Thursday, March 6, 2014

3 Quarks Daily is Having a Contest, and I am Entering

3 Quarks Daily is having a contest::

Friday, February 28, 2014

Mark Blyth to Judge 4th Annual 3QD Politics & Social Science Prize

NOTE: Please nominate good political blog writing for our prize in the comments section of this post.
- See more at:

Friday, February 28, 2014

Mark Blyth to Judge 4th Annual 3QD Politics & Social Science Prize

NOTE: Please nominate good political blog writing for our prize in the comments section of this post.
- See more at:

Friday, February 28, 2014

Mark Blyth to Judge 4th Annual 3QD Politics & Social Science Prize

NOTE: Please nominate good political blog writing for our prize in the comments section of this post.
- See more at:

Prizes are being offered.
I have entered:

It may be a bit technical to make it past the first round, so, if you care to, wish me luck.  Thanks.

Wednesday, March 5, 2014

Are Unions Necessary?

Unions are necessary, or rather, what is necessary is an institution, or institutions, powerful enough to balance the concentrated powers of capital, in order to create a robust economy, and a robust democracy.

In the absence of this power, capital unchecked accumulates and concentrates, to the detriment of the economy and society.  As capital concentrates, the growth of the buying power of labor, (and we see with the austerian policies promoted by the Right, government, also) first slows, then stops, then starts to decline.  And we are starting to enter the period of decline, after years of stagnant income by labor.  Capital is destroying its market, and with it, opportunity for continued profit, and the incentive to invest. This leads to a gradual decapitalization of the economy, although this will first be concealed by investment bubbles in enterprises which do not produce real goods and services. That is, the economy will continue to appear to grow, even while in real terms, in terms of industry and infrastructure, it actually declines.

Government itself, and certainly after Citizens United, is not strong enough to provide this countervailing power.   Indeed, its policies show it has clearly become the captive of capital, and so aggravates the already mal-distribution of power.

So this countervailing power once, inadequately perhaps, partly provided by unions, but now largely absent, is necessary even for the survival of capital. 

Thursday, February 27, 2014

Graphs on Inome Inequality

A graph that has been doing the rounds, lately.
And here:
And here:

 The source is:

The World Top Incomes Database:

This is my own version, taken from an EXCEL download of the relevant data, the graph drawn using the EXCEL graphics wizard, (since I couldn’t figure how to copy the graph itself directly to my website.)  All data includes capital gains, which for the bottom 90% isn’t much.  All data is for the United States.

Note that the .01% are doing really well. Their average income is currently at almost $22 Million.  So well, in fact, that we have to redraw the graph with out the top two brackets get some sort of perspective:

With this graph, we can see that the top 10 - 5% bracket have made some progress since oh, say 1985, say,  and the top 5 - 1% a little more.  And the other two brackets have done quite nicely, though, as Washington says, peanuts and chump change respectively compared to the .01%.  If we look at the bottom 90% however, it seems as if their glory days are in the past.  From 1941 or so to 1975 their income more than tripled.  It has remained largely static since then, however, and since the 2007 recession has declined about 15% from its peak. 

Of course, looking at the graph of the top percentages, we could say: “Hey, that’s the income of just a few.  There’s still plenty to go around for the rest of us.”  

But let’s look at that.  Here’s the Share of Total Income for the top percentiles, starting at the top 10%., which we see now take home about 50% of the country’s personal income. (To recover the brackets in the above graphs, take the difference between two adjacent curves.  Thus, the top 10 – 5 % bracket is the difference between the top line and the magenta line, about 12% in 2012, the 5 – 1% bracket the difference between the next two lines, in 2012 about 15%, etc.)   

As is clearer in the next graph, the top 1%  pull in about 23% of the nation’s total personal income.  This is up from a low of about 9% in the late 1970’s. The top .01%, that is the richest 30,000 people or so, in 2012 took down over 5% of the nation’s personal income, up from less than 2% in 1980.

Looking at it share-wise, one person’s share is a share denied another. So where in 1979 the bottom 99% of the population shared 91% of the nation’s production, in 2012 they shared only 77%.  If we consider just the bottom 90% of the population, in 1979 they shared 67% of the nation’s production.  In 2012  the bottom 90%  shared less than 50%. That's a 17% decrease in their share of the nation's production.     But to them, it's a 30% decrease in their income.  That is, instead of $30,000 per year, the bottom 90% would be averaging over $40,000 per year.  

The question for the second 9% is are they doing better than they would it the top 1% had not absconded with so many of the gains.  The answer may be no, and even if it is yes, they have to realize that much of those gains were at the expense of the 90%.

Thursday, January 16, 2014

Walmart, Oligopoly and Community Economy

We wish to estimate the effects of a Walmart on a community economy. Some of the general considerations of: are here made more concrete.

