Chicago Political Economy Group\'s CPEG Notes, 2nd Q 2015

CPEG Notes May 2015 Vol. I, No. 2

Editor’s Note This edition of CPEG Notes kicks off with two reviews of the national economic landscape. Prof. Joseph Persky gets things started with his take on the US’ less-than-robust first quarter performance. Ron Baiman then delivers a sharp analysis of the worsening employment scene, while making sense of the deteriorating employment/population ratio. In a Regional Note, Bill Barclay looks at how two Midwestern states have fared under contrasting economic policy regimes: Wisconsin, under Scott Walker, and Governor Mark Dayton’s Minnesota. He takes this approach to generate a deeper understanding of what’s at stake for Illinois under its new austerity governor, Bruce Rauner and his ‘Turnaround Agenda.’ The members of CPEG remain keenly attuned to events in Greece, where the Syriza government is presenting Europe's strongest resistance to austerity policies and neoliberal governance. Mel Rothenberg’s International Note examines the current challenges facing this embattled government and its Finance Minister Yanis Varoufakis. Last month, Rahm Emanuel, a leading figure of financial sector politics was forced to spend $26 million to defeat challenger, long-time reform politician Chuy Garcia in Chicago’s municipal election. CPEG urges readers to visit our website all the time, but this quarter we especially ask that you keep an eye out as we will soon post contrasting explanations of the election. ---Luis Diaz-Perez

Quarterly Recap by Joseph Persky The national economy sputtered through the first quarter of 2015, registering an anemic annualized growth rate of 0.2%. Understanding this number is tricky. On the one hand, Obama’s Council of Economic Advisors notes last winter was the third worst of the last twenty. They also hint seasonal adjustments may be off, as recent previous first quarters have measured sharply lower than adjacent quarters. On the other hand, the economy felt sharp increases in the trade deficit, which grew to $51.4 billion in March. State and local governments shrank at a 1.5% rate, seeking to balance budgets via cuts rather than by raising revenue. With steep falls in energy prices, consumers decided to save (or more accurately pay off debt) rather than spend. The GDP figure was only positive because of substantial inventory increases, much of which was undoubtedly unplanned. Real final sales of domestic product actually fell 0.5%. Forecasters had been hoping for a modest 1% increase in the bad winter. The difference between that figure and the reported 0.2% very likely represents a true economic slowdown. Those same forecasters are scurrying to ratchet down their expectations for the second quarter. As a consequence, virtually all observers are suggesting the Fed will postpone any interest rate hike until September, at soonest.

The question lurking behind all this reevaluation is: does the first quarter dip augur a new/deepening recession? At this point it is fair to say no one can say. But should the second quarter (a quarter with no bad weather and no odd seasonal adjustment) come in with a negative number, a further recessionary decline becomes more likely.

National Note by Ron Baiman Darkening Jobs Picture One approach to examining the scale of our current employment predicament is to see it through the lens of the employment-to-population ratio. Below, Figures 1 and 2 graph post-war recessions from “peak to peak,” and are based on the “Current Population Survey” of household employment. They chart percentage changes in the Employment/Population ratio from the official starting date of each post-war recession until the Emp/Pop ratio either recovers its starting value or a new recession begins, whichever is first. Each post-war business cycle is labeled and centered at its official “National Bureau of Economic Research” (NBER) designated “trough.” In Figure 1 and Figure 2 June 2009 is the official NBER designated “trough,” or start of the expansion phase of the current “Lesser Depression.” The peak of this cycle will begin with the next contraction. Figure 2 takes labor force aging into account by doing the analysis by population age cohorts (16-24, 25-54, and 55 and over), and holding the shares of the age cohorts constant at March 2015 levels. Both figures show what a deep employment hole we are in relative to post-war standards.

Figure 1: Percent Decline in Employment to Population Ratio from Start of Recession for Post War Business Cycles (Business Cycles Labeled and Centered Around Official Trough Date at “0” Marker on Horizontal Axis)

Figure 2 shows that unlike every other post-war recession, the current “recovery” from the Lesser Depression has not led to a recovery of the pre-recession, demographically adjusted employment-topopulation ratio within 49 months. As of March 2015, 69 months after the official June 2009 Lesser Depression trough, the demographically adjusted Emp/Pop ratio is still 3% lower than it was at the January 2008 start of the Lesser Depression. Moreover, unless the difference between the Emp/Pop ratio shown in Figure 1 and the Emp/Pop ratio of Figure 2 can be offset by productivity, income improvement, and redistribution within age cohorts, Figure 2 presents a false picture. None of these conditions show signs of amelioration in the U.S. economy. Because, retirement security and family savings have been declining, Figure 1 presents a more accurate picture of the real impact of the decline in the Emp/Pop ratio.

