Five-year plans of the Soviet Union

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Five-year_plans_of_the_Soviet_Union 

Politics of the Soviet Union

The five-year plans for the development of the national economy of the Union of Soviet Socialist Republics (USSR) (Russian: Пятилетние планы развития народного хозяйства СССР, Pyatiletniye plany razvitiya narodnogo khozyaystva SSSR) consisted of a series of nationwide centralized economic plans in the Soviet Union, beginning in the late 1920s. The Soviet state planning committee Gosplan developed these plans based on the theory of the productive forces that formed part of the ideology of the Communist Party for development of the Soviet economy. Fulfilling the current plan became the watchword of Soviet bureaucracy.

Several Soviet five-year plans did not take up the full period of time assigned to them: some were pronounced successfully completed earlier than expected, some took much longer than expected, and others failed altogether and had to be abandoned. Altogether, Gosplan launched thirteen five-year plans. The initial five-year plans aimed to achieve rapid industrialization in the Soviet Union and thus placed a major focus on heavy industry. The first five-year plan, accepted in 1928 for the period from 1929 to 1933, finished one year early. The last five-year plan, for the period from 1991 to 1995, was not completed, since the Soviet Union was dissolved in 1991.

Other communist states, including the People's Republic of China, and to a lesser extent, the Republic of Indonesia, implemented a process of using five-year plans as focal points for economic and societal development.

Background

Part of a series on
Soviet economics

Joseph Stalin inherited and upheld the New Economic Policy (NEP) from Vladimir Lenin. In 1921, Lenin had persuaded the 10th Party Congress to approve the NEP as a replacement for the War Communism that had been set up during the Russian Civil War. All land had been declared nationalized by the Decree on Land, finalized in the 1922 Land Code, which also set collectivization as the long-term goal. Although the peasants had been allowed to work the land they held, the production surplus was bought by the state (on the state's terms), and the peasants cut production; whereupon food was requisitioned. Money gradually came to be replaced by barter and a system of coupons.

When the war ended, the NEP took over from War Communism. During this time, the state had controlled all large enterprises (i.e. factories, mines, railways) as well as enterprises of medium size, but small private enterprises, employing fewer than 20 people, were allowed. The requisitioning of farm produce was replaced by a tax system (a fixed proportion of the crop), and the peasants were free to sell their surplus (at a state-regulated price) - although they were encouraged to join state farms (Sovkhozes, set up on land expropriated from nobles after the 1917 revolution), in which they worked for a fixed wage like workers in a factory. The money came back into use, with new banknotes being issued and backed by gold.

The NEP had been Lenin's response to a crisis. In 1920, industrial production had been 13% and agricultural production 20% of the 1913 figures. Between February 21 and March 17, 1921, the sailors in Kronstadt had mutinied. In addition, the Russian Civil War, which had been the main reason for the introduction of War Communism, had virtually been won; so controls could be relaxed.

In the 1920s, there was a great debate between Bukharin, Tomsky and Rykov on the one hand, and Trotsky, Zinoviev and Kamenev on the other. The former group considered that the NEP provided sufficient state control of the economy and sufficiently rapid development, while the latter argued in favor of more rapid development and greater state control, taking the view, among other things, that profits should be shared among all people, and not just among a privileged few. In 1925, at the 14th Party Congress, Stalin, as he usually did in the early days, stayed in the background but sided with the Bukharin group. However, later, in 1927, he changed sides, supporting those in favor of a new course, with greater state control.

Plans

Statement from the Newspaper Pereslavl Week. The text reads:

"Plan is law, fulfillment is duty, over-fulfillment is honor!". Here "duty" can also be interpreted as "obligation."

Each five-year plan dealt with all aspects of development: capital goods (those used to produce other goods, like factories and machinery), consumer goods (e.g. chairs, carpets, and irons), agriculture, transportation, communications, health, education, and welfare. However, the emphasis varied from plan to plan, although generally, the emphasis was on power (electricity), capital goods, and agriculture. There were base and optimum targets. Efforts were made, especially in the third plan, to move industry eastward to make it safer from attack during World War II. Soviet planners declared a need for "constant struggle, struggle, and struggle" to achieve a Communist society. These five-year plans outlined programs for huge increases in the output of industrial goods. Stalin warned that without an end to economic backwardness "the advanced countries...will crush us."

First plan, 1928–1932

Main article: First five-year plan

 

Large notice board with slogans about the 5-Year Plan in Moscow, Soviet Union (c., 1931) by a traveler DeCou, Branson [cs]. It reads like it's made by a state-run paper «Economics and Life» (Russian: Экономика и жизнь)

From 1928 to 1940, the number of Soviet workers in industry, construction, and transport grew from 4.6  million to 12.6  million and factory output soared. Stalin's first five-year plan helped make the USSR a leading industrial nation.

During this period, the first purges were initiated targeting many people working for Gosplan. These included Vladimir Bazarov, the 1931 Menshevik Trial (centered on Vladimir Groman).

Stalin announced the start of the first five-year plan for industrialization on October 1, 1928, and it lasted until December 31, 1932. Stalin described it as a new revolution from above. When this plan began, the USSR was fifth in industrialization, and with the first five-year plan moved up to second, with only the United States in first.

This plan met industrial targets in less time than originally predicted. The production goals were increased by a reported 50% during the initial deliberation of industrial targets. Much of the emphasis was placed on heavy industry. Approximately 86% of all industrial investments during this time went directly to heavy industry. Officially, the first five-year plan for the industry was fulfilled to the extent of 93.7% in just four years and three months. The means of production in regards to heavy industry exceeded the quota, registering 103.4%. The light, or consumer goods, the industry reached up to 84.9% of its assigned quota. However, there is some speculation regarding the legitimacy of these numbers as the nature of Soviet statistics is notoriously misleading or exaggerated. Another issue was that quality was sacrificed in order to achieve quantity, and production results generated wildly varied items. Consequently, rationing was implemented to solve chronic food and supply shortages.

Propaganda used before, during, and after the first five-year plan compared the industry to battle. This was highly successful. They used terms such as "fronts," "campaigns," and "breakthroughs," while at the same time, workers were forced to work harder than ever before and were organized into "shock troops," and those who rebelled or failed to keep up with their work were treated as traitors. The posters and flyers used to promote and advertise the plan were also reminiscent of wartime propaganda. A popular military metaphor emerged from the economic success of the first five-year plan: "There are no fortresses Bolsheviks cannot storm." Stalin especially liked this.

