Monday, December 10, 2012

Do Business Friendly Policies Reduce Poverty?

Is the goal of making states more competitiveness for business synonymous with the goal of  reducing poverty?

There is a long history of believing that business success, measured by profits, is the best way to create jobs and lift people out of poverty . With the rise in corporate class conservatives since the late 1970’s the prevailing wisdom has become that whatever advances the interests of business serves the masses and promotes prosperity for all. It is a tenant of faith that a healthy business climate and robust commerce creates jobs (subtext: for those who what to work) and individual prosperity. The poor are poor, according to this narrative, because government laws and regulations restrict business and commerce. Common is the belief that direct government aid to the poor fosters poverty and welfare dependency. According to this thinking, government should do what ever it take so businesses prosper and then leave it up to the individual to take advantage their employment opportunities for personal advancement.

Some form of these ideas can be seen everywhere. In this past election Mitt Romney’s entire campaign for President was grounded in the idea that business prosperity was the key to growing jobs and the economy. The California’s Republican Party Website is even more explicit. It state, as “Core Beliefs”:

“… each person is responsible for his or her own place in society. The Republican philosophy is based on limiting the intervention of government as a catalyst of individual prosperity… Republicans believe free enterprise has brought economic growth and innovations that have made this country great. Government should help stimulate a business environment where people are free to use their talents. “[California Rep Committee Philosophy]

In other words, it is the role of government to promote a robust economy and the responsibility of industrious individuals to take advantage of economic opportunities on their own.

While the sufficiency of business and the free market to lift all boats is mostly a conservative idea, it is not a partisan idea. It has been expressed and pursued very often by Democrats as well as Republicans. In this past Presidential election there was almost no mention by either party of how they would help the poor beyond growing the economy to get people back to work.

So how is that working out, America? This should be an empirical question that can be tested by examining the data. Are business interests and the interests of working class consumers perfectly aligned, or are there points of departure where the needs of ordinary citizens and their families cannot be met without compromising some business interest? First, lets look to see if profits and job growth or wage grow are correlated.

Profits, Employment and Wages

If conventional wisdom holds true, then wages and employment should rise and fall commensurate with corporate profits.

In June of 2012, the St. Louis Federal Reserve released data showing that corporate profits in the U.S. had hit an all-time high. The graph (below) plots corporate profits (CP) as a percentage of gross domestic product (GDP) from 1940 to 2011. GDP is total value of all goods and services sold, so it is a general measure of size or our economy. The shaded areas represent period of recession.

The next graph plots the number of employed Americans as a percentage of our population. This graph shows that there are actually fewer people working today, as a percentage of the total population, than at any time in the past three decades. Last June, in an article related to this graphs, Business Insider magazine speculated that one reason corporations are so profitable is that they don’t employ as many Americans.

If a lower percentage of hiring is one reason corporations are recording record profits, this next graph is the other. This third graph shows total U.S. wages as a percentage of the economy (GDP). Wages are at an all-time low relative to the wealth being generated.

In short, corporate profits are at a record high, employment and wages are at a record low. If profitability and robust commerce is supposed to grow jobs the evidence seems to prove the opposite. The experience of working class consumers over the past several recessions, in fact, is of jobless recoveries. The stock markets and corporate profits recovered while family level economies have not, and median family incomes are shrinking.

Are factors considered good for business also good for people?

When considering which factors make for a more robust, more competitive business environment it is instructive to consider the global view. The World Economic Forum recently published a study on global business competitiveness that ranks 144 nations according to indicators in 12 categories. Overall, the United States is very competitive, ranking 7th out of 144 countries. When you drill down in some of the 12 categories, however, you find factors favorable for business that don’t seem favorable for workers their families.

For example, In the area of Labor Efficiency our labor redundancy costs (12thplace) are low. This variable estimates the cost of advance notice requirements, severance payments, and penalties due when employers choose to terminate “redundant” worker. The low cost incurred by U.S. business in firing their workers are apparently a plus for business competitiveness. The U.S. also did well, 8th in the world, the ease of hiring and firing people. All of this makes for a “flexible” work force, which is good for companies, but it simply isn’t good for workers or their families.

Are the states with the most competitive business environments doing better at lifting people out of poverty?

Every year for the past five, CNBC has scored all 50 states on 43 measures of competitiveness developed with input from business groups including the National Association of Manufacturers and the Council on Competitiveness. States receive points based on their rankings in each factor and the factors are organized into broader categories. CNBC apparently doesn’t present the finds for individual factors, but describes them in general descriptions of each category. In the category of “Workforce” for instance, the prevalence of unions is a negative factor for business while lower costs of doing business is a positive factor. Among the factors creating a low cost for doing business in a state are low tax rates and tax payer funded incentives or tax abatements.

How well are these business interest factor work to reduce poverty in the state? I created the following table to compare the poverty levels of the ten poorest and ten wealthiest state against the business friendly factors that CNBC used in their study.

The ten poorest states, from the lowest upward, are: Mississippi, Arkansas, Kentucky, Louisiana, New Mexico, West Virginia, Oklahoma, Texas, Alabama and South Carolina.

The ten richest state, from the richest down, are: New Hampshire, Maryland, Alaska, New Jersey, Hawaii, Connecticut, Wyoming, Utah Minnesota and Massachusetts.

The following table shows the result of comparing business competitiveness directly with poverty rates in the states.

It’s striking that the poorest states are also more business competitive. The average rank in over all competitiveness for the ten richest states is 7 point lower than for poor state. The ranking for the “cost of business” measures for the ten poorest states is 18, less than half what it is for richer states. The average ranking for the ten poorest states on workforce measures (20) is an indication of the relative lack of unionization. The riches ten states have an average rank of 32nd.Business Competitiveness Ranking data from CNBC’s Top States for Business Special Report:

The ten poorest states have a total of over eight-million poor citizens while the richest ten states have a little over three-million poor. Seven out of 10 poor state are represented by conservative Republican governors, while six out of 10 wealthy states are represented by less conservative Democratic governors.

So, do the goals of making business more competitive and reducing poverty appear to be synonymous or harmonious goals? A healthy economy is obviously a prerequisite to individual prosperity, but clearly business interests are not always aligned with the interests of working class consumers. Some interests that improve the “business climate” appear contrary to the best interests of employees and their families. More importantly, business prosperity is no longer positively correlated to job growth or increased wages. The social contact that had wages rising lock step with productivity was broken in the late 1970’s. Advances in automated manufacturing in combination with outsourcing labor overseas has reduced the number of good paying jobs here in America. As a result, businesses here can flourish while the welfare of working class consumers declines. It seems clear that the interests of human beings and the interests of American businesses are not the same.

Our national dialogue rarely touches on how unrestrained commerce impacts the lives of ordinary citizens, the poor and or those who are less valued in society. Mounting evidence clearly shows this conversation needs to take place. The ascendancy of the business elite has given rise to commerce without a social conscience, and too many of our fellow citizens are being left behind.

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