Is the UN Marxist?

Dr. Flassbeck

I recently stumble upon an interview of Dr. Heiner Flassbeck the Director of  the United Nations Conference on Trade and Development’s department on Globalization and Development Strategies. In that interview he raised two points (at least in the first 5 minutes I forced myself to watch). The first one was that wages were broadly stagnant. The second point was that a struggle was occurring: not between north and south, not between developed and developing but between labor and capital! I’d first like to point out that he did not credit Marx with his assertion (plagiarizing a**). His ”refuses to die” idea was backed up with a chart of logged real wages and productivity from a speech given at the University of Berkeley by Damon Silvers. The chart showed that both variables tracked each other fairly precisely until the 1970’s at which point the growth trend of real wages unperformed that of productivity.

Now if we assume that the un-referenced data is correct and that by productivity it is implied labor productivity and that we are discussing about a chart describing the American labor situation, at face value it would seem that Dr. Flassbeck is right. But before throwing in the towel and replacing all our Bibles with Das Kapital (if you own a Bible), let’s examine the issue a little closer. Using a super standard macroeconomic growth model:

 where α and 1-α are the proportions of capital and labor respectively used to produce GDP (here Y) and with the entrepreneur/employer/firm/corporation/capitalist/slave driver trying to maximize profit through:

  we can derive what actually drives output growth per worker! It turns out it isn’t capital, it isn’t labor, it isn’t the choice of using one over the other it is… drum roll please… technology. So macro 101 tells us that productivity growth in the long run occurs because of improvements in technology. Even a business grad could have told you that. The crux of the problem however is that this very same econ 101 lesson would have told you that labor wage equals the productivity of that labor, like in the first 20 years of the chart.

Everything converges to trend eventually

The thing about this model is that it counts all labor as being the same. Try telling a German worker he’s the same as a Greek one. The real catalyst for the dichotomy resides in globalization, something Flassbeck seems to deny. If instead of calculating the productivity of labor  we calculate the productivity of capital we see that it is dependent on labor. A typewriter doesn’t write scripts without a writer. Let’s say as a publisher you can print 10,000 copies of a good book written by a French philosopher in the 18th century. Let’s say that suddenly an American writer comes along and is willing to be payed a quarter of the Frenchmen’s wage. While the French Voltaire still writes better books (is more productive) he has to convince you that your printing presses will make more money printing his book than say an increasingly popular Jefferson’s (increasingly productive). While for arguments sake the french 18th century writers are better than their american counterparts to not let the latter look like a good bargain the French will have to drop their wage demands. Similarly American workers need to start asking for less even if they are more productive than their Chinese rivals.

The reason for this is that we cannot look at the productivity of labor and wages in a closed circuit but rather in a World wide context. So while I’m sure the communist chart is correct in it’s assertion that industrialized wages aren’t keeping up with its equivalent productivity, I’m quite certain that on a global basis the gap between the real wage and labor productivity is shrinking. Just to be sure I’ll be crunching some numbers and getting back to you on this after exams.

“Francois Hollande” or “Homo Economicus Has Left the Room”

Many people may be forgiven for forgetting that France is one of the Worlds great nations. Let’s gloss over some of France’s economic credentials. Fifth largest nominal GDP, ninth largest in PPP adjusted terms and second largest economy in the European Union. Fifth largest exporter in the World, with over half a trillion of exports annually. Member of the G8 countries, G20 group, OECD, third highest military spending in the World and second largest gross foreign aid provider. Needless to say this stature and success has arisen because of the hard work, industriousness, and entrepreneurial spirit of the French people. The French people while reveling in their stature externally are much more cynical about their successes at home. Most Frenchmen speak of the “Glorious Thirty” and the “Pitiful Thirty” years, eras of post-war economic boom and subsequent economic stagnant malaise. Much attention and commentary is dedicated in political and intellectual circles to restoring the lost equilibrium of previous times of plenty. Much media analysis revolves around the stagnant fortunes of the French way of life and the middle class’ dwindling standard of living.

The French are also quite the political people. A country were successive constitutions have put the onus of wealth creation on governments and on individuals but only through their political choices. France thus, has seen successive ideologies and political currents wrestle with the central question of balancing collective wealth and well being with that of the individual. One might assume that through its rich political and governmental experiences certain lessons of history might have been learned. Moreover, the French being great internationalists and multilateralists, one might further assume that the country strives to benefit from the experience of its fellow nations with regard to its great equity dilemma. One would, seemingly, be wrong to assume these things. The popularity of France’s current presidential candidate front-runner would leave any Homo economicus perplexed.

