Is our tax structure creating feudalism?


I sent my tax information to my CPA last week. I wait anxiously to find out whether I will be depressed because I owe additional money or will rejoice because I receive a refund.

G.E., America’s largest corporation, already knows the answer about its tax bill for the year past. Its business was booming in 2010, earning $14.2 billion. So what will G.E. have to pay to the government for its excellent financial performance? Well, actually, it is claiming that it doesn’t owe anything at all. In fact, it is asking for a $3.2 billion refund.

I’ll write that again.

On its more than $14 billion profit, G.E. expects to pay not one cent but rather expects the IRS to refund more than $3 billion.

The NY Times’ David Kocieniewski writes, “[G.E.’s] extraordinary success is based on an aggressive strategy that mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore.”

I wish I had G.E.’s acumen and resources. I don’t know how to shelter my income in an offshore account. Neither can I afford to employ lobbyists to help write laws that favor my family and me. And I can’t pay the high fees of a tax law firm staffed with former Treasury officials to help me take advantage of tax loopholes no matter how obscure.

So I pay the taxes I owe while G.E. owes nothing.

Some call this fair. It is many things, but being fair isn’t one of them.

One thing that it is is being a symptom of the continued upward redistribution of wealth in the US.

I think it is the widening and yawning gap in wealth distribution that underlies much of the anxiety in American society. There is a lot of anger, as many are caught between disappearing jobs and heavy taxes. Unfortunately, the anger is often misdirected—at immigrants, at the professional class, at people of color, at liberals.

Lobbyists and public relations firms employed by big corporations have written a script that many Americans have accepted. The main antagonist in this drama is government. The script tell us that government is too big, too rapacious, too inefficient, too staffed with bureaucrats interested only  in protecting their own interests. As the story unfolds, we learn that teachers and others on government payrolls are the villains, as are Spanish-speaking immigrants and liberals who want to take away guns so we can’t protect ourselves. (Thirty years ago, when Ronald Reagan read the first draft of the corporate script and declared government as the problem, not the solution, air traffic controllers and welfare queens were the enemies.)

In this unfolding drama, to the rescue of newly marginalized ride anti-government politicians, ready to bust public service unions, the last bastion of organized labor and put an end to all the foolishness about raising taxes on the wealthy and corporations.

The storyline has seeped into the pores of the very people who are being squeezed to the edges of poverty. And instead of electing those who stand with the working people, support unions and want a progressive tax system, there are more, not fewer, politicians in Washington and state houses today who do the ideological bidding of corporate America.

The argument big business has made is that when business is set free from government’s hand, it will be free to create more jobs for the American public. Through the 1950s and much of the Cold War era, the argument seemed valid enough. According to NY Times columnist Bob Herbert, income distribution was more equitable than today, with “the top 10 percent of families accounting for just a third of average income growth, and the bottom 90 percent receiving two-thirds.”

America’s middle class was expanding in that era. By 2009, though, the picture was very different. “The richest 5 percent,” Herbert writes, “claimed 63.5 percent of the nation’s wealth. The overwhelming majority, the bottom 80 percent, collectively held just 12.8 percent.”

There are two moral arguments against the upward redistribution of wealth. The first is the rank unfairness of a system in which a few reap benefits beyond imagination and expect others to pay taxes to keep the system afloat.

The second moral argument is that if the present trend continues, we will be left with a system that begins to take on the contours of modern-day feudalism, a feudalism not in the service of inherited gentry but in the service of transnational corporate power. Democracy will be hollowed out, leaving the mechanisms of parties and voting, but within the context of a system manipulated by a few who command limitless wealth to shape outcomes to their advantage.

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6 thoughts on “Is our tax structure creating feudalism?

  1. I so enjoy reading your reflections. I heard you speak several times at the Northern Virginia Ethical Society. Unfortunately, I could not break through the crowd of well-wishers at the conclusion of your talk. I will try to be more aggressive next time.

    You are critical toward GE and our tax policies because GE pays too little tax to the United States. You argue that corporate tax policies work toward a redistribution of wealth to an ever shrinking group. I don’t disagree with the facts. I just wonder whether the middle class that owns GE stock and benefits through individual and collective holdings, such as via pension plans, are upset. I also wonder if we can have it both ways…that is, we want corporations to create jobs in America but we also want them to pay high taxes. Why would they stay? Why not a strategy of low taxes for creating/retaining jobs in the United States. I say, “Treasury….hire more bow-tied, high powered lawyers and economists.”

    • G.E. is paying so little in taxes because they already shelter profits off-shore. The fact is that they aren’t creating new jobs for Americans. They left not because taxes were too high but because they could exploit labor overseas—in those places without strong unions.

  2. great post, I love how you go into how politicians etc. have created a fiction that Americans are buying hook, line, and sinker about fiendish immigrants, big government, etc. etc. while placing a cloud of obfuscation around what’s going on with big business. THey are NOT in the midst of a recession! They are reaping immense profits and not paying a dime! and to add even more salt to the wound, let’s not forget that Obama named the GE CEO to head up an economic advisory board–the committee on jobs and effectiveness. talk about a janus-faced move! How utterly dishonest!

  3. I agree with everything that Arthur said and I love how Colleen pointed out the “fictional” aspects of this problem.

    I am in one of those unions and I am one of those professionals that are being dragged through the muck and mud of this situation. I”m an elementary school teacher. What can we do to set the record straight?

