With Unemployment So Low Why are Wages Stagnant?

My latest blog originally appeared today in Counterpunch.


If the unemployment rate is so low why have wages for most Americans failed to go up very much recently?  The simple answer is for the very same reasons why economic inequality and social mobility in America has largely ground to a halt in the last 40 years–the decline and war on labor unions.

Last Friday the Labor Department announced that the unemployment rate dropped to 3.9%–the lowest rate since the 1990s.  Yet with this drop wages have yet to increase very much, especially since the Great Recession of 2008.  Why?  Venerable neo-liberal economists, such as the New York Times’ Paul Krugman, hypothesize that employers are reluctant to raise wages for fear they cannot cut them in the future. Others contend that we have not fully recovered from the recession or that the actual labor force participation rates are still high, making wage increases sticky.  All of these explanations miss the point.  Employers are not raising wages because they do not have to.  The reason is that labor unions are so week now that they cannot do what they historically have done which is to pressure employers to increase wages.

Last week was May 1–May Day.  Yet people forget why we have unions. The last 150 years of American history is the battle of workers and unions against corporations. America in the late nineteenth and early twentieth century was the country of  trusts.  It was the emergence of the railroads, steel, big oil, and monopolies.  It was also the era of sweatshops, child labor, adulterated and unsafe foods, and the six day, 70 hour+ work weeks.  It was also the era of piecemeal below subsistence wages, poor working conditions and high injury rates, no health benefits, no retirement benefits, and no protections against discrimination and harassment.  It was the world of Upton Sinclair’s The Jungle. Unions were illegal, and workers who stood up for their rights were beat up by the Pinkertons–company hired security–or arrested by the newly created public police forces which were created to control and brake unions.

No one should wax romantically for this era if you care about workers and the people.  America economically may have grown exponentially, but it did so unevenly, producing massive fortunes for a few but significant economic inequalities for the rest.  The America of the early nineteenth century–the one that Alexis De Tocqueville so famously described in his Democracy in America as one characterized by a general equality of conditions–had vanished.  By the time the stock market crashed in 1929 the income and wealth gap in America had literally produced two Americas:  One was the country of F. Scott Fitzgerald’s The Great Gatsby, the other of the depression-era novel The Grapes of Wrath by John Steinbeck.

The 1935 National Labor Relations Act (NLRA) or the Wagner Act brought relative peace to the labor market in that it recognized the right of workers to collectively bargain.  The NLRA established a process for how to unionize, organize workers, hold elections, and bargain for benefits.  It was a victory for workers, but also for the American people and the economy.  The Wagner Act was part of the New Deal, it was one element in a package of legislation to restructure the economy and fix the market failures in the economy.

The NLRA had more than an economic purpose or impact.  Many of the economic problems in America are political.  They are produced by asymmetric political power between corporations, the rich, and rest of the people.  Unions at their best can be what Arthur Schlesinger, Jr., once called the countervailing power to help limit the power of businesses and corporations.  The Wagner Act thus reset the political equilibrium in American politics to help favor the people.

And it worked.  Labor density and unionization in America dramatically increased in the United States, peaking in 1954 with over 35% of the workforce collectively bargained.  But what did unions accomplish?  There is powerful evidence first that they brought tremendous economic benefits to American workers and the economy.  They produced the minimum wage, the eight hours, five day work week.  They improved workplace safety, gave us health insurance, retirements, and workers compensation.  They raised the standard of living of most Americans, often even those not in unions. They also helped bring more economic equality to the economy, significantly erasing the disparities of the Gilded and Robber Barron eras.  Unions grew and flourished  at a time of significant economic growth, and there is little hard data to show that they caused rises in unemployment.  America’s post WW II affluence is tied in with unions.

But in addition to the economic benefits that unions bring, there was a political aspect to them.  Unions were part of the Democratic New Deal coalition.  The strength of the Post World War II Democratic Party dominance was tied to unions.  Unions got out the vote and they did so to the advantage of Democrats.

But many employers, conservatives, and Republicans hate unions.  Even many workers, especially white collar professionals, share this animosity, thinking they are better off on their own. Almost from the day the NLRA was passed opponents sought ways to circumvent the law.  The found ways to fire striking workers and replace them.  They harassed and fired organizers, they found ways in court to delay or challenge elections.  They claimed unions hurt the economy or restricted individual freedom and passed right-to-work legislation.  Yet unions remained a potent force in American politics until President Reagan became president and signaled with the firing of the air traffic controllers in 1981 that it was okay to go to war against the unions.  Since then, one can  correlate the rising inequality that Thomas Piketty describes or the decreasing social mobility in America to the decreased power of unions.

