Cross-posted at Reports from the Economic Front.

Here is a short (less than 4 minute) video that illustrates the fact that 53% of our tax dollars, conservatively estimated, go to finance our military.

And here is a link to a recent study by Robert Pollin and Heidi Garrett-Peltier on the employment effects of military spending versus alternative domestic spending priorities, in particular investments in clean energy, health care, and education.

The authors first examine the employment effects of spending $1 billion on the military versus spending the same amount on clean energy, health care, education or tax cuts.  The chart below shows their results.


Moreover, even though jobs in the military provide the highest levels of compensation, the authors still find that “investments in clean energy, health care and education create a much larger number of jobs across all pay ranges, including mid-range jobs (paying between $32,000 and $64,000) and high paying jobs (paying over $64,000).”

Let’s see if these facts come up in the next Congressional budget debate.

On January 1st, the minimum wage increased in Arizona, Colorado, Florida, Montana, Ohio, Oregon, Vermont and Washington. These eight states all have laws which require them to automatically increase their respective minimum wages by the rate of inflation. Nevada also indexes its minimum wage but its increase takes place in July.

The state of Washington has the highest state minimum hourly wage at $9.04.  Oregon has the second highest at $8.80.

Eighteen states plus the District of Columbia have minimum wages above the federal minimum wage which remains at $7.25 per hour.  A full-time worker making the federal minimum wage earns just $15,000 a year.

There are those who argue against state laws requiring an inflation adjustment to the minimum wage.  Their most common argument is that such government mandated increases are a threat to business profitability and the health of our capitalist, free-market economy.  This is an interesting argument.  At one time, the conventional wisdom was that capitalism was a means to an end, the end being a better standard of living.  Now it appears that capitalism has become the end itself, and to sustain a healthy capitalism workers will have to make sacrifices.     

Actually, those arguing against increasing the minimum wage are really arguing for the necessity of a declining real wage.  The minimum wage has not kept up with inflation. This is true even in states that currently index their minimum wage.  The reason is that indexing began after years of real wage decline. For example, Oregon’s January 2012 increase to $8.80 from $8.50 still leaves the real inflation-adjusted Oregon minimum wage below what it was in 1976.  In 2011 dollars, Oregon’s 1976 minimum wage was $9.09.

The federal government does not automatically index the federal minimum wage and the chart below highlights the extent of the decline in its real value. The blue line shows the actual or nominal dollar value of the federal minimum wage; increases are the result of a vote by Congress.  The red line shows the real value of the minimum wage in 2010 dollars.  In real terms the federal minimum wage remains considerably below its value in the 1970s.


A second common argument against inflation adjusted increases in the minimum wage is that it is just a training wage for young teens and therefore not important to family survival.  This argument misses the mark for several reasons, the most important being that, as the chart below shows, 80% of minimum wage workers in the eight states with mandated increases are over the age of 20, and more than 75% work more than 20 hours per week (just over half work full-time). In fact, according to an Economic Policy Institute study of national data, families with a minimum-wage worker rely on their earnings for nearly half the family income.


For the last week of December, we’re re-posting some of our favorite posts from 2011.


The US economy faces a number of challenges—among them a lack of job creation and an ever-growing trade deficit. Many policy-makers believe that encouraging business innovation is the best response to these particular challenges. Sounds plausible but experience suggests otherwise.

The best example of why simply encouraging business innovation is not the answer for our employment and trade problems is Apple and its iPhone.

The iPhone was introduced in 2007 and has been incredible successful.  U.S. sales soared from 3 million units in 2007 to over 11 million in 2009.  Global sales topped 25 million in 2009.

While the iPhone is designed and marketed by Apple, almost all the phone’s components are produced by foreign companies operating outside the United States.  These components are then shipped to China where Foxconn, a Taiwanese company, oversees their assembly and their export to the United States and other countries.  As a result, the iPhone generates few jobs in the United States.

Two economists, in an Asian Development Bank working paper, examined the iPhone 3G production process in some detail.  The table below, taken from their study, highlights the main suppliers and the costs of the components they produce for a single phone.  Most of the components are supplied by Japanese, South Korean and German firms, although there are also some U.S. suppliers (although who knows where they actually produce their compnents).

The total component cost of an iPhone in 2009 was $172.46.    Workers in China assemble the iPhone, but because their wages are low the assembly cost per phone (labeled manufacturing costs in the table below) is quite small, only $6.50 a phone.  The total production cost per phone is $178.96.


Because the iPhone is assembled in China all sales in the U.S. mean an increase in Chinese exports (even though the phone is largely composed of inputs produced outside of China) and an increase in U.S. imports.  In 2009, China exported more than $2 billion worth of iPhones to the United States.  Thus, the iPhone, because of the Apple’s production strategy, also adds to the U.S. trade deficit.

