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Do Good Wall Street Days Translate to Good Days for Most Americans?

As usual, there was one of those all-knowing snippets in the news last Friday about what the direction in the stock market meant for the economy.  Observing high corporate profits and buoyed by the idea that the GOP might not play its "just say no" game on the debt ceiling issue (at least for three months), Wall Street profits rose.  See Wall Street at 5-year high, New York Times Business Insider, Jan 18, 2013.

Should we so easily consider Wall Street's well-being as a general sign of the well-being of the economy?  Sometimes it seems that it marches to its own tune, while ordinary Americans continue to struggle.  Foreclosures, job losses, offshoring, state actions to make union membership harder even when most Americans say union membership should be easier, huge inequalities in incomes and wealth and the social problems that go with those inequalities--there are all kinds of things going on that still don't bode well for ordinary Americans whose income is mostly made up of wages and not preferentially taxed capital gains and who don't own much of the financial assets of this country.  Democratic egalitarianism isn't satisfied by such a system that consistently rewards one class of income over another based on what amounts to class distinctions--the kind of income that requires hard work is less rewarded than the kind of income that comes with a silver spoon at birth.

In other words, corporate giants making high profits doesn't provide much reassurance to ordinary guys about the stability of their own personal economies.  High profits seem to translate to higher payouts to corporate managers/shareholders, but ordinary workers don't get more than a trickle of a share of those productivity gains. 

Trickle down hasn't trickled much down the last few decades, if it ever did. Inequality is growing worse, and with that comes even more influence so that the politically powerful are the same as the economically powerful, yielding a return on lobbying that the Founders couldn't have imagined. 

The unequal society that is today's United States has many problems that are at least partially caused by the high level of inequality--from teenage pregnancy to illiteracy rates to lifespan of the underclass to low birth weights to college graduate rates and many other indicators of a less than optimal quality of life.  And those problems are exacerbated by the continuing blind faith of so many Washington politicians in the "degenerating discourse of mainstream economics" (the link is to a recent post on Yves Smith's Naked Capitalism by Philip Pilkington).  We continue to look to Wall Street, and ignore the blight of wealth and income inequality that besets Main Street, because economists have fabricated a convenient theory of equilibrium that is most successful at hiding what is really going on from us while protecting the "free market" impulses of brute force capitalism.

Perhaps one of the positive results of the buoying of Wall Street is the general consumer attitude, which does result in more spending (still perhaps beyond one's means for much of the underclass)?  That spending increases business demand, and could even result ultimately in more job creation, especially if accompanied by more federal spending rather than the counter-stimulus current focus on spending cuts and "balanced" budgets (in at least one sense an oxymoron for a federal government that can print its own money).  But those jobs will require a better educated public than the US is likely to have. Again, partly due to the mainstream economic discourse, we are effectively debilitating public education through cuts in funding, exploitation of teachers, and privatization for the profit-making gains of education profiteers, rendering what was our greatest strength our greatest weakness. 

But what really happens to most of the wealth created by those increases in corporate profits (and those demands for ever higher returns that the wealthy have come to view as their norm, accompanied by those terribly preferential tax rates that mean the wealthy get to keep more of their unearned wealth while ordinary workers cannot)?  One suspects that much of that 'extra' wealth heads out of the country--to offshore tax havens, invested in yet another vacation home abroad, put into emerging markets, following the promise of higher returns without much regard for the impact on the US economy.

As long as we are facing the kind of inordinate reward to the uberwealthy and underreward to ordinary Americans, I find it hard to get excited about a five-year high on Wall Street.  It's main effect is to drive home the need for Congress to develop better tax policy to at least use tax as a means to help, on the periphery, cut back on inequality.  Eliminate the preferential taxation of capital gains and dividends and estates.  Don't listen so much to the deficit scolds who want to decimate earned benefit programs like Medicare and Social Security.  Invest more in physical infrastructure, particularly mass transit and environmentally sounder energy policies.  Don't listen so much to the militarists (who are often in company with said deficit scolds) who want to continue allowing the military budget to engorge itself.

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Tax Questions about the Romney-Ryan Ticket--from Romney's Tax Returns to Ryan's Vouchercare

As the election approaches, I find myself asking what concerns me most about the Romney-Ryan ticket.  There's a lot.

1. Rommey's disparaging comment about "the 47%".

Romney treated the vulnerable elderly, those still unemployed who were left jobless by Bush's "Great Recession", and the vast majority of the bottom three quintiles of the income distribution for which the standard deduction and personal exemption are INTENDED to ensure they don't have to pay an income tax as though they were all deadbeats who had not sense of personal responsibility and just wanted a government handout.  Remember that the income tax is just one piece of the federal tax system--payroll taxes take a significant bite out of low income taxpayers' income, and they usually have state income taxes and sales taxes (which are highly regressive) as well.  Romney's disdain for this group--and his assumption that he needn't bother to think about them--augers ill for the future of a Romney-Ryan administration.  We would take a significant step closer to rule by oligarchs, if we put oligarchs into the presidency who don't even recognize how their wealth and status has been achieved at the cost of ordinary folk.

2. Romney's refusal to release additional tax returns

Romney has simply stonewalled on information of direct relevance to a Romney presidency.  This is bad for two reasons. 

First, it suggests that he would serve as president with the same arrogant view of himself as the one who decides what the people need to know and the same arrogant notion that he got where he did on his own "merit" rather than on the foundation of years of wealth, prestige and status with a large helping of government support for his father's industry (roads are built free of charge to auto manufacturers, and what should be their primary competitors--public passenger railroads--are starved by the GOP in Congress to the point that they can't keep schedules because of being shoved aside by the freight owners of the rails they run on). 

Second, it suggests that there is likely information in those returns that would reflect poorly on him as president.  Even more use of offshore tax havens?  More questionable use of trusts to hide who owns what or where it is?  Failure to report offshore financial assets (that could be the basis for a criminal charge) until participation in the "voluntary disclosure initiative"?  

