2020

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On Trade Unions & Inequality

This chart is pretty wow:

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Florence Jaumotte and Carolina Osorio Buitron of the International Monetary Fund have some ideas about how the correlation may have been caused:

The main channels through which labor market institutions affect income inequality are the following:

Wage dispersion: Unionization and minimum wages are usually thought to reduce inequality by helping equalize the distribution of wages, and economic research confirms this.

Unemployment: Some economists argue that while stronger unions and a higher minimum wage reduce wage inequality, they may also increase unemployment by maintaining wages above “market-clearing” levels, leading to higher gross income inequality. But the empirical support for this hypothesis is not very strong, at least within the range of institutional arrangements observed in advanced economies (see Betcherman, 2012; Baker and others, 2004; Freeman, 2000; Howell and others, 2007; OECD, 2006). For instance, in an Organisation for Economic Co-operation and Development review of 17 studies, only 3 found a robust association between union density (or bargaining coverage) and higher overall unemployment.

Redistribution: Strong unions can induce policymakers to engage in more redistribution by mobilizing workers to vote for parties that promise to redistribute income or by leading all political parties to do so. Historically, unions have played an important role in the introduction of fundamental social and labor rights. Conversely, the weakening of unions can lead to less redistribution and higher net income inequality (that is, inequality of income after taxes and transfers).

I have spent a lot of time thinking about what has caused the major upswing in inequality since the 1980s.

Back in 2011 and 2012 my analysis tended to emphasize financialization and specifically the massive growth in credit creation that took place since the 1980s. I think this was a rather naive view to take.

I don’t think I was wrong to look at financialization. Obviously, unchecked credit creation is a plausible pathway for the rich to make themselves and their friends richer. I just think it was naive to not see financialization — like deunionization, like globalization, and like trends in housing wealth — as part of a broader pie.

My hypothesis is that what changed is that politicians decided that greed was good and that “industrial policy” was a dirty phrase. The political structures that emerged in the wake of the Great Depression and World War 2 which together greatly limited inequality — welfare states, nationalized industries, unionized workforces, constrictive financial regulations like Glass Steagall — were severely rolled back. This created an opening for the rich to get much richer very fast, which they did.

If I’m right, it would take a major political shift in the other direction to start reducing inequality.

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George Osborne & Big Banks

The Telegraph reports that George Osborne thinks big banks are good for society:

The Chancellor warned that “aggressively” breaking up banks would do little to benefit the UK and insisted the Government’s plans to put in place a so-called “ring fence” to force banks to isolate their riskier, investment banking businesses from their retail arm was the right way to make the financial system safer.

“If we aggressively broke up all of our big banks, I am not sure that, as a society, we would benefit from it,” he said. “We don’t have a huge number of banks, sadly, large banks. I would like to see more.”

His comments came as he gave evidence to the parliamentary commission on banking standards where he was accused of attempting to pressure members into supporting his ring-fencing reforms.

“That work has been accepted, as far as I’m aware, by all the major political parties. We are now on the verge of getting on with it,” he said.

Several members of the Commission have argued in favour of breaking up large banks, including former Chancellor, Lord Lawson.

This is really disappointing.

Why would Osborne want to see more of something which requires government bailouts to subsist?

Because that is the reality of a large, interconnective banking system filled with large, powerful interconnected banks.

The 2008 crisis illustrates the problem with a large interconnective banking system. Big banks develop large, diversified and interconnected balance sheets as a sort of shock absorber. Under ordinary circumstances, if a negative shock (say, the failure of a hedge fund) happens, and the losses incurred are shared throughout the system by multiple creditors, then those smaller losses can be more easily absorbed than if the losses were absorbed by a single creditor, who then may be forced to default to other creditors. However, in the case of a very large shock (say, the failure of a megabank like Lehman Brothers or — heaven forbid! — Goldman Sachs) an interconnective network can simply amplify the shock and set the entire system on fire.

As Andrew Haldane wrote in 2009:

Interconnected networks exhibit a knife-edge, or tipping point, property. Within a certain range, connections serve as a shock-absorber. The system acts as a mutual insurance device with disturbances dispersed and dissipated. But beyond a certain range, the system can tip the wrong side of the knife-edge. Interconnections serve as shock-ampli ers, not dampeners, as losses cascade. The system acts not as a mutual insurance device but as a mutual incendiary device.

