A Green Job Program Will Help Workers, the Economy, and the Planet

There’s been much talk about Trump’s plan for jobs and infrastructure that entails over one trillion dollars in new spending (without tax increases) and promises to employ thousands of American workers. Because it looks like this would require significant deficit spending,  it has drawn stiff criticism: even Trump’s the own conservative supporters have expressed concern.

Among advocates of Keynesian spending and Modern Money Theory (MMT), however, some precautionary excitement can be observed. Their perspective is different because they are unafraid of a government deficit, and in favor of direct job creation. They understand that deficit-spending is not inherently bad, and that the US government will never have to default on its debt. When the economy is not at full employment, increasing the deficit would actually be helpful, not harmful.

A fiscal stimulus aimed at reducing unemployment is timely and necessary. Despite the confidence expressed by the Fed about the latest employment numbers, the situation for those who are jobless is not looking good. One of the reasons for the latest rate hike by the Fed was their positive outlook on unemployment numbers. Chairman Yellen has gone as far as saying that (at 4.6% unemployment rate) we are close to full employment and fiscal stimulus is not necessary to reach that goal.

However, the low official joblessness rate hides the fact that an increasing number of Americans have left the labor force altogether; for example there are currently over 5 million Americans who are not in the labor force but have reported that they want a job. This is where a Job Guarantee program could come in handy. In short, the government would act as an Employer of Last Resort, effectively guaranteeing a job to all of those willing and able to work.

And if Trump uses the deficit-spending towards jobs in infrastructure, it might result in something that resembles the job guarantee policy that America needs**. I argue, however, that the financial feasibility should not be the only criterium for a successful implementation of the job-guarantee. It also has to be sustainable. If we’re going to be at full employment, we have to do it in a way the planet can handle.

The current structure of the economy relies too heavily on fossil fuels, wasteful production methods and non-renewable resources. Unless we change this, sustaining full-employment would result in increasing production, consumption, and waste. My favorite Keynes’ quote is that “In the long run we are all dead.” If we’re talking about a long run of increasing pollution,  he will surely be right. As we know, too much of a good thing can be a bad thing. This applies to jobs too. Unless they are green jobs, too many jobs will be bring us environmental destruction.

The issue of the environmental sustainability of a Job Guarantee program has been on my mind since I first heard of the proposal. Mathew Forstater’s Green Jobs proposal was inspirational to my work. In my Master’s thesis, I tweak its existing framework to target environmentally sustainable outcomes. I find that we can transform the Job Guarantee program to ensure its sustainability without increasing its cost. Here’s how:

I set up the program in a way that promotes social enterprise and community development, following the work of Pavlina Tcherneva et al. With the help of social entrepreneurs, NGOs, and Nonprofit Organizations, local communities should decide what projects will be undertaken. For example, communities along the Hudson river could support a program where workers dealt with invasive species such as the zebra mussel and water chestnut. Other localities could handle neighborhood farming, recycling centers, flood containment structures, bike paths, etc.. It’s been found that if the community is involved in determining what projects are taken on, participation levels are higher.

A more detailed account of my proposal and calculations is available upon request, but this is the gist of it: I used an Input-Output model to establish what would be the cost of employing the official U-3 unemployed population into “green” Job Guarantee jobs. That framework accounts for indirect job creation related to the proposal, but not induced employment. What I find is that the US government can, under conservative assumptions, employ all of those who are officially unemployed for around 1.1% of GDP while paying them a $15hr wage. That is about 17% of the annual military budget. The Green Job Guarantee program is projected to cost just under 200 Billion dollars per year in order to ensure employment for 7.8 million people.

As the world economy quickly transitions into a more sustainable state, a shift in the productive structure will occur, rendering some current occupations useless. Workers who are employed in areas like fossil fuel energy generation (the fabled coal workers of the American Midwest for example) will be left without a job and unlikely to find a new one right away. There is no way to predict how quickly this transition will occur: it could be a gradual–albeit fast–process if led by government initiative, a slower and insufficient movement if guided by profit motives, or even a sudden transition caused by widespread popular response to natural disasters.

Given current trends it is safe to assume that the transition to a renewable energy generation and a sustainable economy will occur before the fossil reserves are depleted. Just as the stone age ended before we ran out of stone, the “oil-age” will end before we run out of oil. As such, fossil fuel workers (and those who depend on their consumption) are at risk of losing their jobs in the near future. A Job Guarantee program would allow those workers to not only find employment readily, but also to acquire the on-the-job skills that will allow them an easier transition into the Green economy.

So as we continue to criticize and investigate the means of job-creation proposed by the President-Elect, let’s look beyond the government deficit, and consider the planet, too. Whether you’re afraid of government debt or not, you should be concerned with the destruction of the earth. If we are going to have a public program that aims a generating new jobs and bringing people back into the workforce, then that program should be a Job Guarantee. But, if we’re going to guarantee jobs, the will have to be green. And we have all the tools we need to make that happen.
*Interested in some good work on how to build a sustainable economy? Check out the publications from PERI and the Binzagr Institute for Sustainable Prosperity. Interested in a non-profit that is already doing some great things in that area? Visit GreenWave‘s website and get involved!

