Archive for category: INET

The depth of the U.S. securities market helps ensure dollar hegemony

1. The Ukraine Crisis and Dollar Supremacy

Since the collapse of communism in the early 1990s and the subsequent rise of the world economy as a single market-based operational totality, its monetary counterpart has been a unipolar currency system centered on the US dollar as the premier vehicle currency in the private sector, as well as the premier reserve currency in the official sector. The hegemony of the dollar has survived several global economic shocks, including that of the financial crisis of 2007-9. Whether the system can survive the seismic shocks stemming from Russia’s invasion of Ukraine in February 2022 is now under active debate.

Many prominent commentators argue that it will not, noting the ongoing attempts by Russia and her trading allies to circumvent the US-led imposed financial sanctions. Barry Eichengreen, for instance, observed that because of the Russian and other central banks’ increased diversification of their reserve holdings away from the dollar “we are seeing movement towards a more multipolar international monetary system.”[1] James Galbraith sees a dual currency system in the making, as Russia and her trading allies “carve out… a significant non-dollar, non-euro” rival financial system.[2] In a wider context of innovations in technology and finance, the IMF also noted the possibility of a scenario where “the greenback could be felled not by the dollar’s main rivals but by a group of alternative currencies,” including crypto and digital currencies.[3]

This is not the first time that a geopolitical crisis has prompted musings, at various levels of the academia and the commentariat, about the coming end of dollar hegemony. Invariably, they turned out to be wrong. Given the rather long history of failed forecasts, current predictions about the dollar’s future tend to be given with more caution and hedged with various caveats and qualifications. Indeed, to be fair to Barry Eichengreen, he is careful to emphasize that dollar dominance will not end soon, even while the Ukraine crisis may have accelerated the ‘stealth erosion’ of that dominance. A more general qualifying refrain is that a multipolar currency system, while not yet here, is nevertheless in the cards.

Is it, though? Can the ongoing attempts to establish a non-dollar alternative amount to a serious challenge to the hegemony of the dollar? The contrasting answers to this question reflect two alternative visions of capitalism. The declinist school of thought on the dollar supremacy stems, as Susan Strange noted some 30 years ago, from academic traditions that have historically overlooked the importance of the financial system in shaping the balance of power. It was a result of a methodological choice: at best, they have proxied it with currency regimes that serve international trade relations. As such, the declinist school of US power (and hence the dollar) originates in the productionist vision of capitalism, where trade reflects the structure of production, and where monetary regimes of individual states reflect the position of a country in international trade flows.

An alternative approach, known as the money view of capitalism,[4] or capitalism of futurity, places the tradability of debt[5] as the core institutional setting that defines political economy generally, and, more specifically, the force that anchors major decisions and developments in production, trade, and investment. From the latter perspective, we see no end to dollar supremacy, whether rapid or gradual. As Susan Strange wrote in her seminal critique of a realist school of international relations:

“the error of the declinist school of American scholars lies in assuming that if the US has lost power, some other state must have gained it… The facts suggest that this zero-sum idea is far too simple. The US government has lost power mainly to the market.”[6]

Today, we can add, the financial market. Focusing on the trade flows and currency reserve tactics of the central banks, the declinist perspective on the global role of the dollar overlooks the central force that underpins not only the hegemony of the dollar but lies behind global financialized capitalism in general. That force is the gravitational pull of the dollar-denominated securities markets.

2. The Gravitational Pull of the Dollar

“As recent crises make clear, up to now the dollar-based order has been supported mainly by instability elsewhere and the lack of a credible alternative or compelling reason to create one, or where such reasons are felt, the ability to do so… The system has been held up, in short, by confidence in itself, and not, so far as one can see, by much of anything else.”[7]

Galbraith is correct about the importance of the lack of alternatives to the dollar, yet the problem with his argument is his reading of the cause. He sees the confidence in the dollar as something highly fragile because it apparently lacks any material substance to back it. A lack that, presumably, comes down to the gap between the US share of world production on the one hand, and its share of world securities supplies, on the other.

Between 1986 and 2019, daily forex turnover had risen from about $0.4 trillion to $6.6 trillion.[8] During this period, the dollar’s share of this turnover has averaged about 44%.[9] In today’s terms, this percentage is roughly on a par with the US’s respective percentage contributions to the world’s equity stocks (40% of the $95 trillion outstanding in 2019) and to the world’s bond stocks (39% of the $106 trillion outstanding in 2019).[10] However, it is also far above the US’s percentage share of nominal world output (23% of the 2019 world GDP figure of $88 trillion). These numbers, taken in combination with the trend increase in the US trade deficits, underpin the widely held view, shared by Galbraith, that there will soon come a time when foreign investors will lose confidence in the dollar and thus abandon it due to mounting concerns about the US ability to meet its financial obligations in the face of its deteriorating macroeconomic fundamentals.

This scenario is realistic only if one assumes that there has been no structural change in the relationship between the financial sector and the macroeconomy. Yet, citing Strange again, the addition of credit has altered the balance of power in the world economy. But not in the way that Galbraith and others envisage it.

The expansion of financial markets, the explosion of debt and asset values, are typically associated with the phenomenon of financialization. Over the past few decades, financialization has evolved at an accelerated pace; the financial sector now completely dominates the real productive economic sector on which it rests. In 1980 the combined nominal value of the world’s equity and bond stocks stood at about $11 trillion, a figure on a par with that of nominal world GDP in that year. By 2020 the combined value of those securities stocks had grown over twenty-fold to $234 trillion, while world GDP had only registered an eight-fold increase to $84 trillion in that same period.[11] The growing scale disparity between the financial sector and the underlying real sector is what ultimately fuels narratives of an impending collapse, and the declinist school on the power of the dollar forms one of those narratives.

But financializaton is not a one-dimensional force. Its depth is just as important as an indicator of its historical significance, as is its speed of development because it reflects the structural role of finance in economic transformation. To be specific, the recent scale growth of the world’s equity and debt securities markets is an outcome of fundamental changes in both their supply and demand sides.

From a supply-side standpoint, this growth manifests the radical change in corporate and government dependence on financial security issuance. Previously that dependence may have been small, or, if large, always temporary (e.g., bond issuance to finance a large-scale project or to meet the costs of an emergency). Today, it has become both large and permanent, because of the new financial pressures on corporations and governments that are rising in tandem with the increasing size and complexity of modern economies. For increasing volumes of security issuance to be possible, there obviously must be investors with a correspondingly large enough demand capacity. Chief amongst those investors are the institutional asset managers, the pension and mutual funds, and insurance companies.

Once a small cottage industry catering to the wealthy, over the past four decades asset management has in many countries become a mass industry catering to the retirement and other welfare arrangements of large sections of the population. Along with this growth in asset management scale has come a corresponding growth in the need for investable assets – most notably, for equities and bonds. Although there are other types of assets that serve as stores of value for asset managers, the exigencies of their role as financial intermediaries mean that it is financial securities that necessarily comprise the majority proportion of their asset holdings. What sets these securities apart from other asset classes is their ability to combine a value storage capacity with a relatively high degree of liquidity. “In most countries, bonds and equities are the two main asset classes in which pension assets were invested at the end of 2018, accounting for more than half of all investments in 32 out of 36 OECD countries, and 39 out of 46 other reporting jurisdictions.”[12]

The new structural presence of the asset management sector has important implications for the financial system as a whole. The large absorption capacities of asset managers represent ample opportunities for corporate and government borrowers in having these investors on the buy side of the securities markets. However, at the same time, the industry is operating under new tight constraints regarding the disbursements of cash. As securities have no intrinsic value, their ability to serve as investables with a determinate value storage capacity depends entirely on the degree to which their prices are held firm and thus made tangible, a condition which, in turn, depends on the rate and regularity with which cash is returned.

Here lies the crucial significance of the transformation of asset management from a subsector of finance serving individuals, into an industry of wealth management populated by large institutional players. When households were the representative type of investor in the securities markets, borrowers had far more room for maneuver over cash disbursements. This was partly because households, as small investors, were less able to constrain security issuing organizations, but also because they had less motivation to do so, given that they themselves were under no obligation to invest any part of their savings in financial securities.

By contrast, institutional asset managers are always obliged to keep a substantial proportion of the portfolios that are marketed to the public in the form of liquid securities. It is this obligation that explains why these investors have been instrumental in the establishment of a whole new type of transparency and governance infrastructure in the financial markets that can help guarantee the regularity with which borrowers return cash.

In the final analysis, all understanding of what sustains the dollar’s supremacy in the contemporary era comes down to an insight into the remarkable transformation that securities have undergone in line with the new governance rules and constraints that are now binding on security issuers. Without these constraints, promises of returning cash are always in danger of remaining fictitious: promises filled with empty air. With the new regulatory and governance constraints, securities have been transformed from mere promissory notes into genuinely solid stores of value; from being particles without matter, they become particles filled with matter. What this means is that when all the securities of a country’s organizations are aggregated together, this aggregation endows that country’s financial markets with mass and a corresponding power of attraction for asset managers and other institutional investors: the greater the mass, the greater the power of attraction.

No facet of this power is greater than that exerted by the US securities markets.

Foreign investors currently have trust in the US and in its legal and governance infrastructure of tradability debt, or futurity. Far from there not being “much of anything else” underpinning this trust, there is, on the contrary, much of everything underpinning it. What the US offers, and what no other region can do at present, is a huge and varied abundance of securities (not only equities but also bonds, including corporate, financial, Treasury, agency, and municipal bonds) in which foreign investors can store large amounts of funds and across which they can also move these large amounts relatively easily according to any change in circumstances.

Given the need for dollars as a means of accessing the US securities markets, it follows that just as it is the sheer depth and liquidity of these markets that attracts foreign institutional investors in droves, this attraction serves, in turn, to further amplify the depth and liquidity of the market for dollars itself. This development helps to explain why the dollar remains the most widely used currency in the execution of various cross-currency transactions. For example, the dollar is the funding currency of choice in foreign exchange swap transactions that currently account for nearly a half of the $6.6 trillion daily forex turnover and that are mostly used by banks to hedge exchange rate risks and meet short-term liquidity needs. Similarly, the sheer depth and liquidity of the dollar market means that even when those institutional investors holding globally diversified portfolios transfer funds from one set of non-dollar securities to another non-dollar set of securities, they usually do so indirectly, via the dollar, to contain the costs of these fund transfers.

