Engels, in 1892, explains USA 120 years later
This is worth re-reading about once every other week. From a letter written by Friedrich Engels in 1892:
There is no place yet in America for a third party, I believe. The divergence of interests even in the same class group is so great in that tremendous area that wholly different groups and interests are represented in each of the two big parties, depending on the locality, and almost each particular section of the possessing class has its representatives in each of the two parties to a very large degree, though today big industry forms the core of the Republicans on the whole, just as the big landowners of the South form that of the Democrats. The apparent haphazardness of this jumbling together is what provides the splendid soil for the corruption and the plundering of the government that flourish there so beautifully. Only when the land — the public lands — is completely in the hands of the speculators, and settlement on the land thus becomes more and more difficult or falls prey to gouging — only then, I think, will the time come, with peaceful development, for a third party. Land is the basis of speculation, and the American speculative mania and speculative opportunity are the chief levers that hold the native-born worker in bondage to the bourgeoisie. Only when there is a generation of native- born workers that cannot expect anything from speculation any more will we have a solid foothold in America. But, of course, who can count on peaceful development in America! There are economic jumps over there, like the political ones in France — to be sure, they produce the same momentary retrogressions.
The small farmer and the petty bourgeois will hardly ever succeed in forming a strong party; they consist of elements that change too rapidly — the farmer is often a migratory farmer, farming two, three, and four farms in succession in different states and territories, immigration and bankruptcy promote the change in personnel, and economic dependence upon the creditor also hampers independence — but to make up for it they are a splendid element for politicians, who speculate on their discontent in order to sell them out to one of the big parties afterward.
The tenacity of the Yankees, who are even rehashing the Greenback humbug, is a result of their theoretical backwardness and their Anglo- Saxon contempt for all theory. They are punished for this by a superstitious belief in every philosophical and economic absurdity, by religious sectarianism, and by idiotic economic experiments, out of which, however, certain bourgeois cliques profit.
NPR hack apologizes for Wall Street
For a while, I’ve been thinking about writing a piece on how NPR is more toxic than Fox News. Fox preaches to the choir. NPR, though, confuses and misinforms people who might otherwise know better. Its “liberal” reputation makes palatable a deeply orthodox message for a demographic that could be open to a more critical message.
The full critique will take some time. But a nice warm-up opportunity has just presented itself: a truly wretched piece of apologetic hackery by Adam Davidson, co-founder of NPR’s Planet Money economics reporting team, that appears in today’s New York Times magazine.
In the print edition, the thing is called “A World Without Wall Street.” For some reason, the paper’s web editors decided to call it “What Does Wall Street Do For You?” Maybe they thought that the question would draw in readers, who might find the declarative title of the print edition an appealing little fantasy and just turn the page.
Davidson concedes, with a mocking tone (that’s part of his straining at cool), that Americans have long hated Wall Street. But he rejects the usual complaints—that financiers are a bunch of bloodsucking parasites who periodically drive the real economy into a ditch—with the disclosure that finance is “a fundamentally beneficial business.” It brings together borrowers and lenders, a task that it does “extremely well”—“most of the time.”
Now I will be the first to argue that critiques of finance that let the “real” sector off the hook are incomplete, and even dangerous. (For more: “How to misunderstand money.”) The world of production can be a very nasty place. Corporations make money by paying workers less than the value of what they produce. They’re constantly maneuvering to cut costs, which means cutting pay, speeding up the line, dumping toxic waste in rivers, and a host of other familiar misdeeds. Like financiers, they’re in business to make money, and they’ll do nothing that doesn’t make money unless they’re forced to. Yes, they often provide useful products in the course of their pursuit of money. But it’s wrong to get carried away in painting them as the Good Guys, by contrast with the moneychanging Bad Guys.
But Davidson’s defense brief is incredibly wrong. I’d say “dishonest,” but I suspect he really doesn’t know better. He’s just picking this stuff out of the air. His points, in turn. Without Wall Street…
…the poor would stay poor. Without credit cards, poor people would have no money to buy stuff. Thanks to Wall Street, now they do—a contrast with benighted other countries, where they don’t. He seems to forget that the borrowers have to pay the money back, and at often usurious interest rates. Borrowing money at 18% or more is a poor substitute for a decent job and a civilized welfare state. Besides, the poor are not as well endowed with credit cards as Davidson seems to think—only 28% of the poorest fifth of the population carries a balance on its credit cards. That’s about half the share of the middle- and upper-middle income brackets. (See: FRB: 2009P SCF, especially the Excel file.)
