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The Inequality Gap

Robert Reich, former labor secretary, has some worthwhile advice for the President's State of the Union address:  he notes that the focus should be the "central issue you want the nation to help you take action on".  That's "not immigration, guns or the environment" (though "[a]ll are important") but rather "joblessness, falling real wages, economic insecurity, and widening inequality" . See Robert Reich, Memo to Obama: Focus on the inqueality gap, Salon.com (Feb. 11, 2013).

He's right.

"It's the economy, stupid", that old slogan from the Clinton campaign days, goes only so far.  It doesn't tell us, for example, what parts of the economy are most important--is it the stock market's well-being, and indirectly the fortunes of the very few at the top of the income distribution who own significant amounts of those items being sold on the market?  Or is it the unemployment data, with its distressing litany of continuing failure of our economy to provide decent jobs for ordinary people?  Is it the way that corporate owners and managers can use the powers of government to make unionization difficult and thereby make it much easier for corporate management and shareholders to retain all the productivity gains while workers wages stagnate (everything from Wal-Mart's tendency to tear down union fliers in worker areas (based on my personal observation) to the CEO's determination to beat unions down any way possible (see the New York Times story in the 2/12 edition, At Cablevision, Norma Rae's Been Escorted Outside, New York Times (Feb. 12, 2013), at A23, regarding Cablevision's firing of two  dozen employees for being off work, after claiming to have an "open" management that invited worker conversations yet allowing those same employees to cool their heels for 40 minutes waiting to talk to him and then walking out and firing them for not being on the job)?  Or is it the general optimism of the upper class, who can pass on untaxed estates to heirs who will get those stocks at stepped up basis and renew the cycle of monetization without taxation for their own account?

Stock market statistics mostly tell us about the upper class, along with the upper part of the middle class that has some share of that bounty:  they don't tell us about how well the economy is serving others, unless the general well-being of corporate America spills over to the general well-being of average Americans.  It doesn't do that in an era of push-down on unions to ensure that workers have no voice, push-back on taxes to ensure that the wealthy managers and owners not only get all the productivity gains but have to pay too little in taxes to support the system that made those gains possible.  Mostly, stock market statistics tell us about how the privileged are maintaining their privilege, as their ownership of most of the financial assets continues to mean their heightened influence over most laws and their garnering of most of the gains that do take place.

This is well noted in a post on Economist's View (Mark Thoma), embedding a post by Miles Corak on Free Exchange about research on inter-generational social mobility.

The real lesson from the historical research is not that there is anything inevitable about a low degree of inter-generational mobility, or that it signals more persistence than other research. The most privileged will do everything they can to perpetrate their status across generations, and in past eras the structure of labor markets and public policies permitted, and in some measure continue to permit, a non-level playing field.

I've long argued that the way to evaluate the economy is in terms of how well it is serving ordinary people who make up the middle class (roughly defined as the middle three quitiles of the income and wealth distribution)  and how adequate is the safety net it provides for those who make up the lower class (the bottom quintile of income and wealth).  What matters is economic sustainability, in terms of  adequacy of those many intangibles by which we measure quality of life--like accessible quality health care, accessible quality education, accessible quality jobs, decent wages for decent work.  That means that government's intervention in the economy will need to be on the side of the little guy, ensuring that resource allocation isn't so skewed to the already rich that we become an oligarchy where most of us live off crumbs and a few of us live like kings.  If we want a sustainable economy and sustainable democracy, democratic eqalitarianism demands that governments temper market forces with protections for underdogs, providing counterforces to the redistribution upwards tendency of brute force capitalism.

Today, the rise of the US oligarchy and the frightening power of wealth in determining how laws work have put us in a terrible situation:   "debtor prisons, once a relic of the 18th century, are making a frightening comeback in the U.S. justice system."  Alex Kane, Miss a traffic ticket, go to jail?, Salon.com (Feb. 11, 2013).

So an appropriate slogan for progressives today should be something along the lines of "It's the inequality, stupid."  And that certainly doesn't mean more of the same old failed GOP policies that favor the wealthy, mistakenly labeled "job creators" by the GOP in its constant effort to undo unions (witness Michigan's disastrous anti-union legislation or Cablevision's determination to aid anti-union forces and squelch union activists), favor capital over labor (from the problematic preferential rate for capital gains to the ridiculous "carried interest" taxation of the compensation payments to so-called profits partners (a category of "partner" for tax purposes not provided for in the tax code but essentially an invention of Wall Street) to the squandering waste of an estate tax and charitable contribution deduction that favor meritless accession to and use of untaxed wealth and pushes the burden for government revenues to laborers instead).  And it certainly doesn't mean more of the same "deficit hawks, austerity mavens, trickle-down charlatans, and government haters who have commanded center stage for too long."  Memo to Obama: Focus on the inqueality gap, As Reich says:

The President should make it clear that any Republican effort to hold the nation hostage to the GOP's ideological fixation on the budget deficit and a smaller government will slow the economy, likely pushing us into another recession.  And that those most imperiled are the middle class and the poor. 

He should emphasize that the real job creators are not the rich but the vast majority of ordinary Americans whose purchases give businesses reason to add jobs.  And that if most Americans still cannot afford to buy, the government must be the spender of last resort.  Id.

Reich goes on to make some specific policy suggestions for acting to reduce inequality.  These include

• reversing the impact of the reinstatement of the higher Social Security tax rate by exempting the first $20,000 of income from the tax and lifing the ceiling on income subject to it;
• reviving government-run work corps, like the WPA and CCC, "to put the long-term unemployed directly to work"
• raising the minimum wage
• imposing a 2% tax surcharge on wealth in excess of $7 billion to be dedicated to education
• Cutting corporate and military welfare
• not cutting public investments or safety nets
• giving tax credits for actual job creation
• supporting states that rehire teachers, firefighters police and social workers.  Id. (quoting and paraphrasing).

Sounds like a pretty good plan.   As Corak noted (in the Economist's View post cited above):

[D]ynamic labor markets offering new opportunities to the population as a whole, progressive public policies of relatively more benefit to the relatively disadvantaged, and strong families with growing incomes and human capital will lead to much more mobility than aristocrats of a pervious era could ever have imagined.

