inequality

Boris Johnson is a promoter of the politics of envy

Published by Anonymous (not verified) on Sun, 08/12/2019 - 10:04pm in

This, I think, is the true Boris Johnson:

Johnson is patronising whilst supporting inequality and the politics of envy which, as he makes clear, are the basis for all Tory thinking.

It’s nasty.

And this man wants to be elected prime minister.

The issue with wealth is some people’s incomprehension

Published by Anonymous (not verified) on Tue, 03/12/2019 - 6:36pm in

As the Guardian reports this morning, and I am not going to even seek to précis this:

The UK’s six richest people control as much wealth as the poorest 13 million, according to research by the Equality Trust. They are businessmen Gopichand and Srichand Hinduja (£12.8bn); Sir Jim Ratcliffe, boss of Ineos chemicals (£9.2bn); hedge fund manager Michael Platt (£6.1bn); and property developers David and Simon Reuben (£5.7bn each).

Their combined fortune of £39.4bn jars very heavily with news that at least 135,000 children in Britain will spend Christmas homeless – the worst it has been in 12 years. Polly Neate from Shelter said: “Day in, day out we see the devastating impact the housing emergency is having on children across the country. They are being uprooted from friends; living in cold, cramped B&Bs and going to bed at night scared by the sound of strangers outside.”

But as I noted from conversations in the City yesterday, the concern there is people moving home because of taxation when the concern should be people haing homes at all.

I tweeted last night on this theme, noting:

It is said that F Scott Fitzgerald once said to Ernest Hemingway “Ernest, the rich are different from us”, to which it is said Hemingway replied “Yes, they have more money”.

And that is the difference. But the human need remains the same. What I struggle with is the incomprehension of this reality by some, for whom the money blinds them to all else.

The time has come to talk of many things; of taxing and spending and an economic system that needs mending. 

Protest placard with a picture of the Earth in space and the slogan "One World"Photo by Markus Spiske on Unsplash

In the news, the Prime Minister tells millions of  WASPI women affected by the changes to the state pension age that he couldn’t promise to magic up the money for them despite having found lots in the magic money pot for Tory manifesto pledges; the Home Secretary, Priti Patel, whilst visiting a food bank, claims that the Tory government was not to blame for poverty in the UK and, shifting the blame onto local councils, forgets to mention that central government funding has been cut by nearly 50% since 2010/11.

After 9 years of austerity, the consequences couldn’t be starker for our public and local government services, however, it is UK citizens, families and their children who have borne the distressing costs of cuts to social security benefits, both on their health and financial well-being. It cannot be clearer that the steep cuts to tax credits, child and disability benefits, ESA and Incapacity benefit and housing along with the introduction of Universal Credit have been behind the increases in child malnutrition, food bank use, homelessness and suicide.

The IPPR this week published its report ‘Divided and Connected’ which reveals that the UK is more regionally divided than any comparable advanced economy.

In the same week, the Resolution Foundation published its report ‘The Shifting Shape of Social Security’ It notes in its analysis of the manifestos of the main parties that child poverty is set to continue rising under the Conservative Party’s social security plans, whilst Labour’s £9bn of extra spending would mean 550,000 fewer children in poverty, it would not reverse the effects of the £5bn benefits freeze and could still see more children living in poverty in 2023 than do today. It noted that major policy changes have reduced support for working-age households since 2010 resulting in overall spending in 2023-24 being around £34bn a year lower on current plans than if the 2010 benefit system had remained in place, and that the cuts in support had fallen almost entirely on low-to-middle income working age families. It also noted that the Conservatives’ 2019 manifesto makes no changes to existing policy and as a result child poverty risks reaching a 60-year high of 34%.

Although the conservatives are promising more spending on health and education, it seems clear that they intend to carry along the same policy paths they have followed since they came to power in 2010 which have involved cuts to benefits, conditionality, sanctions and welfare to work. Clearly, they have no intention either of reversing the already implemented cuts or reforms which have done so much damage and left a trail of devastation in many people’s lives. Priti Patel’s remark about who is to blame for poverty is indicative of Tory neoliberal credentials of denying governmental responsibility and passing the buck along to others, whether local government who have been firefighting for lack of funds or indeed shifting the blame onto citizens themselves. Her position has not changed much since 2015 when she said, ‘There is no robust evidence that directly links sanctions and food bank use.”

In the light of the very real consequences on people’s lives of government spending decisions and policies, it is all the more depressing to read the two analyses of the party manifestos by the Resolution Foundation and the IFS which instead of looking at the real effects of government spending policies on the lives of real people, examine them in purely financial terms and arbitrary fiscal rules which as we may now be realising bear no relationship with how money really works.

Hunkered down in household budget explanations, the IFS, rather than considering the spending promises of all three parties from the perspective of potential outcomes for the economy and its citizens, examines them in relation to the prospect of raising taxes or borrowing and the likely impact on the deficit and national debt.  As usual, the question, if not asked directly, is how will the parties pay for their spending plans? When, instead, they should be acknowledging that the real question is how will a future government manage existing resources to meet government goals? This will be the real constraint that any future government will face, however progressive that government may be. The resource balancing act will be key to maintaining spending within the productive capacity of the nation to deliver public purpose.

The Resolution Foundation summed it up depressingly in its conclusion in saying that:

‘The priority that both main parties have placed on credible fiscal frameworks in this campaign is laudable. Such rules are hugely important for the government’s overall economic priorities. In setting out new fiscal rules, it is vital that they provide a clear framework for sustainable public finances, constraining the temptation for policy makers to promise unfunded giveaways.’

Such institutions unsurprisingly have focused on the notion that it is the role of government to balance its budget rather than serving citizens and improving their economic and social well-being. It is regrettable that a recent poll has suggested that many people doubt whether such spending plans are affordable and yet given the reality of the consequences of not spending adequately how could we possibly afford not to?

The nation is now paying the price for politicians pedalling the lie of the last forty years that money is scarce, that there is no such thing as public money and that good government is about fiscal discipline. Even if changing that notion in the public consciousness will take time, in the light of the urgency of the challenges to address climate change and social inequality we need an urgent step change in economic thought on a planetary scale since it is our survival on this planet which is at stake.

This is not, however, a time to make compromises with an economic system which has already done such huge damage. The seeds of an alternative model are already being hijacked by companies cynically promoting their green credentials with one aim in mind: to create more growth to keep the profits rolling. Reducing our plastic use and buying electric cars will scarcely make a dent in the scale of the changes we need to implement. We may have a broad vision, but that now needs to be developed into concrete realities. It may be still a work in progress, but it is a vital one we must not ignore.

This is a time to reimagine the world. A fairer and more sustainable approach to replace the one of endless growth which currently defines our capitalist economic system and puts profit before people and the planet.

Progressives on the left are beginning to initiate a much-needed conversation about what we need to do to reverse the decades of social injustice and challenge the idea that we can maintain the engine of growth on a finite planet.