** I must make clear that, although Trump’s infrastructure plan might very loosely look like a Job Guarantee program because of its intent, it differs significantly from it because of how it will will be implemented. The president elect’s plan is based on private spending and making concessions to big corporations; it is basically a big giveaway to developers and not a program to ensure full-employment and financial stability.

 

In the Spotlight: William “Sandy” Darity

William “Sandy” Darity’s work is the proof you need that the American dream is just that, a dream. The promise that anyone who takes initiative and works hard has an equal chance at success is not true. A close look at data on income and wealth reveals an inherently unequal society. Our recent post on racial inequality points out how for example, race affects the payoffs of a college education. For a much more comprehensive view of this issue, we can dive into Darity’s work.

Darity currently serves as the director of the Samuel DuBois Cook Center on Social Equity at Duke University, where he teaches Public Policy, African and African American Studies, and Economics. The focus of his work is inequality, examined through the lenses of race, class, and ethnicity. He also has analyzed policies that would help fix the legacy of racial injustice in America.

Darity rejects the neoclassical view that “markets” will arbitrage away discrimination over time, and champions a different approach called stratification economics. This strategy uncovers the stories of inequalities by looking at economic variables by different strata. Your chance at success in this society differs based on your race and gender. Examining economic variables by different groups offers a much clearer picture than the abstract “representative agent” models would depict.

As a young economist at Brown and MIT, Darity thought that studying economics would teach him why these inequalities are created and persist. Yet he found, like so many of us now, that studying economics is often more focused on math than society. Thankfully, once degrees are conferred PhD economists can pursue different lines of thought. His work today is a bright light for not only understanding how these inequalities are created and persist, but for understanding how we can fix them.

For example, the piece Umbrellas Don’t Make It Rain: Why Studying and Working Hard Isn’t Enough For Black Americans shows the broken logic behind the idea that more years of education results in higher earnings. Think about a rainy day, he argues. A lot of people might be holding umbrellas, but that doesn’t mean that the umbrellas caused the rain. Similarly, people with higher educational attainments have higher levels of wealth. Yet, it does not mean they accumulated the wealth because of the education.

Often times, working hard at an education or job is just not enough. Darity shows that white families with an unemployed family head have double the wealth of black families with a family head working full time. That’s a difference of $21,892 to $11,649. It’s not because of their educations, either. Black household heads with a college degree have two-thirds of the net worth of white household heads who never finished high school. Data like this suggests that education is not enough to correct these inequalities. This is just a taste of an enormous list of Darity’s publications that help us understand discrimination, prejudice, and inequality.

Darity hasn’t just looked at the problem, he has proposed bold solutions. Two policies which he advocates for are Baby Bonds and the Job Guarantee. The Baby Bonds idea would endow every newborn American with a trust that grows and they can access when they turn 18 years old. Everyone would receive this trust but to reduce wealth inequality those with lower levels of wealth would be given larger endowments, While this idea strengthens future generations, the Job Guarantee proposal fights inequality immediately. Guaranteeing every American access to employment at a living wage with benefits, the Job Guarantee could create a more equitable system.

Economic justice will be a necessary component for achieving racial justice in this country, and Darity’s work helps not only understand the problem but also the solutions that we, as citizens, can help promote. If you’re itching for more, check out this piece on INET, his articles at HuffPo & NYT and be sure to follow him on Twitter @SandyDarity.  I’m sure we’ll hear from him there when his forthcoming book on reparations comes out. I can’t wait to read it!

The Basic Income and Job Guarantees are Complementary, not Opposing Policies.

It’s disappointing to see debates between proponents of the Basic Income Guarantee (BIG) and the Job Guarantee (JG). These discussions detract from the fact that both of these ideal policies are distant from the policies we currently have in place. Supporters of either of these policies should be working together to get either one implemented, and we can debate adding the other later. Today, we need to move beyond our current disjointed welfare system to one that will help Americans, and either policy (or both!) seems like a step in the right direction.

If we look at the current system, the three largest welfare programs we have are Medicaid, the Earned Income Tax Credit (EITC), and the Supplemental Nutrition Assistance Program (SNAP). Before the Affordable Care Act (ACA), Medicaid was limited to certain low-income individuals, but the ACA expanded this program so that all adults with incomes below 138% of the federal poverty line are eligible. For FY 2015 Medicaid cost $532 billion to cover 73 million individuals. EITC provides additional income to low wage workers, and in 2014 paid out $67 billion to 27.5 million tax filers. Finally, SNAP guarantees an income to buy certain necessary items, and paid out $69 billion to 22 million households in 2015.

