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“How to fix capitalism: eight solutions for America’s broken system,” at The Guardian.

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Gerald Friedman forecasts that if Bernie Sanders’ full set of policy proposals were enacted in early 2017, America’s GDP per capita would grow at a rate of 4.5% over the decade from 2016 to 2026. Is that plausible?

Figure 1. Growth rates of GDP per capita in 20 affluent countries
Average growth rate of inflation-adjusted gross domestic product per capita. The countries are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom, and the United States. The data for 1900-1970 are from Angus Maddison, ggdc.net/maddison/oriindex.htm. The data for 1970-2014 are from the OECD, stats.oecd.org, National Accounts. The last two periods are business cycles rather than decades.

Figure 1 shows growth rates by decade for the world’s 20 rich longstanding-democratic nations since 1900. Only a handful of countries have achieved a growth rate of 4.5% or better over a full decade:

  • Countries rebuilding in the 1950s after the Great Depression and World War II devastation: Japan, Germany, Austria, and Italy.
  • Less-affluent nations catching up to the rest of the pack: Japan in the 1930s and 1960s; Spain, Portugal, and Italy in the 1960s; Ireland in the 1990s.
  • The Netherlands in the 1940s.

This is the basis of the widespread skepticism about Friedman’s forecast (Krueger-Goolsbee-Romer-Tyson, Krugman, DeLong).

But others (Klein, Mason, Konczal) point out that the 2008-09 economic crisis and sluggish recovery have left the American economy with a sizable output gap. GDP per capita fell well below its pre-2008 trend, and it remains well below. As figure 2 shows, after past recessions the economy has tended to sooner or later spring back up to the trend line. That includes the Great Depression. In the 1940s, GDP per capita increased at a rate of 3.9% (the closest we’ve gotten to 4.5%, as figure 1 indicates), eventually returning to the pre-Depression trend.

Figure 2. Trend and actual GDP per capita in the United States
Dots: natural log of inflation-adjusted GDP per capita. Line: linear regression line representing a constant rate of economic growth. Data source: Angus Maddison, ggdc.net/maddison/oriindex.htm; OECD, stats.oecd.org, National Accounts.

How did that happen? A key part of the story was the war effort from 1940 to 1945, which served as a massive economic stimulus package, boosting demand and economic growth. Friedman’s 4.5% growth forecast for 2016-26 hinges on the notion that Bernie Sanders’ policy package would achieve something similar.

Would it? My reading of Friedman’s paper is that the 4.5% number should be treated as an upper-bound estimate. It’s what could conceivably happen in the most optimistic scenario, rather than what’s most likely to happen. I’d want to see a lot more sensitivity analysis before giving that number any real credence.

Update: Romer and Romer.

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Since the 1970s, a variety of developments — technological advance, globalization, heightened product market competition, the shareholder value revolution in corporate governance, and looser labor markets — have increased firms’ incentive to resist wage increases and enhanced their leverage vis-à-vis workers. Things have been particularly bad in the United States, where labor unions are weak and have been getting weaker. Here’s how Elizabeth Warren put it in a recent Wall Street Journal op-ed:

“Corporate profits are booming, but average wages haven’t budged over the past year. The U.S. economy has run this way for decades, partly because of a fundamental change in business practices dating back to the 1980s…. Building on work by conservative economist Milton Friedman, a new theory emerged that corporate directors had only one obligation: to maximize shareholder returns…. Before ‘shareholder value maximization’ ideology took hold, wages and productivity grew at roughly the same rate. But since the early 1980s, real wages have stagnated even as productivity has continued to rise.”

Figure 1 is helpful for assessing wage trends. The data only go back to 1995, but they give us information on wages that includes employer-provided benefits and payroll taxes and they allow us to compare across countries. What we see is that the median American’s compensation has grown much more slowly than the US economy and that compensation growth in the United States has lagged behind that of most other rich democratic nations.

Figure 1. Economic growth and median compensation growth
1995-2013. Median compensation growth: average annual growth rate of inflation-adjusted median compensation (wages plus in-kind compensation plus employees’ and employers’ social contributions). Data source: Cyrille Schwellnus, Andreas Kappeler, and Pierre-Alain Pionnier, “The Decoupling of Median Wages from Productivity in OECD Countries,” International Productivity Monitor, 2017, table 1. Economic growth: average annual growth rate of inflation-adjusted GDP per capita. Data source: OECD. The line is a 45-degree line; a country will lie on this line if its median compensation growth rate is equal to its economic growth rate. “Asl” is Australia; “Aus” is Austria.