…there would be no middle class. Davidson once again seems to think that borrowed money is the same as income. There’s no doubt that easy credit over the last 30 years has made class warfare from above more palatable, economically and politically. But neither admirable nor sustainable. Also, Davidson apparently hasn’t read up on the comparative international mobility stats (e.g.,this). He writes: “One of the most striking facts of life in countries without a modern financial system is the near total absence of upward mobility.” In fact, the U.S. has a middling-to-poor standing on mobility in the international league tables. A country like Germany, where consumer finance is relatively underdeveloped, is more mobile than the U.S. The Nordic social democracies show the most mobility of all. Oh, and student debt, now breaking the trillion dollar mark? Nothing to worry about, says Davidson: it’s “largely changed America for the better.” Actually, the rising price of higher ed is making it harder all the time for the working class to go to college. Watching millions graduate with five figures of debt into a miserable job market doesn’t evoke a better America. College should be free.
…lots of awesome things would never happen. Wall Street, because it loves risk and innovation, is responsible for all sorts of wondrous novelties, like lifesaving drugs and artisanal goat cheeses. In fact, financiers long been shy about funding risky ventures. Henry Ford couldn’t get a dime out of them when he was revolutionizing auto production. Financiers weren’t at all interested in computers from the late 1940s through the mid-1960s—the Pentagon and Census Bureau funded the industry in its early stages. Ditto the Internet, which was initially a project of the military. Basic pharmaceutical research is funded by the National Institutes of Health. Wall Street is more interested in things that have been proven. And I doubt that Goldman Sachs has much to do with funding artisanal cheese production, though its employees probably buy a lot of the stuff.
And how does Wall Street do all this? By matching investors and borrowers, of course. In fact, most corporate investment is funded internally, through profits. Very little comes from the stock market. Venture capitalists are crucial to funding startup firms, for sure, but VC is actually a relative speck on the financial landscape. Trading in existing assets, the bulk of what Wall Street does, has almost nothing to do with real activity.
But Davidson concludes with an absolution: it’s still ok to hate Wall Street. They did lots of reckless stuff during the bubble and then got bailed out. But that’s ok, really, we had no choice. And there’s not much we can do to prevent problems in the future: “regulation—no matter how well intended—cannot be trusted to rein in Wall Street.” So the real reason to hate Wall Street is that they’re indispensable.
No wonder NPR’s list of corporate sponsors takes up four pages of its Annual Report.
Lots of fresh audio product
Way behind on posting this stuff to the web. The podcasts get posted soon after—and sometimes even before—broadcast, but not always the web page.
Freshly posted (clicking on the date links will take you right there):
January 7, 2012 Michael Taft on the Irish depression • Jodi Dean, co-author of this, on the vexing question of OWS & “demands”
December 31, 2011 Christopher Jencks on inequality
December 24, 2011 Christine Ahn & Tim Shorrock on North Korea • Aaron “Zunguzungu” Bady on Occupy Oakland
December 17, 2011 Christopher Hitchens (from 2002) on Orwell • Andrew Ross on student debt repudiation (sign up or endorse here!) • Phil Mattera on job subsidies
Yglesias reflects on bubbles
Matt Yglesias is still trying to figure out the late housing bubble. His latest approach is to separate structures and land, which leads him to this conclusion:
I think it makes more sense to restrict the idea of a “bubble” to speculative asset like land (or stocks or gold or whatever) rather than to the actual building. A building boom may be (indeed probably is) in some sense “unsustainable” but when the boom collapses it’s not like an asset price bubble that leaves nothing in its wake but debt. A boom in structure building leaves you with extra structures. Whether or not this is the most useful thing to have on hand is open to debate, but it’s very much the opposite of “paper wealth” that vanishes when the boom fades. The buildings are still there, and still as useful (or useless) as they ever were.
This is not entirely wrong, but it’s not entirely right either.
While the major part of the movement in real estate value is accounted for by land, not structures, the contribution of building itself to the mid-decade expansion was prodigious. From the end of the recession in the fourth quarter of 2001 through the peak (or something close to it) of the bubble four years later, residential investment accounted for 13% of GDP growth, three times its share of GDP at the outset. Ubiquitous memes to the contrary, consumption contributed slightly less than its share (especially durable goods—so much for that boom in flat-screen TVs), as did nonresidential investment (from office buildings to capital equipment). Military spending contributed almost twice its share, but other categories of government spending were mostly in line with their averages.
In other words, residential investment—meaning the building of new houses and the renovation of old ones—was by far the leading sector in the familiar national income equation (income = consumption + investment + government + exports – imports). That’s not even counting spillovers—the boost to consumption provided by all those contractors, the demand for raw materials and equipment, and the rest. And a major reason people built and renovated so much housing is because prices were rising and were expected to continue doing so until the end of time.
Just as optimism about prices led to rampant overbuilding, now pessimism about prices is suppressing building. Residential investment is now about half its long-term average, and its failure to recover is a major factor in the broad economy’s failure to recover.