However, and most regrettably, politicians on the left are still trying to have that conversation stuck in old economic paradigms of how money works. When they are asked how they will pay for these vital programmes the response is always one of tax and spend or borrowing to invest. Raising corporation tax, bringing back the magic money tree from the Cayman Islands, taxing the rich until the pips squeak or borrowing on the markets because interest rates are low. Instead of talking about taxing the wealthy to redistribute wealth by removing their colossal purchasing power and ability to influence politicians, they talk about funding our public services with the proceeds.

Again, on the left some politicians are suggesting that the government is akin to a business and that renationalising transport, our utilities, mail and the NHS will allow the government to plough back the profits back into public services. Yes, we need to end the rip-off of privatisation which has not benefited citizens and has allowed public money to flow into private pockets for profit motives, but let’s not buy into the idea that the government resembles a large corporation with a profit and loss sheet. It doesn’t.

The government is the currency issuer and neither needs to tax nor borrow in order to spend and nor does it need the profits of renationalised industries for us to have public services.  It just needs the political will to deliver them.

The role of government is to create the framework for markets to exist and dictate through legislation how they will function and in whose benefit. It taxes the populace, not to fund its spending but to manage its economic policies, from the redistribution of wealth to expressing public policy and is one of the key tools it can use to manage inflationary or deflationary pressures.

Government not only has the power of the public purse to improve the lives of its citizens it also has the power to legislate to drive its political agenda. All a question of choices which are not dependent on the state of the public accounts. Indeed, not only does it have the power to spend for the public purpose, it has the power to change the rules of the game. For example, it might regulate the financial sector to ensure that when people’s savings of whatever kind are put to work it is done to shift our negative and damaging behaviours towards creating a positive impact on society and our environment instead.

Outcomes are the measure of any government’s success. With the political will it could:

  • create the framework for good quality universal public services provide a social security system which is both not punitive in its functioning but also ensures a decent standard of living for those unable to work through disability, sickness or old age,
  • pay for a just Green transition,
  • offer a Job Guarantee as standard to create price stability and act as an automatic stabiliser for the economy to give people the dignity of proper, well-paid employment when needed.

All of these things are fundamental to the good functioning of society.

What are we so afraid of? A better future for our children? A more sustainable and fairer economy for all? Indeed, a planet for us to live and breathe on? What is not to like? So, when you hear interviewers berating left-wing politicians (who have not quite made the leap into monetary realities) about how they will pay for their progressive agenda ignore those questions and remember instead that a government’s economic record will be defined by how it serves the nation’s economy as a whole, improves the lives of its citizens and how it uses the resources it has at its disposal to achieve its agenda – not whether it balanced the budget.

 

For more in-depth information about how money really works, you can find all you need on our GIMMS website.

https://gimms.org.uk/

 

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The post The time has come to talk of many things; of taxing and spending and an economic system that needs mending.  appeared first on The Gower Initiative for Modern Money Studies.

It May Be Profit Season for US Companies, but Workers Are Left in the Red

Published by Anonymous (not verified) on Sat, 30/11/2019 - 12:00am in

Today is Black Friday, the start of the holiday shopping season. Retail workers will leave their Thanksgivings early—if they enjoy one at all—to start long shifts for too little pay in order to support the consumer binging that is America’s holiday season. The deals for shoppers may be sweet, and the profits for companies will be exponentially sweeter; but the cost for workers will be steep, a symptom of a sector and economy that are stacked against workers, and especially against women workers. 

The boon of Black Friday and the month of holiday shopping it launches contribute to the retail sector’s role as a pillar of the US economy. In recent decades, however, retail jobs have become increasingly precarious. One in ten US workers have jobs in the retail sector, and over 60 percent of US workers will have a frontline retail job early in their careers. Retail employers chronically pay poorly, and they fail to offer employee benefits and predictable or reliable schedules. The median hourly wage of retail workers is just $11, and one in three jobs in the retail sector are part time. When adjusted for inflation, the average hourly pay for retail workers has fallen by $2 since the early 1970s. 

Meanwhile, the cost of fundamental needs—including goods, housing, transportation, health care, and education—have markedly increased, meaning that all of these trends put a secure and stable life further and further out of reach for retail workers. 

The majority of retail workers you’ll see today and throughout the holiday season will be women, who are disproportionately represented in the lowest-paying retail jobs and in low-wage work more generally. Women are 60 percent of workers in the low-wage workforce, and nearly 70 percent of these workers make less than $10 an hour, with Black and Latinx workers overrepresented in those jobs. As the Center for Popular Democracy illustrated, in general merchandise stores, such as Target and Walmart, women make up more than 80 percent of cashier workers, the lowest-paid position in the sector. In recent years, retail work has become even more precarious for women, who have lost jobs in the retail sector while men have gained them. 

The rush of holiday consumerism that starts today will help to fuel sky-high corporate profits, few of which will trickle down to workers (or toward business investments like innovation that help consumers). But it hasn’t always been like this. There was a time when retail workers were more economically secure and more likely to be able to purchase the goods they were selling for their own families. 

During the mid 1900s, a stronger labor movement meant that many retail employers provided a better workplace experience, including reliable schedules and benefits like vacation days. During this time, 35 percent of all workers were in unions. Today, fewer than 7 percent of all workers and 4.5 percent of retail workers are organized; as a result, workers are far less likely to have jobs with solid pay, schedules, and benefits. 

While secure work has been eroded for retail workers, the people who employ them are doing better and better. Since 1978, CEO pay has grown 940 percent while typical worker compensation has only seen a mere 12 percent bump—though in some industries, it has declined. Last year the 30 highest-paid retail CEOs each made more than $15 million, and many made a lot more than that. While workers of color scrape by, runaway CEO pay lines the pockets of overwhelmingly white men

These trends are not inevitable. They are the result of bad choices made by those in power. One of those choices is the proliferation of stock buybacks, which occur when a company buys back its own shares from the open market and artificially increases share prices. This is a wonky concept that most of us think has little to do with average workers, but many companies are spending billions of dollars on buybacks instead of putting that money toward raising wages for the workers without whom their business would fail. With the money they spent on buybacks in recent years, Starbucks could have increased compensation for its nearly 300,000 workers by $24,729, and Walmart—the country’s largest retailer and the largest private employer of women, Black, and Latinx workers—could have increased the hourly wages of its more than 1 million hourly workers by more than $5 with the $10 billion it spent on buybacks. But they didn’t. 

As millions enjoy the deals of Black Friday, retail workers and their families will pay the price this holiday season and throughout the entire year. It is long past time that employers and our society more broadly put workers—the backbone of US companies and our economy—first. This shift would help ensure that workers aren’t left behind when the rest of us have the chance to save a few bucks.

The post It May Be Profit Season for US Companies, but Workers Are Left in the Red appeared first on Roosevelt Institute.

Poverty and equality of opportunity: three pictures to motivate policy for social mobility

Published by Anonymous (not verified) on Tue, 26/11/2019 - 9:56am in

Read my comments presented to the Public Economics Forum on “Intergenerationally Disadvantaged: Newest Evidence and What it Means for Policy,” organized by the Melbourne Institute for Applied Economic and Social Research, on November 26th, 2019 in Canberra, Australia.

Social mobility varies across countries, but it varies in a particular way, a way that I argue is relevant for the conduct of public policy.