How will the financial sanctions currently imposed on Russia impact this situation? The answer is, hardly at all. Of course, these measures will see an increase in the amount of pairwise emerging market economy (EME) currency transactions. Yet to put this increase into perspective, there needs to be an estimate of the percentage share of the $6.6 trillion daily forex turnover that these transactions had prior to the Ukraine crisis. Even a cursory look at the figures makes it clear that this share was negligible.

In the first place, EME cross-currency transactions relate primarily to trades in goods and services, and these trades, taken in conjunction with all other real-sector-related currency transactions, account for no more than 8% of total daily forex turnover.[13] Once one strips out the real-sector-related transactions conducted between the advanced market economies (AMEs) themselves and those between the latter and the EMEs, it turns out that the remaining inter-EME currency transactions barely register as a meaningful percentage ratio.

The combined share of all EME currencies in daily forex turnover is just 13%. Even then, in most cases the counter currency was not another EME currency but an AME currency such as the euro, the yen, the Australian dollar but most notably the US dollar. China’s yuan, although the highest-ranked EME currency in 2019 at 8th place in daily forex transactions, accounted for just 2% of these transactions and no less than 45% of these in turn had the dollar as the counter currency.

In sum, the Ukraine crisis will certainly lead to an increase in “non-dollar, non-euro” currency transactions, just as James Galbraith has argued. But the pre-crisis volume of these transactions was so vanishingly small as to invalidate any suggestion that this increase portends a multipolar currency system in the making.

3. An emergent multi-polar reserve currency system?

The same conclusion holds regarding predictions about the dollar’s primacy as a reserve currency. When Barry Eichengreen recently argued[14] that the Ukraine crisis will accelerate the movement towards a more multipolar international monetary system, his line of reasoning was as follows:

  1. the share of dollars in globally identified foreign exchange reserves has been trending down so that they now account for 59% of these reserves as opposed to the 70% figure of 20 years ago;
  2. the principal cause of this downward trend has been central banks’ diversification away from dollars towards the currencies of smaller economies such as Australia, Canada, Sweden, South Korea, and Singapore;
  3. this diversification into smaller currencies has been facilitated by the liquidity of these markets and hence the low costs of transacting in them, developments that have been made possible by the advent of electronic trading platforms and other financial innovations; and
  4. the principal motivation for this reserve diversification has been the central banks’ attraction to the higher yields that the smaller currencies offer in contrast to those offered by the large currencies.

There is nothing wrong with this explanation as to why central banks are diversifying their reserve portfolios to include more smaller currencies. Nor is there anything wrong with the IMF’s observation that these reserve portfolios may now include alternative currencies such as cryptocurrencies and digital currencies. What is wrong is that these narratives are presented in entirely self-enclosed terms rather than in the broader context of what any increased diversification signifies for the overall composition of central bank reserve portfolios.

As with all institutionally managed asset portfolios, foreign exchange reserve portfolios are organized according to a core-satellite structure, where the core segment in this case typically comprises US treasuries and the satellite segments comprise the higher-yielding securities of other governments.

A key question, therefore, is whether dollar reserves in central bank allocations will fall far enough below 59% to warrant the claim about an emergent multipolar reserve system? The answer to this question, in turn, boils down to the question of whether the dollar core segment in reserve portfolios will shrink to a size comparable with the non-dollar satellite segments. The expectations are that it will not.

Recall that the reason why institutional asset managers must hold a significant, if not majority, proportion of their portfolios in the form of financial securities, is that these best combine liquidity with a value storage capacity. Now, while the huge growth of the stock of securities in recent years has provided these institutional investors with abundant supplies of safe and portable value containers, the flip side of this growth in financial value storage capacity is that it has also provided hedge funds and other speculative vehicles with massive financial firepower when targeting national currencies that are perceived to be vulnerable. As was pointed out in a Group of Ten report back in 1993:

“the growth in the size, integration and agility of international financial markets has greatly increased the scale of pressure that can be exerted against an exchange rate when market sentiment shifts.”[15]

The European currencies felt the scale of that pressure in the EMS crisis of the summer of 1992, while all the Asian currencies (bar the yen) felt the scale of that pressure in the summer of 1997. Indeed, it was largely because of the unnerving experiences of these crises that there was a subsequent sharp increase in central bank foreign exchange reserves. From barely $0.5 trillion in 1995, the total amount of allocated reserves held by central banks had risen to $5.4 trillion by 2010, an amount that was more than doubled again to $11.8 trillion by 2020.[16]

In 2020, the dollar’s share of allocated reserves was indeed 59% as compared with its share of 70% in 2000. However, to say that there was a “trend decline” in the dollar’s share over this twenty-year period is misleading because it gives the impression of a continuous, year-on-year decline. Rather, while there was an initial downward adjustment of the dollar’s share to about 60% that occurred in the first few years following the introduction of the euro, from 2005 to 2020 that 60% share then remained stable, as did the euro’s share of 20%, and as did the remaining 20% collective share of several other smaller currencies.[17] The fundamental reason why the dollar has continued to maintain this 60% share of foreign exchange reserves even as these continue to grow exponentially in absolute terms comes down to the large mass of US Treasuries.

In today’s era, when the world’s capital markets are deep and highly integrated and when cross-currency capital movements accordingly combine huge scale with high mobility, central banks that are concerned to minimize the impact of these movements on their domestic currencies need to have in reserve financial securities that: (i) have a large and safe value storage capacity, (ii) are available in abundance, and thus (iii) are highly liquid. No other financial securities, and no other financial instruments including crypto and digital currencies, can match US Treasuries as regards these criteria.

If any EME-based central banks needed any reminder of this crucial fact, the events of early March 2020, provided it. By that time, the covid-19 pandemic’s negative impact on the global economy became clear to the world’s institutional investors, and they quickly withdrew funds amounting to over $100 billion from the EMEs in the space of days. That withdrawal was catastrophic for many of these countries, but its impact would have been even more devastating had their central banks not quickly intervened in their domestic currency markets with huge sales of the US Treasuries kept in their reserves.

Central banks around the world may well add the higher-yielding securities of other smaller currencies to their reserve portfolios. But can we seriously believe that, at a time when the world’s financial markets continue to grow in scale and become ever more closely integrated, and the threats posed by sudden surges of cross-border portfolio investments grow accordingly, that these central banks will risk substantially shrinking their core holdings of US Treasuries in the search for higher returns? Of course not.

4. The Primacy of the Dollar as an International Currency

On April 1st, 2022, the Bank of International Settlements launched its 13th Triennial Central Bank Survey of Foreign Exchange Transactions and OTC Derivatives Markets, the full results of which are due to be published in November. In the two full years between the 2019 survey and the current one, the world economy suffered its biggest shock since the great depression of the 1930s with the outbreak of the covid pandemic. In 2020, nominal world GDP fell from its 2019 figure of $87.4 trillion to $84.9 trillion, while the world’s combined bond and equity stocks increased by more than 15% from $200.9 trillion in 2019 to $234.3 trillion, an increase principally driven by the steep increase in government bond issuance on the one hand, and the increase in security prices fueled by monetary policy easing, on the other.

The story in 2021 appeared somewhat better, as nominal world GDP rose above its pre-pandemic level to $94.9 trillion, but the world’s combined equity and bond stocks again rose substantially, to reach over $241 trillion.[18] In both these Covid-impacted years, the US share of the world’s supplies of equities and bonds remained stable at around 40%. Thus, going by the observation that forex turnover volume is overwhelmingly driven by financial sector interests as distinct from those of the real sector, we can safely predict that the dollar’s share of the new 2022 figure for daily forex turnover will remain around 44%, while, at the other end of the spectrum, the combined percentage shares of all the EME currencies will stay around 13%, with China’s yuan share at 2%. In other words, our prediction is that the Ukraine crisis that broke out just after the commencement of the latest BIS triennial survey of forex turnover will have had no discernible impact on the currency breakdown of that turnover.

As to the longer term, we also predict that there will be no serious challenge to dollar supremacy in the foreseeable future because there will be no other regional or national currency that will have a sufficient backing mass of equity and debt securities to enable it to mount such a challenge over that time span. To support this prediction, we need only invoke the experience of the euro.

When this currency was launched in 1999, it was widely assumed that, as the currency of the world’s largest single market and trading bloc, it would soon overtake the dollar as the world’s premier international vehicle currency. Chinn and Frankel, for example, argued that the dollar would relinquish that position by 2015 not only because ‘the euro now exists as a more serious potential rival than the mark or yen were’ but also because ‘the United States by now has a 25-year history of chronic current account deficits and the dollar has a 35-year history of trend depreciation.’[19]

This argument could not have been more wrong, because while the euro’s share of daily forex turnover hovered around an average of 19% between 2001 and 2010, it subsequently fell to an average of 16% between that year and 2019, the principal reason for this reverse movement being the eurozone’s failure to supply the world’s large institutional investors with sufficient amounts of euro-denominated securities in which to park their funds.

This insufficiency is even starker in the case of the world’s EMEs that today collectively account for about 20% of world equity stocks and about 15% of world bonds stocks.[20] Many EMEs have too small a domestic real economic base to support securities markets of any appreciable size. Those EMEs that do have large production bases nevertheless continue to have relatively small financial markets principally, if not exclusively, because of continuing weaknesses in their domestic legal and governance infrastructures.

China’s situation illustrates the point. Although China’s equity and bond markets are by far the largest of any EME, these are still small by comparison with those of the US, largely because its governance standards are currently of uneven quality, high in some sub-categories (e.g. law and order, crime prevention) and low in others (e.g. protection of minority shareholders). As for the period ahead, China, which is still a middle-income developing country, will find it difficult to move all its legal and governance institutions rapidly in the required direction.

5. Conclusion

Nothing that has been said above should be taken to mean that we favor a dollar-centered international monetary system. Far from it, for we believe that there are many sound reasons, ranging from the political to the economic, why a multipolar system is desirable.