Then beyond those three largest programs, we have a smattering of additional programs that help the poor in this country. There’s a housing assistance program, Supplemental Security Income (SSI) for the elderly, Pell Grants for college tuition, the Temporary Assistance for Needy Families(TANF) program, the Child Nutrition Program, the Head Start preschool program, various Job Training programs (like AmeriCorps and Job Corps) under the Workforce Investment Act, Unemployment Insurance, the Child Tax Credit, Supplemental Nutrition for Women, Infants, and Children(WIC), and then theres others I’m sure I missed (oh yeah, the Obama phone!) along with various state and local programs. The amount of overlap, overhead, and bureaucracy involved with running all of these programs surely diminishes their effectiveness.

All of these programs provide support by doling out income or necessities, with or without a requirement that the recipient be working. BIG and JG would both be ways to consolidate all of these programs, and then the debate becomes how much does someone have to work in order to receive assistance. A lot of people who advocate for BIG think that our current system has a lot of pointless jobs, and BIG would be away to allow those people to pursue something more creative. Considering that most entrepreneurs have one thing in common — access to capital — that may not be too far off. Then there are JG proponents who probably agree with that point, but think we can use the policy to help organize jobs that need to be done (liking cleaning up our environment, or building our infrastructure). Most people who support BIG worry that a JG would create “make-work”, quoting Keynes famous “bury bank notes and dig them back up” line. To them, just giving people the bank notes makes more sense. On the other hand, JG proponents worry about losing the social utility of work. People want to contribute to society, and they see work that needs to be done. Both policies seem hard to pass in todays political climate.

I think proponents of both the BIG and JG are disappointed with a U6 unemployment rate of 9.5%, current companies lack of interest in maintaining our environment, and over 45 million Americans living in poverty. Call it whatever you want, let’s guarantee every American access to the necessities: healthy food, shelter, and healthcare. Clearly this is going to require some people to do some work, so let’s make sure that work gets done with our social structure as well. Calling it a BIG or a Basic Necessities Guarantee (BNG) or a JG doesn’t matter so much to me.

In fact, I’d probably start with calling it the EITC. Get rid of the minimum income phase in, and we instantly have a “BIG”, with all the infrastructure already in place. It would only go to unemployed or low income citizens, since the EITC phases out, which helps it be a progressive policy. So that it can cover the housing benefits and others, we could expand the credit a bit too. How do we pay for this? It’s simple. Scrap the other welfare programs (keep Medicaid, that one’s complicated). The overhead of having all of these programs is gross. How feasible is this plan? Honestly, no clue. I’ve never made a policy. I’ve barely met anyone who even makes policy. It seems like the closest option there is, however. I can see the complaints already though. These ungrateful welfare abusers will buy alcohol and drugs with their new found income! Somehow it’s not OK to drink and do drugs if you’re poor, but if you’re rich, go for it, right? If you get rid of SNAP, people won’t buy food for themselves! Well surprise, there’s already a way to trade SNAP benefits for cash — it’s called craigslist.

Then there’s the other major complaint this would cause — now there is no incentive to work. We have to keep abject poverty as a social option so that people keep working at McDonalds making the McObese, and keep stocking the Wal-Mart shelves so that Wal-Mart can pay starvation wages which allow people to be eligible for the EITC in the first place. I’m not really sure those are the jobs that need to be done. If our low wage workers were working on local farms producing fruits and vegetables, I’d probably agree… someone has to do those things (or make robots to do them!). Yet I haven’t seen any proof an income stops people from working. It’s all speculation. I bet people still do things. Here I am, incomeless, and I’m doing something. I’m writing. I’m volunteering. I’m applying to jobs that I want to do and think will have a positive benefit. Getting rejected, but still, I’m trying.

Let’s see what happens when everyone has some cash on hand. If we start starving and need the government to force us to produce food, we’ll do it then. Yet from the friends I’ve talked to, boredom is a very potent driver of change. I know my fellow millennials and I have dreams of growing our own food in our parents backyards, or the empty lot across the street, or the empty K-Mart, or the empty mall. If only they’d let us. If only we had a little income, a little land, and some water to give it a try. If only the police weren’t killing and hurting us. If only Nestle wasn’t pumping out water from government land for free and forcing us to spend money on it. A lot of us worked our asses off at school, and what did we get? The choice between huge corporations who we see as destroying the environment, or low incomes working retail living with our family and friends. Meh. My friends and I want something different. I choose believing there’s something better than choosing between two evils.

Remember when the public hated huge corporations for destroying small business, not each others’ identities? Do we remember The High Cost of Low Price? BIG and JG proponents, let’s not quibble. We’re on the same side. There’s work to be done. Get organized. Make it happen.

Originally published on Medium

Using Minsky to Better Understand Economic Development – Part 2

The work of Hyman Minsky highlighted the essential role of finance in the capital development of an economy. The greater a nation’s reliance on debt relative to internal funds, the more “fragile” the economy becomes. The first part of this post used these insights to uncover the weaknesses of today’s global economy. This part will discuss an alternative international structure that could address these issues.

Minsky defines our current economic system as “money manager capitalism,” a structure composed of huge pools of highly leveraged private debt.  He explains that this system originated in the US following the end of Bretton Woods, and has since been expanded with the help of  financial innovations and a series of economic and institutional reforms. Observing how this system gave rise to fragile economies, Minsky looked to the work of John Maynard Keynes as a start point for an alternative.