How can we expect a Romney-Ryan administration to deal appropriately with the obscene "carried interest" provision when he is ashamed of revealing the returns that benefitted him and his donors so magnificently from it?  How can we expect a Romney-Ryan administration to take the fair stand taken by President Reagan's administration on capital gains taxes--in the 1986 reform act under Reagan, the preferential rate that has benefitted Romney and Ryan so enormously and given them much of their wealth was eliminated!

This willingness to stonewall around relevant information and the potential that the information that isn't being disclosed would at least reflect poorly on him suggests that as president he would similarly engage.  Would Romney be another Bush who pushed for preemptive war in Iraq without adequate planning, without regard to the long-term costs, without regard even for a just rationale because of his willingness to railroad everyone to adopt the neo-con approach of loving warfare?  Romney's type of secrecy could easily allow for manipulation of public information to the extent that we are led down another blinder-gate like the Iraq war.

3.  Romney and Ryan's various positions on privatization and/or reduction of benefits under social safety net programs like Social Security and Medicare and Medicaid.

Ryan has made no bones about where he stands--he condemns earned-benefit programs, likely because he never expects to need them (and, after all, Congress has had marvelous health care for itself all these years).  Romney has waffled as he has with every policy, depending on the audience and the stakes, but his core "market fundamentalism" (as revealed by item 1) makes clear where he really stands--privatization and voucherization and benefit cutbacks and program decimation for programs like Medicaid (under the guise of "federalism") would be the future under a Romney-Ryan administration.  Our economy cannot be sustained that way.

4. Attitudes towards inequality, lack of progressivity in the tax system.

One of the most worrisome aspects of a Romney-Ryan presidency would be the lack of concern about the growth of inequality in this country and its disastrous impact on broad-based economic growth and a sustainable democracy.  The far-right GOP from which Ryan springs and which supported Romney's candidacy extols market fundamentalism above all else, celebrates wealth no matter how acquired or at what cost to society, and disregards the decline in the middle class that has been a direct result of the dominance of market fundamentalist policies over the last four decades.  Deregulation, privatization, militarization, the celebration of greed and tax cuts for the wealthy and big corporations are the cornerstones of the new right-wing consensus. 

Those are also the policies that gave us the financialization of the economy, the decimation of U.S.-based manufacturing through our subsidizing of the movement of active businesses offshore, and ultimately the Great Recession and the loss to ordinary Americans of most of their savings represented by the value of their homes.  Bush and his Treasury secretary Paulson took measures to save the big banks, but they didn't put the kinds of conditions on those savings measures that would have gone a long way to ameliorating the impact of the Great Recession--such as requiring clawbacks of mortgage loans in bankruptcy and other measures to prevent the foreclosure crisis that has driven honest, hardworking Americans from their homes. 

 Romney-Ryan and the far-right political machine funded by Sheldon Adelson, Charles and David Koch and their one-percenter peers will simply reinstate the Bush tax-cuts-for-the-rich and damn-the-rest policies.  Under Romney-Ryan, we can expect elimination of the estate tax, which will increase the budget deficit while adding to the enormous inequality gap and allowing multibillionaires to pass their wealth to heirs who do nothing to earn it free of any tax ever (most such estates haven't been taxed on their appreciation during the lifetimes of the decedent, and won't be taxed on death, and won't be taxed to the beneficiary either).  We can expect elimination of any taxes on income from capital, so that the oligarchs will bear none of the tax burden on their primary source of income.  Spending on public infrastructure and safety net programs will cease (as military spending continues to expand to fund the oligarchs who own the military-industrial complex).  Progressive tax rates, which have been steadily reduced to a flatter structure, will likely disappear, replaced by a regressive VAT or by a flat structure that puts more of the tax burden on the middle and lower income groups and much much less on the oligarchs.  Corporate taxes will continue to decrease, as a way of rewarding the multinationals who fund GOP political power and the oligarchs who manage and own the corporate giants.  Wages of workers will accordingly continue to languish.  Corporatism and class warfare will win the day, and ordinary Americans will bear the brunt of it.

This is not a pretty picture.  It is the reason I find the Romney-Ryan ticket such a worrisome prospect for our future.

Growing inequality calls for both "predistribution" and (rightly directed) redistribution

In putting forward my theme of democratic egalitarianism, I have often noted that there is no such thing as an economically egalitarian society--there will always be differentials among people, those differences often relate to social class and the education, privileged upbringing, and networking connections that ensure success for some and deny success to others as well as to innate abilities, so that those differences inevitably translate into some being better off economically than others.   

Because of those differences, the "powers that be"--i.e., existing concentrations of financial assets, prestige and associated political power among the privileged class at the very top of the income and wealth distribution-- result in redistribution upwards from poor and middle class to the upper crust.  And most in that privileged upper-crust think they've acquired it all on the basis of their own merit and that the reason others don't have it is because they are irresponsible, don't work hard enough, don't have a good business sense or are just incompetent. 

(That is of course the tale told by the like of Mitt Romney at his private fundraiser in Flordia, where he revealed his utter disdain for half of the US population and his self-indulging belief that he got where he is entirely on his own merit .  He can't even see, much less acknowledge, either his silver-spoon upbringing of class, wealth and connections or the various government-subsidized upwards redistribution from which he has benefited through capital gains preferences, carried interest treatment, disregard of the harm caused by his leveraged-buyout business model, and government subsidies through high-value government contracts and low-cost government loans.) 

Therefore, I have argued,  democratic institutions (government, programs, policies) must target achieving a sustainable economy that provides a decent livelihood for all.  They must also prevent inordinate inequality, because huge inequality among the citizenry foils all attempts to achieve either a sustainable economy or sustainable democratic institutions. 

That means that government policies must focus on creating paths for redistribution downwards from the upper crust to the middle and lower classes, undoing the corporatist top-down approach that has supported class warfare and allowed the wealthy to capture most of the productivity gains since Reagan's presidency.  Two government systems can work, on the margins, to achieve some level of downwards redistribution--benefits and taxes.  Benefits do so by providing a safety net under those most vulnerable who have never achieved a sustainable economic livelihood--the unemployed and unemployable, the sick, the elderly, the children who have poor schools, poor families, and inadequate shelter, nutrition and opportunity.  Taxes do so by taking more from those who have grabbed an inordinate portion of the resource pie and using those revenues to fund benefits as well as infrastructure (human and physical) that supports the efforts by ordinary Americans to achieve sustainable livelihoods.

