Tackling Inequality

Yves Smith over at Naked Capitalism has a post with a rather spectacular statistic as a headline: "58% of Real Income Growth Since 1976 Went to the Top 1% (and why it matters)". That's a pretty devastating statistic though it clearly points to the salient development in the American economy, a widening, and dangerous in my view, social inequality.

That stat comes courtesy of the Financial Times' Martin Wolf who in turn is citing the work of the Indian born economist Raghuram Rajan, now a professor at the University of Chicago but previously the Chief Economist at the IMF. Dr. Rajan, who is a rather unorthodox economist even if he does lean right on regulatory reforms, has a new book out called Fault Lines: How Hidden Fractures Still Threaten the World Economy which is the subject of both Smith and Wolf posts.

From Martin Wolf:

In his book, Prof Rajan points to domestic political stresses within the US. Related stresses are emerging in western Europe. I think of it as the end of “the deal”. What was that deal? It was the post-second-world-war settlement: in the US, the deal centred on full employment and high individual consumption. In Europe, it centred on state-provided welfare.

In the US, soaring inequality and stagnant real incomes have long threatened this deal. Thus, Prof Rajan notes that “of every dollar of real income growth that was generated between 1976 and 2007, 58 cents went to the top 1 per cent of households”. This is surely stunning.

“The political response to rising inequality ... was to expand lending to households, especially low-income ones.” This led to the financial breakdown. As Prof Rajan notes: “[the financial sector’s] failings in the recent crisis include distorted incentives, hubris, envy, misplaced faith and herd behaviour. But the government helped make those risks look more attractive than they should have been and kept the market from exercising discipline.”

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Getting It Wrong As Usual

Once again Ross Douhat is wrong as usual. In a column entitled Inequality As Usual in the New York Times, Mr. Douhat seeks to divert attention from the causes of social inequality and reassign culpability from its conservative progenitors to liberalism for failing in nine short months to reverse a three decade assault on the middle class and the poor.

According to Mr. Douhat should the Obama Administration fail to reverse our still-widening social inequality, it "will represent a significant policy failure." Perhaps but I take issue with a number of Mr. Douhat's assertions. Only a deluded conservative could claim that the federal income tax is already quite progressive. Quite the opposite. In 1948, still at the start of our "Great Compression", the effective Federal Tax Rate (Income Tax + FICA) for median families stood at 5.30 percent while the effective Federal Tax Rate on the richest one percent was 76.9 percent. Even as late as 1980, the effective Federal Tax Rate for median families was 23.68 percent versus 31.7 percent for the top percent. By 1985, Reagan's tax cuts narrowed that margin to just 46 basis points, 24.44 percent on median families versus 24.9 percent on the richest one percent. While real income for the bottom 90 percent of the population fell by 11 percent between 1973 and 2005, those in the top .01 percent bracket, comprising some 14,000 households with annual incomes averaging nearly $13 million, saw their take increase by 250 percent over the same period and yet they were gifted by the Bush Administration with unparalled tax cuts.

I'm also struck by the problem is too vexing so let's not fix it mentality of Mr. Douhat.

There's only so much that politicians can do about broad socioeconomic trends. The rise of a more unequal America is a vexingly complicated issue, whose roots may wind too deep for public policy to reach.

The zenith of fairness in America was the mid-1960s. That achievement was the fruit of the public policies that were enacted during the Administration of Franklin Roosevelt. The great reduction of inequality that undid the gross divide of the 1920s and created middle-class America between 1935 and 1945 was driven by political change that included the adoption of a progressive tax structure that enabled a larger government role in the economy and provided the basis for a broad range of redistributive programs. Mr. Douhat is simply wrong to suggest that there's only so much that politicians can do about social inequality. History proves otherwise.

On the other hand, we face problems that FDR did not have. One critical difference between then and now is that the Federal Government, thanks largely to 'limited government' GOP Administrations, is encumbered by over $11 trillion in debt. Much of that debt was accrued to pay for a defense build-up that ultimately was little more than a redistributive transfer of wealth to the arms industry. Or take the Bush-Cheney Energy Bill which provided $6 billion in direct subsidies to the oil & gas sector plus another $20 billion to $32 billion in indirect subsidies over 20 years. Our five-year $300 billion Farm Bill includes $15 billion in annual subsidies mostly to large agri-businesses such as Archer-Daniels-Midland and Cargill. Note that 75 percent of these subsidies go to a handful of commodities (mostly wheat, corn, and oilseeds) used as food additives, making highly processed junk food cheap – while fruits and vegetables and whole foods currently get almost no aid. Nearly 70 percent of farm subsidies go to the top 10 percent of the country's biggest growers – while America loses one family farm every half an hour. There's socialism for the wealthy in this country. Conservatives just seem to want to gloss over that fact, perhaps because they are the beneficiaries.

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Their Worries Aren't Quite Like Ours But . . .

Paul Sullivan who writes the Wealth Matters column for the New York Times has an important column out today that sheds insights on how the nation's monied elite views the current economic crisis. As Mr. Sullivan puts it, "the tiny slice who live at the top of the wealth pyramid -- are not sleeping any better than the rest of America." Not surprising, really.

