Oscar Valdes-Viera, Author at

Trump’s Cuba Policy Will Hurt, Not Help Cubans

In a speech showing no regard to Cuban’s historical sensitivities, Trump announced from Miami that he was “canceling the last administration’s completely one-sided deal with Cuba.” By that he meant reversing from Obama’s policy of engagement with Cuba to the old sanctions-based approach. The decision has been extensively criticized, from both the left and the right of the political spectrum, in Austrian-economics outlets and on Cuba’s socialist state media. Even some Republican members of Congress opposed and distanced themselves from this policy, and The American Conservative said Trump was reversing to a “failed,” “brain dead” policy which “will end up strengthening [Castro].”

The stated goal of the policy is to enforce compliance with the Embargo and the tourism ban, take a tougher stand on human rights abuses in the island, and to contribute to the economic, political empowerment of the Cuban people. Despite all the Cold War-style rhetoric in his speech, Trump is not actually “canceling” the whole deal with Cuba. According to the White House policy fact sheet, the embassies will remain open, maintaining diplomatic relations between the two countries, and Cuban-Americans’ travel and remittances are not impacted by the policy. As American University professor William LeoGrande recently put it, the plan is a “compromise between Cuban-American hard-liners’ demands that he reverse every aspect of Obama’s opening, and the pleas of U.S. businesses that he not shut them out of the Cuban market.”

However, the new policy approach will not exactly economically empower the Cuban people, since Cuban private sector entrepreneurs will be hit the hardest by a key policy change—the enhancement of the travel ban for American citizens. While Americans can still travel to the island in groups through a licensed tour company, prohibiting travel under the individual people-to-people license is likely to reduce the number of American visitors—the same citizens that Paul Ryan once praised as “our best ambassadors” of democratic values—which will result in the opposite of the intended policy goal.

Cuban Entrepreneurs Will Take The Hit

The more immediate effects of Trump’s measures will hit Cuban private businesses in the tourism industry. A recent survey found American travelers are directly supporting Cuban entrepreneurs economically. According to the survey, 76 percent of American visitors stayed at casas particulares (privately-owned houses), 99 percent ate at privately-owned restaurants, 85 percent traveled in private taxis, and 86 percent bought art, crafts, or music from independent artists. As a result of a lower number of American visitors, we can expect Cuban Airbnb hosts—Cuba is Airbnb’s “fastest-growing country…with over 22,000 listings,” bar and restaurant owners and their employees, taxi drivers, etc. to see their incomes reduced. This hurts the very same people the policy claims to “empower.”

In the first half of 2017, Cuba received some 285,000 American visitors, an increase of 145 percent with respect to the same period in 2016. As a result of the enforcement of travel restrictions, the number of American visitors and the economic support they provide to the private sector could be greatly reduced. Cuban economist Pedro Monreal estimates direct losses to the Cuban private sector on the range of $14.7 to $20.8 million, in the second half of 2017 alone—and not including the spillover or multiplier effect that the private sector’s incomes may have in Cuba.

Additionally, the language in the regulations expands the definition of Cuban government officials ineligible to receive remittance payments from the U.S, which could potentially exclude a million Cubans from receiving remittances. These private transfers—typically to family members—are the lifeblood of the Cuban private sector economy, both as one of the main sources of funds for entrepreneurs to invest in their businesses and of income for national consumers. Thus, restricting these transfers will affect the standard of living of remittance recipients and also severely obstruct the development of a vibrant private sector on the island.

Cuba’s External Debt Commitments

Cuba has made efforts to renegotiate its outstanding external debt—on which the government defaulted in the 1980s—and to resume servicing its obligations in order to regain access to international finance. President Castro has already taken steps to improve the country’s creditworthiness by promising to honor the commitments resulting from agreements reached during the renegotiation of debt owed to other governments and private sector creditors. The most important agreement was with the Paris Club and its Group of Creditors of Cuba, in December 2015. The Group derogated the accumulated interests and brought down the total stock of debt from $11.1 billion to $2.6 billion—the original principal, to be paid over a period of 18 years. The first installment was already paid in October 2016, amounting to some $40 million. However, by depriving the Cuban government of foreign-currency income from the tourism industry, Trump might also be damaging the ability of the government to repay a debt owed to a number of U.S. ally countries. Moreover, damaging Cuba’s creditworthiness also affects the possibility of extending Cuba credits for the purchase of U.S. agricultural commodities, which is key to make U.S. exports more competitive vis-à-vis other foreign suppliers, and would provide the “greatest” boost to agricultural exports to Cuba.

