Inequality

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Inequality is a term so apparently self-evident that it shows up everywhere in political discourse on both the left and the right.  Much of that discourse, however, is so simplistic that it is easily dismissed by the other side:

– For the left, inequality is morally wrong—despite the fact that it can accompany rising living standards even for the people on the short end of the stick.   A fair number of the 238 cities vying for Google’s second headquarters would probably see a rise in both inequality and the general standard of living if they won (just based on an influx at the high-income end).

– For the right, inequality is good since rich people are the “job creators”, so the happier they are the better—despite the fact that there is no evidence for that logic at all. It also seems rather odd to assert that businessmen are so incompetent as to make hiring decisions based on personal satisfaction rather than opportunities to be staffed.

Despite those points, the effects of inequality are neither uncertain nor hard to understand—it’s just easy to be sloppy about it.  This note is an attempt to be more real.

First one must acknowledge that inequality itself is neither bad nor good.  What matters is the well-being of the population, including in particular those on the lower end of the scale.  For people like Steve Jobs (always the first example) personal wealth is the result of creating an economic engine with benefits to many.  It’s hard to argue with that.   And you can push it one step further and say that the incentives for innovation in the US economy are an important reason why the US has been able to stay ahead of the technology curve.  You can even say that the potential for success is an important part of well-being for many people, so that an economy of pure equality—even in the abstract—is not necessarily a good thing.

None of that, however, tells you very much about the effects of growing inequality in the US.  First of all let’s be clear that the increase in inequality is well-established and true for any definition of wealth (income, assets, …) you might want to use.

Further rising inequality here has been no obvious driver of innovation—on the contrary with increasing inequality the US economy has become more and more dominated by large entrenched companies, with less and less room for new companies to succeed.   And no one can argue that the inequality has improved opportunities for people to succeed—on the contrary US society has become less upwardly mobile by every measure.

As for the effect on peoples’ finances—for that there is no ambiguity.  Some of the most telling statistics came in a recent paper examining per-adult income growth for the bottom 50% of the US population.  It turns out that since 1980 there has been no per-adult income growth for the bottom 50%!  That is compared with a 64% increase for the upper 50%, and vastly more for the top 1% (see the chart at the beginning).  Note this was a period when women entered the workforce in large numbers.  Since we’re dealing with per-adult statistics, we’re saying that for the bottom half of the population the net effect of women working was just to keep things from getting worse!  As another example of the same thing—essentially all the benefits of the 2008 – 2015 recovery went to the top 1%.

So what is going on with inequality and what should we think about it?  In broad terms there is no secret.   We can start with the usual three inter-linked suspects:  automation, globalization, and de-unionization.  All of those decrease the power of lower-skilled workers in dealing with management, so growing inequality is no surprise—and the effects are continuing.  While those effects have been felt everywhere, the response of government to that situation has been different in different countries.  In most countries government has attempted to cushion the blow.   That has not been wildly successful, but intervention has at least damped the situation.

In the US the exact opposite has happened.   Perhaps because of the horrendously expensive electoral process here (assisted by Citizens United), we have seen a precipitous rise in the political power of the increasingly rich top.  And political dialogue has naturally evolved to reflect their interests.  Even previously sacrosanct services such as education have suffered loss of public financing; the student debt crisis is an obvious sign.  If you make a list of the public services that the ultra-rich don’t need, e.g.

– Education

– Healthcare

– Retirement

– Social welfare

– Broad-based infrastructure,

it is obvious that all of it has become controversial.   That is contrasted with an area such as defense, where we’re looking for a buildup.

While Trump’s tax plan has been sold as a job creator, that’s not where it came from.  No one is hiding that fact that it is the Republican donors’ tax plan, and its benefits to anyone else are ancillary—and to say the least unproven.  Trump himself came on-board late in the game and conveniently seems to believe that whatever is good for him personally is best for everyone else.  The tax plan shows inequality as a self-reinforcing trend:  more money => more power => even more money.

The bottom line is that inequality in the US is in the process of making this a very different country.  For the poor it means simply less support, though the US has never been very good at that.   The big difference is for the middle class.   Services that they have traditionally relied upon are becoming problematical, and the tax system is increasingly skewed to benefit the rich.  Furthermore the ongoing effects of automation, globalization, and de-unionization have made the threat of falling out of the middle class very real.   It should be emphasized that automation in particular is accelerating as an issue, with artificial intelligence pushing the threat up the income scale.  A recent report predicts almost one-third of existing US jobs could be lost to automation by 2030.