As Barry Bluestone and Bennett Harrison tell in The Great U-Turn, the Reagan era war against unions was part of a strategy along with deregulation and tax cuts to restructure the economy.  It was also part of a political restructuring of American politics.  The strategy has largely worked.  Overall, less than 12% of all workers are now in unions in the United States, with only 7% of the private labor force collectively bargained.

The decline of the American income in the last 40 years goes part and parcel with the decline of unions. In the last thirty years the American economy has seen a dramatic increase in the gap between the rich and poor such that it now mirrors that of the 1920s.  According to the United States Census Bureau in 2010 the richest five percent of the population accounted for 21% of the income, with the top 20% receiving over 50% of the total income in the country.  This compares to the bottom quintile accounting for about 3% of the total income.

A second study by the Center on Budget and Policy Priorities in 2010, drawing upon Congressional Budget Office research, found that income gap between the top one-percent of the population and everyone else more than tripled since 1973.  After-tax income for the top one-percent increased by 281% between 1973 and 2007, while for middle class or middle quintile it increased by 25%, for the bottom quintile it was merely 16%.  Looking beyond income to wealth, the maldistribution has not been this bad since the 1920s.  According to the Institute for Policy Studies, in 2007 the top one-percent controls almost 34% of the wealth in the country, with half of the population possessing less than 3%.  Since the Great Recession, the numbers have accelerated.

Opposing unions and workers costs families money.  There is a significant difference in median family incomes in states that are right to work (RTW) versus those that are not.  Several years ago I did a study using a three years average median family income for 2009 to 2012.  I found that  RTW states have a median family income of $46,919, non RTW it is $53,418–a difference of $6,499 or 13.9% per year.  Testing for the statistical impact of RTW on median family incomes, the relationship is -0.4.  This means there is statistical evidence that RTW is associated with lower incomes.  RTW depresses wages.  If all of this does not demonstrate a war against unions it definitely does reveal an attack on workers.

Yet Americans have been convinced unions and workers’ rights are bad.  They resent successful unions that pay better wages than they receive instead of organizing to bring themselves up to that level.  We live in a culture that worships the Donald Trumps and MBA-led management teams, yet these are the people who brought us the economic crash of 2008, gross mismanagement of the economy, and the mass layoffs that frequently dot our workplaces.  For many middle class workers, the image of a surprise visit to your cubicle by a HR person with a box telling you that you are fired and have one hour to clear out your desk is all too real.  Yet despite this, Americans continue to believe that they are better off without unions and worker protections.

Fixing the NLRA is a must to yet again reset the economic and political imbalances in the law.  Some claim that unions are no longer relevant or that their corruption has led to their own demise.  There is no question that unions need to clean up their act and support meaningful government reform, but there is also evidence that many people do want to organize and want representation in a union.  If it were easier to organize, perhaps more people would have health care even without Obamacare, or maybe more people would have retirement pensions.

At the federal level, unions made fixing the Wagner Act a top priority in 2008 and 2009 with the Employee Free Choice Act.  The law would have streamlined organizing and holding elections.  While initially as candidate saying he would support such changes, President Obama never pushed the Act when the Democrats had control of Congress, and now the chances for its passage are dead.  Perhaps the most important structural reform of the economy Obama could have made, he simply ignored, costing lasting damage to workers and middle class America.  And how with the Supreme Court ready to take the final constitutional shot against public sector unions, the last organized force to represent workers will be gone.

The problems of the Trump presidency are real but distracting.    While the media is focused on the