The first five-year plan was not just about economics. This plan was a revolution that intended to transform all aspects of society. The way of life for the majority of the people changed drastically during this revolutionary time. The plan was also referred to as the "Great Turn". Individual peasant farming gave way to a more efficient system of collective farming. Peasant property and entire villages were incorporated into the state economy which had its own market forces.

There was, however, strong resistance to this at first. The peasants led an all-out attack to protect individual farming; however, Stalin rightly did not see the peasants as a threat. Despite being the largest segment of the population they had no real strength and thus could pose no serious threat to the state. By the time this was done, the collectivization plan resembled a very bloody military campaign against the peasant's traditional lifestyle. This social transformation along with the incredible economic boom occurred at the same time that the entire Soviet system developed its definitive form in the decade of 1930.

Many scholars believe that a few other important factors, such as foreign policy and internal security, went into the execution of the five-year plan. While ideology and economics were a major part, preparation for the upcoming war also affected all of the major parts of the five-year plan. The war effort really picked up in 1933 when Hitler came to power in Germany. The stress this caused on internal security and control in the five-year plan is difficult to document.

While most of the figures were overstated, Stalin was able to announce truthfully that the plan had been achieved ahead of schedule; however, the many investments made to the west were excluded. While many factories were built and industrial production did increase exponentially, they were not close to reaching their target numbers.

While there was a great success, there were also many problems with not just the plan itself, but how quickly it was completed. Its approach to industrialization was very inefficient and extreme amounts of resources were put into construction that, in many cases, was never completed. These resources were also put into equipment that was never used, or not even needed in the first place. Many of the consumer goods produced during this time were of such low quality that they could never be used and were wasted.

A major event during the first Five Year Plan was the famine of 1932–33. The famine peaked during the winter of '32–'33 claiming the lives of an estimated 3.3 to 7  million people, while millions more were permanently disabled. The famine was the direct result of the industrialization and collectivization implemented by the first Five-Year-Plan. Many of the peasants who were suffering from the famine began to sabotage the fulfillment of their obligations to the state and would, as often as they could, stash away stores of food. Although Stalin was aware of this, he placed the blame for the hostility onto the peasants, saying that they had declared war against the Soviet government.

Second plan, 1932–1937

Further information: Soviet anti-religious legislation and USSR anti-religious campaign (1928–1941)

Because of the success made by the first plan, Stalin did not hesitate with going ahead with the second five-year plan in 1932, although the official start date for the plan was 1933. The second five-year plan gave heavy industry top priority, putting the Soviet Union not far behind Germany as one of the major steel-producing countries of the world. Further improvements were made in communications, especially railways, which became faster and more reliable. As was the case with the other five-year plans, the second was not as successful, failing to reach the recommended production levels in such areas as the coal and oil industries. The second plan employed incentives as well as punishments and the targets were eased as a reward for the first plan being finished ahead of schedule in only four years. With the introduction of childcare, mothers were encouraged to work to aid in the plan's success. By 1937 the tolkachi emerged occupying a key position mediating between the enterprises and the commissariat.

Consistent with the Soviet doctrine of state atheism (gosateizm), this five-year plan from 1932 to 1937 also included the liquidation of houses of worship, with the goals of closing churches between 1932–1933 and the elimination of clergy by 1935–1936.

Third plan, 1938–1941

The third five-year plan ran for only 3½ years, up to June 1941, when Germany invaded the Soviet Union during the Second World War. As war approached, more resources were put into developing armaments, tanks, and weapons, as well as constructing additional military factories east of the Ural mountains.

The first two years of the third five-year plan proved to be even more of a disappointment in terms of proclaimed production goals. Still, a reported 12% to 13% rate of annual industrial growth was attained in the Soviet Union during the 1930s. The plan had intended to focus on consumer goods. The Soviet Union mainly contributed resources to the development of weapons and constructed additional military factories as needed. By 1952, industrial production was nearly double the 1941 level ("five-year plans"). Stalin's five-year plans helped transform the Soviet Union from an untrained society of peasants to an advanced industrial economy.

Fourth and fifth plans, 1945–1955

Stalin in 1945 promised that the USSR would be the leading industrial power by 1960.

The USSR at this stage had been devastated by the war. Officially, 98,000 collective farms had been ransacked and ruined, with the loss of 137,000 tractors, 49,000 combine harvesters, 7  million horses, 17  million cattle, 20  million pigs, 27  million sheep; 25% of all capital equipment had been destroyed in 35,000 plants and factories; 6  million buildings, including 40,000 hospitals, in 70,666 villages and 4,710 towns (40% urban housing) were destroyed, leaving 25  million homeless; about 40% of railway tracks had been destroyed; officially 7.5  million servicemen died, plus 6  million civilians, but perhaps 20  million in all died. In 1945, mining and metallurgy were at 40% of the 1940 levels, electric power was down to 52%, pig-iron 26% and steel 45%; food production was 60% of the 1940 level. After Poland, the USSR had been the hardest hit by the war. Reconstruction was impeded by a chronic labor shortage due to the enormous number of Soviet casualties in the war (between 20 and 30  million). Moreover, 1946 was the driest year since 1891, and the harvest was poor.

The USA and USSR were unable to agree on the terms of a US loan to aid reconstruction, and this was a contributing factor in the rapid escalation of the Cold War. However, the USSR did gain reparations from Germany and made Eastern European countries make payments in return for the Soviets having liberated them from the Nazis. In 1949, the Council for Mutual Economic Assistance (Comecon) was set up, linking the Eastern bloc countries economically. One-third of the fourth plan's capital expenditure was spent on Ukraine, which was important agriculturally and industrially, and which had been one of the areas most devastated by war.

Sixth plan, 1956–1958

The sixth five-year plan was launched in 1956 during a period of dual leadership under Nikita Khrushchev and Nikolai Bulganin, but it was abandoned after two years due to over-optimistic targets.

