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.”

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Andy Grove on Jobs and the Need for US Industrial Policy

Andy Grove, the founder and former CEO & Chairman of Intel Corporation, wrote a short op-ed for Bloomberg News last week that takes a hard look at our serious unemployment question. Perhaps because it was published on the eve of a long holiday weekend, Grove's op-ed didn't get much discussion (Yves Smith at Naked Capitalism linked to it but that was pretty much it). That's regrettable because Grove, one of the driving forces in the tech boom of the past 30 years, covers some important ground asking some very poignant questions including one of the ones that has so troubled me over the past decade.

I am fortunate to have lived through one such example. In 1968, two well-known technologists and their investor friends anted up $3 million to start Intel Corp., making memory chips for the computer industry. From the beginning, we had to figure out how to make our chips in volume. We had to build factories; hire, train and retain employees; establish relationships with suppliers; and sort out a million other things before Intel could become a billion-dollar company. Three years later, it went public and grew to be one of the biggest technology companies in the world. By 1980, which was 10 years after our IPO, about 13,000 people worked for Intel in the U.S.

Not far from Intel’s headquarters in Santa Clara, California, other companies developed. Tandem Computers Inc. went through a similar process, then Sun Microsystems Inc., Cisco Systems Inc., Netscape Communications Corp., and on and on. Some companies died along the way or were absorbed by others, but each survivor added to the complex technological ecosystem that came to be called Silicon Valley.

As time passed, wages and health-care costs rose in the U.S., and China opened up. American companies discovered they could have their manufacturing and even their engineering done cheaper overseas. When they did so, margins improved. Management was happy, and so were stockholders. Growth continued, even more profitably. But the job machine began sputtering.

U.S. Versus China
Today, manufacturing employment in the U.S. computer industry is about 166,000 -- lower than it was before the first personal computer, the MITS Altair 2800, was assembled in 1975. Meanwhile, a very effective computer-manufacturing industry has emerged in Asia, employing about 1.5 million workers -- factory employees, engineers and managers.

The largest of these companies is Hon Hai Precision Industry Co., also known as Foxconn. The company has grown at an astounding rate, first in Taiwan and later in China. Its revenue last year was $62 billion, larger than Apple Inc., Microsoft Corp., Dell Inc. or Intel. Foxconn employs more than 800,000 people, more than the combined worldwide head count of Apple, Dell, Microsoft, Hewlett-Packard Co., Intel and Sony Corp.

10-to-1 Ratio
Until a recent spate of suicides at Foxconn’s giant factory complex in Shenzhen, China, few Americans had heard of the company. But most know the products it makes: computers for Dell and HP, Nokia Oyj cell phones, Microsoft Xbox 360 consoles, Intel motherboards, and countless other familiar gadgets. Some 250,000 Foxconn employees in southern China produce Apple’s products. Apple, meanwhile, has about 25,000 employees in the U.S. -- that means for every Apple worker in the U.S. there are 10 people in China working on iMacs, iPods and iPhones. The same roughly 10-to-1 relationship holds for Dell, disk-drive maker Seagate Technology, and other U.S. tech companies.

You could say, as many do, that shipping jobs overseas is no big deal because the high-value work -- and much of the profits -- remain in the U.S. That may well be so. But what kind of a society are we going to have if it consists of highly paid people doing high-value-added work -- and masses of unemployed?

It is my contention that economic inequality poses a mortal danger to democratic values and democratic societies. In the United States we have moved away from the notion of a relative egalitarian distribution of the national income and indeed championed policies that lead to increased inequality. This, in turn, is now putting pressure on our democratic governance. It is not by accident that we are seeing billionaires of the most unusual stripes run for public office, largely to defend their largesse and create what amounts to an aristocracy, or that we have a Supreme Court overturn a century of restraint on the corporate financing of political campaigns. Indeed these are the logical conclusions of a society that placed the desires of a few over the needs of the many. Avarice is triumphant, poverty evermore commonplace and American democracy under stress if not in serious jeopardy.


The Necessity of Tackling Structural Unemployment

Government data to be released on Friday October 2 by the Bureau of Labor Statistics is set to show that that nation's unemployment rose to a 26-year high of 9.8 percent in September as companies pared payrolls by 180,000, according to the median forecast of economists surveyed by Bloomberg News. Part of the reason for the persistence of joblessness even as the economy technically recovers is that we face a structural unemployment problem.

Since the nadir of the last recession in November 2001, the U.S. has lost 839,000 jobs in the private sector, based on data from the Bureau of Labor Statistics -- the first time that's happened over the course of a business cycle since 1980-82. Manufacturing and construction were particularly hard hit.

Permanent layoffs -- for workers who don't expect to ever regain the same job -- hit a record 53.9 percent of the unemployed in August, according to the bureau. Some 33.3 percent of the jobless had been out of work for 27 weeks or longer last month, down from a record 33.8 percent in July. And at 59.2 percent, the share of Americans who are employed is at its lowest level in 25 years.

Long duration structural unemployment now represents a record 3.2 percent of the US labor force and over a third of those unemployed. Some industrial sectors have been completely devastated. As of June 2009, 35% of all jobs in auto industry have been lost, 25% of textile jobs, 25% of all furniture making jobs, 15% of semiconductor jobs, 15% of all plastics and rubber manufacturing jobs gone likely forever. All told according to the Bureau of Labor Statistics, 14% of all high paying manufacturing jobs have been shed since the start of the economic downturn in December 2007.

In 1999, economist Jay Kaplan predicted that "as less-skilled workers are increasingly displaced in America, the problem with structural unemployment is likely to balloon into a major social and political problem. How the United States deals with the redistribution of income from those gaining from these trends to those who are willing to work but are not needed will be a test of the nation's future. Rather than relying on opportunistic cries for trade protection, the U.S. and other developed countries should ensure that its citizens have the education and skills required in our global economy."

That day has come. The Administration needs to commit to a state-led national industrial policy that protects nascent sectors and provides ample opportunities for worker  education and re-training. Even with the economy growing, it will take two perhaps three years for the unemployment rate to fall back down to 7 percent or lower. That's likely to have serious political repercussions.

In 1984, Walter Mondale proposed a comprehensive national industrial policy. It fell on deaf ears, instead the country latched onto the wholesale destruction of its manufacturing base as advocated by the GOP so as to ensure ever greater corporate profits. While The American economic model, with its strong state and local governments, decentralized economy, and powerful interest groups, has long demonstrated its immunity to central planning, it has been to the nation's detriment. No one is suggesting a wholesale replacement of the American free enterprise system but rather a national industrial policy as a additional quiver in our economic arsenal. Having an industrial policy is part of a being modern polity. Count Germany, France, China, Japan, Taiwan, Brazil, Chile, Colombia, Singapore, South Korea, Denmark, Portugal and Norway as having one. It's time we learn from the rest of the world.

Below the fold, economist Clyde Prestowitz's call for An Industrial Renaissance Policy.

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