Back to Cold War Politics amid Recession and Economic Reforms

The Cuban government had been implementing austerity for the past six years as part of a process to “update” Cuba’s economic system by reducing the role and size of the state in the economy. This process included tight controls over fiscal expenditures and massive layoffs from the state economy. For example, Cuban official statistics show that from 2010 to 2015, government employment was reduced at a rate of 117,000 jobs a year; removing around 585,600 jobs from the economy in that period. The assumption was that those workers would be absorbed by an expansion of the private and cooperative sectors—which indeed increased their ranks by 461,000 jobs, around 79 percent of the reduction in government employment. Thus, Trump’s measures will be affecting the most dynamic job-creator sector of the Cuban economy.

This comes at a time when Cuba is trying to shake off an economic recession from last year—when GDP contracted 0.9 percent—and is beginning to make payments to its international creditors for the first time in more than two decades. Thus, Trump’s measures do not only jeopardize the expansion and profitability of the private sector, it also threatens the economic and social development of the nation, in general, and, in particular, the ability of the leadership to successfully restructure and revitalize the economy so that it works for the many—while at the same time escaping a looming recessionary episode and fulfilling external debt commitments. All of which, again, will have a disproportionately negative effect on the Cuban people.

Cuba: Caught-up Between “Trumpian” Politics?

The decision to roll back the policy of engagement with Cuba once again shows Trump’s frequent inconsistencies. This policy is not about putting America first, as it hurts American companies doing business with Cuba and restricts the right of U.S. citizens to travel freely. It is not about human rights, as Trump deals with a number of countries with abysmal human rights records—e.g. Saudi Arabia, Turkey, Philippines. And, it is not about economically empowering the Cuban people, as they will be the first to feel the effects of a worsening economic environment, standing to lose some $21 million this year. Instead, this foreign policy seems to be all about American internal politics. About the vote Trump needed from Miami’s Rep. Mario Díaz-Balart for the healthcare bill to pass Congress. About renting Marco Rubio’s loyalty during the Senate Intelligence Committee’s hearing of former FBI Director Comey. And, it is about Trump’s crusade to destroy all of President Obama’s signature policies—whether it is climate change, health care, labor laws, or Cuba.

The Borrowed Science of Neoclassical Economics

Another “Econ 101” story we hear in microeconomics classes is that, as consumers, individuals are always involved in a rational, hedonistic competition trying to maximize their own utility. The utility principle was brought to the forefront of the economics profession with the Marginal Revolution of the 1870s. The Marginal Revolution, the story goes, was a response to the rise in prominence of the theories of Karl Marx. While this might be true, it is only part of the story. The rest has been conveniently left out of the intro courses because it reveals that the foundations of neoclassical economics were essentially plagiarized from the natural sciences.

Modern orthodox economists frequently theorize and propose their models wrapped in algebraic expressions and econometrics symbols that make their theories incomprehensible to anyone without a significant training in mathematics. These complicated mathematical models rely on sets of assumptions about human behavior, institutional frameworks, and the way society works as whole; i.e. theoretical underpinnings developed through history. Yet, more frequently than not, their assumptions go to such great lengths that the models turn out utterly detached from reality.

This approach was promoted during the 1870s, in an effort to emulate the success of the natural sciences in explaining the world around us, and so transform Political Economy into the “exact” science of Economics. The new discipline, born with a scientific aura, would provide a legitimate doctrine to rationalize the existing system and state of affairs as universal, natural, and harmonious. It is understandable that economists wanted their field to be more like the natural sciences. At the time, great advances in physics, biology, chemistry, and astronomy had unraveled many mysteries of the universe. Those discoveries had yielded rapid development around the world. The Second Industrial Revolution was well underway, causing a transition from rudimentary techniques of production to the extensive uses of machines. Physics and mathematics were validated to a great extent with the construction of large bridges, transcontinental railroads, and the telephone.There exists extensive evidence to establish that this success of the natural sciences and the scientific method had a big influence on the mathematization of what had been the field of Political Economy. Early neoclassical theorists misappropriated the mathematical formalism of physics, boldly copied their models, and mostly admitted so. Particularly guilty of this method were W.S. Jevons and Léon Walras; credited with having arrived at the principle of marginal utility independently.

