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Friday, July 31, 2015

Overview of Inequality, Family Budgets, Proposals

I will speak tomorrow, August 1, 2015, to the local Democrats in Oakhurst, California. My topic:
               Inequality as a Threat to the American Middle Class

Here's my outline with the comments I will make. 
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WEALTH DISTRIBUTION

                      half own 1.1%                                  own 12%              own 17%         own 30%
                                                                                                                                                    top 1%
                                                                                                                                                    own 40%    
0% --------------------25%---------------------50%-----------------------80%---------90%---------100%

         no savings                under $80,000            average               average       percentile
                                                                                    $225,000               $500,000      90 - 94   95 to 99
                                                                                                                                   $1.3 mn      $3.3 mn
                                                                                                         Average for top 1%  ---  $27 million
                                                                       Average for all households: $685,000 as of 2015 Q1

Reference: Flow of Funds Report, page i,  Survey of Consumer Finances, page 17, showing a 40% drop in median household savings, from $126,400 to $79,300, between 2007 and 2010. In three years the "typical" household lost nearly half its life savings. Is that simple enough? The Congressional Research Service report that shows the lower-half owns but 1.1% of all savings, and Edward Wolff's report here. Wolff states that the median dropped by 47%, from $108,000 to $58,000 between 2008 and 2010. It dropped below its 1969 level.

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Moving in Opposite Directions, the Richest and the Majority 
Total private wealth in the past seven years has grown by 45%, adjusting for inflation. See the Federal Reserve's Flow of Funds, page 2.
In seven years since 2008 total private savings for all households in the nation grew            
                                        by $28 trillion .
To make that $28 trillion understandable, it also equals $88,000 per citizen, and $229,000 per household -- of new or additional personal savings over 7 years.
The private savings of all households has increased by about 45% during the period when the nation suffered its worse economic blow in 75 years, since the Great Depression.
If we want we can start a year earlier, 2007, and then the personal savings increased not by 45% but by 25%. Again, during the worst economic performance in 75 years.
This is 45% increase in seven years for ALL CITIZENS, adjusting for inflation, increased savings and net worth from $56 trillion in 2008 to just under $85 trillion. Quite an amazing performance during the worst economic catastrophe in 75 years! While ALL households increased savings by 45%, the middle household, the median, lost 40%of its life savings, or as Edward Wolff reports, 47%, from $107,500 to $57,000. ---  Moving in Opposite directions 
Wolff further states, page 10, "Then during the financial crisis of the late 2000s, median non-home wealth nose-dived by a colossal 60 percent to only $10,000 – is lowest level over the fifty-year period!"
The median had $25,000, then lost 60% or $15,000, now has $10,000 in "non-home wealth". And this is why the liquid asset poverty rate is around 44%, see here
And that means that nearly half of all citizens are in danger of living on the streets after a 3 month period with no income, save for the government safety net programs that aid the low income households. It makes one believe that the "middle" concept is all wrong. The lower 40% of households, according to Wolff, see the WaPost graphic below, have no savings. 

As the wealthiest 5% of households own 75% of all financial assets, see here page 11 (this SWA report by Sylvia Allegretto is excellent), and financial assets were the source of most of the new wealth, then the top 5% or the wealthiest 6 million gained about $450,000 per year in wealth, a total of $3.125 million over seven years. The cash annual income (not life savings) of top-earning 0.9% of households is more than $500,000 per year. The gain in wealth, the new $28 trillion, is not treated as taxable cash income. But one might ask, what's the difference? In the most realistic sense, it is equivalent to cash; it is a liquid asset, as of course cash is. One possible way to adjust for such windfall increases is a tax on financial assets or wealth, or as a second choice, a tax on financial transactions -- the Robin Hood Tax. Though this is not popular, that could change. The Credit Suisse Bank report World Wealth Report, page 146, shows the composition of wealth in the U.S. as 70% financial and 30% non-financial. (See link below to WWR) The ZeroHedge article, referred to above, shows wealth composed of 82% financial assets, 18% other. See the Flow of Funds report, page 2, to confirm the gain of $28 trillion. It is $87,500 per American citizen, or $226,000 per household. Unfortunately for most citizens, the gain went to a small minority of Americans.

A Double Boost -- Wealth and Income Surge 
        for the Few at the Top -- Everyone else gets creamed       
"Top 1% Got 93% of Income Growth" reads the 2012 Bloomberg article.   What it fails to mention is the simultaneous surge in wealth benefiting only the wealthiest. Remember the lower half of U.S. families saw their assets reduced by 47%, according to Edward Wolff, and their non-home liquid assets reduced from $25,000 to $10,000, while the median income dropped by about $5,000.  Below is a good visual of the growth of net worth, or private savings, in America. See the other visuals of private savings at this site, Floating Path. In 2007 private wealth fell by $12.7 trillion. Since 2008 it has grown by $28.4 trillion. Since 2007, wealth has increased by 24%, or since 2008 it has increased by 45%. After 2008 the income for most Americans declined. Both income and wealth went up for the top 5%, BUT income and wealth fell for the lower 80%. That is the lesson of the Great Recession and Obama's failure to manage the recovery which he inherited from GW Bush. The increase in "wealth" was strictly nominal. "Investors" bid up the value of a limited pool of financial assets, and like a bubble that limited pool expanded in value. Physically, not much was added to our nation's capacity. That wealth should be taxed: $28 trillion could easily wipe out the national debt standing at $18 trillion, or the publicly held national debt at $10 trillion. In comparison, the federal government will spend $3.9 trillion in 2015, and the Social Security Trust Fund totals $2.8 trillion which is 1/10th the total of new private wealth created since 2008.  But an even better use of this $28 trillion would be to emloy every unemployed and under-employed worker into a living wage job, and that would manifestly and actually improve our national well-being. 


