From 1945 to early 1980s, the income of every U.S. economic class rose at roughly the same rate or “slope”. Since 1980, 99%-class “slopes” have flattened dramatically, while the top 1% has continued upward on the same slope. It’s easier to see on a graph: Income growth parity (IGP) is a core measure of a nation’s structural integrity. Since the early 1980s, the USA has been falling deeper into a dangerous socioeconomic slope disparity. When the disparity gets bad enough — and I think we’re very close — it leads to socioeconomic instability. Economic historians call the last 35 years “the great divergence”. Our once-thriving middle-class (e.g., 1945-1980) has been systematically gutted, while a microscopically tiny super-wealth-class has grown effectively unchecked. According to Princeton economist Alan Krueger, of all the OECD countries, only Chile, Korea, and Switzerland have tax systems that have led to greater income inequality curves than the U.S.. The U.S. period 1945-1980 saw the creation of the healthiest middle-class in world history. But since the 1970s, the U.S. middle class (defined as income within 50% of median) has shrunk more than 16% (see chart). During this same period, a tiny number of Americans (the infamous 1%) boosted real income by nearly 300%. Even by absolute standards, America’s middle class is no longer the world’s strongest. And our poor are suffering more than at any time since such records started being kept (1950s). In the early 1980s, U.S. tax rates were re-engineered to suck increasing amounts of wealth out of the bottom 99% and deliver it into the hands of the 1%. This was called Supply Side policy. The theory was that all that additional wealth and income growth concentrating in the 1% class would trickle-down to the poor and middle classes. But it hasn’t worked. Krueger notes that over $1 trillion of income has been shifted from the 99% classes into the 1% class — without a proportionate rise in the poor and middle classes. Here’s a graph from Jacob Hacker at Yale showing this shift since the 1980s: Between 1945 and 1980, progressively wealthier individuals were asked to pay a progressively higher U.S. tax percentage, with massive windfall income being taxed the highest. There were no exceptions to this policy. You earned more, you paid a higher percentage of the national tax bill (though huge tax incentives were given for U.S. infrastructure investments, which every wealthy taxpayer took advantage of. American infrastructure, like Interstates and bridges and commons, thrived during this period): This was called fully progressive taxation. And it was brilliant. Massive wealth was still created at the top 1%, but not at the disproportional expense of the poor and middle classes. But for the last 35 years, we’ve been redistributing disproportionate amounts of wealth from the pockets of lower and middle classes into the burgeoning accounts of a small number of American families. We are destroying our historical all-class socioeconomic contract. And by doing so, we are destroying the foundations of American liberty — a foundation built on the health of our middle-class. Two other key 1945-1980 fiscal policies that kept the U.S. in slope-parity are capital gains and dividend tax rate. From 1945-1980, the average capital gain was taxed around 30-35%. Today it is 20-25%. From 1945 to 1975, dividends were taxed around 70-90%. Today it’s 20%. Unlike the middle classes, very top earners derive most of their income from Capital Gains and Dividends — which are taxed at a far lower rate than 99% income sources (wages, interest, small-business income, rental income, farm income, retirement distributions, etc.). If these huge CG and D tax reductions to the ultra-wealthy truly “trickled down” we would have a strong and vibrant middle-class today. But these massive gifts to the ultra-wealthy are not trickling down. They have not been trickling down for 35 years. Alas, for the last 35 years, wealth and income-growth have been trickling UP from the 99% to the 1% without a proportionate sharing of the pie by our poor and middle classes. After these sweeping tax code changes took effect in the early 1980s, we have seen an ongoing redistribution of greater and greater wealth into the hands of fewer and fewer people. In 1976, the 99%-class possessed 80% of American wealth (see chart, below). Very healthy. Today, the 99%-class possess roughly 60% of American wealth, and by 2025 that may be reduced to 55%. This represents a 20-25% reduction of middle-class wealth in just 40 years, transferred directly into the hands of the 1%. Wealth distribution vs. national health is a well known econometric. There are a basket of countries that represent the healthiest nations on the planet today, by just about any metric (GINI, capital reinvestment stores, well-being indices, etc.), countries such as Norway, Finland, Denmark, etc.. Their 