Jevons’ Theory of Political Economy shows this very clearly. He explicitly says he wants to “treat Economy as a Calculus of Pleasure and Pain, the form which the science, as it seems to, must ultimately take.” Here Jevons has abandoned the term “Political Economy,” and instead he is talking about the science of “Economy;” a science that would become “as exact as many of the physical sciences; as exact, for instance, as Meteorology is likely to be for a very long time to come.” Moreover, the concern of this new exact science would be limited to “the mode of employing their [referring to the population] labour which will maximise [sic] the utility of the produce,” and taking as “given” institutions like the property of land.

Walras showed many of the same intentions, claiming that “pure theory of economics is a science which resembles the physic-mathematical sciences in every respect.” Walras wanted that the pure theory of economics would deal with the relation between men and things (what he called “industry”) in a scientific way, while relations among men (termed, “institutions”) would be the object of study of social economics employing non-scientific techniques. This way, Walras removed property rights and class conflicts from the set of issues with which economics should be concerned. He abstracted the pure Economics theory from reality, and created an imaginary, utopian world: “an ideal market . . . [with] ideal prices which stand in an exact relation to an ideal demand and supply.”

American economist Irving Fisher furthered the work of Jevons and Walras in even less subtle ways. By the end of the 19th century, Fisher was openly copying physics models, term by term and symbol by symbol! Fisher’s Mathematical Investigations shows how he takes physics concepts and translates them to economics jargon:

Figure 1. Correspondence between the terms taken from mechanics and their economics counterpart in Mathematical Investigations

Source: Fisher, I. Mathematical investigations in the theory of value and prices, and appreciation and interest (p. 85).

Of course, none of this would be problematic if the adapted physics theories could be applied as Jevons and Walras proposed. But humans are not particles! In order for their scientific approach to work, Jevons and Walras had to assume a utility theory of value, which implied that people’s individual preferences were perfectly quantifiable, and that the amount of pleasure they obtained from the consumption of a certain good could always be measured. With these tools, Jevons and Walras assumed people to make rational decisions with the intention to maximize their utility.

This way, the Marginal Revolution transformed Political Economy into the pure science of Economics. Their methods, however, reveal that this formalization was more of a scam than an actual process of discoveries through scientific methods. Those who followed, however, took it to be a solid foundation. The founders of neoclassical economics used it to build theories that portray the existing order as rational, natural, and just. The social setting of the individual, institutions, and social relations of production continued to be exempt from examination, in the name of impartiality and objectivity. Economic “laws” continued to be devised—not discovered. The economy came to be portrayed as a system that operates autonomously and independently of human will, and comes to harmonious fruition under a free-market capitalist system of production. These conclusions, however, are built into the assumptions.

The urgency with which these theories were invented can be understood against the backdrop of Marx’s rise in popularity. Marx explained capitalism in the way a mechanic would open the hood of a car and explain the function of each part. His theories talked of conflicts of classes and exploitation as the inevitable consequence of private property, and the reduction of labor to another factor of production. With the intention to develop a counterargument, neoclassical thinkers decided to exempt those exact elements from their examination, and their models would show a capitalist society where there exists no exploitation, but rather a harmony of interests among classes and where the income created is divided according to the marginal productivity of each factor of production. No wonder neoclassical economists, like Robert Lucas, consider issues of distribution as “harmful” and “poisonous” to the economics profession; even in the face of staggering inequality. Maybe Piero Sraffa was right when he suggested that we should toss out these faulty theories.

Written by Oscar Valdes-Viera
Illustration by Heske van Doornen

Removing the Blinders: Trump Voters and Racial Inequality

A friend recently told me that he voted for Donald Trump, despite the candidate’s racist approach, because racism is “something that hasn’t existed [in America] for sooo long.”

We know some groups of voters—e.g. the KKK—deliberately organized and voted not to “make America great again” but to make America white again. While we don’t know how many of this type there are, we know they couldn’t have elected Trump on their own. They had help from people like my college-educated friend, who thinks racism is confined to history books. This tells us a lot about the degree to which voters are misinformed. Millions of people decanted towards a racist candidate even though they don’t consider themselves to be racists. The election made it clear that there are enough people like my friend to get Donald Trump elected.

15064263_10210729624538835_1318057045_o — Illustration: Heske van Doornen

In our last piece we discussed Dean Baker’s book, which shows that many policies and institutions disproportionately benefit the social elite, and in effect, further marginalize the already marginalized and perpetuate inequality. People of color have long been kept down by policies and institutions that favor the hegemonic class. Racism will not be an issue of the past as long as we have a rigged socio-economic system that systematically breaks down communities of people of color, concentrates poverty to their neighborhoods, cripples their educational opportunities, and limits their access to better incomes and wealth accumulation. The numbers below speak to such current racial disparities.