Net Worth

Reader, superimpose on this graph the growth of net worth of the lower half of U.S. households. They own 1.1% of all net worth today, see here.
It has been essentially flat since 1952. And we call this progress?
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The average household net worth or savings in 2015 is $685,000.  Average is not average, though. Few citizens, about 1 in 10, live in a family with about that much in savings. Only half of all households own more than $80,000, the median. (See here.) And as we've read in the Wolff report, $10,000 in non-home savings is the median, which Wolff reports is less than the 1960 level. Therefore it's not surprising (or is it?) that only 10% of households own the official "average" or more. In the same seven years the median household net worth has fallen from $130,000 to around $80,000, (as I've noted in recent blog entries, below) a fall of 40%, a loss of about 20 to 30 years of savings, or as Edward Wolff claims, a loss of 41 years of savings. Also since 2007 median income, not wealth but income, has dropped 8%, and some 9 million jobs were permanently eliminated with the 1.5 year recession, and millions of homeowners lost their houses through foreclosure during the worst slump in 75 years. Of the Recession, 14 months occurred under G.W. Bush, 4 months under B. Obama.

In Australia the "typical" or median adult owns about 4 times more than the typical adult in the U.S. --- 4 times, not $40,000 but $160,000. Therefore, the median household savings is around $320,000 in Australia, not $80,000 in the U.S. All the neighbors in Aussie land are pretty well off. Even though Australia is a very wealthy nation on a per capita basis, it has chosen to share its abundance. Many advanced nations have chosen to share; in these countries the "typical" savings rate is much higher, often double, that of the U.S.  The World Wealth Report, by Credit Suisse Bank, the databook, page 141, shows the relationship between "mean average" wealth per adult to "median" wealth per adult. ("Typical" and "Median" are interchangeable terms.)  The average is always higher than the median, but the higher the ratio between the median to the average, the greater the inequality gap. In the U.S. average household wealth, $685,000, is 6.6 times greater than the median, $80,000. In Belgium the average wealth per household ($476,000) is only 1.7 times greater than median wealth ($280,000 per household). Most Belgium households own in the neighborhood of $250,000 to $300,000. Most, not all. Belgium has a lower average than the U.S. ($476,000 to $685,000), but the median is higher ($280,000 to $80,000). Average to median: In Italy average is 1.8 times higher than median, Australia 1.9, UK 2.2, France 2.3, and Norway 4.1. In the U.S., again, 6.6 times greater.

If the U.S. had the same ratio as France for instance, 2.6, then most of our neighbors would have $263,000 of household net worth, not $80,000 or less. I believe this would improve the quality of our lives, our families, our neighborhoods in many ways.

These countries are not poor. The median wealth in Belgium is greater than the U.S. median by 3.5 times ($280,000 to $80,000 as I showed in the last paragraph). Japan's median surpasses the U.S. median by 2.2.  In France by 2.6, in UK by 2.5, in Italy by 2.6, in Norway by 1.6, but in Australia the median adult savings is 4.2 times greater than the U.S. median adult savings. The middle class in these nations enjoys a higher quality of life with far greater security. In simple words, other countries share their economy's surplus among the general  population, but in the U.S. the wealthy hoard most of the wealth. And that trend is a threat to our culture, society and economy. Our lives could be greatly improved if we could shift this picture to greater sharing. If others do it, and they do, why not us?   

Take a glance at childhood poverty rates among advanced nations, and ask if we can be proud of our record, especially given that our national income per capita, over $37,000, is the highest. Compare our performance with Korea, UK, and Denmark.
http://web.stanford.edu/group/scspi/cgi-bin/facts.php
Fact 9 image is missing
As I report later in this essay, the five nations with the highest income inequality gap among 38 advanced nations are 1) Mexico, 2) Turkey, 3) Chile, and 4) Israel tied with the U.S., the income  inequality gap between the 20th and 80th percentile of income earners, as reported by the OECD.
The high child poverty level duplicates this inequality gap. Australia needs to work on its poverty level, obviously.

Page 147 of this Credit Suisse databook shows wealth distribution in deciles among the population of 38 countries of the world. In the U.S. the wealthiest 10% own about 75% of all wealth. In Japan, 48%. These are the two extremes among the 38 nations, except for Indonesia which surpasses the U.S.

The U.N. Human Development Index ranks the U.S. at the 5th place among about 170 nations of the world. When adjusted for inequality, see here Table #3, the U.S. slips down 23 places to #28. This loss of 28 places is exceeded by only one nation, Iran.

Here's a chart from Edward Wolff's data, published in the Washington Post:


40% have Zero net worth in the U.S.A. 
44% are liquid asset poor. See here. These households "do not have a basic safety net to weather emergencies or prepare for future needs, such as a child’s college education or homeownership." The BLS states that 43% of the unemployed endure at least 15 weeks (3 months and 2 weeks) of unemployment, see here. The definition of liquid asset poverty: "Liquid asset 

poverty is a measure of the liquid savings households hold to cover basic expenses for 

three months if they experienced a sudden job loss, a medical emergency or another 

financial crisis leading to a loss of stable income."