Desire, however, is not enough. Nor is it enough to hope that the foundations of dollar supremacy are so fragile that it is only a question of time and of another shock or two to the world political and economic order for those foundations to come tumbling down. On the contrary, those foundations are strong, which means that any attempts to elevate rival currencies to a position where they can challenge dollar supremacy must start by recognizing the reason why its foundations do remain strong. That reason comes down to the hard stuff of the financial securities markets, their constituent solid matter. The chief purpose of this short contribution has been to explain the nature of that matter.

References

Arslanalp, Serkan, Eichengreen, Barry and Simpson-Bell, Chima, 2022, “Dollar Dominance and the Rise of Nontraditional Reserve Currencies”, IMF Blog, 1 June 2022, https://blogs.imf.org/2022/06/01/dollar-dominance-and-the-rise-of-nontraditional-reserve-currencies/

BIS, 2019a, “12th Triennial Central Bank Survey of Foreign Exchange Transactions and OTC Derivatives Markets”, November.

BIS, 2019b, Quarterly Review, December.

Chinn, M. & Frankel, J. 2008, “Why the euro will rival the dollar”, International Finance, 11(1), 49–73.

Commons, John, 2017, Institutional Economics. Its Place in Political Economy, London, New York: Routledge.

Eichengreen, Barry, 2022, “Ukraine war accelerates the stealth erosion of dollar dominance”, Financial Times, 28 March 2022.

Galbraith, James, 2022, “A multipolar financial world is here”, INET, May 5th 2022; https://www.ineteconomics.org/perspectives/blog/the-dollar-system-in-a-multi-polar-world

Georgieva, Katarina, 2022, “The Future of Central Bank Money”, 2 February 2022, https://www.imf.org/en/News/Articles/2022/02/09/sp020922-the-future-of-money-gearing-up-for-central-bank-digital-currency

Group of Ten. (1993). International capital movements and foreign exchange markets: Report to the Ministers and Governors by the Group of Deputies. Basel, Switzerland: Bank for International Settlements.

IMF, 2017, Composition of Foreign Exchange Reserves, March.

IMF, 2021, Composition of Foreign Exchange Reserves, March.

Mehrling, Perry, 2010, The New Lombard Street, Princeton: Princeton University Press.

OECD, 2019, Pension Markets in Focus, p.29.

SIFMA, 2020, US Capital Markets Fact Book.

SIFMA, 2021, US Capital Markets Fact Book.

SIFMA, 2022, US Capital Markets Fact Book.

Strange, Susan, 1994, “Wake Up, Krasner! The World Has Changed”, Review of International Political Economy, 1:1.

UNCTAD, 2019, “Financing a Global Green New Deal”, Trade and Development Report.

https://unctad.org/webflyer/tr…

UNCTAD, 2022, “Tapering in a Time of Conflict”, TDR Update, March. https://unctad.org/webflyer/ta…

Notes

[1] Eichengreen, Barry, 2022, “Ukraine war accelerates the stealth erosion of dollar dominance”, Financial Times, 28 March 2022.

[2] Galbraith, James, 2022, “A multipolar financial world is here”, INET, 5 May; https://www.ineteconomics.org/perspectives/blog/the-dollar-system-in-a-multi-polar-world

[3] Arslanalp, Serkan, Eichengreen, Barry and Simpson-Bell, Chima, 2022, “Dollar Dominance and the Rise of Nontraditional Reserve Currencies”, IMF Blog, 1 June 2022, https://blogs.imf.org/2022/06/01/dollar-dominance-and-the-rise-of-nontraditional-reserve-currencies/

[4] Mehrling, Perry, 2010, The New Lombard Street, Princeton: Princeton University Press.

[5] Commons, John, 2017, Institutional Economics. Its Place in Political Economy, London, New York: Routledge.

[6] Strange, Susan, 1994, “Wake Up, Krasner! The World Has Changed”, Review of International Political Economy, 1:1.

[7] Galbraith, James, 2022, “A multipolar financial world is here”, INET, May 5th 2022.

[8] BIS, 2019a, 12th Triennial Central Bank Survey of Foreign Exchange Transactions and OTC Derivatives Markets, November.

[9] BIS calculates currency percentage shares out of 200%, to allow for the double counting of each currency pair. For simplicity, in what follows we halved the shares to give figures out of 100%.

[10] SIFMA, 2020, US Capital Markets Fact Book.

[11] SIFMA, 2021, US Capital Markets Fact Book.

[12] OECD, 2019, Pension Markets in Focus, p.29.

[13] BIS, 2019b, Quarterly Review, December.

[14] Eichengreen, Barry, 2022, “Ukraine war accelerates the stealth erosion of dollar dominance,” Financial Times, 28 March 2022.

[15] Group of Ten, 1993, p.33.

[16] IMF, 2017, Composition of Foreign Exchange Reserves, March. IMF, 2021, Composition of Foreign Exchange Reserves, March.

[17] UNCTAD, 2019, “Financing a Global Green New Deal”, Trade and Development Report.

[18] SIFMA, 2022, US Capital Markets Fact Book.

[19] Chinn, M. & Frankel, J. 2008, “Why the euro will rival the dollar”, International Finance, 11(1), p.51.

[20] UNCTAD, 2022, “Tapering in a Time of Conflict”, March. https://unctad.org/webflyer/ta…

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We live in an age of growing inequality, insecurity over future prosperity, and anxiety about employment and opportunities for professional advancement. The concept of Industrial feudalism is a striking way of understanding how this situation arises even as we are offered more consumer choice and markets are liberalized.

Industrial feudalism emerges as industrial society is stratified into relatively closed social classes that are defined in relation to their property or their professions. In effect, that society loses the economic and social dynamism by which capitalism overthrew the hereditary hierarchies of feudalism.

The concept and analysis of industrial feudalism emerged in Polish Marxist discussions of the 1890s in relation to the social and economic hegemony of large industrial corporations. In our new working paper, we extend this idea to the present day by showing how social classes are differentiated by the composition of their property. As the distribution of wealth becomes more unequal, that property, and the credit practices associated with it, eliminate social mobility and thereby recreate industrial feudalism.

The idea of industrial feudalism was introduced by Polish sociologist Ludwik Krzywicki (1859-1941) as a consequence of industrial cartels, with the capacity to stabilize their markets and their profit margins, at the cost of economic and social stagnation and declining opportunities for innovation and social advancement.

Among Krzywicki’s most enthusiastic admirers was the economist Oskar Lange (1904-1965). Lange criticized Roosevelt’s New Deal and Keynesian intervention by arguing that such policies supported the monopoly positions of certain capitalist groups. In this situation the profit of the entrepreneur ceases to be the reward for a willingness to undertake risk and the efficient minimization of costs. It becomes simply a privilege arising out of economic concentration and government guarantee. Financial and industrial feudalism, he thought, was now a system of precisely defined group privileges, divided among social strata as rigid as any in medieval times. In such a society, incentives to progress disappear. More than this, such a society would revive the cultural and political superstructure of feudalism with every kind of discrimination, intolerance, fanaticism, and narrowness of outlook, with the state bureaucracy integrated with the oligarchy of haute finance and big business. Keynesianism, in his view, had to be tied to a progressive anti-trust agenda and full employment.

The industrial feudalism of Krzywicki and Lange regarded entrepreneurship as the source of social mobility. While the scope for entrepreneurship and access to finance clearly affects the rigidity of industrial hierarchies, social hierarchies are distinguished by ownership of more general categories of wealth, that may include industrial capital, but may also consist of household wealth which may be inherited. Concentrated ownership of both industrial and non-industrial property makes the distribution of wealth a factor in the current tendencies towards an industrial feudalism in which differences between social strata are reinforced by an absence of social mobility.

Around the world, after the peak recorded in the early 1910s, wealth inequality followed a downward trend until the late 1970s and has been rising steadily since the mid-1980s. In contrast to income, wealth inequality in many countries was largely unaffected by the global financial crisis in 2007, reaching new heights by the late 2010s. Rising wealth inequality has not been limited to advanced capitalist economies like the UK or the USA. Indeed, with greater openness to capitalist forms of production, increases in wealth inequality have been dramatic in the transition economies in Central and Eastern Europe as well as in China.

Existing literature on the sources of wealth disparities does not explore the social and economic implications of these inequalities for the functioning and the development of capitalism. In our working paper, we develop a new theoretical framework to link the mechanisms of wealth inequalities to diminished prospects for social mobility which recreate industrial feudalism in modern times.

Different social classes own different kinds of wealth. So the returns to owners in different classes differ, and so do the credit practices associated with that wealth. Lack of access to all kinds of wealth prevents upward mobility, but the ownership of certain wealth (which can be borrowed against) helps to avoid downward mobility of property-owning classes.

Social classes are therefore defined by their ownership of wealth as much as by their income. In each class there is a standard wealth portfolio that a household needs to possess in order to maintain its position in that class. For each class there is a floor that prevents a household in a given class from becoming déclassé due to a failure of income. These are made up of the credit practices that households use to prevent their falling into the wealth class below their class. But for each class, there also exists a ceiling which consists of the difference in value between the standard wealth portfolio of that class, and the value of the standard wealth portfolio of the next class up in the wealth hierarchy.

Wealth disparities arising due to developments in the asset markets are shaped by changing macroeconomic conditions, and not by households’ individual characteristics influencing their capacity to save and their investment choices. The case of the subprime crisis in the USA highlights the role that changing macroeconomic conditions and financial sector operations play in determining social mobility through their impact on both the access to and the stability of wealth. While undoubtedly important, saving is only one way through which households accumulate wealth and move along the social ladder. The composition of wealth in terms of access to various types of assets as well as leverage is crucial in understanding the increasingly unequal distribution of wealth because of disparities in capital gains available to a household. Thus, differences in price appreciation for various assets have a substantial impact on wealth inequality.