Inequality begets inequality. Up to 50% of income inequality is passed on to the next generation in countries like the United Kingdom, Italy, and the United States, but only 20% or even less in countries like Norway, Denmark and Finland, where there is a much smaller gap between parent incomes.


Incomes are stickier across generations where inequality is higher

But different kinds of inequality matter in different ways for social mobility.

Research using the variation of social mobility within countries like the United States and Canada shows that intergenerational cycles of low income are more likely in communities that have more bottom half inequality, the correlation with overall inequality and with top end inequality being much weaker. Upward mobility is easier when the poorest incomes are not that far off from middle incomes.

The bottom line for public policy is don’t let inequality increase in the bottom half of the income distribution, indeed strive to reduce it in a way that encourages labour market and social engagement.

This is something that is pretty accurately flagged by a commonly-used measure of low-income, the fraction of the popultIon with incomes below half of the middle income.

The proportion of children living in households with less than half the income of those half way up the income latter also varies significantly across countries, averaging about 13 per cent across the rich countries, but more than 6 percentage points higher in the United States, but about 10 percentage points lower in Finland and Denmark.

Eliminating child poverty goes hand-in-hand with promoting social mobility.


Child poverty rates average 13% in rich countries, but vary significantly

Australia finds itself at about the average, with 13 out of every 100 children living in households with low income during 2015. My country, Canada, is well above this average but more recent data for 2017, released by Statistics Canada and also the OECD, shows an important drop, documenting rates below the overall rich country average, and now below that for Australia

What happened?

I would like to argue that what happened is a change in policy and policy priorities, changes that offer concrete examples for policy learning across countries.

The election of a progressive government in October 2015 opened the door for policy that was of relatively more advantage to the middle class and the relatively disadvantaged. This included a number of measures spearheaded by the then Minister of Families, Children and Social development, Jean-Yves Duclos. These included important improvements in housing, education, and income transfers, most notably the introduction of the Canada Child Benefit.

These changes culminated with the passing into law of Canada’s Poverty Reduction Strategy, an overarching framework to guide policy, to monitor progress, and to engage citizen feedback in a spirit of continual improvement.

Canada’s poverty reduction strategy has three elements: (1) it establishes an official poverty line and sets associated targets for significant yet feasible reductions in poverty; (2) it establishes a series of supporting indicators that recognize aspects of poverty beyond income; and (3) if offers an implicit “contract” to future governments, embedding poverty reduction as a social priority in the future.

The strategy—particularly an appropriate country-specific definition of poverty and associated targets for its elimination—is concretely informed by the UN Sustainable Development Goals, but also more abstractly by Michael Barber’s approach to policy implementation, targets being intended to promote public engagement, making government accountable in a transparent and timely way.

With poverty falling in a way that closes the gap between what the less advantaged have and what they need to participate normally in society, in a way that facilitates opportunity for children, and in a way that fosters resilience and security among the middle class, my guess is that the playing field is becoming a bit more leveled, and the odds of less advantaged children growing up to become the next generation of less advantaged adults are falling. This is both an aspiration and a concrete policy lesson for other countries.

 

You can download a copy of the slides I used  to frame my comments to the Public Economics Forum held on November 26th, 2019 in Canberra, Australia. : Poverty and equality of opportunity .

We don’t need a perfect world; we need a fairer and more equitable one. Understanding how money works is the first step.

Published by Anonymous (not verified) on Sun, 24/11/2019 - 12:02am in

Person at the bottom of stairs climbing from darkness into the lightPhoto by Free To Use Sounds on Unsplash

As the election campaign rolls on and party leaders battle it out on our television screens, the Liberal Democrats commit themselves to more austerity and Paul Mason, left-wing journalist and former music teacher, indulges in some fantasy explanations of how money works. More on that later….

In yet another indication of how the austerity has not only done grave damage to those who least deserve it, but also to the economy, two more reports have been published to add to the already long list exposing the consequences of cuts to public spending.

The Scottish based Poverty Alliance organisation which published its report Righting the Wrongs: A manifesto to tackle poverty is urging the next Government to ‘put solving poverty at the heart of all that it does, including by creating a more compassionate social security system, [and] building a labour market that works for everyone….’

When confronted with the realities of people’s lives through their stories we can see the real tragedy behind the policy decisions and cuts to public spending of the current Conservative government.

Jamie from Glasgow struggling to raise a family on a low income described it as ‘like being stuck in the middle of a spider’s web with no escape route’ and Jackie, a community activist commenting for the Poverty Alliance report, said that ‘more and more people are being locked into poverty by jobs that are low paid and insecure. When people can barely afford to put food on the table and when parents working full-time are struggling to cope, there is something very wrong that we have to put right.

An analysis published by the TUC, also this week, has revealed that the number of children growing up in poverty in working households has risen by 38% over the last decade, bringing it to 800,000 since 2010.

The study also showed that government policies account for the majority of rises in child poverty, with more than 485,000 children (in working households) having been pushed below the breadline, not only as a direct result of the government’s in-work benefit cuts but also as a consequence of other major factors which include weak wage growth and insecure work. The report also noted that over the past decade workers have suffered the most severe wage squeeze in two centuries and although wages have just started to grow, weekly wages are still £14 below pre-crisis levels.

Frances O’Grady, the TUC General Secretary, commented about the report that no child in Britain should be growing up in poverty and cuts to in-work benefits have come at a terrible human cost.

Overall the poverty figures are shocking. As GIMMS reported earlier this year following a report by the Social Metrics Commission, there are now around 14.3 million people living in poverty, of which 8.3 million are working-age adults, 4.6 million children (of which around 2.9 million are in working households as identified in the later TUC report) and 1.3 million pension age adults.

Aside from these shocking statistics which represent avoidable and unnecessary human degradation, the combined effects of government policies and cuts to spending on public services have had a damaging effect not only on the lives of those caught in the austerity crossfire but also on the economy as a whole. A decaying public and social infrastructure and toxic welfare reforms have had a significant impact on poverty and inequality and show clearly in whose interests the government has been acting. The promotion of individualism and self-reliance, along with decreasing state intervention to replace our public infrastructure with private, profit-motivated services has been a long-standing agenda of successive neoliberally inspired governments.

Access to high-quality health and social care, education and training, well-paid secure work and good quality, affordable housing all play a vital role in the health of the nation and its economy. When people are denied those basic support systems it can only, in the end, lead to more deprivation, ill health, hunger, homelessness and increased crime, the consequences of which ripple into every part of society burdening it with both additional financial costs and societal breakdown.

As was reported by the BBC only this week more than 2 million adults are unable to see a dentist either because they can’t afford treatment, find an NHS dentist or get care where they live as a result of underfunding and recruitment problems. It is claimed that many people are being reduced to practising self-dentistry to alleviate the pain of rotten teeth which can cause all sorts of other problems like periodontal disease which can, in turn, lead to an increased risk of heart disease.