And the Reich plan is certainly better than what most of the GOP-led state experiments like Michigan are coming up with, which read like a plan for even more redistributing upwards to the top few, including:

• eliminating income taxes in favor of regressive sales taxes,
• eliminating business taxes in favor of regressive user fees (a GOP-led Michigan "upward" redistribution "innovation"),
• pushing hard against unions  (a GOP-led Michigan "innovation"),
• reducing safety net support like Medicaid (being considered in Michigan),
• taxing vulnerable seniors on pension income (another of Michigan's recent "innovations"),
• cutting support for state universities while reallocating the support that remains to those that serve the upper class rather than underprivileged who will generally need to borrow more and take longer to succeed (another of Michigan's redistributionist efforts).

Related articles

Red state tax "reform" and "economic growth"

Robert Reich: Coming Tuesday (Hopefully): The State of the Union's Economy

FOCUS | The State of the Union's Economy

Rising inequality in America is causing the economy to sputter

Dell's Offshored Cash Hoard and Fair Taxes

 As most people who follow mergers, acquisitions and other mega transactions are likely aware, Michael Dell wants to take the company he founded private in a leveraged buyout.  LBOs, of course, use the company's own assets as collateral for debt to purchase the company--one of the types of financial alchemy that has contributed to the last thirty years of corporate consolidations and elite wealth accumulation, both of which are problematic for sustainable economies and sustainable democracies. 

Michael Dell has a particularly interesting "problem".  Like most high-technology companies, Dell has avoided a lot of US tax by offshoring  and claiming its profits in offshore tax havens rather than in the US.  So it has more than $14 billion of highly liquid assets in offshore affiliates and not here.  See Zahary Mider and Jesse Drucker, Dell Leveraged Buyout May Hinge on Cash Hoard Outside US, Bloomberg.com (Jan. 18, 2013).

We shouldn't allow that, but fixing it would require real corporate tax reform, not the stuff that commissions and Congress blather on about most of the time, like "lowering tax rates" and "simplifying the tax code", both of which are nonsensical when it comes to corporate multinationals who pay incredibly low effective tax rates already and who will use any "simplification" as just another inviation to exercise their sophisticated tax skills at manipulating the Code for their private tax advantage.  

Congress of course hasn't had the gumption to take on Big IT for years.  And under the Bush Administration, when Congress and the Treasury seemed to be motivated primarily by seeing how fast they could give away tax breaks to corporate business through the tax code, Congress enacted one of its most foolhardy tax expenditures that especially benefited corporations that had been "bad" tax citizens--the 2004 misnamed "American Jobs Creation Act" that allowed the bad companies that had offshored their profits to avoid tax  the indulgence of bringing those untaxed profits home at what amounted to no or negative tax rates--the so-called "repatriation holiday" provision.  As usual, the right-wing claimed that these corporate tax breaks would create jobs.  They didn't (as shown by Bush's dismal job creation record, even before the onset of the great Recession).  Instead, they were used for corporate stock buybacks and similar goodies for those investors who are mostly the wealthy upper-class who own most of the corporate assets.   So the repatriation tax holiday exemplified the problems of the corporatist agenda and the way it exacerbates inequality, a kind of class warfare in bits and increments. 

So we can expect a new onslaught of lobbying by companies like Dell for another extraordinarily wasteful "repatriation holiday."  The lobbyists will claim that such corporate tax cuts are essential if we want big companies to keep creating jobs.  But that's bunk.  The evidence is in from the last repatriation holidy--it lined the pockets of the rich, as most of these corporate tax breaks have done and did not create jobs.

Obama and the Democrats in Congress should resist.  Ordinary Americans should not  bear the burden of ordinary income rates when the wealthy are taxed at preferential capital gains rates.  And ordinary Americans surely shouldn't be called upon yet again to subsidize profit-making corporation's low-tax regimes through the cuts ordinary Americans will suffer to needed services. 

Related articles

Globalization, winners and losers, inequality, and the right tax policy (Part I of "Just What Tax Reform?")

Social Security/Medicare vs Corporate Welfare

Dell Is 'Hoisted on its Own Tax Petard' in Proposed LBO

Cayman Islands to Disclose Hidden Companies and Directors

Nobody In Congress Dares To Close The Trillion Dollar Loophole That Apple, Google And Microsoft Use To Reduce Taxes

11/24/12 Links worth noting: Germany rejects Swiss banking secrecy deal; Labor Devaluation

 David Jolly, German Lawmakers Reject Swiss Tax Deal, New York Times (Nov. 23, 2012).

 The US and other countries like Germany have been pressing the Swiss on their bank secrecy, which allows U.S. and other foreign citizens to establish bank accounts without the knowledge of the home country and thus hide assets and income from home-country taxation.  The US passed laws (called by the acronym "FATCA") that require foreign banks to actively report information on US accountholders.   The hope is that every country will recognize the harm done to tax systems by banking secrecy and join in imposing similar information-reporting requirements. 

The Swiss, meanwhile, have been trying to circumvent universal adoption of such laws.  See, e.g., Nicholas Shaxson, A scheme designed to net trillions from tax haves is being scuppered, Guardian.com (Nov. 22, 2012).   Britain, Luxemburg and Austria are cited as being in the forefront of the scuttling movement:  Britain, for example, has entered into a "Rubrik Agreement" with the Swiss.

The Swiss thought they had a deal with Germany.  This would be a bilateral deal in which the Swiss agree to an upfront payment in lieu of any back taxes on the accounts and then agree to act as tax collector for the foreign government on the accounts, thus maintaining secret the identity of the foreign taxpayers. 

Such an agreement is problematic for two reasons:  (i) it requires the foreign government to trust the Swiss banks to pay the right amount over in taxes and (ii) it undermines the drive to eliminate offshore banking secrecy as a cover for tax evasion. 

Transparency in international banking and taxation matters would require that banks provide information on accounts held by foreigners to the foreigners' home jurisdictions, without any account-specific or accountholder-specific request required.  The reason for a more transparent rule is that otherwise the home jurisdiction has to have information it does not have (who has an account at a Swiss bank) before it can ask for the information it needs to ferret out who has such an account and may be engaging in tax evasion.  The biggest cracks in banking secrecy have thus come from  whistleblowers and opportunists who sell account-holder information to purchasing jurisdictions. 

