A trickle. do you remember? The idea is that if we increase profits by suppressing real wages and/or corporate tax cuts, by turning real income into capital, as if by magic, companies will start to invest a lot of money in productive capital, stimulating economic growth, and earnings “Trickle down” to the worker who made the initial sacrifice. The evidence base never supported the idea, but it still resonates. I read two interesting articles yesterday, and although they may not seem relevant at first glance, they are. The first reveals the staggering decline in productive investment in both the private and public sectors, and the long-term damage this will do to our ability to meet the climate challenge. The second shows that the argument that cutting corporate taxes is good for growth is false.
Australia’s experience with real wage cuts and business investment
In 1983, the Labor government took office in Australia. They initially tried to create tripartite arrangements with unions, business and the government to manage wages in order to reduce what they called a “real wage surplus” (considered real wages exceeding productivity).
The corporate sector refused to accept any sweetheart deals, so the government alone implemented the wage agreement, which is just a fancy term for systematic cuts in real wages over the next decade.
Union leadership (at the highest level) sold out the workers and negotiated the deal with the government, which had long-term effects on the ability of shop-floor union officials to negotiate on behalf of their members.
Workers get a promise from the government that if they accept real wage cuts through the wage-setting system, businesses will invest more and everyone will be better off.
The former happened, but the latter didn’t.
The first graph shows the wage share, which is the ratio of real wages divided by productivity. If the wage share is falling, then real wages must be rising more slowly than productivity, or falling more sharply.
The shaded area is the validity period of the wage agreement. During this period, real wages were falling because the wage-setting tribunal did not pass the full CPI increase.
The situation worsened after the agreement period, and a wage-suppressing mentality became entrenched, with successive governments attacking the ability of unions to raise wages.
The graph below shows the private investment ratio from the September 1959 quarter to the March 2022 quarter. The shaded area is the validity period of the wage agreement.
During this period, the ratio has not risen significantly.
So in Australia, we have experienced firsthand the illusion that reallocating national income from the workforce to companies can improve the lot of us all.
Declining investment in productive capacity is a global phenomenon
Bad behavior in investment ratios has actually become a global trend under neoliberalism.
Financial Times article (19 July 2022) – The investment drought of nearly two decades is catching up with us —Martin Sandbu agrees.
He found:
From 1970 to 1989, the share of GDP spent on investment in six of the world’s seven largest economies averaged from 22.6 percent in the United States to 24.8 percent in Germany. The seventh is Japan, accounting for 35%.
Among the G7, only Canada has maintained this level of investment: 22.5% this millennium is barely down from 22.8 then. All other countries managed to reach their 1970-89 investment levels in only four scenarios: the US in the boom years of 2000 and 2005-06, and France in 2021.
That seems odd given “the cost of financing is lower than ever,” he said.
Most countries are reducing investment in their GDP to build productive capacity and provide for stronger economic growth without triggering inflationary pressures
The article states:
The G7’s annual GDP is about $45 trillion. If we are to achieve net zero investment by 2050, restoring its investment ratio could fill nearly half of the global shortfall of $4 trillion in annual cleantech investment required by the International Energy Agency.
The private sector isn’t the only one lagging behind.
Public sector investment has also fallen sharply as countries fall into the spell of “fiscal consolidation,” “budget repair,” austerity, and more.
While we could argue that the climate emergency requires less production capacity, why worry, the reality is that the state of existing production capacity is insufficient to handle the kind of carbon-reduction activities that are so desperately needed.
Lack of investment has exhausted existing production capacity and left many countries with many carbon-intensive stranded assets.
Just look at Australia’s electricity sector, where more and more coal-fired power stations are being scrapped due to lack of maintenance as they become unreliable.
I think this chart in this article is scary (thanks to the FT). It shows net public investment in the euro area as a percentage of GDP.
Net investment is the difference between gross investment and depreciation (replacing worn-out capacity). If it is falling, then the capital stock is falling.
The Financial Times article asked:
Why have we lived so long with past investments without making enough new ones? Funding costs are clearly not an issue, and interest rates are historically low…
Instead, they blamed a lack of demand (austerity) and cheap labor (wage suppression and relocation to eastern Europe).
The same reason is global.
Businesses that have access to cheap labor have no incentive to replace it with more expensive capital.
Furthermore, if the existing capital stock is sufficient to sustain production at current spending levels, why build capacity that cannot be used?
This duality is a hallmark of neoliberalism and exposes its short-sighted nature.
A high-wage economy is one in which workers enjoy rising real living standards, as businesses are forced to invest in productivity gains to ensure wage growth is met.
We get better products, higher quality jobs, and better material conditions for everyone.
The neoliberal approach is the exact opposite.
Suppressed wage growth -> low investment -> low productivity -> high profits.
It ends up being an unsustainable system.
Another reason for the decline in productive investment is that capitalism has shifted from an industrial capital base to an around-the-clock dominance of financial capital.
The financial sector is the least productive sector. It has little effect other than shuffling the gambling proceeds.
Sure enough, it’s quick money and doesn’t require people who have the funds to deal with pesky workers and have to actually sell what consumers might need or like.
This stage of late capitalism is now dominated by speculators and small companies, and the entrepreneurs are asleep.
More anti-trickle down evidence
Another article I read on this topic will be published in the European Economic Review (August 2022) – Can corporate tax cuts boost economic growth? – The authors are Sebastian Gechert and Philipp Heimberger.
The answer to the question they ask in the title is simple!
The relevance of this study is obvious.
Corporate lobbyists continue to harass politicians to cut corporate taxes on the grounds that more profits will lead to higher productive investment, stronger job growth and higher wage growth.
This is trickle-down logic.
Increase profits, everyone benefits.
Except they didn’t.
There is now a growing body of literature examining this question, as we have endured decades of neoliberalism and there is enough data to do meaningful statistical research on some key propositions – like this one.
Visual data is always a good starting point.
It doesn’t prove anything, it just provides a basis for conjectures, and one can often easily dismiss some competing theories just by looking at the data.
The authors provide this chart showing the 5-year moving average of global corporate tax rates and real GDP growth rates.
Over the past 4 years, corporate tax rates have continued to decline without any commensurate increase in real GDP growth.
Some of the studies they reviewed predicted higher growth with lower corporate taxes, but the authors found statistical bias in the estimates, and they concluded:
After correcting for this bias and accounting for heterogeneity between studies, we cannot reject the hypothesis that corporate tax changes have no economically relevant or statistically significant effects on economic growth.
This means they cannot find a statistically significant relationship between corporate tax rates and real GDP growth.
I won’t delve into all the statistical material in the paper.
You can read it if you want – but overall, the techniques are sound.
They found:
1. “The short-term response of GDP to corporate tax cuts is even less of a boost to growth than estimates without a clearly defined time horizon.”
2. “We did not find the impact of corporate tax cuts to be significantly more positive on long-term growth…”
3. “There appears to be no substantial difference between OECD and non-OECD countries in the impact of corporate tax changes on growth.”
4. “If we kept government spending the same, the corporate tax hike would be slightly more detrimental to growth” – it just means that government spending is growth-enhancing.
repeat yesterday
I removed a lot of comments from yesterday’s blog post – Mask rules should be reintroduced to stop our rising death rates (July 10, 2022) – Mainly because they didn’t discuss the discussion.
Some are downright rude, but that’s normal and they go straight to the dumpster.
But yesterday’s discussion wasn’t about zero coronavirus.
The removed comment has nothing to do with my actual reason for writing this post.
This is because the Covid-19 outbreak in Australia is now rapidly accelerating again and the death rate is also rising rapidly.
The problem then is that our hospital system is now close to collapse and many people are being turned away with non-life threatening problems that often require surgery and treatment because there are no beds and more and more health care professionals are either giving up by going overboard stress or a serious illness in your own system.
That’s the problem I’m trying to solve, and the only short-term solution to this problem is to use all the means at our disposal to suppress the accelerated spread of the virus.
I know freedom lovers who think individualism triumphs over collective well-being.
But if the pursuit of individual freedom means our society is failing because we can no longer even provide guaranteed and adequate healthcare, then we have a big problem.
I also don’t agree with the point made by several commentators that in some places being “forced” to wear appropriate protective masks that have been unequivocally proven to reduce the spread of these respiratory viral infections would be a mental health disaster.
That’s pure nonsense.
Additionally, these comments do not address the inconsistency of the “freedom” argument, which appears to accept red lights and speed limits at intersections that seriously hinder the freedom of drivers to have a good time in their actual vehicles, but argue that it is necessary to Wearing a mask is an unacceptable symbol of authoritarianism and state control.
Finally, I have noticed that many left-leaning commentators take this “liberal” argument to the extreme, and then advocate all sorts of stingy regulatory control over capitalists, bankers, corporations, entrepreneurs, because they argue that if we leave these roles to Their own devices will do us all harm by being overly greedy.
One breath is individualism, the next is collectivism.
My point is that we must take a collective view to uphold social integrity. If we can pursue our individualism without compromise, then we should be able to.
Often, we have to regulate the behavior of individuals and corporations to achieve a balance that allows “society.”
Enough for today!
(c) Copyright 2022 William Mitchell. all rights reserved.