Wealth and income inequality

Figure 1 shows the disparities between selected races, in terms of wealth, income, home equity, and savings for retirement. As can be seen in the figure, in 2013 net worth for white households was almost 13 times larger than that of African-Americans and 10 times higher than that of Hispanics.

Figure 1. Median Household Wealth, Income, Home
Equity, and Retirement Savings by race, for 2013

Source: Authors’ calculations per The Survey of Consumer Finances (2013)

Not only did whites hold more wealth, but whites also receive higher incomes. A black or Hispanic household in the middle of the income distribution is likely to receive only as much as 58 percent as its white counterpart. While the amounts of savings for retirement for average white households are 4 times larger than those for black or Hispanic.

White households not only have larger sums saved for retirement, but also over 54 percent of these households have some kind of savings. Meanwhile the percentage of black or Hispanic households with savings is considerably lower, as shown in Table 1 below.

Table 1. Percentage of households
with savings and home equity, by race for 2013

	Savings	Retirement Savings	Home Equity
White	54	57	70
Black	39	34	38
Hispanic	37	26	38

Source: Authors’ calculations per
The Survey of Consumer Finances (2013)

Table 1 also shows that average white households are more likely to have equity on their homes. While in 2014 homeownership rates for whites households was at least 26 percentage points larger than the other two groups analyzed here, making whites 1.6 times more likely to own a home—the principal source of wealth-building for most Americans.

Educational Attainment

People of color see their access to incomes and wealth building opportunities severely crippled by educational attainment. Figure 2 below offers a breakdown of educational attainment within each race, using household data. It shows, for example, that 77 and 87 percent of all blacks and Hispanics household heads have less than a College degree as their highest level of education, respectively, while 62 percent of white household heads have less than a completed college education. These differences increase for higher levels of education. As the figure shows, only 7 percent of blacks and 5 percent of Hispanics obtain a graduate degree.

Figure 2. Highest Educational Attainment of Household Head Within Each Race

Moreover, a college degree is not a guarantee of financial success in the future, at least not for non-white families. Even if they attend college, the median wealth return to college graduation for Black and Hispanic households is 9 and 8 percent, respectively, of the returns that accrue to white households, as shown in Table 2. Meaning that for every $1 in wealth that accumulates to Black and Hispanic families, white families accrue $11.5 and $13.33, respectively.

Table 2. Median Wealth Return to College Graduation, 2011

	White	Black	Hispanic
Median Returns to College	$55,869	$4,846	$4,191

Source: Demos analysis of Survey of Income
and Program Participation (SIPP), 2011.

Mass incarceration

The rapid increases in incarceration rates in the U.S. beginning in the mid-1970s have disproportionately affected people of color. By 2008, African-Americans and Hispanics were being incarcerated at a rate 6 times greater than whites and they represented 58 percent of all prisoners, even though blacks and Hispanics only comprise around 25 percent of U.S. population. By 2010, 1 out of 3 high school dropout black male between 20 to 39 years old were imprisoned; compared to just 13 percent for whites with similar characteristics.

As an election-relevant impact of the era of mass incarceration, it is estimated that 1 in 13 African Americans of voting age are deprived of their right to vote as a consequence of voting restrictions imposed by twelve states, with the sole objective of disenfranchising individuals after they have completed their sentences; more than 7 percent of black adults are disenfranchised, while the same restrictions apply to 1.8 percent of non-African-Americans.

The result is that it is estimated that 1 in 3 black males born today is likely to spend some time in prison. And even after they serve their time, wages for black ex-inmates tend to grow 21 percent slower than those of white ex-inmates.

Red lining and exclusionary zoning

Exclusionary zoning and red lining are policies that effectively deny affordable housing and other services—e.g. banking, insurance, supermarkets—to certain groups of the population based on their incomes, race, or ethnicity. It has been widely reported how those policies make it difficult for people of color to find homes in good, safe neighborhoods with access to quality education, employment opportunities, and quality healthcare. The impact of these policies is the creation of race and income segregated areas, with poverty and wealth concentrating in different neighborhoods. It is estimated that a black person is over 3 times more likely to reside in neighborhoods with high poverty concentration than a white person, while Hispanics are twice more likely than whites.