How the Great Recession Became Great
The Federal Reserve's Flow of Funds report, Table D.3 shows household debt, mostly mortgage debt,  grew by 95% (nearly doubling) from 1996 to 2008, from 67% of GDP in 1996 to 97% in 2008. Today it stands at 85%. This indicates that the regression of the debt to wealth ratio is a phenomenon of financial wealth growth, not a decline relative to annual GDP output. Meaning aggregate household debt is still high in the U.S. -- for what that may be worth to the typical reader who reads this much of my blog essays. We are not out of the woods.
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INCOME DISTRIBUTION

Income distribution is not as brutal as wealth. The top earning 1% of taxpayers, among 166 million tax returns, not 120 million households, earn about the same amount as the collective total income of the lower-earning 50%. The ratio holds true as well for households as for taxpayers. Both parties earn around 16%, and together they pull in 1/3rd of all income. About 60% of all pre-tax income goes to the higher earning 20% of households. About 50% pre-tax income goes to the top 10%. After-taxes and government transfers, the top 20% received 50% of all income.


                16.4% of total income                              23.7% of income                     59.9% of income

0%--------------------------------------------------50%--------------------------------80%--------------100%          
            average $35,000                                                  $125,000                           $324,000

The average at the top goes up drastically because the top one percent take in $1.6 million on average. (0.9% of taxpayers earn 16.7% of all income.)

Source: Congressional Joint Committee on Taxation, page 30, 2014
The best source I've seen for distribution of income is from the CBO, here.
This Joint Committee page also shows that the top 5% of taxpayers pay 47% of federal taxes, and 70% of all income taxes, because they earn 32.3% of all income. The top one percent pays 45% of all income taxes with about 17% of total income. The Citizens for Tax Justice shows Who Pays Taxes In America, breaks down the income distribution, and also indicates that the effective overall tax rate for the top 1% is about 33% of their total income. In the 1950s, under Eisenhower, the top marginal tax rate on income above $500,000 was 91%, not today's 44%. See this chart.
The best investigation of income distribution may be that of the Congressional Budget Office, the CBO, see here. It shows average income for all households in 2011 was $93,900 after transfers and before taxes. The median in 2011 was $50,520, see here page 1. Again, the average and the median are a stark mismatch. 
Worth noting on page 10, the lowest earning 20% of households, with a pre-tax income of $24,600 receives 19% of its income from government social safety-net transfers, including Medicaid and "Other cash and in-kind" benefits, a total of $4,674, about 1/5th of their income. Therefore, 4/5ths of their income comes from "Labor", Medicare, and Social Security. The report also states that the total  social safety-net support equals 4% of national income, which would be today around $576 billion, which seems too small by $100 billion, by my count. The total wage income of half of U.S. workers, 78 million, is less than $900 billion, which is also less than 7% of 2013's national income, see the Social Security Administration report, here, and the BEA.gov report on national income.  Ideally the EITC would dramatically increase while the minimum wage would slowly increase, to enable the poorest households to share the great prosperity of our nation --- $93,900 was the average household income in 2011, $685,000 is today's average household savings. Read "Raising America's Pay: Why It's Our Central Economic Challenge", here.


The Rift Grows !!!
If your income was over $161 million last year, you are very wealthy, and you have probably seen a 90% increase in income since 2003. If your income was over $1.3 million, your income since 2003 has increased by almost 50%. If you, along with 80% of U.S. taxpayers, had an income below $85,440, then your "average" income has fallen. All this at a recent article by David Cay Johnson, here. Johnson has come out with a new book,                                                                            Divided: The Perils of Our Growing Inequality, see here.

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I don't want to distract readers from this essay, but two exceptional analyses can be found here and here. The first from ZeroHedge has a lovely, colorful bar graph, third down, showing all the facets of wealth since 2004, that shows that real (or inflation adjusted) total private wealth has increased by about 40% since 2005, from $60 trillion to $83 trillion. (The Flow of Funds Account (FFA) states a 37% growth in total private wealth, 2005 to 2015 -- so the Zero Hoedge graph seems to draw its data from the FFA.) In the same period the median household's savings has fallen by 47%, to below 1969 levels according to Edward Wolff. Wolff, page 9, "Then between 2007 and 2010, median wealth plunged by a staggering 47 percent! Indeed, median wealth was actually lower in 2010 than in 1969 (in real terms). The primary reasons, as we shall see below, were the collapse in the housing market and the high leverage of middle class families.10"
 Reading down in the Zero Hedge article, it states that gap in wealth is widening among the U.S. households: "Median net worth of households in the highest quintile was 39.8 times higher than the second lowest quintile in 2000, and it rose to 86.8 times higher in 2011. (Figure 2)."
Reader, is this a threat to middle class shared prosperity?
The second, from the Washington Center for Equitable Growth, shows the portion of total wealth held by the lower-saving 90% has not been so low since 1941.
I also suggest that the reader look at Inequality.org and Inequality.com. The first is a product of the Institute for Policy Studies, the second from Stanford University's Center on Poverty and Inequality. Glance at their "20 Facts about Inequality." Both sites have graphs and data related to wealth and other topics, very enlightening.
Below in this essay you'll find a graphic of wealth distribution published in the Washington Post from data compiled by Edward Wolff.
There are pie graphs of wealth distribution at various places, hereherehere.
The most interesting variant is one that tries to incorporate Social Security payouts, here.
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Inequality in the past 50 years

My favorite Federal Reserve graph shows that 82% of all workers, called nonsupervisory workers,  today receive 4% less each week in wages than 51 years ago. The BEA.gov, personal income, here, shows that "disposable per capita income" (meaning after-tax income) has grown since 1964, in chained or inflation adjusted dollars, by 175%, nearly tripling, from $13,485 to $37,084. (See BEA.gov, personal income, 1964 to 2015, chained dollars disposable personal income per capita) If this does not convince you of stark unequal treatment of income, then nothing will convince you.
For the Fed graph go here, then convert 1964's income of $95.50 a week into today's dollars, here, and it will convert to $735.16, the pay in 1964. Then compare it today's pay of $705.26 a week, on average. Annually, that is $36,660 in wage income for full-time and year-round workers.
The U.S. Census, here, shows that income doubled, not tripled, between 1967 and 2013. The "per capita income"  "in 2013 dollars" has increased since 1967 by 92%, from $15,026 to $28,829.
But do not forget the first sentence above --- wages for 80% have actually dropped.