In the original discussions of the post-war Bretton Woods, Keynes proposed the creation of a stable financial system in which credits and debits between countries would clear off through an international clearing union (see Keynes’s collected writings, 1980).

This idea can be put in reasonably simple terms: countries would hold accounts in an International Clearing Union (ICU) that works like a “bank.” These accounts are denominated in a notional unit of account to which nation’s own currencies have a previously agreed to an exchange rate. The notional unit of account – Keynes called it the bancor – then serves to clear the trade imbalances between member countries. Nations would have a yearly adjusted quota of credits and debts that could be accumulated based on previous results of their trade balance. If this quota is surpassed, an “incentive” – e.g. taxes or interest charges – is applied. If the imbalances are more than a defined amount of the quota, further adjustments might be required, such as exchange, fiscal, and monetary policies.

The most interesting feature of this plan is the symmetric adjustment to both debtors and creditors. Instead of having the burden being placed only on the weakest party, surplus countries would also have to adapt their economies to meet the balance requirement. That means they would have to increase the monetary and fiscal stimulus to their domestic economies in order to raise the demand for foreign goods. Unlike a pro-cyclical contractionist policy forced onto debtor countries, the ICU system would act counter-cyclically by stimulating demand.

Because the bancor cannot be exchanged or accumulated, it would operate without a freely convertible international standard (which today is the dollar). This way, the system’s deflationary bias would be mitigated.  Developing countries would no longer accumulate foreign reserves to counter potential balance-of-payment crises. Capital flows would also be controlled since no speculation or flow to finance excessive deficits would be required. Current accounts would be balanced by increasing trade rather than capital flows. Moreover, the ICU would be able to act as an international lender of last resort, providing liquidity in times of stress by crediting countries’ accounts.

Such a system would support international trade and domestic demand, countercyclical policies, and financial stability. It would pave the way not only for development in emerging economies (who would completely free their domestic policies from the boom-bust cycle of capital flows) but also for job creation in the developed world. Instead of curbing fiscal expansion and foreign trade, it would stimulate them – as it is much needed to take the world economy off the current low growth trap.

It should be noted that a balanced current account is not well suited for two common development strategies. The first is  import substitution industrialization, which involves running a current account deficit.  The second is export-led development, which involves  a current account surplus. However, the ICU removes much of the need for such approaches to development. Since all payments would be expressed in the nation’s own currency, every country, regardless it’s size or economic power, would have the necessary policy space to fully mobilize its domestic resources while sustaining its hedge profile and monetary sovereignty.

Minsky showed that capable international institutions are crucial to creating the conditions for capital development. Thus far, our international institutions have failed in this respect, and we are due for a reform.

Undeniably, some measures towards a structural change have already been taken in the past decade. The IMF, for example, now has less power over emerging economies than before. But this is not sufficient, and it is up to the emerging economies to push for more. Unfortunately, the ICU system requires an international cooperation of a level that will be hard to accomplish. Aiming for a second-best solution is tempting. But let’s keep in mind that Brexit and Trump were improbable too. So why not consider that the next unlikely thing could be a positive one?

In the Spotlight: Stephanie Kelton

If you want to be at the cutting edge of economic policy-making, listen to Stephanie Kelton. She explains how a government spends, and how confusion about debt and deficits have held America back. Shaking up democrats and republicans alike, she shows there is nothing inherently dangerous about a large budget deficit. We should aim for a balanced economy, not a balanced budget.

Her encouragement of ambitious fiscal spending is rooted in Modern Money Theory, which reveals the true nature of money as a creature of the state (discussed in detail here). So long as a government is sovereign and has its own central bank, Kelton shows, it is the sole issuer of its currency. Being the sole issuer of its currency, it can never run out of money, and it will never fail to meet its debt obligations. It’s completely able to spend as needed.

Kelton is always quick to respond to the most common points of critique. Is she arguing for the government to run infinitely large deficits forever? No. She is advocating for the government to determine its spending level based on the state of the economy. Spending should be high enough to facilitate full employment, and low enough to keep inflation in check. The spending level should be chosen based on the impact it has on the economy. Not based on whether it allows for two columns to sum up nicely in Excel.

Over the past couple of decades, this school of thought has gained significant momentum. Kelton, who teaches at the University of Missouri Kansas-City, gained traction in the world of finance and more recently broke into Washington, where she served as Bernie Sanders’ chief economic advisor during his campaign. Providing the economic backbone behind Sanders’ plans to raise the incomes of the 99%, the vast potential of Kelton’s approach to fiscal policy gained recognition. Kelton still works with Bernie to further his movement and mobilize support across the globe.

It is worth keeping Kelton’s message in mind as the Trump presidency unfolds. Judging by this article in Politico, Trump plans to cut taxes on the wealthy, and “make the deficit great again.” Considering Kelton’s stance on the matter, such a move should be recognized as problematic because it worsens income disparities, not because it worsens the budget deficit. We should judge Trump on the impact he makes on the economy, not on his ability to balance the books.

