Do Pro-Business Policies Reduce Poverty?

President Calvin Coolidge once said, "... the business of the American people is business."  He was quoted out of context at the time.  His remarks were aimed at newspaper reporters who were inept at covering business news, but this intentional misquotation seemed to sum up his economic policies.

Today this misquote seems prophetic. Political leaders from both parties speak as if whatever benefits business benefits the people.  State governments offer tax breaks and business friendly regulations to attract companies that might bring in more jobs.  This is especially true in less wealth states where poverty rates are high.  President Lyndon Johnson’s War on Poverty has been transformed into pro-business politics and the promise of work for the worthy.

It is true that the poor need jobs, but the causes of poverty are more complex.  There is little regard for other factors such as the need for quality daycare, health care access, job training or transportation. Journalists rarely asks politicians how they plan to help the poor.  When they do, candidates talk about their plans to grow the economy.  This has some become an acceptable answer.

The insurgent idea that serving business interests is the best way to fight poverty arguably arose in the mid 1970’s when corporate interest groups were forming and the business lobby became a powerful influence on Congress.   This was the high water mark of American unions as organized business groups launched campaigns to turn Congress and public opinion against them.  

At the same time these industry lobbying groups began fermenting hysteria over the growing “welfare state.”  The poor were poor, they argued, because anti-poverty programs make people dependent on government handouts while government regulations restrict the ability of companies to create jobs for those willing to work.  According to their narrative, government needed to spend more resources supporting commercial interests and deregulating markets.  President Reagan road these pro-business, anti-union, anti-government sentiments to the White House in 1980.

The success of the pro-business movement is evident.  In this past election Mitt Romney’s entire presidential campaign centered around the idea that business prosperity was key to growing jobs and the economy. The California Republican Party explicitly incorporates this thinking in their 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 http://cagop.org/inner.asp?z=585A]

In other words, it is the role of government to facilitate the business economy but each individual’s responsibility to avail them self of the opportunities businesses provide.

The sufficiency of robust commerce to lift all boats isn’t just a conservative or partisan idea. It is expressed and pursued often by Democrats as well. In this last election even President Obama avoided talking about the poor by referring to them as “those aspiring to be middle class.”  There was almost no mention by either party of how they would accomplish this beyond trying to growing the economy.

So how well is our pro-business politics working out for the poor? This should be an empirical question that can be tested by examining the data. Are business interests and the interests of the poor perfectly aligned? Are there points of departure where the needs of some folks cannot be met without compromising some business interests?  Most importantly, does the data show that when businesses are doing well there are more jobs and better wages?

Profits, Employment and Wages

Corporate profits are a measure of how well businesses are doing, so conventional wisdom would say wages and employment should rise and fall commensurate with corporate profits.    The hypothesis is that when companies do well there are more good paying jobs and therefore less poverty.  Is there evidence to the contrary?

In June of 2012, the St. Louis Federal Reserve released data showing a number of economic indicators over the last 71 years.  Using their report, 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 and a good measure our economy. The shaded areas represent periods of recession.  This graph shows that corporate profits rebounded since the 2007 recession and are at the highest level since 1940. The recession is clearly over for corporate America.

 

Does it therefore hold true that robust corporate profits mean more jobs?  The next graph plots the number of employed Americans as a percentage of our population. This graph uses an employment per population percentage because the population doesn’t stop growing during recessions.  A fair comparison over time has to incorporate population growth for the same reason dollar comparisons over time have to fact in inflation.

This above graph shows that there are actually fewer people working today as a percentage of the population than at any time in the past thirty years. Last June, in an article related to this graphs, Business Insider magazine speculated that one reason corporations are so profitable is that they aren’t employing as many Americans.

Does it also hold true that robust corporate profits means better wages?  The next graph depicts the total amount of U.S. wages paid as a percentage of the value of all goods and services sold (GDP). It shows that wages are at an all-time low relative to the wealth being generated.  If jobless recoveries are one reason for record corporate profits, the decline in wages pictured in this next graph may be the other.

It turns out that the null hypothesis is true.  Corporate profits are at a record high, employment and wages are at a record lows and the notion that what is good for business is good for people is false. The stock markets have recovered.  Corporate profits have recovered, but the financial well-being of families have declined. Median incomes are shrinking and prospects for the poor are increasingly dismal.

Are Measures of Business Competitiveness Compatible with the Interests of Individuals?

When considering what factors make businesses more competitive it’s best to take a broad global view. A global survey of business competitiveness was recently conducted and released by the World Economic Forum. The study on global business competitiveness ranks 144 nations according to indicators grouped in 12 general 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 indicators favorable for business that are clearly at odds with worker interests.  For example, In the area of “Labor Efficiency” the U.S. labor “redundancy” costs are low, which means it doesn’t cost as much here to fire employees.  This makes us more competitive (12^th place) on this measure. This variable includes the estimated costs of providing advance layoff notices, severance payments any penalties that other countries might imposed on employers for terminating “redundant” worker. The U.S. may be more competitive in this measure, but is this factor good for individual workers?  Does it reduce poverty?

The U.S. also did well (8^th) when it comes to the ease of hiring and firing people. All of this makes for a “flexible” work force, which is good for business, but does it stabilize the workforce or encourage employers to try and weather out minor economic storms?

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

Every year for the past five years CNBC has scored all 50 states on 43 measures of business competitiveness.  This survey was 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. I was unable to locate a detailed list of factors within each category, but  CNBC has published general descriptions of each category. In the category of “Workforce” for instance, they indicate that the prevalence of unions in a state is a negative factor for business competitiveness, while lower costs of doing business is a positive factor. Among the factors creating low costs for doing business are lower tax rates and tax incentives or tax abatements for business.  The general category findings for each state are published.

Getting back to the hypothesis. that when companies do well there are more good paying jobs and less poverty, are the states with the most competitive business environments also doing better to relieve poverty in those states?

To answer this question I used the CNBC business competitive findings to compare against the ten states with the highest rates of poverty and the 10 states with the lowest poverty rates. The ten states with the highest levels of poverty are, in order from the bottom up, Mississippi, Arkansas, Kentucky, Louisiana, New Mexico, West Virginia, Oklahoma, Texas, Alabama and South Carolina.  The ten states with the lowest rates of poverty, starting from the top, are New Hampshire, Maryland, Alaska, New Jersey, Hawaii, Connecticut, Wyoming, Utah, Minnesota and Massachusetts.  The results of this analysis are found in the table below.

Business Competitiveness Ranking data from CNBC’s Top States for Business Special Report: http://www.cnbc.com/id/100000994

It’s striking that states with the highest poverty levels are also states that are more business competitive. The average rank in “Overall Business Competitiveness” for high poverty states is 7 point higher (more business friendly) than the rank for low poverty states.  In the “cost of business” category, high poverty states have an average rank of 18 verses 37 for low poverty states.  In the “workforce” category, which includes the prevalence of unions in a state, the high poverty states have an average rank of 20 verses 32 in low poverty states.

Despite being “business friendly” the ten high poverty states have over eight-million poor citizens while the ten low poverty states have just over three-million poor. There may be some political asymmetry as well since 7 out of 10 states with the high poverty rates have conservative Republican governors, while 6 out of 10 low poverty states have Democratic governors.

Conclusion
While a healthy economy is necessary for individual prosperity, it is clearly not sufficient.   What is best for business may be good for some, but not for all of our citizens.  There are certain business interests at odds with individual interests. Our political leaders need to acknowledge this when making policy.

The total dominance of pro-business politics has successfully crowding out meaningful debate on how to help the poor, the ranks of whom are swelling every year.  The poor are more marginalized and invisible than ever.  Almost no one speaks for them.  There is no hope for them in the more competitive business policies being proposed.  In fact, business prosperity is no longer well correlated with job growth or adequate pay, so plans to grow the economy ring hollow. The social contact that once pegged wage increases with increased productivity is broken. As a result, big business can flourish while the welfare of workers and the poor decline. This is unacceptable.

The ascendance of pro-business politics has given rise to commerce without conscience and too many ordinary citizens being left behind.  We need to change the dialogue and strike a better balance.  We need to reclaim the role that government must play in meeting the needs of all our people.