And while income either doubled or tripled for "per capita" it fell by 4% for 80% of the workers.
Is this inequality?         

Wrong! -- Now I'll argue the opposite
The U.S. Census report Income and Poverty, September 2014, page 23, shows that between 1967 and 2013, the portion of households that earn over $100,000 a year has increased from 7.7% to 22.5%. Now between one in five and one in four households are earning over $100,000. That is definite a step forward. And those earning below $35,000 has fallen from 39% to 34%. Everyone, the rich and the poor, are making more income! That is shared prosperity!


But Wait a Minute!

The top one percent received 88.5% of all growth between 1979 and 2012, according to this report.
And they increased their (already oversized) income by 180%, while the lower-earning 99% increased their income be less than 3%.  Here's an "info-graphic", a snap-shot of the report:




One of the authors holds two PhD.s in economics.
Now who do you believe?


A look at State of Working America, Income, here, shows that of all the income growth between 1979and 2007, 80.9% of it went to the top 5%, and 19.1% went to the lower 95%. And nearly 60% went to the top 1%.
Hardly an equal sharing of the gains of growth.
Who are the authors of this report? Saez and Picketty?  Saez, a professor at University of California, Berkeley, can be found here, see his report Striking It Richer, and Thomas Picketty is the author of the best selling economics book of 2014, Capital in the 21st Century.

The reports from the Economic Policy Institute are the best.  Send them a thank you is my suggestion.
The OECD published a report comparing inequality among 34 developed nations. The U.S. ranked tied at fifth most unequal. The comparison between the 20th and 80th percentiles showed Mexico with the highest gap, 1 to 13.3, then Turkey 12.8, then Chile at 8.0, then the U.S. and Israel tied at 7.7. (Or see here, Measure: S80/S20 disposable income) Most European nations had a ratio of 1 to 4. (See here for a quick bar graph, and here, page 56, and here, and here. The OECD is concentrating on the ill effects of Inequality.)

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American Middle Class Budgets, 
                      Incomes and Expenses


First look at the changes, 2000 to 2012, in the expenses of the family with two children.
See page 8 of this report, The Middle Class Squeeze.
middleclasssqueeze-fig1.3

Page 8 shows that the median income for a 2 child and 2 parent family is $84,000, very high. According to another web site, this is the 74th percentile. But reasonable for adults of this age, mid forties with dependent children.

In 12 years the income has increased a bare $600, virtually no growth. Expenses have offset each other: taxes down $4,400, consumer goods down $5,500. But five key or "pillar" expenses have jumped $10,600, these expenses are housing, college savings, health care, child care, and retirement savings.

The 30 fastest growing occupations between 2012 and 2022 are listed here at this report from the Department of Labor. The median for the all the 15.6 million new jobs predicted in the report is $34,750. In July, 2015, the median full-time year-round worker earned $40 050, see here. So the future's faster growing occupations will add 15 million new workers earning about 12% less than today's median worker.

Regarding the "Middle Class Squeeze" report, I quibble with their health care expenses. The Kaiser Family Foundation (here) states that these expenses have doubled between 2002 to 2013. "Family premiums have increased 80% since 2003 and have more than doubled since 2002." (page 12)  (This KFF report has a summary graphic.) 
Exhibit A

The average premium costs $16,351 of which the out of pocket cost to employee is $5,884 or 36% (this from the first report cited, page 12). This is a raise in total compensation of $10,467. This raise in compensation is not accounted for in the Middle Class Squeeze report.  
The actual cost may be $8,600 to the Middle Class family of the example, but their total compensation is under-reported. 

Let's turn to another source, the Economic Policy Institute "Family Budget Calculator". 
I turn to Topeka, Kansas, because this locale has the median costs in the nation for 2013. Here we see the expense of health care is $1,342 a month or $16,104 a year. Consistent with the K.F.F. survey results.  
On August 26, 2015, the EPI updated their Family Budget Calculator, and they state, "
  • The basic family budget for a two-parent, two-child family ranges from $49,114 (Morristown, Tenn.) to $106,493 (Washington, D.C.). In the median family budget area for this family type, Des Moines, Iowa, a two-parent, two-child family needs $63,741 to secure an adequate but modest living standard. This is well above the 2014 poverty threshold of $24,008 for this family type.  
This report is very helpful to assess the geographic price differences and the variations in household size, in fact 10 different family sizes are analyzed among 618 geographic locations.

Monthly costs

for a family with

2 parents and 2 children

in TopekaKansas
 Housing$692
 Food$754
 Child Care$1,181
 Transportation$603
 Health Care$1,342
 Other Necessities$370
 Taxes$339
Monthly Total$5,280
Annual Total$63,364
A look at the family's expenses shows that about a quarter are for child care and a quarter are for health care.

Now we look a little further, to the table showing working age family incomes, courtesy of State of Working America, an Economic Policy Institute project.


I'll be!  The graph seems to
come across onto this blog.





















Median expenses: $63,634
Median income:  $65,577
That means that about half the families of working age will have expenses greater than income,
and half will not.
What does that say for the "middle class", typical or iconic family in America?
Half are struggling.
Recently the Pew Surveys stated that 40% of Americans self-described as low-income, 44% as middle class, and 16% as upper.