Seventh plan, 1959–1965

Grain to increase from 8.5 milliard poods (139 million tonnes) in 1958 to 10–11 milliard poods (~172 million tonnes) by 1965

 

Meat to increase from 7.9 million tonnes in 1958 to 16 million tonnes by 1965

The seven-year plan marked by 1959 postage stamps

Unlike other planning periods, 1959 saw the announcement of a seven-year plan (Russian: семилетка, semiletka), approved by the 21st Congress of the Communist Party of the Soviet Union in 1959. This was merged into a seventh five-year plan in 1961, which was launched with the slogan "catch up and overtake the USA by 1970." The plan saw a slight shift away from heavy industry into chemicals, consumer goods, and natural resources.

The plan also intended to establish 18 new institutes by working with the Ukrainian Academy of Sciences.

Eighth plan, 1966–1970

Main article: Eighth five-year plan (Soviet Union)

The eighth plan led to the amount of grain exported being doubled.

Ninth plan, 1971–1975

Main article: Ninth five-year plan (Soviet Union)

About 14.5 million tonnes of grain were imported by the USSR. Détente and improving relations between the Soviet Union and the United States allowed for more trade. The plan's focus was primarily on increasing the number of consumer goods in the economy so as to improve Soviet standards of living. While largely failing at that objective it managed to significantly improve Soviet computer technology.

Tenth plan, 1976–1980

Main article: Tenth five-year plan (Soviet Union)

Leonid Brezhnev declared the slogan "Plan of quality and efficiency" for this period.

Eleventh plan, 1981–1985

Main article: Eleventh five-year plan (Soviet Union)

During the eleventh five-year plan, the country imported some 42 million tons of grain annually, almost twice as much as during the tenth five-year plan and three times as much as during the ninth five-year plan (1971–1975). The bulk of this grain was sold by the West; in 1985, for example, 94% of Soviet grain imports were from the non-socialist world, with the United States selling 14.1  million tons. However, total Soviet export to the West was always almost as high as the import: for example, in 1984 total export to the West was 21.3  billion rubles, while total import was 19.6  billion rubles.

Twelfth plan, 1986–1990

See also: Perestroika

The last, 12th plan started with the slogan of uskoreniye (acceleration), the acceleration of economic development (quickly forgotten in favor of a vaguer motto perestroika) ended in a profound economic crisis in virtually all areas of the Soviet economy and a drop in production.

The 1987 Law on State Enterprise and the follow-up decrees about khozraschyot and self-financing in various areas of the Soviet economy were aimed at the decentralization to overcome the problems of the command economy.

Five-year plans in other countries

Most other communist states, including the People's Republic of China, adopted a similar method of planning. Although the Republic of Indonesia under Suharto is known for its anti-communist purge, his government also adopted the same method of planning because of the policy of its socialist predecessor, Sukarno. This series of five-year plans in Indonesia was termed REPELITA (Rencana Pembangunan Lima Tahun); plans I to VI ran from 1969 to 1998.

Information technology

State planning of the economy required processing large amounts of statistical data. The Soviet State had nationalized the Odhner arithmometer factory in Saint Petersburg after the revolution. The state began renting tabulating equipment later on. By 1929, it was a very large user of statistical machines, on the scale of the US or Germany. The State Bank had tabulating machines in 14 branches. Other users included the Central Statistical Bureau, the Soviet Commissariat of Finance, Soviet Commissariat of Inspection, Soviet Commissariat of Foreign Trade, the Grain Trust, Soviet Railways, Russian Ford, Russian Buick, the Karkov tractor factory, and the Tula Armament Works. IBM also did a good deal of business with the Soviet State in the 1930s, including supplying punch cards to the Stalin Automobile Plant.

Honors

The minor planet 2122 Pyatiletka discovered in 1971 by Soviet astronomer Tamara Mikhailovna Smirnova is named in honor of five-year plans of the USSR.

Soviet-type economic planning

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Soviet-type_economic_planning 

 

Part of a series on
Marxism–Leninism

Soviet-type economic planning (STP) is the specific model of centralized planning employed by Marxist–Leninist socialist states modeled on the economy of the Soviet Union (USSR).

The post-perestroika analysis of the system of the Soviet economic planning describes it as the administrative-command system due to the de facto priority of highly centralized management over planning.

Characteristics

Institutions

The major institutions of Soviet-type planning in the USSR included a planning agency (Gosplan), an organization for allocating state supplies among the various organizations and enterprises in the economy (Gossnab) and enterprises which were engaged in the production and delivery of goods and services in the economy. Enterprises comprised production associations and institutes that were linked together by the plans formulated by Gosplan.

In the Eastern bloc countries (Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, Romania, and Albania), economic planning was primarily accomplished through the Council for Mutual Economic Assistance (CMEA), an international organization meant to promote the coordination of Soviet economic policy amongst the participating countries. The council was founded in 1949 and worked to maintain the Soviet style of economic planning in the Eastern bloc until the Soviet Union's dissolution in 1991.

There is a small amount of information in state archives regarding the founding of CMEA, but documents from the Romania state archive suggest that the Romanian Communist Party was instrumental in beginning the process which led to the creation of the council. Originally, Romania wanted to create a collaborative economic system which would bolster the country's efforts to industrialize. However, the Czech and Polish representatives wanted to have a system of specialization put into place, wherein production plans would be shared amongst members, and each country would specialize in a different area of production. The USSR encouraged the formation of the council as a response to the United States’ Marshall Plan, in hopes of maintaining their sphere of influence in Eastern Europe. There also existed the hope that the less developed member states would ‘catch-up’ economically with the more industrialized ones.

Material balances

Main article: Material balance planning

Material balance planning was the major function of Gosplan in the USSR. This method of planning involved the accounting of material supplies in natural units (as opposed to monetary terms) which are used to balance the supply of available inputs with targeted outputs. Material balancing involves taking a survey of available inputs and raw materials in the economy and then using a balance-sheet to balance them with output targets specified by industry to achieve a balance between supply and demand. This balance is used to formulate a plan for the national economy.

Analysis of Soviet-type planning

Part of a series on

Major types Capitalism Socialism Communism

There are two fundamental ways scholars have carried out an analysis of Soviet-type economic planning. The first involves adapting standard neoclassical economic models and theories to analyze the Soviet economic system. This paradigm stresses the importance of Pareto efficiency standard.