The floors and ceilings that keep households in their social classes are also affected by the social policies of governments. Welfare state provision, quality public services, and government policies to secure full employment strengthen the floors preventing declines in social class status. Already since the 1980s changes in public policy have increasingly followed financial logics and reflected financial sector interests, with the state transforming public services into tradable financial assets that yield return. In this sense, similarly to what was observed by Lange, in contemporary capitalist economies, the state has become an instrument of particular classes of capitalists, especially rentiers and large business owners. By restricting wealth accumulation capacities for some while simultaneously promoting wealth concentration among others, the state has actively contributed to rising wealth inequalities and limited social mobility.

The paring down of welfare provision since the 1980s has coincided with asset price inflation. In the United States, Great Britain, and numerous other countries where residential real estate markets emerged, the housing market came to be relied upon for emergency credit, and cash flow to pay school fees and for private medical care. This has alienated the property-owning middle class from a welfare state for which that class pays but does not need because it can generate cash flow from property.

Rising asset prices generate a more unequal distribution of wealth by increasing the value of wealth that must be acquired to secure a position in the next wealth class. At the same time, the growing credit possibilities of rising asset values reinforce the floor preventing demotion into a lower social class. In light of asset price fluctuations, diversity and stability of the wealth portfolio, and the credit practices associated with such portfolios, thus have a defining role in both upward and downward movements across classes.

This asset dependence is specific to particular classes because they have different kinds of assets. Different kinds of assets have different credit implications and practices associated with them and these different credit implications and practices may ease cash flows in particular classes to prevent downward social mobility. But increasing asset inequality makes upward social mobility more difficult. In this way asset inflation and growing wealth inequalities restrict social mobility and give rise to industrial feudalism.

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If you were a Black person in America in the 1890s, you wanted to live in Brooklyn.

Not Brooklyn, New York. No, you wanted to be in the bustling Brooklyn district of Wilmington, North Carolina. At that time, 25,000 people lived in the thronging Cape Fear River port, the state’s largest city. More than half of them were Black. In Brooklyn, you could meet Black seamstresses, stevedores, cobblers, restauranteurs, shop owners, artisans, midwives, merchants, doctors, lawyers, bankers, and police officers. The federal customs agent was Black. So was the county treasurer. And even the town jailor.

Wilmington was the most racially progressive city in the South. It was America’s future.

But very soon, it would be awash in blood — transformed into the country’s traumatic past. This repressed and unresolved trauma haunts the present in a thousand ways, most recently in the shocking siege on the U.S. capitol. It continues to damage us all.

Here is the story of what happened, and why we need to talk about it.

Black American dreams

By the 1890s, Wilmington’s upwardly mobile Black community had been blossoming for decades, its seeds planted during slavery. In the antebellum period, enslaved Blacks in urban homes and plantations were often highly skilled. They moved about more freely than their rural counterparts, mingling with the townspeople. Some could even read and write.

Black people were the lifeblood of Wilmington. Black sailors and navigators made the city’s prosperous trade hum along, and the railroads and other businesses relied on enslaved and free Black workers. The city’s stunning architecture was the handiwork of Black masons, builders, and carpenters. Landmark structures like the Classical Revival Bellamy Mansion, which still stands today, were built by enslaved and free Black artisans. According to David Zucchino, the Pulitzer-prize winning author of Wilmington’s Lie, an essential account of the events of 1898, the city had nearly 600 free Blacks, artisans and tradesmen, before the Civil War.

After the war, Blacks poured into the city seeking work and security. By 1880, they made up 60% of the population – the most of any sizeable southern city. (Atlanta, by comparison, was only 40% Black). By the 1890s, a Black person could find opportunity at every rung of society. Many reached the middle class, and a few accumulated significant wealth. Cultural life was blooming. You could see Black people joyfully celebrating the Emancipation Act every year and putting on masked parades on the traditional Jonkonnu holiday.

White and Black people often lived and worked peacefully side by side in Wilmington. Most astonishing of all, some even began to vote together.

A Coalition Like No Other

After the Civil War, the position of Black people in North Carolina rose and fell. Some achieved prominence, like state senator Abraham Galloway, who refused to step aside for white men on the streets of Wilmington and openly carried a pistol.

But it wasn’t long before the white Conservative Party began to recover lost ground, especially after Reconstruction. In the 1870s, these whites began a program of “Southern Redemption” to expand power by keeping Blacks out of politics. There was a problem, though: Democrats, as the Conservatives came to be known, had earned the wrath of white small farmers pummeled by economic recessions. Some ditched the Democrats for the new Populist Party.

In 1892, a new crop of progressive Democrats, like young Raleigh newspaperman Josephus Daniels, challenged the elite planters and wealthy industrialists in their party so resented by the Populists. But white farmers and laborers were still too disgusted with Democrats’ support of railroads, banks, and other powerful interests to come back into the fold.

The Democrats’ worst nightmare came in 1894 when North Carolina witnessed something seen nowhere else in the South. A new party, the Fusionists, forged a coalition of Republicans, Blacks, and white Populists to beat a common foe – the Democrats. In most of the country, Populists tended to ally with Democrats, but not so in North Carolina.

It wasn’t that white Populists had much love for Black people. Most didn’t. But they disliked another group even more: the fatcat railroad barons, bankers, lawyers, and manufacturing kingpins getting fatter at their expense. The white working class was fed up and did the unthinkable, teaming up with Blacks and Republicans to support the same candidates.

North Carolina’s Fusionists routed the Democrats in the elections of 1894, taking control of the state senate, the house, and the courts. The new Fusionist legislature pushed through reforms that expanded registration, voting, and local governing opportunities for Blacks. Members even voted to honor the recently-deceased Frederick Douglass — creating such a stink among conservative whites that the government quickly erected a Confederate monument in front of the state capitol in Raleigh – recently removed in the wake of George Floyd’s murder.

For Blacks, the future was looking bright. In 1896, North Carolina attorney George Henry White became the only Black in the U.S. Congress at the time. Blacks boasted 300 magistracies across the state, and they were becoming a powerful political force on the coastal plains where most lived, holding 1,000 offices altogether. In the 1896 local election in Wilmington, a whopping 87 percent of eligible male black voters turned out, giving America one of its first mixed-race municipal governments.

That’s when whites began to get really nervous.

“A bomb getting ready to explode”

Progressive Democrat Josephus Daniels was an ambitious young entrepreneur, not unlike the Silicon Valley upstarts of our time. Along with William Randolph Hearst and Joseph Pulitzer, he shaped the modern newspaper, figuring out how to use the media to pull the strings of politics. Some wondered why he didn’t run for office. The answer is that he didn’t have to. By his early thirties, Daniels had the reins of the most influential media platform in the state, Raleigh’s News and Observer. He was hellbent on using it to defeat the Fusionists.

As biographer Lee Craig outlines, progressivism for Daniels meant railroad regulation, agricultural reform, and prohibition. In theory, he was sympathetic to the plight of working class whites and used his paper to criticize the railroads and J.B. Duke’s American Tobacco trust. But he also knew the Democrats weren’t really going to quit making rich white men even richer. And he knew the Fusionist alliance was shaky, particularly on race. The newspaperman saw that the poorest whites were the most likely to begrudge Black economic progress. So Daniels decided that progress would mean sacrificing Black people. It meant white supremacy.

In 1898, Democrats across the state agreed to run on racism for the upcoming elections. Daniels supplied the propaganda for the white supremacy campaign, while his cohort, political organizer Furnifold Simmons, spewed racism on the stump.

Stoking resentment of Black prosperity wasn’t difficult. Edward A. Johnson, a Black alderman of Raleigh, reported that “Negroes in Wilmington had pianos, servants, expensive carpets, lace curtains at windows” and that “White Supremacy orators of that city constantly asked from the platform, ‘How many of you white men can afford to have pianos and servants?’”

Wilmington community activist Hollis Briggs, Jr. recently put it like this: “African Americans actually controlled the commerce and when you’ve got a race of people that control commerce and that were well off…then you’ve got a whole other group of people that were upset by this economic boom for African Americans. What you had was a bomb getting ready to explode.”

On top of this, the Democrats added themes of domination and sex. White people had to be riled up over the threat of “Negro rule.” Daniels went all out, giving North Carolina a master class in the dark arts of disinformation. His reporters dug up racist dirt. They picked up tall tales about Blacks in taverns, ran them as news. Every day, the News and Observer dished up false reports and flagrantly racist editorials. North Carolina will soon become a Black republic. Black people are buying guns to kill you. Hip to the power of images, Daniels printed grotesque cartoons that demonized Blacks– literally. A famous one shows a Black man as a hideous vampire bat terrorizing white people.

But all that still wasn’t enough. Whites must be scared by something even more farfetched — the bugaboo of the “black beast rapist.” Daniels sought to play on the white working class sense of aggrievement and emasculation in a way that would make them forget their hatred of fatcats – at least temporarily. He hit upon the lie that did the trick: Black men are coming to rape your women.

In the summer of 1898, Daniels received a gift in the form of an editorial written by Alex Manly, the mixed-race editor of the Daily Record, the paper of the Wilmington’s striving Black middle class. Manly had responded to a call for the lynching of Black men accused of raping white women by puncturing the biggest taboo in the South. He pointed out that white women were sometimes quite willing to have sex with Black men, just as white men were quite willing to have sex with Black women. Manly’s editorial was reprinted in newspapers across the state, along with feverish claims that the editor had besmirched the virtue of white women.

White people went berserk.

A coup, not a “riot”

In late October 1898, white supremacists in Wilmington got the perfect leader for their repulsive campaign. Alfred Moore Waddell was a former congressman – and a lawyer who defended lynchers, as Zucchino indicates. His specialty was giving rabble-rousing speeches to foment racism.

Waddell and his fellow white supremacists Democrats hatched a plan for the city. They would rig the outcome of the 1898 elections by intimidating Black voters, peeling off Populists, stuffing ballot boxes, and whatever else it took. But that wouldn’t suffice, because there weren’t many local elections in Wilmington that year. After November 8, many Blacks, Fusionists, and Republicans would still be in office. Waddell & Co. didn’t plan on waiting until the next election to get rid of them.

The solution was to execute an insurrection. The top men of the white supremacist campaign secretly agreed that after the election, they would overthrow Wilmington’s bi-racial government and install white officials in their place.