And there’s another problem as well.   Adam Smith himself pointed out that the private sector cannot be trusted to provide the proper environment for its own success.   He saw both policing the private sector (e.g. anti-trust, free entry) and education (to sustain the private sector) as tasks for government.   So growing inequality—with the ultra-rich running the government for their own sake—is not only a threat to the well-being of the population, it is a threat to the vitality of the economy itself.

While solutions are outside the scope of this note, we must recognize that rising inequality puts us on track to become a second-class power with few rich and many poor.  That, as noted last time, is our future as banana republic.

The Foreigners Threatening America

25700577124_b9b3d89b92_kRepublicans are good at hateful, manufactured stereotypes.  “Welfare queens” worked pretty well for a while.   Now we have snobbish, nose-in-the-air elitist liberals.  They’re all like that right?  Just like shiftless blacks and Mexican rapists.  Who needs reality when you can tell who to hate based on skin-color, clothing or even the music they listen to.

Let’s get some reality.  Maureen Dodd did us a service last week with her annual piece presenting her brother’s comments from the other side of the political fence.   There was surprisingly little of substance—just breezy support for Trump’s “delivering on his promises to shake things up” and dissatisfaction with the Republican Congress for not getting the job done.  Nothing on actual policy beyond a hint of racism with the kudos to Bannon for “holding Republicans’ feet to the fire”.  All told this was another confirmation that the Trump core will follow wherever he leads.  It wasn’t different from the content of the Trump rallies or from any of the many recorded interviews with Trump supporters.   Just a reminder that after a year of Trump sell-outs nothing has changed.

It’s time to get over the white racism of the left—that the core Trump supporters are ultimately our people who need to be brought back into the fold.  They may be perfectly okay in normal life, but so were the Nazis who saw the Jews being rounded up in their neighborhoods and thought it was okay.   Fascism will do that to people.  Financial reverses plus a skilled demagogue, and reasonable, intelligent people can succumb to it.  And it’s not going to change any time soon.

It’s also clear what Trump and his supporters are doing to this country.  In their assertion of ultimate white privilege, they are undermining what has made this country great—the opportunity for everyone to succeed.  The fascist denial of objective reality is undermining US economic success, denying educational opportunity, and crippling the worldwide response to climate change.  Like Britain, we are on the way to becoming a second-rate power.  However the dangers here are worse—from another economic crash, from a war, or from our uncritical buddy-buddy relations with the Russians.

Two books in particular have shaped ideas about Trump core supporters:   Hillbilly Elegy and Strangers in Their Own Land.   Both tried to be sympathetic, describing the people, their views, and their reasons.  But the second is particularly relevant because it described Louisiana—a state where they’d won.   It was a disaster of epic proportions:   an environmental catastrophe and an educational system gutted to provide tax breaks for oil companies.  The whole business kept running by tax revenues transferred from the north.

The Trump campaign liked to say the last election was the last chance to protect the country from a Latin American takeover.  We now know he may have been right—we are well underway to becoming a banana republic where the ultra-rich control everything (through Citizens United and the Koch Organization) including how little they are taxed.   Public services, including education, are not priorities.  Hannah Arendt (quoted by Michelle Goldberg) talked succinctly about the collusion between the Nazi economic elite and the fascist-inspired masses they controlled, “The temporary alliance between the elite and the mob rested largely on this genuine delight with which the former watched the latter destroy respectability.”

That is what is foreign to America.   That is what must be pushed back before it is too late.

 

Big Brother

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The big story today is the Koch-financed purchase of Time Inc.  While this did make the NY Times—in a rather innocuous, long-winded article—you have to go to the Guardian to get a notion of what is going on.  There are three points:

– Most obviously this gives the Koch organization a direct mouthpiece in print media. To be clear—the Koch organization does not represent just Koch money.   It channels money from the richest people in the US and distributes untraceable billions of dollars through a political organization of 1600 staffers.   It quite literally owns the Republican party (Pence is their creation) and is the source (and explanation) for the current tax bill.

– Also this month, the FCC with its new Trump-appointed head, “eliminated protections against monopolies in local broadcast news, a move widely seen as clearing the way for the expansion of a Trump-friendly local broadcasting network”.  This is the Sinclair Media Group, which forces all local subsidiaries to broadcast centrally-prepared Trump agenda propaganda.

– Finally we have the much-discussed FCC ruling last week rolling back net neutrality.  This action has not gone unnoticed, but its impact has been discussed primarily in terms of network providers’ ability to block competitors for their own services.   In the current context however, it is equally important to recognize this amounts to oligarchic control of internet content.

So there you have it.  Print media, television, and internet all at risk of coming under control.  It can happen here.