  4. I read Arthur’s and the other comments on this post regarding tax structure and thought I might add the comments of Robert Reich, who like Bob Herbert and so many of us is dismayed at the disproportions of wealth distribution in this country. Reich goes further than unfair tax structure and off shore shelters and provides a detailed, current assessment of the economic situation with a detailed plan for reversing the situation. It’s worth reading. I recently read Robert Reich’s book on the factors that produced the Great Recession of 2008. Basically, his thesis is that a misdistribution of wealth and income led to circumstances similar to those that precipitated the Great Depression of the 1920’s and 1930’s. His book is filled with a well written description of these circumstances as well as concrete suggestions to prevent such problems in the future, which are currently being addressed in our country’s political process. I was interested enough so that I summarized the book, and felt that I would pass the summary on to people who might read it (see below). I highly recommend the book itself. We are at a critical moment in our social and political process. AFTERSHOCK- THE NEXT ECONOMY AND AMERICA’S FUTURE Robert Reich 2010 Introduction The Pendulum At the G20 meeting in September 2009, Treasury Secretary Tim Geithner stated that the Great Recession was caused by “for too long, Americans were buying too much and saving too little.”He wanted an economy in which Americans consume less and China consumes more and we borrow substantially less for a “re-balanced” global economy. Reich thinks that Geithner misstated the fundamental problem- Americans don’t spend beyond their means-their means have not kept up with what they should be able to afford. Too large a proportion of wealth had gone to the people at the top. This is our economic, social and political predicament. The benefits of the economy need to be shared more. The first stage of American capitalism (1870-1929) involved increasing concentration of income and wealth. The second stage (1947-1975) more broadly shared prosperity. The third stage (1980-2010) increasing concentration. We need a fourth sage in which broad based prosperity is the norm. Our history is more like a spiral than a pendulum-we don’t exactly return to a previous point but arrive at those points with different attitudes and perspectives. We ask questions about inequality: who is supported and who is cut adrift, when are there political consequences , what and for whom is the economy for? Technically, the Great Recession has ended, but its aftershock has just begun. Economies always rebound from declines. What happens next? If fundamentals are in order, we can expect healthy and stable growth; if not, economies as well as societies become imperiled. Reich argues that the fundamentals are profoundly skewed. We will have to choose between deepening discontent and nastier politics and fundamental social and economic reform. Reich believes we will and must choose the latter. The recovery will be anemic with large numbers remaining jobless or with lower wages. Therefore, consumers will not be able to keep the recovery going and businesses will not have the impetus to invest. Foreign markets will not buy enough American exports because they are concerned about their own unemployment. The US government cannot run sustained deficits or sustained money cheapness to fill the gap. Therefore the economy will be weaker than during the “phantom” recovery of 2001-2007, when consumers had drained their savings and were borrowing against the rising value of their homes. The recovery before that through the 1990‘s was fragile and ended when families could not work longer hours and the dot.com bubble burst. The problem emerged around 1980 with global competition and labor-replacing technologies. Instead of strengthening measures to support the US workforce, political leaders embraced de- regulation and privatization, attacking labor unions, cutting taxes on the wealthy and shredding social safety nets with resultant stagnant wages, job insecurity, widening inequality. In 1970‘s top 1% took 9% of total income. In 2007, top 1% took 23.5% of income. As the economy grows, people in the middle want more, but if wages don’t rise, they borrow. But this cannot last. The government interprets these episodes as temporary crises because of excessive debt, and tries to fix them by flooding financial institutions with enough money to avoid runs on banks. The high debt is actually a symptom, not a cause of the crises. Politicians opt for short term fixes that do not disturb moneyed interests on whom they have become dependant. The rich defend their disproportionate affluence as related to their talent and essential role. The meltdown of 2008 was ameliorated only by lowering interest rates to near zero and bailing out Wall Street, cutting taxes and spending huge amounts on infrastructure and unemployment benefits as had occurred with the Great Depression. These efforts removed the pressure for fundamental reform. Aside from expanding health care, little was done to overcome the inequalities. Declaring the recession to be over, the moneyed interests said the system worked and lobbied against changes to improve the imbalance. Other countries with less inequality were hurt by the financial crisis also. America’s bad debt was parceled around the world and exports to America were dropping. Without enough purchasing power, we will not be able to sustain a strong recovery. Politics will become a contest between reformers and demagogues. Part I THE BROKEN BARGAIN 1. Eccles’s Insight The Federal Reserve Board is housed in the Eccles building in Washington, DC. Marriner Eccles was chair from 1934-1948. He analyzed the economic stresses of the Great Depression. He was from Utah, of Scottish Mormon descent. Mariner was initially a Mormon missionary who became a businessman and made a fortune- a bank president who became a tycoon-director of railroad, hotel and insurance companies as well as head of a bank holding company, president of lumber, milk, sugar and construction companies. He survived the crash but was shaken when the economy didn’t quickly rebound. He found that his thinking was profoundly incorrect and that he did not know anything about the commercial effects on the economy and social structure and he despaired climbing from the bottom of the pit. When his depositors began demanding their money he reduced lending and called in loans to increase reserves. But then small businesses couldn’t get loans. “seeking individual salvation we were contributing to collective ruin.” Economists and business leaders tried to balance the federal budget and thought that lower prices and interest rates would spur investment. But Eccles thought investment in a disabled economy wouldn’t occur, without a climate of prosperity with purchasing power increasing demands for higher living standards. Millions couldn’t satisfy their barest needs let alone buy more elaborate technology. Many leaders thought that the depression was a result of God given economic laws, like those in the biblical story of Joseph and the Pharaoh who dealt with lean and prosperous years sent by God. The explanation was that we had been spendthrifts and wastrels in the roaring 20’s. We had wasted instead of saving and we had inflated values. Those who had been prudent and thrifty would reinvest at the right time in new production, ending the famine. Eccles thought this was nonsense- it was really resistance to change that might benefit all the people but could be disadvantageous to the powers of the status quo. Eccles saw that men with great economic power had undue influence in the economic rules and the government that enforced them. Eccles realized that the economic game was not being played on a level field but was tilted towards wealth and power. Eccles appeared before the Senate Financing Committee just before FDR was sworn in. Others had advised reducing the national debt and balancing the federal budget. But Eccles (anticipating Keynes) said that the government had to go deeper into debt to offset the lack of consumer and business spending. He suggested a program “to bring about, by Government action, an increase in purchasing power on the part of all the people.” Despite being a Scottish banker he arrived at his conclusions by logic and experience. He proposed relief for the unemployed, government spending on public works, government re-financing of mortgages, a federal minimum wage, federally supported old-age pensions and higher income taxes and inheritance taxes on the wealthy to control capital accumulation and avoid excess speculation. Initially, FDR followed the advice of the business world, to keep the economy afloat but do little for anyone else. FDR’s treasury secretary, Henry Morganthau jr was a balance budget advocate, who never the less asked Eccles for advice and eventually to join his administration, where his ideas eventually began to be accepted. When the governor of the Federal Reserve Board unexpectedly resigned, Eccles got the job, but only on condition that the Washington Fed had more power over the money supply than the NY Fed (Wall street). Eccles opposed tight money and high interest rates. The power shift was accomplished by new supportive legislation. Eccles became one of the architects of the economy through the depression and the Great Prosperity after WW2. Eccles retired to Utah in1950 and wrote a memoir. He concluded that excessive spending had nothing to do with the depression, rather it was the result of the siphoning off of purchasing power from the majority to a tiny minority. Mass production has to be accompanied by mass consumption which means that purchasing power has to be available to most people. When people’s credit ran out they borrowed in the form of mortgage debt, installment debt and foreign debt. The debt bubble had to burst, and when it did, the reduced demand brought unemployment and a vicious cycle. “For Eccles, widening inequality was the m ain culprit.” 2. Parallels. “History does not repeat itself but sometimes rhymes.” (Mark Twain). The economy has to be reorganized when income gets out of whack. Wages did not increase from 1970‘s -2000‘s-they dropped. Family incomes were only slightly higher. The economy had increased 60%. The share of income going to the top 1% peaked in 1928 and 2007 at 23%. The top 0.1% had 11% of the income at both peaks. Same pattern for top 10%, getting almost 50%of the income. Between the two peaks was a valley the floor of which for the top 1% was 8-9% in the 1970‘s, then it gradually rose. Sociologists divide work patterns into working (production and service) and business class (selling, promoting services and ideas). Ratio is2.5:1. People are born into these classes, with ever widening gap. The affluent secede geographically into high tax base communities and therefore higher levels of service, privately provided, isolating themselves from the less affluent, who have to rely on public services which are of lesser quality and lesser funding. The working class went into debt to raise their living standards. Savings were down from9-10% from the 1950‘s to 3% in the mid 2000‘s. Debt rose from 55% of household income to 138% in the same period, largely backed by mortgaged homes. Pre-depression private credit doubled, mortgage debt tripled and credit ran out in 1929. Also, in both periods, the affluent used their soaring incomes and higher credit to speculate in a limited range of assets, leading to an explosion of values. This led to the dot com and housing bubbles bursting in 2006 and 2007. In the 1920‘s similar ballooning occurred in stock and real estate bubbles. Speculation lured gullible investors. Bad Latin debt was repackaged as new securities which were sold to gullible investors. However much the daredevil antics of speculation were the proximate causes of the bubbles, the deeper problem of growing imbalance between earnings and consumption, with lopsided incomes played a role. Had the rich received a smaller share, they would not have speculatively raised the costs of assets so high. The biggest differences between the two eras was what happened after the bubbles burst. In 1929, the economy plunged into a vicious cycle. The unemployed couldn’t purchase, therefore people were laid off which contracted spending further. There was a widening economic divide which produced economic insecurity. Social cohesion caused by shared suffering produced the political will to make reforms. Marriner Eccles proposed programs that FDR eventually instituted, such as social insurance, infrastructure improvements, schools, public universities. These were financed initially through public borrowing. After WW2, there was further expansion of technology, infrastructure, defense spending, worker productivity. The volume of production went beyond military needs. The buoyant economy helped to pay the debts. The Great Recession didn’t produce any economic gains. The government curtailed the economic slide by rescuing the business world with bail-outs, stimulus packages and expansion of the money supply. However, the successful averting of economic collapse reduced the urgency of the greater challenge-reducing the widening economic inequality. Aside from improving health care access, little has been done to redistribute wealth, therefore growth will be hard to sustain and unemployment will persist. Median incomes will remain flat or decline and economic insecurity will persist. The middle class will not be able to buy enough to keep the economy going.. This is the aftershock, from which will emerge either a backlash against trade, immigration, foreign investment, big business, Wall street and government itself-or large scale reforms which reverse the underlying trend. 