A close reminder of how African-Americans suffer this issue is that the President-elect of the U.S. was investigated and eventually sued by the Justice Department for discriminating against potential black tenants in his company’s buildings; what The New York Times called “the color barrier of the Trump real estate empire.”

These are only a few selected facts, but there are many more; these facts are not as evident to everyone, nor do they capture headlines on TV and Facebook like, e.g., police shootings of unarmed African-Americans.

This piece does not address the reasons, causes, and policies that got us to this point. This is nothing close to a history of racism in America and these are by no means the only injustices that people of color suffer in this country. However, after seeing all this, it should be evident that racism is not an issue of the past—certainly not one for the history books. There are still many people today that lived in racially segregated states under the Jim Crow laws. They had to literally fight for their rights to vote, to access the same schools as whites, or just to sit in the front of a bus. We might not have legal Jim Crow-style discrimination anymore, but American institutions covertly retain remnants of the Jim Crow era. Meanwhile the rich and powerful have rigged American socio-economic institutions with a bias towards their class and race, perpetuating an oppressive system that pretty much defines our place in society according to the color of our skin and the class status of the families from which we are born.

Now, my friend, be careful with any “buts” you might want consider as retort. If you are still not convinced that there is a deeply-rooted-institutionalized race problem in America, then go further than this piece, be curious about it, turn to your black and brown friends—ask them about it, and hear what they have to say.

Post co-written by Daniella Medina and Oscar Valdes-Viera
Illustration by Heske van Doornen

Behind Optimism in the Economy, the Fed Fears the Next Recession

After a two-day meeting concluding on Wednesday, Federal Reserve officials voted to keep interest rate unchanged at a target rate of 0.25 to 0.50 percent. According to Chairwoman Janet L. Yellen’s press conference, members of the Federal Open Market Committee (FOMC) feel they are closing-in on the Fed’s statutory mandate—to foster maximum employment and price stability—and they consider that the case for a rate increase before the end of the year is still strong.

Their optimistic view of the economy is based on economic growth picking up its pace in the second half of the year, mainly supported by household spending and what Ms Yellen described as “solid increases in household income.” Meanwhile, the labor market has been tightening and some Fed officials consider the low unemployment rate to be at its full employment value, or at least “pretty close to most FOMC participants’ estimates of its longer-run equilibrium value,” to use Ms Yellen’s words. Even though inflation remains below the Fed’s target, given current economic growth and an improving labor market, we will see a pick up soon after “transitory influences holding down inflation fade.”

“We’re generally pleased with how the U.S. economy is doing,” expressed Ms. Yellen.

However, after presenting such an optimistic economic outlook, it seems at odds that Fed officials lowered their projections of GDP growth for 2016. The median growth projection for the year is now 1.8 percent, down from 2.0 percent in June. In short, it seems contradictory that policymakers believe the case for an interest rate increase has “strengthened”, while at the same time revising down their growth projections, for the third time this year.

Sending a strong signal in August that a possible interest rate hike was coming and then pulling back, made market participants question the Fed’s and Ms. Yellen’s credibility. But again, during the press conference following the meeting, Ms. Yellen said that an interest rate increase is due before the end of the year, if “we simply stay in the current course.” So which one is it? Is the economy strong enough to operate with higher rates, or not?

I think the conflicting message can be somewhat explained by noting two things. First, Chair Yellen’s remarks at Jackson Hole, last month. This speech was about the monetary policy toolkit the Fed has at its disposal to respond to future economic downturns. Among the tools, however, Ms. Yellen didn’t include the alternative of negative interest rates. Whether or not negative rates are a good idea is not the point. The point is that she declared that “doing so was impossible,” sending a strong message that the Fed is very much constrained by the zero lower bound on nominal rates. Then this past Wednesday Ms. Yellen reiterated that the zero lower bound is a “concern,” saying that monetary policy action has “less scope than [she] would like to see or expect [them] to have in the long run.”

Ms. Yellen’s remarks at Jackson Hole made it clear that the Fed trusts that, whenever the next downturn hits, “conventional interest rate reductions” will be their first line of defense. However, in order to make those reductions, rates cannot be down to where they are right now; they need some room for maneuver. For example, during the past nine recessions the FOMC cut the fed funds rate by an average 5-1/2 percentage points. Meaning that right now the Fed is 5 percentage points short of what they would need to reduce rates, if an average recession hits the economy.

