Income Disparity

The Congressional Budget Office (CBO), a nonpartisan body, recently released a report on income disparity in the U.S. and, surprise, surprise, we’re back to the income disparity of 1928 . . . and that took the Great Depression and World War II and Franklin Roosevelt to fix.

One of the delights for me was the highlighting of the Gini Index of income disparity. This index is a number between zero and one, with zero being perfect sharing of income (Socialism!) and one being perfect despotism of income, one group gets all of the money, the rest none. This last summer Time magazine ran an article on the London, England riots and used the tag line “They should have seen it coming.” Time’s argument was that Britain had one of the highest income disparities in Europe, exemplified by a Gini coefficient of 0.38 (second highest in Europe behind Portugal). According to the CBO report, our Gini number hit 0.57 in 2007, far, far worse than in England! I wrote a letter to Time pointing this out with the question, “When should we expect riots here?” They didn’t print my letter.

Since then the “Occupy Wall Street” movement appeared which, bless them, has been nonviolent so far, that is if you exclude the behavior of various police departments. The CBO report is a free download and worth reading, but the Gini Index tells all, and it has been going up and up for three decades in this country. Little more need be said.

If you haven’t followed this blog, the reasons for this are fairly simple. Beginning with Ronald Reagan, the top income tax rate fell from 70% to below 40%, where it is now. (Please realize that the “top” or “marginal” rate is only paid on income above a certain high level. Everybody pays the same rates on each level, and the rates go up as the income goes up. Most people don’t make enough income to pay the highest rate at the highest level.) What this huge drop in the highest marginal rate meant to business executives, as an example, is that instead of receiving nontaxable finge benefits as perquisites, they started receiving more salary. Then the CEOs began manipulating their Boards of Trustees into ever higher compensation. The ratio of CEO to average worker salaries skyrocketed during this period. The money accumulated by the highest earners was then spent politically (on both Republicans and Democrats but more on Republicans) to lower taxes on the highest income categories and specifically on income earned from investments /”capital gains” (with CEOs arranging to receive more and more compensation in the form of stock options, resulting in their income being taxed at considerably lower rates than ordinary folks) and other tax benefits that allowed even higher concentrations of wealth. Today the top 400 families of Americans control as much wealth as the bottom 150,000,000 Americans.

What isn’t being discussed, yet is the cost of this income disparity. And, if you think there isn’t a cost, think again. A good start on understanding some of this has been summarized in an excellent TED presentation you can find here: http://www.ted.com/talks/richard_wilkinson.html

 

PS If you aren’t familiar with stock options they are very simple. I promise to sell you XX shares of stock (an option to buy) at a set price (usually a low one). At some time in the future, when the stock price is higher or much higher you can exercise your option: you buy the stock at that low, low price and immediately resell it at the current much higher price. And, with “capital gains” taxes at 15%, the taxes paid on this would be far less than if considered ordinary income. The one advantage to the company is, if the CEO drives the price of the stock down his/her options are worthless.

What Is Wrong With These People?

The fine line between irrationality and stupidity has just gotten finer. Consider the reaction of conservative pundits and legislators regarding President Obama’s “decision” to remove our troops from Iraq by the end on this year. The President has been hammered by these idiots for making “a grave mistake.” “It is wrong,” they say. “Their democracy is too fragile,” they say.

Hello? The agreement to have all of our troops out of Iraq by the end of 2011 was made by George W. Bush. President Obama, refreshingly, said he would “honor that agreement.” I say “refreshingly” because it is not often the case that Presidents honor the deals of their predecessors. In fact, most foreign countries who disagree with us are accustomed to taking a strategy of waiting (or stalling) until a new President is elected to see if they can get a better deal.

And, in case anyone hasn’t noticed, it is their country and they want us out. How would we feel if, say, Mexico invaded the southern U.S. to cut of the U.S. demand for illegal drugs that is ravaging their northern states? Would we not want them out? If we had a negotiated agreement for them to leave and they unilaterally decided to stay because they felt we couldn’t be trusted just yet, how would that feel? When the shoe is put on the other foot, it feels quite different. Iraq did not invite us in, we invited ourselves. Iraq owes us nothing.