Russian connection, criminal investigations, political impotence, White House staff changes, and insulting tweets, what is given short shrift are the fundamental problems with the US economy that gave rise to the Trump presidency, and how little is being done to address them.
The latest economic news superficially is great.  The unemployment rate has dropped to 4.3%, as 209,000 jobs were added in July.  This is the lowest unemployment rate in 16 years.   The economy has added job for 83 consecutive months–a record–and it now appears that all of the jobs lost during the 2008 economic crash have been recovered.  Conversely, the Dow Jones is over 22,000.  Democrats will credit Obama for the jobs report, Trump supporters will take credit for both the jobs and stocks.  But these rosy numbers do not tell the entire story.
The labor force participation rate is 62.9%.  This number measures what percentage of the eligible workforce is working.  This number remains low and has changed little in the last year.  Part-time employment has changed little over the last year, the number of discouraged workers (those who have stopped working for work) has changed little over the last year, the percentage of long-term unemployed (more than 27 weeks) has not changed much in the last year, and this group represents more than 25% of those unemployed.  In terms of wages, the average increase over the last month was 9 cents, and only a total of 2.5% over the last year.  Essentially, the Obama (-Trump) job recovery stalled at least a year ago.  It has never produced much in terms of significant wage growth, and it has not done much to bring back many new workers or the chronic unemployed back into the job market.
When it comes to the stock market, many experts argue that there is no good reason for the Dow to be at 22,000, at least this is the argument by Forbes, where the claim is that stocks are over-valued.  One traditional measure of stock value to determine if it is over-inflated is the price-earns ratio.  Historically it is about 15–a value less than that means a stock under 15 means it is under-valued, over that it is inflated.  In July the PE ratio for Wall Street was 20-way over value and comparable to the PE ratio in the late 1920s and 1990s before crashes occurred then.  It was also over 21 in January 2008, right before the current crash. Irrational exuberance might be the appropriate description here.
However, even if stocks are priced right they point to a continued economic trend in the US over the last 40 years–more and more income is being generated by stock and capital than by labor.  As the economist Thomas Piketty has pointed out, this is the recipe for why the gap between the rich and poor in the US has exploded over the last two decades.  Simply put, workers are making less money in terms of wages and the affluent more in terms of stock investments.
The recent unemployment figures coupled with the 22,000 Dow highlight the fundamental problems in the US economy that fueled the election of Trump.  He, along with Bernie Sanders, pointed to the failure of the Republicans and Democrats to do much to help the poor and working class over the last 40 years.  Good paying jobs have been lost, the gap between the rich and poor has increased, and Wall Street fiddles while Main Street burns.  Trump correctly pointed to the job anxiety of White working class America who have been left out of the economy (as have people of color but Trump never talked about that), but there is no indication in the recent unemployment reports or stock market gains to suggest that things have changed.
And there is no indication that either Trump, the Republicans in Congress, or the Democrats have viable ideas to address the problems of chronic unemployment and the rich-poor gap.   Efforts to repeal and replace Obamacare would have hurt working class America more, the proposed immigration reform does nothing to help American workers in terms of address wages or increase employment, and what little one hears about tax reform in terms of cuts to capital gains similarly will do little to address the wage and inequality gap.
The problems of the Trump presidency are many, but they distract from a deeper set of economic problems that have existed for two decades and which no one wants to fix.

The Truth about Right-to-Work Laws

With Republicans in control of so many state governments and legislative chambers across the country one can expect that they will move their agenda.  Among items on their wish list will be right-to-work (RTW) legislation.  The argument will be that RTW laws will cut unemployment and grow the economy.  Ostensibly the argument conversely is that unions increase unemployment and hurt the  economy.

What do we really know about RTW laws?

 There are 24 RTW states and 26 plus the District of Columbia without such laws.  The Bureau of Labor Statistics (BLS) provides data on unionization rates, unemployment, and median family income.  Look at the October 2014 state unemployment rates as computed by the BLS.  Six of the states with the highest unemployment rates were RTW.  Among the ten with the lowest rates, five were RTW.  The average unemployment rate for RTW states was 5.5%, for non-RTW, it was 5.8%.  Since the 2008 recession, the difference in unemployment rates between RTW and non-RTW states has been minimal, revealing no clear pattern that the former has produced more jobs than the latter.

            Another way to examine the issue is by doing a statistical test called correlation analysis. Statistically, if being RTW decreases unemployment the correction is 1. If RTW increases unemployment the relationship is -1, and if the laws have no impact the relationship is 0. Is there any statistical correlation between a state being RTW and unemployment rates?  The correlation is 0.1 using 2014 data or 0.09 using 2012 data.  There is essentially no statistical relationship between states being right-to-work and unemployment rates. 

But now take a look at the differences from another angle.  There is a significant difference in median family incomes in states that are RTW versus those that are not.  Using a three year average of median family income from 2011 to 2013, RTW states have a median family income of $49,276, for non-RTW it is $55,725Ba difference of $6,449 or 13.1% per year.  Testing for the impact of RTW on median family incomes, the correlation relationship is -0.4. This means there is statistical evidence that RTW laws are associated with significantly lower incomes.  RTW appears to depress incomes.

           Now is there any statistical correlation between the percentage of the workforce in a state that is unionized and unemployment rates? Again using BLS data, one finds a correlation of 0.1  The connection is almost non-existent.  However, the percentage of the state’s workforce unionized demonstrates a positive 0.47 correlation with incomes.  Unions appear to increase family income while having no impact on unemployment rates.