And yes, in theory all those new houses could be providing some use value—there are more than a few homeless and underhoused people in the USA who would happily move in tomorrow—but as long as people lack the money to buy or rent them (and banks are unwilling to lend the money to buy them), then they’re as good as useless. In fact, as long as they’re an overhang on the market, causing people to pull back from buying houses for fear that excess inventory will depress prices for years to come, then they’re worse than useless. Because under this delightful capitalist thing, it’s money that matters, as the great political economist Randy Newman once put it. Physical use values often take a distant back seat to the monetary imperative.
The Fed and the class struggle
Mike Konczal assembles some striking quotes from Federal Reserve transcripts showing how obsessed the monetary overlords are with keeping wages down. I won’t recycle any of the quotes—check out his post for the full flavor.
Reading these, Mike wonders what the contribution of the Fed has been to wage stagnation over the last few decades. My sense is, not much since Volcker left in 1987. There’s no doubt that the Volcker crackdown of 1979–82, with a second-wave attack in 1984–85, did cause a major shift in the relative power of capital and labor. What employers saw as a frightening insolence among the working class in the 1970s was broken by the early 1980s recession—a point that Reagan underscored by firing the air traffic controllers and replacing them. Employers got the message that it was ok to bust unions, and they did with great fervor.
The expansion that followed that recession, though marked by decent employment gains, was accompanied by a massive wave of Wall Street-led takeovers and restructurings. Mass layoffs even in relatively good times became routine. And this had an effect on worker consciousness: they’d agree to anything the boss demanded, lest the plant be closed and the work shifted elsewhere. And sometimes even if they agreed, the plant would be closed eventually anyway.
With Greenspan’s ascension to the Fed chair in 1987, the business of the central bank became less one of controlling inflation—which means constant wage vigilance—and instead one of cleaning up the messes that financiers created. Cleaning up financiers’ messes meant a bias towards low interest rates, not tightness.
Here’s a graph of the real federal funds rate since 1955. Real means the actual rate less inflation over the previous year. The federal funds rate is the interest rate that banks charge each other for overnight loans; it’s the Fed’s main policy target, and the rate under its most direct control.
Over the long term, it’s averaged 1.5%. (That was also its average during the Golden Age, from 1955–73. Note that real fed funds stayed above the average line for almost the entire 1960–73 period, the really fat years for the American working class.) During the Volcker days, October 1979– August 1987, it averaged three times the 1.5% mean. During the Greenspan era, August 1987–January 2006, it averaged 1.6%, just 0.1 point above dotted line. There were periods of tightness, like the late 1980s and late 1990s, but they weren’t all that different from the pre-Volcker patterns.
Actually the late 1990s were the only period of sustained and broad wage growth in the last 40 years, and Greenspan let it continue because he was a true believer in the New Economy productivity revolution. With productivity growing at a 3.5% rate, and wage growth of 2.5% (including fringe benefits—and closer to 1.0% without), there was plenty of room for profits to grow too. Not only that—the working class was still afraid, which to Greenspan was a good thing:
Several years ago I suggested that worker insecurity might be an important reason for unusually damped inflation. From the early 1990s through 1996, survey results indicated that workers were becoming much more concerned about being laid off. Workers’ underlying fear of technology-driven job obsolescence, and hence willingness to stress job security over wage increases, appeared to have suppressed labor cost pressures despite a reduced unemployment rate.
At the time of that testimony, in 1999, he was worried that that effect might be ebbing, with a 4% unemployment rate. So policy was tightened—until the dot.com bubble burst. Once there was a financiers’ mess to clean up, interest rates were cut dramatically.
So I’d say that the Fed hasn’t really had to tighten to keep wages down in almost 25 years. The “real sector”—the absence of unions, the low and eroding value of the minimum wage, the threat of outsourcing, and all the other familiar weapons of the class war from above—have been doing their work for them. Should that change, the Fed will be vigilant at heading off the threat of “wage inflation”—meaning raising interest rates to jack up the unemployment rate, thereby inducing the appropriate level of worker anxiety. But right now it has its hands full trying to keep the world from falling further apart, which is why we have a real fed funds rate of around –4%.
NYC: more unequal than Brazil
The New York City Independent Budget Office is just out with an analysis (pdf )of income distribution in the city. It’s no surprise that it’s very unequal. The surprise is that it’s far more unequal than Brazil’s.
Full details are available in the letter—which was in response to a request from City Council member James Oddo—but here are some highlights:
- The poorest tenth (decile) of the city’s population has an average income of $988, and claim 0.1% of the city’s total income. Since the source of this data is tax returns, the very poor no doubt have hidden sources of income. Taxable income doesn’t include many social benefits, like public housing or Food Stamps. Even allowing for that, my god.