3. The Basic Bargain Ford paid his workers unusually well-the higher wages turned his workers into customers who could eventually buy his cars. He recognized that workers are also consumers who recycle their earnings; if this is not so, the economy produces more than can be purchased. Ford was exceptional in letting his workers share the bounty. Productivity gains outpaced most earnings. The rich, however continued to use their increased earnings to speculate. John Maynard Keynes (b. Cambridge 1883) thought capitalism the best system, but two faults: 1. fails to provide full employment 2. arbitrary and inequitable distribution of wealth and incomes. Until these are corrected, highly unstable, vulnerable to booms and collapses. Government needs to work to correct these faults. Classical economists had viewed the markets as self correcting. Unemployment would cause wages to drop until it became profitable to hire again. Unemployment was considered to be secondary to stubborn resistance to lower wages even though workers didn‘t work hard enough to deserve the higher wage level. Joblessness would make them accept lower wages. This fit into “social Darwinism” of the era. Hoover’s secretary of treasury, Andrew Mellon cautioned against government action after 1929 crash. Let wages and prices be allowed to fall clearing away waste and lassitude…”people will work harder, lead a more moral life.” Eccles thought that people in power were justifying the status quo by invoking a dubious morality. Keynes did not see unemployment as a moral failing either. He saw it as a failure of demand, with inadequate purchasing power. Keynes used macroeconomic policy to maintain full employment. Expand money supply to lower interest rates and stimulate loans; increase government spending to create jobs to make up for consumer shortfall in demand.Keynes argued that growth depends on the rich investing and saving, but unless there was full employment extra savings were harmful because they reduce the demand for goods and services. The problem was too little demand not too little savings. Keynes gave a theoretical basis for what Eccles thought government should do: maintain aggregate demand so that production doesn’t outrun the capacity to buy, which produces less incentive to invest. Give workers a proportionate share of the economic growth. This is the basic bargain in a balanced economy. 4. How Concentrated Income at the Top Hurts the Economy The rich do not spend nearly all they earn; they hoard, invest and speculate. If there isn’t enough consumer demand for a higher living standard, domestic investment is lessened because there is little profit in investing. Every dollar spent has a multiplier effect. Overall, rich people do not spend enough. An example is Warren Buffet with 2008 net worth of 68 billion dollars. Another is CEO of Bank of America Kenneth Lewis who earned 100 million in 2007. To spend it, he would have to spend $274,000/day- that’s $380.00/minute in a twelve hour, 7 day week. There are many examples of high earning-high spending rich people but they only spend a small portion of their yearly incomes. The advantage of a fortune lies more in its cachet than in its spending power. Most rich people can’t spend the money they earn. The 19th century ethical philosophy “utilitarianism” founded by Jeremy Bentham thought that the law should provide the greatest happiness to people equally.Taxing the wealthy to help the poor increased the sum of happiness. Eccles and Keynes had a broader economic justification for redistributing wealth. If Ken Lewis had managed to spend 25 million, leaving 75 million unspent, that money would not have gone into the economy. If 500 people took home 200,000 and spent 150,000 (50,000 in savings) total spending would be 75 million. If 2000 people had taken home $50,000 the money would have been almost all spent and there would have been less debt. Before 2008, 50% of spending was done by the top 20% (40% by the top 10%). If the broader middle class took a greater proportion, total spending would have been greater. There would be greater consumption of goods and services as well as education, recreation and the arts-useful and pleasant. Many of America’s rich have been generous-Carnegie, Rockefeller, Gates, Buffet et al, but they don’t generate as many jobs and economic growth as would occur if a larger percentage of people had more wealth. The lure of wealth is certainly an incentive to entrepreneurial zeal. How much is necessary for motivation? Keynes said that “lower stakes will serve the purpose equally well.” Eccles was not criticizing the rich- his viewpoint was pragmatic. 5. Why Policy Makers obsess about the Financial Economy instead of About the Real One. Economic policy makers believe that Wall street’s financial health is a precondition for a prosperous real economy. The real economy does need to borrow money from the financial economy, but its reliance on Wall street is a recent phenomenon. Previously, when the middle class could save more, they borrowed from local banks and savings & loans institutions. Wall street just issued stocks. The situation changed when the law separating investment from commercial banking was repealed in 1999. This changed Wall street into a casino with high stake bets, the betting houses keeping a percentage of the wins for themselves and fob off losses on others including taxpayers. It’s like a masquerade ball. The bailout of the street as well as massive lending to the banks by the Fed is the policymakers response to financial threat-“stabilizing and re capitalizing” the system, ie saving the assets and the asses of bankers. Mexico’s “Peso crisis” required financial rescue in 1997. East Asia’s crisis demanded capital infusions, Long Term Capital Gain management had to be baled out. After the dot-com crash and Enron’s plunge, capital markets needed assistance, Financial officials viewed these rescues as exceptions to the assumption that rational investors aren’t threatened by financial crises because they evaluate and weigh all risks beforehand. The biggest banks and the insurer that backed them (AIG) were baled out in 2008. But the real economy on main street worsened. Officials viewed this as a result of risky lending rather than the effect of greater borrowing to meet a decent standard of living.The locus of the problem was in the real economy, not the financial economy. Policy makers viewed the debt load as the problem to be remedied-splurging (saving too little and borrowing more than one could afford). Savings from other countries (China, Japan, Germany, oil producing countries) invested in this country did make it easier for Americans to afford the costs of borrowing, but this doesn’t mean that the answer to long term problems is to borrow less and save more and spend within our means. Had the share of the economy’s gains been distributed more evenly, most Americans could have afforded a good life-style and still saved for a rainy day-they wouldn’t have needed to borrow so much. The basic bargain had been broken-earnings had not kept up to reasonable expectations of what they could afford. The Great Prosperity:1947-1975 The nation provided enough money to workers so they could buy what they produced. There was mass production and mass consumption. Everyone’s wages grew, not just the top 1-10%. The wages of lower income people grew at a faster rate than higher income people. Productivity also grew, defying the predictions of those who said top executives needed the incentive of outsized earnings. How did this change? The US government did not directly redistribute income from the rich to the poor – it created the conditions for the middle class to share the prosperity.It pushed the economy towards full employment, creating a progressive income tax, enhancing the bargaining power of workers, building up social security and a safety net. The New Deal was relatively small, but the spending of WWII was huge. The national debt equaled 120% of the entire economy. Post war, instead of economic collapse, people had the means to buy and produced a huge demand for things that been unavailable during the war, as well a baby boom. New jobs were created and the debt shrank as a percentage of GDP. The Great Prosperity reorganized work. Time and 1/2 for overtime created additional incentive for hiring new workers. There was a requirement for minimum wages and unemployment benefits. Government increased the bargaining leverage of workers-the right to join labor unions. In mid 1950‘s, 1/3 were in unions. Higher wages meant greater buying power; health and pension benefits were not taxed. Even executive pay was a result of bargaining between business, labor and, indirectly, the government.Executives didn’t take home disproportionately large packages. A 1956 college textbook called The American Class Structure described changes from the class divisions of the 1920‘s because of the new corporate organization of production- all were employees, not owners. Corporate bureaucracies tended to level incomes-the bottom elevated and the top constrained by job categories. “Income is determined by functional role in the bureaucracy.” There was security against the economic risks of life: Social Security unemployment benefits, disability insurance, pension funding, and in 1965 health insurance for the elderly and the poor.Economic security was part of prosperity and enabled sharing the costs of adversity as well as consuming the fruits of labor. The government sponsored low cost mortgages and interest deductions on mortgage interest. Government subsidized the cost of electricity and water in some parts of the country and it built roads to connect homes with commercial centers-the most ambitious public works program yet, partly justified to speed troops to war, if need be. The road building program generated suburbs, shopping malls, boosted auto sales, enlarged the construction industry, the trucking industry and reduced the costs of transport and transit. Government widened access to higher education. The GI bill paid for vets. There was an expansion of public universities with average tuitions 4% of mean income instead of 20% in private universities. College enrollment surged-3/4 in public universities and colleges. A lot of university research was under written by the government-cold war defense spending, but spilled over into commercial production. Some examples are small transistors, hard plastics, optical fibers, lasers, computers, jet aircraft and engines, even the Internet. The nation also found the time and money to rebuild Western Europe and Japan. Truman wanted development based on fair dealing “The old Imperialism-exploitation for foreign profit-has no place in our plans.” We gave technological assistance to developing nations and shared in the world’s economic growth, keeping Communism at bay. A new global assistance and trade system was created, which permitted American corporations to expand and prosper. This was paid for by revenues from an expanding middle class as well as upper class. Income taxes were as high or higher post WWII. (top marginal rates were 79-94% during the war, 91% during the fifties and dropped to 77% in 1964. Even after deductions and credits, high income taxpayers paid over 50% taxes on their earnings. But the high tax rates didn’t reduce economic growth-middle class prosperity enabled economic growth. the result was most people came out ahead, including the top. The government’s new role came out of The Great Depression and WWII, which produced a sense of common purpose- we were all in it together, rising or falling. The historian James Truslow Adams coined the phrase “the American dream…” “ a better, richer and happier life for all our citizens of every rank.” There were many inequalities, however, blacks and women, in particular, which eventually improved. There was also a blandness, uniformity and materialism that many people hated, although there was much more opportunity. Widely shared income gains were essential to economic growth. 