Overall RTW laws have no real impact on unemployment and instead states with them have lower median incomes.  Similarly, unionization does not depress employment and instead increases wages.  Presumably more wages for workers means more consumption and a better economy in the state.  Thus, from an economic point of view, RTW laws do not appear to be a good economic deal for a state and in fact one might be able to argue that they bad policy that should be avoided.

America's Paradoxical Economy

    The economic situation and choices for America are not terrific.  This is clearly the case after the April 2013 unemployment  report indicated only 88,000 new jobs generated last month, coupled with nearly 500,000 individuals leaving the job market.  But the jobs’ numbers only point to one part of the overall American economic paradox.
    One the one hand the stock market is at a record high along with many companies showing record profits.  This should be good news for the economy but not necessarily.  First, the record profits are coming at a time of high unemployment.  Companies are making products or delivering goods and services but they are not hiring workers.  The profits are coming via increased productivity through automation or via flat wages that can be maintained as a result of high unemployment.  In short, companies have failed to hire workers because they are being replaced by machines as in manufacturing, or simply they do not need to increase wages because high unemployment is not pressuring wages up.  Couple that with weak unions and there is no real pressure to increase wages.
    The consequences of a flat labor market mean that there is insufficient consumer demand for significantly more goods and services.  Couple that with still high consumer debt (along with student loan debt) and there are structural limits to how much consumer demand can drive the economy out of a recession.
    Now consider data demonstrating that the economic growth is weak.  The GDP is not expected to grow much in the coming year and the best evidence is that the sequestration will perhaps take approximately .05 off annual GDP growth that is essentially not expected to grow more than about 1-2% this year.  Sequestration will also lead to government layoffs and add to the unemployment program.  What we have here is an economic austerity program similar to Europe that is not a recipe for economic growth.
    Now think about one potential bright spot for the economy–the housing market.  The real estate market appears back with stronger demand and increased prices.  Yet here too there is a problem.  The growth in part is stimulated by record low interest rates that appear to be overheating the market.  There is no question that it is a great time to borrow for housing and there are indications that the low interest rates are encouraging speculative building.  None of this is really good.  Why?  We really do need to increase interest rates to cool down the market otherwise we are headed for another bubble.  The low interest rates fueled the last real estate bubble that burst in 2008.  Moreover, we have done very little since 2008 to reform the real estate and housing markets.   Dodd-Frank, the financial reform law, has done little to change behavior here.
    But if one increases interest rates at the Federal Reserve Board to cool off the housing market then that rate increase could very well hurt the rest of the economy.  Cutting back on economic demand while raising interest rates is a terrific way to throw the economy into a recession.
    Now consider that sequestration is already cutting back on the safety net for the poor and unemployed.  Obama is now talking about agreeing to further cuts in government spending for Social Security and other similar programs.  These cuts too will hurt the most vulnerable and also damage the economy in the sense of cutting back on money that money to consume.
    Finally, think of all those individuals who have left the job market.  They cannot find jobs, perhaps lack the training to find new ones, face job discrimination, and often lack the resources or capacity to borrow for retraining.  We have in these individuals significant underutilization of their skills and talents–letting them go to waste.
    In sum, we have a tremendously paradoxical economy.  It is both overheated and underperforming at the same time.  Tools to fix one part of it may damage the other.  There is no question we need to develop and grow the economy but at the same time we need to attend to the redistributional aspects of an economy that is the most skewed in terms of wealth and income in many generations.  Policies are needed to grow the economy, cool the growing housing bubble, train workers for reemployment, and relieve many from the continued high consumer and other debt that they hold.

America Beyond the 2012 Elections: What the candidates should be discussing

Groucho Marx declared that any club that would have him as a member he would not want to join. His sentiment perhaps captures my attitude toward presidential candidates–anyone who wants to be president I would not want to support! The reason is that with America’s problems so pressing, anyone who wants the job or thinks they have easy solutions to the difficult problems is probably a fool and should not be president.

The same is true this year. While the presidential primary and now general election seem again mired in social issues, the tough issues facing America are left untouched or inadequately discussed.  Yes, there are concerns about the solvency of Social Security and other entitlement programs, and the economy and gas prices loom large, yet there is little serious debate about how to solve these issues, whether the president even has the power to do anything, and also little discussion about a range of other pressing concerns that need to be addressed. Regardless of who wins in November, consider some of the pressing issues that need to be confronted but which are being ignored.

Obama faces an economy where the best projection is of high unemployment and low economic growth. But there is more. Home values remain about 25% or more below what they were in 2008, consumer and now student debt is high, and many people have already blown through their unemployment benefits and face an uncertain future. Consumer confidence remains near historic lows, suggesting little chance that retail sales and spending for the coming holidays and into next year will revive the economy. The public just does not believe the country is headed in the right direction (61% say in the wrong direction) and few think we are better off now than four years ago.