1% possess in the range of 25-28% of national wealth, similar to the USA in the 1950-1980 period. Very healthy. The wealth ratios of a nation are never an accident. Whether by omission or commission, tax policy, over time, determines the class-wealth distributions of a nation. In its role of aggregating wealth accumulation, good policy can overcome any external force, such as GDP, inflation, trade imbalance, or money velocity. Good government adjusts fiscal and monetary policy to adapt to economic conditions, with a primary goal of maintaining a healthy 1% / 99% wealth and IGP balance (while properly funding the government). I’ve seen few studies on this, but have noted that the healthiest all-class social economies occur during a 1% wealth accumulation ratio in the 20-25% range. Today we are at or near 40%, which has directly led to what can only be called a dying middle-class. Wealth ratios, income slopes, and a nation’s social health are inexorably linked. It should be noted here that wealth inequality works both ways. Stated simplistically, if tax policy engineers too much wealth out of the hands of the 1% investment-class, you undermine the stores of private capital required for smart, fundamental business creation, growth, and liquidity that creates jobs for the 99% (the extreme case is pure Marxist economic theory which eliminates all private capital). Conversely, if fiscal policy engineers too much wealth flowing into the 1%, you undermine the foundation and liberty of a healthy nation, which is middle class prosperity. We want to maintain the “maxima range” that optimizes 1% wealth with broad middle-class health and a “strong poor” (as we experienced 1945-1980). As Will Durant once noted, “the health of a nation is more important than the wealth of a nation”. Optimal health and maximized wealth are inexorably linked only through smartly engineered socioeconomic balance. Today, we’re in a grossly imbalanced socioeconomy, both in terms of smothering top-heavy wealth accumulation and profound income slope disparities. This socioeconomic imbalance has been growing for 35 years. The reality of our plight is clear: As a raw percentage, 99%-class real wealth has fallen dramatically and consistently for 35 years (sucked up by 1% interests). From 80% to 60%. The middle-class has shrunk 18% during this same time, and continues to shrink More people are living in poverty today than at any time since they started keeping census data in 1959 1 in 5 Americans are now on food stamps – more than at any time since the program started Fully HALF of all American children will be on food stamps before their 18th birthday – more than at any time in U.S. history 77% of families are living paycheck-to-paycheck, with little or no savings to cover emergencies – the largest critically exposed % in modern U.S history. Household savings ratios are today at their lowest moving average in modern U.S. history (this isn’t due to low interest rates — compare with China’s low interest rates but historically high household savings) American middle-class debt ratios are again nearing their highest point in modern history Over 1/3 of all American families are now in default on a debt. There are today a record number of multi-generational households forced entirely by socioeconomic conditions. From 1945-1980, America had the highest GDP per capita in the world, by far. Today, we’re #13, and falling Since 1980, while the 99% has been falling deeper and deeper into economic despair, the 1% has accumulated more U.S. wealth percentage than at any time since before the Great Depression. In fact, some have noted that our current economic disparity looks identical to the rising disparity that (in part) triggered the Great Depression. See this graph: The latest Pew studies show that a vastly larger number of people consider themselves low-mid or lower class compared with 20 years ago. Critics argue that our lower class has it “better than ever” with “higher mobility” (often, such critics are “think tanks” funded by 0.01%-class interests, such as Cato, Heritage, and Manhattan). But caloric intake and flat-screen TVs are not primary indicators of wealth, prosperity, or well-being. An historically healthy distribution of national wealth, along with income growth parity, low debt ratios, and high savings rates are the key indicators of free-market well-being, and by these metrics the USA (and much of western civilization in general) has become sick and imbalanced. And getting sicker year by year. We need the political will to bring our social and fiscal policy back into healthy and sustainable ISP (like 1945-1980). We need the political will to reverse engineer the dangerously excessive accumulations of American wealth back into the hands of our middle classes (like 1945-1980). But our government today looks more like a corporatocracy than a representative democracy. Elected