7. How We Got Ourselves Into the Same Mess Again. The pendulum began to swing back towards the conditions before The Great Depression in the late 1970‘s and worsened during the next few decades. Middle class wages stopped climbing, even though the economy expanded, with the benefits going to the top. In the Clinton administration, the minimum wage was raised, emergency leave support instituted, attempts at universal access to health care, access to college, refundable tax credit for low-income workers, tying of executive compensation to performance. However, Alan Greenspan insisted on cutting the federal budget rather than deliver more supports, and lowered interest rates ( nb. Joseph Stiglitz disagrees and says interest rates were increased, which increased the profits of lending institutions, which then invested with larger returns producing a surplus in tax receipts) which helped a strong recovery. There was temporary rise in middle class wages in the late 1990‘s because of an upturn in the business cycle, but no stable change in the economic structure. When the economy cooled, family incomes were lower. During the Great Prosperity (1947-1975), wages were directly related to productivity. After 1975, the two directions diverged. Globalization was blamed for the flattening of incomes, since jobs were outsourced. However, imported goods were cheaper, and there were new markets for export, as well as investments from abroad in the USA, creating jobs. The problem was not just loss of jobs, but increasing automation, which lowered job rates within the USA. Millions of jobs were lost to automation, not just globalization. However, trade and technology have not really reduced the number of jobs available-the new jobs don’t pay as well. At the same time, the pay of the well connected has soared. Why was so little done to spread the wealth? We could have expanded our educational system (early childhood and public universities), created more job retraining and made more extensive public transportation. Also, we could have given workers more bargaining power, especially in personal services industries,such as retail stores, restaurants, hotel chains, child and elder care. We could have enlarged safety nets, like unemployment insurance for part-time work, wage insurance, transition assistance, universal health care. We could have required severance pay from employers laying off workers, linked the minimum wage to inflation. We failed to raise taxes on the rich and to cut them for the poorer people. We failed to attack overseas tax havens by threatening loss of citizenship to those who evaded taxes this way. We could have expanded public investment in research and development with the requirement that new jobs be created in the USA from the results. We could have insisted that foreign trade nations establish a minimum wage that’s 1/2 their median wage. Government could have enforced the basic bargain, but it did the opposite-it de-regulated and privatized the economy. It increased the cost of public higher education, reduced job training, cut public transportation, allowed the infrastructure to corrode, reduced aid to jobless families with children, restricted eligibility for unemployment insurance. It halved the top income tax rate from range of 70-90% that prevailed during the Great Prosperity to 25-39%, allowed the rich to treat their income as capital gains, with no more than 15% taxes, and shrank inheritance taxes that affected the top 1.5% of earners. At the same time, sales and payroll taxes were increased, taking more out of the pockets of the middle class and poor. We allowed companies to break the basic bargain, slashing jobs, wages, benefits, shifting risks for pensions, health care to employees. Unions were busted (by 2010, less than 8% of private workers were unionized). American companies became global companies deriving most of their revenues from overseas. Nothing impeded CEO salaries from sky-rocketing to more than 300 times the average worker, compared to thirty times during the Great Prosperity. The pay of financial executives and traders rose into the stratosphere. The super rich were top financial and business executives. The Federal Government de-regulated Wall St while insuring it against major losses.That turned finance from a servant to a master of American industry, demanding short-term profit over long-term growth. Between 1997 and 2007, finance became the fastest growth part of the economy.By 2007, financial and insurance companies made more than 40% of American corporate profits.Both before and after the bubble burst, Wall St banks and financial managers got billions in bonuses. In 2009, the 25 best paid hedge fund managers earned an average of $1 billion each! The financial economy took over the real economy. The expectations of bond and stock traders became the measure of success, just as before the Great Depression. Why did the pendulum swing back? When will it swing in the other direction? Some argue that there was no need for government intervention. They say the economy did better on its own with lower taxes on the rich. They blame the Great Recession on too much middle class debt and too many unsubstantiated mortgages. This argument equates the stock market with the economy and doesn’t address the basic bargain, where the middle class can’t buy what it produces. Some think that the pendulum swing related to declining confidence in the government, which had “been living too well.”The tax revolts in the late 1970‘s were against paying more taxes on flattened income. The inflation of the 1970‘s wasn’t due to excess government spending-there was a 12x increase in oil prices and a drop in dollar value. The real reason for the pendulum swing was the concentration of economic power with its “undue influence in making the rules “ as Marriner Eccles described in the twenties. Campaign contributions, lobbyists and public relations organizations pushed through legal changes for the rich- including union busting, cutting corporate payrolls, reducing benefits, lowering taxes for themselves and de-regulating Wall st. They put pressure on companies to perform, pushed leveraged buy outs, paid with high risk “junk bonds,” pumped up profits by firing workers, then dumped the company on the market at a higher price. The Dow Jones average rose 10x between 1980 and 2000. The value of middle class pensions did rise, since they were dependent on the stock market. However, the average market holdings of the middle class were small compared to those of the rich. The rich and powerful also conditioned people’s attitudes. They financed think tanks, books media, ads to persuade that free markets were best. Their choice was between free markets and big government, the former the solution, the latter, the problem. How could the public be so gullible? There was loss of generational memory-the children of prosperity took it for granted and so did the grandchildren of prosperity. They had no memory of the great Depression experience of a fallible and unreliable market offset by a strong and reliable government. They saw the apparent failure of government and the success of the market. They had no memory of a society in which people were all in it together, but one in which we were increasingly on our own. 8. How Americans Kept Buying Anyway: The Three Coping Mechanisms To mitigate the pendulum swing, there were three coping mechanisms: 1. Women moved into paid work, both professionally and non-professionally. Contraception helped plan families, laws against discrimination and wider educational opportunities became available. This transition has been one of the most important social and economic changes in many years. Instead of a minority of women working, there was a majority- limited only by the hiring cost of running a household or child-rearing. 2. Everyone works longer hours, sometimes multiple jobs. Typical American worker put in 350 more hours per year than European workers and even Japanese workers. DINS=double income, no sex. 3. Draw down savings and borrow to the hilt. During the Great Prosperity, middle class saved 9% after taxes; by 2006, the proportion was 2.6%. Debt had averaged 50-55 % of annual after tax income in prosperity-it reached 138% by 2007. Borrowing vehicles were credit cards, auto loans, college loans, mortgage loans, re-financing on inflated home values. Some blame consumers for borrowing too much, others fault banks for careless loans, foreign lenders, the Federal Reserve, which lowered interest rates too much, regulators, with poor oversight. Although much of the blame is justified, the real cause was the lack of growth of middle class income. People could no longer live as they had been or thought they should or could be living. 9. The Future Without Coping Mechanisms Paul Volker (former chair of Federal Reserve) told Obama that Americans had been living beyond their means. Laura Tyson said the problem was that their means hadn’t been growing. Reich says Tyson was correct. It is an economic and moral challenge-concentrated wealth and income threatens the cohesion and integrity of society and undermines democracy. In November, 2008, Obama was faced with the immediate challenge of rescuing the financial system-fragile banking system and massive debt. The coping mechanisms are exhausted-there aren’t enough jobs or hours to go around- it will take years to make up for the lost jobs, and wages will continue to erode. The great Recession accelerated structural changes that began in the late 70‘s, viz, automation and outsourcing. Re-hiring will be associated with lower pay and benefits. Over the long term the challenge is pay, not jobs, with subsequent widening of income disparity.Borrowing will be curtailed-tighter standards, bank regulations and oversight. Housing will not gain its speculative peak for a long time.Americans are paying off, paying down or walking way from outstanding loans-de-leveraging. At the same time tens of millions of boomers will be retiring with shrunken nest eggs. In 2009, 50 million workers lost at least one trillion in their 401k plans. Even if and when the stock market returns to its peak, boomers will have lost years of economic gain- many will put off retirement, making it harder for younger people looking for work. There will be less middle class consumption. Even though replacements for worn out things will be forced, this is not enough for a vigorous recovery. Bank of America and Merrill Lynch analysts predict that the top 10% of Americans, who accounted for 40% of the spending would have the spending power to fuel a recovery, because their assets were mostly in stocks rather than in homes. Reich thinks this reasoning is specious, because the 10% at the top were taking home 50% of the income, and a recovery can’t be fueled by 40% of prior spending. There will not be a sufficient demand without a buoyant middle class to justify new equipment, buildings, factories, research, products, services, etc. It is theoretically possible that a new product or software application could be so revolutionary that every business would be forced to buy it (as did the Internet and dot-com booms of the 1990‘s,) but without that kind of jolt, the long term trajectory will not be good. Government can fill the gap for a while, but it would lead to deficit spending and printing more money. Some people think the answer will come from consumers outside the USA but Reich believes they are wrong. 