 Figures for Walmart are taken or calculated from:  We will see Walmart has about 3200 stores in the US, approximately one store per 100,000 people, which we will consider the size of the community we are interested in. It’s a size most people can relate to.

We have, for 2012  $328,704,000    US Sales for Walmart.
USA % of total Sales is 70%, from 4570 Stores Worldwide
So we estimate the number of US stores at about 3200. 
That’s about 1 store per 100,000 people.

Walmart has 1.4 Million employees in the US, so we can estimate about 300 employees per store.  (We’re including the employees at the 158 distribution centers and the Headquarters.  It won’t affect the main conclusions. If anything, it will lead to them being understated.)

We have: sales (revenue) per person at $1100, or $110,000,000 per our community of 100,000 people.
(Walmart makes $236,000 in revenue per employee. Keep that in mind when we talk about employee pay.)

From the table here: we find that in the retail trade, the average owner makes about $63,000 on just over $3,000,000 in sales.
We go over to:  Statistics about Business Size (including Small Business) from the US Census Bureau, (data for 2007) and page:  It seems to be the latest figures, so we’re going to assume that the relevant figures have not changed all that much since then.  (They have, but in ways which won’t affect the argument much.)

From the Excel spreadsheet ‘US all industries,’ downloaded from that page, line 19464 etc, we have data in a different form.  We take the bin that contains the average receipts for retail establishments, line 19469: firms whose receipts are between $2.5 Million and $4,999,999, and use the figures from that bin.  We estimate the average retail establishment has somewhere around 12 employees, with average pay of around $25,000, or a payroll per firm of about $300,000.  Ballpark figures, and on the conservative side, I think.  

which quotes, puts the average at about $18,000 for a sales associate at Walmart   From the Excel spreadsheet, line 19482, we get an average salary for employees in retail firms with receipts over $100,000,000, of which Walmart is one, of a little over $22,000.  We’ll use that figure instead, though it includes the salaries of the bosses in Bentonville, Arkansas, and so is  higher than the average store worker makes. It’s bad enough.

So that’s the data we’ll use.  What can we conclude?

First, how many small businesses are wiped out when a Walmart moves in?  Well, as we see, average receipt for a small retailer is $3 Million, so $110,000,000* would support, say 35 such businesses.  That’s most of a downtown. Since small businessmen are much of a community’s leadership, the social consequences are far beyond the mere economic consequences. Indeed, this destruction of these leadership opportunities in a community is perhaps the most pernicious effect of a Walmart moving in.

Walmart says they provide jobs.  However, we estimated the average small retailer employs 12 people, which times 35 retail establishments gives a total of 420 jobs.  Walmart provides about 300 jobs for a net loss of 120 jobs. 

What about payroll? Our local retailers provide 420 times $25,000, or a payroll of $10.5 Million.  Walmart provides 300 jobs at $22,000, for payroll of $6.6 Million.  Or about $4 Million less. This $4 Million is taken out of the community, which money would otherwise remain.  That $4 Million is enough to support another 40 jobs at $100,000 per job. (This is the average capital required to support jobs of all types.)   So the total loss in employment is about 160 jobs, which if we consider about 50,000 persons of our community of 100,000 to be in the labor force, adds almost 1/3 of 1% to the unemployment rate in our community.

(Admittedly, this calculation is hugely sensitive to the number we take as the average number of employees in the average retail firm. If we instead take 10 as the average number, the displaced payroll is only 350, for a net of only 50 lost jobs, 70 lost jobs if we include the effect of loss of capital.  If 14 it is 490, for a net of 190 lost jobs, over 240 counting the loss of capital effect.)

Of course, Walmart provides income and employment to Bentonville, Arkansas and the surrounding area, but this is small compensation to the thousands of communities which are not Bentonville.   And similarly for other large corporations.  Their headquarters are surrounded by islands of prosperity, created by the extraction of money from other communities, which are materially poorer for their efforts.  

That’s just Walmart.  If we consider the top 30 retailers, their combined total revenue is $1320 Billion, about 4 times that of Walmart alone, or say about $4,400 per capita.  That is 1/3 of all retail business in the US is done by the top 30 firms. (The total revenue of all retail firms is about $13,000 per capita. Of course, all the top 30 retailers are not present in all communities. But this is still the average effect, though the reality is ‘lumpier.’)  This indicates that organization, that is, the organization of the retail industry into oligopoly, accounts for over 1% of the unemployment rate, or about 600 jobs in our community of 100,000.  About ¾ % is direct reduction in payroll, and ¼ %, or 160 jobs, is due to $16 Million capital being taken out of the community by combined reduction in payroll in the community by the largest 30 retailers.