- The bottom half of the city’s income distribution has 9% of total income; the bottom 80%, 29%. Comparable figures for the U.S. are 19% for the bottom half and 44% for the bottom four-fifths.
- The richest 10% of New Yorkers have 58% of total income, and the richest 5%, 49%. The national average is 42% for the top 10%, and 32% for the top 5%
- And here’s where the action is, the proverbial 1%: it has 34% of total income, compared with 19% for the U.S. as a whole.
Some dollar amounts to make those percentages more concrete:
- The average income of the poorest 30% is $6,373, on a par with Egypt and about $1,200 below China’s (computed on a purchasing power parity basis, which attempts to adjust for price differences across countries).
- The city’s median income—the level at which half the population is richer and half is poorer—is $28,213. That’s roughly the level of Greece.
- The average income of the top 10% (a category that begins at $105,368) is $387,259.
- The average income of the top 1% (a category that begins at $493,439) is $2,247,515. These are the people that Andrew Cuomo was very reluctant to tax.
How does the city’s income distribution compare with that of Brazil, a country with a worldwide reputation for stunning inequality?
- The income of the top 20% of New Yorkers is 64 times that of the bottom 20%. In Brazil, that ratio is 17 times.
- The income of the top 10% of New Yorkers is 582 times that of the poorest 10%. In Brazil, that ratio is 35 times.
The New York and Brazilian comparisons are pretty rough, since the Brazilian figures are based on survey data reported by the World Bank. Rich people don’t answer surveys, so the incomes of rich Brazlians are probably way underestimated by that data. But if you look a little down the scale, to the second-richest quintile (20% slice) of Brazilians, they have incomes about 6 times the poorest quintile. In New York, the comparable ratio is 14 times.
So there you have it: New York City makes Brazil look almost like Sweden!
Credit union update
An update to my earlier skepticism about the transformative power of moving your money from a bank to a credit union (“Moving money (revisited)”).
The Federal Reserve is out with the flow of funds accounts for the third quarter, its periodic detailed view of the movements of money by instrument and sector. Credit union assets rose 0.9% (not adjusted for inflation) between the second and third quarters. Consumer credit (like credit cards and auto loans) extended to members rose 0.9%, and mortgages by 0.2%. Holdings of federal agency securities, meaning mortgage-backed securities like Ginnie Maes and Freddie Macs, were up almost 2%. Far greater increases were recorded in bank deposits, with checking accounts up by almost 50%, and savings accounts and the like up by almost 5%.
Over the last year, assets are up almost 5%, with mortgages flat and consumer credit down almost 1%. But holdings of Treasury bonds are up 95%, and of mortgage securities, 28%. Checking accounts are up 21%, and savings deposits, 9%.
Since the recession began at the end of 2007, credit union assets are up by 25%. About a quarter of that increase went to home mortgage loans—but over half (55%) went to mortgage-backed securities and 15% to savings deposits elsewhere.
In other words, the credit union is acting as a middle man for unknown banks, and to a lesser extent greasing the conventional mortgage markets. Lending to members is flat to mildly down.
Of course, all this predates the alleged CU boom inspired by Occupy Wall Street. But given their recent behavior, if the hard numbers bear out all the anecdotal supports of billions moved, then the lion’s share of the intake went to Ginnie Mae’s and bank deposits.
You may like the lower fees and more personal service of a credit union, but you’re not really doing anything dramatically political by banking there.
The boom in Food Stamps
One area where the languishing U.S. economy is breaking records these days is in need. One measure: more than one in seven Americans is now on Food Stamps, an all-time record.
Here’s a graph of the share of the U.S. population drawing benefits from what used to be called the Food Stamp program, and is now known as the Supplemental Nutrition Assistance Program, or SNAP, which is no doubt some bureaucrat’s idea of catchy.
As of September, the latest month available (data here), over 46 million people, or almost 22 million households, were drawing SNAP benefits. That’s 14.8% of the population. That’s almost 5 points above the previous records. Note that the line kept rising during most of the weak Bush-era expansion, unlike the declines seen in the expansions of the 1980s and 1990s. There was a brief decline in 2006 and 2007, but that was quickly and savagely reversed with the onset of the Great Recession—and it’s continued to rise despite two-and-a-half years of official recovery.
Benefits are remarkably low. The average SNAP recipient gets $134 a month in assistance, which works out to $4.40 a day. That’s 10% less than the U.S. Department of Agriculture’s “thrifty” meal budget, and about half its “moderate” budget. (See here.) The thrifty plan is a descendant of the USDA’s old “emergency” standard (which was used to set the original poverty line). The Department claims that the current version (report here) meets most dietary minimums, though it falls short on a few.
For your average well-fed American, living on a daily ratio of less than $5 for food prepared at home would be hard to imagine. But without SNAP benefits, 46 million people would be in a state of anguish rather than just scraping by.
