The bottom line here is simple. Both capitalists and workers have cause for complaint. Capitalists have lost pricing power - the degree of monopoly has fallen - which has tended to depress the profit share. But this has not benefited workers because instead the "wedges" of other incomes and higher imports have depressed their share.
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You might object that imports are not a cost for capitalists to the extent that they comprise consumer goods. You'd be wrong. If workers buy domestic consumer goods, their wages are not a cost to capitalists in aggregate. This is because what they lose through the back door in higher wage costs is recouped through the front in higher spending. If, however, workers spend their incomes overseas, then wages are a net cost. In this sense, all imports are a cost to UK capitalists, either directly (imported materials) or indirectly.Read it at Stumbling and Mumbling
The wage & profit squeeze
by chris dillow
The cost of a persistent CAD.
16 comments:
" If, however, workers spend their incomes overseas, then wages are a net cost."
How are they? The incomes are in the local currency, and that currency is then exchanged and spent back on the exports of the country.
Or it is reinvested in the country, or net-saved as excess non-government sector savings - which the government can offset with injections if it understands MMT.
So if there's an aggregate loss, it is down to bad domestic government policy.
Why do economic commentators define 'overseas' as though it is an amorphous mass that simply emits goods and services by magic?
It's a false analysis viewpoint - just like 'governments must borrow'. The persistence of that viewpoint must be political.
Neil, for an open economy, as addressed in the post, it follows from the profit identity that wages spent on imports are a cost to domestic capitalists in aggregate. Profit is identically equal to the sum of capitalist expenditures, the budget deficit and net exports, minus worker saving. It is different for a closed economy (i.e. the global economy), since then net exports cancel to zero.
This does not mean that a trade deficit is down to bad domestic policy. We know from MMT that exports are a real cost to the economy as a whole (as opposed to capitalists as a whole) and that imports are a real benefit. MMT shows that it is possible to obtain the real net benefit of a trade deficit while maintaining strong domestic demand (and income, and profit) through appropriate deficit expenditure. Only part of the deficit expenditure will go to imports (because the marginal propensity to import is less than one). Part will also go to worker saving. The rest will correspond to higher profit in aggregate.
Hang on, capitalists are the ones taking their factories abroad to benefit from lower costs and wages.
Instead of producing goods at home they do it in a cheaper foreign country. Then they import the goods back into the home country for sale. The loss in domestic export income is made up for by increasing domestic private sector/ consumer indebtedness, or a larger government deficit. Profits for those at the top of the pyramid are increased, not reduced.
Anon,
"Hang on, capitalists are the ones taking their factories abroad to benefit from lower costs and wages."
Those would be mercantilists in my view, not capitalists per se... unless mercantilists are a sub-species of capitalists which I guess they could be.
And in many cases (I surmise the majority of cases), no capital is being so-called "exported" from the US to build the factories/facilities that are employed in this process, the foreign businesses use local capital to build local factories and then will sell to US customers who pay in USDs just as readily (IF NOT MORE READILY) than their own domestic customers who pay in the local currency.
I see this as boiling down to massive savings desires on the part of the surplus countries. In the case of the USD here is the record of these zealous savings desires:
http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
You can see right here on this spreadsheet the enormous amounts that these external entities have accrued. It works out to about $50k per US household at this point and RISING.
This is an irrational activity (belies the REH on a massive scale) as the nations that have provided REAL goods and services to the US only at macro level have to show for their efforts this electronic spreadsheet; and, they seek these USD balances without even the coercion of taxes that US domestic entities have applied to them.
These balances sit in securities accounts in the US banking system and the financial claims they represent are never made.
To me, this issue may traverse national boundaries/borders, but it boils down to "savings desires" at core; or perhaps greed ie "more - having"..... it is an irrational activity.
Resp,
Say Billionaire Bob decides to move his clothes factory abroad. He shuts the one in the US and fires all the workers. Government picks up the tab (unemployment benefit etc).
He then either swaps a shitload of dollars for foreign currency or takes a massive loan out in the foreign currency. In both cases he is moving his personal financial capital abroad.
He then hires the local impoverished masses for a dollar a day. The goods they produce are shipped back over and sold at a large profit. As the trade deficit grows the money to buy those goods comes increasingly from private sector indebtedness or government deficits/debt. The profits accrue to Billionaire Bob and are reinvested in the US financial sector, which facilitates the expansion of private indebtedness or profits from the interest paid on government debt.
"Hang on, capitalists are the ones taking their factories abroad to benefit from lower costs and wages.
Instead of producing goods at home they do it in a cheaper foreign country. Then they import the goods back into the home country for sale."
The capitalist argument is that this is only a minor part of the external operations of a multinational corp, where the investment, production, and consumption is chiefly external to the home country and expected to grow exponentially in the merging nations.
In justifying this argument, they cite the imports to GDP ratio to prove that imports are not a major factor.
So Foxconn was a US company that was making iPads here in the US that moved it's capital to Taiwan and now started to make them there because the wages are cheaper in Taiwan than in the US?
