A maverick economist: how excessive executive pay threatens living standards

SmithersProductivityBonusCultureSoaring executive pay and the rise of the bonus culture in the US and the UK have harmed economic performance, and threaten continued rises in living standards. But changing things may prove difficult.

This is the third post in my current series exploring some of the work of iconoclastic economist Andrew Smithers. Today I want to outline his explanation for the productivity slowdown in the US and UK economies in recent years, as explored in his book Productivity and the Bonus Culture.

Although changing demography in the form of an ageing population is part of the story, this is difficult to change dramatically given current attitudes to immigration. Simply put, Smithers argues that weak investment is the cause of slowing productivity growth, and that one of the main causes of this is the advent of the bonus culture in publicly listed corporations. If the trend of rising living standards is to be restored relatively quickly, policy reforms are needed which overcome this problem. Continue reading

The scissors of slump — Michael Roberts Blog

Last week, US Treasury Secretary Janet Yellen told the US Congress that “We now are entering a period of transition from one of historic recovery to one that can be marked by stable and steady growth. Making this shift is a central piece of the President’s plan to get inflation under control without sacrificing the […]

The scissors of slump — Michael Roberts Blog

The unifying impact of external threats

EUUrsulavdLThe Ukraine-Russia conflict and the evolving response to it from much of the ‘west’ has reminded me of a key aspect of the political economy of development: external threats to sovereign states and their neighbours, including wars hot, cold and everything in between, have the potential to unite otherwise divided populations around a common cause and transform politics and policymaking.

Events have been moving quickly in recent days, in all sorts of ways. Protests against Russia’s war in Ukraine have mobilised across Europe. The leaders of EU member states, as well as the bureaucratic machinery of the EU itself, have rallied to condemn and respond to the invasion. NATO members have cohered into an unusually united front. Germany has promised to rapidly increase defence spending and modernise its armed forces. A number of countries are providing Ukraine with supplies of weapons. The escalation of financial sanctions promises to do serious damage to the Russian economy. The tragic return of war to Europe in this form is rapidly shaking up politics and policymaking. Continue reading

Robert Reich on how America got obsessed with the deficit

Robert Reich, who was Labour Secretary under Bill Clinton back in the 1990s, produces plenty of snappy, informative videos and I have shared them on this blog a number of times. Here he is criticising America’s obsession with the government deficit.

Reich claims that this obsession, in its modern guise at least, began under Ronald Reagan, and points out that the concern fails to stretch to the vast and ever-increasing military budget, as well as tax breaks for particular corporations and for the wealthy more generally. Instead, it focuses on the ‘lack of affordability’ of programs which benefit the poor, the middle class and these days even the environment. Republicans in particular seem to do this when Democrats are in power, and then rather ignore the issue when they hold the reigns.

From Reagan and Bush Junior to Trump, tax cuts for the wealthy were prioritised under the mantle of ‘trickle-down economics’, the idea that these cuts would pay for themselves since the wealthy would respond by stepping up investment and job creation. But this assumes that most wealthy people are entrepreneurs and are motivated primarily by ever-higher earnings. The case for this is not so clear cut.

It is worth noting that outside of the Great Financial Crisis of 2008-09 and the pandemic, moments when substantial fiscal stimulus was more justified, Republican policies of tax cuts for the wealthy and large increases in military spending have consistently blown up the deficit rather than pay for themselves by shrinking it through faster economic growth. These outcomes have then led to calls for ‘starving the beast’, or cuts to spending programs which prioritise the most vulnerable.

Robert Reich on the real reason the economy might collapse

Below is another useful short and engaging video from former US Labour Secretary and Professor of Public Policy at UC Berkeley Robert Reich. This time, he returns to a recurrent theme, that rising inequality, not least in the US, increasingly constrains aggregate demand and economic growth. As income and wealth become more concentrated at the top of the distribution, due to wages failing to keep up with productivity, the growth of consumption, usually the largest component of aggregate demand, has become dependent on poorer groups going into debt, which itself is unsustainable. This is the underconsumption thesis, which has become influential among many left economists and some politicians.