10. Why China Won’t Save Us In September, 2009 the Group of Twenty had a summit in Pittsburgh. Obama spoke of “re-balancing” world growth especially between the economic colossi of China and the USA. Obama says the USA has to sell to China, not just China sell to the USA based on credit supplied by China. The long term fix is for Americans to save more and Asians like the Chinese to spend more, ie Chinese consumers will substitute for American former spenders to keep the American economy going. The hope is that the Asian market is potentially huge and its middle class is growing, the US dollar will decline and they will buy more from us and we will buy less from them, leading to a resurrection of manufacturing in the USA. New technologies will be produced here and exported. Reich thinks this is wishful thinking. China’s market is growing very fast for computers, cell phones, cars, appliances (the country will become the largest shopping bazaar in history). However, Chinese consumer spending is growing slower than its overall economy. The share of national income going to households in wages and investment is dropping as the share going to companies increases. In 2009 personal consumption was 35% of the economy, where it had been 50% in 1999. Investment rose from 35% to 44% of the economy during this period. Most new jobs were in production, not sales or service as in the USA. Profits are being plowed into production- the government stimulus package in 2009 was $585 billion dollars, geared to railways, roads, power grids, sewers, factories- a larger proportion of China’s economy than our stimulus spending was to our economy. China’s capital spending will dwarf ours, but its consumer spending is only 1/6 of ours. What China produces goes mostly to other nations. Why is Chinese consumer spending relatively low? Inadequate social safety nets (health care, education, retirement. There are more young Chinese males than females, so assets are part of the marriage bargain. Chinese society is aging quickly because population growth has been limited, therefore money is being saved to support the elderly. The larger reason for low spending is the orientation to production rather than consumption, including a wish to lead in technology. China wants American know-how, so it allows Americans to sell to China, provided that the goods are produced in China, including cars, consumer goods, clean energy technologies, aircraft. That way, China acquires American technical expertise and also produces jobs. The yuan has a fixed relationship to the dollar, which undervalues its currency (if its value floated, the yuan would be more valuable). That way, its exports are cheaper and more saleable. It also makes the cost of Chinese imports artificially high and encourages Chinese foreign investments through the sale of yuan when the dollar drops in value. China’s export policy is also its social policy, since many millions of people are looking for better paying work, and if they don’t find it, there will be social unrest. Job creation, even at the cost of subsidizing foreign buyers is preferable to allowing the yuan to float, risking job shortages. Re-balancing trade is very complicated and not so easy to achieve. Both China and the USA are capable of producing much more than their consumers can buy. In the USA, the problem is a disproportionate share of income going to the wealthy. In China, the disproportionate share goes to capital investment. There is a disconnect between production and consumption in both countries, with the threat of civil unrest in China, and political unrest in the USA. If other nations respond to a declining dollar by buying more from the USA, thereby generating more American jobs, there might be fewer jobs in those nations, which would be unpopular. It is risky to rely on currency regulation as a major jobs policy since it would lead to competitive devaluation of currency. Anyway, our export sector would have to grow immensely to make up for jobs lost, and then we’d become poorer because imports would cost more. 11. No Return to Normal The underlying problem is not the recklessness of institutions, even though they were reckless. It isn’t the excessive debt, although that too occurred. The fundamental problem is that Americans no longer have the purchasing power to buy what we are capable of producing, because too much of our income has been going to the top. Pay and production are no longer linked. Obama brought the economy back from the brink with bank rescues and stimulus packages, combined with low interest rates.The health reform legislation of 2010 was a small step in the right direction. There is persistent high unemployment with flat or declining wages.Growth is not an end-it is a means to better our lives individually and communally. Economic prosperity produces a “virtuous cycle” with the wealthy accepting a smaller share because they still come out ahead and when the less wealthy get a larger share, they are more willing to pay taxes. Slow growth has the reverse effect and produces a “vicious cycle.”as each group fights against additional burdens. How to move from a vicious to a virtuous cycle? How to produce widespread prosperity which is necessary for growth and vice versa. There are economic and political ramifications. PART II BACKLASH 1. The 2020 Election Imagine the year 2020, in which an Independent party pulls enough votes from the Democrats and Republicans to win by a plurality in the White Housed and the Congress. Its platform is: no illegal immigration, a freeze on legal immigration, increased tariffs on all imports, a ban on American outsourcing, a ban on foreign investments in the USA, withdrawal from the UN, WTO, World Bank, International Monetary Fund, end involvement in foreign countries, refuse to pay interest on our debts to China, stop trade with China unless it floats its currency. Profitable companies will be prohibited from laying off workers, The Federal budget must be balanced and the Federal Reserve abolished. Banks will only be allowed to take deposits and make loans, Investment banking will be prohibited, insider frauds will face prison for at least 10 years. In order for the government to balance the budget, provide for defense and pay our national debt, personal income will be capped at $500,000/year; Earnings above that are 100% taxed. Earnings above $250,000 are taxed at 80%. All net worth above $100,000 will be taxed at 2%/year. Any American sheltering income in a foreign nation will lose citizenship. The presidential victory speech of the Independent party candidate would indicate that the people have taken America back from big government, big business and big finance. We have taken our freedom back from the politicians, from foreigners robbing us of our jobs, from the rich, from immigrants, from the elites, from the money manipulators and corporate greed masters, influence peddlers, pork peddlers. America for Americans. The result would be chaos in the stock market, business world, political world. How could this have happened? 2 The Politics of Economics, 2010-2020 Politics is bound up with economics. There is a perception that presidents are responsible for economic events. James Carville “It’s the economy, stupid.”Jobs and economy are almost always at the forefront of voters’ minds. Even then, the hypothetical scenario presented above would relate to voter frustration and anger as well as economics; they have to make do with less. Poor families with minimal education are hardest hit. The middle class adapts: live with parents and delay marriage and children. Search for bargains, buy more private labels and generics, lower grades of meat, fewer vacations, give up 2nd cars, do one’s own repairs, grow their own food. Just before the Great Recession, consumption was 70% of GDP in USA. By contrast, in Britain, 65%, Germany, 55%, Japan, 52%. During the Great Prosperity, it was 62% in the USA. Permanent frugality will not come naturally to the USA. We need a better understanding of the confluence between economics, politics and behavior. 3. Why Can’t we be Content With Less? America has a cultural obligation to consume, but it was tempered previously by thrift and self-sufficiency. The simple life has been viewed a honorable. Even after mass production and mass marketing, materialism was eschewed. “The people of this country need a …philosophy of living, not having; of happiness, not wealth,” said John Ellsworth Jr in The North American Review of October, 1932 during the Great Depression. Years ago, a psychologist surveyed the Forbes wealthiest 100, who had only slightly greater happiness than the average American, and even that was temporary.People in other countries are much the same, according to a researcher who examined 256,000 people in 17 countries and found little connection between money and happiness, above a subsistence level. What money buys has diminishing returns as long as we are not destitute; happiness is less about getting what we want than appreciating what we have. Much of what people want can’t be bought anyway. Behavioral scientist Abraham Maslow in 1943 wrote a “Theory of Human Motivation” in which he posited a hierarchy of human needs. At the bottom were food, shelter, sex and sleep, then safety and security. Once these needs are met, our higher needs can’t be satisfied in the market. Trying to purchase them actually robs them of their emotional sustenance They include love, acceptance, affiliation and esteem, self-actualization- our yearning to find meaning in our lives and to express ourselves. One could argue that with less paid work and money to spend people could enjoy simpler lives. People were coping with declining wages by sleeping 1-2 hours less before the Great Recession, a form of deprivation that created a new industry of sleep related services-twice as much spent on this compared to a decade before. In mid 2009, The Archives of General Psychiatry released a study showing that 10% of Americans were on anti-depressants within the course of a year-the most prescribed medication in the country. The proportion on anti-depressants doubled in the decade before 2007, even as the stock market and home values soared. The harder we work to buy things, the less time and energy we have to enjoy them-a mixed message: Work like mad but enjoy life to the fullest, an impossible contradiction. Sociologist Daniel Bell identified this cultural contradiction years ago. The Protestant virtues of hard work and deferred gratification were at odds with a market which instructed us to have instant gratification and indulge ourselves. The process was fueled by anxieties over aging, status and personal attractiveness. The argument for hard work has always had a lie for its premise: one day, we will be satisfied, if not in the work, then in the accumulation of what we desire. But that day never seems to arrive. Even Adam Smith, the putative father of market economics, writing in the 18th century in his Theory of Moral Sentiments (not in his Wealth of Nations) described the typical worker who “through the whole of his life…pursues the idea of a certain artificial and elegant repose which he may never arrive at, for which he sacrifices a real tranquility….It is this deception which rouses and keeps in continual motion the industry of mankind.” It is not implausible that Americans will find more contentment as we consume less, but we will have to make painful adjustments. 4 The Pain of Economic Loss There will be a lower standard of living. Behavioral research shows that losses are more painful than gains are pleasurable.Gains and losses aren’t symmetrical, because what we possess sets the standard for how we see our subsequent well being. When we lose something of value, we retain its memory and regret the loss, especially if we relied on it or depended on it. Societies whose living standards drop, experience more stress than societies which never had as much to begin with. Suicide rates go up if people remain jobless, and did so in the USA consistently during the Great Depression. In Germany, after WWI, most Germans became poorer, rebuilding was difficult because of reparations, hyperinflation and widespread unemployment. Germany became eager for an easy solution and a scapegoat as presented by Adolf Hitler. The hardest loss for middle-class America will be loss of expectations that the future will be materially better for themselves and for their children. The disappointments involved are akin to having a serious illness. The despair could make people angry at themselves and/or at the economic system or political or business leadership. People could become angry reactionaries, but not necessarily. 5. Adding Insult to Injury The second painful adjustment is the realization that the standard of living will be below that of the rich.We compare ourselves- when people at the top do better, we feel poorer. America’s rich took a hit in the crash of 2008-the Forbe’s 400 lost $300 billion, but they still had $1.27 trillion. The median pay of CEO’s dropped 15% to $ 7.3 million. Pay and benefits at Wall st big banks dropped 11%, although 5000 of Wall st “top performers” received multi-million dollar bonuses.Twenty-five% of top executives had increases in their retirement plans-their contracts guaranteed fixed returns. By the end of 2009, most of the rich had bounced back, and the gap was widening again. Most of their assets were in financial instruments whose value rose as companies cut costs and payroll and expanded global operations. The major assets of the middle class were their homes which lost value. A year after the crash, Wall st awarded bonuses as if the crash hadn’t occurred. Wall st resisted efforts to tie its hands. Compensation packages continue to soar, linked to profitability and stock performance. The 25 leading hedge fund managers did even better than investment bankers and corporate executives, at $1 billion each on the average. If this continues, the share going to the top will increase and the share everywhere else will decrease. Value is often figured as its relation to what other people have, ie not only the indispensable to support life but the perceived necessities which are not really indispensable, but would be shameful not to have. The concept of “conspicuous consumption” was noted by economist-sociologist Thorstein Veblen and “demonstration effect” by economist James Duesenberry-the social pecking order. When the top earners do better, the social norms change upwardly- it isn’t just a matter of envy. Inequality produces dissatisfaction. During the Great Recession, conspicuous consumption became unseemly. Entry to prestigious universities is easier for the wealthy , who attend private schools of high quality, have access to tutors, test preparation services, coaches and who donate large amounts of money. The best health care facilities have become available only to the rich. Education, medical care, beautiful property, things in limited supply are becoming less available to the middle class. The rich have bid up the price of desirable private modalities and reduced the quality of public modalities. The rich sequester themselves from the public and take their tax money with them. As a result of these deprivations, many feel poorer and frustrated. “Income inequality increases social discontent and fuels social unrest.” (economists Perotti and Alesina) which increase the probability of coups, revolutions and mass violence. This hasn’t happened in the USA so far. Here, opulence has provoked more ambition than hostility. We often aspire to become rich. However, we don’t like wealth exercising political power. 