We have been moving backwards on both of these systems.  The radical right has spent the last 30-40 years pushing an agenda that ultimately wants to (i) dismantle or radically reduce benefits programs (voucherizing medicare, privatizing social security, cutting back on unemployment, allowing states to reduce medicaid and children's health coverage, etc.) and (ii) eliminate taxes on corporations and the primary source of income of high-wealth individuals through a gradual reduction in progressive rate structure, elimination of the estate tax, elimination of capital gains taxes (and treatment of wealthy people's wages as though they were capital gains, through provisions like stock options and carried interest).  Paul Ryan's positions on Medicare and Social Security should be a clarion-call to get out the vote--against the Romney-Ryan ticket-- of every person who does not earn more than $300,000 a year.   The Norquist-Koch Brothers-Karl Rove-Ryan-Romney agenda on taxes should similarly cause ordinary Americans who earn less than $300,000 a year to take to the streets and to refuse to vote for any member of the GOP.  Recall that the beginning of the current trend towards too little tax revenues and especially too little taxation of the ultra rich was radical reduction of rates with purported base-broadening (such as elimination of the capital gains preference, creation and then ramping up of the alternative minimum tax).  As could be expected, lower rates lived on (and were lowered even more by Bush) but much of the base broadening was short-lived:  lobbying by the privileged at the top led to a quick return to a capital gains preference and the undoing of the AMT as an inequality leveler.  The Bush tax cuts rewarded corporate owners and managers and the wealthy class with extraordinary tax relief, while imposing long-term deficits on the country, behind a cheerful facade of "tax simplification" that was irrelevant for the 70% of the population that uses the standard deduction.

There is a third leg to the reduction-of-inequality stool.  Tax reform that restores a truly progressive income tax is one leg.  Benefit reform that builds on the achievements of the New Deal rather than destroying them is another.  The third leg is what some call "predistribution"--paying attention to the means by which the uppercrust has seized all of the productivity gains and reduced the ability of everyone else to have a decent, sustainable livelihood. 

British Labour leader Ed Miliband has called for predistribution as a new agenda in Britain.  See Predistribution: A Big New Idea, Noted, The Nation (Oct. 8, 2012), at 5. 

The term [predistribution] was coined by US political scientist Jacob Hacker, who in 2011 noted that discussions of government responses to inequality often begin and end with redistribution [downwards]--taxing the rich to provide benefits for the rest.  But that's only half the equation, Hacker said, uring progressives to pay more attention to 'the way in which the market distributes its rewards in the first place.' That includes regulations that protect consumers and empower workers: 'The regulation of markets to limit extremes and give the middle class more voice is hardly easy. ... But it is both more popular and more effective than after-the-fact mopping up.'

Milibrand agrees.  Noting the high human cost of austerity, he said, 'We need to care about predistribution as well as redistribution.' After trying 'to make work pay better by spending more on trasfer payments,' he argued, government must 'also make work pay better by making work itself pay.'

These concepts--predistribution (making up for malfunctioning markets to make work itself pay) and redistribution downwards (actual reallocation from market results through taxation and benefit policies)--are closely interrelated.  Successful redistribution downwards augments the ability of workers to afford necessities and small luxuries, and that economic activity empowers workers in the markets and gives workers an opportunity for a voice in the markets and workplaces compared to a position where employers and owners have almost dictatorial control and can garner all the workers' productivity gains for themselves.  Focus on predistribution, however, reminds us that worker rights are essential to a sustainable, broad-based economy

What kinds of rights are we talking about?  Surely a critical right is the workers' right to collective bargaining (supported by a "yes" vote on Proposal 2 in Michigan that would put that right in the state constitution where it could not be removed by the radical right legislative block).  Surely the right of the state to build infrastructure (that will create worker jobs) rather than allowing a wealthy tycoon to corner the market on international bridge crossings in Detroit and hog the revenues for himself rather than allow them to be earned by the people (Proposal 6, vote "no" so that Matty doesn't have veto power allowing him to co-opt public infrastructure for his private profits).

Predistribution pays attention to how much ordinary workers are paid compared to how much the managers at the top get out of a company.  We should be "pushing local employers to narrow the pay ratio between the top and the bottom ranks of their workforce."  Id.  For too long, we have acted like it is just fine for the "market" to demand that the wealthy be allowed to exploit communities and workers for their own benefit.  We need to say no.

Predistribution pays attention to regulations that protect workers--from worker safety to time off to family leave. It disregards the multinational corporations' pleas for laws to suit them and instead asks why we should be subsidizing their ability to move active business assets to foreign countries and leave US workers unemployed.  It acnkowledges that we have for too long allowed corporate owners and managers to snow us with their claims that "globalization" and "free trade" worked for our benefit, when in fact these are excuses for offshoring jobs so that the owners and managers can enjoy even higher "rent" profits.  As Milbrand says, "It's just not true that all the top CEOs will leave the country unless we pay them whatever they demand."  Id. 

Senate Votes at 4 today (7/25) on Obama Tax Cut Proposal

After threatening to filibuster the Obama tax cut proposal, Mitch CcConnell pulled back.  See Lori Montgomery, McConnell pulls back from filibuster on Senate tax-cut vote, Washington Post, July 25, 2012. The Republicans want to pass a deficit-expanding tax cut for the wealthiest Americans who have garnered the most from this lopsided economy in which companies lay off workers to diminish service but achieve ever greater (short-term?) profit margins for those at the top. 

(Aside:  That's not the only way that megacorporations are trying to syphon off all the productivity gains for the few at the top.  See the story about a bank analyst's conclusion that Wells Fargo was making more money for shareholders by providing lousier service to its customers.  Nathaniel Popper, Bank Analyst Sees No Payoff in Customer Friendly Focus, New York Times (July 24, 2012).)