In the lead-up to November, the campaigners didn’t just hint that violence was coming if the elections didn’t go their way. They came right out and said it: Wadell stated, “We will never surrender to a ragged raffle of Negroes, even if we have to choke the Cape Fear River with carcasses.”

What they didn’t say is that violence was coming even after the election went their way.

As Zucchino details, white supremacists were more than ready for bloodshed. They had two militias, the Light Infantry and the Naval Reserves, consisting of soldiers just returned from the Spanish-American War and itching for a fight. Instead of answering to the white Republican governor as they were supposed to, they reported to the white supremacists. The Democrats also had a paramilitary group known as the “Red Shirts” that terrorized Black communities.

As the election approached, Wilmington looked to be preparing for a siege. Whites stockpiled every possible weapon, including a Colt rapid-fire machine gun for the Infantry, the deadliest weapon of the day. Meanwhile, Blacks were denied the purchase of guns and powder, even by sellers outside the state.

Black congressman George H. White pressed President McKinley to prevent the coming bloodbath, but no help came. The Republican Governor Daniel Russell was in fear for his own life, and would do nothing to stop it.

On election day, things went just as the Democrats planned. Through fraud and intimidation, they “won” across the state. Some thought that violence in Wilmington had been avoided, but they thought wrong.

Two days later on November 10, all hell broke loose. But not in the sense of a spontaneous “riot,” as newspapers across the country described it, and many history books still do. No, this violence was long in the planning. Wilmington’s white supremacists used the pretext of a false threat of a violent uprising among the Black population to unleash a mob of 1,500 whites, led by the Light Infantry militia, to wreak havoc. Armed to the teeth, the mob headed to the Daily Record, hoping to lynch Alex Manly. He had already fled, so they burned the building. The mob swarmed on the Black neighborhoods, targeting Brooklyn in particular, murdering untold numbers and chasing hundreds out of town as they went.

By day’s end, Black bodies were strewn across the streets and gutters. Zucchino puts the number of fatalities at 60; some think it was even higher. The more prominent Blacks were put on trains out of town at gunpoint, ordered never to return. The poorer ones fled to swamps and cemeteries outside the city, where they froze and starved for weeks.

Some professional Blacks and white Fusionist politicians hoped to wait out the violence. They calculated wrong. The coup leaders banished everyone they didn’t want around, and some of the banished didn’t make it out alive. Zucchino reports that one popular Black barber was put on a train and found dead hours later, shot by a Red Shirt. A white Fusionist on the banishment list found himself hanging from a rope, only surviving by squeaking out the Masonic distress cry. He was saved by a fellow mason in the mob.

As the insurrection unfolded according to plan, Waddell named himself mayor and put white supremacists in the place of duly elected officials, including aldermen, 100 police officers, the city clerk, the treasurer, the city attorney, and anyone “whose affiliation with the Fusion-negro regime made them obnoxious to the people and the present administration.”

For the once-prosperous Blacks of Wilmington, whose only crime was success, the future suddenly grew dim. Zucchino writes that “the city’s black middle class, built and nurtured for decades, was collapsing. Hundreds of black families were homeless. Those who remained were by now thoroughly intimidated, accepting of white authority, and thus welcomed by whites to remain in Wilmington.”

The poor Blacks hiding in the swamps and cemeteries were eventually lured back because the whites in Wilmington couldn’t manage without their cheap labor. Plus, white supremacists dearly loved having Black servants.

A turning point in America

Wilmington’s Black community was thoroughly devastated by the coup. By the 1900 census, the city was majority white. Blacks continued to flee as the years passed. Today, the Black population stands at less than 19%.

After 1898, no Black citizen held public office there again until 1972.

The Wilmington coup stands as the only successful and lasting armed overthrow of a legitimate municipal government in American history on U.S soil. It was a horrific turning point for the country, marking the beginning of Jim Crow and poisoning race relations to the present day. Not only was it a stain upon North Carolina, but on the federal government, too, which knowingly abandoned Black people to death and destruction.

Yet if you ask most Americans, they know little about it.

This is partly due to the barrage of fake news about events circulated in the media at the time around the country, from Raleigh to Philadelphia to New York City. To help correct the record, in 2000, North Carolina’s General Assembly established the 1898 Wilmington Race Riot Commission to investigate. The commission released its report in 2005.

One of the commission’s goals was to study the economic impact on Black people in Wilmington and the state. The report cited such problems as capital losses, less funding for education and thus lower literacy rates for Blacks, and broken support networks. Duke University economist William Darity, a member of the commission, discussed the economic catastrophe in the documentary film, “Wilmington on Fire,” He describes a blow that resulted in a significant decrease in the overall status of Black jobs in Wilmington and a steep decline in overall economic prospects. Going forward, the city had more Black service workers, fewer artisans and entrepreneurs. Middle-class dreams were shattered.

Commission member Harper Peterson said, “Essentially, it crippled a segment of our population that hasn’t recovered in 107 years.”

Today, Black Americans still suffer from economic despair and exclusion from the American dream. They still face brutality from authorities, attacks on their civic rights, twice the unemployment rate of whites, and a pervasive, structural wealth gap born in part of events like the coup and their aftermath.

Woodrow Wilson and FDR

Nobody was ever prosecuted for the Wilmington insurrection. White supremacists didn’t just get away with murder and treason in 1898. They were richly rewarded for it, in the South and beyond — none more so than Josephus Daniels.

Biographer Lee Craig notes that Daniels remained unrepentant about the white supremacy campaign even half a century after the fact. But that didn’t seem to bother the U.S. presidents who relied on his good counsel.

One fan was Woodrow Wilson, whose family moved to Wilmington when he was a teen. There, Woodrow enjoyed hanging out with the scions of planter elites, and as president, he remembered his North Carolina friends, saving the best for Josephus Daniels.

President Wilson made one of the key architects of southern apartheid his Secretary of the Navy. Daniels became, as Craig observes, “one of the few men Wilson held in high regard and consulted throughout his eight years in the White House.” The unapologetic white supremacist created the war machine that helped win World War I and oversaw the aggressive expansion of U.S. military power in Nicaragua, Mexico, Haiti, the Dominican Republic, and Cuba.

That’s not all. The man known as the father of Jim Crow launched the career of Franklin Delano Roosevelt, who served under him as assistant secretary of the navy. When FDR became president, he still fondly referred to Daniels as “Chief, and awarded the treasonous criminal with an appointment as his Ambassador to Mexico, a key position. President Roosevelt described Daniels appreciatively as “a man who taught me a lot that I needed to know.”

In 2021, when a mostly white mob stormed the capitol in Washington, some wielding Confederate flags, a few astute observers understood the evil echo of what had happened over a century before. Academics Kathy Roberts Forde and Kristin Gustafson summed up the parallels of the Wilmington coup and the capitol siege: “Each was organized and planned. Each was an effort to steal an election and disfranchise voters. Each was animated by white racist fears.”

There have never been reparations for the descendants of those victimized in the Wilmington coup and massacre.

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With President-elect Joe Biden transitioning to the White House, Americans need clarity on a policy agenda that can make good on his “Build Back Better” campaign slogan. We take BBB to mean creating possibilities for upward socioeconomic mobility for as many Americans as possible, as quickly as possible. The policy agenda must focus on ways to create tens of millions of new employment opportunities that can substantially lift the living standards of working-class households while dramatically increasing investment in the productive capabilities of the future labor force.

We also understand the “back” in BBB to refer to rebuilding the broad American middle class that existed in the United States entering the 1980s but that has persistently eroded since then. The past four decades have been marked by an increasing concentration of income and wealth among the richest households and downward socioeconomic mobility for a large portion of the American working class, especially for those who hold no more than a high-school diploma. “Build back” means restoring the government and business investments in the productive capabilities of the U.S. labor force that created a growing middle class in the three decades after World War II—as we document in our series of INET working papers on U.S. African American employment history, including our latest contribution, “Employment Mobility and the Belated Emergence of the Black Middle Class.”

Government has a major role to play in the BBB agenda. Many progressives have argued for low-cost or free public higher education and the reduction or cancellation of student debt. The fact is that, prior to the 1980s and beginning with the subsidies provided by the GI Bill in the decade after World War II, the U.S. system of public higher education, based on the land-grant colleges, was either low cost or tuition-free. Moreover, with their wages supported by labor unions, growing numbers of blue-collar families had incomes that helped their children go to college, enabling upward intergenerational socioeconomic mobility to white-collar employment requiring a higher education. We now have to “build back” because from the 1980s, just as the digital revolution called for increased investment in the capabilities of people for the “knowledge economy,” state-level governments in the United States permitted tuition costs of public higher education to soar, while the federal government imposed high-interest rates on student loans, with no possibility of a clean slate through bankruptcy.

The United States still has a world-class system of higher education, attracting prepared and motivated people from around the world. Government policy at the federal, state, and municipal levels must make this higher-education system much more accessible and affordable to Americans than is currently the case.

But BBB cannot rely on government investment alone. The business sector provides over 80% of employment in the U.S. economy, and we rely upon major business corporations to provide productivity-enhancing careers to tens of millions of people. BBB will only be possible if U.S. business corporations, and especially the biggest employers, are induced to collaborate seriously with government by allocating their vast resources to investments in productive jobs and productive people to fill them.

Among the nation’s six million firms, there are about 2,200 companies with 5,000 or more employees in the United States. With an average of about 21,000 employees, these large companies provide jobs to about 35% of the U.S. business-sector labor force, pay them some 40% of the sector’s wages, and account for an estimated 46% of sales. BBB will only work if these large companies allocate their profits to increase the remuneration of their employees, provide them with stable employment through which they can become more productive over time, and, in particular augment corporate investments in the productive capabilities required to generate the innovative goods and services on which our future prosperity depends.

Unfortunately, most of the largest companies that dominate the U.S. economy have not been allocating their profits in ways that can support a BBB agenda. To the contrary, since the 1980s they have been using their profits to make the rich richer while avoiding taxes, depressing wages, rendering employment unstable, and neglecting opportunities to invest in innovation. Specifically, rather than reward workers and invest for the future, major U.S. corporations have been using their profits, and even taking on debt, to put money in the pockets of shareholders. The 216 companies in the S&P 500 Index that were publicly listed from 1981 through 2019 devoted 50% of their net income to cash dividends in both 1981-83 and 2017-2019 but increased stock buybacks from only 4% of net income in the early years to 62% in the recent years. In the decade 2010-2019, companies in the S&P 500 Index paid out $5.3 trillion in buybacks—54% of their profits—and $3.8 trillion in dividends—an additional 39% of profits.