However, in recent months the American economy appears to be recovering. The unemployment rate is steadily decreasing, the stock market is at pre-2008 levels, and the housing market appears to be stabilizing This has brought a shift to three other domestic issues—gas prices, debt, and social issues. In 1980 rising energy prices due to two embargoes by oil producing countries had an impact on President Jimmy Carter’s election loss to Ronald Reagan. In 2012 projections are that gas prices may increase from approximately $3.00 per gallon to perhaps $5 by July. These rising prices are already causing a potential worry in terms of their impact on the US economy, and they are the subject of political criticism by Republican presidential candidates who are blaming Barack Obama for the increases.

American Decline?
A second domestic issue is the American budget deficit. The current budget deficit for fiscal year 2013 is projected to be nearly $980 billion with overall nation debt estimated at $15.6 trillion. This debt is a concern for many reasons, some of which is over worry that the United States cannot continue to finance it budget deficits by borrowing. Continued long term US debt affects its credit rating and ability to borrow money from sources, some of which are international. Efforts to reduce the debt and budget deficit potentially have an impact on defense spending and there are some discussions regarding how this might affect US military might. Paul Kennedy describes how one threat to the United States may be that its declining economic strength may compromise its ability to maintain its international military supremacy or standing in the world as it loses it capacity to maintain both hard (military) and soft (economic) hegemony.

Former national security advisor Zbigniew Brzezinski writes in his new book America and the Crisis of Global Power that the budget deficit, an unstable financial system, decaying infrastructure, growing economic equalities, and partisan politics threaten America’s national security and international standing. In many ways his arguments echo what Paul Kennedy had asserted 25 years ago in his influential 1987 "The Rise and Fall of the Great Powers" that the declining economic stature of the United States could have a significant impact upon its geo-global standing. Both books powerfully connect domestic politics to national security and assert that the country must confront certain realities. Yet unlike when Kennedy wrote it appeared America had bipartisan capacity to act, Brzezinski sees the very polarization of our political system as a strategic liability, standing as impediment to solving the other problems that exist.

This polarization affects the capacity to govern. Samuel Huntington and others were roundly criticized over a generation ago for asserting that America faced a governability crisis. Yet now he seems prescient. The list of problems confronting the American political system is endless. There is the growing polarization of the political parties that makes compromise near impossible. Add to that the personalization of political attacks that render compromise after election difficult. But there is also the growing disaffection of the public from the two major parties, the inability of the Democrats and Republicans to escape capture by special interests, the impossibility of the an opportunity for minor parties to emerge. Polls increasingly point to large majorities of the American public expressing dissatisfaction or distrust with Congress and the government overall, and while money in politics has always been a problem, the Supreme Court’s decision in Citizens’ United v Federal Election Commission has exacerbated the impact that wealthy donors and corporations have on the political process. Political scientist E.E. Schattschneider wrote more than 50 years ago that America was in danger of becoming the largest aristocracy in world where political power was stratified by wealth, race, and gender, and that has largely come to be.

But the political divisions are a consequence of another real problem America must confront—the growing gap between the have and have-nots. Mounting evidence demonstrates that the United States has the largest gap between the rich and poor this country has experienced since the 1920s. Since the 1970s repeated studies document declining social mobility for the poor and middle class and a nation where the rich have done will and the rest have not. The United States fares poorly in comparative statistics on equality and mobility compared to other developed countries. The reality is that there is a significant class divide in this country, affecting political engagement, life prospects, health, and a host of other issues.

Domestic Policy: Infrastructure, Health Care, and Gas Prices
Another issue is America’s crumbling infrastructure. It now seems a distant memory that in 2007 a bridge collapsed in Minneapolis. For a few days infrastructure was the word of the day. “Infrastructure” is not a sexy word. Nor is it the type of word that most of us use in everyday conversation, until the Minnesota bridge collapsed. Yet infrastructure—a short hand way of referring to America’s bridges, roads, highways and sewer and water pipes—is important to our everyday lives. Without the basic infrastructure of roads we would never get to work, to school, or go shopping. Without it we could not cross rivers, drink water, or flush our toilets. In 2007 the American Civil Engineering Society estimated a need of at least $2.2 trillion to revitalize America’s aging infrastructure. While no additional bridges have fallen, the aging American infrastructure costs the economy billions in lost competitiveness.

