Winner-take-all capitalism undermines democracy

Vijay K. Mathur

 “We can have democracy in this country, or we can have great wealth concentrated in the hands of few, but we can’t have both.”

— Louis D. Brandeis

 

In the U.S., we find the emergence of winner-take-all capitalism (WTA) in markets. In WTA markets, capitalists become prosperous and labor’s share of income declines. There are winners and losers in such markets. Professor Robert Frank states in “Winner-Take-All Society”: “The top prizes in many winner-take-all markets, however, significantly overstate the social value added by top performers.” Hence they attract undue amount of resources.

 

WTA markets create income and wealth inequality. Pew Research (January 9, 2020) reports that median income of high-income households was seven times the median income of low-income households in 2018. Wealth inequality was even greater. Median wealth of high-wealth households was 75 times the median wealth of low-wealth households in 2016. These inequalities are rising and may get worse.

Professor Frank notes that the extraordinary reward structure, common in entertainment and sports, has become more widespread in the economy as illustrated by a couple of examples here. Nobel Laureate economist Joseph Stiglitz, in “The Price of Inequality,” finds that “the six heirs to the Wal-Mart (sic) Empire command wealth of $69.7B, which is equivalent to the wealth of the entire bottom 30 percent of the US society.” Chrystia Freeland states, in “Plutocrat,” that during the deepest recession in 2007, Blackstone, a large private equity firm, raised $4 billion by creating a publicly held company worth $31 billion at that time (now worth $554 billion). And one of the cofounders, Steve Schwarzman “came away with personal stake worth $8 billion at that time, along with $677 million in cash.” Now, he is worth $18.3 billion.

 

One probable result of WTA markets is that the growth of elites with substantial resources undermines democracy. Theoretical and empirical evidence show that in the early beginning of a democracy, income inequality increases, but in more mature democracies, income inequality decreases. However, Stiglitz wonders why pre- and post-tax income inequality, even including transfer payments, is greater in the United States than in other advanced countries with similar technologies and per capita incomes.

 

Stiglitz hypothesizes that laws and regulations through institutional political framework govern the nature of market forces, and I may add, the trajectory of the distribution of the social product. Political scientists Jacob Hacker and Paul Pierson, in “Winner-Take-All Politics,” also share similar views. WTA markets affect not only income and wealth inequality but also political inequality, where the political process works for the superstars who control most resources. WTA creates crony capitalism, where the capitalists engage in rent-seeking behavior (using political process to seek economic benefits such as subsidies, less market competition, lax laws and regulations, and favorable tax laws). This ultimately distorts the distribution of income and wealth.

 

WTA markets also affect overall productivity, hence growth rates. Stiglitz argues that the decline in the productivity of low-wage workers is more than the increase among high-wage workers. He also adds that experimental evidence shows that “raising wages of workers who felt that they were being treated unfairly had a substantial effect on productivity.” Productivity affects economic growth. WTA markets misallocate resources due to less labor mobility and competition in markets, therefore creating inefficiencies in the economy. Concentration of resources in few hands and less market competition also creates disincentive for innovations, a hallmark of economic growth. WTA markets and politics also reduce trust and create uncertainty in the overall economy, as we are going through now, and hence decreasing investment.

 

It appears that the COVID-19 pandemic may further lead to the concentration of resources and power in the hands of a few capitalists, since there is an incentive to substitute capital for labor in production. Capital cannot get infectious diseases, hence reducing the threat of production shutdowns. However, as a result the consumer base may dry up, thus worsening the effect of WTA. Democracy and social justice for all cannot survive in a society that consists of winners and losers.

 

Mathur is former chairman and professor of economics, Department of Economics, Cleveland State University, Cleveland, Ohio. He resides in Ogden.

Fear of refugees depriving Americans of jobs is groundless

  

Vijay K. Mathur

 

 

Arrival of refugees at an increasing rate at the US-Mexico border in the past couple of years has further heightened the hostility of the Trump administration toward refugees and immigration.  Now the administration has issued proclamation 10014, June 22, 2020, to stop the entry of aliens as immigrants for 60 days with some exceptions (www.whitehouse.gov).  The excuse is to protect Americans from adverse health outcomes and job loss to aliens due to the Covid-19 outbreak.

 

Since 1947 various attempts have been made by the US administrations to reform the chaotic rules and regulations that deal with the refugees’ issue, according to the State Department study, August 2017. Finally, Congress decided to pass the Refugees Act in 1980 and used the UN definition of refugees. It also standardized the procedures for their resettlements and established the Office of Refugees Resettlement (ORS).