The Chinese company that is building the Bay Bridge in the SF bay area was a US company that moved to China?
I know of a (former) small family mushroom farm here in the US that has been wiped out of the business by mushrooms that are being produced in Indonesia and sold to US buyers and they didnt "move their capital" to Indonesia I can tell you that!
What you are saying here is not true in all cases for sure... perhpaps not at all.
@ Matt
This is the argument only of the multinationals, who do the bulk of the business.
Lie it or not, this is the trend that globalization is taking. Many companies are not independent of states, and the relevance of the nation state model is receding.
This has advantages and disadvantages. The obvious disadvantage is that the old model is breaking down, with the wrenching that breakdown involves. But as at old entrepreneuring partner of mine used to say, "Every breakdown is an opportunity for a breakthrough." It's a good attitude to take.
The advantage is that we begin to think in more in terms of a closed global economy rather that open economies competing with each other.
but Tom,
What about the disadvantage to the workers over in these foreign lands who, in effect, are not being paid (AT ALL) in REAL terms for all of their hard work?
Those Chinese people building the Bay Bridge are really not being paid imo....
Resp,
Matt, wagers in emerging countries are rising quite rapidly and the world is in a better position economically as whole than it ever has been. There's a long way to go and the path being chosen isn't the most effective or most efficient, but it's working overall.
The developed countries are hurting but that is their own fault for adopting dumb policy when they have the ability to counter the demand leakage by offsetting it. Similarly, the exporting countries need to be lifting financial repression domestically more quickly.
This could be resolved rather easily through coordinated policy based on a correct understanding of the existing monetary system. This is what we should be pushing for. As Roger Erickson is fond of saying, it's about increasing the adaptability rate by exploring available options cooperatively.
"a closed global economy rather that open economies competing with each other."
Now that really is revolutionary, and visionary.
Question 1: would this closed global economy have a single shared monetary system, i.e a single shared currency?
"they didnt "move their capital" to Indonesia I can tell you that!"
I suppose "moving capital" really means "redistributing capital".
When Billionaire Bob takes his "capital" abroad, essentially what he is doing is changing the distribution of that capital.
Before it was largely invested in real capital and financial capital within the US.
Now it is invested in foreign real capital and financial capital within the US.
Look at the sectoral balances.
Either the private sector picks up the tab (goes into deficit) or the government picks up the tab (goes into deficit).
This is why Wynne Godley, the Godfather of MMT, argued that persistent large trade deficits were 100% unsustainable.
But thanks to Mosler, Mitchell and Wray we think that trade deficits are just great.
As you say, Matt, what about those poor buggers overseas who are paying for our irrational 'free ride'?
"Question 1: would this closed global economy have a single shared monetary system, i.e a single shared currency?"
These things are best evolved over time in response to need rather than imposed. That was the problem with the euro. They had an idea in mine (forcing political union) and designed a system that was doomed to fail.
Until humanity evolves collective conscious enough to apprehend its species nature, trying to create a world government or global currency will fail.
This is a process that is just beginning. It's got a long way to go and there will be many ups and downs.
"collective conscious"
i.e. the opposite of competitive markets?
Or will this new super being, the 'collective conscious', be so complex that competition still exists within its bowels, despite its one shared goal?
Will we be like bacteria in a belly, toiling away according to the laws of evolution, unaware of the fate which awaits our host?
What are the economics of this 'collective conscious' exactly?
Collective consciousness is a sociological concept that is is reflected in the shared knowledge, values, mores, ethics, aspiration, culture of a group or society that characterizes the "common person." The boundaries of collective consciousness are delineated by what is deemed marginal — reactionary, on one hand, and radical and avante garde on the other.
Collective consciousness shifts, sometimes slowly when powerful institutions preserve the status quo, and some times quickly when a old order breads down. One of the ket factors in evolving collective consciousness is education that encourages flexibility, and one of the key factors holding collective consciousness in place is social rigidity.
Collective consciousness is closely related to the concept of Zeitgeist, or the spirit of the time. It is the pot in which we are all stewing mostly rather unconsciously excepting for those that study it and those who have natural insight into it, such as the great poets and artists that capture the spirit of an era in a manner that cannot be described.
"What are the economics of this 'collective conscious' exactly?"
Right now the dominante economic paradigm is neoliberalism. That paradigm is now long in tooth, under attack at the margin, with the margin expanding toward the core, and increasingly distrusted and rejected by people that it has ill-served. But it retains institutional dominance and shapes national and global events.
Moreover, it is an extension of imperialism and colonialism, therefore, is received with skepticism by developing nations, even though they are forced into paradigm in order to participate in the global economy on the terms of those who control it.
What is happening now is an emerging contest between those that control the global economy, the developed countries and cronies, and the emerging world over the direction of globalization.
Neoliberalism is at the core of Western collective consciousness but not the rest of the world. This is the real foundation of the dialectic that is taking place. E.g., China is developing a market economy with Asian characteristics, which it anticipates becoming a new paradigm for the developing world in opposition to Western neoliberalism.
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