The American health care system is a mess. The United States currently spends nearly 18% of its GDP on health care, far greater than the 10-12% spent by other developed countries. Spending will only grow as the Baby Boomers age. The United States does not have universal coverage and 44 million plus lack basic coverage. Health indices such as infant mortality, life expectancy, and obesity rates compare unfavorably to other nations. Obama’s health care act may not have been an ideal solution, but it tried to do something.  Republican Party repeal or Supreme Court invalidation of the health care act and return to a free market solution will fail to address the problem.

Short term rising gas prices are a problem but the longer term issue is that this country remains wedded to a low cost hydrocarbon economy that is not sustainable. Demands to frack or drill more will do little to depress long term energy prices as worldwide demand increases. In fact, statistical evidence demonstrates that America’s increased production over the years has had little impact on decreasing energy prices. Unlike Germany which is moving rapidly into alternative energy sources, or Europe in general which has adjusted to higher prices, the American economy is not prepared for a new energy future.

Finally, there are significant educational and demographic changes that America needs to face. Educationally, America’s students underperform compared to those in most other developed countries. It is not that teachers are not teaching but that our school system represents a horse and buggy era far too slack on math, science, and other standards. Americans still think that second languages are unnecessary, and ignore the ways that poverty and racism affect learning and outcomes. Demographically, we face a more diverse yet aging society. Future workers will have to support an aging population and these new employees confront a high-tech world where they may not have the skills to compete on a global scale.

All of the above described problems are dire and require money to fix them. This list does not even include the environment and global warming, but the last problem America faces—its budget deficit, as noted—may make that impossible. Continued long term US debt affects its credit rating and ability to borrow money from sources, some of which are international. Efforts to reduce the debt and budget deficit potentially have an impact on defense spending and there are some discussions regarding how this might affect US military might. Both Paul Kennedy and Brzezinski, as noted, describe how one threat to the United States may be that its declining economic strength may compromise its ability to maintain its international military supremacy or standing in the world as it loses it capacity to maintain both hard (military) and soft (economic) hegemony. Together they and others see a need to address the long term fiscal health of the country but alas, the growing political polarization of the United States places a solution beyond immediate grasp.

Foreign Policy
So far in 2012 foreign policy issues have been secondary concerns this year. The United States formally withdrew from Iraq in 2011, leaving this issue as a minor concern for most. However, the United States still has troops in Afghanistan and there are some who criticize President Obama’s intention to phase out the military commitment there.

The Middle East in general is perhaps the primary foreign policy concern for the United States. There is concern over Iran’s nuclear ambitions, defense of Israel, and the latter’s potential bombing of Iran to prevent its access to nuclear weapons. The Obama administration does not presently support military action against Iran but some of the Republican presidential candidates do. The notable exception is Ron Paul who does not see Iran as a security threat to the United States. The United States supports the opposition in Syria but so far official US policy has not endorsement arming them or taking more aggressive military action. Again, some of the Republicans endorse this action.

In addition to the Middle East, North Korea’s stability and nuclear ambitions are of concern. Recently the United States secured some agreements regarding the North Korean nuclear program. Regardless of who is elected president, steps will continue to be taken to address this issue. It is unlikely that the US will return to the rhetoric of George Bush who labeled North Korea one of the “axes of evil.”

Finally, Europe does not seem to factor large in terms of issues dominating the 2012 American elections. This is perplexing given the historical close alliances with Europe and how financial instability across the continent could impact the American economy. Furthermore, Russia does not factor very high in the 2012 presidential debates, although Mitt Romney, the likely Republican Party presidential nominee, has described that country as one of the main competitors and security threats to the United States. China is perceived as more of a rival or threat to US interests than is Russia. Barack Obama shortly after assuming the presidency canceled the missile shield proposal in Europe that his predecessor George Bush was advocating. Were a Republican elected as president it is possible that the missile defense shield proposal might again be resurrected.

Overall, these are the difficult issues confronting America’s future and it does not look like either any of the candidates or political parties are confronting them in a realistic fashion. Nor does it appear that either the media or the public is either.

The Last Word
There is an interesting article in the New York Times discussing how Obama is having a difficulty attracting big donors this election. It notes how over 58% are small donors this time. Big money is going to the GOP.  It seems that after wealthy America threw a party and had to pay the bill, they turned in 2008 to Obama to bail them out. Now that they are bailed out and partying again they have turned their bake on him. There is a message here for Obama and corporate Democrats. The silver lining here is that if Obama gets reelected it will be with small donors and perhaps they will mean a change in politics. But the worry for Obama and the Democrats is that big money is again voting ideological and that is usually a good sign for Republicans.

The Economic and Political Truth about Right-to-Work Legislation

Today's blog also appeared as a Community Voice piece today in Minnpost. 