Kelton’s message can also provide a powerful weapon against the republican majority that the democratic party will soon be up against. Her advice for democrats is as follows:

“Democrats face a difficult road ahead. Having failed to recapture the Senate, there may be few opportunities to advance progressive goals — e.g. raising the minimum wage or boosting infrastructure spending — without compromising other core values. Democrats may be tempted to give Republicans a taste of their own medicine by hollering about budget deficits as cover for obstructionism. That would be a mistake. Instead, they should stand firm against cuts to programs like Medicare and Social Security, exposing the truth about the government’s ability to sustain these programs indefinitely. And when they fight efforts to deliver huge tax cuts for those at the very top, they should make it clear that their opposition is not based on the budgetary impact but rather on the social and economic effects of widening income and wealth disparities.”

If you’re curious for more, be sure to follow Kelton on Twitter, and keep track of the blog she runs with Bill Black. You should also have a look at her crystal-clear presentations. Click here for a talk on the role of government, here for her ideas on inequality, and here to hear about her thoughts on the Bernie Sanders movement. And if you want to know how all this applies to the Euro-zone, this piece she wrote with Randall Wray is a great resource.

Using Minsky to Better Understand Economic Development – Part 1

The global system has seen two major shocks in 2016: the Brexit vote and Trump. What these events have in common is their populist rhetoric that promised to bring back jobs. These elections have tapped into growing anxiety over job security, which has not been addressed by most governments and has given room for demagogues to tap into the anger of the people. They reflect a problem that transcends the boundaries of any single nation: the global economy has been in a slump for almost a decade. Governments need to create jobs, and public fiscal stimulus is the way to do so. To allow it, we must rethink that system.

To understand why we have to consider the international system in which nation states currently operate in. Its current characteristics present challenges for developed and developing economies alike. There are two important features to consider: first, the system creates a deflationary bias by requiring recessionary adjustments and hoarding of the international mean of payment (i.e. dollars). Second, it lacks mechanisms to offset the chronic surpluses and deficits between nations, thus breeding financial instability. In a nutshell, it leads to poor creation and distribution of demand that is managed through capital flows. Instead of propping up demand, the global economic system props up debt.

This post will be split into two parts. This first part will employ the theories of Hyman Minsky to explain the features of our current global economy. Next week, we will follow up to discuss an alternative system that would allow for a better distribution of demand among countries and would support emerging economies’ development by freeing them from the swings of international markets.

In his Financial Instability Hypothesis, Minsky addresses the ability of a company to honor its debt commitments. Companies can finance investment through previously retained earnings (internal funds) and/or by borrowing (external funds). If retained earnings prove to be insufficient, and the company comes more and more reliant on borrowed funds, the company’s balance sheet structure shifts from being stable to unstable. As presented in a previous post on this blog, Minsky described this process as moving from a stable “hedge” profile to a riskier “speculative” profile, and finally to a dangerous “Ponzi” profile.

Similarly, a country has three ways in which it can meet its debt commitments denominated in foreign currency: i) by obtaining foreign exchange through current account surpluses; ii) by using the stock of international reserves (obtained through previous current account surpluses); and iii) by obtaining access to foreign savings, i.e. borrowing. The first characterizes a hedge financial profile in which the cash inflows are sufficient to pay the foreign currency denominated liabilities. Any mismatch between inflows and outflows can be covered by reserves (its cushion of safety) or by borrowing; while the former can still characterize a hedge profile – as long as the cushion of safety is big enough to cover the shortfall for the necessary period of time – the latter is said to be speculative. In other words, the country borrows to cover a mismatch with the expectation that future revenues will be used to meet those debt obligations.

A situation in which further rounds of borrowing are necessary to meet those commitments is by definition a Ponzi scheme. It can only be sustained over time if it manages to keep fooling investors to continue to lend. Once a greater fool is not found and financial flows are reversed, the economy collapses in a Fisher-type debt deflation: as assets are liquidated to meet those financial obligations, their prices fall and the debt burden becomes increasingly heavier. The case of a country is different from a company, where outflows are often accurately expected, and it commonly leads to massive capital flight, currency devaluation, fall in public bond prices and increase in its premiums (i.e. interest rate payments). This last point illustrates the implications of accumulating foreign liabilities – reserves included – and implies the growth of negative net financial flows from borrowers to creditors through debt servicing. In general, from developing to developed countries.

The adjustment process punishes the borrower much harder than the lender. Greece presents a clear example. For the borrowing country, the standard imposed remedy is austerity: curtail of imports and public expenditure in order to forcefully meet those debts. Or, more often, to stir up enough confidence and access additional financial resources from private investors; in other words, continuing the Ponzi financing. Even in a case where interest payments on the borrowed funds are lower than the rate of capital inflow, the stock of debt would still expand, increasing financial fragility. A development strategy dependable on increasing usage of foreign savings is thus not feasible.