New radio product
Just uploaded to my radio archives:
December 3, 2011 Michael Dorsey, professor of environmental studies at Dartmouth, on the Durban climate summit • Bélen Fernández, author of The Imperial Messenger, on that egregious blowhard Thomas Friedman
November 26, 2011 Greg Graffin, lead singer of Bad Religion and author of Anarchy Evolution, on evolution and punk rock • Jeffrey Sachs, the economist formerly known as Dr Shock, on the mess that is the USA, a topic he explores in The Price of Civilization (see my review of his last book here)
Clarifying executive power
Peter Frase is right (“Are CEOs workers, and should we care?”) that talking only about ratios of CEO to worker pay ignores positions in the M-C-M’ circuit. The pay of CEOs and other top executives is almost entirely a return on capital. Perhaps there’s some reward to skilled labor there, but nothing approaching $11 million. Unlike workers, who live under harsh labor discipline, your average CEO is lightly supervised by a board. It’s a rare day when a bad CEO gets fired. The CEO class enjoys an esprit de corps; they sit on each other’s boards where they endorse large pay packages. Workers are barely allowed unions. And CEOs have enormous social power. They help run the government and the prestigious cultural institutions. They’re major players in the ruling class. I regret not having mentioned all this the first time around.
The CEO as humble worker
For some reason—pathological liberalism? being in the pay of the Washington Post?—Matthew Yglesias wants to blur the distinction between worker and boss. In a strange post at his new Slate playpen (“CEO Pay Drives Inequality”), Yglesias declares the old “rhetoric about ‘workers’ is really a legacy of an outdated time.” Why, you might ask, when class distinctions have a salience not only in fact but in discourse that they haven’t seen in many decades? Because unlike the rentiers of old, today’s rich work hard.
Really, Matt, the point isn’t how hard you work, it’s what you take home. In 2010, the average big-company CEO pulled down $11.4 million. If you assume these “well-compensated wage slaves,” in Yglesias’ phrase, put in 3,000 hours a year, that works out to $3,800 an hour. Last month, the average nonsupervisory worker in the U.S. earned $19.54 an hour, or 0.5% as much as the CEO. That average not-so-well-compensated wage slave would have to work 292 years to match the boss’s paycheck (assuming a more conventional 2,000 hour workyear).
Seth Ackerman, from whom I learned of Yglesias’ curious epiphany, offers up this quote from Andrew Carnegie for historical perspective:
Working people have my full sympathy, and I always extend a helping hand. I am a workingman and in my young days worked in a cotton mill and ran an engine. In all my life I suppose I have done more work than any employee I have ever had.
At least Carnegie gave us a few libraries to remember him by. You have to wonder what today’s crop of CEOs will bequeath us as their legacy.
David Brooks: making stuff up, again
Ah, the charmed life of a New York Times columnist: you can say anything you want, true or not.
David Brooks has a long history of, shall we say, careless use of evidence. Back in 2004, Sasha Issenberg did a masterful fact-checking of his earlier work: “Boo-Boos in Paradise.” Our serial fictioneer is at it again. In today’s column, he defends Germany’s stubborn insistence on austerity for the so-called PIIGS (Portugal, Ireland, Italy, Greece, and Spain) as a defense of “a simple moral formula: effort should lead to reward as often as possible,” an “ethos” this is being “undermined from all directions.” In the case of the eurocrisis, Germans “are being asked to bail out nations with vast public sectors.”
Good thing for Brooks that he didn’t offer any evidence of this claim, because the numbers don’t support his sermonizing. Here’s what the OECD says:
German social spending is almost 6 percentage points above the OECD average—and 9 points above the U.S. It’s higher than every one of the PIIGS. Ireland’s is almost 3 points below the average.
But, hey, it’s always fun to moralize!
Me on money in NYC
Me and (one hopes) a bunch of other people talking about money, tonight at 7, 60 Wall St atrium. More here: Money: What is it? | The Public School
From the archives: the small business myth
This is a piece I wrote years ago for the mostly right-wing Canadian paper The National Post. Though more than a decade old, it’s still mostly true and relevant. Sorry—no links to sources and such.
National Post (Canada)—September 23, 2000
SMALL IS NOT BEAUTIFUL Forget the romantic view of small business: for employees, big firms are less nasty places to work Doug Henwood
Everybody loves small business. Well, maybe Fortune 500 CEOs and the investment bankers who serve them don’t, but practically everyone else does. Across the political spectrum, it’s celebrated for its authenticity, pluck, and copious powers of job creation. On the right, the needs of small business are used to counter proposed regulations or minimum wage increases, as if the virtues of small business were self-evident. On parts of the left, small business is positioned as local and human-scaled, in contrast with globe-striding behemoths.
This is a mass infatuation badly in need of some fact-checking.