 

The question is whether the fear of refugees (including asylees) taking jobs from Americans and becoming a burden on American society is grounded in facts.  Perhaps the fear created by the Trump Administration is not based on the evidence of the economic status of refugees in the labor market.  Courtney Bell, Christian Dustman and Ian Preston (BDP), Journal of Economic Perspective, Winter 2020, find that male refugees, even with less human capital, lacking language and job skills, caught up to the employment rates of other immigrants within two years and to the natives within ten years after their arrival, a better outcome than Canada, Australia and many countries in Europe.  However, employment rates of refugee women were less than their male counterparts, other migrant and native women.   

 

The complaint that refugees would affect employment and wage rates of lower skilled workers is also unsubstantiated. The research by Professor David Card of Princeton University in 1990 examined the consequences of the Mariel Boatlift of 125,000 Cuban refugees in 1980, to Miami.  Close to 45,000 Cuban refugees, who permanently settled in Miami, had almost no effect on wages and unemployment of less skilled workers in the Miami labor market.  Other studies reported by National Immigration Forum (NIF), June 14, 2018, also support this result.   In addition, the Forum found that in 2015 there were more refugee entrepreneurs than native-born entrepreneurs.  Over 181,00 refugee entrepreneurs generated $4.6 billion in business income.  Refugees’ total net fiscal contribution to budgets at all levels of government was $63 billion during 2005-2014.

 

Gardner Policy Institute reports, April 2017, that Utah had 11,408 total new refugee arrivals from 2006 to 2016.  Most were concentrated in Salt Lake County and were from nations such as Congo, Syria, Vietnam and Iraq.  The IZA Institute of Labor Economics, Bonn, Germany, February 2018, reports that during 2005-2010 Utah’s average employment rate among all refugees was slightly less than 30%, ranking 24^thout of 41 reported states. Their self-employment rate ranking (a sign of entrepreneurship) was even worse than other states (see IZA DP NO 11343).  Utah policy makers need to pay more attention to this unsatisfactory record.

 

Despite the general success in the employment sector of the US, refugees faced a greater wage gap than in many other countries within 2 years of arrival: 60% lower than natives and 51% lower than other immigrants. The wage gap, though lower, persisted even a decade after their arrival (see BDP).  Perhaps poor health and lack of language and job skills may be contributory factors.  However, after 25 years, refugee households’ median income was $14,000 above overall median income of US households (see NIF), thus the fear of economic burden of refugees is illusionary. 

 

The US has thrived on the contributions of immigrants and refugees.   Cato Institute, July 20, 2018, finds that Australia and most Western and Northern European countries are more accepting nations for refugees than the US. The fear created by the Trump Administration about refugees and immigrants is unwarranted.  However, an orderly admission process is needed. Congress is obligated to pass a comprehensive immigration bill to resolve the current chaos caused by haphazard policies on refugees and immigration.

 

Mathur is former chairman and professor of economics, Department of Economics, Cleveland State University, Cleveland, OH.  He resides in Ogden. 

Economic recovery policies must focus on income inequality rather than on GDP growth

Vijay K. Mathur

Policymakers, following economists and media in general, have traditionally focused on implementing policies to increase growth in GDP (Gross Domestic Product). However, beginning in the early 1970s, increasing income inequality shows that all Americans have not shared the prosperity generated by economic growth. Isabel Sawhill, in her book "The Forgotten Americans," raises this issue very cogently.

Sawhill primarily addresses the economic plight of the white working class between the ages of 25 and 64. Since the ’70s, labor force participation has been decreasing and wage and salary income has been stagnant for this group, even with the increase in productivity. The same holds true for most Americans. The labor force participation rate peaked at 67.3% in early 2000 and has since declined to almost 63% percent, per the Bureau of Labor Statistics. Most productivity gains have gone to Americans in the top of the income distribution. Hence, income inequality has increased, and its incidence is harder on low- and middle-income Americans with an inadequate social insurance system.

Congressional Research Service reported July 23, 2019, that cumulative percent change during 1979-2018 in real wages for households in the top 10% of the income distribution was 37.6%, while for the middle- and low-income households it was 1.6% and 6.1%, respectively. Men in the middle and low income lost and women gained real wages. Household income for the top 1% increased 229% while the bottom 90% gained only 46% for the years 1979-2015 (Economic Policy Institute (EPI), March 27, 2019). Wage inequality is the driving force for income inequality. Using census data, Utah Workforce Services reports that Utah’s income inequality index (Gini coefficient) declined during 2014-2017 but has increased since 2017.

The capitalist system, supported by technological revolution and globalization, lately has not generated an economic system where all Americans have shared in private sector prosperity and growth in productivity. Real wages have diverged from productivity since the ’70s. EPI reports that cumulative percentage change in productivity from 1979 to 2017 was 70.3%, while hourly compensation grew only 11.1%. It is the responsibility of the government and the private sector to ensure jobs’ growth, with wage growth commensurate with increase in productivity. The gig economy, with more part-time workers and contract workers, and more self-employed (not by choice), is not a healthy sign of a growth economy, higher standard of living and happiness.

