This video is worth watching and listening to as Robert Reich exposes the fallacies that underpin the neo-liberal economics so beloved by John Key and his asset stripping cronies.