Friday, the Germans rejected--for now at least--a German-Swiss deal supported by Chancellor Merkel that had been two years in the making.  France is apparently also considering rethinking a similar deal.

The Swiss leverage was clearly stated by Swiss banking official Mario Tuor, who "noted that without a deal, the status quo would remain: German officials can seek specific information from the Swiss government on people suspected of tax evasion, or go back to buying data stolen from Swiss banks. 'With an agreement, every German taxpayer in Switzerland would be taxed,' Mr. Tuor said." German Lawmakers Reject Swiss Tax Deal 

 The Steady Devaluation of Labor, TwoHalfHitches (Feb. 2012).

This is an oldie but goodie, one worth reminding you of (or calling to your attention for the first time).

[The] minimum wage, in constant dollars, has had its ups and downs since 1970 but the overall trend indicated by the straight black line is down. The numbers show that the American economy puts less value on the entry level worker than it did in 1970. Why is that? Are minimum wage workers less intelligent now than they were forty years ago? Are they lazier?

The reason probably has a lot to do with the rise of the global economy and cheaper Chinese labor. It may also have to do with basic attitudes toward labor. Some see labor as a commodity, while others believe it is not.  

***

Representative Steve King (R-IA) on the floor of the House of Representatives last year:

"Labor is a commodity just like corn or beans or oil or gold, and the value of it needs to be determined by the competition, supply and demand in the workplace."

 

***  

Samuel Gompers, cigar maker-turned-labor organizer and founder of the American Federation of Labor in the early 20th Century, had a different business ethic related to labor and said this: “You cannot weigh the human soul in the same scales with a piece of pork.”

Labor advocates actually managed to insert a statement affirming the status of human labor in the 1914 Clayton Antitrust Act:  “The labor of a human being is not a commodity or article of commerce.”

 

 

Related articles

Indonesia Mulls Minimum Wage Boost Amid Protests

German-Swiss tax deal fails

German Lawmakers Reject Pact on Undeclared Swiss Accounts

German-Swiss tax deal fails in parliament

Bern and bankers digest German tax deal veto

UBS chief says banking secrecy 'over'

A scheme designed to net trillions from global tax havens is being scuppered | Nicholas Shaxson

Inequality, Taxes, and Corporatism viewed thru the lens of Nick Reding's "Methland"

[editorial note: back from a great break in Colorado with children and grandchildren, so postings will resume normal routine. edited in afternoon to add cite to Angry Bear post by Mike Kimel.]

The Congressional Research Service recently released a new report on U.S. income inequality.  See Hungerford, Changes in the Income Distribution Among Tax Filers 1996 to 2006: The Role of Labor Income, Capital Income, and Tax Policy, CRS (Dec. 29, 2011) (Download Hungerford. Changes in the Distribution of Income Among Tax Filers Between 1996 and 2006. Role of Labor Capital and Tax. 122911).   The CRS report is a sobering document, especially in light of the growing unrest as ordinary people realize how their opportunities are limited by the increased control of resources at the top (e.g., Occupy Wall Street, the "99% vs. 1%, etc.).   For example, see the New York Times article today on inequality and the fact that U.S. mobility trails that of Europe and Canada.  The article is based on a number of different studies such as that of Marcus Jantti and colleagues, American Exceptionalism in a New Light, and suggests that inequality has lingering impacts, especially on the poor and the ability of the poor to move out of the bottom.   See Jason DeParle, Harder for Americans to Rise from Lower Rungs, New York Times, Jan. 4, 2012 (in print edition, Jan. 5, at A1).  The article discusses the considerable evidence that there is limited access today to what we have called the "American Dream":  stickiness exists especially for the poor and the affluent, as the poor generally lack opportunities to get out, and the affluent generally have all the advantages they need to stay affluent.  See especially the graphic accompanying the article, Comparing Economic Mobility.  Id. at A12.  The causes of America's mobility problem are multiple--poverty; a thin safety net (threatened even more now by the right-wing's determined attack on earned benefits like Social Security and Medicare under cover of their purported concern about deficit reduction); the disadvantages of single motherhood; high incarceration rates, especially for black males; a long history of racial stratification that still impacts daily life; the pay tilt towards educated workers (usually made up of children of the affluent); the decline in unionization compared to other affluent countries; and the magnitude of the gap between the rich and the vast majority of Americans.  Even conservatives, who tend to think that mobility is overrated as a policy goal, may conclude that "stagnation at the bottom [is] alarming and warn[] that it will worsen."  Id. at A12 (citing conservative journalist Reihan Salam of the National Review and Daily Post).

Meanwhile, not surprisingly, the right-wing in this country continues to pursue exactly those policies that have so contributed to the decline of mobility, the stagnation of incomes for the lower income population, and the loss of employee power in the workplace.  See, e.g., the plan of the Republican majority in Indiana  to enact so-called "right to work" legislation that allows non-union members to freeload off unions by getting the bargained for rights and wages without paying dues to make that bargaining possible.

What those interested in tax policy should pay especial attention to is the role of tax changes over the last 40 years in augmenting the inequality gap.  Tax is not the sole culprit, but it is a contributor and something that Congress can easily do something about, if it can summon the political will to act.  From the report summary:

Inflation-adjusted average after-tax income grew by 25% between 1996 and 2006 (the last year for which individual income tax data is publicly available). This average increase, however, obscures a great deal of variation. The poorest 20% of tax filers experienced a 6% reduction in income while the top 0.1% of tax filers saw their income almost double. Tax filers in the middle of the income distribution experienced about a 10% increase in income. Also during this period, the proportion of income from capital increased for the top 0.1% from 64% to 70%.

Income inequality, as measured by the Gini coefficient, increased between 1996 and 2006; this is true for both before-tax and after-tax income. Before-tax income inequality increased from 0.532 to 0.582 between 1996 and 2006—a 9% increase. After-tax income inequality increased by 11% between 1996 and 2006. Total taxes (the individual income tax, the payroll tax, and the corporate income tax) reduced income inequality in both 1996 and 2006. In 1996, taxes reduced income inequality by 5%. In 2006, however, taxes reduced income inequality by less than 4%. Taxes were more progressive and had a greater equalizing effect in 1996 than in 2006.