Strengthening unions probably would be the most effective way to ensure regular wage increases for middle- and low-paid workers. But accomplishing that is a very tall order. As figure 2 makes clear, America’s declining unionization rate isn’t a recent phenomenon. Nor is it mainly a function of Reagan administration hostility in the 1980s. Unionization in the US has been falling steadily for more than half a century. Indeed, union decline isn’t a peculiarly American problem. Unionization rates have been falling in almost all affluent nations. Only five still have a rate above 40%, and four of those (Belgium, Denmark, Finland and Sweden) are helped by the fact that access to unemployment insurance hinges on union membership. It’s well and good to wish for bigger, stronger unions, but no one has yet figured out an effective strategy to achieve that.

Figure 2. Unionization in the United States
Share of employees who are union members. Data sources: 1900-82 are from Richard B. Freeman, “Spurts in Union Growth: Defining Moments and Social Processes,” in The Defining Moment: The Great Depression and the American Economy in the Twentieth Century, edited by Michael D. Bordo et al, University of Chicago Press, 1998, table 8A.2. 1982ff are from Bureau of Labor Statistics, data.bls.gov, series LUU0204899600, using Current Population Survey data.

Are there alternatives to stronger unions? One possibility is “codetermination,” whereby employees elect a portion of their company’s board of directors. Shareholder obsession with short-run profits is one of the key obstacles to wage growth. Giving employees more voice in firms’ decision making might mitigate this.

Opponents of codetermination tend to argue that it will weaken firms’ performance. However, it appears to have had no such adverse effect in the European countries where large firms operate under codetermination rules.

Few companies will opt for codetermination unless they are legally obligated to, so Democratic lawmakers have introduced legislation — the Reward Work Act and the Accountable Capitalism Act — requiring employee election of 33% or 40% of the board of directors in large US corporations. These bills have no hope of becoming law at the moment, but the political environment will shift at some point, perhaps as soon as 2021.

It’s worth noting that even if such a requirement eventually is enacted, codetermination’s reach would be limited. In the Accountable Capitalism Act, the codetermination requirement would apply to companies with annual revenues of $1 billion or more. The roughly 1,300 firms that meet this criterion employ approximately 45 million Americans, or about one-third of the workforce.1

Germany is a helpful test case for gauging codetermination’s impact on wages in a country that doesn’t have especially strong labor unions. While German unions and collective bargaining remain powerful in some manufacturing industries, they have weakened considerably in much of the rest of the economy, as figure 2 shows. But codetermination is solidly entrenched. German workers have been able to elect half of the directors in firms with 2,000 or more employees since the early 1950s and one-third of the directors in firms with 500 to 2,000 employees since the mid-1970s.2

Figure 3. Unionization and collective bargaining in Germany and the United States
Unionization: union members as a share of all employees. Collective bargaining coverage: share of employees whose wages are determined by a collective agreement. Data source: Jelle Visser, “ICTWSS: Database on Institutional Characteristics of Trade Unions, Wage Setting, State Intervention, and Social Pacts,” version 5.1, 2016, Amsterdam Institute for Advanced Labour Studies, series ud, ud_s, adjcov.

So has Germany had healthy wage growth? No, it hasn’t. As figure 1 above shows, Germany’s record has been similar to that of the United States: growth of median compensation has been much slower than growth of the economy, and it has lagged well behind compensation growth in most other affluent democratic countries.3 Germany’s slow wage growth owes partly to its reunification with the former East Germany in 1990 and its intentional creation of a low-wage (“mini-jobs”) segment of the labor market in the early 2000s. Still, its wage performance gives us little reason for optimism about codetermination’s ability to boost wages in the US.

There are other arguments for codetermination. It might do better at restraining top executives’ pay. It might make firms less likely to downsize during recessions. Perhaps most important, there is a good case on fairness grounds for enhancing employees’ ability to influence decision making in the company they work for. But the evidence supporting codetermination as a remedy for wage stagnation isn’t, in my view, especially strong.

  1. This is an estimate. The 1,000 companies in the “Fortune 1000” have 34 million employees in total, and the firm at the bottom of the list has revenue of $1.8 billion. 
  2. There is only one other rich democratic nation, the Netherlands, that has strong codetermination and a moderate-to-low unionization rate. But unlike in Germany, in the Netherlands collective bargaining coverage remains very high — 85% as of 2014. 
  3. This is true for household income as well. 
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Tyler Cowen poses a question:

“There is a Swedish election on Sunday [September 9], and to counter the Sweden Democrats many of the other Swedish parties are moving to the right on immigration, the median voter theorem in slow motion, so to speak. Exactly what kind of institutional failure is this? Political? Intellectual? Democratic? The absence of real democracy? I should stress that I am happy to live near Somali and Yemeni women in hijab (and not) in northern Virginia, and I believe American assimilation continues to work reasonably well, including for Muslims and in fact especially for Muslims overall. But the formula seems to work less well in Sweden, with its tighter social structures and more generous welfare benefits. What exactly went wrong? What is the final equilibrium? Will anyone ever be able to say again ‘if only they had a Nordic-style social welfare state’?”