Second, as Ms. Yellen noted during the Q&A, monetary policy operates with long and variable lags—in other words, that the implementation and effects of new monetary policies would normally take some time. For this reason, she argued, the principle of forward looking is so important. That is, acting ahead of time, and based on projections and forecasts, before a threat materializes. In this regard Ms. Yellen stated, “I’m not in favor of the whites of their eyes rights sort of approach. We need to operate based on forecasts.” Moreover, the Chairwoman has repeatedly stated that any adjustments in the stance of monetary policy will be “gradual,” in a succession of small increases. Thus, it would be inconsistent to keep rates unchanged when the Fed forecasts of inflation are pretty much on target for 2017 and 2018 and when monetary adjustments will be gradual and needing some time to be implemented and have effect.

It seems as if the Fed fears its ability—or lack of—to respond to the next crisis, and those fears could be weighing heavily in their considerations of a rate hike. If that is the case then the good news, for them, is that they have their favorable outlook of the economy and the principle of forward looking to justify the hike.

So, if there are no negative surprises, it’s very likely that before the end of the year the fed funds rate will increase from its current target range of 0.25-0.50 percent to the 0.50-0.75 percent range. The next Fed meeting will take place just a week before the election. Even though the Fed is not supposed to play politics, policymakers will not want to rattle the markets right before polls open. So November’s meeting is not likely to be the one, all bets are on December.

Illustration by Heske van Doornen

State of the Unions in the US Economy

Debates about the disappearance of the middle class and the lack of opportunities for the majority of Americans have been at the forefront of the 2016 presidential election. However, discourse surrounding unions and ways to increase the bargaining power of workers are often overlooked in these discussions.

These are integral components of the issue that could enhance the current economic climate for the middle class, and especially benefit low-wage, minority, and immigrant workers. Without unions, employees can be fired at-will in most states and have no collective leverage to negotiate with employers over their most basic terms and conditions. There are almost 15 million union workers across the country who have these rights, and therefore benefit considerably from better wages and working conditions. Here are four ways unions make a difference.

1. Unions benefit workers—especially women and minorities—through the union wage premium,according to data from the Current Population Survey.

Collective bargaining gives union members wage advantages over nonunion workers, despite holding the same jobs and sharing similar characteristics (e.g. education level, age, race, gender). This is called a union wage premium. On average, union members commanded a 26 percent wage premium in 2015.
Women tend to have considerably higher union wage premiums than men. In 2015, they made about 33 percent more than their nonunion counterparts, on average, while the union wage premium for men was approximately 17 percent. Unions are also offering another advantage through helping to close the gender pay gap.
Minorities have also shown to have better economic outcomes when they belong to unions. As of 2015, average Hispanic full-time workers’ weekly earnings were 47 percent higher when they were part of a union. The typical African-American worker received a 30 percent union wage premium.

2. Unions not only push for higher wages, but their members also tend to obtain more comprehensive benefits. According to the U.S. Bureau of Labor Statistics, union workers are more likely to have access to health insurance, as well as have retirement plans and paid sick leave.

This is especially important for immigrant workers and employees in low-wage jobs. The Center for Economic Policy Research (CEPR) finds that immigrant workers who are union members have close to a 50 percent higher chance of having employer-provided health insurance, and twice the probability of having a retirement plan. Union workers in low-paying jobs have a 25 percent higher probability of having these benefits.

3. Unions fight to maintain an equitable distribution of income among employers and workers.

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It is no coincidence that the percent of income going to the top percent of earners has increased while union membership has declined. The erosion of collective bargain reduces the share of income going to American families in the middle of the income distribution—not only union members. That is because unions pull millions of non-union Americans into the middle class by setting higher compensation standards that push everyone’s wages up. The decline of the middle class is, therefore, directly related to the decline in the density of unions.
The shrinking middle class has resulted in less spending money for many American families. Considering that household consumption is the main engine of our economy—accounting for around 70 percent of GDP—when the majority of workers can’t afford to spend the economy stagnates. Thus, contrary to popular opinion, unions do not impede economic growth when they fight for labor to receive its fair share of income, they are actually necessary to maintain a strong economy.

4. Unions are crucial for democracy.

As a recent Century Foundation report explains, unions serve as counterbalancing influences to arbitrary government powers. They function as “schools of democracy” for workers and help maintain a public education system that fosters democratic values. For example, the Milwaukee Teachers’ Education Associationsuccessfully advocated to revitalize the school curriculum to include issues surrounding civic engagement. Unions also represent one of the largest forms of an organized voice for low and moderate income Americans. In short, strong unions could ensure that society does not become governed by a small number of wealthy individuals.

