Business Week the Nineties by Dean Baker
Awhile back, Max submitted an article by Dean Baker: Title: Business Week Restates the Nineties [Apologies for html, but you need it for the charts. This came up a week or so ago. Dean finally finished this, after my egging him on. Feel free to circulate, with credit of course to Dean Baker, Center for Economic and Policy Research. -mbs] -- comment: This is a very good article, but it's interesting that Dean never mentions a major factor that BUSINESS WEEK also skips, i.e., the high exchange rate of the dollar during the late 1990s (and today, but the subject is the 1990s).[*] The high dollar implies that imports are cheap (as do low oil prices), boosting U.S. real wages. On the other hand, the high dollar intensifies competition from imports and competition for U.S. exporters, hurting profits. This suggests that to the extent that BUSINESS WEEK is correct that workers gained in the 1990s (and Dean admits that there is _some_ truth to this view), it is a temporary matter, since the dollar is extremely unlikely to remain high forever (especially given the large U.S. current account deficit). Also, following the logic of PPP, according to the ECONOMIST's Big Mac index, the dollar is significantly over-valued. (Overall, the dollar looks more overvalued against the average of the other big currencies than at any time in the life of the Big Mac index. -- quoted in the L.A. TIMES, 4/27/02, page C3 (Measured in Burgers, Greenback Overvalued).) Michael Perelman mentioned the discussion between Ellen Frank and Jane D'Arista about the likelihood of the dollar falling drastically: I will have to be careful about misrepresenting and oversimplifying, but I understood Ellen to be saying that the dollar was not in danger because investors had nowhere else to go; Jane, that the dollar was in danger if other countries ceased buying new financial assets because they needed their foreign exchange for other uses. The point that I understand Ellen to have made is that it's unlikely that the US dollar will lose its status as paper gold, the world money imposed by its hegemonic power. I agree. However, that does not mean that the dollar can't fall drastically relative to other currencies, as it did in the mid-to-late 1980s. Going from 1985 to 1986, the G-10 trade-weighted exchange rate of the dollar fell 24.3%. The next year, it fell 14.7%, while for 1987-88, it fell 4.4%. The major currencies index fell 19.7%, 12.3%, and 7.2% during those periods. This meant that imports became significantly more expensive while competition for US business eased up, encouraging stagflation and the decline of real wages relative to productivity. The big questions concern _when_ the dollar will fall and, (more importantly) _how quickly_. The dollar doesn't have to fall to zero in order for there to be a stagflationary shock that will make Alan Greenspan face nothing but bad choices. (Such shocks are more important today than in the 1980s, because of the increased openness of the U.S. economy.) On the other hand, if the dollar falls slowly and gently, it's no big problem. But this latter seems unlikely given the way that currency markets are so speculative in nature -- unless the Fed succeeds in slowing the fall down. But the Fed's efforts would involve higher interest rates, which would encourage the double dip recession scenario. what's Alan to do? [*] I asked Michael Mandel, the author of the BUSINESS WEEK article about this, and he said:Now, one could argue about the sustainability of the strong dollar--but that argument has been going on for years without a good conclusion. This hardly seems satisfactory. I had written: I have just one major one minor comment about what's left out of the following [the BW article] Major: the soaring exchange rate of the dollar isn't mentioned at all. That allowed real wages to soar after 1995 or so because it made imports much cheaper. It also put pressure on export-competing employers, keeping them from raising prices. (Having a similar effect was the relative stagnation of economies outside the U.S.) Normally, a rising dollar would pull down aggregate demand (as in the early 1980s), but the credit- and optimism-based private sector boom more than counteracted that drag (along with the drag of the rising federal government surplus). It also meant increasing external debt. Minor: the rise of house ownership was also encouraged by lowering standards in mortgage loaning (partly encouraged by Clinton-era policies). This makes consumer spending more prone to a fall [since it allowed the accumulation of potentially unsustainable debt]. His full reply was as follows: I can rephrase your dollar comment. What we had in the 1990s was the good impact of the rising dollar, with none of the bad impacts. Imports were cheaper, and unemployment continued to fall. Now, one could argue about the sustainability of the strong dollar--but that argument has been
Re: Business Week the Nineties by Dean Baker
- Original Message - From: Devine, James Jane, that the dollar was in danger if other countries ceased buying new financial assets because they needed their foreign exchange for other uses. I've known Jane since 1976 when I was a wee lad playing viola in a Bethesda string ensemble with her son. Every financial-doomsday prediction she has made since then - actually, from the late 1960s when she learned her trade on the Hill as Wright Patman's Banking Committee staff guru - has come true, from REITs to Third World debt crisis to big-bank-bankruptcies and bailouts to SLs to junkbonds to securitisation to emerging markets to dot.coms to...