Small business creates jobs, yes, but it also destroys them in large numbers, since small firms go under so frequently.
Small business pays less, innovates less, and does more physical damage to nature and workers than the big guys.
You often hear it said that small business creates most new jobs. That’s a half-truth. Most people work for firms employing under 500 workers, the semi-official definition of a small business, so it’s not surprising that such firms should be responsible for the bulk of job growth. The real question is whether small business creates more than its share of new jobs. And there the answer is no.
Firms employing fewer than 500 people accounted for 78% of U.S. workers in 1980, 80% in 1990 and 80% in 1996 — in other words, the share was essentially unchanged over nearly two decades.
Some people might think that businesses with hundreds of employees aren’t so small, but the numbers for really small operations are quite underwhelming: firms employing fewer than 20 people accounted for 26% of workers in 1980, 26% in 1990 and 26% in 1996 (that repetition is no typo). If small firms, no matter how defined, were really the prodigious job machines they’re supposed to be (and if big firms were as relentlessly downsizing as the headlines would lead you to believe), then their share of total employment should have increased dramatically over the course of 16 years.
That underwhelming performance of really small business is worth a bit more attention because, despite these numbers, it’s still often claimed that that’s where all the real job action is. The claim is ultimately traceable to 1980s work by the consultant David Birch, who once famously said that 88% of the new U.S. jobs created in the first half of the 1980s were in firms employing fewer than 20 workers. That factoid was repeated by pundits and politicians, and has since made its way around the world. But it’s not true.
Mr. Birch came up with this nugget by playing with some computer tapes from the credit rating and business information firm Dun & Bradstreet. But a closer examination conducted some years later showed the D&B tapes to be full of errors, at odds not only with official unemployment insurance registration info, but even with the phone book. Firms were classed as being born and dying when they merely changed hands. And Mr. Birch’s methodology was pretty idiosyncratic, to put it kindly.
For example, firms that started in the very small category — fewer than 20 workers — were categorized for all time as staying there, even if they’d grown beyond the small category. Or, more wackily, if a firm with 600 employees had a bad year and canned 200 of them, this would show up as a gain of 400 jobs for the small business sector. Not that Mr. Birch ever fully disclosed his techniques, like most serious researchers would; he did, however, tell the Wall Street Journal in 1988 that his figures were “silly,” and that “I can change that number at will by changing the starting point or the interval. Anybody can make it come out any way they want.” Despite that confession, Mr. Birch is still taken seriously by the U.S. press.
More rigorous work than Mr. Birch’s shows that the job creation story is far from simple. For example, a detailed study of 40,000 U.S. manufacturing firms between 1972 and 1988 by Steven Davis, John Haltiwanger and Scott Schuh found that “large, mature plants and firms account for most newly created (and newly destroyed) jobs.”
Smaller employers generated plenty of jobs, but they also destroyed them in great quantities; new jobs were more likely to persist at larger employers than smaller. They concluded that “in a nutshell, net job creation…exhibits no strong or simple relationship to employer size.”
What about job quality? Let’s start with pay. A study by the U.S. Bureau of Labor Statistics (BLS) for 1995 showed little variation in pay for professionals and managers by establishment size, with small operations (those with fewer than 500 workers) paying 1% below the national average, and larger ones (1,000 workers or more) paying 2 to 3% above average.
At finer levels of occupational classification, the differences were occasionally a bit wider, but not profoundly so. Differentials widen, though, as you move down the status hierarchy. Data entry clerks in small establishments earned 7% below the national average, while those in large firms earned 20% above. Gaps for janitors were wider, and those for labourers were wider still. (Though this is mainly a story about private business, similar patterns were visible among government workers; in small jurisdictions, workers in “protective services”—like cops and prison guards—earned 18% below the national average, while those in large ones pulled in 11% more. This sheds new light on the passion in the United States for small government.)
These are pretty broad-brush patterns, and there may be simple reasons why pay increases with employer size. Maybe big firms have “better” workers—more educated, more experienced—and are more likely to be unionized. But there is now a large literature in economics showing that worker “quality”—I keep putting these things in quotes because, while conventional economists use phrases like this, I find it offensive to talk about people as if they were consumer durables ranked in some kind of buyers’ guide—explains some of the pay differential, it hardly explains all. In a phrase, size matters, and quite a lot—and there’s good evidence that the advantage has been growing over time.
Though the relation was first noted as early as 1911, a classic modern study in the field is a 1989 paper in the Journal of Political Economy by Charles Brown and James Medoff. They crunch data from several different surveys, and all tell pretty much the same story: while bigger firms (and bigger plants or offices within firms) do have “better” workers, that accounts for roughly half their pay advantage. Larger outfits pay more for similar work done by similar workers than do smaller ones. Using standard statistical techniques, this fact of economic life persists regardless of occupation, industrial sector, education, experience, geographical location, union status. The disparities remain whether workers are paid an hourly rate, a piece rate or a salary. Workers who move from small employers to large and presumably carry with them the same set of skills they had on their old job, generally get a significant raise (roughly equivalent to going from a nonunion job to a union one)—and the reverse is true as well.