officials consistently write fiscal policy benefiting a tiny oligarchy — not “we the people”. Those with the most to lose from a return to true progressive fiscal policy are the same people with the highest influence on our lawmakers. Princeton political scientist Larry Bartels wrote, “Senators appear to be considerably more responsive to the opinions of affluent constituents [the .01%] than to the opinions of middle-class constituents, while the opinions of constituents in the bottom third of the income distribution have no apparent statistical effect on their senators’ roll call votes.” Desperately needed fiscal changes will not happen without a serious grass-roots movement of the people. The Princeton and Northwestern studies are showing what we’ve intuited all along — that our elected officials are mostly working (writing fiscal policy) for the highest bidders, and ignoring the will of their lower- and middle-class constituents. Heck, when you’ve been promised a $2M/year lobbying position after leaving office, it’s hard to resist. When the lions share of your campaign money comes from a handful of .01% special interests, it’s hard to say no. FDR had a very simple definition of fascism. He said “whenever the government is controlled by private economic power, that’s fascism.” Eisenhower warned us that corporate control of government was in our future. Eisenhower’s prediction has come true. Over 90% of national news media is controlled by just six corporations. These six news outlets are owned almost entirely by 0.01% interests — the same small group of families (and organizations) who championed supply-side fiscal policy in the 1980s, and promote the same self-serving policies today. News and information has become consolidated into the hands of those whose primary goal is to continue upwardly redistributing greater wealth and power. Today’s 90% news reports everything but our massive supply-side redistribution of wealth and income from the 99% to the 1%. Stories covering inequality are heard with increasing frequency from independent news organizations on ALL sides of the political spectrum, but rarely heard from CNN (Time), MSNBC (Comcast), Newscorp (Fox, Harper), CBS, ABC (Disney), or Clear Channel — The .01% Media. National .01% media is skilled at creating and sustaining political identity. This goal is achieved via addictive polarization using divisive partisan programming which promotes and sustains anger, distrust, fear, and blame (of the “other side”). Left wing vs. right wing. Us against them. Bad guys and good guys. Political identity is a powerful drug in the hands of the world’s most skillful manipulators. But it’s mostly all a show. The .01% owners and ultimate programmers of news media are (surprise!) not much interested in political ideology. They are interested in maximizing personal wealth. Sharply polarizing media programming is mostly theater to keep people focused on endless political identity fights, while ignoring the elephant in the room. Our six core media outlets rarely (if ever) report on our foundational problem, which is corporate control of government for the express purpose of .01% wealth consolidation. I challenge you to find a feature news story in the .01% media taking a sustained, in-depth look at .01%-control in government and media. I challenge you to find a .01% media report digging deeply into the impact of wealth on crony / lobby fiscal lawmaking. Politicians on both sides of the aisle are increasingly “owned” by these .01% interests (largely via campaign funding and revolving-door K-St incentives). Politicians are no longer working for the commons, for we-the-people. This is why lawmakers will continue voting for tax and fiscal policies that redistribute increasing levels of wealth and income growth from the 99% to their 0.01% handlers. Grossly imbalanced income growth slopes are tearing this country’s “social contract” into shreds. The USA now has less slope equality than Kenya or Yemen. With the exception of Romania, no developed country has more kids below their country’s poverty line than the USA — while more and more of American wealth is being vacuumed up by an ultra-tiny number of individuals. And it’s getting worse, not better. Throughout free-market history, it is normal and expected that powerful minorities will control a sizable percentage of a nation’s wealth. But Americans have not seen wealth and income growth disparity this out of whack since just before the Great Depression. And our disparity continues to grow: One family of six people are now worth more than the bottom 40% of the American population combined. The late Robert Feinman wrote, “We in the US need to decide if we are going to slip into an inefficient oligarchy and risk civil unrest, or redirect our resources and wealth into more equitable avenues. No society is perfectly egalitarian, but we … are probably near an economic tipping point. How we deal with the coming challenge is up to us.” Other Reading: Return of the Oppressed, Peter Tuchin Other Reading: The Pitchforks are Coming for us Plutocrats, Nick Hanauer Related Links: Wealth for Common Good | Fair Economy | Responsible Wealth Start around 10:00 into video for a psychologist’s