Re: Re: Business Week the Nineties by Dean Baker
Patrick Bond wrote: - Original Message - From: Devine, James Jane, that the dollar was in danger if other countries ceased buying new financial assets because they needed their foreign exchange for other uses. I've known Jane since 1976 when I was a wee lad playing viola in a Bethesda string ensemble with her son. Every financial-doomsday prediction she has made since then - actually, from the late 1960s when she learned her trade on the Hill as Wright Patman's Banking Committee staff guru - has come true, from REITs to Third World debt crisis to big-bank-bankruptcies and bailouts to SLs to junkbonds to securitisation to emerging markets to dot.coms to... That's interesting, but the core in the prediction is not the then clause but the if clause. What would cause other countries to need their foreign exchange for other uses? Carrol
Re: Business Week the Nineties
Title: Business Week Restates the Nineties Sparring with the American Way propagandists at SP's Business Week is a waste of time, IF YOU ASK ME. Of course American workers benefited. They became stock holders, too. That's why all their money went into Enron stock if they worked at Enron. BTW, is an ex-federal bureaucrat who now works at a typical defense contractor'labor'? They certainly own the stock of their own companies. Charles Jannuzi
Business Week the Nineties
Title: Business Week Restates the Nineties [Apologies for html, but you need it for the charts. This came up a week or so ago. Dean finally finished this, after my egging him on. Feel free to circulate, with credit of course to Dean Baker, Center for Economic and Policy Research. mbs] Business Week Restates the Nineties Dean Baker Center for Economic and Policy Research 1621 Connecticut Ave., NW Washington, DC 20009 202-332-5218 [EMAIL PROTECTED] April 22, 2002 A recent issue of Business Week featured a provocative cover story, which offered a new interpretation of the economy's pattern of growth in the nineties (Restating the 90s, 4-1-02; p 50). The article claims that the big gainers from the nineties were actually workers, not corporations and shareholders. One representative comment asserts that workers received 99% of the gains from faster productivity growth at non-financial corporations. It is easy to demonstrate that this was not the case. Data from the Commerce Department and the Labor Department show quite clearly that there was a redistribution from labor's share to capital's share (profits plus interest) during the decade. This is the first time that this has been the case since the Vietnam War. During the rest of the post World War II period, labor share has either increased, or at least held constant. The fact that the redistribution went from labor to capital -- and not in the opposite direction, as implied by this quote -- means that capital received more than its share of the faster productivity growth in the nineties. The basic issue on distribution can be settled easily by examining the commerce department's data on corporate income. This is graphed in the figure below.[1] The starting point is 1988, because that was the peak profit year of the last business cycle. The profit share dipped in the early nineties recession, as it always does during a recession. However, it recovered strongly in the mid-nineties, reaching a peak of 21.6 percent in 1997, a level exceeded only by the Vietnam War era profit peaks. The profit share trails off slightly over the next three years, but even in 2000, it is still above the peak share of the last cycle. This is true regardless of whether the broad measure of capital income is used -- combining profits and net interest, or a more narrow measure that just takes the profit share directly. (From the workers' standpoint, it doesn't matter whether their wages are reduced due to growth in the profit share or the interest share, in either case the rising capital share implies a decline in labor's share.) It is possible to tell a slightly different story by focusing more narrowly on the non-financial corporate sector. Profit shares in the non-financial sector also peaked in 1997 at a level well above the eighties high point, but they fell more sharply in the last three years of the decade, as shown in the graph below.[2] As a result, the broader measure of profit share in 2000 was somewhat below the peak of the eighties cycle. The main reason for the sharp falloff in the profit share in the last part of the business cycle was a 20.5 percent decline in profits in the manufacturing sector. This in turn was attributable to the flood of low cost imports resulting from the run-up in the dollar following the East Asian financial crisis. While this does support the claim of a shift away from capital at the end of the decade, this is only due to the fact that post-peak years are compared to the peak of the eighties or nineties cycle. At the peak on the nineties cycle, the profit share was almost a full percentage point higher than it peak in the eighties cycle (19.2 percent compared to 18.3 percent). It is also worth noting that the non-financial sector is not very well defined. Profits can shift from non-financial to financial as firms change the way they conduct their business. For example, if a store extends credit directly to customers, and charges interest, these earnings would appear as profits in the non-financial sector. On the other hand, if they opt instead to rely on credit cards, then the interest earned from their customers will appear as profits in the financial sector. If more financial services are out-sourced in this manner, thereby shifting profits from the non-financial sector to the financial sector, it would be misleading to characterize the development as a shift to labor. The data from the broader corporate sector is unambiguous -- the profit share increased in the nineties, and remained above its previous business cycle peak (1988) until the onset of the recession in 2001. One factor that may explain some of the conclusions in the business week article is that it uses data for the recession year of 2001. Profits always fall sharply in a recession, and 2001 was no exception. For example profits fell by 19.2 percent