If the Bush tax cuts were to be extended without modification (as the GOP proposal would have it), the average reduction in taxes for Americans in the three lower quintiles (who make less than 75 thousand a year) would be considerably less than $1000.  See Citizens for Tax Justice, U.S. Taxpayers and the Bush Tax Cuts: Obama's Approach vs. Congressional GOP's Approach (July  2012).  So the typical American who earns between 40 and 50 thousand dollars a year will get less than a thousand dollars from an extension of the Bush tax cuts. 

Compare the result for the wealthiest Americans under the GOP proposal.  Another year of the Bush tax cuts for the wealthiest taxpayers in the richest 1% would give them an average tax cut of about $71,000.  See Citizens for Tax Justice, U.S. Taxpayers and the Bush Tax Cuts: Obama's Approach vs. Congressional GOP's Approach (July  2012).   That means that the Republican plan gives a 7000% larger tax cut to the wealthy than to those ordinary folk making 40-50 thousand. 

Note that the wealthy still get a tax cut of about $20,000, even under Obama's plan to cut the additional breaks at $250,000.  That's because of the way the graduated income tax brackets work.  Everybody--rich or poor--is taxed at the 10% rate on the first $17,400 of income in 2012.  Everybody, rich or poor, is taxed at the 15% rate on any income they earn above $17,400 up to $70,700.   The rate increases to 25% for income in excess of $70,700 up to $142,700 (already in the upper middle class quintile) and to 28% for income above that up to $217,m450, with the rate going to 33% on the excess up to 388,350 (obviously now we're talking about only the marginal income earned by the wealthy) and then 35% on the excess above that, to whatever millions or billions it may reach.  Accordingly, the very wealthiest millionaries would get the same tax break ordinary folk do on the income they receive in the lower rate brackets up to $250,000.  And as a result, only 1.9%--the very few richest Americans in the ultra-elite--would have less of a tax cut than otherwise under the Obama proposal.

The tax-cut logic that is being proposed by the right-wing extremists is absurd.  They complain of a deficit but then work to skew the tax laws to favor the ultra wealthy.  Most of the big tax expenditures that make tax laws more complex for individuals are either subsidies primarily for activities of the ultra wealthy or anti-abuse provisions that are needed because of the aggressive anti-tax behavior of the ultra wealthy.

I hope that the Senate will have enough sense today--and stamina, and ability to resist the plutocratic pressure from the donor classes--to vote for the Obama proposal rather than agree to the right -wing pressure to pass yet another tax break for the wealthy.  Progressives already caved on restoring the estate tax to 2009's more sane levels--because of that, heirs of billionaires will continue to get even more of a windfall receipt that they haven't earned and that gives them an unprecedented advantage in the unlevel playing field that has become the US economy.

 

Ten tax tricks (non-rich need not apply)

Back on tax day in April, Bloomberg.com ran a good story on the tax tricks the rich can use to reduce, defer or avoid altogether federal income taxation.  Jesse Drucker, How to Pay No Taxes: Ten Strategies Used by the Rich, Bloomberg.com (Apr. 17, 2012).

As Drucker notes, the very very wealthy at the top of the income distribution have made out extraordinarily well in the last decade as to amount of taxes paid.

For the 400 U.S. taxpayers with the highest adjusted gross income, the effective federal income tax rate—what they actually pay—fell from almost 30 percent in 1995 to just over 18 percent in 2008, according to the Internal Revenue Service. And for the approximately 1.4 million people who make up the top 1 percent of taxpayers, the effective federal income tax rate dropped from 29 percent to 23 percent in 2008. It may seem too fantastic to be true, but the top 400 end up paying a lower rate than the next 1,399,600 or so.

They don't even necessarily have to cheat to do it.  They just use the tried and true tax reduction methods built into the system for their benefit--like "monetizing" their wealth through borrowings that they don't pay back in their lifetimes, but are paid out of the estate (which can sell stocks with the step up in basis resulting in no taxes).

That’s because those figures fail to include the additional income that’s generated by many sophisticated tax-avoidance strategies. Several of those techniques involve some variation of complicated borrowings that never get repaid, netting the beneficiaries hundreds of millions in tax-free cash. 

The article lists ten common ways the rich avoid taxes.

1. The no-sale sale (borrowing against stock, combined with puts and calls, so that the rich guy can either pay back the cash or hand over shares, years after the sale is actually conducted.  (Drucker notes that Philip Anshultz used one of these deals and ended up with the tax court saying he owed $94 million in back taxes.  But the deals are still going strong.)

2. the skyscraper shuffle (using tiered partnerships to borrow against partnership property, move the loan into a subsidiary and then distribute the subsidiary to liquidate a partner, letting him cash out of a real estate partnership and avoid taxation, retaining ownership of the entity with the cash and deferring taxes indefinitely)

3. the estate tax eliminator (leaving stock earnings to kids and avoiding the estate tax with a GRAT)

4. the estate freeze (using an intentionally defective grantor trust and debt to freeze the value of an estate--and avoid estate taxes on future appreciation--by moving assets out of the estate tax free for the benefit of beneficiaries and benefiting from valuation discounts due to the use of the trust)

5.  The option option (receiving options rather than shares as compensation so that the tax bill won't be due til the options are exercised)

6. the bountiful loss (purchasing identical underwater shares and using puts and calls to protect against any risk of further loss, and then selling the old shares to realize the loss--with just enough of a time window to avoid the wash sale rule--while retaining the same property in the form of the new shares)

7. the friendly partner (selling real estate by forming a partnership with the buyer, taking out a loan collateralized by the property, and ultimately distributing the cash to the seller who retains an interest in the partnership)

8. the big payback (buying various life insurance products that completely escape t income tax and, if owned by the appropriate type of trust, also the estate tax)

9. IRS Monte Carlo (converting traditional IRAs to Roth IRAs, especially in sets so that you can take advantage of the 21-month "change your mind" period selectively as it benefits you)

10. the venti (having a chunk of your big CEO compensation paid through a deferred compensation plan where earnings grow tax-deferred for years or decades).