Finally, we note that the 30 largest retailers combine to eliminate, and replace, about 140 local retailers from our community of 100,000, (about $440,000,000 divided by $3,000,000.) 

Since retail is about 6% of the economy, we might think that if the entire economy were organized into similar oligopolistic structure,** the unemployment rate would be about 16 to 20% greater than- what?-  minus 10%? This seems impossible. Clearly, some oligopolistic organization is required to maintain the output of the economy at its current level. Indeed, in the absence of large corporations, labor would not be sufficiently organized to produce enough to sustain our current level of consumption. (Actually, we would expect the increase in unemployment to be much greater than 20%, since we are only figuring the contribution of the very largest firms, and not, say, the 20,000 largest firms in the US, all of which are over $100,000,000 in receipts.)  However, increasing the degree of oligopoly beyond a point will increase the unemployment rate while at the same time creating an excess of supply.  (This increase in degree of oligopoly is one change from the 2007 data we might expect.) Note this is a purely a structural effect.  So we would expect greater scale of organization, to a point, the point of diminishing returns, to increase supply.  Beyond that point, increasing scale will result in a decrease in supply.  Ordinarily, we would expect negative feedback about that point.  That is, we would expect a tendency for scale of organization to settle at that point.   

However, it is the tendency of oligopoly, unchecked, to concentrate into fewer and fewer firms. This is because, as we have noted elsewhere, the tendency for oligopolies to collect extra-normal profits, or rents.  An oligopolistic company thus expands, and accumulates power, at a rate greater than companies in more competitive industries.  There is thus external pressure on industries to organize as oligopolies, since an industry which fails to do so will lose power and influence relative to those industries which do concentrate.   

 Now we have not discussed the increase in consumer's surplus, brought by the lower prices, which motivates, for a community, the intrusion of a Walmart into that community.  That we will discuss in a subsequent post.    

*The fact that the average single Walmart store has receipts greater than the lowest margin of the top bin in the table ($100,000,000 receipts) highlights the limits of the Census data presentation, and so the limits of its usefulness.  
**The data from the table seems to imply at least a comparable degree of oligopoly through out the economy.  In retail, firms over $100,000,000 account for 62% of all retail receipts.  For all private industry, the comparable figure for receipts for all firms over $100,000,000 is 68%.  So, if anything, the rest of the economy would seem to be, on average, more oligopolistic than retail.   However, for the entire economy, the average pay for the average firm seems to be about $35,000, whereas the average pay for firms over $100,000,000 is $50,000.   We can still have it both ways, though.  Consider, the $22,000 average pay for retail.  Included in this average is the salary of the bosses at the corporate HQ, so the average in a given store is much less.  Similarly, we can consider the average of large corporations in other industries, in the communities in which they operate, ie get their receipts, as opposed to the communities in which they have their headquarters, to be less than the average for that industry. Or, more precisely, to be less than, or at least comparable to, the average of the average sized firm.  This is so in order for them to compete, locally, despite the larger corporate overhead.  Of course, there are other savings, but these can all be considered as reductions in compensation to operational employees, along the chains of supply.  For instance, a large corporation will have its own warehousing, but the cost of labor for this warehousing must be less than the local competition. Increases in efficiency can only save so much, and will eventually be copied. (Referring to the previous post, efficiency is a multiplicative factor. It is necessarily less than 1, and can only be increased at ever increasing expense.)  Other things being equal, then, this means its compensation for its warehouse employees must be less. (But consider Costco. It pays its employees more, so we  must consider that it employs them more efficiently.)  Similarly for its factories and transport, on average.   Where research and product development are also involved, the savings in overhead for production must be even greater. 

Thus a large corporation will (almost) always take more, in the case of stores, or in the case of factories, add less, than a locally run business, to a local economy. In fact, consider a corporation purchasing a local business.  It is the belief of the purchasing corporation that the local business is undervalued by its local owners, else it wouldn’t buy it.  That is, that more can be extracted from the local business’ community, in the case of a store, or, in the case of a factory, less put into the community, than is currently being done by the local owners.    

Tuesday, December 31, 2013

Sectors Combine in Non-Linear Manner.

This is a work in progress:

Sectors are considered to add value to each other.  However, sectors combine in nonlinear manner.  That is they do not just add value between each other, they also multiply between each other, and with themselves.   

Consider transportation.   Transporting an object across country does not add value to that object.  It multiplies that object’s value, say by a factor of, for example, 1.3.  This would ‘add’ 30% to the value of the object, but the real process is not addition. If the process were addition, then driving an empty truck across country would add value to nothing. (Unless the truck were more valuable on one side of the country than the other.  Then the truck’s value would be multiplied.)  But this is absurd.  On the other hand, multiplying with nothing still gives you nothing. 