FT_14.01.24_middleClass_line_420



























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Proposals and Solutions 

Sixteen for '16, by Salvatore Babones  --- a book of policy proposals.

Mr. Babones contributes to the Institute for Policy Studies, a think-tank that sponsors the excellent monthly newsletter TooMuchonline.org.

Sixteen for 16 Book cover
The 16 solutions:

1. Government-led job creation
    (this is my #1 choice, and if you look through this blog you will find that I report several times on Philip Harvey's government job creation plan "Back to Work", or the Congressional Progressive Caucus budget proposal for a 3 year expense of $350 billion a year creating 8.5 million full-time year-round jobs, with additional support for later years. You will find references to plans and specifications that would return the nation to high employment, living wages and rising wages for all workers, and shared prosperity. Also look at the analysis of Bivens, here, and of Scott, here, of the EPI, detailing the effects of a $250 billion debt-financed infrastructure program.

2. National infrastructure renewal

3. A rededication to public education
  (and I encourage readers to read Diane Ravitch's book Reign of Error)

4. Universal single-payer healthcare,
often known as Medicare for All.
Senator Bernie Sanders is sponsoring such a measure.

5. Higher taxes on higher incomes
Mr. Picketty, the best selling author of Capital in the 20th Century, whom I note above, supports a highest marginal income tax rate of 80% applicable to only income exceeding $457,000. The current rate on this high income is almost 44%. The Joint Committee on Taxation reports that only 0.9% of taxpayers earn over $500,000. Their share of total income is 16.7%, or one sixth of all income.)

6. Refinancing Social Security

7. Stronger bank regulation

8. The right to join a union  

 9. living minimum wage

10. 10 sick days, 10 holidays, and 10 vacation days

11. An end to the prison state   Look at the incarceration rate change at this site, lower left graph. 

12. Secure reproductive rights

13. Making it easier to vote

14. Closing down the NSA

15. More humane treatment of refugees

16. Addressing global warming

I add some other reforms:
instituting higher Earned Income Tax Credit,
creating Individual Development Accounts,
supporting the proposals found in the book on The Bankers' New Clothes by Admati and Hellwig,
reducing the size of the U.S. military,
and creating publicly funded elections, outlawing campaign finance contributions.
And the concept of employee profit sharing and ownership sharing needs a revival, as documented in the book The Citizen's Share. Profit and ownership sharing was promoted in the 1880s and was very popular among capitalist titans in the 1920s, but today it has renewed appeal not to be dismissed. After all half of U.S. employees work in firms with more than 500 employees, and 75% work in firms with more than 20 employees.
I realize I've smothered the readers with fact, reference and detail. The crux of my argument I find summed up best in the Introduction to Joan Tronto's book, A Caring Democracy, available for reading here.  She says, "what it means to be a citizen in a democracy is to care about citizens and about democracy itself. . . . What has gone wrong . . . is that we have lost sight of the other side of existence besides the world of the 'economy.'"  Caring is the work of living. Take a look.

Thank you Oakhurst Dems for inviting me to speak.   

Wednesday, May 27, 2015

Trans-Pacific Race to Bottom

                 The Trans-Pacific Trade Partnership ---
      A Race to the Bottom and a Subversion of Democracy




Chinese assembly workers' average work week: 56 hours. Average income: $1.33 to $1.74 an hour, or  $75 to $97 per week, or $3,900 to $5,100 a year. Read the full report at Economic Policy Institute. But other Chinese workers earn less than $0.50 an hour.
In 2007 manufacturing costs in China were 4% of comparable labor costs in the U.S., or $1.36 an hour versus $34 an hour. (See Labor Department publication here.)
For a BLS comparison among 33 countries see here. Mexico average, $6.48 an hour, U.S. $35.55 an hour. In Mexico 66% of workers earn less than 3 times the daily 2015 minimum wage of $4.58 per day, meaning  2/3rds earn less than $15 a day (see this report section 5, table 1). $15 a day is about $75 a week or $3,900 a year. 40% of Mexican workers do not earn enough to maintain their families above the poverty line, see here. These are our trading partners!
_____________________________________________________
On May 14, 2015, The Senate approved, 65 to 33, “fast track” authority for the trade agreement known as the Trans-Pacific Partnership (TPP) among ten nations.  
The vote fell out: Republicans 49 yes, 2 abstentions; Democrats 16 yes, 31 no; Independents 2 no. Senator Feinstein yes, Senator Boxer no. 

This deal has been highly controversial. The group Private Citizen, Global Trade Watch, summed up their critique: “. . . the deal would extend the incentives for U.S. firms to offshore investment and jobs to lower-wage countries.” Also it would create expanded powers for foreign corporations to challenge protective regulations on finance, on the environment, and workplace safety. It does nothing to end "currency manipulation" according to Robert Scott at the Economic Policy Institute, which if eliminated would create 2.3 to 5.8 million U.S. jobs. Currency manipulation is the "leading cause of these trade deficits" according to Scott. Senator Elizabeth Warren states that the TPP would “tilt the playing field in the U.S. further in favor of big multinational corporations. Worse, it would undermine U.S. sovereignty.” (Both those reports, by Scott and Warren, are essential reading to understand this issue.)

It is challenged by economist Dean Baker who says, “For example, if New York State wants to restrict fracking, a foreign gas or oil company could contest the ban in an investor state tribunal. . . . But the TPP is about corporate profits, not free trade.” 