Domestically, we have the shenanigans of Congress’s “Super Committee,” the one which has to come up with a deficit reduction plan by November 23^rd or suffer “automatic” cuts to defense and domestic spending (which I will believe when I see them). The Republicans on that committee, have offered a plan consisting entirely of cuts with no increases in revenue from taxes. In fact, all of the Republican members of the committee, excuse me, the Super Committee have signed a pledge to Grover Norquist, a lobbyist, to not raise taxes under any circumstances. And it seems that none of them will.

What this means is for Republicans a pledge made to a lobbyist trumps the pledge they made to uphold the Constitution and trumps their pledge to represent the will of their constituents. A poll just yesterday indicated that 63% of millionaires are in favor of higher taxes on . . . millionaires! The Grover Norquist Pledge trumps this. The Constitution states numerous times that the job of Congress is to run the business of the country by raising revenue and that the bills of the country must be paid. The Grover Norquist Pledge trumps this.

It is no wonder that the public approval rating of Congress has fallen to 9%. As I have stated before, ordinary people when faced with financially strapped times cut their spending and, if needed to pay their bills, find another job to increase their income. It is called “revenue enhancement” by some, common sense by others.

I think it is time for the signers of Grover Norquist’s Pledge to either realize they have a higher calling or . . . find another job.

I Wanna Be a Corporation, Too. . . .

Mitt Romney is oft quoted as saying “Corporations are people, too,” which he did say but has been misinterpreted, I am sure, as are many things in politics. For example, Sarah Palin didn’t say “I can see Russia from my house,” comedian Tiny Fey did, but Palin got tagged with the saying. Romney is tagged with his saying even though I believe he meant that corporations are made of and by people. Mistaken or not, the comment hit a nerve. One of the best comments I have heard or seen in response was a sign at one of the “Occupy . . . ” protests, namely “I’ll believe corporations are people when Texas executes one.”

That sign got me thinking. The idea of a corporation is that it is a fictitious person (a corpus) doing business. One of the aspects of corporations that business people love is that if the going gets really tough, the corporation can “disincorporate,” that is the people in charge can kill the fictitious person. Since that “person” is dead, it no longer owes its creditors or has any other obligations. If corporations were real people, any time one bit the dust a coroner’s enquiry would be necessary, but because they aren’t, there isn’t even a funeral.

Corporations have been doing this dance for years. If one’s creditors are at the door, the corporation “dies” and a new corporation, often with the same people composing it, is born elsewhere. I can understand why the people behind this magic trick are in favor of it, but I don’t understand why the general business community favors it because it is often stuck with the bills. But since most of the losses are borne by stockholders, I guess it works in general, at least for public corporations.

While the Supreme Court has decided that fictitious people are not only good for business but for politics, too, it looks as if fictitious people are becoming more like you and me every day. (The guy who invented virtual avatars is way behind the curve.) But, I don’t think SCOTUS has gone far enough. I want to be a corporation, too! But, not so I can die to get out of trouble but for tax reasons. Consider the fact that corporations only pay corporate tax on their profits and, of course, corporate lobbyists have made sure that every kind of expense made by a corporation is included as a loss in their profit and loss statement. I want the same treatment.

I want to pay taxes only on my profit for the year, not on my income. Think about it. From your income, you deduct all you spent on housing, food, transportation, education, entertainment of friends (only 80%), etc. and at the end of the year, what do you have left over? Let’s say you managed to save $300. So, your tax bill is 35% (the corporate rate) of $300 or $105. Write a check and you are done.

Poor people spend almost everything the make on necessities, so they won’t pay federal taxes at all. The vast majority in the middle won’t pay much tax as we aren’t into saving, but people making beaucoup bucks, well, for them it would be different. Investments in the stock market aren’t expenditures, they are like putting money into a savings account, so after rich folks have paid for their food, electricity, garbage, yachts and mansions, everything they have left over would be taxed at the corporate rate. That hedge fund manager who made $1 billion dollars in a single tax year would pay roughly 35% of that in taxes instead of the 15% he did pay. (I don’t weep for the guy, he still would clear $650,000,000 after taxes under my plan, which works out to about $340,000 and change per hour worked.)

Why should corporations get all the breaks? Don’t you want to be a corporation, too?