Apple is not alone in embracing China as its production base.  China is now the world’s largest exporter of manufactured goods. And, as the chart below shows, the share of Chinese exports that are labled high technology is growing.  This trend has encouraged many analysts to claim that the U.S. is now locked in fierce economic competition with China.


However, as we see next, more than 80% of China’s high technology exports are actually produced by foreign companies operating in China.  Moreover, these foreign companies have significantly increased their control over this production.  In 2002 foreign owned firms that were 100% foreign owned (which means that they had no Chinese partner) accounted for only 55% of Chinese high technology exports.  In 2009 they accounted for 68%.


Why do so many transnational corporations choose to locate production in China?  The answer is obvious: profits. Apple again serves as a good example.  The table below, taken from the Asian Development Bank working paper cited above, shows Apple’s profit-margin on the iPhone.  In 2009 it was a whopping big 64%.


Struck by the size of Apple’s profit-margin, the authors of the Asian Development working paper considered whether the iPhone could reasonably be made in the United States.  As they note:

The role of the PRC in the production chain of iPhones is primarily the assembly of all parts and components into the final product for re-shipment abroad. The skills and equipment required for the assembly are very basic and there is no doubt that American workers and firms are capable of assembling iPhones in the US. If all iPhones were assembled in the US, the US$1.9 billion trade deficit in iPhone trade with PRC would not exist. Moreover, 11.4 million units of iPhone sold in the non-US market in 2009 would add US$5.7 billion to US exports.

For the sake of discussion, they assumed that assembly line wages in the U.S. are ten times higher than in China.   Given that Chinese production workers earn roughly $1 an hour, that is not an unreasonable assumption.  The higher wages would mean that the total assembly cost per phone would rsie to $65 and the total manufacturing cost would approach $238.  If Apple continued to sell the iPhone for $500, the company would still earn a very respectable 50% profit margin.

Moreover, as the authors point out:

In this hypothetical scenario, iPhones, the high-tech product invented by the U.S. company, would contribute to U.S. exports and the reduction of the U.S. trade deficit, not only with the PRC, but also with the rest of world. More importantly, Apple created jobs for U.S. low skilled workers; those who could not be the software engineers needed by Apple. Giving up a small portion of profits and sharing them with low skilled U.S. workers by Apple would be a more effective way [than depreciation of the exchange rate] to reduce the U.S. trade deficit and create jobs in the United States.

Of course, shifting production to the United States would mean that Apple would earn less money and there is little reason to believe that the company is prepared to sacrifice its profits for the good of the country.  If we want to tackle our employment and trade problems were are going to have to do more than promote more attractive conditions for business.


The extent of our labor market problems has been highlighted many times and in many ways.  Yet, with little being done to correct them, it is worth keeping the issue in the public eye.

What follows are three charts from the Economic Policy Institute.  This one highlights the ratio of unemployed persons to job openings.  Although the ratio has fallen since the “end” of the recession, it remains considerably higher than a decade ago.  It currently stands at 4 unemployed per job opening.


This one breaks down the data by industry.  It reveals that there are problems across the board. 


This final one shows that the job crisis is hitting everyone.  As the Economic Policy Institute explains: “Those with higher levels of education are leaving (or never entering) the workforce at the same rate as those with just a high school degree.” Only those with less than a high school diploma seem to be experiencing improved employment opportunities.


And the response of many political and business leaders to this dismal situation?  Primarily calls for austerity–or better said cuts in social spending.  Some economists have even developed a theory of austerity-led growth, arguing that slashing government spending will unleash private investment and job creation. 

We have been witnessing a test of this theory in Europe and not surprisingly it hasn’t produced positive results.  As the economist Kevin O’Rourke explains:  “One lesson that the world has learned since the financial crisis of 2008 is that a contractionary fiscal policy means what it says: contraction. Since 2010, a Europe-wide experiment has conclusively falsified the idea that fiscal contractions are expansionary.”

I am willing to bet that this outcome wasn’t a surprise to most workers.

Cross-posted at Reports from the Economic Front.

The deficit commission, better known as the “Super Committee,” failed to produce a plan to cut deficit spending by $1.2 trillion over the next ten years.  According to the ground rules of the agreement that created the commission, its failure is supposed to trigger approximately $1 trillion in “automatic” spending cuts that will go into effect beginning January 2013.

The agreement included the following stipulations for guiding the automatic cuts:

  • Approximately 50% of the required reduction is to come from the so-called security budget (national security operations and military costs).
  • Approximately 32% is to come from non-defense discretionary programs (health, education, drug enforcement, national parks and other agencies and programs).
  • About 12% is come from Medicare (reduced payments to Medicare providers and plans).
  • The rest is to come mostly from agricultural programs.

To be clear, these are reductions to be made in projected budget lines.  In other words, the cuts to the security budget will not produce an actual decline in security spending, only a slowdown in the projected increase previously agreed to by Congress.

