From a comment over at Economist’s View, by someone identified only as ‘pm.’

Everyone knows that Ronald Reagan reduced income taxes (more than one half for the wealthy); what is less commonly understood is that he extensively offset this by raising payroll taxes(more than double for most self-employed). Today, most American families pay more in payroll taxes than they do in income taxes. Between 1946 and 1981, income taxes averaged 12%(+/-1%) of normalized GDP. Reagan reduced income taxes to near 9%. Clinton increased them back to 12%; and Bush/Obama reduced them again to 9 %(and below). However, on budget expenses(which excludes Medicare,Social Security, Iraq war and stimulus) have remained 12%(+/-1%) of normalized GDP throughout. The deficit in income taxes has been financed by borrowing, largely from the Social Security trust fund.  When Clinton raised income taxes back to 12%, this eliminated the on budget deficit. The CBO projected that this, plus the Social Security and Medicare surpluses, was enough to pay off the entire US debt by the time that the Social Security/Medicare trust funds would have to be amortized for beneficiary payments, all without having to raise taxes to pay for the amortization of those trust funds. Like Reagan before him, Bush took those excess payroll tax receipts and gave them “back” as income tax reductions, heavily weighted to the wealthy–who didn’t create those surpluses in the first place. By doing this, Bush guaranteed that income taxes would have to be raised in order to amortize the trust funds. The failure to do so simply permits the 1% to steal the money contributed by workers for their retirement. Everything about not raising taxes or limiting expenses, is about stealing the 99%’s money. The national debt has been caused primarily by income taxes which were reduced far below their historic 12%(+/-1%), not by on budget expenses, which have remained at their historic 12%(+/-1%) throughout. These taxing games have transferred $ trillions from the 99%’s payroll taxes to subsidize income taxes.

Beezer here.  And so the ongoing theft is revealed.  The Bush tax cuts, which favored the wealthy, effectively transferred Social Security surpluses back primarily to the wealthy by running public deficits.  The deficits insured that tax raises, or entitlement cuts, would be needed in the future.  Guess which ‘solution’ is on the table?: Entitlement cuts.  Republicans refuse to consider tax increases, and both democrats and republicans favored payroll tax cuts to fight the recession.  Unless the general public learns how their pockets are being picked, they will be picked.  They will lose their social security and medicare benefits.  That’s the plan.  And it’s working well so far.

Keynes described the phenomenon where there’s an almost insatiable desire to save with the natural result of declining consumption and investment (demand).  This is a specific type of recession, or depression, and the recuperative cures are clearly laid out by Keynes in his work The General Theory of employment, interest and money.

Here’s a quick post over at macromarketmusings that shows our economic position and it exactly describes what Keynes so perceptively explained would be the case.

Friday, July 8, 2011

The Employment Report Shouldn’t Be a Surprise

The demand for money and money-like assets remains elevated as indicated in the figure below.  This means nominal spending remains depressed.  Until this changes we shouldn’t be surprised by employment reports like the one we got today.

Update: Here is the household sector’s money and money-like assets as a percent of total household assets plotted against the same civilian-employment population ratio. The money and money-like assets include the following: cash, checking account funds, time and saving account funds, money market funds, and treasury securities.

 

In the short term Keynes said the government will have to spend in proportion to the decline in demand caused by the increase in savings.  Going into the recession demand declined by $1.4 trillion annually but the amount of government spending that was directed at increasing demand was, net, about $300 billion annually.   Most of the spending went to efforts at shoring up insolvent bank balance sheets.  From Dean Baker at the Center for Economic and Policy Research here.

People who have the hubris to know arithmetic would also point out to Brooks that the “huge” stimulus did not fail because they knew from the onset that it was nowhere near large enough. The annual stimulus was around $300 billion in each of 2009 and 2010. The loss in annual demand from the collapse of the housing bubble was around $1.4 trillion. Followers of arithmetic know that $1.4 trillion is considerably larger than $300 billion, therefore they did not expect the stimulus to be anywhere near sufficient to boost the economy back to full employment.

Economist Paul Krugman points out that this type of situation can render traditional monetary policies less effective–the so-called ‘pushing on a string’ problem.    The Federal Reserve finds itself in this type of situation.  The Fed has flooded capital markets with liquidity and dropped short term interest rates effectively to zero.   Yet the private economy remains sluggish still, almost three years later.  Krugman says fiscal policy, not more monetary easing, is what’s needed.  That could mean anything from specific tax cuts (something we’re doing in spades right now but with not enough forthcoming in the way of new jobs) to large infrastructure projects (something I think would be more effective, taxes in my opinion have at best secondary effects on economies).

OK, David Brooks has what amounts to a reply. I don’t want to get into a tit for tat. But I do want to take on the claim that believing that simple actions can bring big improvements in the economy amounts to belief in magic.

The key point here is the difference between raising the economy’s long-run growth rate, which is very hard, and increasing demand when the economy is operating below potential, which isn’t hard at all.

Look: under normal conditions, when interest rates are well above zero and there’s room for conventional monetary policy to operate, we actually take it for granted that the Fed can produce dramatic acceleration of short-run growth. When Paul Volcker decided in 1982 that the economy had suffered enough, he loosened the reins — and it was Morning in America.

Now, of course,the Fed funds rate is already zero, so Bernanke can’t just slash the rate. But the same logic through which looser monetary policy can produce a rapid economic turnaround now applies to fiscal expansion.

Stroking your chin and saying, well, I don’t believe in magical solutions because experience shows that raising growth is hard sounds serious, but it’s actually silly. It’s like saying that it’s really hard to extend the human lifespan, so it’s foolish to believe that an infection can be quickly cured with a dose of antibiotics.

But haven’t we tried a huge fiscal expansion? No, we haven’t. The ratio of spending to GDP is up because GDP has fallen and safety net programs like unemployment insurance and Medicaid are covering more people — that is, what we’re looking at isn’t stimulus, it’s the consequences of the slump.

The point is that realizing that there’s a lot you can do to reverse a short-term slump isn’t magical thinking — it’s what basic macroeconomics, what we learned through hard thinking and hard experience, tells us. Rejecting all that may sound judicious, but it’s actually an act of intellectual amnesia.

And in another Krugman, New York Times op-ed piece, he explains this in a little more detail.

Our failure to create jobs is a choice, not a necessity — a choice rationalized by an ever-shifting set of excuses.

Excuse No. 1: Just around the corner, there’s a rainbow in the sky.

Remember “green shoots”? Remember the “summer of recovery”? Policy makers keep declaring that the economy is on the mend — and Lucy keeps snatching the football away. Yet these delusions of recovery have been an excuse for doing nothing as the jobs crisis festers.

Excuse No. 2: Fear the bond market.

Two years ago The Wall Street Journal declared that interest rates on United States debt would soon soar unless Washington stopped trying to fight the economic slump. Ever since, warnings about the imminent attack of the “bond vigilantes” have been used to attack any spending on job creation.

But basic economics said that rates would stay low as long as the economy was depressed — and basic economics was right. The interest rate on 10-year bonds was 3.7 percent when The Wall Street Journal issued that warning; at the end of last week it was 3.03 percent.

How have the usual suspects responded? By inventing their own reality. Last week, Representative Paul Ryan, the man behind the G.O.P. plan to dismantle Medicare, declared that we must slash government spending to “take pressure off the interest rates” — the same pressure, I suppose, that has pushed those rates to near-record lows.

Excuse No. 3: It’s the workers’ fault.

Unemployment soared during the financial crisis and its aftermath. So it seems bizarre to argue that the real problem lies with the workers — that the millions of Americans who were working four years ago but aren’t working now somehow lack the skills the economy needs.

Yet that’s what you hear from many pundits these days: high unemployment is “structural,” they say, and requires long-term solutions (which means, in practice, doing nothing).

Well, if there really was a mismatch between the workers we have and the workers we need, workers who do have the right skills, and are therefore able to find jobs, should be getting big wage increases. They aren’t. In fact, average wages actually fell last month.

Excuse No. 4: We tried to stimulate the economy, and it didn’t work.

Everybody knows that President Obama tried to stimulate the economy with a huge increase in government spending, and that it didn’t work. But what everyone knows is wrong.

Think about it: Where are the big public works projects? Where are the armies of government workers? There are actually half a million fewer government employees now than there were when Mr. Obama took office.

So what happened to the stimulus? Much of it consisted of tax cuts, not spending. Most of the rest consisted either of aid to distressed families or aid to hard-pressed state and local governments. This aid may have mitigated the slump, but it wasn’t the kind of job-creation program we could and should have had. This isn’t 20-20 hindsight: some of us warned from the beginning that tax cuts would be ineffective and that the proposed spending was woefully inadequate. And so it proved.

It’s also worth noting that in another area where government could make a big difference — help for troubled homeowners — almost nothing has been done. The Obama administration’s program of mortgage relief has gone nowhere: of $46 billion allotted to help families stay in their homes, less than $2 billion has actually been spent.

So let’s summarize: The economy isn’t fixing itself. Nor are there real obstacles to government action: both the bond vigilantes and structural unemployment exist only in the imaginations of pundits. And if stimulus seems to have failed, it’s because it was never actually tried.

Listening to what supposedly serious people say about the economy, you’d think the problem was “no, we can’t.” But the reality is “no, we won’t.” And every pundit who reinforces that destructive passivity is part of the problem.

Beezer here.  Krugman has a speech available he made at a conference on Keynes.  In it he describes his interpretation of what Keynes wrote about depression economics and why not understanding Keynes (he’s not taught much at economics schools today) means we’re repeating all the same mistakes we made going into the Great Depression.  Keynes identified fallacies in classic economics that come to the fore in financially caused recession, or depression.  Krugman maintains modern economists were never taught Keynes and as a result are falling today  for the same fallacies.  Unfortunately, this includes all Republicans, and most unfortunately it appears Obama too.

Back in the day I used to subscribe to National Review, the mother magazine of old style Republicans.  But as the Republican Party started moving into bizarro land I dropped my subscription and, eventually, dropped my membership in the GOP.  After 40 years.  That said there does appear to be some semblance of reality still left at the Review.   Not much.  Just a sliver. So here it is from an article by NR writer Josh Barro regarding the debt standoff.

Stupid Debt Brinksmanship

May 20, 2011 3:48 P.M.

By Josh Barro

As Brian Beutler summarizes over at Talking Points Memo, a number of Republican officials (including Pat Toomey and Paul Ryan) are relying on advice that a brief default on federal bonds would not rattle the financial markets:

Ryan told [CNBC] that he talks to “lots of bond traders” and “lots of economists” and they all say that investors are willing to put up with a default of “a day or two or three or four” if it produced massive budget changes as part of a Capitol Hill debt limit deal.

This is a very dangerous thing for policymakers to think.

The problem is not that these traders are necessarily wrong. None of the previous debt limit impasses has led to a temporary bond default, and it’s possible that a brief default really would be just a minor hiccup. Unfortunately, it’s also possible (as many other voices on Wall Street are warning) that a default would permanently raise Treasury spreads, drive investors to find alternative safe havens, cause a double-dip recession, and unleash various other evils. So, if they are willing to create the possibility of a default, Republicans in Congress are willing to expose America to severe downside risk.

It’s important to step back and consider the stakes here. Republicans say it is important, above all else, to rein in federal government spending. But the risk with excessive spending is not that government will literally become unaffordable or that we will be unable to service our debts. The United States has tremendous available fiscal capacity, as demonstrated by significantly higher tax burdens in most other first-world countries. The real risk of elevated spending is that we’ll adopt a permanently higher level of taxation.

That is a risk, but not a catastrophic one. While there is a link between government spending and economic growth, it is not as strong as conservatives like to believe. For example, Mueller and Stratmann find that a one percentage point rise in government spending as a share of GDP will tend to reduce annual GDP growth by a bit under one-twentieth of a percentage point. If we take Simpson-Bowles as an example of the sort of deficit deal that might be achieved in the medium term without the need to flirt with a bond default, then we’re talking about a difference of one to two points of GDP in government spending compared to an all-Republican plan.

There is also nothing special about government spending as a share of GDP as opposed to other determinants of economic growth, such as rule of law, freedom of contract, immigration policy, free trade and the structure of the tax code—not to mention policies on infrastructure, land use and education. Basically, we could make up a sub-0.1 percentage point hit to long term GDP growth with policy improvements elsewhere.

Which is to say, it does not make sense to create a risk that U.S. Treasuries will be dislodged as the world’s safe-haven investment as a strategy to shift the size of government by a percentage point of GDP or two. Winning this fight is not so important that it makes sense to throw caution to the wind, but that is what Republicans in Congress appear willing to do. The gamble looks even worse when you consider that a debt-limit-impasse-gone-wrong would not necessarily lead to Republicans getting their way on the long-term fiscal adjustment.

Unfortunately, I think the sanguineness about a bond default reflects a feeling among some conservatives that it might not be such a bad thing if it became much more expensive for the federal government to borrow money.

Finally, I’d note that I still don’t think there will actually be a default on bond interest payments for any period of time. While some congressional Republicans may be OK with a brief default, it’s ultimately up to the Administration to decide whether to pay interest or not, and I still believe they will prioritize interest payments over other obligations. Nonetheless, it’s disconcerting that some Republicans are ready for a default, even if Tim Geithner is here to save them from themselves.

Hat tip to Marginal Revolution, Tyler Cowen’s blogsite that is on Mark Thoma’s economist’s view top blogroll.

Former Secretary of Labor under Clinton and economics professor, Robert Reich,  argues that the majority of Americans hold opinions that are to the left of both President Obama and Republicans.  Based on opinion polls, he’s correct.  His article is entitled ‘Beware the Middle Ground of the Great Budget Debate.’

“How debates are framed is critical because the “center” or “middle ground” is supposedly halfway between the two extremes.

We continue to hear that the Great Budget Debate has two sides: The President and the Democrats want to cut the budget deficit mainly by increasing taxes on the rich and reducing military spending, but not by privatizing Medicare. On the other side are Paul Ryan, Republicans, and the right, who want cut the deficit by privatizing Medicare and slicing programs that benefit poorer Americans, while lowering taxes on the rich.

By this logic, the center lies just between.

Baloney.

According to the most recent Washington Post-ABC poll, 78 percent of Americans oppose cutting spending on Medicare as a way to reduce the debt, and 72 percent support raising taxes on the rich – including 68 percent of Independents and 54 percent of Republicans.

In other words, the center of America isn’t near halfway between the two sides. It’s overwhelmingly on the side of the President and the Democrats.

I’d wager if Americans also knew two-thirds of Ryan’s budget cuts come from programs serving lower and moderate-income Americans and over 70 percent of the savings fund tax cuts for the rich – meaning it’s really just a giant transfer from the less advantaged to the super advantaged without much deficit reduction at all – far more would be against it.

And if people knew that the Ryan plan would channel hundreds of billions of their Medicare dollars into the pockets of private for-profit heath insurers, almost everyone would be against it.

The Republican plan shouldn’t be considered one side of a great debate. It shouldn’t be considered at all. Americans don’t want it.

Which is why I get worried when I hear about so-called “bipartisan” groups on Capitol Hill seeking a grand compromise, such as the Senate’s so-called “Gang of Six.”

Senator Dick Durbin, Democrat of Illinois, a member of that Gang, says they’re near agreement on a plan that will chart a “middle ground” between the House Republican budget and the plan outlined last week by the President.

Watch your wallets.

In my view, even the President doesn’t go nearly far enough in the direction most Americans would approve. All he wants to do, essentially, is end the Bush tax windfalls for the wealthy – which were designed to be ended in 2010 in any event – and close a few loopholes.

But why shouldn’t we go back to the tax rates we had thirty years ago, which required the rich to pay much higher shares of their incomes? One of the great scandals of our age is how concentrated income and wealth have become. The top 1 percent now gets twice the share of national income it took home thirty years ago.

If the super rich paid taxes at the same rates they did three decades ago, they’d contribute $350 billion more per year than they are now – amounting to trillions more over the next decade. That’s enough to ensure every young American is healthy and well-educated and that the nation’s infrastructure is up to world-class standards.

Nor does the President’s proposal go nearly far enough in cutting military spending, which is not only out of control but completely unrelated to our nation’s defense needs – fancy weapons systems designed for an age of conventional warfare; hundreds of billions of dollars for the Navy and Air Force, when most of the action is with the Army, Marines, and Special Forces; and billions more for programs no one can justify and few can understand.

If Americans understood how much they’re paying for defense and how little they’re getting, they’d demand a defense budget at least 25 percent smaller than it is today.

Finally, the President’s proposed budget doesn’t deal with the scandal of the nation’s schools in poor and middle-class communities – schools whose teachers are paid under $50,000 a year, whose classrooms are crammed, that can’t afford textbooks or science labs, that have abandoned after-school programs and courses like history and art. Most school budgets depend manly on local property taxes that continue to drop in lower-income communities. The federal government should come to their rescue.

To think of the “center” as roughly halfway between the President’s and Paul Ryan’s proposals is to ignore what Americans need and want. For our political representatives to find a ”middle ground” between the two would be a travesty.”

Beezer here.  Right now the Republicans are discovering some unpleasant facts:  Most Americans reject the notion Social Security and Medicare need slashing, and they also overwhelmingly believe the rich don’t pay enough taxes.  Rep. Paul Ryan was roundly booed at a recent town meeting in his own district when he asserted that the rich produced all the jobs and therefore they should receive tax cuts.  It appears the successful con job conducted by Republicans for the past mid-terms is beginning to unravel.  Finally.  As per usual a visit to economist’s view directed one to Reich’s article.

America isn’t ‘broke.’  America is just confused.

Somewhere along the journey of the past 30 years or so, America forgot how to do business and build productive capacity.  This forgetfulness didn’t happen in America’s boardrooms, it happened in Washington DC.

Two distinctly naive concepts gained wide acceptance in DC and as a consequence among the population at large.  One was that because America was so rich and powerful, it could turn it’s productive capacity on at will.  No, it’s even worse than that.  America began to believe it would happen without America even being consciously involved.  The ‘invisible hand’ took care of this issue for America.  This magical ‘tooth fairy’ would deliver.

The reality is that competitive markets are the best engine for economic growth and these markets more resemble a mixed martial arts contest than the classroom markets imagined by economists.  If the ‘tooth fairy’ existed at all, she would be eaten for lunch in these markets.  Counting on the ‘invisible hand’ to deliver is like going into a boxing match and forgetting the opponent has two hands not just one.

The second naive belief was that the government could not help America grow.  In the 1980s President Reagan ridiculed his own government, and by association the people it represents, by asserting the government was the source of economic problems and, ergo, not an institution that could help.  An incredibly naive pronouncement, but it took hold nevertheless among the public at large.

Large multinational companies knew better.  They co-opted government to receive special tax breaks and subsidies.  They knew the government could directly help their endeavors.

They also knew they could grow overseas and in order to do so they negotiated with foreign countries for access.  In China this normally meant the American company had to build productive capacity in China, hire local talent, sell half the production outside of China and take on a Chinese partner thus assuring that intellectual property was transferred.  So much for the ‘tooth fairy’ in China.  She apparently doesn’t speak Mandarin.

The results?  According to the Wall Street Journal, via an edited version in economist’s view:

U.S. multinational corporations, the big brand-name companies that employ a fifth of all American workers, have been hiring abroad while cutting back at home, sharpening the debate over globalization’s effect on the U.S. economy.

The companies cut their work forces in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million, new data from the U.S. Commerce Department show. That’s a big switch from the 1990s, when they added jobs everywhere…

The data … underscore the vulnerability of the U.S. economy, particularly at a time when unemployment is high and wages aren’t rising. Jobs at multinationals tend to pay above-average wages and, for decades, sustained the American middle class. …

While small, young companies are vital to U.S. economic growth, big multinationals remain a major force. A report by McKinsey Global Institute … estimates that multinationals account for 23% of the nation’s private-sector output and 48% of its exports of goods.

So does America negotiate similar concessions from those who wish to gain access to the still rich by comparison American market?  That would be a ‘No.’  Why should we?  The ‘tooth fairy’ is taking care of America.  There are a few exceptions, but America only acts when a private organization forces the issue.  One example is where the Steelworkers Union filed suit with the World Trade Organization against Chinese dumping of steel pipe in America.  The union won and stiff import tariffs were levied on these steel imports.  The result?  China spent $1 billion building a steel pipe plant Texas that employs 600 full-time steel union workers.  Just try and get the ‘tooth fairy’ to do that.

Of course if we were really serious we would have required the Chinese company to take on a US partner, source most of the product domestically, and sell half the product overseas.

As debilitating as the ‘tooth fairy’ concept is, the idea that our own government can’t help us grow is just as bad.

There is absolutely no debate over the valuable role modern infrastructures play in enabling robust economies.  None.  The American Society of Civil Engineers estimates that the country needs to spend $2.2 trillion over the next five years just to maintain our existing infrastructure, never mind upgrade things.  The University of Massachusetts Political Economy Research Institute estimates as many as 18,000 jobs could be created for every $1 billion spent on infrastructure.  Even if that estimate is off by 8,000 jobs, investing $1 trillion creates 10 million jobs–more jobs than were officialy ‘lost’ in the Great Recession.

There are other important means government can apply to grow the economy and create jobs.  One is to provide cheap capital to industry, reducing the cost of expansion.  Former Intel CEO Andy Grove explains a problem government can definitely help overcome.

“The underlying problem isn’t simply lower Asian costs. It’s our own misplaced faith in the power of start-ups to create U.S. jobs. Americans love the idea of the guys in the garage inventing something that changes the world. New York Times columnist Thomas L. Friedmanrecently encapsulated this view in a piece called “Start-Ups, Not Bailouts.” His argument: Let tired old companies that do commodity manufacturing die if they have to. If Washington really wants to create jobs, he wrote, it should back startups.

Mythical Moment

Friedman is wrong. Start-ups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordable, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.

The scaling process is no longer happening in the U.S. And as long as that’s the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.”

Grove uses a personal experience of this, when he decided to use alternative energy in his own home.

“The job-machine breakdown isn’t just in computers. Consider alternative energy, an emerging industry where there is plenty of innovation. Photovoltaics, for example, are a U.S. invention. Their use in home-energy applications was also pioneered by the U.S.

Last year, I decided to do my bit for energy conservation and set out to equip my house with solar power. My wife and I talked with four local solar firms. As part of our due diligence, I checked where they get their photovoltaic panels — the key part of the system. All the panels they use come from China. A Silicon Valley company sells equipment used to manufacture photo-active films. They ship close to 10 times more machines to China than to manufacturers in the U.S., and this gap is growing. Not surprisingly, U.S. employment in the making of photovoltaic films and panels is perhaps 10,000 — just a few percent of estimated worldwide employment.”

But wait, there’s more.  Remember when we stopped making consumer electronic products because the companies that used to make them domestically started making them in Asia in order to get cheaper labor?

Here’s Grove on what happens because of that movement.

“There’s more at stake than exported jobs. With some technologies, both scaling and innovation take place overseas. Such is the case with advanced batteries. It has taken years and many false starts, but finally we are about to witness mass- produced electric cars and trucks. They all rely on lithium-ion batteries. What microprocessors are to computing, batteries are to electric vehicles. Unlike with microprocessors, the U.S. share of lithium-ion battery production is tiny.

That’s a problem. A new industry needs an effective ecosystem in which technology know-how accumulates, experience builds on experience, and close relationships develop between supplier and customer. The U.S. lost its lead in batteries 30 years ago when it stopped making consumer-electronics devices. Whoever made batteries then gained the exposure and relationships needed to learn to supply batteries for the more demanding laptop PC market, and after that, for the even more demanding automobile market. U.S. companies didn’t participate in the first phase and consequently weren’t in the running for all that followed. I doubt they will ever catch up.”

These problems aren’t really being created by the average American, who still knows how to show up and work.   They are being created by a political class that does believe in the ‘tooth fairy’ and does believe the government can’t help grow our economy.   The Republican Party is comprised almost entirely by members of this class, but too many Democrats have been influenced as well.  It’s this political class which has damaged our economy and to this day hinders its recovery.

One can only hope that, at some point, a leader comes forward who can  sweep aside the cobwebs and simply say: ‘Let’s do this.  Let’s get back to building productive capacity.  Building new, modern infrastructures.  Creating jobs that pay.  Forget the naysayers who claim we can’t afford to succeed.  No one, no ‘ Tooth Fairy’ is going to do this for us.  We must do this ourselves.  And we must do it now.’

Another example of how far right America has moved politically, or at least in the Republican Party pushed by its radical Tea Party wing.  While the Tea Party crowd is eager to remove labor’s rights to associate and collectively bargain, the Chinese Communists are considering moves to strengthen collective bargaining rights.

From a New York Times op ed piece authored by Han Dongfang, Director of the non governmental China Labour Bulletin:

Liberate China’s Workers

By HAN DONGFANG

Published: April 6, 2011

HONG KONG — There is no legal right to strike in China, but there are strikes every day. Factory workers, hotel employees, teachers and taxi drivers regularly withdraw their labor and demand a better deal from their employer. Strikes are often successful, and these days strike leaders hardly ever get put in prison.

It may seem ironic that workers in a nominally Communist country don’t have the right to strike, and that workers are apparently willing to defy the Communist Party by going out on strike. But China effectively abandoned Communism and embraced capitalism many years ago. And in a capitalist economy, strikes are a fact of life.

Chinese scholars, government officials and even some businessmen have long recognized this fact and have called for the restoration of the right to strike, which was removed from the Constitution of the People’s Republic of China in 1982. Deng Xiaoping feared that the economic reforms he was introducing would lead to labor unrest.

Although Deng and his successors were able to quiet labor unrest and strike action for a while, the trend over the last five years or so has been clear.

As the business leader Zeng Qinghong noted recently, the number of strikes is increasing every year. Mr. Zeng, who is head of the Guangzhou Automobile Co., reported that in just two months last summer, there were more than 20 strikes in the automotive industry in the Pearl River Delta alone, and that new strikes were occurring all the time.

Mr. Zeng suggested in a submission to this year’s National People’s Congress, China’s annual legislature, that the right to strike should be restored because it was a basic right of workers in a market economy and a natural adjunct to the right to work.

I agree with Mr. Zeng on this point and would like to take his argument one step further. The right to strike is clearly important, but the most vital and fundamental right of workers is the right to collective bargaining. After all, why do workers go out on strike?

Very simply, they go on strike for higher pay and better working conditions. The strike is not an end in itself but is part of a bargaining process. And if the collective bargaining process were more effective, in many cases, workers would not need to go out on strike at all.

If you talk to factory workers, most will tell you they would rather not go on strike if they can avoid it. Indeed, most only go on strike because they have no alternative.

China’s workers want and need an alternative. They want a system in which they can raise their demands for higher pay and discuss those demands in peaceful, equal and constructive negotiations with management. If workers can achieve their goals through peaceful collective bargaining, in the long run there will be fewer strikes, workers will be better paid and labor relations will be vastly improved.

We also have to be aware that if the right to strike is reinstated in the Constitution in isolation — without the right to collective bargaining — there would be a danger that the right of workers to go on strike might actually be eroded.

Just look at the right to stage a public demonstration. Chinese citizens do have the constitutional right to demonstrate but in reality they have to apply to the police for permission, and of course very few of those applications are granted.

Likewise, if workers have to apply to the authorities before they can go on strike, the right to strike will become meaningless. Moreover, the number of strikes would not be reduced because workers would continue to go out on strike regardless and labor relations will deteriorate even further.

On the other hand, if the right to strike is framed in a way that can liberate workers and encourage and empower them to engage in collective bargaining, safe in the knowledge that they have a powerful weapon that can be deployed if necessary, labor relations will be enhanced and the number of strikes might actually decrease.

There is a saying in China that “you should not only focus on your head when you have headache because the real reason for the headache could be your foot.” As Mr. Zeng noted, the rapidly increasing number of strikes in China has become a major headache, not only for business but for the government as well.

If the government wants to reduce the number of strikes in China, it needs to take a holistic approach and address the root cause of the problem — the absence of an effective collective bargaining system in which democratically elected workers’ representatives can negotiate better pay and conditions with their employer.

If such a system can be implemented in China it would obviously benefit workers but it would also benefit employers like Mr. Zeng who are concerned about high worker turnover and the loss of production through strike action.

Crucially, it is also in the interest of the Chinese government to introduce collective bargaining. The authorities may be nervous about handing power to the workers but they should bear in mind that by doing so they would aid the development of more harmonious labor relations, which could lead to the Communist Party’s goal of creating a more prosperous, stable and harmonious society.”