In contrast to this approach, scholars such as Pawel Dembinski argue that neoclassical tools are somewhat inappropriate for evaluating Soviet-type planning because they attempt to quantify and measure phenomena specific to capitalist-based economies. They contend that because standard economic models rely on assumptions not fulfilled in the Soviet system (especially the assumption of economic rationality underlying decision-making), the results obtained from a neoclassical analysis will distort the actual effects of STP. These other scholars proceed along a different course by trying to engage with STP on its own terms, investigating the philosophical, historical and political influences that gave rise to STP whilst evaluating its economic successes and failures (theoretical and actual) with reference to those contexts.

The USSR practiced some form of central planning beginning in 1918 with War Communism until it dissolved in 1991, although the type and extent of planning was of a different nature before imperative centralized planning was introduced in the 1930s. While there were many subtleties to the various forms of economic organization the USSR employed during this 70-year time period, enough features were shared that scholars have broadly examined advantages and disadvantages of Soviet-type economic planning.

Soviet-type planning is not the same as economic planning in general as there are other theoretical models of economic planning and modern mixed economies also practice economic planning to a certain extent, but they are not subject to all of the advantages and disadvantages enumerated here.

Features

"Catch up and overtake" (Russian: Кто кого? Догнать и перегнать). A 1929 Soviet propaganda poster based on 1917 paraphrase from Lenin, praising the economic superiority of state socialism.

The unique features of Soviet-style economy were an ideologically driven attempt to build a total economic plan for the whole society, as well as unquestioned paradigm of superiority of the state socialist system. Attempts to modify or optimize the former based on pragmatic analysis of economic outcomes were hindered by the latter. Dembinski describes the Soviet approach to Marxist economy as "quasi-religious" with economic publications by Marx and Lenin being treated as a "Scripture".

Michael Ellman describes specific features of the Soviet economic planning in economic and mathematical terms, highlighting its primarily computational challenges. The theoretical objective of the Soviet economic planning, as executed by Gosplan, was rational allocation of resources in a way that resulted in output of desired assortment of goods and services. The plan was built and executed in annual cycles: each year, a target output of specific goods were determined and using estimates of available input resources Gosplan would calculate balance sheets planning output for all factories. As the number of commodities reached hundreds of thousands, a number of aggregations and simplifications were made to facilitate the calculations, which until late 60's were performed manually.

Actual performance

At first, the USSR's growth in GDP per capita compared favorably with Western Europe. In 1913, prior to the revolution of 1917, the Russian Empire had a GDP per capita of $1,488 in international dollars which grew 461% to $6,871 by 1990. By comparison, Western Europe grew from a higher base of $3,688 international dollars by a comparable 457% to $16,872 in the same period and reached $17,921 by 1998. Following the fall of the USSR in 1991, its GDP per capita figure fell to $3,893 by 1998.

One 1986 publication compared Physical Quality of Life Index (PQLI) based on infant mortality, life expectancy and literacy rate (World Bank data) and other indicators such as number of patients per physician and argued that countries with socialist-style economic planning achieved slightly better indicators at low and medium levels of income than capitalist countries at the same levels of economic development. The gap narrowed down in case of medium and high income countries, all of the latter however in the "high income" category and none "socialist".

Starting in the 1960's, the Soviet economy suffered from stagnation and became increasingly dependent on undisclosed loans from capitalist countries that were members of the Paris Club, while continuing to present Marxism as progressive and superior to a market economy. At the moment of its default and the dissolution of USSR, Russia alone owed $22 billion to the club, with other Eastern Bloc countries taking loans on their own account.

Main article: Era of Stagnation

Widespread shortage of goods and failures of supply chain were presented as "temporary difficulties" by official propaganda, but numerous scholars in the Eastern bloc argued that these are systemic flaws of the Marxian economy. János Kornai coined the term "economy of shortage" to describe the state of the Soviet economy. Leszek Kołakowski presented the political and economic state of Eastern bloc authoritarianism as a logical consequence of Marxism–Leninism, rather than a "deviation". Nikolay Shmelyov described the state of the Soviet economy in the 80's as having large-scale systemic inefficiencies and unbalanced outputs, with one good being constantly in shortage, while others were constantly in surplus and wasted. These issues were naturally observed by Soviet economists, but any proposals to change the basic operating paradigms of the economic planning in response to observed inefficiencies were blocked by ideological hardliners, who perceived them as an unacceptable deviation from Marxism–Leninism, an economic model which they perceived to be "scientifically" proven to be superior.

The New Economic Policy (1921-1928) was a short period of economic pragmatism in the Soviet economics, introduced by Lenin in response to widely observed shortcomings of the War Communism system following the 1917 revolution. NEP, however, was criticized as reactionary and reversed by Stalin, who returned to total economic planning.

Falsification of statistics and "output juggling" of factories in order to satisfy central plans became a widespread phenomenon, leading to discrepancies between "reality of the plan" and the actual availability of goods as observed on site by consumers. Plan failures, when it was no longer possible to hide them, were blamed on sabotage and "wrecking". Shortages and poor living conditions led to industrial actions and protests, usually violently suppressed by the military and security forces, such as the Novocherkassk massacre.

See also: Ryazan miracle, Socialist emulation, and Vreditelstvo

Performance in the Eastern Bloc

During the 1950s, the economic alliance between members of the Eastern bloc and the state monopoly acted as a safety net in the face of Western sanctions being imposed. As a result, the Eastern Bloc countries started to develop autarkic tendencies which would last until the Soviet Union's dissolution. Trade was also able to grow, not just between member states but within them as well, and the agrarian states of the eastern bloc began to industrialize. The Soviet Union also gave Eastern bloc countries subsidies in the form of raw materials at prices lower than those offered in the global market. However, despite these efforts, varying degrees of development still remained between the industrialized countries and the more agrarian ones, which would contribute to the Bloc's economic stagnation in later decades.