As I previously argued, the failure of the commission is a good thing.  The commission was actively considering structural changes to a number of key social programs.  One was to change the formula for calculating social security payments so as to reduce them.  Another was to raise the age at which people could access Medicare. The automatic cuts, if enacted, will reduce spending on important programs, but at least they do not include steps towards their dismantling.  In fact, Social Security and Medicaid are exempt.

The next stage of the budget battle has now begun.  Political forces are maneuvering to change the formula for the automatic cuts mandated by the budget agreement.  In fact, this maneuvering began weeks before the commission formally announced its failure to agree on a deficit cutting plan.  According to a November 5, 2011 New York Times report:

Several members of Congress, especially Republicans on the House and Senate Armed Services Committees, are readying legislation that would undo the automatic across-the-board cuts totaling nearly $500 billion for military programs, or exchange them for cuts in other areas of the federal budget.

I believe that we need to enter the fray with a different plan, one that includes blocking further cuts to non-defense discretionary programs and Medicare.  It is worth recalling that the agreement that established the deficit commission already included approximately $1 trillion in cuts to non-defense discretionary programs.

It is the security budget that we need to focus on.  And we need to be clear that our aim in demanding cuts to that budget, as well as tax increases on the wealthy and corporations, is to help generate funds to support an aggressive federal program of economic restructuring not deficit reduction.

The table below makes clear just how important it is to target the security budget. It shows the pattern of  federal spending on discretionary programs, defense and non-defense, over the years 2001 to 2010.  The big winner was the Department of Defense, which captured 64.6% of the total increase in discretionary spending over those years.  It was still the big winner, at 36.9%, even if one subtracts out war costs.

While the defense gains are staggering, they do not include spending increases enjoyed by other key budget areas dedicated to the military.  For example, many costs associated with our nuclear weapons program are contained in the Energy Department budget.  Many military activities are financed out of the NASA budget.  And then there is Homeland Security, Veteran Affairs, and International Assistance Programs.  It would not be a stretch to conclude that more than 75% of the increase in spending on discretionary programs over the period 2001 to 2010 went to support militarism and repression. No wonder our social programs and public infrastructure has been starved for funds.

There is no way we can hope to reshape our economy without taking on our government’s militaristic foreign and domestic policy aims and the budget priorities that underpin them.

Although Republicans and President Obama are said to disagree about economic policies, there is one initiative that they both enthusiastically support: free trade agreements.  President Obama single-handily resurrected the free trade agreements with Korea, Panama, and Colombia from political oblivion; they were ratified by the U.S. Congress in October.   

Now, he is eagerly pursuing a new multilateral agreement known as the Trans-Pacific Free Trade Agreement (involving Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam, and the United States).  Significantly, as Public Citizen reports, “a leaked document revealed that the Obama administration signed a special pact to keep all documents relating to the Trans-Pacific Free Trade Agreement negotiations secret.” 

One might ask why the leaders of so many countries are anxious to sign such agreements, agreements which not only lower tariffs but also strip away the powers of governments to regulate international investment, production, and capital flows.

One answer is the enormous economic power of transnational corporations (TNCs), the main beneficiaries of these agreements. According to the United Nations Conference on Trade and Development:

TNCs worldwide, in their operations both at home and abroad, generated value added of approximately $16 trillion in 2010, accounting for more than a quarter of global GDP. In 2010, foreign affiliates accounted for more than one-tenth of global GDP and one-third of world exports.  


The largest transnational corporations are from developed capitalist countries.  These corporations also tend to be among the largest and most powerful firms in their respective home countries.  At the same time, as the table below shows, their international operations now account for a majority of their assets, sales, and employment.  Looking at all TNCs, the United Nations reports that the value added by their foreign affiliates generated approximately 40% of their total value added in 2010, up from 35% in 2005.


The estimates of TNC production cited above, although impressive, actually understate transnational control over global economic activity.  At one time, TNCs only engaged in international production through establishment of foreign affiliates.  In some cases, the parent company and its foreign affiliates operated relatively independently, each serving a different market. 

Now, transnational corporations generally rely on complex cross border production networks that involve the linking of production across many countries, with final sales often taking place in still other countries. Most importantly, these networks often include “independent” partner firms that undertake various activities according to an overall transnational corporate strategy.  While some of the partner firms may themselves be transnational corporations, many are not, which means that TNC controlled activity is greater than the combined activities of parent and affiliate firms. 

Transnational corporations use a variety of so-called “non-equity modes” (NEMs) of control to direct the operations of their partner firms, with contract manufacturing and service outsourcing among the most important. Cross border activity involving NEM relationships is conservatively estimated to have generated over $2 trillion of sales in 2010.  The United Nations reports that some 18–21 million workers are directly employed in firms operating under NEM arrangements. Around 80 per cent of NEM-generated employment is in developing and transition economies.