6. Outrage at a Rigged Game Americans might accept low wages and employment, lowering of our standard of living, wider financial inequality, but we won’t tolerate a rigged economic system. The game is tilted towards wealth and big business. Reich cites union busting, slashed payrolls and benefits, junk bonds and private equity deals that flipped companies like cards, burdened them with debts and forced mass layoffs; resplendent pay packages of corporate and financial executives and traders, cutting of marginal taxes on the rich and de-regulation of Wall st. Reich also cites the Savings and Loan bank bailout, costing taxpayers 125 $billion, with corrupt practices by bank owners like Charles Keating donating $300,000 to 5 senators “who greased the skids with federal regulators.” He cites insider and junk bond trading scandals with Ivan Boesky and Michael Milken. He cites the corporate looting scandals where CEO’s of Enron and Worldcom padded their nests at the expense of investors. Other corporations cooked their books including Adelphia, Global Crossings, Tyco, Sunbeam and Imclone. Major accounting firms admitted negligence or paid fines without admitting guilt. Nearly every major investment bank defrauded investors by urging them to buy stocks that the bank’s analysts thought were “junk”. Wall st made large and risky bets with other people’s money before the crash of 2008. He cites Goldman Sachs creating bundles of mortgage debt and selling them as good investments, lobbying credit rating agents to give them high ratings, then selling them short when the bottom fell out of the mortgage market. This didn’t change the voting records of Americans, who continued to reward incumbents on the upswings and punish them on the downswings. But the situation is changing. In 2008, the fall of Lehman Brothers caused panic among banks who had made bad bets. The nation was warned of economic collapse by Paulson (Bush Treasury Sec’y) Bernanke (Fed Res chmn) Geithner (Fed res NY) and 700 $ billion bailout was given to banks (in secret deals). This was billed as saving Main st and jobs, but appeared to do neither-the banks were solvent as a result and could do new deals, but businesses couldn’t get loans, few people could renegotiate mortgages, homeowners were not allowed to declare bankruptcy to avoid forfeiting their homes. It began to look like an insider deal for Wall st at the expense of others. Paulson and Geithner had connections at Goldman Sachs ( respectively, former CEO, and appointed by Rubin, a former CEO) and Blankfein was CEO, helping to engineer the bailout.Goldman-Sachs and Citigroup were among the biggest bailout beneficiaries. When AIG bailout was considered AIG owed 13 billion to Goldman-Sachs. Paulson and Geithner consulted with Blankfein. Had AIG been forced into bankruptcy, Goldman-Sachs would have collected far less. These facts were not publicly disclosed or acknowledged for many months. Paulson and Geithner argued that the Wall Street banks were too big too fail because the rest of the financial system had become dependent on them.. Later on, several of the big banks were made even bigger by providing subsidies ( to Bank of America, Wells Fargo, JPMorgan Chase) to help them merge with weaker institutions.Banks could value their bad loans however they wanted and the Federal Reserve kept their interest rates so low that the banks borrowed essentially free. Within a year, the banks were profitable again including mortgage profits. The government was subsidizing bank’s mortgage loans, but the savings weren’t being passed on to homeowners.(mortgage rates were not cut). After the bailout, there was talk about regulation to avoid similar problems in the future, but the proposed rules were filled with loopholes. At the same time, homeowners couldn’t declare bankruptcy. Also, despite the plea that the banks were too big to fail, no anti-trust laws were invoked to break them up. It is difficult for legislators to hold Wall Street and big business accountable while at the same time, being dependent on them for money. Reich points out that there is a revolving door between the business world and jobs at the Treasury Department and banking committees of the legislators. “Deep wellsprings of empathy are commonly found in the troughs of anticipated employmnt” The banks were saved from bankruptcy and they used some of their winnings to essentially bribe lawmakers. The game was fixed. Also, there has been an enormous surge in lobbying from $1.44 billion in 1998 to $3.47 billion in 2009.-this is an underestimate, since there is vagueness about who registers and enforcement is casual. As the costs of campaigns have escalated, political contributions from wealthy people become more important, despite the internet process of harnassing small donors. The Supreme Court fostered this even more with the Citizens United decision making corporations equal to individuals. At the turn of the 20th century, sacks of money were deposited on the desks of friendly legislators; today, political corruption is not as overt. The photo of an executive in the company of a legislator commands attention to the power liaison between the two. The perceived entree to the legislator’s influence is useful in dealing with the executive’s contacts.The politician may or may not get a contribution, but he gains access to a network of wealthy people- in time, these people will give money also and ask that others do so. The politician is relatively isolated from the concerns of less influential people, who are represented by polls and occasional political appearances. He is not immersed in the lower economic echelons because he is immersed in the culture of the comfortable. The wealthy do not buy the politician’s vote- they buy his mind. In the 1970‘s, 3% of retiring congress people became lobbyists; by 2009, more than 30% had done so. Starting salaries for lobbyists have balooned to about $500,000; former chairs of committees were getting $2 million or more to influence legislation in their former committees. The Center for Public Integrity says that between 1998 and 2004 (both Democratic and Republican years in power) more than 2200 former federal officials registered as lobbyists and so did more than 200 former members of congress. In order to be enacted, major legislation usually requires payoffs to powerful corporations and industries. Obama had to guarantee the health care industry that they would come out ahead with his proposed health care legislation. Similarly, to get caps on greenhouse gases and allow permits to pollute within the caps, congress had to promise subsidies for the nuclear industry, and agribusiness ethanol and so-called clean coal. The market for trading permits would be open to speculators and derivatives- a large source of revenue for Wall st. The middle class has become more sensitive to the government’s advancing corporate interests, using tax-payer dollars to subsidize R&D, opening foreign markets, giving government contracts, all raising their share prices. The middle class is also noting the regressive direction of tax policy. In 2001, Bush lowered the estate tax and scheduled its repeal in 2010; Obama and the Congress didn’ t restore this tax, on the richest 2% of the country and as a result it will drain $485 billion dollars during the next decade. Another example is the low tax paid by certain money managers (hedge funds and private equity funds) because their fees are treated as long-term capital gains-the reason was that both Senate Republicans and Democrats need their campaign donations. Meanwhile, state and local governments increase regressive sales taxes, because of lower revenues. Some legislators are even pushing a national sales tax to replace the federal income tax. At the same time, local property taxes fall on the shoulders of homeowners, rather than the financial assets of the wealthy. If Americans feel they can get ahead despite the tilted playing field, the situation could still be tolerated, but access to wealth is stacked against the middle class. Social mobility is being limited by economic circumstances. Politicians rarely speak of this problem. This produces anger and could usher in the Independence party as hypothetically described previously, bringing with it nationalism, isolationism, intolerance and paranoia. 7. The Politics of Anger. Reich refers to a Russian folk tale about a peasant whose neighbor becomes wealthy enough to have a cow. The peasant’s response is to pray that the cow be killed. Reich thinks that the Independence party or its facsimile will kill the cow. Reducing unfair winnings is almost as important to people as getting a modest share for themselves. For example, some would slash investment and trade with other countries despite the subsequent loss of cheaper goods from abroad, if they believed the people at the top would have greater losses than those lower down. They would support confiscatory taxes on the wealthy, even if that were to discourage investment, because that would hurt the rich most of all. They would opt to kill the cow. Economic anger was evident when the government bailed out AIG with $150 billion, and the firm gave its executives $165 million in bonuses and a $440,000 spa resort holiday. There were death threats against AIG executives. Anger at the bailout produced political losses for some politicians who had voted for it, and anger was directed against people who had great wealth and connections and were considered to have abused them. Backlash can be seen in the turn against international trade and immigration.Tariff reduction and trade agreements have been put on hold. Laws have been passed encouraging racial and ethnic profiling and baning ethnic studies. There has been increasing virulence and shrillness in politics.The “Tea Party” has derided establishment Republicans, and threatens them with defeat. At a national convention of “Tea Party Nation” the “cult of multiculturalism” was denounced and shouts of “Take back our country” were heard. There are attacks on “the elites…who think they are above everybody else.” Talk radio and yell TV emit vitriol towards races, foreigners, elites, intellectuals, politicians, executives. Richard Hofstader (historian) described a recurring strain of paranoia in American politics.”Kill the cow populism.” PART III The Bargain Restored 1. What Should be Done: A new Deal for the Middle Class Reich states that he could have grounded his argument in morality-it is unfair that some have such a large share of the income while others struggle to make ends meet. He states that he could have based it on traditional American values-lopsided distribution is at odds with our history and the ideal of equal opportunity. Instead, he bases his argument on two threats that such inequality poses for everyone. The first is economic-unless the middle class gets its fair share, it cannot consume what the nation produces, and the result would be slow economic growth and boom and bust economies. The other threat is political- widening inequality wi
  5. I posted above a summary of Robert Reich’s book “Aftershock” but the full summary wasn’t downloaded. Therefore, below is the last part of the summary, probably the most important, since it describes the remedies that ought to be pursued to rectify the lopsided wealth distribution in this country. Reich emphasizes that correction of the problems will economically enhance people at every level, including the top. I think that he wishes to avoid “killing the cow” of higher earners to avoid harming the lower earners in the process.