The council began to lose its credibility from the 1960s onwards, because disagreements between member countries over the necessity of various reforms led to the slowing of economic growth. In order to encourage economic integration and maintain soviet economic planning, the International Bank for Economic Cooperation was established in Moscow in 1963, and the ‘transferable ruble’ was introduced. The integration failed to materialize for a number of reasons. Firstly, the new currency was separated from foreign trade as is characteristic of centralized planned economies, and so was not able to perform the various functions of money outside of being a unit of account  Additionally, integration failed due to a general lack of interest, as well as the implementation of ‘market liberalization’ policies within several member states throughout the decade. Hence, the CMEA switched gears in the second half of the 1960s, and instead a reform was proposed which encouraged countries to pursue their own specialized industrialization projects without the needed participation of all other member states. East Germany, Poland, Hungary, and Czechoslovakia agreed to these terms, however Bulgaria and Romania did not, and many political officials throughout the Eastern bloc prevented the ‘market liberalization’ policies from being implemented at the CMEA level. The inability for member countries to reach a consensus about economic reforms coupled with the desire to create ‘dynamics of dissent’ within the Council against the USSR contributed to a lack of planning coordination by the CMEA throughout the decade.

In the 1970s, the CMEA adopted a few initiatives in order to continue economic growth and to modernize the economy. Firstly, the Eastern bloc heavily imported technology from the West in order to modernize, increasing the debt of the Eastern Bloc to the West dramatically. In 1971, the CMEA introduced the ‘complex program’, designed to promote further trade integration. This integration plan heavily relied on countries specializing in the production of certain goods and services, and parallel initiatives were discouraged and to be avoided. For instance, Hungary specialized in the manufacturing of buses for local and long-distance transport, which encouraged other member countries to trade with Hungary in order to acquire them.

However, the economic problems of the Eastern bloc continued to increase as reforms failed to pass and specialization efforts failed to incentivize states to improve their products. This resulted in economic growth which paled in comparison to that of the West. In a study assessing the technical efficiency of three Eastern bloc countries (Hungary, Poland, and Yugoslavia) from the 1970s to the 1980s and comparing it to that of developed and developing countries, it was found that the three European socialist countries were less efficient than both developed and developing countries, and this efficiency gap had only widened in the years of analysis. Additionally, among those three countries, Yugoslavia was consistently the most efficient throughout the period of study, followed by Hungary, then Poland. The raw material subsidies (Molotov Plan) that the Soviet Union had provided since the 1950s were drastically reduced to the point of insignificance by the end of the 1980s, due to Eastern bloc countries having to buy industrial goods at a higher price than what was offered on the global market. The lack of support from the USSR as well as the lack of political consensus over reforms only hastened the decline of the CMEA.

Advantages

From a neoclassical perspective, the advantages of STP are quite limited. One advantage of STP is the theoretical possibility to avoid inflation. Complete price stability is achievable, not only because the state plans all prices and quantities, but also because the state has complete control over the money supply via the wages it pays as the sole employer. To maintain a fixed currency value, all the state must do is balance the total value of goods available during a given planning period with the amount of wages it pays according to the following equation, where ${\displaystyle P}$ represents the general retail price level, ${\displaystyle Q}$ accounts for the quantity of consumer goods and services, ${\displaystyle Y}$ is total household income (wages paid), ${\displaystyle \mathit{T}\mathit{P}}$ is transfer payments, ${\displaystyle S}$ is household saving, and ${\displaystyle T}$ is direct household taxes:

$${\displaystyle P\times Q=Y+\mathit{T}\mathit{P}-S-T}$$

However, the USSR arguably never realized this theoretical possibility. It suffered from both open and repressed inflation throughout much of its history because of failure to balance the above equation.

Another advantage of economic planning from the neoclassical perspective is the ability to eliminate unemployment (with the exception of frictional unemployment) and business cycles. Since the state is effectively the sole business proprietor and controls banking, it theoretically avoids classic financial frictions and consumer confidence challenges. Because the state makes labor compulsory and can run enterprises at a loss, full employment is a theoretical possibility even when capital stocks are too low to justify it in a market system. This was an advantage that the USSR arguably realized by 1930, although critics argue that sometimes certain segments of Soviet labor exhibited zero productivity, meaning that although workers were on employment rolls, they essentially sat idle because of capital deficiencies, i.e. there was employed unemployment.

Those scholars who reject the neoclassical viewpoint consider the benefits of STP that the USSR itself adduced. One is the ability to control for externalities directly in the pricing mechanism. Another is the total capture of value obtained in STP which is neglected in market economies. By this, it is meant that while a worker might put in a certain amount of work to produce a good, a market might value that good at less than the cost of labor the worker put in, effectively negating the value of the work done. Because in STP prices are set by the state, STP avoids this pitfall by never pricing an item below its labor value. While these do seem to be valid theoretical advantages to STP (especially under a Marxist–Leninist framework), it has been argued by some that STP as implemented by the USSR failed to achieve these theoretical possibilities.

Disadvantages

From a neoclassical perspective, there were many disadvantages to STP. They can be divided into two categories: macroeconomic and microeconomic.

Macroeconomic disadvantages included systemic undersupply, the pursuit of full employment at a steep cost, price fixing's devastating effect on agricultural incentives and the loss of the advantages of money because STP eschews money's classic role. Additionally, planners had to aggregate many types of goods and inputs into a single material balance because it was impossible to create an individual balance for each of the approximately 24 million items produced and consumed in the USSR. This system introduced a strong bias towards underproduction, resulting in a scarcity of consumer goods. Another disadvantage is that while STP does allow for the theoretically possibility of full employment, the USSR often achieved full employment by operating enterprises at a loss or leaving workers idle. There was always a Pareto superior alternative available to the USSR rather than full employment, specifically with the option to close some enterprises and make transfer payments to the unemployed.

The microeconomic disadvantages from a neoclassical perspective include the following:

• Encouragement of black-market activity because of fixed resource allocation.
• Low quality of Soviet goods induced by shielding them from world markets.
• The neglect of consumer need because of the challenge in measuring good quality.
• The tendency of enterprise-level Soviet managers to understate productive capacity in fear of the ratchet effect. This effect resulted from an enterprise overproducing in a given plan cycle. They would have to match their new level of higher production in the next cycle as the plan was adjusted to fit the new data.
• An anti-innovation bias (also from fear of the ratchet effect).
• Storming (shturmovshchina), i.e. the hurry to complete the plan at the end of a planning cycle resulting in poor production quality.
• Scattering of resources, i.e. excessive spread (raspylenie sredstv), where too many projects (especially construction) would have been started simultaneously and it took much longer to complete because of a lack of available inputs on time

Scholars who reject the neoclassical approach produce a shorter list of disadvantages, but because these disadvantages are valid even from the Soviet perspective, they are perhaps even more damning of STP than those listed above. These scholars consider STP's inability to predict things like weather, trade and technological advancement as an insurmountable drawback to the planning procedure. STP's use of coercive techniques such as the ratchet effect and labor camps which are argued to be inherent to STP on the one hand ensured the system's survival and on the other hand resulted in the distorted information that made effective planning challenging if not impossible. Lastly, these scholars argue that the semantic limitations of language made it impossible for STP planners to communicate their desires to enterprises in sufficient detail for planning to fully direct economic outcomes. Enterprises themselves under STP still made a variety of economic decisions autonomously.