Why Isn’t the Tax Cut Bipartisan?

In previous posts we’ve talked about possibilities for bipartisan cooperation on the federal budget and the tax plan.   There were obvious possibilities for that to happen.   The biggest cuts after all are to the corporate income tax, and Obama already discussed his interest in that in the 2015 State of the Union.  Other Democrats talked to Trump about bipartisan options prior to the announcement of the tax plan.

Why didn’t that happen?  Let’s look at the primary provisions.

  1. The Corporate Tax Cut

First of all, as many have mentioned, the average effective corporate rate in the US is not 35% but more like 24%, which is not so far from the international average.   Real tax reform would bring the effective and nominal rates in closer line with each other–with the advantage of removing artificial lobbyist-created inequities in the tax plan.   That, with adjustments to assure parity with other countries, would not break the bank.  It would help the country and could have bipartisan support.

We have instead chosen to close few loopholes, insist on a nominal 20% corporate tax rate, and incur a massive revenue shortfall.  That choice gives us the deficit as well as the middle-class tax increases.  The connection to jobs is weak at best, so most of this additional corporate saving going to investors.   Since it isn’t a matter of competitive parity—why are we doing it?

  1. The Pass-Through tax cut

The stated target of this tax cut was small business, but in fact few small businesses would be helped.   Further, as was recognized early, this tax cut opens opportunities for wealthy people to avoid personal tax rates.   The current form of the tax cut has rules that attempt to limit that.  However many loopholes remain, and the rules are strangely targeted.   Manufacturing and real estate can benefit, but not services.

Since most of this money is going to people who can exploit the loopholes—not to the stated targets—why are we doing it?

  1. The Estate Tax cut

This is of course the most problematical of all.   Only rich people with estates over $10 million are involved, and the benefit increases with wealth.  It is worth emphasizing that we don’t just raise the tax-free limit, we completely abolish it and with no unpaid capital gains taxes on the heirs!

As to why we’re doing it, the explanation is the most transparent of self-serving nonsense—“making rich people richer is good for everyone”.

 

These tax cuts are not bipartisan, because their logic has nothing to do with the welfare of the country.   Donors are complaining they haven’t gotten what they paid for, so it’s time to get the job done.  Bipartisanship is not on the agenda.   These tax cuts are delivered as ordered.

It is important to recognize that there is nothing mysterious about the small, ultra-rich donor community (with the Koch organization as primary mover channeling money from others) and also nothing ambiguous about their demands—both money and power.  You might even argue—though it’s a stretch—that perhaps the stock market is rising not on business prospects, but on all that extra money the ultra-rich donors will have to invest somewhere!

And there’s another twist to this too.   Trump and the Koch brothers have much the same motives, but Trump is the President after all.  How can he get away with a tax program that has been precisely engineered for his own benefit?

Trump was born for this job.   He actually believes that whatever is good for him personally is by definition the best possible thing for the country.

So we are left with a philosophical quandary.   Is a crook who uses his office to pocket more than a billion dollars from the country excused if he is too self-intoxicated to realize what he’s doing?

 

 

Some History and Consequences of a Tax Cut

1929

In the years since the Great Depression economists of all stripes have come to a consensus about what happened.   Wild speculation produced a crash.   That led to intense stress on the banking system.   The Federal Reserve (as primary villain) was unwilling and unable (because of the gold standard) to provide support.   So the banks failed, and the rest of the economy collapsed.  National income was down a massive 60% by 1932.

The collapse originated in the US and was much worse here than elsewhere. Germany, still paying World War I reparations, was a special case and fared badly.  It is important to remember that without the 1929 crash, Hitler would have remained a curious side-show.

Recovery in the US took a full decade.  There was a serious blip in 1937-38 when Roosevelt dialed back on stimulus and a GDP slowdown followed.  International trade dwindled in the 30’s, as many countries instituted protectionist barriers.   The US wasn’t fully out of the depression until the second World War.

 

2008

Fast forward to the crash of 2008.   The banking system was again central, because mortgage-backed securities brokers had become unregulated de facto banks.  (Why should businesses earn nothing on cash when mortgage-backed securities paid real interest and were rated “just as safe”?)  When the deteriorating economy led to large-scale mortgage defaults, the mortgage-backed securities collapsed in value and trillions of dollars of supposedly safely-banked assets disappeared.

People running things had fortunately learned the lessons of 1929, and stepped in immediately to keep the banking system afloat and pump money into the economy to prevent a depression.  That stopped things going from bad to worse—very painful but not a depression.