Richer groups typically spend a smaller share of their income on consumption than poorer groups, so that for the economy as a whole, as long as investment is constrained by consumption rather than by savings, falling inequality will boost economic growth through its effect on raising sustainable consumption. If investment were constrained by savings, then a form of “trickle-down” economics could work, if rising savings led to rising investment. But sluggish underlying growth, notwithstanding the recession and recovery from the Covid crisis, has in recent decades been associated with falling interest rates and rising debt.

Economies have responded to the sluggish domestic demand associated with rising inequality in different ways. Some, such as the US and UK, have overseen rising debt, unevenly distributed among households, firms and the government. For a time this allowed growth to continue and has typically been accompanied by current account deficits, reflecting net borrowing from abroad. Others, such as Germany, have relied on growing net exports (export minus imports) and current account surpluses to sustain demand and growth. Current account surpluses in some countries are of course the necessary flipside of current account deficits elsewhere, since their total sum must be zero: they must balance at the global level. The surplus countries are international net lenders, funding and sustaining the deficit countries.

Crudely speaking, the solution to these imbalances and the unsustainable buildup of debt amid sluggish domestic demand and underlying growth is the same, even if the details vary between countries: policies which reduce the inequality of income and wealth would go a long way to boosting domestic demand, reducing the dependency of growing demand on rising debt or foreign demand reflected in rising net exports. All this has admittedly been complicated by the economic fallout from the Covid crisis, but in the longer term the trend of rising inequality needs to be reversed in order to restore more sustainable and balanced growth trends worldwide.

Reich’s video, which is certainly worth watching, does not go into these details, which concern both the US and the world beyond. But they are an important part of the story.

Wages and productivity — Real-World Economics Review Blog

from David Ruccio and issue 9 of RWER Mainstream economists continue to insist that workers benefit from economic growth, because wages rise with productivity. Here’s the argument as explained by Donald J. Boudreaux and Liya Palagashvili: Firms cannot afford a misalignment of their workers’ pay and productivity increases – the employees will move to other […]

via Wages and productivity — Real-World Economics Review Blog

Pandemic of inequality

The Levy Institute has just published a short paper on the inequalities associated with the Covid-19 pandemic in the US. It can be found here. A summary of the paper is below.

The costs of the COVID-19 pandemic—in terms of both the health risks and economic burdens—will be borne disproportionately by the most vulnerable segments of US society. In this public policy brief, Luiza Nassif-Pires, Laura de Lima Xavier, Thomas Masterson, Michalis Nikiforos, and Fernando Rios-Avila demonstrate that the COVID-19 crisis is likely to widen already-worrisome levels of income, racial, and gender inequality in the United States. Minority and low-income populations are more likely to develop severe infections that can lead to hospitalization and death due to COVID-19; they are also more likely to experience job losses and declines in their well-being.

The authors argue that our policy response to the COVID-19 crisis must target these unequally shared burdens—and that a failure to mitigate the regressive impact of the crisis will not only be unjust, it will prolong the pandemic and undermine any ensuing economic recovery efforts. As the authors note, we are in danger of falling victim to a vicious cycle: the pandemic and economic lockdown will worsen inequality; and these inequalities exacerbate the spread of the virus, not to mention further weaken the structure of the US economy.

The authors focus on the greater likelihood of ill health among the poorest in the population, and how they are more likely to suffer serious complications should they contract Covid-19.

They also repeat the case often made in papers from the Levy Institute, that high levels of inequality have weakened aggregate demand and growth, not least in the US. This has been associated with high levels of household and corporate debt, and played a major role in the historically weak recovery from the 2008 crisis. If steps are not made to reduce inequality, not least in access to healthcare, the US economy is likely to continue to perform poorly over the long term. This will be in addition to the shocks resulting from the response to the pandemic itself.