As with pay, so with benefits. As of the mid-1990s, just 62% of full-time workers in small independent establishments (what the U.S. BLS calls plants and offices with fewer than 100 employees not owned by a larger entity) were covered by health insurance, compared with 77% of those working in larger operations; 42% of those in the small shops had a retirement plan of any kind, compared with 80% of those in larger ones. And as with pay and benefits, so with worker safety.
In a recent report for the International Labour Organization, U.S. economist Peter Dorman wrote that “size and risk are inversely correlated at all levels of scale.”
Most of what I’ve cited so far is based on U.S. data, but studies of other countries, including Britain, Japan, Germany and Canada, come up with pretty much the same results.
A 1998 paper by two Statistics Canada economists, Marie Drolet and René Morissette, shows that even after controlling for the usual factors—like worker education and experience, industry, occupation, and union status—large firms pay 15 to 20% more than small ones, a relation that has persisted over time. Pension coverage is at least four times higher in large firms. Despite the disadvantage in pay, workers in small firms are more likely to work more than five days a week. Small doesn’t seem so beautiful after all.
Why does size matter? Here the answers are a bit harder to come by, though there’s no shortage of suggestions. It’s nicer to work for small firms—fewer rules, less hierarchy—so they can get away with paying less (though large firms have lower quit rates than smaller ones). Large firms are more vulnerable to unionization, so they pay more to keep workers happy and organizers away (though the fact that the size effect prevails even among union workers calls this one into question).
Small firms have less market power, so profit margins are thinner and they’re under greater pressure to keep down costs. It’s harder to supervise a large group of workers, so higher pay is an incentive for them to behave without the boss keeping an eye on them every minute of the workday (though the persistence of the size effect even for workers paid piece rates, where the wage is a direct function of productivity, calls this into question).
Collecting a large number of workers under one roof——literally, in the case of a big plant or office, or figuratively in the case of a big business with lots of locations—results in all kinds of organizational and intellectual synergies that elude small firms, making them more efficient, innovative and profitable. Smaller firms have less snazzy capital equipment, duller managers and less sophisticated work structures, making them less efficient, innovative and profitable.
Workers in large firms may have “subtler virtues” (in Brown and Medoff’s charming phrase) that can’t be measured or statistically modeled, which might be responsible for the pay differential. As plausible as these explanations appear, economists have been unable to decide for sure whether they’re accurate or not (and the parenthetical remarks cast serious doubt on some of them).
I said at the beginning of this piece that small business often serves an ideological purpose. On the right, it’s deployed to resist any political impulses to regulate business or push up wages. That implicitly concedes that smaller firms are nastier to work for, but it’s also a bit devious, since McDonald’s probably would suffer at least as much from a minimum wage increase as Mom’s Burger Shack would. Here, small business becomes a virtuous stand-in for business as a whole, since small business probably has a better public image than the big, no matter how ill-deserved. Even if this is a devious move, it’s not much of a surprise.
What I find more surprising, and disturbing, is the tendency of some folks on the left to embrace small business with some passion. This is particularly true in the unfortunately named anti-globalization movement—as if internationalization itself were the problem rather than the way it’s carried out. Their anti-globalism is connected to a desire to “relocalize” economies, and with them to reorient production on a much smaller scale. These aims seem more motivated by nostalgia—and, in many cases, by a nostalgia for something that never existed—than any serious analysis.
Larger firms are also far more productive than smaller ones. Small-is-beautiful advocates rarely tell us how tiny enterprises would produce locomotives, computers or telephones; maybe they’d prefer to do away with these things and revive a hunter–gatherer society. But if that’s what they intend to do they should tell us.
And people who presumably care about workers should also rethink their passion for tininess: the experience of actually existing small businesses show that they’re not great employers, with poor pay, cheesier benefits and more dangerous workplaces. Bigger firms are easier to regulate, more open to public scrutiny, friendlier to affirmative action programs and more vulnerable to union organizing.
A progressive case for bigness is rare and unpopular these days, but somebody has to make it.
Doug Henwood is editor of the Left Business Observer newsletter, and author of the book Wall Street.
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Posted on January 6, 2012 by Doug Henwood
That jobs report
[This was my radio commentary for the January 7 show. Audio here.]
Friday morning brought the release of the employment stats (Employment Situation News Release) for December. It was a strong report, though not quite as strong as it looks on the surface. Many of the gains are likely to be reversed in January, but the trend of modest, steady improvement continues—and manufacturing had its best year since 1984.