He’s right that Sweden is struggling with this. If you want to know more, I found James Traub’s “The Death of the Most Generous Nation on Earth” and Sasha Polakow-Suransky’s Go Back to Where You Came From particularly helpful.

Comparison with the United States is problematic. Sweden’s refugee inflow since 2000 has been the largest among the rich democratic countries, and it has dwarfed America’s.

Refugee entrants
Asylum seeker inflow as a share of the population. Data source: OECD. The other 19 countries are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Korea (South), the Netherlands, New Zealand, Norway, Portugal, Spain, Switzerland, and the United Kingdom.

From 2000 to 2016, a total of 1.2 million refugees entered the United States. Had the refugee inflow in the US matched that of Sweden, the number would have been 21.6 million. That’s more than the population of Nevada, New Mexico, Nebraska, West Virginia, Idaho, Hawaii, New Hampshire, Maine, Rhode Island, Montana, Delaware, South Dakota, North Dakota, Alaska, Vermont, and Wyoming combined.

Is Sweden doing badly on immigration? If the benchmark is its own performance in other areas — poverty, employment, health, happiness — or its successful absorption of refugees from World War II through the 1990s, then the answer, at least as of 2018, may be yes. What if the benchmark is US immigration performance? Here are a few relevant indicators:

Employment rate among immigrants with less than secondary education

  • Sweden: 53%
  • US: 65%
  • 2012. Data source: OECD, Indicators of Immigrant Integration 2015, figure 5.2.

Share of immigrants with income below 60% of the country’s median household income

  • Sweden: 27%
  • US: 37%
  • Data source: OECD, Indicators of Immigrant Integration 2015, table 8.1.

Immigrant life satisfaction

  • Sweden: 7.2
  • US: 6.9
  • 2005-2017. Average response to the question “Please imagine a ladder, with steps numbered from 0 at the bottom to 10 at the top. The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you. On which step of the ladder would you say you personally feel you stand at this time?” Data source: Gallup World Poll, via the World Happiness Report 2018, online appendix.

Migrant acceptance index

  • Sweden: 7.9
  • US: 7.3
  • 2016-17. Three questions: “I would like to ask you some questions about foreign immigrants — people who have come to live and work in this country from another country. Please tell me whether you, personally, think each of the following is a good thing or a bad thing? How about: Immigrants living in [country name]? An immigrant becoming your neighbor? An immigrant marrying one of your close relatives?” “Bad thing” response is scored 0, “it depends” or “don’t know” is scored 1, “good thing” is scored 3. The three items are added together, so the index ranges from 0 to 9. Data source: Gallup World Poll, via Neli Esipova, John Fleming and Julie Ray, “New Index Shows Least-, Most-Accepting Countries for Immigrants,” Gallup, 2017.

Vote share for the anti-immigrant party or candidate in the most recent national election

  • Sweden: 20% (2018, Sweden Democrats, projected)
  • US: 46% (2016, Donald Trump)
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Lane Kenworthy by Lane Kenworthy - 9M ago

Need something to cheer you up? Try this.

If you want a longer read, consider these:

  • Steven Pinker, Enlightenment Now
  • Johan Norberg, Progress
  • Hans Rosling, Factfulness
  • Christian Welzel, Freedom Rising
  • Ruy Teixeira, The Optimistic Leftist (and blog)
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Over at Foreign Affairs.

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Lane Kenworthy by Lane Kenworthy - 9M ago

Income inequality in the United States is high compared to other rich democratic nations, and it has risen sharply since the late 1970s. During that period, household incomes in the middle have grown slowly — much more slowly than the economy (GDP per capita or per household). It looks very likely that top-end income inequality has been a key cause of slow income growth in the middle. The two are arithmetically related, the timing fits, and the key hypothesized causal path, wages, behaves as predicted. The high and rising income share of the top 1 percent appears to have cut income growth since 1979 for the median American household roughly in half.

The full paper is here.

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Lane Kenworthy by Lane Kenworthy - 9M ago

The United States has long been committed, more than any other rich democratic country, to the notion that employment is the key to poverty reduction. This presupposes that people in work can get enough hours at a sufficiently high wage to earn a decent income. How has this approach fared? An assessment here.

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A new report (summary) documents further weakening of some elements of associational life since Robert Putnam’s Bowling Alone was published in 2000. Is big government to blame? See here.

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A look at 30 outcomes from 1932 to 2016.

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