Of course, economic development is an extremely broad subject and we sure don’t want to commit the mistake of suggesting a “one-size-fits-it-all” policy a la neoliberal disciples. Nonetheless, a common issue for many developing economies is the lack of complexity and variety of its production structure – heavily dependent on primary goods – and the low price-elasticity of demand for its exports, which means that shifts in prices (exchange rate) do not do much to stimulate exports (increasing demand). As such, price adjustments might not always work as expected. This is one of the rationales behind the familiar “import substitution industrialization” strategy that tragically seems to have become the case for the UK and US.

These common characteristics affect the ability of emerging economies to face both up- and downswings of the international economy with countercyclical policies. While international liquidity is abundant in booming periods, it becomes extremely scarce during the slumps. Both capital floods and flights can be domestically disruptive for a developing economy, affecting its employment and output level, solvency, and – ultimately, its sovereign power. With scarce demand and international liquidity, the indebted economy falls into the debt-deflation spiral: it has to incur in a recession big enough to collapse imports at a faster rate than exports thus generating surpluses to clear off debt.

It should be clear that besides being completely inefficient – as opposed to the argument commonly used by “free-the-capital” defenders – the current economic system does little to stimulate demand. It is quite the contrary. Notwithstanding, after almost 10 years after the financial crisis, the world economy is still suffering the consequences of economic “freedom,” and the fighting tool has focused excessively on monetary rather than fiscal policy. Instead of cooperation, we are prone to have currency wars, protectionism, “beggar-thy-neighbor” policies and chronic debt accumulation.

These points of criticism are not novel, but they do deserve more of our attention. The same applies to their solutions, which are the focus of Part 2 of this article.

Removing the Blinders: Trump Voters and Racial Inequality

A friend recently told me that he voted for Donald Trump, despite the candidate’s racist approach, because racism is “something that hasn’t existed [in America] for sooo long.”

We know some groups of voters—e.g. the KKK—deliberately organized and voted not to “make America great again” but to make America white again. While we don’t know how many of this type there are, we know they couldn’t have elected Trump on their own. They had help from people like my college-educated friend, who thinks racism is confined to history books. This tells us a lot about the degree to which voters are misinformed. Millions of people decanted towards a racist candidate even though they don’t consider themselves to be racists. The election made it clear that there are enough people like my friend to get Donald Trump elected.

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Illustration: Heske van Doornen

In our last piece we discussed Dean Baker’s book, which shows that many policies and institutions disproportionately benefit the social elite, and in effect, further marginalize the already marginalized and perpetuate inequality. People of color have long been kept down by policies and institutions that favor the hegemonic class. Racism will not be an issue of the past as long as we have a rigged socio-economic system that systematically breaks down communities of people of color, concentrates poverty to their neighborhoods, cripples their educational opportunities, and limits their access to better incomes and wealth accumulation. The numbers below speak to such current racial disparities.

Wealth and income inequality

Figure 1 shows the disparities between selected races, in terms of wealth, income, home equity, and savings for retirement. As can be seen in the figure, in 2013 net worth for white households was almost 13 times larger than that of African-Americans and 10 times higher than that of Hispanics.

Figure 1. Median Household Wealth, Income, Home
Equity, and Retirement Savings by race, for 2013

Figure 1
Source: Authors’ calculations per The Survey of Consumer Finances (2013)

Not only did whites hold more wealth, but whites also receive higher incomes. A black or Hispanic household in the middle of the income distribution is likely to receive only as much as 58 percent as its white counterpart. While the amounts of savings for retirement for average white households are 4 times larger than those for black or Hispanic.

White households not only have larger sums saved for retirement, but also over 54 percent of these households have some kind of savings. Meanwhile the percentage of black or Hispanic households with savings is considerably lower, as shown in Table 1 below.

Table 1. Percentage of households
with savings and home equity, by race for 2013

  Savings Retirement Savings Home Equity
White 54 57 70
Black 39 34 38
Hispanic 37 26 38

Source: Authors’ calculations per
The Survey of Consumer Finances (2013)

Table 1 also shows that average white households are more likely to have equity on their homes. While in 2014 homeownership rates for whites households was at least 26 percentage points larger than the other two groups analyzed here, making whites 1.6 times more likely to own a home—the principal source of wealth-building for most Americans.

Educational Attainment

People of color see their access to incomes and wealth building opportunities severely crippled by educational attainment. Figure 2 below offers a breakdown of educational attainment within each race, using household data. It shows, for example, that 77 and 87 percent of all blacks and Hispanics household heads have less than a College degree as their highest level of education, respectively, while 62 percent of white household heads have less than a completed college education. These differences increase for higher levels of education. As the figure shows, only 7 percent of blacks and 5 percent of Hispanics obtain a graduate degree.

Figure 2. Highest Educational Attainment of Household Head Within Each Race

image11
Source: Authors’ calculations per The Survey of Consumer Finances (2013)

Moreover, a college degree is not a guarantee of financial success in the future, at least not for non-white families. Even if they attend college, the median wealth return to college graduation for Black and Hispanic households is 9 and 8 percent, respectively, of the returns that accrue to white households, as shown in Table 2. Meaning that for every $1 in wealth that accumulates to Black and Hispanic families, white families accrue $11.5 and $13.33, respectively.