Figure 2: Same as Figure 1, but Using Employment to Population Ratio by Population Age Cohort (16-24, 25-54, 55 and over) and Assuming that these Population Age Cohorts are Fixed at their March 2015 Population Shares.

Of course, it’s not just rising infant mortality produced by “excess inequality.” The entire spectrum of the modern American social calamity is, in large measure, a result of the lack of well-paying work. As the Baltimore riots remind us, unemployment, especially among inner-city youth is at record levels, and jobs that are available are likely to be low-wage service sector “dead-end” jobs that do not offer a path out of poverty. For one thing, the “recovery” has generated a far higher share of low-wage jobs and lower shares of middle- and high-income jobs compared to the jobs lost since 2007. The result has been the expansion

of job deserts dotted by dead-end service-job “shrubs.” Such was the vision of the U.S. economy wellcaptured recently by Eduardo Porter who notes: “On nearly all indicators of mortality, survival and life expectancy, the United States ranks at or near the bottom among high-income countries,” says a report on the nation’s health by the National Research Council and the Institute of Medicine. …..The United States has the highest teenage birthrate in the developed world — about seven times the rate in France, according to the O.E.C.D. More than one out of every four children lives with one parent, the largest percentage by far among industrialized nations. And more than a fifth live in poverty, sixth from the bottom among O.E.C.D. nations….Among adults, seven out of every 1,000 are in prison, more than five times the rate of incarceration in most other rich democracies and more than three times the rate for the United States four decades ago...As economists from the University of Chicago, M.I.T. and the University of Southern California put it in a recent research paper, much of America’s infant mortality deficit is driven by ‘excess inequality. American babies born to white, college-educated, married women survive as often as those born to advantaged women in Europe. It’s the babies born to nonwhite, non-married, nonprosperous women who die so young. Of course, it’s not just rising infant mortality produced by “excess inequality.” The entire spectrum of the modern American social calamity is, in large measure, a result of the lack of well-paying work. What to make of the recent uptick in labor costs? According to the BLS, the Employment Cost Index (ECI) that tracks employer costs for wages and benefits increased 2.6% on an annualized basis in Q1 2015, up from 1.6% for the year preceding March 2014. This phenomenon is always welcome, however, given Figures 1 and 2, it is highly unlikely that a market-led private sector “expansion” alone will produce sufficient tightening of the labor market to generate full employment at well-paying jobs. Thus, there is no substitute for public policy campaigns such as the “Fight for $15” minimum wage campaign, other efforts to improve working conditions for low-wage service employment, as well as large- scale livingwage federal jobs programs to generate adequate well-paid employment and gradually eliminate the low-wage service employment that is underwriting deepening economic and social inequality (See: http://www.cpegonline.org/reports/jobs.pdf). Such direct labor-market policy measures need to be supported by changes in trade and industrial policy, in particular stopping future, and rescinding, past so-called “free trade” deals (See: http://www.cpegonline.org/workingpapers/CPEGWP2010-1.pdf). This data coupled with very weak Q1 2015 GDP growth reinforces the need for a massive public policy push against low wages, and for creating living-wage jobs. Observers have pointed out that the recent increase in the ECI was concentrated among higher-wage workers who receive incentive pay such as sales commissions, and that average hourly earnings for private sector workers rose only 2.1% in March from a year earlier, hardly different from the 2% nominal annual average growth since the beginning of 2010. The average hourly earnings estimate is from the Current Employment Statistics survey (that is independent of the National Compensation Survey used to

estimate the ECI). This is a better measure of overall income from wages as it takes into account increases in low-wage sector employment shares that are held constant in the ECI index estimation. This data coupled with very weak Q1 2015 GDP growth reinforces the need for a massive public policy push against low wages and for creating living-wage jobs. Eliminating poverty and reducing income and wealth inequality will not come about without directly confronting the ideology and policies eviscerating what’s left of political and economic democracy in the U.S.