Three potential causes of the increase in after-tax income inequality between 1996 and 2006 are changes in labor income (wages and salaries), changes in capital income (capital gains, dividends, and business income), and changes in taxes. To evaluate these potential reasons for increasing income inequality, a technique to decompose income inequality by income source is used. While earnings inequality increased between 1996 and 2006, this was not the major source of increasing income inequality over this period. Capital gains and dividends were a larger share of total income in 2006 than in 1996 (especially for high-income taxpayers) and were more unequally distributed in 2006 than in 1996. Changes in capital gains and dividends were the largest contributor to the increase in the overall income inequality. Taxes were less progressive in 2006 than in 1996, and consequently, tax policy also contributed to the increase in income inequality between 1996 and 2006.

 

The members of Congress who pass such preferences (the GOP in particular, but certainly various members of the Democratic party such as Max Baucus fall into the same group) spin such preference for the rich (a group which includes most members of Congress) as supporting job creation.  Their spin suggests that anytime anyone invests in corporate stock, they are acting as entrepreneurs and increasing the possibility of jobs for the rest of us. 

The spin is mostly just that.  Most of the capital gains from sales of corporate stock have nothing to do with having invested in a company directly in ways that provide more capital to the company and lead to creationof jobs.  Most of such gains are from secondary market sales--sales of stock from one rich person to another.  Secondary market sales have absolutely nothing to do with job creation or entrepreneurship: they have everything to do with acquiring more money with taxes that are at extremely low preferential rates. 

Similarly, getting dividends from a corporate enterprise has nothing to do with job creation--they just make the corporate stock holder richer at a preferential tax rate (under the 'temporary'[ provision enacted in 2003 and extended several times since).   Many 'freshwater' economists and many tax professionals argue for "integrating" the corporate tax and the tax on dividends or outright elimination of the corporate tax, claiming that  the dividend tax represents a 'double' (and therefore wrong) taxation of corporate profits.  That logic has led to an increasingly rich variety of corporate loopholes built by Congress into the Code--from the various expensing and bonus depreciation provisions (letting corporations reduce their taxable income compared to their actual business profits by claiming a deduction for capital expenditures) to various preference gimmicks, such as the "domestic manufacturing deduction" that provided a significant reduction in the corporate tax rate to all kinds of industries, including many processes that few would consider to qualify for "manufacturing." 

 But the double taxation claim is merely that--a claim based on the way the theor treats corporate entities.  Economists been unable to prove empirically that shareholders actually bear the burden of the corporate tax.  But even if they do, there are other reasons having to do with institutional power and the sustainability of democracy for supporting a corporate tax.  If you start out thinking that "only people pay taxes", you would likely conclude that "corporations can't pay taxes; therefore, the corporate tax is 'really' being paid by the owners of the corporation."  Of course, we used to say that only people can vote, so only people should be allowed to spend money on campaign speech.  Now the Supreme Court--which has treated corporations as "persons" under the Constitution since the nineteenth century--has decided that corporations have free speech rights that are broad enough to allow them to use their vast resources to influence who gets elected.  Thus, corporatism has paved the way for corporations to buy elections and then lobby for the laws and regulations that suit them, while arguing that corporations shouldn't pay any taxes to support the government that grants them various subsidies through the election/lobbying/regulation (deregulation) process.  It has supported the US movement towards "free trade" agreements, such as NAFTA, that have been difficult for the poor in countries with whom we trade, for environmental protections in the U.S., and  for locally owned businesses and local workers in the U.S.

If you avoid the corporatist agenda and start out with the assumption that corporations pay tax (because we have treated such entities as taxpayers under the Code), then you can recognize that corporate tax policy can be set to permit reasonable profits and to disincentivize unreasonable--i.e., societally undesirable--behavior.  An example would be the problem of corporate consolidation in a globalized economy, which provides inordinate power to multinational entities (I have called them quasi-sovereigns) and significantly reduces the power of ordinary employees. 

To understand something about the problem of corporate consolidation (as if the 2007-08 financial crisis caused by "too big to fail" financial institutions shouldn't have been enought), read the book Methland: The Death and Life of an American Small Town, by Nick Reding (Bloomsbury 2009).  In trying to understand the causes of the meth explosion in U.S. rural towns, it details the devastating effect of corporate consolidation on rural workers and economies--Big Agriculture and Big Pharma essentially bought out the vertical processes (for Ag, from seed to table, with a few firms like Cargill, Tyson, and ADM controlling huge swaths of the American food system).  In the process of gaining control, they consolidated many small, local producers, shut out unions, sought-out illegal immigrant labor to avoid wage and benefits laws, and dropped wages--in one case, wages for workers in an Iowa meat processing plant dropped overnight from around $18 an hour to less than $6 an hour, with a simultaneous cut off of benefits. See Methland, at 69 (noting the decline in wages when Cargill took over the formerly locally owned Iowa Ham plant in 1987). 

"[T]he evolution of the meth epidemic had occurred in lockstep with three separate economic trends that had contributed to the dissolution of small-town United States.  ...  And the things that spurred this simultaneous rise and fall: the development of Big Pharmaceuticals, Big Agriculture, and the modern Meican drug-trafficking business."  Id. at 109.

***

"By 1999 ... Cargill-Ecxel [an agribusiness plant in Ottumwa Iowa] placed newspaper advertisements in the poork, industrial border towns of Jarez and Tijuana offering two free months' rent to workers who could make it to Ottumwa from Mexico.  For Cargill and the rest of the packing conglomerates, employing illegals would appear to have been the best of all possible situations, for the simple reason that these employees, lacking legal identification, didn't technically exist, and therefore had no rights.  Nor were they apt to argue with the harsh conditions of an industry that continues today to have the highest rate of employee injury in the United States.  A failed 2001 federal criminal case brought against a Tyson plant in Shelbyville, Tennessee made clear that corporations would essentially not be held liable for employing or recruiting illegal immigrants to work in the plants.  Despite the fact that two Shelbyville managers were caught on tape by federal investigators asking human traffickers for five hundred undocumented workers over four months, Tyson's defense team successfullyh maintained that it's too difficult for Tyson employees to determine who's who among legal and illegal employees.  The ruling institutionalized the notion that employers of immigrants are not beholden to offering the same rights to workers that other companies must, for the simple reason that they don't know--and don't need to know--who works for them."  Id. at 153.