After nine years of cutting NHS spending in real terms, creating a pressured working environment for staff, capping their pay, stopping nursing bursaries and driving people away because of stress, senior NHS leaders are warning this week that hospitals are so understaffed lacking sufficient doctors, nurses and other health professionals to provide services that the ‘safety and quality of care are under threat.’ The latest figures show that the performance against key waiting times for A&E, cancer treatment and planned operations have fallen to their worst-ever level and that this could deteriorate even further as winter approaches.

NHS mental health services which have borne the brunt of cuts have become little more than a firefighting service to deal with the ever-growing numbers of people needing support.

Earlier this month the organisation State of Hunger published its report, drawn up in conjunction with Heriot-Watt University and the Trussell Trust. It revealed that more than half of households referred to foodbanks were affected by poor mental health, predominantly anxiety or depression, while 23% of people referred to foodbanks were homeless. The report gives a voice to those people who have paid the price for austerity and welfare reform – the worry about paying bills, keeping a roof over one’s head or having a job which pays enough.

“If I don’t pay my bills, then I’ll get the house taken off me. After paying arrears, I’ve got £8 a fortnight and that’s to pay for gas, electric, water. It’s just impossible, it really is. I go to bed at night wishing I won’t wake up in the morning.”

 

“I’ve used the food bank because I was on such a low income before I got my disability benefit… I had a mental breakdown because basically the amount they give me doesn’t cover the costs of my rent.”

 

Education joins health in forming the backbone of a functioning economy and societal well-being and yet, it too has suffered from crippling cuts to spending. Kevin Courtney, the joint general secretary of the NEU said this week that ‘The future of education hangs in the balance’.  Despite government promises of more money, the School Cuts Coalition made it clear only last week that four in five state schools will be financially worse off next year than they were in 2015 and this will affect schools in areas where there are already high levels of deprivation.

Even with the additional funding promised by government, there will still be a shortfall of £2.5bn in the year ahead after years of already damaging cuts. The consequences for schools are grim. More pupils per class, fewer teachers and support staff and reduced curriculums with subjects like music, language, art and design being cut as a result of the pressure, not to mention the reduction in capital expenditure on schools’ estate which has left it in a bad state of repair and not fit for purpose.

Our children represent the future and yet they are the ones that will bear the brunt of lack of adequate government spending and planning for an education and training system to meet the challenges they will face in the future.

A healthy economy demands a healthy and educated nation as a prerequisite. It demands quality housing, good secure jobs and pay. The last nine years of austerity and forty years of the pursuit of neoliberal dogma have pulled that rug from under people’s feet, leaving them in a world of increasing uncertainty.

It is regrettable in this respect that the notion that the state has a responsibility to ensure the health and well-being of all its citizens through the provision of universal services and other state-provided interventions is being mistaken for a ‘nanny state’ rather than acknowledging the value of such investment in society and its economy.

Whilst government has pursued its handbag economic strategy and ignored monetary realities for the lie of balanced budgets, it has failed in its duty as an elected body to serve the interests of citizens and the economy as a whole.

Whilst pursuing austerity, it has ignored the fundamentals of macroeconomics which it won’t hurt to repeat. Spending, wherever it comes from, creates income for someone else, whether that’s government which starts the ball rolling by creating the money into existence to pay for its needs which flows in turn right down to businesses, working people or even those having the misfortune to be involuntarily unemployed or coping with a disability or illness which prevents them from working. Through its obsession with austerity and lowering deficits at a time when it should have been spending more, it has weakened the economy and wilfully left people without the means to provide themselves with sufficient income to meet their daily needs.

As data from last year shows, it has left British households collectively supporting their spending through reducing savings (if indeed they had any) and taking on more debt. Quite simply government austerity has transferred the burden onto households which as private debt levels rise will prove unsustainable.

The fragile house of cards which represents the economy after nine years of government folly will either stagger on or fall into another recession unless the next government deficit spends sufficiently to promote full employment and serve the public purpose.

In the light of this, it is all the more incredible to note that after Ed Davey, deputy leader of the Lib Dems said earlier this month that Labour and the Tories were ‘writing promises on cheques that will bounce’ they have decided to make austerity their USP (unique selling point) for their election campaign. Yes, you read that right!

In his recent speech he positioned the Liberal Democrats as the ‘party of fiscal rectitude’ and the Conservatives and Labour as the ‘parties of fiscal incontinence’. Davey is proposing to adopt a fiscal rule for day to day spending aiming for current account surpluses in every year of their five-year costings.

With yet more household budget accounting and to meet its objective will require tax rises and yet more spending cuts. Furthermore, on the basis that achieving a surplus is not a saving and removes money from the economy and if our trading partners don’t spend all they earn thus taking even more out of our economy the net result will be a severe recession (as if we weren’t already heading in that direction). A bit of an own goal and a very foolish one at that!

And yet depressingly it has to be said another own goal was scored this week by the journalist and self-styled economist Paul Mason who presented a short promotional video for Novara Media explaining the deficit and debt in the language narrative of overdrafts, loans and mortgages along with that old ‘canard’ about paying for public services by taxing the very rich.

This is indeed ‘fantasy economics’ of the most damaging kind.

In response, the economist Professor Bill Mitchell explains it very succinctly and it is worth printing it here in its entirety:

‘This is the classic ‘soft’ mainstream macroeconomics that assumes the government is financially constrained and is thus not dissimilar to a household.

It is ‘soft’ because, unlike the hard-mainstream positions, it allows for deficits (‘funded’ by debt) to occur in a non-government downturn but proposes them to be offset by surpluses in an upturn, irrespective of the overall saving position of the non-government sector.

None of this framing or language is what I would call ‘progressive’.

It has the hallmarks of the way neoliberals construct the concepts and the narrative.

The inferences are also plainly false when applied to the British government.

  1. It is not financially constrained in its spending.

The constraints relate to real resource availability.

In terms of restaffing the NHS, for example, are there qualified labour resources available? What training would be required? Would this mean that British Labour is also going to be advocating open borders to ensure the staffing is available? [….]

  1. There is no meaningful knowledge that be gained by comparing a household with a home mortgage and a currency-issuing government spending its own currency.

The household is the currency user and the government is the currency issuer.

Totally different constraints apply.

  1. It is false to claim that it is virtuous to ‘tax the rich’ in order to fund essential health and welfare services.

This is one of the worst frames that the progressives now deploy.

The British government might want to tax the rich to reduce their power and influence (exercised via their spending habits) but it never has to do that in order to fund essential services.

The only constraint that exercise involves is the availability of real resources.’

  1. The British government does not have to issue debt to ‘fund’ its deficits. The capacity of the non-government sector to purchase the debt derives from past deficits that have not been taxed away yet.

Even if the government issues debt to match its investment in essential infrastructure to deliver better housing, transport health care, and engage in climate action etc, this investment is not linked at all to the current interest rates in place.

 

There is no meaning to the term “cheap” finance, when the spending does not need to be financed (in the currency the government issues).

The issuing of risk-free debt from a currency-issuing government really amounts to the provision of corporate welfare and no progressive should advocate its continuance.

  1. There is no meaning in saying the recurrent deficit is like an overdraft or the capital deficit is like a mortgage. Those terms gain meaning when applied to units that are financially constrained.

