Home > Uncategorized > Yes, the economy is rigged, contrary to what some economists try to tell you

Yes, the economy is rigged, contrary to what some economists try to tell you

from Dean Baker

I see Greg Mankiw used his NYT column to tell folks that politicians are spinning tales when they say the economy is rigged. I would say that economists spin tales when they tell you it is not. (Mankiw and I just ran through this argument on a panel in Boston last week.) Let’s quickly run through the main points.

First, the overall level of employment is a political decision. We would have many more people employed today if the deficit hawks had not seized control of fiscal policy back in 2011 and turned the dial toward austerity. The beneficiaries of higher employment are disproportionately those at the middle and bottom of the income distribution: people with less education and African Americans and Hispanics. So the politicians pushing austerity decided that millions of people at the middle and bottom would not have jobs.

Furthermore, in a weaker labor market, it is harder for those at the middle and bottom to get pay increases. So the shift to austerity also meant that tens of millions of workers would have to work for lower pay. Read all about it in my book with Jared Bernstein (free, and worth it).

The second way in which it is rigged is our trade policy. First there is the size of the trade deficit. This is the result of policy choices. Instead of forcing our trading partners to respect Bill Gates copyrights and Pfizer’s patents, we could have insisted they raise the value of their currency to move towards more balanced trade. But Bill Gates and Pfizer have more power in setting trade policy than ordinary workers.

Also, contrary to what Mankiw tries to tell folks in his column, the trade deficit did play a big role in our loss of manufacturing jobs. As my favorite graph for the day shows, manufacturing employment was roughly constant at around 17,500 million from the late 1960s until 2000. During this period, there was substantial growth in manufacturing productivity, as Mankiw says. This growth caused manufacturing employment to decline as a share of total employment, but to remain roughly constant in absolute terms.

Manufacturing Employment

manu jobs2Source: Bureau of Labor Statistics.

However, from 2000 to 2006 manufacturing employment falls by more than 3 million, or close to 20 percent. The change was the explosion in the size of the trade deficit, as an over-valued dollar made our goods less competitive. This plunge in employment devastated lives and whole communities. It was a clear policy choice. Importers like Walmart and outsourcers like GE benefited, as ordinary workers lost big-time.

In addition to the volume of trade flows, there is also the content. We could be importing doctors, dentists, lawyers, and other highly trained professionals. This would mean writing trade agreements that made it as easy as possible for smart kids in foreign countries to train to our standards in these areas and then to work freely in the United States, just like people born in New York or California.

This would have lowered the wages of the most highly paid workers and reduced the prices that the rest of us have to pay for health care, dental work, and other high-priced professional services. We didn’t go this route because highly paid professionals have more power than autoworkers and textile workers. (Yes, we can compensate developing countries so that they can train 2–3 professionals for every one that comes here — please don’t show your ignorance by arguing the opposite in a comment.)

Then we have the financial sector. This has many of the richest people in the country who make their money fleecing the rest of us. It is wrong to say that the sector is deregulated, since it benefits from all sorts of government backstops, as we saw clearly in 2008–2009. We could downsize the sector, making it smaller and more efficient, with a financial transactions tax. Such a tax could free up more than $100 billion a year (@0.6 percent of GDP) for productive uses, while hugely reducing the incomes of the very rich.

Next we come to patent and copyright protection, both government granted monopolies that allow some folks to get very rich by charging the rest of us more money. This is most apparent with prescription drugs. A drug like Sovaldi carries a list price of $84,000 when it would sell in a free market for just a few hundred dollars per treatment. This rigging reflects the political power of the pharmaceutical, software, and entertainment industry. (Yes, there are other ways to finance drug development and creative work.)

Then we get to our broken corporate governance process that allows even failed CEOs like Carly Fiorina to walk away with over $100 million. The problem is that CEO pay is largely determined by their friends on the boards of directors. It is not determined by people who are asking whether they could get as good a CEO for less money. (Why try to take money from your friend?)