Regional Note by Bill Barclay Rauner’s Run Aground Agenda Illinois’s new governor, Bruce Rauner, former chair of the private equity fund GTCR, has proposed a “Turnaround Agenda” for Illinois. The agenda is much like the polarizing proposals of neighboring governor Scott Walker of Wisconsin, Rauner seems to want to reduce, or perhaps even eliminate, unions as the voice of workers, impose significant cuts on Illinois spending in health and education, and reduce taxes for high-income households and businesses. All this in the name of making Illinois a good place to do business and “make Illinois the most competitive and compassionate state in America.” Unlike Walker, Rauner is not supported by a Republican-controlled legislature. Instead of proposing his state be declared a “right to work state,” as Walker has done, Rauner wants to create ‘right-to-work’ zones, calling them ‘empowerment zones.’ These zones would give "taxpayers a say in the collective bargaining process at the local level.” Rauner says this “would allow (these zones) to compete and recruit more manufacturing firms and transportation companies.” He would also end the prevailing wage requirement covering state and municipal construction projects. Rauner’s political strategy is to circumvent the Illinois legislature, building momentum for his Turnaround Agenda by asking various municipal councils and county boards for their endorsements. Round 1 has gone to Rauner’s opponents on points, but the fight is far from over. Let’s consider the Rauner Agenda by raising two questions: 1) is there any way to assess the probability this approach would improve Illinois economic performance; and 2) how has his political strategy worked to date? It is hard to construct live experiments in the economy but, in this case, we have something very close: a comparison of Wisconsin and Minnesota to shed some light on the billionaire Illinois governor’s Turnaround Agenda. The Wisconsin story: Under Gov. Walker, Wisconsin took several steps in response to the ravages of the Lesser Depression, which, at the worst point left Wisconsin with a $3.6 billion budget deficit and unemployment rate of 9.2%. Specifically: (1) (2) (3) (4) (5)

Wisconsin reduced spending on education; Shifted costs of health care and pensions to state employees; Reduced taxes on high income households to attempt to stimulate investment and job creation; Became a “right to work” state, believing this would attract investment and increase job growth; Rejected the Medicaid expansion offered under the Affordable Care Act; while,

(6) Gov. Walker spent much time and political capital attacking unions, especially public sector unions. Having endured a recall campaign, the state remains politically polarized. The Minnesota story: Under the leadership of Gov. Mark Dayton, Minnesota also took a series of steps in response to the ravages of the Great Recession, which, at the worst point left MN with a $2.6 billion budget deficit and unemployment rate of 8.3%. Specifically: (1) Minnesota increased state spending for education, especially at the post-high school level; (2) Increased state spending on job training; (3) Increased the tax rates for higher income households (for households receiving over $250,000/year. MN now has the 4th highest income tax rate of any state); (4) Increased the corporate income tax rate; (5) Took the Medicaid expansion offered under ACA; (6) Increased the state minimum wage to $9.00 (8/1/15) and then $9.50 (8/1/16) for businesses with $500,000 or more in annual sales and indexed it to inflation beginning in 2018; (7) Gov. Dayton worked with both public and private sector unions. What were the outcomes to these two very different approaches to making a state “competitive and compassionate?” (1) Although Wisconsin’s labor force was a bit larger than Minnesota’s reflecting its larger population, Minnesota has created more jobs over the past four years than Wisconsin; (2) Wisconsin still has a budget deficit - Minnesota has a budget surplus of $1.2 billion; (3) Wisconsin unemployment rate in March was 4.6% vs Minnesota’s 3.7%; (4) Minnesota’s uninsured rate fell 41% while WI’s increased – and it is costing Wisconsin $150 million more to cover fewer people through Walker’s “Badger Care;” (5) Manufacturing wages in Minnesota are now $600/month higher than in Wisconsin; (6) Wisconsin personal income growth since the official end of the Great Recession has lagged that of the US as a whole (ranking 44th in the country), while Minnesota personal income growth has been faster than the US as a whole; (7) Wisconsin’s state GDP has grown by less than 2%/yr. in each of the past 4 yrs. while Minnesota’s state GDP has grown by over 2%/yr. and in 2010 by almost 4%. Will Illinois follow Wisconsin’s example? To date, Rauner’s clumsy attempt to go around the legislature and build momentum through the actions of other levels of government has had mixed success. Among the initial 50 governmental bodies targeted by Rauner’s team, as of early May, 23 endorsed the Agenda, 11 had rejected it, three countered by passing “pro-labor” resolutions and 10 tabled the proposal. Rauner’s 23 favorable units of government is a little misleading as it includes 15 communities, each with fewer than 7,000 residents. Round 1 has gone to Rauner’s opponents on points, but the fight is far from over. Although there has been substantial opposition to the Rauner Agenda, this opposition has been of a defensive nature. There has been very little action to raise necessary revenue, such as an increased tax rate for high

income households, complicated, of course, by the prohibition in the Illinois constitution on a progressive income tax, or taxing financial trading on the Chicago exchanges.