Now some details, edited for radio. Employers added 200,000 jobs in December. Over a fifth of that gain, 42,000, came from couriers and messengers—meaning all those FedEx and UPS folks delivering holiday packages ordered from the likes of Amazon. Online retailers had a great December. Not so much for brick and mortar retailers, who’d apparently expected otherwise and hired ambitiously, adding another 28,000 to the headline figure. Given the ultimate disappointment of the holiday season, retail-store-wise, and the explicitly temporary nature of the courier jobs, these gains—which together accounted for over a third of the total—are likely to be reversed in January. What I’ve been calling the eat, drink, and get sick sector returned to its previous strength after slipping in November, as bars and restaurants and health care together added almost 50,000, a quarter of the total.
There are good jobs in health care (and also lots of not so good ones), but with an exception I’ll get to in a moment, the strongest sectors were either evanescent or low wage or both. This is hardly the bold acceleration that some insta-pundits were touting on Friday morning. Maybe they’re Democrats.
In the negative column: temp firms, where hiring is often a portent of strength to come, and government, which continues to shed workers, though now mostly at the local level (and there, mostly education—isn’t that nice?).
There was surprising strength in manufacturing, a sector where employment fell by a third between 2000 and 2010 and where the absolute number of workers employed is well below what it was in 1947, even though the labor force has tripled since then. For the year, the factory sector added almost 200,000 workers. That’s the best gain in percentage terms (using yearly averages) since 1984. More on the manufacturing revival in a minute or two.
The numbers I’ve been citing come from a survey of about 300,000 employers. There’s also a simultaneous survey of about 50,000 households. That household survey gave a less upbeat picture than its employer counterpart. It showed no change in the share of the population working. But it did show a decline in the unemployemnt rate, from 8.7% to 8.5%, the lowest level in almost three years. Hidden unemployment was also down, with the number working part time for economic reasons and those classed as not in the labor force but wanting a job both falling strongly. As a result, the broad U-6 unemployment rate, which includes them along with discouraged workers (those who’ve given up the job search as hopeless), fell 0.4 point to 15.2%, also its lowest level in almost three years.
But the unemployment rate, which is down from its recession peak of 10% in October 2009, has been flattered by what’s known in the trade as labor force withdrawal. That is, you’re not counted as unemployed if you’re not actively looking for work. Many of the unemployed have simply given up on finding work, and they’re not counted as unemployed. So even though the unemployment rate is down a point and a half from that 10% peak, the share of the adult population working for pay, the so-called employment/population ratio, is exactly the same now as it was at that peak. (See graphs appended below.) That is not what we’d see in a normal recovery. We’re still 6 million jobs below the pre-recession peak at the end of 2007. At the growth rate we’ve seen over the last six months, it would take almost four more years to recoup those losses—and that’s not allowing for population growth. We’re still in a very deep hole and emerging only very slowly.
manufacturing miracle
And now a few more words on the manufacturing revival. Friday’s Wall Street Journal had a piece (“In U.S., a Cheaper Labor Pool”) on how Caterpillar, which has been doing quite well lately, is threatening to close a plant in Canada and move operations to a low-wage site unless it gets big concessions from its union, the Canadian Auto Workers. That low-wage country its threatening to move to? The United States. The Journal also reports on other manufacturing firms moving south from Canada (but without crossing the Rio Grande): Siemens, Navistar, and Electrolux. The reason? American workers are very productive but they earn a lot less. Caterpillar claims that its workers in Illinois cost the firm less than half as much as their comrades in Ontario. Over the last decade, unit labor costs—wages and benefits paid per dollar of output—have fallen by 13% in the U.S. They rose by 2% in Germany, 15% in Korea, and 18% in Canada. When you factor in transportation and other costs, U.S. workers in some sectors are starting to become competitive with China, where wages have been rising sharply for years and workers have developed a habit of striking and ransacking the boss’s office. The trend towards bringing factory work back to the U.S. even has a name: onshoring. A revival of manufacturing would be good in many ways, but one based largely on low wages and high levels of exploitation is not something to cheer.
graphic supplement
Here are graphs showing the labor force participation rate (LFPR, the share of the adult population that’s either working or looking for work—the employed plus the unemployed), the employment/population ratio (the share of the adult population that’s working), and the unemployment rate (the share of the labor force—the employed plus the unemployed—that lacks a job and is actively looking for work) over time.
FIrst, note the long rise in the LFPR and EPR (much of it the entry of women into paid work), their peaks around 2000, and their decline since.
And here’s the unemployment rate and EPR since 2000. Note that the unemployment rate is down 1.5 points since 2009, but the EPR is basically flat. The unemployed have had a hard time finding work, and have been dropping out of the labor force in record numbers. That’s only recently showing signs of turning around.
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