Slope Parity

From 1945 to 1977, the income of every U.S. economic class rose at roughly the same rate or “slope”. Since 1977, the middle- and lower-class “slope” has flattened dramatically, while the top 5% has continued upward on the same slope. It’s easier to see on a graph: Since 1977, our country has drifted into a dangerous socio-economic slope disparity. When the disparity gets bad enough — and I think we’re very close — it leads to social instability and unrest. Keep in mind, income growth parity isn’t a measure of relative wealth (this isn’t a “class envy” or “Marxist wealth redistribution” problem — I’ll discuss wealth accumulation later in this essay), but rather a measure of a nation’s fundamental structural integrity — the foundational fiscal policy on which a healthy nation is built — economic policy that can make or break a strong and vibrant middle class. We have a profound structural problem. Economic historians call the last 35 years “the great divergence”. Income growth parity is a cornerstone of U.S. liberty and justice for all. Without reasonable parity, a once-thriving middle-class is gutted, creating a microscopically tiny super-wealth-class that eventually assumes majority ownership of a nation (aka, oligarchy) while all others suffer. The period 1945-1977 saw the rise of a strong and vibrant American middle-class. But since 1977, the U.S. middle class (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%. Why did this happen? There are only two possible conclusions: 1.) Since 1977, 95% of Americans have grown increasingly lazy and stupid, or 2.) Since 1977, our ECONOMIC SYSTEM (fiscal policy) has been designed and engineered to suck wealth out of the bottom 99% and deliver it into the hands of the 1%. The correct answer is #2. If anyone thinks differently, please do explain. Here’s a graph from Jacob Hacker at Yale showing what the 95% has given up for the top 5% since 1977: Why did this happen? What structurally changed between the 1945-1977 period and 1977-2013 period? Why has the middle-class been gutted? And why does it continue to shrink — slowly and effectively killing the heart and soul of America? The most obvious change is our tax code. Between 1945 and 1977, progressively wealthier people were asked to pay progressively higher U.S. taxes, with massive windfall income being taxed the highest. There were no exceptions to this policy. You earned more, you paid more: A highly progressive tax rate was used to adjust all income slopes into social parity. And it worked elegantly. Massive wealth was still created at the top, but not at the expense of the middle class. Today we’re accelerating the creation of massive wealth at the very top, but we’re doing it at the expense of all other socio-economic classes. We are killing ourselves with an imbalanced zero-sum disparity. Another fiscal policy that kept the country in slope-parity is capital gains and dividend tax rate. Before 1977, the average capital gain was taxed around 30-35%. Today it is 20-25%. From 1945 to 1977, dividends were taxed around 70-90%. Today it’s 20%. Here’s the problem. Very few American’s below the top 15% earners enjoy significant capital gains or dividend income. Ultra-low CG and D tax rates benefit only the very top earners. 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 has been trickling UP from the 99% to the 1%. FICA and Social Security payments are another area where the ultra-wealthy could pay a higher share, perhaps a flat percentage on all income, no cap, rather than a $100K cap.  Mitt Romney pays 14% Federal tax on over $20 million income, yet I am paying 21% on a tiny fraction of that. Something is terribly wrong with this picture. Our 1945-1975 tax code understood the social necessity of true progressive taxation. Everyone paid on a progressive scale, including the top 1%. Today, our highly revised tax code has gutted the very heart of American prosperity — the middle class. Today, the 99% continue to pay a progressively higher tax as their income goes up, while the 1% is now playing under different rules:  a REgressive tax system where the wealthiest are taxed at much lower percentage rates. Unlike the middle class, the top wealthiest derive most of their income from Capital Gains and Dividends — which are taxed at a far lower rate than the normal income sources of the middle classes (wages, interest, small-business income, rental income, retirement distributions, farm income, etc.). Since these profound changes to our tax code in the 1970s, our fiscal policy has caused a redistribution of greater and greater wealth into the hands of fewer and fewer people. In 1976, the 99%-class possessed 80% of American wealth. Very healthy! Since 1976, around 1/2 percent of American wealth has been leaving the 99% every year, sucked up by the 1%. Today, the 99%-class possesses just 64% of American wealth, and by 2020 that will likely be reduced to 60%. A 20% reduction of middle-class wealth in 40 years, transferred 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.). They are: Sweden, Norway, Finland, Denmark, etc.. Their 1% possess in the range of 25-28% of national wealth, similar to the USA in the 1950-1975 period. The wealth ratio of a nation is never an accident. Whether by omission or commission, money policy determines the wealth