    PART III The Bargain Restored

    1. What Should be Done: A new Deal for the Middle Class

    Reich states that he could have grounded his argument in morality-it is unfair that some have such a large share of the income while others struggle to make ends meet. He states that he could have based it on traditional American values-lopsided distribution is at odds with our history and the ideal of equal opportunity.

    Instead, he bases his argument on two threats that such inequality poses for everyone. The first is economic-unless the middle class gets its fair share, it cannot consume what the nation produces, and the result would be slow economic growth and boom and bust economies. The other threat is political- widening inequality with the perception that big business, Wall st and the government are in cahoots, gives fodder to the demagogues on the extreme right and extreme left. They gain power by turning public anxiety into resentment against particular people and groups.

    Important steps to reverse these trends-Some steps would be costly, but could be paid for so they wouldn’t increase the national debt, and because they would generate sustainable growth, they would shrink the debt as a proportion of the GDP.

    A reverse income tax.

    Supplement the wages of the middle class-add money to their payroll checks.. We provide this for low income workers (Milton Friedman’s idea) through the earned income tax credit (EITC). This reduces poverty and also increase the incomes of families that will spend the money, creating more jobs. In 2009, EICT was the largest anti-poverty program, over 24 million households receiving benefits.

    Reich suggests that full time workers with $20,000 or less income would receive a supplement of $15,000, which would decline incrementally as income increased. $10,000 for $30,000/year, $5000 for $40,000/year and zero for $50,000/yr.The tax rate for full-time workers between $50,000-90,000/year (no matter what the source of income) would be cut to 10% of earnings; between 90,000 and 160,000 the taxes would be 20% of earnings. The yearly cost of wage supplements to the federal government would be $633 billion. The cost of tax cuts to the middle income families would be billions more.