Peter Joseph (probably not his real last name) has released a new Zeitgeist film. I disagree with a number of Peter’s “Venus Project” assumptions, conclusions, and leading questions. I also found his first two films especially lacking in solid content, relying more on hearsay, dubious history, and weak conspiracy theories. In some cases, Zeit 3 is terribly naiveÂ (“upgradable” technology, idealized production and distribution incentives and strategies, utopian city design, overstated energy alternatives, etc.). Yet I’m sharing this movie with you because I think the film is a good conversation starter and especially good thought provoker, addressing a number of profoundly important questions. I find it ironic that the filmmaker, an atheist, uses a John Ortberg lecture as his core value statement — ultimately pointing to the failure of GDP as an adequate, or even relevant, measurement of our individual and collective well-being (a position I passionately agree with). I’m convinced that we need to start thinking towards third-way “systems-based” economies that combine the best elements of free-markets and central resource planning, while retaining the liberties of an unalienable rights-based republic re-imagined in healthier paradigms of resource sustainability, human empathy, and global-equitable access to fundamental human needs. Centralized economies fail for many reasons. One reason is because, historically, they haven’t appropriately rewarded the people and organizations who excel and add real value back into the community. But cultural definitions of excellence, value, reward, and community vary subjectively. Corrupt, bailed-out banking systems and an obese military-industrial economy are two areas in which we can start to radically re-define the terms excellence and reward. And we can start to expand our definition of community from tribes and borders to a sense of global family. I agree with the filmmaker (@ 2:16) that we are faced today with a potentially fatal “value system” disorder and (@ 2:20) that many of today’s economic assumptions are gross distortions driven by temporary access to cheap, concentrated energy. For the health and well-being of our great grandchildren and our planet in general, we need to develop a better informed and more comprehensively linked value system between our economic systems, our natural resources, and our fundamental connectedness as a human
Timely and fascinating paper by Carmen and Vincent Reinhart at the University of Maryland, which shows convincingly that major economic collapse is almost always preceded by an excessive easing of credit. Today it’s much harder to borrow and everyone is trying to pay down debt (aka, de-leveraging). The Reinhart’s point out that periods of de-leveraging normally last almost as long as the boom years that preceded them. They show that this most recent period of over-leveraging started somewhere around 1997 and ended in 2007-8. If their thesis is correct, get ready for a protracted de-leveraging period lasting nearly the rest of this
Coincidence? Over the last 48 hours, I have read or heard the phrase “double-dip recession” no fewer than four times. In each instance, the phrase was used via a major media outlet. Robert Reich said point-blank “we’re falling into a double-dip recession.” CNN repeated the phrase. British PM Cameron said yesterday that Britain’s peacetime record budget deficit could anchor us for decades. Fed Chairman Bernanke used the phrase yesterday in a speech, as a foil. The meme is spreading. Since the economic meltdown of 4Q08 (and subsequent bailout) I have been skeptical of a theory that seeks to build prosperity on a foundation of massive debt and worthless paper. Is Reich right? Does this growing loss of confidence portend a downturn? I want to briefly explore what are arguably the three key markers of economic health. 1. Employment As a former Secretary of Labor, Reich makes his central point: “the labor market continues to deteriorate… the median wage continues to drop.” He argues, and I would tend to agree, that we have artificially prolonged an inevitable reckoning by (1) increasing liquidity via massive debt, (2) coaxing a temporary boost with near-zero interest rates (which cannot be sustained), and (3) deferring replacement of aging hard goods (cars, capital, etc.). Of course, Reich has the solution: raise taxes so government can fix it with more redistribution programs (!) An outrageous contradiction. 