In Europe and Japan, CEOs are also well-paid, but they tend to get a third or a quarter of what our CEOs earn. This matters not only because of the pay the CEOs get, but also because of its impact on pay structures throughout the economy. It is now common to see top executives of non-profit hospitals, universities, or private charities get salaries of more than $1 million a year. They argue that they would get much more working for a corporation of the same size. And, this money comes out of the pockets of the rest of us.

So folks, the economy is rigged — better to believe the politicians than the economists.

  1. May 11, 2016 at 3:31 pm

    Excellent!

  2. May 11, 2016 at 3:36 pm

    The “market” is simply an ideological construct designed to fool the simple minded.
    Like “communism” was supposed to mean brotherhood.
    In reality, these are ideas planted into the heads of the populace to serve the ends of the self appointed oppressors.

  3. May 11, 2016 at 3:46 pm

    Query about 17,500 million in the 5th paragraph? Doesn’t make sense to me. Is that an error? If not, what does it mean? When I compare it to the graph it seems the million should be thousand. My thinking is that you meant 17.5 million?

    • Harry Forge
      May 12, 2016 at 4:57 pm

      Herb, that’s right. 17,500 is the European way of writing 17.5.

  4. David Chester
    May 11, 2016 at 3:52 pm

    The national economies of many countries are rigged or preset to favor certain small parts of the community. These people are landlords who control our rights for access to the land and other natural resources. This results in the opportunities that land rights offer being limited and that the benefits are not being shared by the whole community.

    The value of the land and its usefulness is largely (but not completely) dependent on the ability to access it and this in turn is a function of the amount invested in the infra-structure (roads, railways, ports, bridges, tunnels and ferries, etc) for which much of the taxpayer’s money is spent. Yet these rights are withheld by speculators in the land value, which grows as the community expands. The land laws favors these owners and so the system is biased in their favor.

    The landlords charge rent for access rights and this rent is something for which no work has been done by the parasitic land owners. They are aided by the banks who provide loans for the purchase of the development sites near the outskirts of cities, which are known to have good potential for increases in their values. Since the value of the land has been created by the proximity of the community, it is morally correct that any benefits should be returned to that community and that the rising prices and selling of the land should not be left to the competitive activities of the speculation landlords and the banks.

    To un-rig this system of land ownership, we need to stop the benefits from land going to banks (as interest on their loans) and land owning monopolists whose high rents and land non-use cause the costs for land access and its use to be unreasonably high. Both things result in a lack of progress of the community, which is forced to pay monopolistic prices for its consumer goods and who are thus limited in what they can demand. Entrepreneurs cannot function with so little demand for produce and such high production costs.So land owners activities cut 2 ways into the progress of the rest of the communities. Unemployment becomes rife and poverty grows.

    Governments can un-rig the current system by collecting their tax monies from the rent of the landlords and not from the earnings of the other workers. By taxing land values alone (whether the land is being used or not), the cost of land access and use will drop because no unused land will be worthwhile holding for speculation in its price. Goods will become cheaper to make and rents and land based taxes will initially drop in amount, until the system becomes re-stabilized again at a lower costs, more productive and prosperous level.

    TAX LAND NOT PEOPLE; TAX TAKINGS NOT MAKINGS!

  5. graccibros
    May 11, 2016 at 4:38 pm

    Dean, I have no problem with your main thesis and the title here, none at all. But help me out in understanding the charts and conclusions for “industrial employment.” I have seen these “stability” numbers before, indeed, I wrote about them at great length in my long essay, short “book” of 110 pages, “The Costs of Creative Destruction,” which was triggered by the juxtaposition of Wendell Berry’s Jefferson Lecture in April of 2012 with a “lecture” given by Gene Sperling in Wash, DC about the revival of American manufacturing in March of 2012, at the National Press Club. Sperling was, at that time, President Obama’s chief economic advisor. Long before the rise of China, in which America, more specifically, many of “our” economic elites played such a large role in paving the way for, especially the heads of “our” transnational companies, many average Americans recall the songs, movies, and laid off workers from the de-industrialization process of the 1970’s and 1980’s and beyond, the entry of the term “Rustbelt” into the common language, and images and statistics from Youngstown, for example, still written about in works like George Packer’s “The Unwinding,” in 2013. Here’s a brief sample on the fate of Youngstown from that work: “Russo (a labor studies prof. at Youngstown State) calculated that during the decade between 1975-1985, fifty thousand jobs were lost in the Mahoning Valley – an economic catastrophe on an unheard-of-scale. Yet, Russo said, ‘The idea that this was systemic didn’t occur.'”