Involuntary unemployment surprises many economists, especially conservative politicians and policymakers. They would argue that a rational individual should be willing to accept a job, even if wages paid are below his or her expectations. However, as Nobel Laureate Professors George Akerlof and Robert Shiller argue in the book "Animal Sprits," the answer lies in efficiency wages. Effectiveness and efficiency of work effort in a job depends upon the wages paid. Employers cannot monitor their workers' efforts perfectly in doing their jobs. Employers’ preference for lower wages may backfire in lack of motivation, reduced work effort and productivity.

The COVID-19 pandemic has further worsened the economic well-being of low- and middle-income Americans. Their employment prospects look dim even after the emergence of a virus treatment and vaccine. Policymakers have to implement plans for education and training programs to prepare the labor force for emerging technologies. Utah has done better than many other states during the epidemic. Reduction in unemployment claims in Utah is a healthy sign for a quicker recovery. However, attention must be given to shared prosperity.

The growth rate of the economy is essential, but the focus must be on its distributive aspects — i.e., how it affects working Americans whose main earnings and standard of living is determined by labor market participation. Income is based upon education and training in the technologically sophisticated economy. I hope that our policymakers and politicians are wise enough to foresee the upcoming challenges.

Mathur is former chairman and professor of Economics, Department of Economics, Cleveland State University, Cleveland, OH. He blogs at mathursblogonomics.blogspot.com

The Free market: An instrument of economic growth

Vijay K. Mathur

In the current Democratic presidential debates, concern is raised that free market capitalism is contributing to income and wealth inequality. Capitalism now is seen as crony capitalism, where businesses get political and regulatory favors to benefit themselves rather than most Americans, thus increasing income inequality. Is there a better economic system than free market that brings growth and prosperity to the nation and its people?

Presidential candidate Sen. Bernie Sanders is a proponent of “democratic socialism,” a term borrowed from the economic system of Nordic countries (such as Sweden, Norway, Denmark) that existed in the 1960s. These countries are now far removed from socialism and have a thriving free market system, more freedom (www.heritage.org), less regulation, higher per capita income and lower income inequality than the US. They have a very robust and extensive social safety net compared to the US, and their residents are willing to pay higher tax rates to support it.

What kind of free market system produces high growth and prosperity that benefits most people in a country? Contrary to the general notion among many economists, William L. Baumol, professor of economics at Princeton and New York Universities (now deceased), cogently argued in his book “The Free-Market Innovation Machine” that an oligopolistic market structure with few firms dominating in competitive free markets drives innovation and growth. Free market competition among a few dominant firms forces them to make innovations part of their economic strategy to survive. Innovations are “systematized” and “routinized” in oligopolies and are the drivers of economic growth and higher standard of living. Utah’s growth is largely driven by innovating industries, called super-centers by the Brookings study (The New Yorker, Feb. 3, 2015). Utah is one of the top 15 innovation centers in the country.

Oligopolies have resources to routinize innovations and keep track of other firms’ behavior in order to be competitive. However, a large number of small firms competing in perfectly competitive markets (an ideal free market structure) do not have resources to routinize the innovation process. In addition, they cannot keep track of other competitors’ economic strategies, ascertain emerging technologies and dynamic movements of markets.

Many individual innovators and entrepreneurs eventually transform themselves into larger oligopolistic firms. Examples of new small-scale startups that eventually became giant multinational companies are Google (now part of Alphabet), Microsoft and Apple. These companies compete in oligopolistic markets and are constantly engaged in incremental product innovations to keep ahead of their competitive rivals.

A labor force that matches the skills and talents needed in innovative companies participates in the economic growth and prosperity. Professor Thomas Philippon argues in his book “The Great Reversal” that market concentration in the U.S. has been increasing since the 1990s due to oligopolies, thus causing income inequality and efficiency problems. However, as Baumol, John Panzar and Robert Willig contend in their book on contestable markets, efficiency problems do not arise when markets are contestable, where entry and exit of businesses are relatively easy. Antitrust laws and regulations must make sure that there are minimum barriers to entry and exits in markets.

The threat of entry is precisely what persuades incumbents to constantly engage in innovations, maintain market share and increase profitability. In the long run, exorbitant profits are driven down by competition due to the entry of new competitors, who also bid up wages for the labor they need to compete. I am sure most are familiar with the fate of companies such as IBM, Xerox and Kodak, and traditional auto companies due to the entry of Tesla.

The U.S. economy is a free market economy and increasingly dominated by oligopolistic firms, mostly in service and high tech industries. In the short run, the labor market is going through a structural change, because it has not kept up with the emergence of new technologies. In some corners of the country, there is a battle cry for democratic socialism since a significant part of the labor force, due to inadequate technological training, especially in manufacturing, has not participated in the prosperity of businesses and the economy.