***

"Consider what used to happen in Oelwein, Iowa before the large scale consolidation in the 1980s and 1990s of almost every niche of the food-production chain.  Corn farmers...would have bought seed from the local seed company.  Once harvested, that corn would go to a grain elevator, also locally owned.  It would be shipped to a small feedlot in order to fatten cattle raised in Nebraska, Wyoming, Florida or Arizona; or perhaps it would go to a dairy in northern Missouri, a chicken farm in Indiana, or a pork outfit in Kansas.  The variables were infinite and the market was dynamic.  The barge, truck or railroad car that carried the grain was likely independently owned, too, as would have been the pigs, cows, and chickens it fed.  At each stae, the price would have to be 'discovered' as multiple potential customers vied to handle the product, with competition keeping the price 'true'... in the context of the marketplace.  Eventually, the Oelwsin corn used to feed sows in Topeka might return to Oelwein in the form of hocks to be disassembled, packaged, and shipped at the Iowa Ham plant... From there, a whole new market ... would take over in order to distribute the food and sell it at the retail level, perhaps at the grocery once owned by the Leo family (which today is an IGA).  James and Donna Lein would have been the essential building blocks in a vibrant system in which the variables contributed at all stages to what's called the 'social capital' of rural communities.

Beginning with the precedent set in 1987 with the IBP takeover of Hormel in Ottumwa--and the subsequent takeover of Iowa Ham by Gillette--a few companies would come to control most of the U.S. food business. ... Price discovery no longer happens; the value chain is controlled by a limited number of entities.  Seed is not sold; it's biogenetically engineered by companies like Monsanto, which entered into a joint venture with Cargill in 1998.  Cargill--not the farmer--owns the corn this is grown [under contract]....  In the Illinois and Ohio river valleys, Cargill owns 50 % of the grain elevators and other storage facilities.  Along with Tyson, Swift and the National Beef Packing Company, Cargill owns 83.5% of the beef packing inustry [and so on for turkey production, flour milling, ethanol production, animal feed plants, and soybean crushing]. Id. at 169-160.

***

Once competition has been annihilated ... the surviving companies, like Cargill, begin to effect political decisions through their enormous lobbying capabilities.  The government no longer governs unimpeded: it does so in tandem with the major companies. Id. at 161 (citing Douglas Constance, a rural sociologist at Sam Houston State University, Huntsville Texas).

This loss of local ownership through massive consolidation of business enterprises was a change orchestrated from the top of the U.S. government under Reagan's policies of privatization, deregulation, tax cuts (and loosening of tax and antitrust mechanisms that had worked against consolidation), and militarization.  It is a change continued today through the more and more flexible tax regulations and Code provisions governing tax-free reorganizations.  These policy approaches supporting consolidation of enterprises both vertically and horizontally favor the development of powerful corporations that can influence governmenbt in their favor while demanding subsidies (bonus depreciation, expensing, and other tax loopholes that have steadily reduced corporate taxes well below 25% for most of those that pay them at all, even while the rates remained statutorily at 35%.  Looking at the way corporate consolidation has harmed rural America should lead us to ask whether reversing the policies favoring such consolidation--such as making tax-free reorganizations much more difficult, pursuing anti-trust violations under new theories that look to the problems inherent in quasi-sovereign corporate entities, charging corporate and other businesses an expatriation fee equal to the increase in value of business assets while in the United States--may not be worth considering as one step in remedying both the "too big to fail" and "quasi-sovereign" problems while also providing resources to address the thin safety net and falling wages of the bottom of the income distribution.

For more ideas on inequality and its relation to a dynamic, growing economy and more stable society, see Mike Kimel's post on Angry Bear, The Pelzman Effect: Why Economic Growth Has Slowed in the US over Time.

It's the Jobs, Stupid--support for the unemployed, not repatriation tax holidays for multinationals

Mark Thoma over at Economist's View has an interesting graph on the topic of "how long will it take the labor market to recover?" (Oct. 9, 2011).  Although September's news was not as bad as expected--110,000 jobs created and thus official unemployment rate of 9.1% holding steady--it is still a far cry from good news. 

I'm pleased to report that Detroit is doing better than expected.  While its unemployment rate is still above the national average, it has come down faster from its exceptionally high rate.  And the people that I know best that were hardest hit are now back at work.  One worked for a business that made auto parts, and had been laid off for three years.  He got his old job back three weeks ago and has been estatically working overtime until he is too tired to get up on a Sunday morning!  The other is a construction worker who has suddenly gotten more potential jobs than he can handle.  Great news.  They and their families can now breathe somewhat of a sigh of relief.  They can afford a few new things for the kids and can worry a little less about where the next mortgage payment is going to come from.  They are out there buying groceries and clothing and gas at a higher rate than before, and that puts more dollars in the cash registers of local businesses.  A win all the way around.

That's why the most important thing for Congress to focus on right now is jobs.  That means funding unemployment insurance to keep the long-term unemployed on their feet looking for jobs and still buying food and clothing for themselves and their kids.  It means thinking about PROVEN measures that stimulate jobs should be up there with fairness in thinking about tax policies.  So Congress should continue the most important tax breaks for the part of the working middle class that is struggling the most--payroll tax reductions.  It ought to mean paying attention to labor laws and redressing the current imbalance that allows employers to intimidate workers who want to unionize and make it close to impossible for the union organizers to meet with the workers.   Unionization rights need to be updated to account for the fact that we are no longer a close-knit bunch of workers in the same geographic space but often communicate more by email than by talking in person--so card voting should be allowed.  And guess what--it also ought to mean ensuring that the already struggling middle class does not have to worry about the potential loss of Social Security and Medicare benefits.  The government should reaffirm that these earned benefits are earned, and not going to be taken away. 

Of course, one of the best ways to do that for Medicare would be to move to a "medicare for all" system that would (i) allow the government to be much more effective in controlling price increases; (ii) ensure that everyone had decent health care, whether or not they had a job; and (iii) permit employers to let the government handle health care while the savings mean more employees can be hired.