ratios of a nation. In its role of properly aggregating wealth accumulation, good policy can overcome any external force, such as inflation or money velocity. Good government adjusts fiscal and monetary policy to adapt to current economic conditions, with the primary goal of maintaining a healthy wealth ratio balance (while properly funding the government), which appears to be somewhere in the 20-30% range. Stated simplistically, if fiscal policy engineers too much wealth out of the hands of the ultra-wealthy, you undermine the stores of capital required for smart, fundamental growth that creates jobs for the 99% (the extreme case is Marxist economic theory). Conversely, if you engineer too much wealth flowing into the 1%, you undermine the foundation of a healthy nation, which is the middle class. You want to find that (elusive and debatable) maxima point that balances 1% wealth while maintaining strong and vibrant middle-classes. Today, we’ve grossly overshot that maxima. We know this from of a number of markers: 99% wealth has fallen dramatically for 35 years The middle-class has shrunk 18% during this same time 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 history 77% of families are living paycheck-to-paycheck, with little or no savings to cover emergencies Household savings rates 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 at their highest point in modern history From 1945-1980, America had the highest GDP per capita in the world, by far. Today, we’re #13, and falling Since 1975, while the 99% has been falling deeper and deeper into economic despair, the 1% has accumulated more of the U.S. wealth pie than at any time since before the Great Depression. In fact, some have noted that our current economic disparity looks identical to the 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”. But caloric intake and flat-screen TVs are not primary indicators of wealth, prosperity, or well-being. An historically balanced (maxima) distribution of core wealth is the key indicator of free-market well-being, and by that metric the USA has become a sick and imbalanced society. And getting sicker year by year. We need the political will to bring our social and fiscal policy back into slope parity. We need the political will to reverse engineer the dangerous and excessive hoard of 1% wealth back into the hands of our 99%. But our government today looks more like a corporatocracy than a representative democracy. Elected officials today pass more fiscal policy benefiting a tiny oligarchy than “we the people”.  Those with the most to lose from true progressive taxation 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 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 middle-class fiscal changes will not happen without a serious grass-roots movement of the people. Profoundly 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 a tiny number of individuals. Throughout history, it’s normal and expected that powerful minorities will control a sizable percentage of wealth. But Americans have not seen wealth disparity and income growth disparity this out of whack since 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. As wealth disparity and income-slope disparity continue to grow, it could literally trigger the end of American liberty as we know it. And in many ways, wealth disparity has already eroded much of our core middle-class foundation. Without a strong middle class, a nation soon becomes plundered by an increasingly powerful plutocracy. So why aren’t we hearing this profoundly important data on mainstream news outlets? Well ….. there’s a problem. Over 90% of national news is controlled by just six corporations, and those six corporations have only one goal:  to maximize advertising revenue and shareholder wealth. They maximize revenue via addictive polarization using divisive political programming which promotes and sustains an unhealthy sense of anger, distrust, fear (of the other side), and blame. 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. These six news outlets are owned almost entirely by 1% interests — the same people and organizations who have disproportionately increased their wealth on the backs of the middle-class for the last three decades. These six outlets go out of their way to assure that the middle-class (their target market) does not hear any reporting about these massive wealth and income-slope imbalances that are destroying our country and our liberties. The middle-class will continue to be manipulated with left-wing and right-wing identity polarization, while politicians on both sides of the aisle continue voting for fiscal policies that further enrich the 1% by sucking more and more wealth from the 99%. 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 Related Links: Wealth for Common Good | Fair Economy Start around 10:00 into video for a psychologist’s  

Zeitgeist 3 – Moving Forward

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 naive (“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  

Over-Leverage / De-Leverage

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  

Debt

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 “high levels of public indebtedness could weigh on economic growth for years.” The world’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.