Table 2. Median Wealth Return to College Graduation, 2011

  White Black Hispanic
Median Returns to College $55,869 $4,846 $4,191

Source: Demos analysis of Survey of Income
and Program Participation (SIPP), 2011.

Mass incarceration

The rapid increases in incarceration rates in the U.S. beginning in the mid-1970s have disproportionately affected people of color. By 2008, African-Americans and Hispanics were being incarcerated at a rate 6 times greater than whites and they represented 58 percent of all prisoners, even though blacks and Hispanics only comprise around 25 percent of U.S. population. By 2010, 1 out of 3 high school dropout black male between 20 to 39 years old were imprisoned; compared to just 13 percent for whites with similar characteristics.

As an election-relevant impact of the era of mass incarceration, it is estimated that 1 in 13 African Americans of voting age are deprived of their right to vote as a consequence of voting restrictions imposed by twelve states, with the sole objective of disenfranchising individuals after they have completed their sentences; more than 7 percent of black adults are disenfranchised, while the same restrictions apply to 1.8 percent of non-African-Americans.

The result is that it is estimated that 1 in 3 black males born today is likely to spend some time in prison. And even after they serve their time, wages for black ex-inmates tend to grow 21 percent slower than those of white ex-inmates.

Red lining and exclusionary zoning

Exclusionary zoning and red lining are policies that effectively deny affordable housing and other services—e.g. banking, insurance, supermarkets—to certain groups of the population based on their incomes, race, or ethnicity. It has been widely reported how those policies make it difficult for people of color to find homes in good, safe neighborhoods with access to quality education, employment opportunities, and quality healthcare. The impact of these policies is the creation of race and income segregated areas, with poverty and wealth concentrating in different neighborhoods. It is estimated that a black person is over 3 times more likely to reside in neighborhoods with high poverty concentration than a white person, while Hispanics are twice more likely than whites.

A close reminder of how African-Americans suffer this issue is that the President-elect of the U.S. was investigated and eventually sued by the Justice Department for discriminating against potential black tenants in his company’s buildings; what The New York Times called “the color barrier of the Trump real estate empire.”

These are only a few selected facts, but there are many more; these facts are not as evident to everyone, nor do they capture headlines on TV and Facebook like, e.g., police shootings of unarmed African-Americans.

This piece does not address the reasons, causes, and policies that got us to this point. This is nothing close to a history of racism in America and these are by no means the only injustices that people of color suffer in this country. However, after seeing all this, it should be evident that racism is not an issue of the past—certainly not one for the history books. There are still many people today that lived in racially segregated states under the Jim Crow laws. They had to literally fight for their rights to vote, to access the same schools as whites, or just to sit in the front of a bus. We might not have legal Jim Crow-style discrimination anymore, but American institutions covertly retain remnants of the Jim Crow era. Meanwhile the rich and powerful have rigged American socio-economic institutions with a bias towards their class and race, perpetuating an oppressive system that pretty much defines our place in society according to the color of our skin and the class status of the families from which we are born.

Now, my friend, be careful with any “buts” you might want consider as retort. If you are still not convinced that there is a deeply-rooted-institutionalized race problem in America, then go further than this piece, be curious about it, turn to your black and brown friends—ask them about it, and hear what they have to say.

Post co-written by Daniella Medina and Oscar Valdes-Viera
Illustration by Heske van Doornen

Rigged: How Mainstream Economics Failed Us All

Econ 101 operates under the observation that “households and firms interacting in markets act as if they are guided by an invisible hand that leads them to desirable market outcomes.” Thus the role of the economist is “to understand how this invisible hand works its magic,” a role limited to developing and employing models to illustrate the magic workings of this invisible hand. Dean Baker’s latest book, “Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer,” tells a different story. The “invisible hand,” guiding the market, is actually the hand of the financial and political elites, who work to ensure the market works in their favor and to facilitate upwards distribution of income.

In the late 19th century neoclassical economics transformed the subject into “the Calculus of Pain and Pleasure,” by introducing the concept of utility, and creating a theory based on the assumption that each individual aims to maximize their own utility. By introducing a mathematical component, the new theory offers, as Baker states, “a basis for distributing income that is independent of political decisions or moral judgments.” The discussions about class struggle and distribution of wealth, which previously dominated the economics debate, became obsolete. Ever since the mathematical component has become the norm in mainstream economics.

“Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer” very skillfully proves that textbook economics is far removed from the world we actually live in. Baker shows how the distribution of income in our society has little to do with merit and how postulates of neoclassical economics are selectively invoked to prevent any actions that do not benefit elites. Interventions that promote upwards distribution of incomes are never criticized, while inequality and unemployment are left for the invisible hand to fix.     

Head-on the book addresses the myth of the free market: “markets are never just given. Neither God nor nature hands us a worked-out set of rules determining the way property relations are defined, contracts are enforced, or macroeconomic policy is implemented. These matters are determined by policy choices.” It is active policy and not some magical invisible hand that lead to the unequal society in which we live. Baker then goes on to address some of the main policies that actively intervened in the economy to distribute income upwards.