2. Real Estate Interest rates are at near-historical lows, yet new mortgages are at a 13-year low. IMF economists are predicting a dramatic continued downturn in real estate values – in some markets as much as 40%. The taxpayer-funded housing credit has expired, there are over 1 million bank-owned homes not yet on market, another 5 million mortgages are expected to end in foreclosure, another 6.3 million homes sit vacant (not to mention a growing amount of distressed commercial property), April year-over-year real estate values are down 4.1%, and interest rates cannot remain at record lows much longer. According to WSJ, post-tax-credit home activity (May) is down 25-30% – a trend they say will continue. 3. Debt Ratios & Unfunded Liabilities U.S. national debt has just surpassed 90% of GDP ($13 trillion – adding $1 million every 30 seconds) – a peacetime record. Click on the link and compare the external Debt-to-GDP ratios of USA and China (hint: it’s 94% vs. 8%). Total U.S. unfunded liabilities are $109 trillion, and growing without any sign of turning back. This is nearly twice the GDP of the entire world ($58 trillion). And with an aging population, the growth of these unfunded liabilities (medicare, social security, etc.) are showing no sign of slowing. They are, in fact, accelerating. We lifted ourselves out of a wartime debt (125% of GDP) because our 1940’s economy was roughly 60% primary productivity (industrial, agricultural, manufacturing). Today, 80% of U.S. GDP is based on secondary activity (services, tax funded, etc.). The economic engine has shifted to the Far East, which holds dramatically increasing amounts of U.S. debt. We have a serious and worsening Debt-to-GDP problem. I would call it a National Emergency. The Federal Government is not the solution. It is, to a large extent, the problem. We are moving steadily away from producing what we need in this country. We are also moving away from producing on a scale that enables us to trade for what we do need. Rather than do without, we are increasingly importing things with a promise to pay later. This cannot go on. When our trading partners, especially China, no longer want to loan us hundreds of billions of dollars a year to be paid later, we will have little productive capacity left and we will be a poor nation. We need successful industries and we need to innovate within them to keep them thriving. However, when your trading partner is thinking about GDP rather than profit, and has adopted mercantilist tactics, subsidizing industries, and mispricing its currency, while loaning you the money to buy the underpriced goods, this may simply not be possible.“ – Ralph Gomory, President Emeritus at Alfred P. Sloan Foundation; Former Head R&D IBM; Research Professor at NYU With a nod to King Crimson, I repeat myself when under stress: we can’t build (let alone sustain) a free, buoyant society on a foundation of massive debt. When seen in the light of increasingly scarce natural resources, the U.S. is heading for a national train wreck, effectively becoming a debt slave to a new world financial order. From the New York Times, It was too much debt that caused the problem in the first place: a new report by the International Monetary Fund warns that â€œhigh levels of public indebtedness could weigh on economic growth for years.â€ The worldâ€™s budget deficit as a percentage of gross domestic product now stands at 6 percent, up from just 0.3 percent before the financial crisis. If public debt is not lowered back to pre-crisis levels, the I.M.F. report said, growth in advanced economies could decline by half a percentage point annually. Furthermore, financial policy makers find themselves running out of weapons in their arsenal. After borrowing trillions to stimulate their economies and ease credit concerns during the last wave of fear in late 2008 and early 2009, governments cannot borrow trillions more without risking higher inflation and shoving aside other borrowers like individuals and companies. Short-term interest rates, already near zero in the United States, cannot be lowered any further. And vital steps like raising taxes or cutting spending increases could snuff out the beginnings of a recovery in northern Europe and worsen the pain in recession-battered economies like Spain, where unemployment recently passed 20 percent. With the exception of wartime, the public finances in the majority of advanced industrial countries are in a worse state today than at any time since the industrial revolution. A little group called Consumer Metrics Institute has been remarkably accurate at predicting economic trends roughly six months before they happen, including the 2008 crash. As their model predicted, 2010 U.S. GDP has been growing at a 3% annual rate. But CMI now predicts a 3Q drop into 2% contraction. At best, they call for an “extended mild slowdown” in the recovery — at worst they are predicting the early stages of a deep, prolonged structural economic shift, also known as a double-dip recession.