Manufacturing a good is multiplicative. Each step in the manufacturing process multiplies the value of factors, and the value of the final product is the ‘product’ of these steps. 

Profit is multiplicative.  Where nothing is produced, no profit can be made.  A product or service is sold at a multiple of its value:  Greater than one for a profit, less than one for a loss.   

Government, then, which is basically in the business of redistributing, transferring, demand, is multiplicative.  It is in the business of rearranging factors, seeking to maximize the total produced by the economy.  However, it can really only tax agriculture and other extractive sectors, mineral mining and energy extraction. This implies that the product of the tax (a factor less than one), and the subsidy (greater than one), is always less than one, because of the cost.  That is the cost is always greater than the benefit. But where the government transfers demand from non-productive sectors to productive sectors, that is, where the subsidy is fictitious, an economy can experience real benefit.    

There are cross terms  And powers of terms. The church (charity) is another. It transfers demand down the social scale,  thus expanding the base of consumption and giving more members of society a stake in that society.    

Libertarian states minimize the government source of cross terms, and thus cannot compete against larger effective governments which increase cross terms, and thus greatly magnify the economy. 

Saturday, November 30, 2013

Over-compensating the Wealthy

Previously, we showed that paying the CEO’s too much results in the contraction of revenue of businesses, particularly in the case of the Universal Corporation, but in general to any economy.
This is somewhat dated, but it shows CEO  pay has far outpaced even the profits of the corporations they manage.  In fact, their increase in compensation has tripled the increase in corporate profits.  However, it is the combination of the top three lines which we are interested in, since each, and their sum, is far higher than the increase in production worker's pay, and these combine to provide the compensation of the wealthy.
CEOs' average pay, production workers' average pay, the S&P 500 Index, corporate profits, and the federal minimum wage, 1990-2005 (all figures adjusted for inflation)
Source: Executive Excess 2006, the 13th Annual CEO Compensation Survey from the Institute for Policy Studies and United for a Fair Economy. 
Corporate profits are interesting, as our thesis is that these will eventually decline and turn negative, as consumers are increasingly reduced to subsistence and impoverished, because all of the money is ending up in the hands of the wealthy.  Meanwhile, as with overfishing, until the stocks are depleted,  there is the appearance of abundance, and, as with overfishing, the justification of over-exploiting the worker.  Of course this won't happen for all corporations at once.  As the middle is hollowed out, those corporations servicing the middle be the first to suffer losses, while those that service the high end and the lower end of the income distribution may even experience an increase in profits:  The higher end will prosper because of the increased income of its members.  Those corporations servicing the lower end will prosper because formerly middle income households will become their customers as they join the ranks of the poor.  Thus we would expect companies like JC Penney and Sears to experience difficulties, while companies like Dollar General and Walmart, and at the high end, Apple, prosper.  But this is a transition, and not a stable state. 

We also showed that an excess of savings leads to a contraction of revenue in an economy. Thus, since the wealthy save more, the greater the concentration of wealth, the greater the rate of savings, and the greater shortfall in revenue.   With the existence of a financial sector, we can close the system: Money saved goes into banks, where it is lent back to expand demand, in the short term. Unfortunately, lending it back into the economy carries the expectation that it will be repaid to the banks, which means on the net, over the medium to long term, it has no effect on demand. And actually, if we include interest, which takes more money out of the economy than is lent into it, lending by banks has the effect, over the medium to long term, of reducing demand in an economy.  And the revenue of business is equal to the demand, that is, the money spent by consumers.  So lending by banks, which reduces demand, and thus revenue, in the larger economy, has the long term effect of discouraging investment. 

And the greater the debt, the greater this effect is.   With total debt of the non-financial sector equal to almost 3 times GDP, interest payments alone are equal to about 8% GDP.  This is money owed the wealthy, since they are the ones with money to save and lend, by those with less money, since they tend to borrow, and at the least, save less.  As long as the non-financial sector can carry the debt, the transition state persists. When the debt can no longer be carried, it is called in, and the market collapses as money goes to paying off debt instead of buying  production, and sustaining the revenue of industries.

The problem for an economy, a civilization, and indeed the wealthy themselves, is that when there is excess concentration of power, there is no check on the self-serving of the powerful.  It is a case of the Tragedy of the Commons:  The survival of civilization requires the restraint of all the wealthy, but it is in the interests of each to pursue the maximum gain, for himself.  And this is what happens.  Each pursues his maximum gain,
and together they destroy the commonwealth on which all depend.  They have bought off the policeman, and now there is no one to restrain them in their depredations.  

Because of debt, the transition to the steady state, instead of being smooth, can be catastrophic.