So Why Are Union Membership Rates So Low?

Although there is overwhelming data showing the benefits of unions, they are battling to maintain their crucial foothold in the economy, especially in the private sector.

According to data from the Current Population Survey, unions remain strong in the public sector, with more than one-third of employees identifying as union members. Not surprisingly, the public sector employs more minorities and provides more equal wages than the private sector. The professions with the strongest unions include teachers, police officers, and firefighters.

However, workers in the private sector are over five times less likely to participate in unions, with membership rates down to 6.7 percent.

The decline in union participation in the private sector has dragged down the total union membership rate. However, thanks to strong public sector unions, the rate of decline has stagnated in recent years, remaining at 11.1 percent since 2014.

Among states, New York has had the highest percent of union members with 24.7 percent in 2015. South Carolina has been on the other end of the stick, with only 2.1 percent of full-time workers belonging to a union. Examining the breakdown of union workers by state reflects the impact unions can have on lifting the wage floor for all citizens. States with higher union density tend to have a higherminimum wage for union and nonunion workers alike.

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Even though polls show that close to 60 percent of workers see unions favorably, structural barriers have been holding back organizations from embracing unions.

The election process to establish a union, governed by federal law (National Labor Relations Act), puts major barriers in place for workers who want to become members. Even when workers want to be part of a union, they are typically harassed and can find themselves illegally fired. The National Labor Relations Board (NLRB) maintains that workers have the right to “form, join or assist a union.” However, the CEPR found there has been a steep rise in illegal firings of pro-union workers in the 2000s compared to the previous decade. Employers have a variety of unfair labor tactics they have used in union organizing drives—like hiring anti-union consultants (a $4 billion-a-year industry) or spying on their workers. However, minimal penalties and slow enforcement disincentivize companies from following the law. For example, two of the biggest employers in the U.S.—McDonald’s and Walmart—have been targets of such lawsuits but have rarely faced significant enough repercussions to dissuade them from continuing to employ these practices.

Another obstacle to establishing unions have been the Right-to-Work (RTW) laws, which are estimated to reduce union membership rates by 8.8-9.6 percent. With the addition of Wisconsin and West Virginia in the past two years, twenty-six states now have RTW laws. Under RTW state laws, companies can’t lawfully agree to agency shop, which allows workers to receive benefits secured by unions without contributing to cover collective bargain costs. The lack of agency shop cripples unions, and dissuades those interested in organizing drives.

Proponents of RTW argue these laws foster economic growth by raising competitiveness and attracting more business into their states. However, these laws promote economic growth by supplying their citizens labor at the cheapest price, instead of promoting and creating higher wage jobs. Workers in RTW states, which are most common in the South, are estimated to make $1,558 less per year, on average.

How Are Unions Responding?

Unions and their allies are developing new strategies to overcome these challenges and build alternative forms of workers bargaining.

A first priority has been strengthening labor laws and access to unions. Promising developments include the WAGE Act introduced last year that would extend civil rights laws to workers in unions. And, an emboldened National Labor Relations Act has put in place new rules to make elections faster and to make it easier to organize workplaces, like McDonald’s, that are jointly owned by a main company and numerous franchise.

In response to the limitations of firm-by-firm bargaining, unions are mounting cross-industry, cross-state campaigns to uplift the working conditions of all workers. The Fight for $15 movement is bringing together thousands of workers to demand a $15 minimum wage,which has already been implemented for workers in Seattle,New York, and California.

Unions are also partnering with alternative labor organizations, like workers centers, to provide support to workers—mainly people of color, immigrants, and low-wage workers but also those in the patchwork economy—that do not have access to union
representation.

By Oscar Valdes-Viera
Illustration by Heske van Doornen

This piece was originally published (here) by The Century Foundation in New York.

Stability is Destabilizing

In a recent interview with Andrew Ross Sorkin, published in The New York Times, President Obama argued that the U.S. economy is in fine shape, despite public feelings that it might not be. Then a few days later the same newspaper ran an interview with William C. Dudley, the president of the Federal Reserve Bank of New York, in which he foresaw continued economic growth. And like the president of the Richmond Fed, Mr. Dudley made the case for slowly raising interest rates because the economy is “on track” and global conditions are “dramatically better.”