What's the moral of this tale?  That Congress could easily stop every one of these tax avoidance schemes if it wanted to.  And it should want to, so that the ultra-rich don't continue to have access to schemes that allow them to avoid taxation that are simply not available to ordinary people.

US inequality is getting worse

The Congressional REsearch Service released a report in March showing that US inequality is getting worse. Linda Levine, US income distribution and mobility: trends and international comparisons, Congressional Research Service (Mar. 7, 2012).

Here's an excerpt from the summary provided in the report itself.

Approaching three years into the recovery from the 2007-2009 recession, the unemployment rate remains over 8%. The persistent difficulty of many of the workers who lost jobs to find reemployment has meant reduced incomes for them and their families. A historically slow rebound in the labor market appears to be partly responsible for some groups’ focus on the distribution of the benefits of economic growth and for some policymakers’ interest in redistributing income through the tax code, for example. Varying perceptions about a trade-off between economic growth and income equality appear to underlie longstanding congressional deliberations about such policy issues as the progressivity of income tax rates, the tax treatment of capital gains, and the adjustment of the federal minimum wage. If income were equally divided across households, each quintile (fifth) would account for 20% of total income. The Congressional Budget Office and others have documented that the bottom fifth has long accounted for much less than 20% of total income. The bottom quintile’s share of income has remained little changed for the past few decades at less than 4%, according to U.S. Census Bureau data. In contrast, the income shares of the top fifth and the top 5% of households appear to have trended upward. The top fifth’s share of total household income rose from 42.6% in 1968 to 50.2% in 2010; the top 5%’s share, from 16.3% to 21.3%. (Estimates derived from
federal income tax data suggest that those at the very top of the income distribution have experienced greater gains.) The middle class, defined as the middle 60%, received a
disproportionately smaller share of the total economic pie in 2010 (46.5%) than in 1968 (53.2%).

***

Based on the limited data that are comparable across nations, the U.S. income distribution appears to be among the most uneven of all major industrialized countries and the United States appears to be among the nations experiencing the greatest increases in measures of inequality. Three leading explanations are put forth for these cross-country differences: (1) other advanced economies devote a larger share of national output to transfers, which tends to equalize income across households; (2) the progressivity of tax rates varies by country and thus has different effects on the distribution of after-tax income; and (3) equality in the distribution of earnings,
which account for most household income, varies substantially across countries.

So Inequality is increasing and mobility in the US economy is diminishing, as the rich get richer and the middle class gets poorer and the poor stay poor.  Because so many Americans have believed the hype about "free markets" pushed by the right and the Chicago School economic perspective, they don't understand the failures of the "free market" theory --for example, that it cannot accurately predict much of anything about the economy,and that its policy dictates are likely to be total failures since they are based on assumptions that simply don't hold for actual societies (like infinite lifetimes, 100% consumption of incomes, a unitary preference and other nonsense). They echo the radical right's rhetoric antagonistic to redistribution in favor of those who are disadvantaged by the growing inequality, and blithely miss the way tax policy and spending policy redistributes upwards in ways that contributes to the increase in inequality.   Americans are also lulled into complacency about the harm of increasing inequality by the American myth that everybody that has the will to take the risks can be a self-made millionaire.  Thus, they miss any opportunities to force Congress to bring the oligarchy under control through wiser tax policy and legislative initiatives focused on addressing genuine public needs through democratic egalitarianism.

Graphs Show It Clearly--the richest are much richer and most of us are poorer

David Cay Johnston has employed a couple of key graphic images that tell a significant story about the way that US laws have favored the rich--including tax administrative procedures that have reduced real audits of the rich and tax laws that have cut the top rates significantly and cut the rates on the "favorite" form of income of the rich to extraordinarily low rates.  See David Cay Johnston, The rich get richer, reuters (Mar. 15, 2012) (noting that the figures he uses here, in 2010 dollars, are from an analysis of IRS data by Emmanuel Saez and Thomas Piketty). [hat tip Francine Lipmann and Tax Prof]

The 1934 economic rebound was widely shared, with strong income gains for the vast majority, the bottom 90 percent.

In 2010, we saw the opposite as the vast majority lost ground. National income gained overall in 2010, but all of the gains were among the top 10 percent. Even within those 15.6 million households, the gains were extraordinarily concentrated among the super-rich, the top one percent of the top one percent.

So while the Great Depression acted as a leveler, the cascading impact of tax and other fiscal policies that are extraordinarily favorable to the rich was little influenced by the Great Recession.  Here're the two telling graphs from the article.

Johnston notes that the story in numbers for adjusted gross income is discouraging: 

Saez and Piketty show that the vast majority’s average adjusted gross income, of which wages are just a part, was $29,840 in 2010. That was down $127 from 2009 and down $4,842 from 2000.

Most shocking? The average income of the vast majority of taxpayers in 2010 was just a smidgen more than the $29,448 average way back in 1966.

At the top, the super-rich saw their 2010 average income grow by $4.2 million over 2009 to $23.8 million. Compared to 1966 their income was up on average by $18.7 million per taxpayer.

The graphic illustration shows just how much the inequality we see today is from the richest of the rich getting an indecent proportion of income growth. 

Is this a problem that needs fixing?  Yes, it clearly is.  We have long recognized the importance of a society where everyone takes part and everyone has at least the minimum essentials for a decent life and a chance for improvement. 

A society where a very few "elite" at the top garner all the benefits of the system and more and more of the income for themselves is not a sustainable society--the top becomes predatory, willing to take gains no matter what the cost to everyone else.  It is the kind of attitude that many who are familiar with Wall Street banks have criticized as endemic to Wall Street culture--and one that was revealed even more starkly by the resignation from Goldman of a star banker who publicly criticized the current culture at Goldman that believes in profits for the firm at the sacrifice of the good of the customer.  See Greg Smith, Why I am Leaving Goldman Sachs, New York Times Op-Ed (Mar. 14, 2012).  Shareholders obviously agree with Smith that the "profit for the firm above care of the client" mentality is wrong.  See Christine Harper, Goldman Roiled by OpEd Loses 2.2 Billion for Shareholders, Bloomberg (Mar. 15, 2012). 