As the following figure reveals, cross border production activity anchored by NEM relations now dominates a number of key export industries.  For example, NEM production now accounts for more than 50% of all toy, footwear, garment and electronics exports.


The production of the iPhone offers one of the best examples of the logic and operation of these transnational corporate controlled cross border production networks.  As the Asian Development Bank explains:

iPhones are designed and marketed by Apple, one of the most innovative U.S. companies. Apart from its software and product design, the production of iPhones primarily takes place outside the US. Manufacturing iPhones involves nine companies, which are located in the PRC, the Republic of Korea (hereafter Korea), Japan, Germany, and the US. The major producers and suppliers of iPhone parts and components include Toshiba, Samsung, Infineon, Broadcom, Numunyx, Murata, Dialog Semiconductor, Cirrius Logic, etc. All iPhone components produced by these companies are shipped to Foxconn, a company from Taipei,China located in Shenzhen, PRC, for assembly into final products and then exported to the US and the rest of the world.

Not surprisingly, the division of profits, as shown below, reflects the overall hierarchy that structures this and other cross border production networks.


The importance of cross border production networks to transnational corporate profitability helps to explain why these corporations are such strong supporters of free trade agreements.  And, although I have focused on manufacturers, transnational retailers which sell the products produced by these networks and financial service companies which underwrite both the production and consumption of these products are also major beneficiaries and therefore powerful advocates. 

The operation of these networks, the majority of which are centered in East Asia, have greatly contributed to the growth of global imbalances, marked by East Asian trade surpluses and U.S. trade deficits.  These imbalances were papered over, and global capitalist accumulation sustained only because of the debt-driven housing bubble which financed U.S. consumption. 

The collapse of the bubble has led many analysts to call for a rebalancing of Asian and U.S. economies. However, rather than address this need, governments throughout the world, responding to dominant capitalist interests, continue to pursue new free trade agreements, a pursuit that if successful will only intensify existing economic and social problems and make needed changes harder to achieve.   

Cross-posted on Reports from the Economic Front.

The Occupy Movement has clearly transformed conversations about the economy.  It is now inequality — in particular, the gap between the top 1% and everyone else — rather than the national debt that dominates the news.

To review, this gap is real, as the following charts from the Economic Policy Institute make clear.  This chart shows the percentage increase in household income over the period 1979 to 2007 by income group.  While the top 1% enjoyed income gains of 224% over the period, the gains enjoyed by the bottom 90% were far more modest: 5%.  Equally striking is the fact that the household income of top 0.01% shot up an astounding 390%.


Unfortunately, there is another income gap that has not received nearly as much attention.  It is the white-nonwhite gap.  The Portland, Oregon based Coalition of Communities of Color recently published a report on the socioeconomic situation of people of color in Multnomah Country (which includes Portland).

As the chart below reveals, the mean income of families of color in the top decile (10%) actually declined by $6,002 over the years 1979 to 2007.  By contrast, the mean income of white families in the top 10%  rose by $122,591.  White families and families of color in the bottom half of the distribution all suffered losses.


The following two charts show the mean earnings of each group by decile and their change between 1979 and 2007.

Portrait in 1979:


Portrait in 2007:


This last chart shows poverty rates by color.  Clearly, as we work to create a more equitable society, our efforts must also be guided by awareness of the existence of serious racial and ethnic inequities.


Our financial system is dominated by banks considered too big to fail.  And that is a problem for the rest of us.  As Time magazine explains:

“Too big to fail is opposed by the right and the left, though not apparently by the people drafting legislation,” says Simon Johnson, an MIT professor and the author of a recently published book on the subject, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. “The current financial-reform bills are effectively a wash on the issue.”

The question is how large banks ought to be allowed to become. When large banks run into trouble, regulators are often unwilling to let them fail, as bank failures can wipe out individual depositors. What’s more, banks often fund their operations by borrowing from other banks. The bigger the bank, the more likely it is to put other banks at risk if it fails. Mass bank failures, especially of big banks, means people can’t get loans. And no loans, no economy.

That’s why the government decided to bail out most of the nation’s largest banks at the height of the financial crisis. And here’s where the problem potentially gets worse. Once bankers understand that the government will bail out their firms when their loans or other financial bets go bad, they are likely to take riskier and riskier bets. That, of course, leads to more potential bank failures — and more taxpayer-funded bailouts.

Not only have attempts at reform largely failed, government regulators have often tried to paper over financial problems by encouraging our dominant banks to swallow smaller, less stable ones, thereby worsening the problem.

So, who are our ”too big to fail” banks and how did they get so big?  Here is a time line that charts the process and highlights the winners.


Of course there are answers to this “too big to fail” problem.  One is turning our banks into public utilitiesHere is Yves Smith talking about this solution: