Fact checking the AFL-CIO

The AFL-CIO issued a missive this week outlining what the organization thinks ought to be done to correct what is wrong with the US economy. As both a supporter of the Obama administration and key member of the broader leftist coalition, it's worth examining the group's thinking on this important subject matter:

The crash of 2008 and the Great Recession were inevitable consequences of three decades of economic policies designed by and for Wall Street and the wealthiest Americans. At the heart of the problem was the hollowing out of American manufacturing, the growing dysfunction of our financial sector and a rapid increase in economic inequality, all of which crippled the growth engine of the U.S. economy. 

Starting in the 1980s, corporate America decided to boost profits by shipping U.S. jobs overseas. NAFTA and the admission of China into the World Trade Organization (WTO) accelerated the drive to relocate production to “export platforms” in foreign countries that would ship goods back to the U.S. market. Corporations that sent jobs overseas became forceful proponents of a “strong” (overvalued) dollar, which enhanced the profitability of their overseas operations but at the same time made much of the U.S. manufacturing sector uncompetitive and led to perennial U.S. trade deficits. 

Also by the 1980s, the U.S. financial sector was failing to perform its essential function of channeling savings to productive investment in the real economy. Financial firms on Wall Street focused instead on making a quick buck by stripping assets from existing businesses and downsizing their workforces, and on various forms of complex financial engineering that had little economic value. Financial firms also provided critical support for a “strong dollar” policy that diverted productive investment away from the U.S. manufacturing sector toward overseas operations.  By the eve of the crash of 2008, the manufacturing sector had shrunk to half its 1960 size, while the financial sector had doubled in size and accounted for 40 percent of corporate profits.

Let's unpack this a bit. The first criticism is that US corporations began "shipping US jobs overseas" in the 1980s. If this is true, then US unemployment should have steadily risen as more and more jobs disappeared and were transferred to foreigners (apparently worker solidarity does not cross national boundaries). Looking over the unemployment rate in the 25 years preceding the 2008 financial crisis, this plainly has not been the case:

US unemployment rate 1983-2008

Next, we are told that corporate America favored a strong dollar policy. Notably, what the piece does not say is whether the dollar actually was strong. Let's take a look at the evidence (each currency starts at January 1990, with the exception of the euro which was not an accounting currency until January 1999):

US dollar vs. Euro

US dollar vs. Japanese yen

US dollar vs. Swiss franc

US dollar vs. British pound

For each currency the story is basically the same. The dollar held steady or appreciated during the late 1990s/early 2000s as investors sought dollars amidst increasing US interest rates and a bullish US stock market, then weakened for roughly the seven years preceding the financial crisis. If anything, a strong dollar is associated with strong economic performance rather than any weakness.

The language about financial services firms "stripping assets from existing businesses and downsizing their workforces" is nothing more than the re-allocation of assets from less productive ends towards higher-value functions -- a contributor to prosperity rather source of harm.

The next bit about the decline of US manufacturing -- the piece goes on to twice reference "deindustrialization" -- is plainly false as illustrated by yet another chart:

What deindustrialization looks like

Next up is a rather predictable invocation of that most tired of leftist bogeymen, income inequality:

...The experience of the past 30 years shows that rising inequality is bad not only for workers, but also for the economy as a whole. Less affluent households tend to spend more of their income, generating more economic activity, while more affluent households tend to consume less. Wage stagnation undermines political support for the levels of taxation necessary to support public investment in things like roads and schools, which underpins future economic productivity. And high levels of inequality are associated with political decision-making that leads to slower growth. In short, the upward redistribution of income throws sand in the gears of the economy.

This is just a stunning amount of nonsense mashed together in one paragraph. It is true that consumption forms a key part of economic activity. Another key part is investment, which is funded by savers. If everyone spent all of their income there would be nothing available for investment -- thank goodness for those who don't devote all of their money to consumption.

Taxation levels, meanwhile, are already more than sufficient to support schools and roads. Indeed, if government restrained itself to areas such as education and infrastructure it would be running massive surpluses. As it is, the US already spending plenty on both:

Note that federal spending on highways doubled from 1960 to the present day even while population growth did not keep pace (US population in 1960 was around 180 million while today it is around 311 million -- about a 73 percent increase), while mass transit spending increased even faster. All of this is eminently affordable at current tax rates; it simply requires pruning back less essential government functions.

The penultimate sentence, meanwhile, about income inequality being "associated with" unspecified political decision-making that leads to slower growth is so meaningless that a serious response is impossible.

Buried further in the piece is this:

...The Republican candidates pretend that tax cuts for corporations and the wealthy are the answer to wage stagnation and the economic crisis, but the Bush years taught us that these obscenely wasteful tax cuts only make the problem worse. They are the equivalent of eating our seed corn, because they starve the kind of public investment in education, infrastructure and innovation that is indispensable for long-term economic growth.

In 2001, the federal government collected $2 trillion in revenue (EDIT: Also note that this was in the midst of a booming economy that produced a budget surplus). Eight years later this figure was $2.1 trillion. Furthermore, spending increased during this same time period from $1.9 trillion to $3.5 trillion. This notion that government either was starved of revenue or was forced to reduce spending is at odds with the facts.

The rhetoric about seed corn is perhaps the most instructive aspect of the entire screed. Actual seed corn is found not in the coffers of the federal government, but in the bank accounts of the country's most productive corporations and individuals. This is where investment comes from that funds the development of new technology and products that consumers find useful, and it's the very place the AFL-CIO wants to take money away from to fund its favored government projects.  

The piece continues for many more paragraphs, but the point has been made: the AFL-CIO lives in an economic fantasy world, basing its policy prescriptions and interpretations of economic history on gross distortions if not outright fabrications.