Rather than do buybacks, whose purpose is generally to manipulate stock prices, these companies could have been persistently allocating the majority of their profits to rewarding their employees and investing in their capabilities to generate innovative products. BBB needs government-business collaboration to invest in the U.S. labor force through a combination of education and employment. Expanding access to public higher education is the easy part. It will be far more difficult to recreate a system of business-sector employment that will support widespread upward socioeconomic mobility.

Yet, U.S. business corporations have made this critical contribution in the past. From the 1940s to the 1980s, large U.S. business corporations provided both blue-collar and white-collar employees a career with one company (CWOC), which included corporate-funded healthcare and a defined-benefit pension. In the case of blue-collar workers, CWOC was maintained through union representation that ensured employment security by enforcing the principle of seniority—that is, first hired, last fired. At the white-collar level, which increasingly required at least a college education for entry, the companies would train employees, engage them in on-the-job collective learning processes, and then make every effort to retain their productive capabilities in career-long employment.

In many of the leading U.S. companies, the availability of these good middle-class jobs grew during this period. From 1954 to 1979, for example, General Motors increased employment of full-time union workers in the United States from 367,500 to 468,000, as its worldwide employment of all types of personnel grew from 576,500 to 833,000. As their main representative in collective bargaining, the United Auto Workers secured for its members increases in wages and benefits, including cost of living allowances. As a result of these corporate employment policies, wage growth tracked productivity growth in the U.S. economy as a whole from the late 1940s to the mid-1970s. Under these social conditions, even those members of the U.S. labor force with no more than a high-school education could aspire to and attain a middle-class living standard.

In terms of upward socioeconomic mobility, however, there was a big problem with this “Old Economy” business model: it was overwhelmingly a white man’s world. Prior to the Civil Rights Act of 1964, many companies had explicit “marriage bars” that required that women leave employment when they ceased to be single. The admissions policies of colleges and universities reinforced such discrimination. It was not until 1963, for example, that Harvard Business School admitted the first women into its MBA program—eight of them, hyper-carefully selected, in a class that included 676 men. And when these women graduated in 1965, the corporate employment offers they received were underwhelming.

At the other extreme of corporate employment were African Americans, who, in the immediate post-World War II decades, tended to be stuck in the lowest-paid unskilled jobs in mass-production industries. Blacks had initially begun to fill these types of jobs during World War I, at the beginning of the half-century-long Great Migration from the Southern cotton economy to the Northern/Midwestern industrial economy. A major magnet was the booming automobile industry, centered in Detroit. Even though Black employment was mainly confined to the dirtiest and most dangerous foundry jobs at the auto companies, the wages that African Americans received were a big step up from the meager incomes that they had been earning as sharecroppers in the South.

During World War II, under the scrutiny of the Roosevelt administration’s Fair Employment Practices Committee, Blacks made progress in accessing superior blue-collar jobs as part of the mobilization effort, often taking the places of whites who joined the armed forces. With demobilization, however, the upward mobility of blue-collar Blacks, as well as women, hit a roadblock as returning white males reclaimed the best manufacturing jobs.

Yet, by the 1960s, it was much more the case that the male offspring of white blue-collar households were attaining the higher educations required to enter white-collar employment, making space for Blacks to gain greater access to the better-paid semiskilled and skilled blue-collar jobs. During the 1960s and into the 1970s, moreover, there was strong demand for mass-production workers while the proportion of the U.S. labor force that was foreign born, and could compete for these jobs, was at a record low. It was in this context that the civil-rights movement was able to support the upward mobility of blue-collar Blacks, with Title VII of the Civil Rights Act of 1964 providing a formal mandate for this progress under the Equal Employment Opportunity Commission, set up in 1965.

In our latest INET working paper, we document the employment gains that Blacks made in the 1960s and 1970s, with a specific focus on upward mobility within the blue-collar job hierarchy at the leading mass-production companies. Observing the trajectory of upward socioeconomic mobility of white Americans in the post-World War II decades, it was reasonable to expect that in the last decades of the 20th century Black households would also, in turn, experience upward intergenerational mobility. But as we now know—and as we document in detail in two forthcoming INET working papers—from the 1980s, in the United States, blue-collar employment increasingly provided a precarious pinnacle for a downwardly mobile population rather than a platform for a more secure and rewarding future.

In particular, we analyze three transformations in employment relations—which we call rationalization, marketization, and globalization—that unfolded from the 1980s, with each change eroding channels of individual and intergenerational employment mobility that had provided pathways to the “American dream.” Rationalization entailed permanent plant closings, often in the face of superior manufacturing capabilities, emanating especially from Japan. Marketization meant the end of the CWOC employment norm as, for white-collar employees, “New Economy” companies valued a highly educated, younger labor force with open-system capabilities over career employees with decades of corporation-specific experience. Marketization also increasingly involved outsourcing manufacturing activities to lower-wage firms. Globalization saw U.S. companies access a worldwide labor force of highly educated personnel, while offshoring their outsourced production jobs to emerging economies in which labor costs were low but where broad-based K-12 educational investments in the labor force had been made.

Over the decades, these changes in employment relations have had a devastating impact on American blue-collar workers, whatever their race or ethnicity. But as these transformations gained force in the 1980s, it was Blacks who were most vulnerable, in large part because of their dependence on employment as blue-collar workers in mass-production industries in which job losses were most prevalent and in which they tended to be “last hired, first fired.” For the “American dream” to remain intact in the 1980s and beyond, U.S. government agencies and major business corporations needed to collaborate to “build better” through a commitment to supporting upward mobility, based on affordable higher education and a new employment system of lifelong learning.

Instead, when work disappeared, to echo William Julius Wilson, what Blacks found awaiting them were dead-end, low-paid service sector jobs, while the expansion of the War on Drugs helped to enable the descent from mass production to mass incarceration. The downward mobility of blue-collar Blacks from the 1980s, with declining life expectancy toward the end of the decade, would increasingly become the fate of blue-collar whites, as government and business failed them too. But compared to the heroin and crack epidemics of the earlier decades, during which Blacks were stigmatized and disproportionately jailed as the most visible participants in the distribution and consumption of illicit drugs, the subsequent opioid crisis and the resulting surge in “deaths of despair,” afflicting mainly whites, has been met with a far more empathic response from law enforcement.

The shared fate of downward socioeconomic mobility of large portions of the white and Black populations would feed into a racial divide with dire political as well as economic consequences. Add to that the devastation of the pandemic, and, beginning on January 20, 2021, it makes the Build Back Better agenda a daunting, if also an essential, project.

Structuring BBB’s policy agenda requires a hard and honest look at why it is now necessary to dig so deep just to build back, before we can begin to contemplate “better.” Our research suggests that the answer is straightforward. In the 1980s, as the previous era of upward socioeconomic mobility shifted into reverse, U.S. business corporations, on which so much of our productive and remunerative employment depends, succumbed to the destructive ideology that a company should be run to “maximize shareholder value”—in effect, a business strategy to concentrate America’s income and wealth in the hands of the rich.

As we have already indicated, many of the most successful corporations began to direct almost all their profits, and often more, to shareholders. As, through U.S. immigration policy and foreign direct investment, U.S. corporations gained access to a global labor force for the knowledge economy, executives who controlled resource allocation in the leading corporations lost interest in the fate of the American working class. Not surprisingly, the politicians whom the corporate executives lavishly funded slavishly adopted the same point of view.

What is to be done? As one of us has long argued, the most direct instrument for reallocating the nation’s economic resources to create employment opportunity for Americans is to stanch the flow of corporate cash to shareholders. Profitable corporations should continue to pay reasonable dividends to shareholders, but they should end the trillions of dollars in stock buybacks done as open-market repurchases. In mobilizing corporate resources to support its BBB agenda, the Biden administration can start with an easy, but impactful, first step: ban buybacks.

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The rapid and global spread of the new Coronavirus is set to shape the world for the next years to come. In our new paper in the Review of Economics and Statistics, which INET helped support, we study how, within a very short period of time after the arrival of the new Coronavirus, economic anxieties rose drastically and that this growth was driven by features of the Coronavirus that are not yet broadly known: its mortality and contagiousness.

To measure economic anxieties and to shed a light on the underlying drivers of economic anxieties we conducted two surveys of representative samples of the US population on March 5 and and March 16, 2020, early in the pandemic. Within this 11-day time span the number of confirmed cases within the United States jumped by a factor of approximately 26, from 176 to 4576.

Anxieties drastically increased in this time period. On March 5, 55% of respondents agreed that the US would be severely affected by the coronavirus. This increased to 78% of respondents by March 16. The share of respondents that “strongly agreed” with this statement increased from 16% to 43%.

We also noted strong increases in concerns about the economy. On March 5, 68% of respondents were worried or very worried about the effects of the coronavirus on the aggregate US economy, on March 16 the fraction of respondents who expressed this worry increased to 88%.

While the trends between the early and the later survey are similar for self-identifying Democrats and Republicans, there is nevertheless a significant gap between these two groups. In March, Republican voters were less likely to believe that the world or the US would be severely affected by the coronavirus. The partisan gaps in perceptions or anxieties had narrowed between the early and the late March survey. However, the partisan differences in the perception of the impact of the new coronavirus on the US economy and on the personal economic situation barely changed or even widened between the surveys.

Individuals who identified as Democrats held substantially higher beliefs about the severity of the crisis and show higher worries regarding the economy. However, independent of the specific demographics, we observe that beliefs about the severity of the crisis as well as economic worries increased for all subgroups between March 5 and March 16.

Underlying factors behind the anxieties

Through an online survey of a representative sample of the US population, we shed light on the underlying mechanisms through which the new Coronavirus may have driven economic anxieties in the US population early in the pandemic.