The debate over the merits of constitutional amendment making Minnesota a right-to-work (RTW) state is heating up. Proponents of RTW contend that it will make Minnesota more business competitive and produce jobs. Opponents respond that it will lower family incomes. Because the debate has taken on partisan implications with Republicans and chamber of commerce constituencies favoring RTW and Democrats and unions opposing it is difficult to separate fact from fiction. Is RTW about economics, or is politics, directed at busting unions which have historically supported Republican candidates and causes? The simple answer is that it is about both. RTW does not produce the economic benefits that its advocates claim, and instead the real justification has to rest upon its political aims.

What do we know about the economic impact of RTW? Legislative debates on the issue are generally badly informed or woefully devoid of fact-based impartial evidence. Often studies are cited by organizations with clear political agendas. Groups such as the Cato Institute, the Mackinac Center, and the Chamber of Commerce argue that RTW laws produce lower unemployment rates for states. Conversely, the generally liberal Electronic Policy Institute finds the opposite, and also asserts that RTW adversely impacts unionization and family incomes. More nuanced and independent research yields a better picture.

Right-to-Work Laws Fail to Increase Employment

In Right-to-Work Laws and Economic Development in Oklahoma Lawrence Mishel finds no evidence that RTW laws increase employment. Conversely he finds evidence that they decrease wages. Lonnie Stevans of Hofstra University in a paper entitled "The Effect of Endogenous Right‑to-Work Laws on Business and Economic Conditions in the United States:  A Multivariate Approach" reached the same conclusion on both points, while also noting that the rate of self-employment was higher and bankruptcies lower in RTW states.

Conversely do RTW laws hurt unionization? H. Craig Petersen and Keith Lumsden in "The Effect of Right‑to‑Work Laws on Unionization in the United States" find little evidence for this claim. States, for example, such as Nevada, which is RTW, have one of the higher unionization rates in the country at 16.6% in 2011. The same conclusion is reached in the article "The Effects of Right-to-Work Laws: a Review of the Literature" by William J. Moore and Robert J. Newman.

But in addition to the above research, one can also do the math to look at the impact of RTW.  There are 22 states with RTW and 29 states plus the District of Columbia without.  The Bureau of Labor Statistics (BLS) provides statistics on unionization rates, unemployment, and median family income.  What do we learn from crunching some numbers?

Fox's Bill O'Reilly asserts that RTW states have a much lower level of unemployment than the union states do. Using BLS December, 2010 data, the unemployment rate for RTW states was 9.2%, for non RTW it was 9.7%. Now look at the December 2011, BLS numbers. Supporters of the amendment can point to the fact that seven of the top ten states with the lowest unemployment rates are RTW. Conversely, five of the ten states with the highest unemployment rates are RTW. Second, the average unemployment rate for RTW states in December, 2011 was 7.6%, compared to 7.9%. Using the most recent January 2012 numbers, the unemployment rate for RTW states was 7.3%, and 7.8% for non-RTW states. Overall, not much differences here in terms of economic performance.

Another way to examine the issue is by doing statistical correlation analysis. Statistically, if being RTW decreases unemployment the correction with it is 1. If RTW increases unemployment the relationship is -1, and if the laws have no impact the relationship is 0.Is there any statistical correlation between a state being RTW and unemployment rates? The correlation is 0.09 suggests no relationship. Essentially, O'Reilly is wrong in his statement.

But the classification of states as O'Reilly does into those which are RTW versus union is too crude. Many RTW states do have unionization levels comparable to those lacking such legislation. Is there any statistical correlation between the percentage of the workforce in a state that is unionized and unemployment rates? With a correlation of 0.1 the connection is almost non-existent.

Right-to-Work Laws Depress Family Incomes
But now take a look at the differences from another angle. There is a significant difference in median family incomes in states that are RTW versus those that are not. Using a three years average median family income for 2009 to 2009, RTW states have a median family income of $46,919, non RTW it is $53,418 a difference of $6,499 or 13.9% per year. Testing for the impact of RTW on median family incomes, the relationship is -0.4. This means there is statistical evidence that RTW is associated with lower incomes BRTW depresses wages. Finally, the percentage of the state's workforce unionized demonstrates a positive 0.47 correlation with incomes unions increase income.

RTW laws are only one variable affecting the economic climate of a state. But is fair to say that these laws have no real impact on unemployment and instead states with them have lower median incomes. Similarly, unionization does not depress employment and instead increases wages. Presumably more wages for workers means more consumption and a better economy in the state.