After the collapse of the USSR, other scholars have argued that a central deficiency of Soviet economic planning was that it was not premised on final consumer demand and that such a system would be increasingly feasible with advances in information technology.

Employee compensation in the United States

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Employee_compensation_in_the_United_States 

 

Wages in the United States

  Nominal wages

  Adjusted for inflation wages

Employer compensation in the United States refers to the cash compensation and benefits that an employee receives in exchange for the service they perform for their employer. Approximately 93% of the working population in the United States are employees earning a salary or wage.

Typically, cash compensation consists of a wage or salary, and may include commissions or bonuses. Benefits consist of retirement plans, health insurance, life insurance, disability insurance, vacation, employee stock ownership plans, etc.

Compensation can be fixed and/or variable, and is often both. Variable pay is based on the performance of the employee. Commissions, incentives, and bonuses are forms of variable pay.

Benefits can also be divided into company-paid and employee-paid. Some, such as holiday pay, vacation pay, etc., are usually paid for by the firm. Others are often paid, at least in part, by employees—a notable example is medical insurance.

Compensation in the US (as in all countries) is shaped by law, tax policy, and history. Health insurance is a common employee benefit because there is no government-sponsored national health insurance in the United States, and premiums are deductible on personal income tax. 401(k) accounts are a common employer organized program for retirement savings because of their tax benefits.

Salaries, wages, commissions

See also: Great Regression

Salary, bonuses, and non-equity incentives are often called "Total Cash Compensation".

Wages

See also: Real wage

 

Wages adjusted for inflation in the US from 1964 to 2004

 

Unemployment compared to wages

Wage data (e.g. median wages) for different occupations in the US can be found from the US Department of Labor Bureau of Labor Statistics, broken down into subgroups (e.g. marketing managers, financial managers, etc.) by state, metropolitan areas, and gender.

In the United States, wages for most workers are set by market forces, or else by collective bargaining, where a labor union negotiates on the workers' behalf. The Fair Labor Standards Act (FLSA) establishes a minimum wage at the federal level that all states must abide by, among other provisions. Fourteen states and a number of cities have set their own minimum wage rates that are higher than the federal level. For certain federal or state government contracts, employers must pay the so-called prevailing wage as determined according to the Davis-Bacon Act or its state equivalent. Activists have undertaken to promote the idea of a living wage rate which accounts for living expenses and other basic necessities, setting the living wage rate much higher than current minimum wage laws require.

"The FLSA requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek."

Salaries

In the United States, the distinction between periodic salaries (which are normally paid regardless of hours worked) and hourly wages (meeting a minimum wage test and providing for overtime) was first codified by the Fair Labor Standards Act of . Five categories were identified as being "exempt" from minimum wage and overtime protections, and therefore salariable—executive, administrative, professional, computer, and outside sales employees. Salary is generally set on a yearly basis. (These employees must be paid on a salary basis above a certain level, $455 per week as o, though some professions – "Outside Sales Employees", teachers and practitioners of law or medicine—are exempt from that requirement.)

Executive compensation

Main article: Executive pay in the United States

"Executive compensation" has its own set of regulations and lacks many of the tax benefits of other employee compensation because it exceeds their income limits.

Equity compensation

Main article: Employee stock ownership

Employee stock options

Main article: Employee stock option

Employee stock options are call options on the common stock of a company. Their value increases as the company's stock rises. Employee stock options are mostly offered to management with restrictions on the option (such as vesting and limited transferability), in an attempt to align the holder's interest with those of the business shareholders. Options may also be offered to non-executive level staff, especially by businesses that are not yet profitable, insofar as they may have few other means of compensation. They may also be remuneration for non-employees: suppliers, consultants, lawyers, and promoters for services rendered.

There is usually a period before the employee can "vest", i.e. sell or transfer the stock or options. Vesting may be granted all at once ("cliff vesting") or over a period time ("graded vesting"), in which case it may be "uniform" (e.g. 20% of the options vest each year for 5 years) or "non-uniform" (e.g. 20%, 30%, and 50% of the options vest each year for the next three years).

Types of employee stock options

In the U.S., stock options granted to employees are of two forms, that differ primarily in their tax treatment. They may be either:

• Incentive stock options (ISOs)
• Non-qualified stock options (NQSOs or NSOs)

Other equity-based compensation

Besides stock options, other forms of individual equity compensation include:

• restricted stock – Stock that cannot be sold by the owner until certain conditions are met (usually a certain length of time passing (vesting period) or a certain goal achieved, such as reaching financial targets) They may be compared to stock options with a strike price of $0.
• restricted stock units (RSUs) – Rights to own the employer’s stock, unlike restricted stock they are tracked as bookkeeping entries and lack voting rights. They may be paid in stock or cash. The National Center of Employee Ownership describes them as being "like phantom stock settled in shares instead of cash"
• stock appreciation rights – These provide the right to the monetary equivalent of the increase in the value of a specified number of shares over a specified period of time. As with phantom stock, it is normally paid out in cash, but may be paid in shares.
• phantom stock – A promise to pay a bonus in the form of the equivalent of either the value of company shares or the increase in that value over a period of time.
• employee stock purchase plan (ESPP)

Taxation of employee stock options in the United States

Because most employee stock options are non-transferable and are not immediately exercisable though they can be readily hedged to reduce risk, the IRS considers that their "fair market value" cannot be "readily determined", and therefore "no taxable event" occurs when an employee receives an option grant. Depending on the type of option granted, the employee may or may not be taxed upon exercise. Non-qualified stock options (those most often granted to employees) are taxed upon exercise. Incentive stock options (ISO) are not, assuming that the employee complies with certain additional tax code requirements. Most importantly, shares acquired upon exercise of ISOs must be held for at least one year after the date of exercise if the favorable capital gains tax are to be achieved.