The rhetoric coming from these top policymakers can seem rather soothing to most people, including many economists. However, we know that Hyman Minsky would have remained highly skeptical. In fact, Minsky famously argued that “stability is destabilizing,” and that is because periods of economic instability and recessionary episodes emerge naturally out of the normal functioning of a prosperous modern capitalist economy.

For Minsky the nature of instability is linked to the relation between finance and investment in capital assets during the business cycle. Economic agents often compromise future incomes in order to secure the assets they need to undertake production. The accumulation of capital in the economy is largely financed by borrowing, which is recorded as liabilities on balance sheets. The liabilities represent a group of payment commitments on a future date, while the assets held represent a series of expected cash receipts from operations. The performance of the economy will later either validate or invalidate the structure of those balance sheets. Even though Minsky was talking about the capital development of the economy, his argument can be broadly extended to any economic unit; from a corporation borrowing to build its new headquarters to a person borrowing to buy a car or pay for college.

In his Financial Instability Hypothesis (FIH), Minsky identified the degree of financial fragility in the system by defining three income-debt relations for economic units: hedge, speculative, and Ponzi finance. For hedge financing units, the income flows from operations are enough to fulfill debt commitments outflows in every period. For units involved in speculative finance, the income flows are only enough to meet the interest component of their obligations and they will have to roll over debt because they cannot repay the principal. For Ponzi finance, the income flows from operations are not enough to cover the interest costs of their loans or the repayment of principal. Ponzi units highly depend on the possibility of refinancing their debt, otherwise they have to resort to the liquidation of assets or issuing new liabilities in order to meet their obligations.

The movement to more units engaged in Ponzi finance happens as a natural consequence of periods of stability and prosperity. During economic expansions, borrowers and lenders become confident in the ability of the former to meet cash commitments, which is a rational response based on recent past experiences and on the higher probabilities of success associated with the expansionary environment.

Thus, economic units are not likely to have difficulties to meet their payment commitments as they come due during economic expansions. However, such optimistic expectations lead to relaxing lending standards and reducing margins of safety. They also validate riskier projects, the use of more debt relative to assets, and lower liquidity; all of which increase the fragility of the economic system (for more see here and here).

Borrowers and lenders seem to operate on a hit-or-miss basis; if a behavior is successful, it will be rewarded and it will be repeated. So the behaviors described above will continue, and in fact be encouraged, until the turn of the economic cycle. Thus, while the economy prospers, financial positions are becoming increasingly fragile under the stable surface. Indeed, according to Minsky, during prolonged periods of prosperity the modern capitalist economy tends to move from a robust financial structure dominated by hedge financing units, to what he called a “deviation amplifying system” dominated by abundant speculative and Ponzi financing units.

The boom gives way to the bust when interest rates suddenly rise or when realized income flows fail to meet what was projected (note that economic units need not incur losses, but just have revenues depart from expectations – so basically any small shock to a fragile economy can potentially trigger a crisis). When the economic environment changes, income flows begin to fall and Ponzi units find it impossible to borrow to sustain their positions. They will then try to make position by selling out position; this means selling assets to meet their payments. The consequence of a generalized sell-off is to put downward pressure on asset prices, which can make the market prices too low as to generate sufficient income to meet the commitments – making this operation self-defeating. These dynamics, plus the excess supply, reinforce the necessity to sell and raise the real debt burden, leading to a potential Fisher-style debt deflation. These processes reset the system, starting again from a robust financial position – because all the fragile positions were washed off by the debt deflation – but will eventually give way to another crisis.

The idea that “stability is destabilizing” is summarized by Minsky’s two theorems of financial fragility in the FIH: (I) the economy has financing regimes under which it is stable (hedge) and financing regimes in which it is unstable (speculative and Ponzi); and (II) over periods of prolonged prosperity, the economy transitions from financial relations that make for a stable system to financial relations that make for an unstable system. In other words, the economy tends to move from a financial structure with abundant units engaged in hedge finance to a structure dominated by speculative and Ponzi units. The natural shift from hedge positions to speculative to Ponzi is a required condition for instability to arise, and, as explained above, the move (and the erosion of margins of safety) happens during periods of economic stability and prosperity. One of Minsky’s most important contributions was to point out that the process leading to an unstable system is an inevitable, endogenous, and evolutionary process of the modern capitalist economy.

So, what can we learn from all of this? Well, the next time you hear politicians or big shot economists talking about how stable the economy is and how on track it is, remember Minsky and remain skeptical.

Written by Oscar Valdes-Viera