[Goldman is worried--I got a release from a PR firm suggesting that Goldman's profit-making is a boon to the economy and gives its clients great trust in the firm.  I read it and thought--hmm, misses the point.  Smith isn't condemning profit-making per se.  He is condemning profit-making at all costs, and in particular the "greed is good" type of profit-making that creates conflicts of interest with the client that is purportedly being served but would as soon eat a client as eat a steak, if money could be made for the firm (and the trader's bonus) that way.]

If we want the kind of society that gives everyone a chance to have a decent education, we have to quit running down public schools and diverting public monies to support private religious schools.   Hold schools accountable, but quit the wasteful focus on testing and assessment.  Do a little assessment and a lot more teaching.

If we want a more equal society, then we have to change our tax laws so that they don't favor the rich over everybody else.  Reduce the interest deduction, so that leveraged buyouts aren't a way to take a stable working company, make a huge profit by borrowing, and then dump it (either in bankruptcy or out of it, but nonetheless yoked with the debt that got the private equity firm rich).  Get rid of provisions that are primarily beneficial to the wealthy--reinstate a hefty estate tax, eliminate the preferential rate on capital gains, reinstate the phase out of deductions at high income levels, increase the top income tax rate (let the Bush tax cuts lapse in toto or at least for the top earners), phase out the accelerated depreciation schedules, bonus depreciation and expensing provisions, and otherwise return our tax system to a saner progressive model that can support the important basic research at universities and basic public infrastructure development that are the real keys to economic growth.

The right has bamboozled the public with its tiresome but endless class warfare rhetoric pushing corporatist policies that claim that tax cuts for wealthy corporations and wealthy individuals are the way to boost growth and help the majority of Americans have good jobs and decent wages.  It's a lie.  The way to do that is by moving to a more progressive tax system and providing more government funding for basic research (NIH, NSF, etc.) and for public infrastructure (mass transportation, rails throughout America and its inner cities, urban development).  
 

Ian Ayres on the Brandeis Tax

I've often argued here that vast inequality is harmful to democracy, and that the kind of unequal society that we have today, reflected the Gilded Age of yore, is especially worrisome.  Much of what is happening in this country that threatens freedom and economic suffering for many is related to the vastly unequal incomes and wealth of the top 1% compared to the rest of us.  Oligarchy finds it easy to flourish in such a society, and democracy struggles to keep its head above water.  The corporatist agenda that favors big business (and its owners) facilitates the capture of the state for the benefit of the rich--lobbyists swarm legislators, and campaign funding by corporations floods the airwaves with repetitive (and hence believed even if untrue) messages favoring corporatist allies. 

The main defenses that a society has against such developments are twofold:  1) a strong sense of community that incentivizes the uberrich to give a good bit of their wealth away to help the community and 2) a strong tax system--especially estate taxes and other taxes that fall primarily or exclusively on the uberrich as a way of skimming off the excess rents they have acquired because of their status and unrelated to genuine merit or hard work.  {As Elizabeth Warren said, nobody can claim to have earned all they earn without the help of the state, and the wealthy in particular depend on the state to protect their property and even their status.)  Hence I talk here of democratic egalitarianism and my view that equilibrium is not a realistic state so redistribution is always occuring.  Most redistribution will be 'upwards' for the benefit of those at the top, unless democratic institutions push for a rebalancing redistribution 'downwards' to assist those in the middle and lower income groups. 

Ian Ayres has a series of postings on a proposed "Brandeis" tax intended to impose limitations on the inequality gap.    

Don't tax the rich, tax inequality itself, New York Times, Op-Ed, Dec. 18, 2011.

In 1980, the wealthiest 1 percent of Americans made 9.1 percent of our nation’s pre-tax income; by 2006 that share had risen to 18.8 percent — slightly higher than when Brandeis joined the Supreme Court in 1916.

Congress might have countered this increased concentration but, instead, tax changes have exacerbated the trend: in after-tax dollars, our wealthiest 1 percent over this same period went from receiving 7.7 percent to 16.3 percent of our nation’s income.

What we call the Brandeis Ratio — the ratio of the average income of the nation’s richest 1 percent to the median household income — has skyrocketed since Ronald Reagan took office. In 1980 the average 1-percenter made 12.5 times the median income, but in 2006 (the latest year for which data is available) the average income of our richest 1 percent was a whopping 36 times greater than that of the median household.

Brandeis understood that at some point the concentration of economic power could undermine the democratic requisite of dispersed political power. This concern looms large in today’s America, where billionaires are allowed to spend unlimited amounts of money on their own campaigns or expressly advocating the election of others.

There will be rich always: finding a new way to think about income inequality, Freakonomics, Dec. 20, 2011.

The vast shift in national income toward our richest 1 percent is especially vivid if their income is expressed in terms of the median household income. Indeed, an important goal of our op-ed was to suggest a new unit of measure, “medians” to help us think about what it means to be rich. In 1980, if you earned 3.8 medians, you were in the top 1 percent, but by 2006 even the poorest in the 1 percent club earned 6.9 medians. 

What we call the “Brandeis Ratio,” the average income of the richest 1 percent (which includes the billions earned by the lucky few) has grown even more disproportionate. As shown in the chart below, in 1980, one-percenters on average made 12.5 medians, but in 2006 (the latest year in which data is available) the average income of our richest 1 percent was a whopping 36 medians.

 An inequality tax trigger: the Brandeis Ratio explained, Freakonomics, Dec. 21, 2011.

 A central idea behind our Brandeis tax proposal was to have a tax that is triggered by increases in inequality. Our Brandeis tax does not target excessive income per se; it only caps inequality. Billionaires could double their current income without the tax kicking in — as long as the median income also doubles. The sky is the limit for the rich as long as the “rising tide lifts all boats.” Indeed, the tax gives job creators an extra reason to make sure that corporate wealth does in fact trickle down.