 

Crisis and Recovery

Even at the beginning, however, something strange happened in this country.   At the very end of his presidency, George Bush did the right thing  (for once) and in the face of disaster introduced legislation to keep the banks afloat.  Despite advice of economists, his own party refused to support him—claiming to fight socialism.  However 172 Democrats and 91 Republicans did support the bill, and by a 263 to 171 vote helped pull the country back from the brink.

The episode seemed odd at the time.  But with the start of the Obama presidency and the new Congress, it quickly became clear what had happened.   That had been a transitional moment.  The old Republican party that at least cared (conservatively!) about the well-being of the country was no more.

The new Republican party, more and more a creature of the Koch machine, had only one goal—cutting taxes on the small group of ultra-rich backers who now owned the party.   That translated immediately to a surprising position.   Mitch McConnell (always quick to know which way the wind was blowing) later summarized it as “The single most important thing we want to achieve is for President Obama to be a one-term president.”  Private statements of position were even stronger. There would be no cooperation on anything—even on recovery from the recession.  Obama wouldn’t give them the tax cut, so it was scorched earth.  Republicans at the time trotted out ideological objections to stimulus—which the current Republican enthusiasm for both presents and deficits shows up for the hypocrisy it was.   Everything that kept the country going had to be passed over Republican opposition.

Even with a Democratic majority, that limited what could be done as stimulus.   At the same time the Kochs founded and funded the Tea Party as an apparently populist, anti-spending front group.  Slow growth plus anti-establishment rhetoric plus an unprecedented dose of Koch money (enabled by Citizens United) helped Republicans gain control of the House.  Keeping the country poorer was a rousing success!

After Obama was reelected Republicans doubled down on slowing the recovery and preserving the remaining pain.  Their ploy was a commitment to balanced-budgets (today of course demonstrated to be bogus), including even a proposal for a constitutional amendment.  On that basis they deliberately blocked any further stimulus or social programs (such as Obama’s State of the Union proposals for community colleges and daycare)—starving government to sow discontent for the election.   By 2016 they had held the country hostage to their tax cuts for the full six years they controlled Congress.

Trump wasn’t their chosen candidate—too much of a loose cannon—but he would do.   He was an even better populist front than the Tea Party.  He didn’t even notice the irony in his “slowest recovery” claims.  Pence was their guy all the way, and Trump picked a cabinet full of other Koch people.  On tax cuts there was no problem managing Trump.   He already believed anything good for himself was good for the country.  The tax cut plan is now here.   It is worth more than $1B for Trump himself, and is everything the rich donors could have hoped for.

You have to hand it to the Koch machine.  All the distributed power in the power in the American political system has now been centralized and controlled.  Local, state, Congress, the Presidency, the Supreme Court—the Koch organization has money in all of it.   More to spend than the Republican party itself, and all under strict control.  A few hundred fabulously wealthy people are running the USA for their benefit.

 

Now

That’s where we are.

For the tax cut, what’s on the table is an astonishing giveaway of the country to the richest few.   The asserted benefits to the middle class are nothing but after-the-fact propaganda.  There is no logical or historical justification for claiming that upper class tax cuts produce jobs.   Business tax cuts, while they sound good, are actually no better.   Businesses hire people because of opportunities, not cash on hand.  With today’s low interest rates the cost of capital is not a big barrier to new opportunities, so tax cuts will end up going to the investors.

This is not really a stimulus package, and it’s a myopic approach to our real problems in any case.  One reason the recovery hasn’t helped everyone is that the Republicans’ past financial lock-down has prevented whole categories of problems from being addressed.  The economy is changing and issues such as skills mismatch, automation, educational opportunity and even infrastructure aren’t addressed just by throwing money at the private sector.

There’s another problem too.   All that tax cut money will now be chasing investment—a dangerous invitation to speculation.   And we’re incurring new large deficits to pay for it at the wrong time in the business cycle.  The country is out of recession, and large deficits in good times are bad.   When our speculative bubble comes to an end, it will be all the harder to find the stimulus money to get up off the floor.

There is also a real question about who’s going to be around to help.  Remember the disastrous Federal Reserve behavior in 1929 and the unanimity it took to get back from 2008.   Janet Yellen may not be retained as Federal Reserve Chairman when her term expires next February.  One prominent candidate to replace her has no specialist background in economics and opposed all stimulus after 2008 out of an unsubstantiated fear of inflation.   Trump has not chosen his nominee, but it’s something to worry about.

Too many pieces from 1929 are coming back together. The ultra-rich are getting their tax cuts.   By all evidence there is little interest in learning from the past and even less in looking out for the lot of the rest of us.