Economic Man—Part 2, Rationality Goes Out the Window

Modern economics is based on rational decision making. The focal point for economists in training is the so-called “economic man” (Homo economicus) who, by making self-interested decisions, based on having enough information available to make a good decision, made economic markets work. This 20th Century evolution of classical economics sounds perfectly reasonable. But “reasonable” does not mean “true” or even “helpful.”

Let’s assume it is true: we make economic decisions rationally by, in essence, weighing the data.

I remember a time when my father decided it was time for a new pickup truck. He did his research, figured out the make and model he wanted and what price he wanted to pay. He then spent quite a while saving up the purchase price. He then went into an auto showroom, told a salesman what he wanted and for what price and if they said “yes,” he paid in cash and drove his new truck home. This seems to fit the rational decision making model based on the economic man to a tee.

But what do I see now? I see 20 brands of mayonnaise on grocery shelves. I see multiple web sites giving conflicting advice on any purchase one may want to make. I see purchase processes so complicated that an accountant can’t figure them out ahead of purchase. “Oh, if you want that phone, it is only $69.95 (if you sign a two year contract for phone services for $XX per month, taxes, fees and whatevers not specified until you get your first bill). Now, would you like our warrantee that protects you if your phone is lost or stolen, and for only $YY per month, we will store all your contacts and emails on our “cloud,” yada, yada, yada.” Is it no wonder that our decision making is no longer rational? (Phone, want phone; want iPhone!)

I used to go to Consumer Reports magazine in the library to do research but now I use the internet, the search engines of which sell high rankings to companies. We have access to data, lots of data, more than anyone can sift through. We are suffering from data overload. We are distracted with irrelevancies and then swamped in an ocean of “information.”

This is nowhere more prominent than in politics. The economic man theory is a theory about how people make economic decisions, but a decision is a decision. Making rational decisions, ones in one’s own personal best interests, should be the basis of a good political system, as much as the rational economic decisions make for a good economic system. But if the “rational” part of each of us can’t identify important information or worse, can’t find important information, then rationality is out the window.

Our politics is dominated by ideas that have no merit. One such is that rich people are “job creators.” That may have been true in the past but was never proven, it is merely a supposition that rich people invest their money in banks and stock markets and bankers and stock markets provide funds to businesses to hire people, should they want to. But is this what is actually happening now? Apparently not. Banks are not lending anywhere near capacity. Businesses collectively are sitting on nearly $2 trillion of cash and, hence, don’t need loans or stock sales and the stock markets, well. . . . argh! The stock markets have been taken over by “financial engineers.” Harvard University actually created a program to produce such people, whose job it is to figure out how to extract money from the stock markets to make the engineers (or their masters) rich but to not produce anything of value in trade. This is where the “exotic investment instruments” (derivatives, etc.) that you may have heard of came from. These are “milk the goat” schemes: the goat has the milk, I take the milk. I am the richer for it. But what does the goat get out of the deal?

So, are the companies whose stocks are being traded on the stock markets, paying dividends to stockholders, actually creating jobs? Well, the recent record shows way more jobs shipped overseas than have been created here, so the “job creators” would be better labeled as “job exporters.”

So, why is that phrase pounded on time and again by Republicans? Well, even if it is a lie, it is close to a plausible truth and it is easier to repulse “tax increases for job creators” than, say “tax increases for the filthy rich” or “tax increases for job exporters.”

You and I aren’t even getting bread and circuses here. We are getting disinformation, not misinformation, but disinformation and large quantities of it. When the current Republican candidate for president, Herman Cain, announced his 9-9-9 plan it was lauded as a brave new plan. (Nein, nein, nein! is no, no, no in German, which is appropriate for the Party of No.) Even though it clearly states that we should admit that “ were mistakes and we should just give them up” a position that overwhelmingly is not in favor in the American electorate. Is the 9-9-9 plan serious? I think not, as no argument is being made for its qualities, just grandiose claims as to what it would accomplish. A plan needs some “how” to explain its “why.”

While people spend time arguing the “merits” of this plan, real problems are not being addressed. (The House just banned using federal funds for abortions for the seventh time. I guess they got bored doing nothing of substance.)