We elicited peoples’ beliefs about both case mortality as and its contagiousness (R0) and contrast this with what the medical literature has documented so far. The WHO recently estimated that the mortality of Covid19 disease triggered by the new coronavirus has been around 3.4%. Earlier estimates were closer to 2%. The contagiousness R0 was estimated around 2.

Empirically, beliefs about mortality are quite heterogenous. More than 50% of respondents thought mortality was higher than 5% (average at 19%). This seems substantially higher than what the medical literature on the new coronavirus suggests to date. The beliefs about contagiousness are also heterogenous, with 50% of respondents thinking that every infected person infects at least 10 others. The average is substantially higher with 43. Early medical research suggest an R0 of around 2 (see http://bit.ly/2TSPYmb or http://bit.ly/3aJ7Gzr ).

Figure (A) and (B) plot the distribution of beliefs about mortality and contagiousness (R0) of the new coronavirus as measured in a representative sample (N=915) of the US population on March 4th 2020.

When asking people about their economic anxieties the group of people that appear to overestimate contagiousness and the mortality seem to exhibit significantly higher degrees of anxiety about the disease. If such anxieties and beliefs change the way people behave it may itself be effective in reducing the further spread of the disease. Yet, it could also increase anxieties further.

While respondents appear to overestimate the mortality and contagiousness of the coronavirus compared to official estimates, they appear to significantly underestimate the non-linear nature of infectious disease spread. In the second survey experiment on 16 March, we investigated whether respondents adequately capture non-linear growth patterns by asking them to predict the spread of a fictitious disease. Participants were instructed to assume that the case number of the fictitious disease on day 1 is equal to one, and each day a newly infected person infects two healthy people and then stops being contagious.

Individuals were found to highly underestimate the spread of the fictitious disease. In contrast to correct prediction values of 31 on day 5, 1,023 on day 10, and 1,048,575 on day 20, the median participant estimated a case number of 16 on day 5, 30 on day 10, and 60 on day 20. The predictions of the median participant could be well approximated by a linear mental model.

Furthermore, we find a strong and positive associations between people’s estimates of the number of infected individuals and their worries about the US economy. These results indicate that individuals who exhibit a more accurate mental model of non-linear growth in disease spread also exhibit greater worries about the coronavirus pandemic, as they foresee a greater potential for a widespread contagion of the global population.

Communication and education can shape economic anxieties

A natural question for governments and decision makers across the globe is how the economic fallout from the current crisis can be contained. The media may be playing an important role in shaping how people perceive the underlying risks not just early on but also at this more advanced stage of the pandemic. Through an experiment embedded in our survey, we randomly exposed a subset of the respondents to information comparing the estimated mortality of the coronavirus with that of the regular seasonal flu. Another subset of people were given a comparison of the mortality estimates with that of SARS.

We find that comparing the mortality of the coronavirus with that of the flu increases reported economic worries. This highlights that the way the press framing of information about the coronavirus may matter a lot in shaping the extent of economic anxieties. Given the large heterogeneity in beliefs about key characteristics of the coronavirus, our findings suggest that information and public education may play a central role in achieving successful containment and managing the negative economic impact of increased economic anxiety.

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Rising unemployment due to the pandemic lockdown will mean higher profits for many businesses, as they generate savings due to a lower wage bill and higher productivity, despite reduced economic activity. These savings, together with previously undistributed corporate profits, enable corporations to lend to the federal government so it can finance its current deficit-spending spree. The surge in profits benefits high-income households who trade in government bonds. In other words, the government’s efforts to combat the COVID-19 economic crisis ultimately creates wealth in the form of Treasury bonds for households at the top.

Double-entry bookkeeping, with debits in one account financed by credits from others, has been around for a couple thousand years. In America now, credit and debit arithmetic is crucial to understanding how massive short-run fiscal outlays to combat the COVID-19 pandemic will be financed. Details emerge from double entries built into the national income accounts invented 80 years ago by John Maynard Keynes and others (Taylor, 2010). The bottom line is that lending from corporations’ undistributed profits (one-third of new government debits) and households (most of the rest) will be required. Much of the household net lending or saving less capital formation will be provided by the top 1% who benefit disproportionately from distributed profit income.

Before looking at the background since the Great Recession a decade ago and the current numbers, key observations are the following:

1) The consolidated government deficit (Federal, State, and local) is likely to rise this year by at least three trillion dollars, or 15% of GDP (Taylor, 2020). To attain macroeconomic balance this debit item (or government net borrowing) will have to be funded by credits from corporate business, households, and the rest of the world – there are no other sources. Business and household credits are created by higher incomes than spending flows; foreign credits pay for greater imports than exports.

2) The force driving business profits will be productivity growth. In this year’s second quarter, forecasts suggest that real output will fall by several percentage points. Employment will drop from its level in March by even more. Labor productivity or the ratio of output to employment will increase. Income generated by production mostly takes the form of payments to labor and profits. If wages are relatively flat, higher productivity implies that the profit share of income will rise, increasing business saving. In the short run at least, these enhanced retained earnings will help pay for new government net borrowing.

3) Households, meanwhile, already increased their savings in the first quarter, and outstanding consumer credit fell by 20% (at an annual rate) in April.[1] A second quarter increase in net lending is a likely continuation of these trends. Households in the top one percent of the size distribution of income receive the bulk of non-retained business earnings. They also get capital gains, which average out approximately to equal undistributed corporate profits (Taylor with Ömer, 2020).

An old post-Keynesian adage (probably due to Nicholas Kaldor or Joan Robinson and often associated with Michal Kalecki) states that “Capitalists earn what they spend, workers spend what they earn.” Under present circumstances it might be restated as “Government borrows what it doesn’t tax, corporations and rich households gain wealth by lending to government profit income they don’t spend.”

Historical record

The aim of this year’s surge in government net borrowing is to stimulate aggregate demand, generating output and putting people back to work. Similar policies were applied after the financial crisis a dozen years ago. Figure 1 shows how sectoral debit and credit flows responded. (Net borrowing shares of GDP are shown as positive because they add to effective demand.)

In the years just before the crisis, government net borrowing was largely financed by new loans from abroad (the famous twin deficits). When the 2007-09 recession struck, it was precipitated by private sector retrenchment. Household consumption was flat, while gross business investment fell by 30%. Household saving and business retained earnings went up, meaning that the overall private saving share of GDP rose from 19% to 22%.

Output actually increased between 2007 and 2009. It would have dropped dramatically if the GDP share of government taxes minus transfers to households had been stable. But in fact it fell from 15% to 6% due to automatic stabilizers and the Obama stimulus package of around 5% of GDP. The overall impact was that private net

borrowing fell by 10.2% of output while government borrowing went up by 8.6%. Reduction of the external deficit by 1.7% made up the difference.

Higher business net lending (think of that as negative net borrowing) took the lead in financing government debits in 2009-10. Thereafter through 2019, households were the main source of funds, as their savings share of GDP went up.

Current economic predictions are dire. In the first quarter the pandemic forced massive business closures and job losses. How will credits from business, households, and the rest of the world bankroll massive government intervention? Given its importance in Figure 1, we can begin with business net lending.

Can corporate net lending finance the fiscal deficit?

The drop in real gross domestic product (GDP) during the second quarter may be in the range of six percent.[2] The ratio of employment to the working age population fell by 14% in April [3] and seems unlikely to increase. Because job loss mostly afflicted low-income workers, average private sector hourly earnings actually were 4.5% higher in May than in March but this trend is not likely to continue. As noted above, in the current quarter profits may well increase as a result of these changes.

This conclusion follows from May estimates of gross domestic income (GDI) recently released by the Bureau of Economic Analysis.[4] GDI is based on value-added across the economy. It differs from GDP by a “statistical discrepancy” which is typically less than one percent. GDP summarizes sources of demand economy-wide while the much less widely discussed GDI breaks down the costs of producing it. The main components are compensation of employees and corporate profits which amount to around three-quarters of the total. Other big items include “proprietors’ incomes” (another form of profits), rents, depreciation, and indirect taxes minus subsidies.

Movements in profits and employee compensation or “wages” drive distributional shifts over time.[5] Labor productivity is the accounting key because its changes can be used to sort out shifting relationships between labor and capital. Algebra is in the appendix. Anybody can use it to make calculations on assumptions different from the ones about to be presented. In formal terms,

Productivity Output Employment .

To a first approximation, productivity’s growth rate is the difference between growth rates of output and employment. To provide a low-end estimate of productivity growth, suppose that there is a significant GDP (= GDI) loss over this quarter of Job growth may be As a consequence, productivity growth will be .[6] Incorporating “interactions” (see the appendix) raises this estimate to . Rising productivity in a recession is often observed. Magnitudes of the growth rates are usually smaller but the present situation is extreme.

Wage and profit shares in their total (“factor payments”) must sum to one. The profit share is now around 22% and the wage share is 78%. These percentages will be important below in discussing growth of profits. Shares of the other items in overall GDI are relatively stable so its dynamics are driven by factor payments. It is straightforward to analyze growth of the profit share in terms of growth of the wage share. It is

Wage share = (Real wage x Employment) / Output

= Real wage / Productivity .

Again to an approximation, growth of the wage share equals the difference between the growth rates of real wages and productivity.

For a given real wage, positive productivity growth means that the wage share must fall. Over a quarter-year, the March to May jump in wages may be attenuated by stable or falling average compensation as low-income workers drift back into employment. For simplicity, assume stable wages.

Translating growth of the wage share to the profit share is slightly tricky because the latter is smaller. As sketched in the appendix, a higher level of the wage share means that there is a distributive boost to profits from its negative growth. The boost factor is 3.32 so that wage share growth is matched by roughly growth of the profit share. With GDP growth at minus per quarter, total profits would grow at about 17%.

Total profits during the first quarter of this year were $4.18 trillion at an annual rate. To get to business saving or undistributed profits one must subtract direct taxes, interest, dividends, and minor items. The resulting saving estimate is 2.84 (omitting the dollar sign and “trillion” for simplicity). With investment at 2.69, business net lending was 0.15 or 0.7% of GDP of 21.5 (in the range illustrated in Figure 1).