So if economics is not really the issue (unless one wants lowers wages), then what is it is about? It is about politics. Generally advocates for RTW are Republicans who see labor unions as primary supporters of Democrats. RTW laws, along with voter identification laws are tools aimed at weakening the political support for the Democratic Party by making it more difficult for some to vote, organize, and amass political resources. Simply put, it is an effort to rig the rules of politics to favor one side by demobilizing the other.

Statistics mask reality: Unemployment isn't going down, and Minnesota doesn't have a budget surplus

Today's blog appeared in Minnpost as an editorial on December 7.

"Lies, damn lies, and statistics." Proof that this adage rings true can be seen in two recent stories declaring the national unemployment rate had dropped to 8.6 percent and that the State of Minnesota had a budget surplus of $876 million. While many herald these numbers as signs that the American and Minnesota economies are improving, the truth is that both mask a reality that is far grimmer than the statistics reveal.

The meek jobless recovery from the 2008 recession persists. With unemployment hovering around 9 percent, the American economy seems stuck in terms of job production. Obama had proposed a series of tax cuts and projects to stimulate hiring, but their fate in Congress during a presidential election has doomed them. Even if passed, the original September $450 billion jobs plan would do little to encourage business hiring. That will not occur until consumers are willing to spend enough money on goods and services to make it profitable for businesses to hire. As late as just a few weeks ago the Federal Reserve Board predicted that well into next year unemployment would not fall below 8.5 percent. Such a number poses a political problem for Obama – with the exception of FDR, no president has been reelected with an unemployment rate greater than 8 percent.

The surprising drop in the unemployment rate from 9 percent to 8.6 percent in November appeared to be good political and economic news. Yet it is not for several reasons. First, the rate reflected less a robust growth in the economy than many individuals leaving the workforce because they could not find work. The official unemployment rate calculates only those actively looking for work. If you cannot find work and have stopped looking, you are not counted among the ranks of the unemployed. Buried in recent unemployment figures was evidence that the workforce was contracting — many individuals have simply stopped looking for work. Perhaps half if not more of the drop in the rate in the last month was due to this fact.

Low rate of job creation

Yes, the economy produced 120,000 new jobs. That appears to be good news, but not really. The country is millions of jobs away from re-creating all of the positions lost since 2008. Millions of additional jobs are also required for new workers entering the labor force. The economy needs to produce perhaps 300,000 or more new jobs per month for several years before the loses of 2008 are recaptured. This would require economic growth far greater than the 2–2.5 percent increase projected for the near future.

There is little sign of significant turnaround for the American economy. Consumer debt remains high – nearly $830 billion – and student-loan debt will soon be $1 trillion. Housing prices and sales remain flat, consumer confidence low, and despite some bright signs that Black Friday and Cyber Monday were good, few are foretelling a serious consumer economic boom. The 8.6 percent unemployment rate fails to capture all this.

Minnesota: In the money?

If the 8.6 percent unemployment rate is a lie, news of the $876 million budget surplus is even more so. With predictions prior to the announcement last week that the state was up to at least $1 billion in the red, news of the surplus was greeted as proof that the Minnesota had turned the corner. Republicans cheered the news as proof that balancing the budget with cuts alone and no tax increases was correct. Dayton, with nodding approval of Zygi Wilf, hoped that the surplus would make public financing of a new Vikings stadium more salable. But despite claims by all that a surplus exists, the reality is: It does not.

First, recall the budget deal from last July to end the government shutdown. It came with $2.2 billion taken from K-12, and $700 million in borrowing off of Minnesota’s tobacco endowment. This was on top of other budget cuts to vital programs.

The reality is that the balanced budget was achieved by serious debt financing.

Second, the budget projection benefits from a law that calculates inflation when it comes to state revenue but ignores it for obligations. This means that the actual projection released last week is distorted by overestimating income and underestimating obligations.

Third, the budget agreement from July required that approximately the first $900 million of surplus must be used to replenish the state budget reserves and rainy-day funds. Thus, this $876 million is already called for and not available for spending.

One-time fixes

Fourth, whatever the reality of the current state budget, the fixes, such as borrowing to balance it last July, were one-timers. They failed to address to long-term fiscal imbalances in state financing, setting up the next biennial budget to again be several billions of dollars in the hole.

Finally, whatever the fiscal forecast stated, another one is due at the end of February 2012. That is the one that will be used by legislators to make the budget. It is still not clear whether it will be as optimistic as the one just released, especially if the state and national economies fail to recover.

Minnesota really does not have a surplus. Nor is the United States experiencing a serious decrease in unemployment. These two statistics mask a reality that shows how numbers do not always tell the truth.