I don’t know if it is still the case but at one time, the city of Brisbane, Australia hired a town scientist whose job it was to explain scientific and technical issues to the town council and the public at large. Wouldn’t it be nice if cockamamie economic plans would also be required to be vetted by an independent panel which would simply and succinctly state the facts, . . . the impact on a poor person would be a large tax increase, the impact on a wealthy person would be a large tax cut, etc. Then we could be focused on some real information instead of debates like we have now, such as:

“It will solve the problem!”
“No, it won’t!”
“Yes, it will!”
“No, it won’t!”
“Yes, it will!”
“No, it won’t!”
“Yes, it will!”
“No, it won’t!”
“Yes, it will!”
“No, it won’t!” . . . . ?

Aren’t you tired of this? Don’t you want more from your politicians?

They Tried What They Claim Works . . . and It Didn’t

I remember when George W. Bush was sworn in as president in the year 2001. One of the first actions of his administration was to curtail water standards. Apparently there was a need for more arsenic in our water, not less. I mention this because the entire eight years of the Bush administration can be characterized as a period of reduced regulations, tax cuts, and wars. The reason this is pertinent is that the Republican’s claim that the only thing the federal government can do to relieve the economic malaise we currently suffer from is to a) reduce government regulation and b) cut taxes.

If you were keeping score, the reductions in regulation and the loosening of regulation enforcement under the Bush administration bought us the largest oil spill in history, coal mine disasters, as well as extra arsenic in our drinking water as a chaser. The tax cuts bought us budget deficits where there had been surpluses. And the costs of the wars, that amazingly didn’t appear on a single budget submitted to Congress, were kept “off of the books” and were not considered part of the deficits. (Apparently it is not just tax cuts that don’t need to be paid for in their economic system.)

So, during George Bush’s administration, the tycoons and the lobbyists were writing the regulations, tax cuts didn’t need to be paid for and wars don’t cost a thing. But they still insist that the economy, the one that they wrecked, can only be helped by a double dose of what George Bush stood for.

WTF?

They tried all of those things during the Bush years and they didn’t work. In fact they contributed to the economic disaster we are now in.

And the Republicans campaigned like crazy during the midterm elections on “Jobs, jobs, jobs.” Since then there hasn’t been a serious piece of legislation that would have any positive impact on the economy since the Republicans claimed leadership of the House of Representatives.

Apparently they want to wait until 2013 when, they hope, a Republican will be sworn into the Oval Office and they can get back to . . . reducing government regulation, cutting taxes, and gutting the federal government which is their real aim. Emasculated government can’t do a damned thing to help ordinary Americans and that is exactly what the Republicans want.

Strong government, which helped to create the strongest middle class in the history of this country, is anathema to the Republican’s business masters. The Republicans want nothing to stand in the way of their masters making as money as they can; and if the rest of us all have to drink arsenic, it is a small price to pay.

Our founding fathers, who Republicans often glorify, were in favor of a strong central government, but one that could be adapted in the future to meet future needs unknown to them. Unfortunately the future the Republicans want is one with a paralyzed federal government, starved into a feeble state, and we are currently helpless to stop them.

And . . . if hear the big lie that “our Founding Fathers were in favor of small government” one more time I am going to scream! The constitutional convention had no charge to create an entirely new constitution for the country. The members were supposed to “suggest” modifications to the Articles of Confederation that would require unanimous votes from all of the states to be adopted. (In essence, every state had a veto.) Instead, they took it upon themselves to draft their own charge, write an entirely new constitution with a very strong central (federal) government, including a clause that Congress could pass essentially any legislation they needed to fulfill their mission. They also drafted and enforced an adoption procedure that required less than unanimity for adoption.

These were not the actions of “small government” men. They had small government at the federal level and they scrapped it because it was impotent.

Unfortunately in that most perfect document they created a Senate to balance the potential tyranny of the majority that the House of Representatives represents. By giving big states and small the same number of votes, and the Senate equal power with the House, they defended the rights of minorities. But they also let the Senate make their own rules and the Senate adopted the cloture rule (filibuster) that allows a superminority of the states (currently 41 of the 100) to block any action the Senate might consider. This is the tool Republicans are using to block anything getting done, so nothing is being done. And people are getting angry with government, which is what the Republicans want.

We should be angry only with the obstructionists, not with the entire fabric of our government.

Get even! Fight back! Throw the obstructionists out.