However, taxes can be delayed or reduced by avoiding premature exercises and holding them until near expiration day and hedging along the way. The taxes applied when hedging are friendly to the employee/optionee.

Generally accepted accounting principles

According to US generally accepted accounting principles in effect before June 2005, stock options granted to employees did not need to be recognized as an expense on the income statement when granted, although the cost was disclosed in the notes to the financial statements. This allows a potentially large form of employee compensation to not show up as an expense in the current year, and therefore, currently overstate income. Many assert that over-reporting of income by methods such as this by American corporations was one contributing factor in the Stock Market Downturn of 2002.

Excess tax benefits from stock-based compensation

This item of the profit-and-loss (P&L) statement of companies' earnings reports is due to the different timing of option expense recognition between the GAAP P&L and how the IRS deals with it, and the resulting difference between estimated and actual tax deductions.

At the time the options are awarded, GAAP requires an estimate of their value to be run through the P&L as an expense. This lowers operating income and GAAP taxes. However, the IRS treats option expense differently, and only allows their tax deductibility at the time the options are exercised/expire and the true cost is known.

This means that cash taxes in the period the options are expensed are higher than GAAP taxes. The delta goes into a deferred income tax asset on the balance sheet. When the options are exercised/expire, their actual cost becomes known and the precise tax deduction allowed by the IRS can then be determined. There is then a balancing up event. If the original estimate of the options' cost was too low, there will be more tax deduction allowed than was at first estimated. This 'excess' is run through the P&L in the period when it becomes known (i.e. the quarter in which the options are exercised). It raises net income (by lowering taxes) and is subsequently deducted out in the calculation of operating cash flow because it relates to expenses/earnings from a prior period.

Benefits

The term "fringe benefits" was coined by the War Labor Board during World War II to describe the various indirect benefits which industry had devised to attract and retain labor when direct wage increases were prohibited.

Employee benefits in the United States might include relocation assistance; medical, prescription, vision and dental plans; health and dependent care flexible spending accounts; retirement benefit plans (pension, 401(k), 403(b)); group-term life and long term care insurance plans; legal assistance plans; adoption assistance; child care benefits; transportation benefits; and possibly other miscellaneous employee discounts (e.g., movies and theme park tickets, wellness programs, discounted shopping, hotels and resorts, and so on). Companies provide benefits that go beyond a base salary figure for a number of reasons: To raise productivity and lower turnover by raising employee satisfaction and corporate loyalty, take advantage of deductions, credits in the tax code. Wellness programs can also lower health insurance costs.

Many employer-provided cash benefits (below a certain income level) are tax-deductible to the employer and non-taxable to the employee. Some fringe benefits (for example, accident and health plans, and group-term life insurance coverage (up to US$50,000) (and employer-provided meals and lodging in-kind,) may be excluded from the employee's gross income and, therefore, are not subject to federal income tax in the United States. Some function as tax shelters (for example, flexible spending accounts, 401(k)'s, 403(b)'s). Fringe benefits are also thought of as the costs of keeping employees other than salary. These benefit rates are typically calculated using fixed percentages that vary depending on the employee’s classification and often change from year to year.

Executive benefits (e.g. golden handshake and golden parachute plans), exceed this level and are taxable.

From US Department of Labor, Bureau of Labor Statistics, National Compensation Survey (NCS), March 2011

 

Benefits for workers earning wages in the highest and lowest 10th percent of private industry employees. From US Department of Labor, Bureau of Labor Statistics, National Compensation Survey (NCS), March 2011

Full-time and high wage workers are much more likely to have benefits, as the charts to the right indicates.

Benefits can be divided into as company-paid and employee-paid. Some, such as holiday pay, vacation pay, etc., are usually paid for by the firm. Others are often paid, at least in part, by employees. A notable example is medical insurance, which has risen in cost dramatically in recent decades and been shifted to employees by many American employers. Even when paid entirely by employees, these programs may still provide value to employees and be called benefits because their cost may be considerably lower than that of equivalent non-employer-sponsored programs, thanks to employers having negotiated discounts with providers.

Some benefits, such as unemployment and worker's compensation, are federally required and arguably can be considered a right, rather than a benefit.

American corporations often offer cafeteria plans to their employees. These plans would offer a menu and level of benefits for employees to choose from. In most instances, these plans are funded by both the employees and by the employer(s). The portion paid by the employees is deducted from their gross pay before federal and state taxes are applied. Some benefits would still be subject to the Federal Insurance Contributions Act tax (FICA), such as 401(k) and 403(b) contributions; however, health premiums, some life premiums, and contributions to flexible spending accounts are exempt from FICA.

Perks

The term perks is often used colloquially to refer to those benefits of a more discretionary nature. Often, perks are given to employees who are doing notably well and/or have seniority. Common perks are take-home vehicles, hotel stays, free refreshments, leisure activities on work time (golf, etc.), stationery, allowances for lunch, and—when multiple choices exist—first choice of such things as job assignments and vacation scheduling. They may also be given first chance at job promotions when vacancies exist.

Pensions

Traditional pensions, known as Defined benefit pension plans, provides employees with a guaranteed paycheck (or lump sum) in retirement. The benefit is usually "defined" by a formula based on the employee's earnings history, tenure of service and age, and not depending on investment returns. Because of the high cost and responsibility of the employer to finance the plan, in recent years many companies have phased out their pension plans sometimes replacing them with defined contribution deferred compensation plans, which are defined by contribution.

Deferred compensation

Qualifying and non-qualifying

Deferred compensation is any arrangement where an employee receives wages after they have earned them. Deferred compensation plans in the US often have the benefit of employers' matching all or part of the employee contribution.

In the US, Internal Revenue Code section 409A regulates the treatment for federal income tax purposes of “nonqualified deferred compensation”, the timing of deferral elections and of distributions.