A statement from Americans for Financial Reform argues, “Any bank from a TPP signatory country that claims disadvantage from a regulation . . . could bring a private challenge and claim compensation from U.S. taxpayers.” The Fed could not increase the reserve requirements on banks without approval from the TPP. The U.S. banking system crashed our economy in 2008 bringing an 18 month recession, and we are still suffering from that disaster. This  Great Recession occurred because between 1996 and 2008 banking and credit expansion went wild; in these 12 years the "debt outstanding" of the "domestic financial sector" (see the Federal Reserve report, Table D.3) grew at a rate 5.5 times faster than the economy grew, adjusting for inflation and population growth. Outstanding debt of the domestic financial sector increased from 59% of GDP to 116% of GDP. (see here to calculate for yourself). How can debt burden  double over 12 years, expanding 5.5 times faster than overall growth per capita, without a train wreck resulting? This unregulated credit system caused the destruction of 15 million jobs (8.75 million permanently eliminated according to the BLS), the nose dive of the employment to population ratio, from which we are only 20% recovered after 6 full years, and the loss of family savings (a 40% loss at the median household from $135,400 to $81,200) and the loss of income combined with mortgage  foreclosure for about 1 in 10 mortgage holders. In 2008, for the second time since 1933, the national income declined. Simultaneous to this bad news, the Federal Reserve bailed the banks with $30 trillion in temporary loans, and corporate profits are now at a historical high, and private wealth has increased by over 30% (adjusting for inflation and population growth). That 30% increase in private wealth, an increase of $24.6 trillion in 6 years, brings total private net worth to $83 trillion, and brings the average net worth of all U.S. households to $675,000. But the typical or median household owns $81,200. Median net worth dropped by 40.2% in the same 6 years, down from $135,000. (Both are Federal Reserve data, Flow of Funds report, page 2, and Fed Chartbook, which I hyper link to below.) The wealthiest Americans are the only group apparently benefitting from the self-destruction of the financial sector. 
Most Americans are still up the creek.  We still need stronger measures to reign in the banks, and the TPP undermines our own laws to protect ourselves.   (See my last essay for a fuller description.) Since 2007, Q4, economic growth, real  GDP per capita, has slowed to its slowest rate since 1950, see the Fed's graph.  This is the consequence of the Bush era disregard for financial regulation, and Obama's preference to protect finance not the general working population. By extension, growth has not been this slow since the Great Depression. 

My take is that TPP would continue to lower wages. Presently the collective wage earnings of the lower-earning half (77 million) of all U.S. workers is less than 8 percent of total national income. Their average annual income is less than $10,000, while the average income for all 155 million workers is more than $80,000. This is a little complicated because only 68.2% of all income is from wage and salaries (see the next link below, page 26). But if we compare taxpayers, not workers, the top 1% of taxpayers earn one sixth of all income, more than 54% of lower-earning taxpayers. The top-earning 5% collectively earn more than the collective income of the lower 69% (see the report from the Joint Committee on Taxation, page 30). As for wealth, the portion of private wealth held by the poorer 50% of U.S. households is 1.1%. These ratios are worse in Mexico and China. (See here, page 45, inter quintile ratios 20/80) Economists claim 3.2 million (read the entire report by Robert Scott) to 5 million U.S. jobs have been lost due to trade with China since 2000. This is a race to the bottom. 

While trade could be a means to enrich low-income America, it has not, in fact incomes have increased almost only to the wealthiest in spite of greater trade and bigger trade deficits. See the EPI report that shows 2.9% gain in growth of income to the lower 99% of Americans while the top 1% gains 180.9%, 1979 to 2012, 33 years. The top triples its income in 33 years, while the rest of the nation see no gain. 

Our trade could and should promote inclusive prosperity, and it is possible.
A radio interview dealing with the TPP with Roger Hickey, co-founder of the Economic Policy Institute, was aired on KPFA on May 24, listen to it here. The Senate may be lost but the House of Representatives may still block passage.

Chinese labor classroom

____________________________________

If the above essay was not long enough, here is a letter I wrote to Congressman McClintock's Facebook page. It follows:

Dear Mr. McClintock, 
In the last 51 years, since January 1964, 80% of the nation's workers, called nonsupervisory workers, have seen their average weekly incomes (and by extension their annual incomes) decline by 4%. Adjusting for inflation, the $730.65 weekly earning in 1964 is now $704.33 in April 2015 --- a decline of 3.6%. In contrast, the disposable (after tax) income of average Americans has increased by 193% since 1964 — this is almost a tripling (from $13,048 to $38,211, see the Fed graph here). Why have 80% of the nation's workers been subject to a frozen income level while the nation's per capita disposable income has nearly tripled? 
See the Fed graph: http://research.stlouisfed.org/fred2/series/CES0500000030
80% of U.S. workers are nonsupervisory. You claim that the trade pacts, TPP in particular, are good for the average worker. They are not. 

Here's a quote about the TPP trade pact that you advocate:
"Most (not all, but most) of the countries that would be included in the TPP are poorer and more labor-abundant than the United States. Standard trade theory has a clear prediction of what happens when the United States expands trade with such countries: total national income rises in both countries but so much income is redistributed upwards within the United States that most workers are made worse off. " See the  full essay against the logic of your "free trade" proposal. Instead of issuing more baseless rhetoric, you should read the essay from the Economic Policy Institute, http://www.epi.org/blog/no-the-tpp-wont-be-good-for-the-middle-class/

This is a disaster! We send jobs to them, they send cheap products back to us. We lose jobs, they gain income. But on net, the savings from lower priced products do not match the loss of income from lost jobs, and the resultant depression in wage growth. We lose. It's that simple. (See the report, The Middle-Class Squeeze, page 9 to confirm that price increases have outpaced consumer price decreases.) Workers' average weekly and annual income have decreased by more than almost 4% since 1964 (see .stlouisfed link below). Working age families' median income has increased by 8% since 1979, while average disposable income has increased by 80%, see here and here. (BEA.gov).This is a disaster, clear and obvious. See the Federal Reserve graph and convert for inflation: 
http://research.stlouisfed.org/fred2/series/CES0500000030

Here is the Federal Reserve graph on the current account balance (foreign trade balance): 
https://research.stlouisfed.org/fred2/series/NETFI
Dean Baker states, " This is truly remarkable since 

the $500 billion plus annual trade deficit (@3 

percent of GDP) is the main cause of the 

economy's weakness and continued high 

unemployment."