But that does NOT mean passing more tax breaks for businesses as indirect (and not very cost-effective) stimulus for jobs.  Prime example--the ineffective, costly, and Big Company-favoring "repatriation tax holiday" for which multinationals like Google and Cisco have been so assiduously lobbying--the very companies that have most easily artificially shifted their income offshore by claiming to sell their intellectual property cheaply to offshore affiliates (and getting by with it because of ridiculous transfer pricig rules that make it possible).  We already know repatriation is a very ineffective way to create jobs.  It would be foolish to repeat a past mistake that simply led more companies to offshore more money in anticipation of successfully lobbying for yet another repatriation holiday.

It should even mean cleaning up some of the obvious fairness problems in the tax code that favor the rich and uberrich--e.g., the carried interest provision (a no-brainer, since there's really no logic in private equity fund managers getting capital gains treatment for their managerial work, the treatment of profits interests in partnerships has long been rife with self-interested Wall Streeters setting the scope of the rules, and when ordinary workers have troubling just making ends meet, it is obscene for professional asset managers to be preferentially treated as to their compensation income).

Shaviro on what Nixon would do (if in Obama's shoes on the jobs proposal)

Dan Shaviro made a point worth repeating in assessing Obama's jobs proposals, in What would Nixon Do?, Sept 7, 2011.  He noted that Obama typically compromises before he starts, so he ends up with a much smaller and less courageous policy than he should have had, one that carries out Republican policies and Republican choices.  Those Republican policies inevitably fail, and Obama ends up with the blame. 

Here's an excerpt of what Shaviro says.

[T]here is also another standard Nixon trick that, sleazy though it was in context, the Obama Administration ought to think about. Nixon was a big fan of proposing legislation that he knew couldn't be passed, specifically because if it wasn't passed he would get a campaign issue. E.g., supposedly in 1970 he was disappointed by his success in getting the Democratic Congress to pass a tough crime bill that contained provisions that, under the quaint standards of the time, were considered odious by civil libertarians. Nixon had deliberately put these things in the proposed legislation, although they were largely symbolic and expected to have little actual impact on crime, because he wanted the Democrats to refuse to pass the legislation, whereupon he would make it a campaign issue and blame rising crime levels on them. They took the issue away by acceding.

How would such a scenario play out today? If Nixon faced Obama's current political circumstances, he would not be trying actually to enact stimulus legislation. He would know that he had zero chance of getting anything that would make a significant difference. He would want to propose something that the opposition WOULDN'T pass, and that he could then campaign on. (And it is clear this time around, unlike with the 1970 crime legislation, that the Congress won't accede in order to take away the issue.)

We could use a bit of that thinking today. Why not propose something that is actually big, dramatic, and well-designed? And why not make reasonable, economically supportable arguments about why and how much it might actually help? Then Obama could rightly criticize the Republicans and blame the labor market on them when they fail to pass it.

This would not just be Nixon-style maneuvering. It would also help make the correct point that, since at least mid-2009, we have actually been following Republican budget policies and they haven't worked. As things stand, by repeatedly acceding to them, even in what he proposes, he accepts a state of affairs in which they actually set the policy yet he takes the blame.

Meanwhile, Obama is collaborating in basic miseducation of American voters, by adopting all kinds of false or grossly overstated Republican claims about how regulatory burden and budget deficits are responsible for the jobs situation.

Schwab's Brute Market Capitalism Prescription is worse than a placebo

Charles Schwab has an opinion piece in the Wall Street Journal on his views on what will and won't work to create jobs. See Every Job Requires an Entrepreneur, Wall St. Journal, Sept, 27, 2011, at A15.

I. What won't work, according to Schwab

Responding to President Obama's Sept. 8 jobs speech, Schwab  agrees with Obama that "our recovery will be driven not by Washington, but by our businesses and our workers."  But that's about as far as the agreement goes.  He runs through a laundry list of things that he says "cannot" work (listed below in the unconnected order in which he has them in the piece):

• government spending
• increased taxes
• "artificial" stimulation of the economy
• government regulation
• "shaming the successful"
• redistributing income
• raising taxes on Americans earning more than $1 million a year.

Let's unpack some of this.

Re "shaming the successful"    This is one thing on his list that is put there just to draw the attention and loyalty of the right-wingers.  Nobody suggests that we should "shame the successful".  If anything, our cultural and government policies tend too far towards the opposite.  We praise the successful and treat them like mini-gods, allowing the CEO to benefit from the intellectual property developments of a genius in their lab who gets almost nothing.  We salute the Kathy Giffords, even when it is someone else in their enterprise that made their success possible (think cheap labor in sweatshops that made clothing manufacturers successful).   We toast the Donald Trumps for their "success"--even when it includes numerous failures that have been made less painful by various provisions of the law (think of bankruptcies made more palatable to trump--but not to his creditors--by his ability to "require" hundreds of thousands in monthly income to "maintain" the luxurious lifestyle to which he was accustomed).  We even make celebrities out of assholes who drive our country to ruin--think of the heads of any investment bank dealing in subprime mortgages.   In fact, most everybody makes a practice of applauding the successful, urging that they be followed as role-models, giving them awards, and slipping them nice big loopholes in the state and federal tax codes. 

(Of course, not shaming the successful does not mean that we cannot ask them to bear more of the tax burden in light of their extraordinary success.  More on that later.)

Re "artificially" stimulating the economy:  There's another item that is worded the way it is to set up an a priori conclusion along the lines desired by the author--that little phrase about "artificial" stimulation of the economy.  That (together with the first item about government spending) is an attack on Keynesian policies for dealing with the kinds of tough lingering recessions that we are experiencing today.  Folks, if your heart isn't working, then the docs in the ER are going to apply "artificial" stimulation to get it going again.  When workers are being dumped by businesses while managers make even vaster amounts than before, when large private enterprises are hoarding resources (the trillion and a half of corporate cash sitting uninvested, both here and abroad) and when the financial industry is hoarding its resources (banks reluctant to lend to small businesses, even ones that have shown themselves to be successful), then it is clear that the economic heart isn't working. Government spending functions like those heart shocks in a stagnant economy--the right amount (i.e., enough to be stimulative for long enough) can shock the economic heart into action again and get it moving.  Failure to do it leads to prolonged economic decline, like the Great Depression.