Daron Acemoglu (et al) formalised this earlier this year:

The presence of dense connections imply that large negative shocks propagate to the entire fi nancial system. In contrast, with weak connections, shocks remain con fined to where they originate.

What this means (and what Osborne seems to miss) is that large banks are a systemic risk to a dense and interconnective financial system.

Under a free market system (i.e. no bailouts) the brutal liquidation resulting from the crash of a too-big-to-fail megabank would serve as a warning sign. Large interconnective banks would be tarnished as a risky counterparty. The banking system would either have to self-regulate — prevent banks from getting too interconnected, and provide its own (non-taxpayer funded) liquidity insurance in the case of systemic risk — or accept the reality of large-scale liquidationary crashes.

In the system we have (and the system Japan has lived with for the last twenty years) bailouts prevent liquidation, there are no real disincentives (after all capitalism without failure is like religion without sin — it doesn’t work), and the bailed-out too-big-to-fail banks become liquidity sucking zombies hooked on bailouts and injections.

Wonderful, right George?

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The Great Pacification

Since the end of the Second World War, the major powers of the world have lived in relative peace. While there have been wars and conflicts  — Vietnam, Afghanistan (twice), Iraq (twice), the Congo, Rwanda, Israel and Palestine, the Iran-Iraq war, the Mexican and Colombian drug wars, the Lebanese civil war — these have been localised and at a much smaller scale than the violence that ripped the world apart during the Second World War. The recent downward trend is clear: Many thinkers believe that this trend of pacification is unstoppable. Steven Pinker, for example, claims:

Violence has been in decline for thousands of years, and today we may be living in the most peaceable era in the existence of our species. The decline, to be sure, has not been smooth. It has not brought violence down to zero, and it is not guaranteed to continue. But it is a persistent historical development, visible on scales from millennia to years, from the waging of wars to the spanking of children.

While the relative decline of violence and the growth of global commerce is a cause for celebration, those who want to proclaim that the dawn of the 21st Century is the dawn of a new long-lasting era of global peace may be overly optimistic. It is possible that we are on the edge of a precipice and that this era of relative peace is merely a calm before a new global storm. Militarism and the military-industrial complex never really went away — the military of the United States is deployed in more than 150 countries around the world. Weapons contractors are still gorging on multi-trillion dollar military spending. Let’s consider another Great Moderation — the moderation of the financial system previous to the bursting of the bubble in 2008.

One of the most striking features of the economic landscape over the past twenty years or so has been a substantial decline in macroeconomic volatility. Ben Bernanke (2004)

Bernanke attributed this outgrowth of macroeconomic stability to policy — that through macroeconomic engineering, governments had created a new era of financial and economic stability. Of course, Bernanke was wrong — in fact those tools of macroeconomic stabilisation were at that very moment inflating housing and securitisation bubbles, which burst in 2008 ushering in a new 1930s-style depression. It is more than possible that we are in a similar peace bubble that might soon burst. Pinker highlights some possible underlying causes for this decline in violent conflict:

The most obvious of these pacifying forces has been the state, with its monopoly on the legitimate use of force. A disinterested judiciary and police can defuse the temptation of exploitative attack, inhibit the impulse for revenge and circumvent the self-serving biases that make all parties to a dispute believe that they are on the side of the angels. We see evidence of the pacifying effects of government in the way that rates of killing declined following the expansion and consolidation of states in tribal societies and in medieval Europe. And we can watch the movie in reverse when violence erupts in zones of anarchy, such as the Wild West, failed states and neighborhoods controlled by mafias and street gangs, who can’t call 911 or file a lawsuit to resolve their disputes but have to administer their own rough justice.