***

As emphasized by Lawrence Lessig in Republic, Lost (presaged somewhat in Ayres’ book with Bruce Ackerman, Voting With Dollars), the bulk of campaign finance dollars comes disproportionately from not just the 1% club, but the richest one-half of one-percenters.  Focusing on the average income of one-percenters is a good proxy for the rising political power of plutocrats.

Of lags and caps: possible implementations of a Brandeis Tax, Freakonomics, Dec. 26, 2011 (discussing potential ways to deal with bunching of income and the question of work disincentives--see my earlier post on Greg Mankiw).

Comments on Inequality, Leverage, and Crises--Kumhof & Ranciere Nov 2010 IMF working paper

[guest post by Clifford D. Clark]

Michael Kumhof's and Romain Ranciere's November 2010 paper relates income inequality to national economic crises, particularly those experienced as the Great Depression and the Great Recession.  They conclude that increases in income inequality --comparing the top 5% of households to the bottom 95%--in the years leading up to the two crises exerted a determining influence on the economy.

First, income inequality grew in similar ways in the years before the depression and the recent deep recession. From 1920 to 1928 the share of national income received by the top 5 percent of households increased from 24% to 34 % and from 1985 to 2007 the share of the top 5% increased from 22% to 34 %. Between 1920 and 1932 and between 1983 and 2007 the ratio of household debt to GDP nearly doubled, although the ratio was higher in 2007 than in 1932. The authors find a link between the two phenomena:  income inequality increased at a greater ratethan consumption expenditures in the years before the two crises. The public was spending at rates greater than increases in their income.

Second, in the years before the recent downturn the growth in household debt  was due almost entirely to the bottom 95%. Real hourly wages of the top 10% of households increased by an accumulated 70% between 1967 and 2003, while the median households decreased by 5% and wages at the bottom 10% decreased by about 25%. A similar pattern, but with greater widening, is shown in annual earnings (less capital gains). Yet the change in inequality of consumer expenditures (for non-durable items of the kind tied closely to income) was considerably less. Can one infer that smaller changes in consumption are due to upward mobility? Their answer to the question is “income mobility has been stable or slightly worsening since the 1950s.” Id. at 7.  Further, they find that households  “at the bottom of the distribution of income and wealth are more indebted than households at the top.” Id. at 7. That represents a clear switch:  whereas in 1983 the top wealth group was more indebted than the bottom 95%, by 2007 the reverse was true. By then the bottom 95% had debts equal to 140 % of income, nearly twice that of the top 5%. They conclude that almost all of the change in the debt to income ratio in aggregate was due to the bottom 95%.

Third, an increase in debt requires and increased need for financial intermediation:  accordingly, the size of the financial sector between 1980 and 2007 increased considerably. Measured by the ratio of private credit of deposit banks and other financial institutions to GDP, that quantity increased from 90% in 1981 to 210% in 2007. By Philippon calculations the magnitude of the financial sector in GDP almost doubled to 8% of GDP during that period--that is, there was nearly the same rate of increase as experienced in the years before the Great Depression.  There are also further indicators of risk such as defaults and income to debt ratios.

 Their conclusion is succinctly stated.

“The key mechanism, reflected in a rapid growth in the size of the financial sector, is the recycling of part of the additional income gained by high income households back to the rest of the population by way of loans, thereby allowing the latter to sustain consumption levels, at least for a while. But without the prospect of a recovery in the incomes of poor and middle income households over a reasonable time horizon, the inevitable result is that loans keep growing, and therefore so does leverage and the probability of a major crisis that, in the real world, typically also has severe implications for the real economy.” Id. at 22.

crony capitalism and casino capitalism--bad flavors for right or left, per Kristof and Stiglitz

The Occupy Wall Street focus on "we are the 99 percent" juxtaposed with the CBO's recent report on the growing inequality in America (see here) come at a time when the American right is pushing hard for policies, like Perry's so-called "Flat Tax" and Cain's so-called "FairTax", that will exacerbate that inequality in a winner-take-all economic system that rewards the speculators and fat cats to the detriment of ordinary society.  Hopefully those first two items will cause ordinary folk to think twice before supporting that exacerbating trend on the right.  The right likes to disguise them as 'folksy' 'down-home' populism.  They aren't.  They are wolves disguised in sheep's clothing.

In Crony Capitalism Comes Home, New York Times (Oct. 26, 2011), Nicholas Kristof notes the "alarmist view" of Occupy Wall Street rampant among the media and the elitist critics of the movement--one that sees the protesters as "half-naked Communists aiming to bring down the American economic system" or "a 'mob' trying to overthow capitalism."  He rightly responds that it is instead a movement that "highlights the need to restore basic capitalist principles like accountability."

[I]n recent years, some financiers have chosen to live in a government-backed featherbed. Their platform seems to be socialism for tycoons and capitalism for the rest of us.

***

The American critique of the Asian crisis was correct. The countries involved were nominally capitalist but needed major reforms to create accountability and competitive markets.  Something similar is true today of the United States.

***

Capitalism is so successful an economic system partly because of an internal discipline that allows for loss and even bankruptcy. It’s the possibility of failure that creates the opportunity for triumph. Yet many of America’s major banks are too big to fail, so they can privatize profits while socializing risk.

***

[Mohamed El-Erian, chief executive of Pimco] told me that the economic system needs to move toward “inclusive capitalism” and embrace broad-based job creation while curbing excessive inequality.  “You cannot be a good house in a rapidly deteriorating neighborhood,” he told me. “The credibility and the fair functioning of the neighborhood matter a great deal. Without that, the integrity of the capitalist system will weaken further.”

Kristof and El-Erian are correct. 

The movement in the US over the last few decades has made crony capitalism possible by pretending that abstract economic theories about "free markets" developed by Milt Friedman and his Chicago boys and based on unreal assumptions about human behavior should not only be consulted for setting fiscal policy but are the "God's Truth" bible from which such policies should be derived.  This has led to the capture of the markets by big money.  Swarms of lobbyists for Big Oil/ Insurance/ Banks/ Pharma draft the laws that apply to their industries then work with the agencies to draft favorable interpretations into the regulations and then use powerful firms funded by business coalitions like the U.S. Chamber of Commerce, National Association of Manufacturers or supported by "business-funded so-called 'think tanks' to exploit the courts (packed by the right in the four decades since Reagan) to push industry favorable policies no matter the 'externalities'  for people's lives, the environment, other priorities, and individual freedoms.