See here. 

Not since the early 1980s have we had a nearly balanced current account (foreign trade balance). G. W. Bush pushed the record foreign trade imbalance to the lowest limit, $858 billion in 2006. Today the trade deficit stands at $521 billion. When money leaves the country in foreign trade, workers' incomes drop. That $521 billion, in part, would have gone into workers’ income. Since 1980 we have been shipping money off-shore, like foreign aid, to cheaper labor markets. The wealthiest in all nations have become even wealthier, the poor workers not so. It’s a class war, and you are on the wrong side, the side of the world’s super-ultra-extremely-rich. You are advocating a continuation of this negative reality for American workers, whose wage income has declined since 1964 while total income has nearly tripled! 

Thank you for your e-mail in which you support the TPP, but please go back and do some real analysis. You are closer to a fantasy about trade than truly understanding it. I can help you understand this better if you would just ask for some further info I have available.  

Friday, April 24, 2015

The New Economy Will Be
                 Managed Democratically

                Stimulus Without Debt, A Novel Plan    

       Huge wealth gains while economy declines   
--- $26.4 trillion in added savings has been created during 6 years of a crippled economy, increasing total private wealth to over $83 trillion, or $675,000 per household on average.  
                          
MoneyThe large American economy can serve everyone. That's the objective of this essay. In recent fact it has served just a minority who were already well-off. Stimulus Without Debt is a plan by professor L. Seidman to directly create money without debt or taxation to fund a stimulus, which I have put forth as a direct job creation program, similar to the Congressional Progressive Caucus plans of 2011 to 2015. The economy can employ all workers and create security for all households. It is not impossible. 

Since 2008 private household net worth has risen by $26.4 trillion, or $214,000 per family or household. (see here, page 2) This is a 47% increase in private wealth, or 30% adjusted for inflation and population growth. 
Now the average savings per household is over $675,000
The median savings in 2013 is $81,200. (Source, Fed Reserve Chartbook, see note below.) Median household savings has dropped by 40.2% since 2008, from $135,000 to $81,200. 
Real median household income according to the Fed has dropped by 8%.  The last six years has brought turmoil -- job loss, income loss, house loss and life savings loss --- for most families. 
With one exception ----
This enormous $26.4 trillion gain (or $214,000 more private savings for every household) went mostly to the wealthiest 5% who own 75% of all financial assets. 
Most people, 90%, were unaffected by the asset value increase, which reflected the rise of corporate stocks.
A few retirees with savings were rewarded to some extent, as were pension funds.
The source of this gain of $26.4 trillion is two-fold, increased corporate profits due mostly to lowered costs in labor expenses, stock buybacks and corporate dividends (see William Lazonick's article Profits Without Prosperity here), and a limited universe of places where the rich could put their money. The limited range of "investments" (or secure places to park money) meant that the existing finite selection increased their value, as in a bubble situation. The employment to population ratio is at a 31 year low, among age 25 to 54 the E/P ratio is at a 29 year low, and the labor force participation level is at a 37 year low. 

The Stimulus Without Debt Solution
Without creating more debt, Congress could fund a stimulus. As an  example of a stimulus, in 2008 George W. Bush issued tax rebates worth $152 billion that were mailed to all adults ($600) and children ($300) in most households. 
But rebates are scatter shot, not targeted. Better than a rebate, Congress could fund direct job creation. It would employ the one in four (25%) who are un-employed or under-employed, dropped out, or working full-time year round for less than poverty wage income. It would help those most in need of help. And this would also help everyone. 
Congress would authorize it. The Fed would determine how large to make it. This would establish a separation of power. 
This is the sensible plan, rather than the top-down method the Fed chose with the $2.5 trillion quantitative easing program. The Fed created money out of thin air, absolutely debt free. We can call it "bank rescue without debt". 
I'm proposing the plan, Stimulus Without Debt, of professor Lawrence Seidman, see here, and read it slowly,
http://www.lerner.udel.edu/sites/default/files/ECON/PDFs/RePEc/dlw/WorkingPapers/2014/UDWP2014-01.pdf

Federal-State Coordination for Direct Job Creation
Another permanent plan for direct government job creation is the Federal Employment Reserve Authority proposed by Princeton University professor Martin Shubik. In each of the 50 states an agency would prioritize projects for emergency employment to avoid unnecessary levels of unemployment. See the proposal here and here (page 23) in a much longer report from the Levy Economics Institute. Sample quote: "(4) Once unemployment goes above a fixed level of, say, 6 or 7 percent (to be adjusted as circumstances warrant), the Authority would put out bids for projects in coordination with federal and state funding authorities involved in financing."

A Jobs Program Without Debt
Not mentioned in Seidman's direct money creation plan, is the corollary for the Fed to create out of nothing, out of thin air, and debt free, $300 billion each year (or 1.7% of GDP), and Congress could then create 10 million public jobs at $30,000 per job net cost. The only danger is inflation, and the Fed would monitor for that possible result. Inflation danger is thoroughly discussed in Seidman's paper. 