While left-wing progressive parties continue to frame their election campaigns in neoliberal terms and thus erect unnecessary financial barriers to spending that will prevent them from achieving their goals, the public will also remain in the dark about a subject which is of vital importance; how to answer the question about how government really spends, how its policies can be paid for and what  the real constraints are.

That said and despite the deliberate misleading of the public by Paul Mason, the UK needs a progressive government prepared to act in the public interest through investment in our public and social infrastructure and ready to take action to tackle social injustice, ensure a more equitable distribution of wealth and address the biggest challenge we face – climate change.

 

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The post We don’t need a perfect world; we need a fairer and more equitable one. Understanding how money works is the first step. appeared first on The Gower Initiative for Modern Money Studies.

Writing millions out of our pensions system will hit the poorest hardest

Published by Anonymous (not verified) on Sat, 23/11/2019 - 7:00pm in

News has leaked that Boris Johnson is to write millions of people out of making national insurance contributions. This would be the result of increasing the minimum contribution threshold to the weekly equivalent of £12,500 a year, which Sajid Javid has stated that is an ‘ambition’ which would ‘not necessarily’ be reached by the end of a parliament.

The gains to those making payments will be small. I am not
saying nearly £500 a year is insignificant when you’re earning £12,500 a year:
it very clearly is. But let’s be clear, it’s not only they who will gain. This
benefit will, unless compensated for, go right up the income order to those who
clearly have nothing to do with reducing a charge on those least well off in
our society. It’s certain that most gains will, then, go to those not in
greatest need.

And what matters at least as much as any gain to those on
the lowest incomes is the state pension and other benefit consequences of this.
These are massive, and all at cost to those who Johnson says should gain from
this proposal.

Our state pension entitlement is still based on the number
of years of earned income a person has national insurance contribution made.
Technically this is not quite the same as making national insurance
contributions, but the limits used for appraisal are closely linked to the
national insurance system. And whilst I know there are compensatory benefits
such as pension credit, but that’s not the point. Such benefits come and go. So
far no one has been trying to get rid of the state old age pension, even if its
value has been eroded. And now large numbers of people might have their
entitlement substantially curtailed if, as I would expect, the pension
entitlement threshold increase along with those for national insurance
contributions. How convenient is that for a government wishing to curtail
benefits and shrink what they think to be the welfare state?

And this is not the only issue. It now seems that many
entitlements are based on being able to prove work has been done. Even the
right to stay in the UK can now be based on this. And now many people will not
need to be on payrolls, at least as far as their employers are concerned,
 and may well not have contribution records as a result and so will have
no recourse to this evidence in the event of disputes on such issues. Where
does that leave the vulnerable? More vulnerable is the very least of the
answers to be provided.

I do not have a problem with reducing NIC on those on the
lowest pay. But I mean reducing it and not eliminating it until such time as
dependence on a payment record is also removed and proof that a person has
worked as a measure of a contribution to society is eliminated.

And I do have a problem with this being lauded when very
large tracts of income – from investment sources – attract no national
insurance at all and so provide ample opportunities for tax avoidance for those
recategorising their earnings.

There is a fundamental flaw in Johnson’s plan and that is it
is designed to attack those most vulnerable in our society. That’s typical. It
also needs to be said. This plan stinks of privilege with an indifference to
need. That’s why I oppose it as he’s presented, and as he’s likely to present
it.

Photo credit: Flickr/George Grinsted.

The post Writing millions out of our pensions system will hit the poorest hardest appeared first on The Progressive Economy Forum.

The Rise of the Right

Published by Anonymous (not verified) on Thu, 21/11/2019 - 8:30am in

GIMMS is pleased to be able to present for our MMT Long Read two chapters of the book “The Rise of the Right – English nationalism and the transformation of working-class politics” by Professors of Criminology Simon Winlow, Steve Hall and James Treadwell.

“Throughout Europe right-wing populism has grown to the extent that we can now legitimately begin to think about the very real possibility of a fascist future. The new right-wing nationalism will not be a carbon copy of 20th-century European fascism, but fascism it will be, nonetheless. For years this seemed unthinkable…We must recognise that the adoption of hippy counter-culturalism was a colossal error, and then begin to repair some of the damage it has caused. The first step is to reconnect with the working class with a renewed order of grounded universal ethics and truthful symbolism comprehensible to all cultural groups…the left can be rehabilitated. Reconnecting with the working class and persuading them to believe in its project is a very difficult task, but it can be done.”

The Rise of the Right – English nationalism and the transformation of working-class politics

The Rise of the Right cover

Originally published by Policy Press in 2017.  Permission granted by the publisher to use this content.

https://policy.bristoluniversitypress.co.uk/the-rise-of-the-right

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It’s not balanced budgets that will save us. It’s the power of the public purse and our human values.

Person at a demonstration holding a placard with slogan "What lessens one of us lessens all of us"Photo by Micheile Henderson on Unsplash

Charles Dickens began his novel ‘Hard Times’ thus:

“NOW, what I want is, Facts. […]. Facts alone are wanted in life. Plant nothing else and root out everything else. You can only form the minds of reasoning animals upon Facts: nothing else will ever be of any service to them. [….] Stick to Facts, sir!”

Whilst one might dispute Dicken’s character Gradgrind with his miserable vision of human existence, facts can be very useful. They can trace the human misery caused by 9 years of austerity and the last forty years of a pernicious market-oriented ideology which has led to vast disparities in wealth distribution and caused huge damage to society by encouraging the pursuit of self-interest.  And yet it has to be said as the election campaign gears up, that in terms of monetary reality, of facts there seem to be very few to be had.

As political and economic commentators, not to mention politicians on all sides, emphasise daily their claims that the government finances are like a household budget, the public has largely remained stuck in the quagmire which is presented as monetary reality and distrustful of a political system which has failed them.

Looking at newspaper front pages this week you could be forgiven for thinking that we are headed for bankruptcy if Labour were to win the election or that their spending plans would cost UK households £43,000 each. A ‘reckless spendathon’ is in the offing according to a government spokesperson in a recent BBC television interview.

Aside from such narratives being a fallacy, they are designed to put the frighteners on people who are already suffering financial hardship caused by years of austerity and ideologically driven government policies. Those with a political agenda shore up those false beliefs that borrowing too much will lead to government insolvency. They cynically and callously terrify people that they will be asked to pay for those spending programmes when they will not. This is an establishment that is running scared that their reign of power is coming to an end. The means justify the ends!

It cannot be denied that if we are to escape the worst effects of a coming global downturn, an incoming government of whatever variety will need to implement adequate spending programmes and increasingly fiscal policy is becoming the ‘mot du jour’. However, the message is reinforced daily by all sides of the political spectrum that there are still financial limits to that spending.

Last week Ed Davey, deputy leader of the LibDems said of Labour and the Tories spending plans that they are ‘writing promises on cheques that will bounce’. The very same party that joined in with Tory austerity during the Coalition and voted for public spending cuts and welfare reforms.

In the same week, the Greens promised welcome public investment of £1trillion over 10 years to fight climate change, the money for which it said would come from ‘borrowing’ and ‘tax’ changes.