International Note by Mel Rothenberg Greece and the EU Economic and Financial Crises (2) What follows is a brief update of Greece and the Economic/Financial Crises in the EU of March 20, 2015. For general analysis and background, kindly consult that report. The Greek drama continues: Where Greece seeks debt relief and postponement, the EU financial oligarchy demands that the Greek government turn over its remaining public assets at bankruptcy prices as part of an increasingly draconian austerity attack on the Greek people. After signing on to a framework negotiating policy on February 28, which offered deep concessions by the Greeks, EU authorities still complain loudly that the Greeks are dragging their feet implementing these concessions. The European authorities went on to demand the replacement of Yanis Varoufakis as the chief Greek negotiator. While stepping aside as chief negotiator, Varoufakis remains finance minister and “in control.” Despite his aggressive negotiating style, Varoufakis is part of governing party Syriza’s moderate wing, the faction most committed to preserving the EU and Greek membership. Newly appointed coordinator for the negotiations, Euclid Tsakalotos, is regarded in Greece as being to the left of Varoufakis. The campaign to ridicule and demonize Varoufakis amounts to a propaganda war to discredit and demobilize anti-austerity politics, even the pro-Europe wing of the anti-austerity movement. In the present situation, more a sharp political conflict over austerity politics than a true economic crisis, economic policy is both a weapon and objective. The Greek government is trying to scrape together enough cash to pay upcoming debt obligations by appropriating reserves from local authorities and other government agencies. The EU has recently refused to pay Greece €7.2 billion owed from the earlier bailout, threatening Greece’s capacity to meet current debt payments, the first of which, due in May, is €763 million, about $830 million, that Greece owed the IMF. The Greeks seems to have scraped up enough cash to pay this May bill. But the government is unlikely to find enough to repay the IMF in June and certainly not enough to meet another €3.5bn bill due to the European Central Bank in July without withholding wages and state pension pay outs. Should Syriza avoid adopting this policy of political suicide, risks a forced default, capital controls to stem a fatal bank run, which in turn could lead to a European financial panic. Eric Dor, an expert on eurozone capital flows at France’s Iéseg School of Management, writes that the exposure of the European taxpayer to Greek debt has skyrocketed to €318 billion. That the European financial oligarchy would actually put this at risk, here, is dubious. Rather, they and the Greeks will likely work out a deal to postpone a good part of these debt payments, paired with further Greek concessions. The Greek standoff will likely remain unresolved for a lengthy period because neither side has the capacity or desire to engineer a final showdown, or real settlement. In the present situation, more a sharp political conflict over austerity politics than a true economic crisis, economic policy is both a weapon and objective.

According to Michael Roberts, during a tough, complex and lengthy negotiating struggle Syriza is just holding its own: Tsipras’ move towards making more concessions and perhaps dropping debts, the nonnegotiable ‘red lines’ that Syriza won’t allow to be breached would probably get support from the Greek people, at least if the current opinion polls are correct. One poll found that 79% of Greeks want to stay in the Euro, and 50% want to reach a compromise rather than a rupture (36%). Around 63% of Greeks want to avoid a default on the Greek government’s debts... And if there is a deal that breaks the red lines, then Greeks would prefer a national unity government (44%) rather than a referendum (32%) or new elections (19%) to confirm it. Syriza still leads in the polls with 36% of the potential vote compared to 22% for the right-wing New Democracy; 5% for the social democrat Potami, 3% for the bankrupt PASOK and now just 5% for the fascist Golden Dawn and the Communists. Roberts agrees with the left opposition to Syriza’s moderates. This opposition would argue that this indeterminate state of affairs reflects public confusion due to Syriza’s inconsistency, mobilizing around anti-austerity politics while also endorsing a pro-Euro, pro-EU line. The economic torment of Greece, led by EU finance capital, is designed to demolish any left, antiausterity movement in Europe. This is what happens when people dare to choose a left wing, antiausterity government. Whatever the weaknesses of Syriza’s political stance, it is the de-facto leader of the left, anti-austerity movement in Greece, and in all of Europe. Despite signs of rising European right-wing and neo-fascist forces, Europe’s financial oligarchy directs its rage, and enormous political and financial resources, at destroying Syriza as the main continental threat to its continued hegemony. This oligarchy has done nothing beyond offer weak rhetoric to challenge the nationalist, anti-EU right while, at the same time, deliberately making every effort to reduce Greece to a pauper state, and the Greek people to social misery. The economic torment of Greece, led by EU finance capital, is designed to demolish any left, anti-austerity movement in Europe. This what happens when people dare to choose a left wing, antiausterity government and why the Greek anti-austerity movement led by Syriza demands our full and vigorous support.