Crony capitalism doesn't hold capitalists accountable for what they do.  We put minimal if any restraints (tax law, anti-trust law, patent  law) on business monopolization and business consolidation and business ability to use the power of money to influence the work of legislators, executives and courts.  We allow private equity funds that buy, fire, and sell at great profits to themselves but at great cost to communities, not just in jobs lost, but also in abandoned buildings left to be handled at the taxpayers' expense and polluted waterways, ground and air left to be cleaned (if at all) at taxpayers' expense.  Wal-Mart moves from one address to another across the street and a short hop down the road, because it gets a new tax rebate from the county over the line and leaves behind the community that gave it a tax rebate for the first store, without ever providing the financial benefits the rebate was intended to buy and leaving behind the pollution, waste and destruction of an empty shell megabuilding (real life anecdote from Champaign, Illinois).

Crony capitalism results in excessive inequality (witness the way the managers and owners have accrued all the productivity gains of the last decade) and excessive inequality furthers crony capitalism.

[Lawrence Katz, a Harvard economist, says that] excessive inequality can have two perverse consequences: first, the very wealthy lobby for favors, contracts and bailouts that distort markets; and, second, growing inequality undermines the ability of the poorest to invest in their own education.  "These factors mean that high inequality can generate further high inequality and eventually poor economic growth."

This is very similar to what Joseph Stiglitz has been telling us for some time.  In his 2010 book, Freefall, Stiglitz recognized that America's economic crisis stemmed in part from unfounded faith in Econ 101.  :

Modern economics, with its faith in free markets and globalisation, had promised prosperity for all. The much-touted New Economy – the amazing innovations that marked the latter half of the 20th century, including deregulation and financial engineering – was supposed to enable better risk management, bringing with it the end of the business cycle. If the combination of the New Economy and modern economics had not eliminated economic fluctuations, at least it was taming them. Or so we were told.

The Great Recession – clearly the worst downturn since the Great Depression 75 years earlier – has shattered these illusions.  (This and the following excerpts are from the extract of his book, Why we have to change capitalism, The Telegraph)

Saying that does not make anyone "against capitalism".  It just means that we must open our eyes to understand the potential that unfettered capitalism has for highly negative destruction.  As Stiglitz says, "markets lie at the heart of every successful economy but ... [they] do not work well on their own."  We have to let government work to correct the imbalances that otherwise result from unfettered capitalism--especially the kinds of imbalances that start to grow when casino capitalism is let loose by socializiation of losses and privatization of gains resulting in enormous inequality within the society.

Economies need a balance between the role of markets and the role of government – with important contributions by non-market and non-governmental institutions. In the last 25 years, America lost that balance, and it pushed its unbalanced perspective on countries around the world.  The current crisis has uncovered fundamental flaws in the capitalist system, or at least the peculiar version of capitalism that emerged in the latter part of the 20th century in the US.

***

[A] closer look at the US economy suggests that there are some deeper problems [than just the ones resulting from our current financial crisis and recession]: a society where even those in the middle have seen incomes stagnate for a decade, a society marked by increasing inequality; a country where, though there are dramatic exceptions, the statistical chances of a poor American making it to the top are lower than in "Old Europe."

Stiglitz concludes, as many of us have, that this crisis should be taken as an opportunity to ask what kind of society we would like to have and to make the changes necessary to ensure that we are on the right path.

We have gone far down an alternative path – creating a society in which materialism dominates moral commitment, in which the rapid growth that we have achieved is not sustainable environmentally or socially, in which we do not act together as a community to address our common needs, partly because rugged individualism and market fundamentalism have eroded any sense of community and have led to rampant exploitation of unwary and unprotected individuals and to an increasing social divide.

***

The model of rugged individualism combined with market fundamentalism has altered not just how individuals think of themselves and their preferences but how they relate to each other. In a world of rugged individualism, there is little need for community and no need for trust. Government is a hindrance; it is the problem, not the solution.

But if externalities and market failures are pervasive, there is a need for collective action, and voluntary arrangements will typically not suffice.

The government plays an important role in restraining the "dark angels" of capitalism and allowing the "good angels" to operate for the benefit of society.  Without government as an enforcer of accountability and trust, some version of crony capitalism and its brute-force harm to those who lose out in the struggle for wealthy is inevitable.  

This crisis has exposed fissures in our society, between Wall Street and Main Street, between America's rich and the rest of our society. While the top has been doing very well over the last three decades, incomes of most Americans have stagnated or fallen.

We need to keep this in mind, as we deal with the myriad proposals coming from the right to continue the trend of unfettered markets, crony capitalism and winner-take-all policies.  Deregulation for Big Banks/Oil/Pharma et al will not create jobs, tax cuts for the wealthy will not unleash broad-based growth, and larger inflows of lobbyists [see, e.g., Eggen & Farnam, Lobbyists playing key role in 2012 fundraising, Wash. Post (Oct. 27, 2011)] into even our political decisionmaking processes made possible by the Citizens United case will not provide ever more "free speech" for everyone.  These are excesses of brute-force capitalism exercised in a plutarchy, not evidence of a sustainable democracy. 

The answer is what might be called "mitigated capitalism"--an economy that can benefit from the incentive power of capitalism, but that limits and restrains its excesses through reasonable social welfare programs and safety nets for those that are left behind in one way or another, strong emphasis on providing public education and other systems that allow individuals to take advantage of opportunities to advance themselves, and strong enforcement of laws that protect the public commons (natural resources, air, water, land, and the public square) for the public.  The progressive income tax--a system that taxes every person on their income from whatever source (capital or labor)--and the estate tax--a system that redresses the inability of the tax system to capture the appreciation of capital resources during a person's lifetime--are key ingredients of the tax answer to preventing crony/brute-force capitalism's sway.