The first big splash by the ‘Parti Socialiste’ presidential candidate came when he announced on live television that he wanted to impose a 75% top marginal income tax rate for revenues over a million euros. Other policies announced supposed to reduce ‘inequality’ were; a maximum lowest paid worker to CEO salary ratio of 1 to 20 and a new tax bracket from 150 000 euros to 1 000 000 at a higher 45% marginal rate (currently standing at ~41%). In Hollande’s campaign platform other musings are added to the effect of reducing income tax deductibles for the wealthy. Now, what might be the effect of such policies? (aside from giving Swiss bankers a collective orgasm). One effect would be to vilify the wealthy, to the point where many might leave, if not most. Since most wealthy people (first generation at least) are entrepreneurial and industrious business builders, maybe the intention is to reduce wealth and job creation? One French daily has aptly called the phenomenon of geographical tax jurisdiction arbitrage “Fiscal Exodus”. If the Laffer curve central thesis remains correct, all other things equal, the number of wealthy Frenchmen in Brussels, Geneva and London may well continue to swell.

Ultimately these measures are only for show. They only serve the populist and demagogic purpose of insuring the poor and disenfranchised vote with the socialist. A Hollande aide confessed that the measure might only bring in 250 million extra euros to the treasury, a paltry sum compared to the economic damages the policies will wrought. A policy that is sure to impact the treasury much more severely will be the promise to return the minimum legally insured retirement age back to 60 years of age. The present right of center French administration pushed through an increase in the minimum legally guaranteed retirement age to 62 from sixty back in 2010. The measure was put into place to more or less avoid a Greek fiscal fiasco when baby boomers begin to retire ‘en masse’. Francois Hollande plans to jettison that law, because he believes, apparently, that for every 2 years worked in one’s life, one deserves a year of retirement on average. Add on to that policy his intention to re-tinker the corporate tax rate (35% for large co.’s and as low as 15% for very small enterprises) this would cement France’s third place in the highest corporate tax rates for industrialized nations category. Combine the fact that progressiveness in corporate tax rates is just an incentive for small corporations to generate a maximum of dividend by not reinvesting profits into growth and the fact those marginal rates are going up and it would seem the French Socialist Party is on a war against international competitiveness!

While the above policies don’t really hold up to current economic thought standards, they can be forgiven as staples of the Left’s campaigning and showmanship. The policies that really drive me up the wall are Hollande’s policies towards the Euro. The first policy is one of negotiating a new fiscal treaty where Euro bonds would be issued. With benchmark French 10 year bonds yielding over 90 basis points over similar maturity German Bunds, the trans-Rhine cash grab is barely veiled. No wonder Angela Merkel does not want to meet her greedy potential counterpart. The second Euro Zone focused policy is even more morally hazardous than the first. The socialist candidate wants the ECB to adopt a dual mandate of inflation targeting and growth promotion. Never mind the moral hazard of bailing out broke Euro members, has nobody in the socialist party opened a Monetary Policy introductory book in the last 20 years? Since the early 1990’s central bank after central bank have shifted their monetary policy objectives from currency targeting and growth maximization to inflation targeting with invariably positive results. For a leading candidate to the highest public office of one the greatest nations of the World, to have such a crass and laymen understanding of fundamental economics is astounding to say the least.

So, while arguably the most archaic central bank of them all (the Fed) moves towards greater transparency and is subtly shifting its policy onus from a balance between inflation and growth towards inflation targeting, the French socialists want the ECB to move 20 years backward and forsake its stellar inflation record. Hollande could just as well shout out “To hell with responsibility and orthodoxy”. So let us recap. While the American Left embodied by the democrats and President Obama talk of lowering corporate taxes (to 28% at last check) and encourage the Fed to be more contemporary, the French Left embodied by Hollande wants to turn back the clock of time to a time were symbolism and intentions matter more than results, where its central bank would be ‘nicer’ to poor countries and its corporate tax rate would be higher. Let’s hope that sober economic thought prevails at the end of this campaign, because so far it’s only been mired in intellectual mediocrity. France has always wanted to go against the grain of conformity, who would have know that being conform even in success was so distasteful.

Shout out to our Ghanaian readers!

Cius