Really? The state is the pacifying force? This is an astonishing claim. Sixty years ago, states across the world mobilised to engage in mass-killing the like of which the world had never seen — industrial slaughter of astonishing efficiency. The concentration of power in the state has at times led to more violence, not less. World War 2 left sixty million dead. Communist nations slaughtered almost 100 million in the pursuit of communism. Statism has a bloody history, and the power of the state to wage total destruction has only increased in the intervening years. Pinker continues:

Another pacifying force has been commerce, a game in which everybody can win. As technological progress allows the exchange of goods and ideas over longer distances and among larger groups of trading partners, other people become more valuable alive than dead. They switch from being targets of demonization and dehumanization to potential partners in reciprocal altruism. For example, though the relationship today between America and China is far from warm, we are unlikely to declare war on them or vice versa. Morality aside, they make too much of our stuff, and we owe them too much money. A third peacemaker has been cosmopolitanism—the expansion of people’s parochial little worlds through literacy, mobility, education, science, history, journalism and mass media. These forms of virtual reality can prompt people to take the perspective of people unlike themselves and to expand their circle of sympathy to embrace them.

Commerce has been an extremely effective incentive toward peace. But commerce may not be enough. Globalisation and mass commerce became a reality a century ago, just prior to the first global war. The world was linked together by new technologies that made it possible to ship products cheaply from one side of the globe to the other, to communicate virtually instantaneously over huge distances, and a new culture of cosmopolitanism. Yet the world still went to war.

It is complacent to assume that interdependency will necessitate peace. The relationship between China and the United States today is superficially similar to that between Great Britain and Germany in 1914. Germany and China — the rising industrial behemoths, fiercely nationalistic and determined to establish themselves and their currencies on the world stage. Great Britain and the United States  — the overstretched global superpowers intent on retaining their primacy and reserve currency status even in spite of huge and growing debt and military overstretch.

In fact, a high degree of interdependency can breed resentment and hatred. Interconnected liabilities between nations can lead to war, as creditors seek their pound of flesh, and debtors seek to renege on their debts. Chinese officials have claimed to have felt that the United States is forcing them to support American deficits by buying treasuries.

Who is to say that China might not view the prize of Japan, Taiwan and the Philippines as worthy of transforming their giant manufacturing base into a giant war machine and writing down their treasury bonds? Who is to say that the United States might not risk antagonising Russia and China and disrupting global trade by attacking Iran? There are plenty of other potential flash-points too — Afghanistan, Pakistan, Venezuela, Egypt, South Africa, Georgia, Syria and more. Commerce and cosmopolitanism may have provided incentives for peace, but the Great Pacification has been built upon a bedrock of nuclear warheads. Mutually assured destruction is by far the largest force that has kept the nuclear-armed nations at peace for the past sixty seven years.

Yet can it last? Would the United States really have launched a first-strike had the Soviet Union invaded Western Europe during the Cold War, for example? If so, the global economy and population would have been devastated. If not, mutually assured destruction would have lost credibility. Mutually assured destruction can only act as a check on expansionism if it is credible. So far, no nation has really tested this credibility. Nuclear-armed powers have already engaged in proxy wars, such as Vietnam. How far can the limits be pushed? Would the United States launch a first-strike on China if China were to invade and occupy Taiwan and Japan, for example? Would the United States try to launch a counter-invasion? Or would they back down? Similarly, would Russia and China launch a first-strike on the United States if the United States invades and occupies Iran?

Launching a first-strike is highly unlikely in all cases — mutually assured destruction will remain an effective deterrent to nuclear war. But perhaps not to conventional war and territorial expansionism. With the world mired in the greatest economic depression since the 1930s, it becomes increasingly likely that states — especially those with high unemployment, weak growth, incompetent leadership and angry, disaffected youth —  will (just as they did during the last global depression in the 1930s) turn to expansionism, nationalism, trade war and even physical war. Already, the brittle peace between China and Japan is rupturing, and the old war rhetoric is back. These are the kinds of demonstrations that the Communist Party are now sanctioning:

And already, America and Israel are moving to attack Iran, even in spite of warnings by Chinese and Pakistani officials that this could risk global disruption. Hopefully, the threat of mutually assured destruction and the promise of commerce will continue to be an effective deterrent, and prevent any kind of global war from breaking out. Hopefully, states can work out their differences peacefully. Hopefully nations can keep war profiteers and those who advocate crisis initiation in check. Nothing would be more wonderful than the continuing spread of peace. Yet we must be guarded against complacency. Sixty years of relative peace is not the end of history.