Qualifying

A "qualifying" deferred compensation plan is one complying with the ERISA, the Employee Retirement Income Security Act of 1974. Qualifying plans include 401(k) (for non-government organizations), 403(b) (for public education employers), 501(c)(3) (for non-profit organizations and ministers), and 457(b) (for state and local government organizations) Most medium-sized and large companies offer 401(k)’s.

ERISA, has many regulations, one of which is how much employee income can qualify. In an ERISA-qualified plan (like a 401(k) plan), the company's contribution to the plan is tax deductible to the plan as soon as it is made, but not taxable to the individual participants until it is withdrawn. So if a company puts $1,000,000 into a 401(k) plan for employees, it writes off $1,000,000 that year. If the company is in the 25% bracket, the contribution costs it only $750,000 (with $250,000 saved in taxes).

Employee benefits provided through ERISA are not subject to state-level insurance regulation like most insurance contracts, but employee benefit products provided through insurance contracts are regulated at the state level. However, ERISA does not generally apply to plans by governmental entities, churches for their employees, and some other situations.

The tax benefits in qualifying plans were intended to encourage lower-to-middle income earners to save more, high income-earners already having high savings rates. As of 2008, the maximum qualifying annual income was $230,000. So, for example, if a company declared a 25% profit sharing contribution, any employee making less than $230,000 could deposit the entire amount of their profit sharing check (up to $57,500, 25% of $230,000) in their ERISA-qualifying account. For the company CEO making $1,000,000/year, $57,500 would be less than 1/4 of his $250,000 profit sharing cut. It is for high earners like the CEO, that companies provide "DC" (i.e. deferred compensation plans).

Non-qualifying

Main article: Nonqualified deferred compensation

A nonqualified deferred compensation (NQDC) plan is a written agreement between an employer and an employee wherein the employee voluntarily agrees to have part of their compensation withheld by the company, invested on their behalf, and given to them at some pre-specified point in the future. NQDC refers to a specific part of the tax code that provides a special benefit to corporate executives and other highly compensated corporate employees. Non-Qualified Deferred Compensation is also sometimes referred to as deferred comp (which technically would include qualifying deferred comp but the more common use of the phrase does not), DC, non-qualified deferred comp, NQDC or golden handcuffs.

"Most large companies" have a NQDC that takes compensation until some future date. Income tax is deferred until the recipient receives payment. Depending on the firm and employee, DC can be optional or mandatory, contributions may come only from salary, or may allow gains from stock options. At some firms it is mandatory for all salary in excess of $1 million/year. The benefit feature of NQDC plans vary. Some plans provide matching contributions, which can be awarded at the board's discretion or by a formula. The contributions in the plan may earn a guaranteed minimum rate of "investment," or at a premium over the market rate.

Nonqualifying differs from qualifying in that:

1. Employers may also pick and choose which employees they provide deferred compensation benefits to rather than being required to offer the same plan to all employees.
2. NQDC has the flexibility to treat different employees differently. The benefit promised need not follow any of the rules associated with qualified plans (e.g. the 25% or $44,000 limit on contributions to defined contribution plans). The vesting schedule can be whatever the employer would like it to be.
3. Companies may provide deferred compensation benefits to independent contractors, not just employees.
4. The employer contributions are not tax deductible
5. Employees must pay taxes on deferred compensation at the time such compensation is eligible to be received (not just when it is actually drawn out).

Deferred comp is only available to senior management and other highly compensated employees of companies. Although DC is not restricted to public companies, there must be a serious risk that a key employee could leave for a competitor and deferred comp is a "sweetener" to try to entice them to stay. If a company is closely held (i.e. owned by a family, or a small group of related people), the IRS will look much more closely at the potential risk to the company.

1. Assets in plans that fall under ERISA (for example, a 401(k) plan) must be put in a trust for the sole benefit of its employees. If a company goes bankrupt, creditors are not allowed to get assets inside the company's ERISA plan. Deferred comp, because it does not fall under ERISA, is a general asset of the corporation. While the corporation may choose to not invade those assets as a courtesy, legally they are allowed to, and may be forced to, give deferred compensation assets to creditors in the case of a bankruptcy. A special kind of trust called a rabbi trust (because it was first used in the compensation plan for a rabbi) may be used. A rabbi trust puts a "fence" around the money inside the corporation and protects it from being raided for most uses other than the corporation's bankruptcy/insolvency. However, plan participants may not receive a guarantee that they will be paid prior to creditors being paid in case of insolvency.
2. Federal income tax rates change frequently. Deferred compensation has tax benefits if the income tax rates are lower when the compensation is withdrawn then when it was "deposited" (i.e. at the time it was deferred), and tax disadvantages if the reverse is true.

Deferred comp agreements

Plans are usually put in place either at the request of executives or as an incentive by the Board of Directors. They're drafted by lawyers, recorded in the Board minutes with parameters defined. There is a doctrine called constructive receipt, which means an executive cannot have control of the investment choices or the option to receive the money whenever he wants. If he is allowed to do either of those 2 things or both, he often has to pay taxes on it right away.

Taxation

In a deferred comp plan, unlike an ERISA (such as a 401(k) plan), the company does not get to deduct the taxes in the year the contribution is made, they deduct them the year the contribution becomes non-forfeitable. For example, if ABC company allows SVP John Smith to defer $200,000 of his compensation in 1990, which he will have the right to withdraw for the first time in the year 2000, ABC puts the money away for John in 1990, John pays taxes on it in 2000. If John keeps working there after 2000, it does not matter because he was allowed to receive it (or "constructively received") the money in 2000.

Other circumstances around deferred comp. Most of the provisions around deferred comp are related to circumstances the employee's control (such as voluntary termination), however, deferred compensation often has a clause that says in the case of the employee's death or permanent disability, the plan will immediately vest and the employee (or estate) can get the money.

Performance-linked incentives

Main article: Performance-linked incentives

Long-term incentives are paid five or at least three years out. They are often a mixture of cash and shares of stock in the company, or some other type of equity compensation such as stock options, which are almost always subject to restrictions based on time, performance, or both, known as vesting.

Clawback of "faithless servant" employee compensation

Under the faithless servant doctrine, which is a doctrine under the laws of a number of states in the United States, and most notably New York State law, an employee who acts unfaithfully towards his or her employer must forfeit all compensation received during the period of disloyalty, which compensation is subject to clawback by the employer.