The cost per job would be $30,000, using the estimate of Philip Harvey’s plan, Back to Work. On page 11 he shows that a cost of $28.6 billion in government outlays would create 1,414,000 jobs. This indicates a net cost of $20,226 per job. "Net" is the key idea. Such a plan is affordable, perhaps indispensable. I am assuming his per job figures are too low. Experts will have to evaluate the costs. 

The Congressional Progressive Caucus promotes a direct job creation plan; it has promoted a variant of this plan for the last 5 years. It proposes $336 billion in direct job creation for the next three years. See the section "Renewed Fiscal Expansion . . ." in their budget. In all they propose $1.6 trillion over a 10 year period, most of it in the first three years. 
Their plan involves borrowing, going into debt. But the enlarged economic output translates into greater tax collection and a growing economy. Debt is a ratio, debt over income. Growing the denominator is the best, maybe only, way to exit a recession/depression. 
Additional debt or borrowing is politically problematic. Another method would be to increase taxes, also problematic. Direct money creation, Stimulus Without Debt, would neither increase debt or raise taxes, nor would it increase inflation which is the primary danger of such a plan. Inflation fears are fully dealt with in the proposal by Seidman.  
The Fed can create the money without borrowing or taxing — this would be a quantitative easing directed at the low-income sector that would enrich the entire society. 

Wage income has fallen badly since 1970 when non-supervisory employees earned 51.5% of the national income. Today they earn 41.9%, a loss or difference of over $1.3 trillion. 
This represents a loss of about $11,000 a year per employee (non-supervisory worker) among the lower-earning 80% who work. 
On a per household level, incomes would rise by $16,000 if the 20 year average (1950 to 1970) percentage of national income was restored to the level of 50%. See Fed graph: 
http://research.stlouisfed.org/fred2/series/W270RE1A156NBEA

The EPI states almost the same, "
  • By 2007, the growing wedge between economy-wide average income growth and income growth of the broad middle class (households between the 20th and 80th percentiles) reduced middle-class incomes by nearly $18,000 annually. In other words, if inequality had not risen between 1979 and 2007, middle-class incomes would have been nearly $18,000 higher in 2007.
The inflation adjusted, "real", weekly wage, and the annual wage, for 80% of workers has decreased by 4% over a 51 year period, 1964 to 2015, (see Fed graph here), while the disposable (after-tax) income per capita has increased by 196%. See the Federal Reserve graph demonstrating this Real Disposable Income Per Capita


                            The Big Picture     
I'm going to leave this essay incomplete. Later --- much later, many years later I'll get back to this --- I'll include topics such as 
    ~ converting to clean energy to combat climate change
NASA scientist comment on the new monthly high of over 400 parts per million of CO2 in the atmosphere. Read here.

Have you heard the news? "The last time there was this much carbon dioxide (CO2) in the Earth's atmosphere, modern 

humans 

didn't exist. Mega-toothed sharks prowled the oceans, the 

world's seas were up to 100 feet higher than they are today, 

and the global average surface temperature was up to 11°F 

warmer than it is now."  




And, "Atmospheric concentrations of 

the greenhouse gas [co2], which helps drive global warming, 

haven’t been this high in somewhere between 800,000 and 

15 million years."    Read some article here and here and 

here and here  Employment in energy system conversion 

can change this.

    ~ increasing the minimum wage together with the Earned Income Tax Credit to eliminate poverty. The median annual income for 155  million workers is $28,031, and it should be closer to the average workers' income, $73,000.  
    ~ imposing mandatory paid vacation rules on all corporations,   
    ~ funding Individual Development Accounts, or IDAs, to increase the typical and low-income household savings. The median household saving, $81,200, should be closer to the average, $675,000. (see Fed Chartbook here. It shows that the median household net worth fell by 40%, from $135,400 to $81,200 between 2007 and 2013. It's difficult to find this chart as the pages are not numbered. It's perhaps chart #40, if you wish to look.) Half of U.S. households own 1.1% of all wealth, see here. About 44% of U.S. households report that they could not survive longer than three months on their "liquid asset" savings, which for a family of four amounts to $5,763. About half the families in the U.S. have less than $6,000 in liquid assets, see here. Pew Trusts issued an excellent report in January, 2015, The Precarious State of Family Balance Sheets, that indicates similar levels of savings as reported by the Fed.  
    ~ democratizing the Federal Reserve Board
    ~ taxing personal savings above $50 million or variants such as the Financial Transaction Tax, FTT, which will effectively repress extreme capital formation and utilize the economy's surplus instead of wasting it in astronomical net worth accumulation, 
    ~ creating tax preferences to small corporations
    ~ establishing state banks and regional development and self-sufficiency programs, 
    ~ creating foreign trade agreements that include labor rights and environmental protections and protection against currency manipulation with penalties for violation against them, 
    ~ exploring direct job creation subsidies to corporations

The discussion will also include a reform of the parasitical sectors of the economy --- the financial system, the medical health system, and the military. Somewhere I'll also squeeze in childcare subsidies. And when I finish I'll have also mentioned that we need to take down the telephone poles -- really. Bury the telephone wires  in most neighborhoods. This is a direct jobs program waiting. After that we can paint the classrooms if needed. The American Society of Civil Engineers has a program for all states, see here
Their projects are more important than painting classrooms. But care programs should be mentioned as part of a Jobs Program (see Why Obama Should Care About Care). 

In all, the economy can serve humanity. 
Humanity can save the earth's ecology and still preserve a healthy level of freedom, personal savings and prosperity. Internationally we can create a high quality of life with environmental beauty and health.  

_________________________________________________
I wrote a comment on Robert Reich's article "The Political Roots of Widening Inequality", and you can read it here