Re Redistributing income:  Redistributing income is merely a description of what any system of taxation does, in every case except in that probably nonexistent equilibrium scenario where each dollar of tax a person pays results in a dollar of benefit to that same person.  The question is only what direction the redistribution goes--does the tax system shore up the financially vulnerable by redistributing towards equality or does it pad the couches of the already financially comfortable by redistributing upwards? 

The problem is that our social system as a whole has been redistributing upwards for the past forty years.  Some examples would include the following: 

• erosion of worker rights and bargaining power, resulting in more and more powerful management that unfairly garners more and more of the productivity gains for managers and owners
  • Also relevant here is the battering of workers' pension plans which corporate enterprises consistently underfunded, while managers' lucrative severance and pension rights mushroomed; all occuring at the same time as there is an escalated attack on publicly funded social welfare programs that provide a critical backstop to what little ordinary workers can set aside during good times
• erosion of voter rights as states become more adept at gerrymandering to ensure the re-election of the status quo
  • This is especially galling when it would be relatively simple to mandate use of a single computerized districting approach nationwide, ensuring a fair system
• constant expansion of statutory provisions (including tax) that benefit particular industries and their wealthy owner/managers (Big Oil, Big Pharma, Big Medicine, Big Banks), from so-called tort reforms that limit remedies for those seriously harmed by corporate malfeasance to tax expenditures that have provided permanent long-term subsidies to established and monopolistic industries (percentage depletion, R&D credit, active financing exception; tax-free reorganization provisions, especially ones that permit offshoring of business activity) rather than using the code judiciously to support the development of promising new industries

In short, much of our current system exists to maintain the status quo of the class distribution in society.  Capitalism will always bend in that direction, since financial resources create political power, which supports capitalist capture and setting the rules to support those in power.  Thus, a strong capitalistic system will favor capital (and the holders of capital) and disfavor labor.  It requires some government intervention to create some socialist counterbalances, such as the social safety net programs of Social Security and Medicare, to temper capitalism's push for unilateral advantage to capitalists. 

Our tax system similarly currently favors capital throughout--from the preferential rate for capital gains, to the net capital gain treatment of corporate dividends, to the favorable netting of certain kinds of business gains under section 1231 (yielding preferentially taxed capital gains when there are net gains and higher valued ordinary deductions when there are net losses) to the barely felt pinch of the estate tax (especially with the recent revisions raising exemptions and lowering rates, but also especially because of the ridiculous gambits with discounts and trusts and other run-arounds that could easily be removed legislatively).  With the 1986 reforms, Congress acted to eliminate, finally, the preferential rate for capital gains, but it took lobbyists only a few short years to get the preferential rate reinstated. the Clinton "reforms" lowered the rate, and the Bush reforms lowered it even more (to zero in some cases), with the preference extended to corporate dividends. 

The result is that the wealthy who own most of the corporate assets enjoy a very favored tax status for their income (as well as favored status in most other aspects of their lives), and the United States is one of the most unequal nations on earth--with the many problems and heartaches that go with that inequality.  See Richard Wilkinson & Kate Pickett, The Spirit Level:  Why Greater Equality Makes Societies Stronger, Bloomsbury Press, NY (2009) (surveying extensive studies on the impact of inequality on societies to conclude that it is inequality, even more than the level of income, that causes measurable harm to all income levels in a society--mental health, poverty, physical health, life expectancy, obesity, educational performance, teen births, violence, imprisonment and social mobility).

Re increasing taxes, and taxing millionaires more.  Schwab of course echoes the Tea Party line that all increases in taxes--even on millionaires who have made out like bandits in the four decades since Reagan--would be inherently bad.  The right doesn't even deem it necessary to provide an explanation for why they think this.  Ryan laments that higher taxes (actually hitting only a tiny portion of small business owners) would kill job creation, even though there's no empirical association of lowering taxes with creating jobs.  Schwab just lets all that built-up anti-tax lobbying speak for itself.

But all of the above provides ample reason for reforming the tax code so that it eliminates these extraordinarily favorable tax privileges that the wealthy and the huge multinational corporations currently enjoy--both by eliminating loopholes in corporate taxation (and especially by restricting their ability to grow ever larger through tax-free restructurings or to move assets offshore without paying tax on built-in appreciation) and in the personal provisions that give such benefit to wealthy taxpayers (exclusions of types of income; deductions and credits, etc.), and by increasing the rates of taxation, at least on the upper class in the income distribution (the top 20%).  Those at the very top have contributed no more but gotten all of the productivity gains, leaving ordinary Americans hurting.  It is only fair to ask them to pay more in taxes, to pay forward some of the huge benefits they have received.

And there are a number of other tax increases that we should consider--such as the financial transaction tax that is moving forward in the EU this week.  See, e.g., Phillipe Douze-Blazy, To Ease the Crisis, Tax Financial Transactions, New York Times (Sept. 28, 2011); Stephen Castle, Europe Readies Plan for Tax on Financial Transactions, New York Times, B5 (Sept. 29, 2011); Alessandro Torello, EU Details Its Plan to Tax Trades, Wall St. Journal (Sept. 29, 2011); Greg McKenna, The Bots of FX, Naked Capitalism (Sept. 29, 2011) (article and comments considering the potential beneficial effect of discouraging high frequency trades).

II.  So what's his prescription?

Schwab says the following: (i) businesses are started by entrepreneurs, (ii) Entreprenurial activity requires investment, and (iii) investment requires "confidence" and "certainty"--"Today's uncertainty on these issues--stemming from a barrage of new complex regulations and legislation--is a roadblock to investment." ... And he urges leaders in both political parties to "review every piece of existing legislation and regulation with a claer eye to what impact it will have on business and growth."

In other words, Schwab opines that if only government would quit doing what government is supposed to do--regulate businesses to protect consumers, protect the environment, ensure that businesses pay for their true costs rather than leaving costs as "externalities" that we suffer from--and ONLY pay attention to what business wants (and the kind of "growth" that results from that), then businesses would create jobs. 