What about the second quarter? The foregoing calculations suggest that corporate profits may rise to 4.89, and saving to 3.55. Investment is not likely to decrease by 30% as in 2009-10. The OECD suggests a drop of eight percent over 2020. Suppose that the decrease in the second quarter is a bit more than ten percent, giving an investment level of 2.53. Business net lending would be 1.02 or five percent of GDP (assuming that it falls by six percent over the quarter). If the government’s debit item is in the range of three trillion it will have to find most funding somewhere else. That basically means households.

Household net lending, government net borrowing

Before getting into details on households, note that exports and imports might drop by (say) five percent each, leading to a second quarter foreign deficit of 0.5, or 2.5% of GDP. “Required” household net lending to meet governing borrowing would then have to be in the range of $1.5 trillion. An illustration appears in Table 1, based on consistent accounts. The numbers are constructed to show how double entry macroeconomic bookkeeping might hang together.

The entries for business and the rest of the world have been described. Household net lending in the second quarter would be 1.5 (trillion dollars) if the sector’s net investment is fairly stable and saving continues its upward trend. Along with our postulated six percent GDP loss, household consumption would fall by seven percent in the second quarter.

In the government accounts, purchases of goods and services for consumption and investment (or “G”) are assumed to increase slightly. A fiscal net borrowing flow of 0.98 emerges if taxes minus transfers decrease from 2.13 to 0.98 trillion dollars. The main goal of CARES and earlier packages is to funnel money via the financial sector to households and business. That is why fiscal transfers increase by over a trillion dollars (six percent of GDP) as an offset to taxes.

Which households provide net lending?

In standard economic data as reported by Taylor with Ömer (2020), spending by the poorest tier of households (say the bottom sixty percent) exceeds their income. That is, in consumer budget surveys they report negative saving. Their income comes roughly half-and-half from wages and government transfers.

”Middle class” households in the 61st to 99th percentiles of the size distribution get 85% of their income from working; the rest comes from rents, proprietors’ incomes, depreciation, and transfers from the government and business. They consume less than they receive, roughly offsetting the negative saving by households with lower incomes.

The top one percent get relatively large labor payments, but almost three-quarters of their income (fifteen times as high per household as the middle class’s) comes from other sources. They also rake in around 70% of capital gains which do not figure in the national accounts. With capital gains, they save around half their income. In other words, most of the household savings flows in Table 1 come from the top one percent and most of their income comes from distributed profits and capital gains. These connections will outlast the pandemic.

Flows, stocks, and the pandemic

Table 1 focuses on flows of money through the financial system. Profits and wages are created by production and distributed across business, households, government, and the rest of the world. Changes in output, employment, external balance, and prices are mediated by these flows.

Flows cumulate into stocks of financial claims which enter portfolios of the various actors. The flow-to-stock transition takes time to build, while financial stocks by themselves can be switched among portfolios in nanoseconds. To an extent, anti-pandemic interventions have taken the form of financial engineering, magicking offsetting financial assets and liabilities into existence to stimulate the real economy. How well these moves will work out remains to be seen but they will generate substantial fees for finance.

Table 1 shows how the pandemic hits pre-existing income inequality. The profit surge is passed to high income households who are free to engage in financial transactions, trading government bonds for other claims as they see fit. Maybe people with low incomes will regain jobs and garner some inflows, but the true beneficiaries will be households bringing in two million as opposed to twenty thousand per year. The government’s attack on COVID ultimately creates wealth in the form of Treasury bonds for households at the top.

Further observations

In June, new COVID-19 hot spots appeared and excess mortality did not abate. Another stimulus package could well be on the way. If it takes the form of a trillion dollar transfer to households, for example, then Table 1 shows that such payments would equal the tax take of the consolidated government sector. Net borrowing would rise to one-fifth of GDP.

Such rapid debt accumulation opens several possibilities. The usual expectation is that government debt is “riskless.”[7] If that holds, then balance sheets of both business and rich households would be substantially stronger after the fiscal expansion. Hyman Minsky (1982) thought that similarly strong private sector balance sheets coming out of WWII were a foundation for the subsequent Golden Age of economic growth. Pandemic-based fear for the economy’s future could undermine the idea that government debt is secure. If that expectation fails, there could be an international portfolio shift against dollar liabilities (irrelevant after the War). Depending on the Fed’s response, there are two possible reactions or a combination. The interest rate could rise, increasing the government’s debt service burden and possibly reducing aggregate demand. Or there could be dollar depreciation, which could be inflationary (see below) and would reduce the external deficit.

Then there is the stock market. In financial jargon, beginning in the mid-1980s successive Governors of the Federal Reserve engineered a Greenspan-Bernanke-Yellen-Powell “put,” utilizing bond market interventions to hold down interest rates. Prices of assets such as corporate shares should roughly equal the market’s expectation about their returns “capitalized” (or divided by) the real interest rate (Taylor with Ömer, 2020). Robust corporate profits should therefore generate high equity valuations if expectation is stable. Today it is anything but stable, if market fluctuations since the pandemic erupted are to be believed. Repercussions on the Dow-Jones or S&P of high profits remain to be seen. A COVID crash if expectation falters is by no means impossible.

Controlled interest rates may also be associated with inflation of goods and service prices, a combination nowadays called “financial repression” by mainstream economists. Inflation has the handy side effect of erasing the real value of debt outstanding, just one aspect of its fundamental social role as a mechanism to redistribute wealth and income.[8] A necessary condition for inflation to take off would be an escalation of labor militancy. Prices cannot spiral in a dynamic process unless they are propelled by steadily rising money wages. Across business cycles the wage share has been trending downward for 50 years. The trend could conceivably be reversed if the pandemic spurs rising demands for worker pay.

Or wage repression and austerity policies could be cemented into place. Almost eighty years ago, in a remarkable paper, Kalecki (1943) pointed out that while in a crisis business interests might support public intervention to create jobs, they would oppose maintaining full employment for fear of losing social and political control. “The sack” may not be required under COVID, but it could be reinstated if need be.

Doubts about the security of holding government debt, a stock market crash, wage-driven inflation, and renewed labor repression are known possible responses to the pandemic. Unknown unknowns may lurk in the future as well.

Appendix

Let X stand for output and L for employment. Between levels X_0 at the beginning of the quarter and X_1 at the end, the growth rate ( X) ̂ of X (for example) is given by

X_1=(1+X ̂)X_0 .

Labor productivity is simply ξ=X⁄L. An exact expression for its growth rate from time zero to time one is

ξ ̂=((X ̂-L ̂))⁄((1+L ̂)) .

Effects of the “interaction term” 1⁄((1+L ̂)) are discussed in the text.

The profit share is a bit more complicated. If π and ψ are shares of profits and wages in factor payments, one has π+ψ=1 and ψ=ω⁄ξ with ω as the real wage. With π_0<ψ_0 there is a boost from negative growth of the wage share to positive growth of the profit share,

π ̂=(-ψ_0 ψ ̂)⁄π_0 =((ψ_0⁄(π_0)(ξ ̂-ω ̂)))⁄((1+ξ ̂)) .

Taking into account the interaction term, the profit share growth rate scales to the difference between productivity and wage growth rates according to ψ_0⁄(π_0 (1+ξ ̂)).

References

Board of Governors of the Federal Reserve (2020) “Consumer Credit – G19” https://www.federalreserve.gov/releases/g19/current/default.htm

Bureau of Labor Statistics (2020) “Employment Situation Summary,” https://www.bls.gov/news.release/empsit.nr0.htm

Federal Reserve Bank of New York (2020) “Jun 05, 2020: New York Fed Staff Nowcast,” https://www.newyorkfed.org/research/policy/nowcast

Kalecki, Michal (1943) “Political Aspects of Full Employment,” Political Quarterly, 14: 332-331

Keynes, John Maynard (1936) The General Theory of Employment, Interest, and Money, London: Macmillan

Minsky, Hyman P. (1982) Can “It” Happen Again?, Armonk NY: M. E. Sharpe

Organization for Economic Cooperation and Development (2020) “OECD Economic Outlook Volume 2020 Issue 1: Preliminary Version,” https://www.oecd-ilibrary.org/sites/0d1d1e2e-en/index.html?itemId=/content/publication/0d1d1e2e-en

Taylor, Lance (2010) Maynard’s Revenge, Cambridge MA: Harvard University Press

Taylor, Lance (2020) “CARES Will Care for Wall Street and Big Business, For Macroeconomic Balance Maybe Not So Much,” https://www.ineteconomics.org/perspectives/blog/cares-will-care-for-wall-street-and-big-business-for-macroeconomic-balance-maybe-not-so-much

Taylor, Lance, and Özlem Ömer (2018) “Where Do Profits and Jobs Come From? Employment and Distribution in the US Economy” https://www.ineteconomics.org/uploads/papers/WP_72-Taylor-and-Omer-April-8.pdf

Taylor, Lance with Özlem Ömer (2020) Inequality from Reagan to Trump: Market Power, Wage Repression, Asset Price Inflation, and Industrial Decline, New York: Cambridge University Press

[1] See Board of Governors of the Federal Reserve (2020).

[2] For example, see the “nowcast” by the New York Federal Reserve (2020). Its annual yearly GDP loss of over twenty-odd percent translates into six percent per quarter. The OECD (2020) predicts a seven to eight percent real GDP loss during this year. The “central tendency” in a range of June 10 Federal Reserve estimates is between -5.5% and -7.6%. See https://www.federalreserve.gov/newsevents/pressreleases/monetary20200610b.htm

[3] Data from Bureau of Labor Statistics (2020).

[4] See https://www.bea.gov/sites/default/files/2020-05/gdp1q20_2nd_0.pdf

[5] Taylor with Ömer (2020) presents a long recital.

[6] Recall a theorem from sixth grade arithmetic stating that a negative number minus a more negative number equals a positive.

[7] In the General Theory word of Keynes (1936) “expectation” means a market consensus, not the standard interpretation in the literature as the first moment of a hypothetical probability distribution of business profits.

[8] Annual inflation rates ranged toward 15% during and after both WWI and WWII, for example, eroding the real value of government debt.

Thanks to INET for support and to Michalis Nikiforos and Thomas Ferguson for helpful discussions.

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