Then the Chancellor of the Exchequer in a ‘give with one hand take back with another’ message promised to increase borrowing to fund billions of pounds to pay for new infrastructure but then announced three new fiscal rules to ‘control borrowing, to control debt and to control debt interest’.

Stuck in household budget la-la land he said without a hint of jest:

‘like anyone who budgets whether it’s a household, or small business or large business, I know that we must keep track of what we are spending and what we bring in…. We can’t run an overdraft forever on day to day spending, so I can confirm that our first rule will be to have a balanced current budget. What we spend cannot exceed what we bring in.

Never mind that you can build as many hospitals as you like as part of an infrastructure spending programme but if you make up foolish rules about day to day spending those hospitals will remain empty of nurses and doctors and other health professionals to staff them.  And let’s not forget the bailing out of the banks or successive wars funded without a taxpayer in sight.

The same tired old tropes abound about taking advantage of ‘historically low borrowing rates’ and ‘living within our means’ remain the context for Conservative spending plans and figure in one way or another in the language narrative of other parties too.

In a similar vein this week, the shadow chancellor reinforced that same story when he tweeted:

‘The Tories can’t invest in the public services we need because unlike Labour they won’t raise taxes on the super-rich and take on the international tax dodgers’.

The implication being here that he will bring back the magic money tree from the Cayman Islands to pay for our public and social infrastructure.

Even the Leader of the Opposition has suggested that if they don’t tax the very rich, then Labour won’t be able to pay for public services.

As Professor Bill Mitchell commented in a blog in response:

‘The British government does not need to tax the rich to pay for first-class public services. It can do that at any time it can muster the real resources to accomplish that aspiration. It issues its own currency.

It might want to tax the rich because they have too much power but that is quite separate from justifying such an action because the government needs their ‘money’.

Although without doubt the proposals on the progressive left to tackle social inequality, rebuild public infrastructure and address climate change are laudable and indeed vital, it is to be regretted that the arguments for public spending programmes are being reduced to household budget frameworks of monetary affordability, where the money will come from and economic credibility. We have become fixated by the single idea that the country’s economic ‘health’ hangs on whether or not we run a deficit.

GIMMS will say it again. In reality, the only analysis that really counts when deciding which way to vote in any election is not a judgement based on a government’s financial record or whether it balanced the public accounts but what its economic record was.

We as citizens should be examining where the money was spent and who benefited. Did that spending ensure that its citizens were in secure employment and fairly paid, had decent housing and sufficient food in their bellies? Did it create a healthy and more equitable economy in which wealth was more fairly distributed? Did it ensure that the vital public and social infrastructure such as the NHS, social care, education and local government were adequately funded to serve the public purpose and not fill the coffers of private profit? Or was that public money sucked up by the private sector in a big free for all in which the state serves the interests of the corporations rather than the interests of its citizens?

And what about government policies on health, education, welfare spending and the environment? Did they create stable lives by improving the material, financial, physical and mental health of citizens? Did they ensure adequate investment to ensure that the nation can be as productive as possible through good education and training both for present and future generations? And finally, the environment – what actions did they take to address the climate crisis?

In other words, we should be examining what the real economic outcomes were.

After nine years of telling the public that there was no alternative to austerity and cuts to public spending because the coffers were bare, it’s amazing what the prospect of an election can do to turn the spending taps on. And yet the smoke and mirrors, lies and deception about how government spends just carries on relentlessly.

But now it’s all OK (for the moment) the Conservatives have found the magic money tree, cutting the deficit has apparently given them some savings and the fiscal ‘headroom’ to spend. For those that know, this narrative is a fairy tale of epic proportions. For those that don’t, it should be enough to arouse a cynical response by a public which has been at the sharp end of those tax and spend myths which have formed the basis for its policies.

Indeed, only this week the following headlines should serve as the wakeup call for the public about Conservative economic credibility.

‘UK suffers biggest fall in jobs in four years’

‘UK avoids recession but annual growth slowest in almost a decade.’

‘Wage growth slows’

We can blame it in part on the uncertainty caused by Brexit, but the reality is that behind the faceless employment figures published by the Office of National Statistics are the lives of real people who have been affected by the government’s policies and spending decisions over the last 9 years.

To put it in basic economic terms, when a government spends it creates income for the private sector which is then spent into the economy. When it imposes spending cuts it is removing money from people’s pockets leaving them with only three options: Use their savings if they have any, take out credit or go without.

All spending, whether from government or the private sector, equals income for someone. What happens when you take that away? That’s people who lost their jobs in the public sector as local government, the NHS and schools were forced to pare down their budgets as a consequence of public spending cuts. That’s people constrained by public sector pay caps and pay cuts. That’s people who ended up working two or three jobs on low pay to keep a roof over their head and food on the table. That’s people working in precarious employment in the zero-hours or gig economy with no guaranteed decent income or sick or holiday pay. That’s people affected by the reforms to welfare and the introduction of Universal Credit, from those who are unemployed left with insufficient financial resources to make ends meet and those in work but not earning enough to keep their heads above the water to those left struggling to cope because of chronic sickness or terminal illness.

In seeking the nirvana of balanced budgets by cutting spending the Conservative government has not created a healthy economy it has done the very opposite. The statistics are the proof.  Without adequate spending, the economy suffers, and people pay the price.

And yet as political parties present their spending plans and worry about how they will demonstrate their economic credibility the elephant in the room is crashing about trying to make itself noticed. On one note it is pathetic to see the Conservative party take issue with the opposition’s spending plans calling them reckless and unaffordable whilst promoting its own as being fiscally responsible. On another, in their rush to spend, neither party seems to have considered the real resource factor and how that will be managed.

The IFS for all its neoliberal sins ‘gets’ the elephant in the room and recognises that whoever wins on December 12th their spending plans will be dependent on whether they have the right resources at their disposal to deliver.

After 9 years of insufficient spending into the economy to prepare for the future, will there be sufficient people with the right skills to meet the government’s needs? Whether that’s engineers and construction workers to design and build the proposed infrastructure or homegrown nurses and doctors already trained up to service the planned spending on the NHS? Or in these days of climate crisis we might also be talking about the resources needed to deliver the Green New Deal and ensure a just transition not just for those in the rich west but those in the global south whose countries have already been plundered of raw materials and impoverished so that we can maintain our standard of living.

For progressive parties like Labour and the Green Party who wish to deliver a left-wing agenda what they have to do is decide their key priorities, consider the availability of resources and how they could be freed up to deliver a future government’s objectives efficiently and effectively. A case in point this week is Labour’s plan for free broadband which has much to recommend it in terms of bringing communities together in an inclusive and connected society. Journalists and others predictably have asked the question where will the money come from? They have missed the point entirely and should be asking instead how many workers would we need to deliver it?

Ultimately, all sovereign currency-issuing governments don’t need to match their plans to tax revenue or determine whether the markets can lend them the money. The role of government in this respect is not to balance the budget but to balance the economy.

The public needs to understand that it isn’t the government’s ability to tax the rich but its power to run a deficit which determines the health of an economy. As the sovereign currency issuer, the UK government has the power of the public purse to fund the public works necessary to tackle social and wealth inequalities, deal with the current global economic uncertainty, and fund the Green New Deal, should it choose to do so.