The short-term hardship of Americans, who are severely impacted by technological change, must be dealt with. But democratic socialism and crony capitalism (with tacit political favoritism) are not the answers. I hope our government learns some of the novel ways Nordic countries have dealt with the economic hardships of their citizens, not by promoting socialism and crony capitalism but by adopting free market strategies that promote innovations and growth.

Mathur is former chairman and professor of economics, Department of Economics, Cleveland State University, Cleveland, OH. He blogs at http://mathursblogonomics.blogspot.com.

Reversing American leadership in free trade subverts US interests

Vijay K. Mathur

In 1817 David Ricardo, in “Principles of Political Economy and Taxation,” proposed his theory of comparative advantage where he argued that trade policies in England were protectionist. Comparative advantage proposed that beneficial trade, between two countries and two products, for example, is probable even if one country is absolutely more efficient in the production of both products. However, in the 1930s most nations, including the U.S., imposed trade restrictions, such as tariffs and currency devaluations, to boost exports and reduce imports. Hence, world trade and economies shrank.

After World War II, the U.S., U.K. and 42 other nations met at Bretton Woods, New Hampshire, to fix the world trading system. They established the International Monetary Fund (IMF) to monitor rules for trade and international finance and provide financial assistance to countries with balance of payment deficits. Under U.S. leadership, the World Bank and the General Agreement on Tariff and Trade (GATT), precursor to the World Trade Organization (WTO), were established to provide assistance for economic development, promote trade liberalization and arbitration on complaints of unfair trade practices.

The U.S. leadership succeeded in opening up more trade among nations that benefited all countries, including the U.S. The U.S. total trade was 27.09% of the GDP in 2017 and was almost the same in 2018. Despite the U.S. tariffs on imports, the trade deficit increased by 10% during 2016-2017 (www.macrotrends.net) and 12.45% from 2017 to 2018 (https://.world101.cfr.org). It has narrowed slightly in 2019. However, Utah exports are close to three times its imports, thus resulting in a large trade surplus during 2017-2018. (www.census.gov). Regrettably, it may suffer from trade restrictions in future years. Business Roundtable reported that most exports from Utah are by small- to medium-size companies, and trade created 1 in 5 jobs in 2013.

Under President Trump’s administration, the U.S. leadership in promoting free trade is crumbling. The U.S. is engaged in dismantling the WTO court, weakening the institution that promotes free trade. Selectively imposing import tariffs from China and Europe, the largest trading partners, to improve trade deficits is not having much success. The U.S. withdrawal from multinational trade treaties, except replacing NAFTA with USMC (with minor changes), is not in the national interest.

Import tariffs on products do not provide effective protection to home industries. For example, an import tariff on electrical machinery and steel products increases production cost and prices of products. It decreases demand for products in the U.S., hence the demand for labor, capital and raw materials in the production of those products. Price increases also make our products less competitive in export markets, thus contributing to trade deficit, economic growth and employment. In fact domestic investment and growth is declining. Bloomberg economists calculate that a 25% tariff shaves 1.5% off economic growth, according to a May 13, 2019 article.

The Federal Reserve study from Dec. 23, shows that tariffs by U.S. in 2018 and retaliatory tariffs by trading partners have reduced manufacturing employment and increased producer prices due to an increase in input costs. Aside from the beneficial effect of trade on employment and prices, the question is what are the other gains from trade?

Trade enhances product variety and consumer choice. It promotes intra-industry trade. For example, the U.S. exports and imports automobiles of different makes, models, quality and prices. Trade increases competition in the markets, and leads to economies of scale in differentiated products. The most productive firms (businesses) survive and expand and less productive firms contract or go out of business. This increases overall productivity in industries and in the country, and hence wages. More productive and competitive firms with expanding local and world markets innovate new products and processes. Thus competition increases churn in markets and promotes formation of new businesses.

Imports from lower wage countries, especially in manufacturing, do lower wages and real incomes in the U.S., especially of mid-skill Americans. But loss of wages and income is also partly due to the use of new technologies in businesses. This problem can only be fixed if the U.S. competes in the world market in high-valued products, for example in services and intellectual property-based industries. It must train the labor force for those advanced industries. Competing in traditional manufacturing products is a lost cause. The intellectual property dispute with China is an excuse for general protectionist policies. A policy that claims that trade restrictions would brighten the future living standard of Americans is self-defeating.

Leadership requires that U.S. persuade other nations to further open their markets to increase world trade so that all can prosper in the future.

Mathur is former chairman and professor of economics, Department of Economics, Cleveland State University, Cleveland, OH. He blogs at http://mathursblogonomics.blogspot.com.