Mainstream economics heavily criticizes government regulation and intervention, yet “almost no proponent of deregulation argued against the bailouts that saved Wall Street in the financial crisis.” Regulation is criticized when it threatens profit opportunities but welcomed in instances where it provides government-backed insurance. The financial sector, which has significantly ballooned in the past decades, has enormously profited from bailouts, yet without suffering any consequences for the harm it caused to the rest of the economy in the aftermath of the financial crisis. The large wages in the financial sector effectively constitute rents for those who manage it and offer no incentive to reform and reduce its size. A “ballooned” financial system where the waste “provides income for some of the highest earners in the economy” that takes government bailouts when it fails is a good example that there is no invisible hand moving things towards optimal outcomes.

Another form of government intervention that is heavily critiqued by mainstream economics is protectionism. The recent debates on trade deals have brought the issue of protecting U.S workers from competition from abroad to the forefront. Many of the people “remarking on the narrow-mindedness and sense of entitlement of manufacturing workers” that are refusing to quietly take a hit on their pay to make goods cheaper for everyone else “earn comfortable six-figure salaries.” And while trade deals open up competition for manufacturing workers, they actually offer protections for those at the top of the income distribution. These deals usually propose strict enforcement of copyright and patent protections that secure monopolies and high incomes for many companies and their top earners.

Furthermore, while manufacturing workers are exposed to competition from abroad, professionals are shielded from it. “Developing countries also have tens of millions of smart and ambitious people willing to work as doctors and lawyers in the United States for a fraction of the pay of the ones we have now.” They are not allowed to do so and there are many restrictions in place that bar those people from working in the United States. Yet, these policies are not being labelled as protectionism. Again, intervention is considered unacceptable to protect those who are vulnerable but acceptable when it benefits those in political power.

At the core of mainstream economics is the idea that pay is related to productivity. This claim is refuted in the chapter that addresses the pay of executives in the United States. It is hard to explain the sharp increase in the pay of top executives based on their actual productivity. Baker points out that in the 1960s, CEO pay was 20-1 compared to their average worker. In 2015 that ratio was 276-1. Significantly, stories like that of Home Depot’s Robert Nardelli, who walked out with a significant payout after leaving the company in worse shape, prove that his pay had little to do with the value added to the company. “The pay of top executives is not determined in anything resembling a normal market” but is decided by corporate boards with little incentive to restrict it. To make matter worse, the high pay of CEOs spills out to other top executives, including those working in the non-profit sector. All this while wages for most other workers have virtually stagnated in the past decades. The story of workers being paid based on their marginal productivity just does not hold.

Perhaps the most important issue in Baker’s book is pointing out the problem of unemployment as a deliberate policy choice. A full-employment economy is clearly beneficial to workers and “the key element in assuring the benefits of growth are shared equally throughout the income distribution.” In a full employment economy, workers have the necessary bargaining power to ensure they also enjoy the gains from growth. Persistent unemployment is proof that the invisible hand is not taking the economy towards full employment.

The financial industry, as well as some powerful business interests, would be the only potential losers in a full employment situation. For financial intermediaries, the risk of inflation is damaging to any lending activities. For business, high bargaining power of workers means more money paid towards wages. The non-interventionist principles of mainstream economics are aggressively used to argue against any type of expansionary policy that promotes full-employment. The same elites that benefit from all the non-market mechanisms that distribute income upwards, selectively invoke the dangers of intervention when it is not in their favor.

Average people are scared into opposing any type of expansionary government policy through predictions of hyperinflation that would destroy the economy. Weimar and Zimbabwe are brought up as examples of what happens when a government decides to print money. However, neither of those stories are appropriate comparisons to the current situation the US finds itself in. For the US government, the purpose of printing money would be stimulating weak demand. Zimbabwe and Weimar simply printed money to pay their bills because they were broke. A policy “that insists on balanced budgets or low deficits is a policy designed to keep unemployment high” but sold as one that is meant to protect everyone from the dangers of inflation.

The policies presented by Baker in his book prove that the society we live in “is not laissez-faire or the free market” but it “is operating the government to benefit a select group.” This group cites the wisdom of neoclassical economics when it aligns with their interests but does not follow the same principles in other circumstances. Clearly, textbook economics is far removed from how the real world works.

Baker proves our economy is rigged in favor of the rich. To ensure economic gains are shared by all, it is essential to deepen our understanding of economics to more than just one failed theory. Mainstream economic models all failed to see the crisis and housing bubble, while Baker and non-mainstream economists, such as Hyman Minsky were able to see it coming. While Minsky’s work, in relation to the financial system, has gained many followers since the crisis, his ideas aimed at addressing poverty and reaching full-employment, are still overlooked. Maybe it is finally time to consider other non-mainstream proposals and make out-of-the-box economic approaches accessible to all, so we can all participate in an informed debate on policy issues.

The book “Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer” is available in PDF form for free. You can also order a hard copy from Amazon.