    From my own “The Cost of Creative Destruction:”

    “We can talk about all the other factors contributing to the decline of the work ethic and self-discipline in the blue collar white world, the cultural factors, as Daniel Bell has done in his classic Cultural Contradictions of Capitalism, but let’s leave them out for now: the view of the physical wreckage is enough to convey a sense of what went on…and it’s bad enough just by itself. But I’ll give you the numbers that Murray (That’s Chas. Murray in his “Coming Apart”) avoids any mention of in his book, and that Sperling obscures from his high altitude flyover, taken from Walter Licht’s brief but moving little online essay about Philadelphia’s industrial history, with the nostalgic title “Workshop of the World”: in 1953 Philly had 365,500 industrial jobs; by 1977 it was down to 168,400; and by 2008, it was down to 29,800! Here’s the link at http://philadelphiaencyclopedia.org/archive/workshop-of-the-world/

    Now my question to you Dean, and anyone else who might have an answer, is where did the American jobs lost in auto manufacturing, steel, basic household electronics, textiles – the industries which, off the top of my head this morning, were the oldest and most vulnerable to outsourcing in the stages outlined in Jefferson Cowie’s book about RCA, “Capital Moves” go, or better yet, given the chart and the statistical minimization implied by the numbers, the rebuke to all the talk of “De-industrialization”; what were the “new” industrial jobs in the US which kept the numbers up until the “China trade” impact after 2000? Which manufacturing industries grew, then, to make up for the losses that Licht and Russo cite? Was there some statistical slight of hand going on with the “categories” which moved some non-manufacturing activities into the old column to compensate?

    Picking up on Russo’s apt point that apparently in many trained economists mind that “nothing systematic” had occurred, the “continuity” in manufacturing jobs until 2000 would appear to make “De-Industrialization” a bleeding heart’s “mirage.” Have to deny a hell of a lot of physical evidence in Philadelphia, Newark, Detroit, to believe nothing bad and systemic happened though.

  6. graccibros
    May 11, 2016 at 7:20 pm

    It’s interesting to note that in the link I provided above here in the previous comments, historian Walter Licht (U of P) has a graph which maps the loss of industrial jobs in Phila as a percentage of total jobs against a line doing the same for the nation, and they track pretty closely, 1950 through 2008 or so.

    So let me add this question Dean, referring back to your graph, and not taking anything away from the China “trauma” since 2000, was this steady line of total number of industrial jobs a way of hiding from the profession – and the society – the total costs in all spheres of life – of the De-Industrialization of America?

  7. graccibros
    May 11, 2016 at 9:11 pm

    I see I have no takers on the burying of the physical destruction, and human destruction by the economics profession, the masking of the scope and pain inflicted by the Deindustrialization of America. A parallel to the political establishment’s surprise at the anger level in both parties this year? I think so. I still don’t think the top 20% professionals, by earnings in the Democratic Party get this… I know Gene Sperling doesn’t.

    Dean, under the financial rigging you note, please add this from Satyajit Das’ “The Age of Stagnation,” his book which came out this year. As you probably know, he made his reputation on following the twisting pathways inside the new world of derivatives, but the relevant point here is not as complex, and has been made by many others. It comes from his Chapter called Economic Apartheid, and he reminds us that Quantitative Easing “benefited financiers. Banks increased profits by borrowing, essentially for nothing, from central banks and investing the funds in government bonds or lending it out….In effect, the bank’s earnings did not require undertaking any banking activities, relying instead on the subsidy provided by government policy.” He names JP Morgan, Citibank Bank of America and Wells Fargo’s earnings (pretax) for 2013, the high percentage of their overall earnings “earned” by this form of domestic “carry trade,” if that’s the right term. Some of the no cost loans, of course, were invested or risked abroad.

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