However, at home, our public and social infrastructure is in a shocking state of decay caused by 9 years of cuts to public spending and lack of planning. Reversing that decline is not something that just promising to spend can solve in the short term.  There are important issues to consider for the long term which may not fit the short-termism of the political five-year framework and many politicians who have become used to serving other interests.  That is the scale of the challenges we face.

When all is said and done even though the Labour party persists with the household budget myths John McDonnell has it right in terms of what is required not just to reverse the social injustices heaped upon global populations because of pernicious ‘free’ market ideology or the threat to the human species at our own hand. As he said not only must the scale of investment match the scale of the crises we face both in ecological and social terms, but also if we don’t make these investments our future generations will never forgive us.

Let’s leave the final words to Professor Bill Mitchell who wrote a while back:

“My ideological disposition tells me that the pursuit of human values is the only sustainable way of organising and running a world. The neoliberal era has severely undermined that pursuit.

That’s what we must change and urgently if we want half a chance to save ourselves and our children’s children from disaster.

 

Note: GIMMS has a very good resource section on our website which takes you through how money works. From FAQS to resources sheets and external websites, videos and academic papers for those who want to take it further. For an introduction to how money really works follow the link here.

 

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Productivity Does Not Explain Wages

Published by Anonymous (not verified) on Fri, 15/11/2019 - 6:44am in

Does productivity explain income? I asked this question in a previous post. My answer was a bombastic no. In this post, I’ll dig deeper into the reasons that productivity doesn’t explain income. I’ll focus on wages.

The evidence

Let’s start with the evidence trumpeted as proof that productivity explains wages. Looking across firms, we find that sales per worker correlates with average wages. Figure 1 shows this correlation for about 50,000 US firms over the years 1950 to 2015.

sales_wages Figure 1: The correlation between a firm’s average wages and its sales per worker. Data comes from Compustat. To adjust for inflation, I’ve divided wages and sales per worker by their respective averages (in the firm sample) in each year. I’ve shown stock tickers for select firms.

Mainstream economists take this correlation as evidence that productivity explains wages. Sales, they say, measure firms’ output. So sales per worker indicates firms’ labor productivity. Thus the evidence in Figure 1 indicates that productivity explains (much of) workers’ income. Case closed.

The problem

Yes, sales per worker correlates with average wages. No one disputes this fact. What I dispute is that this correlation says anything about productivity. The problem is simple. Sales per worker doesn’t measure productivity.

To understand the problem, let’s do some basic accounting. A firm’s sales equal the unit price of the firm’s product times the quantity of this product:

Sales = Unit Price × Unit Quantity

Dividing both sides by the number of workers gives:

Sales per Worker = Unit Price × Unit Quantity per Worker

Let’s unpack this equation. The ‘unit quantity per worker’ measures labor productivity. It tells us the firm’s output per worker. For instance, a farm might grow 10 tons of potatoes per worker. If another farm grows 15 tons of potatoes per worker, it unambiguously produces more potatoes per worker (assuming the potatoes are the same).

The problem with using sales to measure productivity is that prices get in the way. Imagine that two farms, Old McDonald’s and Spuds-R-Us, both produce 10 tons of potatoes per worker. Next, imagine that Old McDonald’s sells their potatoes for $100 per ton. Spuds-R-Us, however, sells their potatoes for $200 per ton. The result is that Spuds-R-Us has double the sales per worker as Old McDonald’s. When we equate sales with productivity, it appears that workers at Spuds-R-Us are twice as productive as workers at Old McDonald’s. But they’re not. We’ve been fooled by prices.

The solution to this problem seems simple. Rather than use sales to measure output, we should measure a firm’s output directly. Count up what the firm produces, and that’s its output. Problem solved.

So why don’t economists measure output directly? Because the restrictions needed to do so are severe. In fact, they’re so severe that they’re almost never met in the real world. Let’s go through these restrictions.

Restriction 1: Firms must produce identical commodities

To objectively compare productivity, you have to find firms that produce the same commodity. You could, for instance, compare the productivity of two farms that produce (the same) potatoes. But if the farms produce different things, you’re out of luck.

Here’s why. When firms produce different commodities, we need a common dimension to compare their outputs. The problem is that the choice of dimension affects our measure of output.

To see the problem, let’s return to our two farms, Old McDonald’s and Spuds-R-Us. Suppose that Spuds-R-Us produces 10 tons of potatoes per worker. Tired of growing potatoes, Old McDonald’s instead grows 5 tons of corn per worker. Which workers are more productive?

The answer depends on our dimension of analysis.

Suppose we compare potatoes and corn using mass. We find that Spuds-R-Us workers (who produce 10 tons per worker) are more productive than Old McDonald’s workers (who produce 5 tons per worker).

Now suppose we compare potatoes and corn using energy. Furthermore, imagine that corn has twice the caloric density of potatoes. Now we find that workers at Spuds-R-Us (who produce half the mass of food at twice the caloric density) have the same labor productivity as Old McDonald’s workers.

The lesson? Unless two firms produce the same commodity, productivity comparisons are subjective. They depend on the choice of dimension.

Restriction 2: Firm output must be countable

When you read economic textbooks, it’s clear that the discipline of economics is stuck in the 19th century. Firms, the textbooks say, produce stuff.

But what about all those other firms that don’t produce stuff? What is their output? What, for instance, is the output of Goldman Sacks? What is the output of a high school? What is the output of a hospital? What is the output of a legal firm?

Yes, these institutions do things. But it defies reason to give these activities a ‘unit quantity’. In other words, it defies reason to quantify the output of these institutions.

Restriction 3: Firms must produce a single commodity

Complicating things further, we can objectively measure output only when firms produce a single commodity. If a firm produces two (or more) commodities, its output is affected by how we add the commodities together.

To see the problem, let’s return to Old McDonald’s and Spuds-R-Us. Suppose that both farms have diversified their production. Spuds-R-Us produces 5 tons of potatoes and 1 ton of corn per worker. Old McDonald’s produces 1 ton of potatoes and 5 tons of corn. Which workers are more productive?

The answer depends on our dimension of analysis. In terms of mass, both farms produce 6 tons of food per worker. So labor productivity appears the same. But suppose we measure the output of energy. Again, we’ll assume that corn has double the caloric density of potatoes. Suppose corn contains 2 GJ (gigajoule) per ton, while potatoes contain 1 GJ per ton. Now we find that Old McDonald’s workers are about 60% more productive than workers at Spuds-R-Us. Here’s the calculation:

Spuds-R-Us:
5 tons potato × 1 GJ / ton + 1 ton corn × 2 GJ / ton = 7 GJ

Old McDonald’s:
1 ton potato × 1 GJ / ton + 5 ton corn × 2 GJ / ton = 11 GJ

This ‘aggregation problem’ is why the neoclassical theory of income distribution assumes a single-commodity world — a world in which everyone produces and consumes the same thing. In this one-commodity world, we can measure productivity unambiguously. In the real world (with many commodities) productivity depends on our choice of dimension.

The severity of the problem

Let’s take stock. If we want to measure productivity objectively, the restrictions are severe:

  1. Firms must produce the same commodity
  2. This commodity must be countable
  3. Firms must produce only one commodity

These conditions are so stringent that they’re rarely met in the real world. This is a bit of a problem for neoclassical theory. It proposes that everyone’s income is explained by their productivity. But only in the rarest of circumstances can we measure productivity objectively.

It’s hard not to laugh at this predicament. It’s like Newton proclaiming that gravitational force is proportional to mass. But in the next sentence he realizes that mass can be measured only in the rarest of circumstances.

The neoclassical slight of hand

Neoclassical economists don’t think of themselves as Newtons who can’t measure mass. Instead, economics textbooks don’t even mention the problems with measuring productivity. In these textbooks, all seems well in neoclassical land.

But all is not well. Neoclassical economists perpetuate their fantasy by relying on a slight of hand. Here’s what they do.

First, economists argue that the purpose of all economic activity is to give consumers utility. Buy a potato and you get utility. Buy a cigarette and you get utility. Utility, economists say, is the universal dimension of output. By measuring utility, we can compare the output of any and all firms (no matter what they produce).

After proclaiming that utility is the universal dimension of output, economists pull their trick. Utility, they say, is revealed through prices. So a painting worth $1000 gives the buyer 1000 times the utility as a $1 potato.

With this thinking in hand, economists see that a firm’s sales measure its output of utility:

Sales = Unit Price × Unit Quantity

Sales = Unit Utility × Unit Quantity = Gross Utility

So sales become a universal measure of utility, and utility is the universal measure of output. Now, when we compare sales per worker to wages (as in Figure 1), economists proclaim that we’re comparing productivity to wages.

Except we’re not.

The problem is that this whole operation is circular. The idea that prices reveal utility is a hypothesis. And as every good scientist knows, you can’t use your hypothesis to test your hypothesis. But that’s what neoclassical economists do. They assume that one aspect of their theory is true (the link between prices and utility) to test another aspect of their theory (the link between productivity and income). This is a big no no.

Why do economists use this circular reasoning? Probably because they don’t know they’re doing it. Economists take as received wisdom the idea that prices reveal utility. But this is just a hypothesis. In fact, it’s a bad hypothesis. Why? Because we can never measure utility independently of prices.

Why are sales related to wages?

Whenever I go through the logic above, mainstream economists will retort: “But look at the correlation between wages and sales! How can this not show that productivity explains wages?” Their reasoning seems to be that, absent an alternative explanation, this correlation must support their hypothesis.

In No, Productivity Does Not Explain Income, I gave an alternative explanation. The correlation between wages and sales per worker, I argued, follows from accounting principles.

Sales isn’t a measure of output. It’s an income stream. Once earned, this income gets split by the firm into different categories. Some of it goes to workers. Some of it goes to other firms (as non-labor costs). And some of it goes to the firm’s owners as profit.

Dividing an income stream

Figure 2: Dividing a firm’s income stream. Accounting principles dictate that a firm’s sales get divided into profits and wages.

By definition, the terms on the left must sum to the terms on the right. So it’s not surprising that we find a correlation between wages and sales. They’re related by an accounting identity.

In comments on No, Productivity Does Not Explain Income (and on other sites), some economists pounced on this argument, saying it was fatally flawed. And in hindsight, I admit that I wasn’t clear enough about my reasoning. I was thinking about the real world. But the economists who critiqued my reasoning were thinking in terms of pure mathematics.

To frame the debate, let’s think about something more concrete than income. Let’s think about volume. In rough terms, the volume of an object is the product of its length, width and height:

V = L × W × H

Now, let’s pick a dimension — say length. Will the length of an object correlate with its volume? In general terms, no. I can make an object with any volume using any length. I just have to adjust the other dimensions appropriately. By doing so, I can make a cube have the same volume as a box that is long and thin.

So in pure mathematical terms, the accounting definition of volume doesn’t lead to a correlation between length and volume.

But when we look at real-world objects — like animals — we will find a correlation. If we took all the species on earth and plotted their length against their volume, we’d expect a tight correlation. A bacteria has a small length and a small volume. A blue whale has a big length and a big volume. Fill in the gaps between and we should get a nice tight line.

The reason for this correlation is that animals cannot take any shape. You’ll never find an animal that is a mile long and a few micrometers wide. Such a beast doesn’t exist. Yes, the shapes of animals vary. But in the grand scheme, this varation is small. As a first approximation, animals are roughly cubes. Or, if you’re a physicist, they’re spheres.

With this shape restriction, it follows from the definition of volume that animal length should correlate with animal volume. We’d be astonished if it didn’t.

So too with the correlation between sales per worker and wages. True, this correlation doesn’t follow purely from accounting principles. It follows jointly from accounting principles, and the fact that firms can’t take any form. We don’t find firms that pay their workers nothing. That’s slavery and its illegal. Similarly, we don’t find (many) firms that pay their workers the entirety of sales. That leaves no room for profit.

So in the real world, there are restrictions on how firms can divide their income stream. Here’s what these restrictions look like. In Figure 3, I’ve plotted the distribution of firms’ payroll as a portion of sales. This is the portion of sales that goes to workers. Across all firms, it’s a pretty tight distribution, clustered around 25%.

payroll_frac
Figure 3: The distribution of firm payrolls as a fraction of sales. Data is for US firms in the Compustat database over the years 1950–2015.

Yes, it’s theoretically possible for a firm to give any portion of its sales to workers. But this isn’t what happens in reality. In the real world, most firms give between 10% and 50% of their sales to workers. Just like with the shape of animals, there are real-world restrictions on the ‘shape’ that firms can take.

Given these restrictions, it’s not surprising that we find a correlation between sales per worker and wages. When a firm’s income stream grows, so does the amount going to workers.

None of this has anything to do with productivity. It’s all about income. Sales are the firm’s income. And wages are the portion of this income given to workers.

Prices … the elephant in the room

Let’s conclude this foray into neoclassical thinking. The reason that sales don’t measure firm output is because they mix unit prices with unit quantities. Yes, sales per worker correlates with wages. But the elephant in the room is prices. Greater sales may be due to greater output. But it can also be due to greater unit prices.

In many cases, price differences are everything.

Imagine that a lawyer and a janitor both work 40 hours a week as self-employed contractors. The lawyer charges $1000 per hour, while the janitor charges $20. At the end of the week, the lawyer has 50 times the sales as the janitor. This difference comes down solely to price. The lawyer charges 50 times more for their hourly services than the janitor.

The question is why?

Neoclassical economists proclaim they have the answer. The lawyer, they say, produces 50 times the utility as the janitor. Ask economists how they know this, and they’ll answer with a straight face: “Prices revealed it.”

It’s time to recognize this slight of hand for what it is: a farce. The reality is that we know virtually nothing about what causes prices. And we will continue to know nothing as long as researchers believe the neoclassical farce.

Further reading

The Aggregation Problem: Implications for Ecological and Biophysical Economics. BioPhysical Economics and Resource Quality. 4(1), 1-15. SocArxiv Preprint.

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