Wednesday, June 1, 2016

Why Capitalism and Globalism Together Crush Workers

Properly run and regulated, a capitalist economy can be a good thing. The person with a bright idea forms a corporation, people with spare savings from their productive jobs buy shares, and useful new projects and good-paying new jobs appear for the benefit of all. Americans are trained to think of that ideal image, but we are not encouraged to push for the things that are necessary to ACHIEVE that image.

In any form of economy, the profit of an enterprise flows by default to some sort of an owner. In Big State Socialism, that owner is the government. In humane socialism, it is social collectives of like-minded people who have pooled their resources of money and labor, rather like the initial founders of a start-up business. In capitalism, the profit flows to capital, i.e. to the people who put up investment money. Labor, the workers in the enterprise, only get as much as their market power enables them to demand.  If you have too high of a ratio of would-be workers to jobs, the amount of the profit going to labor will fall, and so more will go to capital.

In America over the last 40 years, automation, the reduction in stay-at-home parents, heavy immigration of would-be workers with no money to spend, and globalization have all combined to reduce the market power of workers, without anybody doing anything useful to re-balance the system. So, the share of income flowing to capital has risen, as can be seen in this chart.
Capital in America sits mainly in the hands of a a very elite group of individuals. You have heard of "the 1%", but the bottom half of the top 1% are mostly professional people who work hard for a living. Capital, people who make their money off of their or, often, off of other people's money (think hedge fund managers and the like), are concentrated in the top 1/10%. Despite their purchases of fantastic homes, yachts, and so on, those folks don't spend a very high percentage of their income. They have so much they couldn't spend it if they made it a full-time job.

That creates a problem. The issue with our economy is not a lack of capital. Corporations are sitting on unprecedented piles of cash. Trillions of dollars are invested in all kinds of unproductive speculation chasing anything that looks remotely like a decent return on investment. No, there is plenty of capital, but what we are short on is good productive investments. Why is that? It is because our consumer economy is short on demand. The incomes of normal families have been flat to declining since 1973. Consumers are maxed out on debt. New college graduates drowning in student loans who hope to buy houses at unaffordable prices strain to find dollars to spend on consumption. All those consumers would be happy to spend more money, to generate the demand that would get the economy going, if they had it, but they don't. Why? Because the share of money going to rich capitalists, the people who don't spend all their money, has been increasing rapidly. That concentration of wealth is sucking the life out of our economy. That hurts all Americans, including, ironically, the wealthy, who could actually be better off if there was enough healthy consumer demand to allow the economy to grow as fast as it could.

Where does globalization come in? This can be seen through some math that nobody talks about. Say that a business can sell 5 widgets for $20 each, to earn $100. Say further that all of that money went to labor, so that the employees pocketed the $100. Now they could go out in the market and buy 5 widgets, or $100 worth of something else, from some other business, with the employees of that business earning $100 (assuming, for the sake of simplicity, that there are  no material costs) that they in turn spend. That economy will produce full-out. Now bring in the capitalist, Junior Warbucks, who instead pays the workers only $50 and takes $50 for himself, spending $20 on his yacht and keeping $30 to use for unproductive speculation.  That sucks out $30 worth of demand with each round, reducing production and growth.

Now bring in another country, perhaps Thailand.  On day 1, workers in Thailand offer nice Jasmine rice for sale, and workers in America say "hey, that's nice stuff, I will buy $10 worth of that." So the workers in Thailand get $10, the American workers have $40 left to spend on U.S.-made products, and Junior Warbucks spends $20 on U.S. made stuff and holds back $30 like before. So now $60 still gets recycled in the U.S. economy, creating demand, while the Thai workers get $10 that they didn't get before, which means a lot to them.

But now Junior Warbucks gets an idea. Instead of paying $50 to U.S. workers, he can move the widget plant to Thailand and get those Thai workers to do the job for $5, leaving another $45 of profit for himself.  So now the U.S. workers get nothing, and can spend nothing. The Thai workers get $5, and they have to be glad to take it because the business of selling Jasmine rice to American workers just evaporated, since those workers can't afford that exotic luxury any more. Junior still only needs $20 for his yacht, so now he uses $75 for unproductive speculation. So, only the $20 that Junior spends on his yacht gets recycled in the U.S. economy, not the $60 from before. The U.S. economy shrinks, and the Thai economy drops from $10 to $5.

The important thing to note here is that the good-paying jobs in the U.S. made it possible for BOTH the U.S. workers and the Thai workers to be better off. When those jobs moved to Thailand at lower wages, both countries suffered, because money that could have been recycled into jobs and productive enterprise was instead sucked out of the system and used to bet on bond prices, oil futures, collateralized debt obligations, credit default swaps, buying politicians, and the other nonsense that has replaced productive activity in America. This is globalization gone wrong; it goes wrong when globalization is used to shift income out of the hands of labor and into the hands of capital.

Shared Economic Growth aims to pull valuable activity back into America to increase the market power of American workers, causing money to flow back into the hands of labor rather than capital. Further, the offsets are structured to allow workers to earn more on their savings, again boosting the amount of healthy consumer demand in America, allowing for stable growth rather than the weak and unsustainable  debt-fueled artificial growth we've been relying on for the past 16 years.  As money shifts from unproductive speculation to productive labor, everyone will benefit, not just in America but in other countries that use their own resources to produce things that these newly-empower American workers want. That is healthy capitalism, the balanced kind that works for everyone, the kind that built the healthy America of the 50s and 60s. We need to take the steps necessary to regain that balance. Shared Economic Growth is the right first step.