That's wrong on three scores.

First, experience with such "laissez faire" government shows that what results from market capitalism without restraint is monopoly and stagnation and lack of innovation.  It is in fact important to have government as a partner in the economy (representing the people's desires that they cannot implement singlehandedly), else brute capitalism will take over and the overwhelming majority of ordinary people will lose out.  George Bush's reign was one in which a good bit of the "free marketarian" ideology was followed, and it had a LOUSY job creation record.

Second, businesses aren't not investing in ways that create jobs because of "uncertainty" about taxes or regulations or stimulus programs.  The uncertainty has been around since humans engaged in market transactions--how much will the sovereign exact from this transaction; what requirements on place, manner of undertaking the transaction will there be, who else will need to benefit???  That uncertainty is just one of the risks that every business considers, and not one of the major risks like counterparty risk, commodity pricing risks, natural disaster risks, consumer dissatisfaction risk, etc.  On the contrary, those things have in fact created jobs, from businesses that remove asbestos to construction workers building schools. 

Third, the kind of growth that results from government's dereliction of its duty to the people, in the interest of creating the kind of market capitalism growth that has rocketed the upper-class into the ultra rich zones while leaving the middle classes collapsing into the poverty strick, is not what servesthe people.  The people are served by creating a sustainable economy in which decent livelihoods can be had by all, not by creating a kind of restricted growth zone based on market cap applicable only to rich managers and owners. 

Suggesting that "proposed laws and regulations should be put to a simple test [of asking] what will this do to encourage businesses and entrepreneurs to invest?" leaves out most of what government should be doing vis a vis the economy--protecting its citizens from the vagaries of the economic marketplace and ensuring that the markets operate for the good of society.

Is Ryan's Worry about taxing job creators worthy of focus?

Paul Ryan--Republican from Wisconsin, radical right in perspectives, and chair of the House Budget Committee--is marching in lockstep with the radical right minority that is holding the majority of the US hostage in pursuit of its dream of decimating the federal government's human capital and safety net programs.  In a September 18 appearance on Fox News (hat tip to OmbWatch, below), Ryan made that clear in objecting to Obama's jobs proposal by claiming that any tax increase that would hit the wealthiest small businesspeople would be a sure-fire way to undo job creation.

The other thing, in the tax side is permanent tax increases on job creators doesn't work to grow the economy. It's actually fueling the uncertainty that is hurting job growth right now. And don't forget the fact that most small businesses file taxes as individuals. So, when you are raising these top tax rates, you're raising taxes on these job creators where more than half of Americans get their jobs from in this country.

OMB Watch's Craig Jennings  has some very good graphs and a sharp analysis of the lack of facts behind Ryan's pretextual 'I care about jobs'  objection to taxing wealthy small business owners, at What Happens When We Tax the "Job Creators", OMBWatch.org (Sept. 22, 2011).  

In essence, OMBWatch points out that

1) very few small business owners make enough to be in the top two income brackets (only about 2 percent). 

Aside:  Isn't it more likely that the "job engines" in our society are tose genuine entrepreneurs that are starting businesses with a few employees and making some money for themselves but not enough to be in those top income brackets?

2) For those who are in that rarified group making more than $300,000 in take-home profits, a tax increase of about $5000 more a year wouldn't be enought to change their minds on hiring decisions.  They hire if they think they can expand their business and make more, and don't refuse to hire just because they make $295,000 in after-tax income in a year instead of $300,000. 

3) Empirical data support the conclusion stated in point (2).  There is no statistically relevant relationship between changes in top marginal income tax rates (13 of them since 1945) and following year decreases or increases in employment.  Employment increases sometimes and decreases other times when rates go down; employment increases sometimes and decreases other times when rates go up.  A graph of changes in the top marginal income tax rates against changes in private sector jobs between 1945 and 2010 shows no correlation--top rates go mostly down, and average monthly private sector job growth varies up and down without correlation. (See chart below, from OMBWatch 9/22/11)

House GOP Response to Obama Jobs Bill Speech

The House GOP responded to Obama's jobs act speech by writing a letter asking for the text of his proposed legislation. 

Two things are noteworthy here:  the insistence on offsets, and the presupposition that deregulation would do more for creating jobs than unemployment expansion, payroll tax cuts, and credits for hiring the long-term unemployed and the other Obama proposals.

The letter says that Republicans "look forward" to receiving information about the offsets proposed for the jobs proposals.  This  highlights one of Obama's mistakes in the jobs speech and in fact throughout his administration.  He has allowed the GOP to set the agenda.  Even when it is obvious that the economy is stalling, he still walked the "deficit reduction" walk --including calling for changes to workers' earned benefit programs (Medicare and Social Security) in line with the GOP's four-decade campaign to decimate them as unjustifiable 'entitlements'.   That permits the GOP to practice their obstructionism in two places--first, in the jobs-supporting proposals and second, in the pay-for proposals. 

The letter presages that battle by noting that the House GOP wants to look back to GOP-sponsored bills that would "remove government barriers to private-sector job creation". In other words, the GOP is repeating the same worn mantra that government regulation that protects ordinary Americans from the air, water, land pollution, bad labor practices, and other anti-consumer actions of a too-powerful corporate business sector is the thing hindering job creation. 

Everyone (except perhaps the low-information American voters who have been constantly misled on this issue by the corporate media) knows that isn't true.  What hinders job creation is the lack of a consumer base to buy the products that would be produced by new jobs.  It isn't regulation--regulation is at most a cost that limits the corporate managers' and owners' profits, since it forces business to internalize costs that it had foisted off on the public prior to the regulations.  It isn't taxes--taxes are similarly just a cost of doing business.  Remember that corporations have had an enormously profitable time, and they have huge warchests of cash, both abroad and at home.  They have plenty of money to hire if there were only people to buy the products and services to be provided by the new hires.  Until that vicious cycle is broken, stagnation will continue.   

Other than its repetition of the Reaganomics anti-regulation mantra, the letter says nothing in substance.  It claims to approach the Obama jobs proposals with bipartisanship and cooperation.  But the years of the Obama administration have demonstrated that there is no such thing as cooperation among the current Republicans in Congress.