Though much of the article covers how America's aristocracy manages their wealth for the benefit of generations yet unborn and the dynamics of managing trusts that run a half billion or more, a number observations are worth highlighting because even though their worries aren't quite like ours, some of their worries are worth noting and their behavior is of critical importance to the general well-being of the nation.

Even though the stock market has rebounded from its March 9 low, the family office advisers said many of their wealthiest clients were bracing for more bad news and wondering how it would affect their family unity.

"They are now looking at financial planning and things middle-class families live by," Kathryn McCarthy, a leading adviser to wealthy families, including the Rockefellers, said at the gathering this week convened by Bessemer Trust.

Before you start laughing up your sleeve, be advised that this is not a good thing. When the super-rich get cold feet, the rest of America gets swine flu. They are, after all, the people who might finance new companies that create jobs, make big investments to support existing companies and spread their wealth throughout the economy.

According to a study the Family Office Exchange plans to release this month, the super-rich are most worried about what they do not know. Some 45 percent of the 108 ultrahigh-net-worth families surveyed in August ranked the economy and financial markets as their No. 1 concern. They were most concerned about government intervention in the financial markets and a commercial real estate bust.

The former worry, from their point of view, is certainly understandable. Lax regulations of financial markets allowed old money to turn serious money into some rather serious money. Between 1982 and 2000, the Rockefellers went from $3.3 billion to $8.5 billion, the Mellons from $1.6 billion to $10 billion, the Phippses from $1.2 billion to $7 billion, the Pritzkers from $1.0 to $10.0 billion, the Mars from $1.2 billion to a very robust $16 billion, the Hearsts from $500 million to $7 billion. The 'financialization' of the economy coupled with the low tax regime has been very good to them. If in 1981, the top one percent accounted for 9.3 percent of the national income by 1997 that share had grown to 15.8 percent.

But with two-thirds of the nation's total income gains from 2002 to 2007 flowing to the top 1 percent of US households, their share of the national income has only grown. As of 2007, the top one percent accounted for a 21.8 share of the national income. In my view, such uneven gains spell trouble for the future of American democracy.

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Bush's Parting Gift: Poverty Rate Rose in 2008

The US Census Bureau released its annual report for 2008 which found that the nation's poverty rate climbed to 13.2 percent last year, up from 12.5 percent in 2007 and matching an eleven year high. Given the economy, next year's report should find an even higher rate.

According the US Census Bureau, 39.8 million US residents last year lived below the poverty line which is defined as an income of $22,025 for a family of four. Two and half million more people fell into poverty in the final year of Bush. Furthermore it is beyond disconcerting that the number of the severely poor has increased faster than any other segment of the population. Since 2000, this segment has expanded by close to 30%.

Overall, median family incomes in 2008 fell to $50,300, compared with $52,200 the year before wiping the gains of the three previous years. Adjusted for inflation, median family incomes were lower in 2008 than a decade earlier. As Lawrence Katz, an economist at Harvard University, noted the Bush years were a "lost decade for the typical American family."

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Who Killed the Middle Class?

Frankly, it is not really much of a murder mystery but seemingly a large swath of America lives obliviously to the fact that the broad-based prosperity built by Franklin Delano Roosevelt and that reached its zenith under Lyndon Baines Johnson has been under assault almost continuously since the 1970s. But give the devil his due, and by devil I mean the GOP, for they have successfully managed to convince an absurdly large percentage of the population that the greatest evils we face are big government, high taxes, gay marriage, abortion rather than our burgeoning socio-economic inequality.

Over at the Financial Times, Edward Luce writes on The Crisis of the American Middle Class combining anecdotal evidence with cold hard facts. The anecdotes are painful to read and I leave them for you to read but the cold hard facts of our retreat from the Roosevelt's New Deal America defined by a progressive tax structure that permitted interventionist and redistributive government to construct the broadest prosperity the world has ever known merit highlighting.

This is the country that Reagan and Bush have engendered:

The slow economic strangulation of . . . middle-class Americans started long before the Great Recession, which merely exacerbated the “personal recession” that ordinary Americans had been suffering for years. Dubbed “median wage stagnation” by economists, the annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973 – having risen by only 10 per cent in real terms over the past 37 years. That means most Americans have been treading water for more than a generation. Over the same period the incomes of the top 1 per cent have tripled. In 1973, chief executives were on average paid 26 times the median income. Now the ­multiple is above 300.

The zenith of American equality was 1964 when the ratio of CEO to average worker pay stood at 24:1. By 1973, the starting point for Luce, it had barely moved to 26:1. Even by 1980, the ratio was still a modest 35:1. The great divergence would begin the Reagan years. By the time Reagan left office it was 71:1. The ratio would surge in the 1990s  and hit 525:1 at the end of the recovery in 2001. The fall in  stock market valuations reduced CEO stock-related pay (e.g., options) causing CEO pay to moderate to 153 times that of an average worker in 2002. Since then, however, CEO pay has exploded and by 2005 the ratio was racing towards the stratosphere once again hitting 411:1.



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