    Lost revenues would be compensated for by a carbon tax on fossil fuels, which would gradually increase to encourage less use of carbon. If the initial tax was $35.00/metric ton, the tax would raise $210 billion the 1st year and rise to $115.00/metric ton , yielding $600 billion. The public would pay this tax indirecly as the price of goods rose in proportion to its carbon use. A carbon tax would encourage reduction of greenhouse gases through use of alternative energy sources, and could help develop cheaper sources. By stimulating such investments, the carbon tax would increase energy demand.

    Higher Marginal Taxes on the wealthy.

    Those at the top should pay a higher tax on their incomes. Reich proposes top 1% of earners (more than 410,000/yr) pay 55% on marginal income, top 2% pay 50% over 260,000 and top 5% over 160,000 pay 40% on marginal income. These taxes , when added to the taxes from the 50-160,000 group, would raise $600 billion more than our present tax system. Add the $210 billion carbon tax for the first year and total is $810 billion . This would more than pay for the income supplements and tax cuts proposed. The surplus could be used for other initiatives and for reducing the federal deficit.

    Income from capital gains would be treated as wages or salaries. Income between 50 and 90,000 even if it were from capital gains would be taxed at 10%. However, someone with income of several million dollars would pay 55% on all income, including capital gains. ( he mentions that the 400 highest- income taxpayers with an average income of over $300 million dollars, paid 17% of total income in taxes in 2007-this is not a progressive tax.)

    From 1936-1980, the top marginal rate was 70% or more. Since 1987, the top rate has been 40% and after deductions, between 20-25%. Higher taxes have not produced slower growth. During 1951-1980, top rate was 70-92%, average growth rate was 3.7%.Between 1983 and the Great Recession, when the income tax rate was 35-39%, growth rate was 3%.

    This isn’t a “Robin Hood” re-distribution. The middle class would spend more and move the economy toward full capacity. There would be higher growth and profits. The rich would receive a smaller share of the economy’s overall gains, but the overall gains would be larger than they would be otherwise. Hence, richer Americans would likely come out ahead as they did during the Great Prosperity.

    A reemployment system rather than an unemployment system.

    Previously, unemployment worked because there were similar jobs to go back to. Now, we have to re-train for new jobs. Wage insurance could be part of this process. People would be eligible for 90% of the difference between old wages and new wages, for a finite period (eg 2 years). This would stimulate movement into new jobs that pay less, saving cost of unemployment benefits, and adds revenue from income taxes. For job retraining, 90% income support would be provided for one year during re-training.

    Reich estimates the cost of a re-employment system to be $3 billion above the 2.35 billion now spent on unemployment insurance /year. The costs would drop as the skills were acquired and the rate of long-term unemployment decreased.Any shortfalls would be made up for by a severance tax on profitable corporations that lay off workers.

    School Vouchers based on Family Incomes

    Improving the earnings in the bottom half requires improving education and skills. Spending on public schools should be replaced by vouchers inversely related to family income that can be cashed in at any school meeting standards. This would introduce competition into the school system, which should improve overall performance and give purchasing power to lower and middle income families. This would infuse billions of dollars to upgrade plants and equipment and to hire better teachers. Reich proposes that after three years, the schools would have to compete with other schools for the revenue. The schools would be either private “charter schools” or public schools. He expects that wealthy suburban school districts would compete for these children and the vouchers they bring. There should also be vouchers for early childhood education. $20 billion/year should be devoted to vouchers for early childhood education, money coming from the reverse income tax.

    College Loans linked to Subsequent Earnings

    Education is financed increasingly, with student loans. Many are concerned about their eventual ability to pay back these loans, especially in lower paying professions, whose social contribution is useful and desirable. Reich thinks that the financing of higher education should be changed.
    Tuition should be free at public colleges and universities. To attend private higher education, federal loans should be available. The pay back should be a fixed percentage of taxable income, eg 10% for their first 10 years of full-time work, paid into a fund that finances public higher education and provides loans for private education. After that, loans would be considered fully paid. This way, lower income graduates would be subsidized by higher income graduates. Ten percent may not do it, but the percentage should be geared to be self-funding, without additional federal revenues.

    Medicare for All

    The next stage toward health care reform should be Medicare for All, says Reich-it’s the most efficient way, and would require subsidies for middle and lower income families. we depend on private, for profit insurers. Over 30% of health care spending goes for administrative costs, twice the cost in Canada. Medicare administrative costs are 2% compared to 11% with Medicare Advantage (private Medicare). Allowing Medicare to bargain with drug companies for cost of drugs would lower costs even more. The savings from extending Medicare to all would be $60-400 billion/year, enough to subsidize the coverage without more taxes. Reich points out that 3/4 of people polled said that it was important to give people a choice of both a public and private plan. (However, that is not a comment on single-payer preference, only on including a public option.)

    Public Goods
    Reich suggests an increase in public transportation, parks, recreational facilities, museums and libraries, free of charge.These public goods make up to some extent for stagnant or declining wages and would provide more jobs. Expanded public transportation would reduce traffic congestion and carbon emissions.

    Money Out of Politics

    Money increasingly distorts political decisions. We need strong campaign-finance laws, generous financing of elections, stricter limits on contributions and “issue advertising” which is partisan. We should require that all campaign contributions go through blind trusts to hide the origins of the contributions and thereby help avoid quid pro quo political favors. The claim of support would not be supported by a public record, separating quid from quo.

    2

    How It Could Get Done
    The agenda is realistic and doable, Reich states. To implement it would require cooperation at all levels of society, which could come from a major crisis in society, uniting the grassroots to seek reform rather than reactionary “kill the cow” politics. Theodore Roosevelt and Woodrow Wilson tried to institute reforms, with some success, but major reforms had to await FDR presiding over the Great Depression.

    Barack Obama had a similar situation early in his administration, but when the immediate crisis was contained, political support for large scale reform diminished. In reassuring the public that jobs would return, he failed to expose the long term trend and its dangers. We were left with diffuse economic problems that seem unrelated and inexplicable. Housing foreclosures, continued high unemployment, lower earnings, less economic security, widening inequality, soaring pay for the elite produce bewildered and angry responses.

    Health care reform appeared tangential to these other more immediate problems and the public was not as actively supportive of reform as it needed to be to weaken the hold of vested interests. As a result, in order to get reforms started, the White House had to broker profitable deals for the health insurance and pharmaceutical industries. The resulting legislation is inadequate. The same happened with reforms for the financial system. They should have been described as efforts to change the bestowing of outsized rewards on a few at the risk and extraordinary cost of almost everyone else. Instead, they defined the goals narrowly, to reduce risks to the financial system. It became a technical fix on conducting business and the public lost interest once the worst had passed.

    The Obama administration postponed the day of economic reckoning, but the postponement cannot last for long, says Reich. An aftershock with a deep recession might spur reform, but a slower aftershock, with years of high unemployment, languishing wages and slow growth may not be enough to upend vested interests “that can too readily hold onto their power and increasingly anachronistic views” as Marriner Eccles described them in the 1920‘s and early 1930‘s. The early stirrings of backlash may yet convince established interests that reform is needed to forestal worse repercussions.

    Sooner or later the powers that be will become concerned about the lackluster economy. A strong middle class is necessary to purchase products and services. Only the most globalized American firms can create profits abroad. There will be increasing public anger, and a backlash of political control via political contributions. There will be an increasing number of bills to raise tariffs and reduce trade, restrict immigration and limit global investment, with negative effects on the business world’s earnings. There will be attempts to limit firing of employees and outsourcing abroad, break up cartels and constrain investments, cap earnings, limit wealth and impose confiscatory taxes.

    The major fault line in politics will not be between Republicans and Democrats; it will be between establishment and angry populace to “take back America.” When the establishment sees where this is heading, there will likely be a realization that the alternative to change is worse and support reforms leading to fairer distribution of wealth, income and opportunity.

    The question is how will the pendulum swing back in our economy- with reforms that widen the circle of prosperity or with demagoguery that isolates us from the world, shrinks the economy and sets Americans against eachother. America has lots of resilience and common sense. When faced with a crisis, we have become pragmatic and risen to the occasion. The lopsidedness of our economic situation not only diminishes economic growth but tears at the fabric of society. The basic bargain is fairness and the need for stability will promote reform in that direction.

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