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Thursday, August 21, 2008

Justice Revolution in Economics

The Justice Revolution

The wealthiest one percent of U.S. households own more property than the lower 91%, and in 2006 one percent received more income than the lower 60%.
The lower half of U.S. households own 2.5% of the national wealth, and earn 15% of the annual national income.
Really, I need a picture. I wish I had one, and a megaphone.
Nearly 30% of the workforce are unemployed, part-time employed but wishing full-time, discouraged from looking for work, or earning less than poverty wages.
(See njfac.org/unemployment rate.)
Is this an Aristocracy? Why do so few know of this condition?
From 1983 to 2008, 25 years, half of the economic growth has gone to the top one percent.
(Documentation follows in the essay.)


Aristocracy: government by a small, privileged minority.

According to economics professor at University of California Emmanuel Saez:
“Therefore, in the economic expansion of 2002-2006, the top 1 percent captured almost three- quarters of income growth.” “This implies that top 1 percent incomes captured about half of the overall economic growth over the period 1993-2006.

“Indeed, the top decile share in 2006 (of national income) is equal to 49.7 percent, a level higher than any other year since 1917 and even surpasses 1928, the peak of stock market bubble in the “roaring” 1920s.” (page 2)

The graph on page 5 shows “The Top Decile Income Share in the United States, 1917-2006.” Between 1942 and 1982 the income for the top decile averaged around 35% of national income. Today it is at 49.7%.
(See http://elsa.berkeley.edu/-saez/) (page 2)
--- from the essay Striking It Richer by professor of economics Emmanuel Saez of University of California, March 15, 2008,

According to economics professor Edward Wolff:
The richest 1 percent accumulated 53 percent of the total gain in marketable wealth over the 1983-1998 period. The next 19 percent received another 39 percent, so that the top quintile accounted for 91 percent of the total growth in wealth, while the bottom 80 percent accounted for a mere 9 percent.” “Meanwhile, the poorest 40 percent lost 76 percent of their (very modest) wealth.”
Professor Edward Wolff, “Where Has All the Money Gone?” Milken Institute Review, Vol. 3, page 37, 2001.


There is injustice around the issue of compensation for work. The injustice is amply demonstrated by the figures for income and wealth distribution. The nation and the world will soon devise new ways to redistribute income and wealth, and we will create methods to insure against such an imbalance happening again. This movement will be the Justice Revolution.

The genesis for our nation’s Great Depression, 1929 to 1942, stemmed from the same imbalance of income and wealth. Marriner Eccles, the Chairman of the Federal Reserve between 1934 and 1948 said that a “giant suction pump” sucked the profits out of the system leaving consumers too little income to purchase the products they manufactured. The storm clouds now gathering are global, just like the global warming problem, and require a global solution.

I am going to try to sketch the outlines of the problem and the solutions. I think they are clear enough, even if my figures are contestable, as any data set will be.
A revolution in awareness and a new public understanding of economics will emerge: Inequality is economically dangerous at worst, and a drag on productivity at best.

Taking a broad view, we see that we organize ourselves into groups to build things and serve each other. Groups are legally enshrined as corporations. Only a minority of the group, the owners, decide on how to distribute the profits from work. People must sell their labor to groups in a competitive bidding that constantly devalues their labor contribution in order to be employed.

Both practices work well up to a point, the point at which labor is undervalued on a national scale, and the workers are impoverished by the owner group.

Wealth: In 2006 (See Currents and Undercurrents, Federal Reserve Bank, U.S. Department of Treasury, Arthur Kennickel, and see my essay A Wealth Tax to Eliminate Poverty) wealth had these national characteristics:

0 to 50 percentile (or half of U.S. households)
average net worth ----- $25,000 -----percentage of national wealth ----- 2.5%

50 to 90 percentile (or 40% of U.S. households)
average net worth ---- $312,500 -----percentage of national wealth ----- 28.0%

91 to 99 percentile (or 9 % of U.S. households)
average net worth --- $2,005,000 --- percentage of national wealth ----
36.1%
100th percentile (or 1 % of U.S. households)
average net worth --- $14,649,000 --- percentage of national wealth ---
33.4%

The average wealth for the top 1% is 668 times the average of the bottom 50%.
If you converted the wealth into stacks of $100 bills, the bottom 50% stacks would all rise one inch off the ground; the average height of the top 1% would rise nearly 60 feet high, and Bill Gates’ and Warren Buffet’s stacks would approach 30 miles in height.
(See end of essay for another rendition of U.S. wealth.)

Income: In 2006 (See State of Working America, 2006/2007, page 97, quoting the Urban-Brookings Tax Policy Center Microsimulation Model (version 0305-3A) income broke down in quintiles accordingly:

1st 20% ---- 2.5%
2nd 20% ---- 6.4%
3rd 20% ---- 11.4%
4th 20% ---- 19.8%
5th 20% ---- 60.3%

According to inequality.org, quoting a study by Piketty and Saez, "the top 1% of households received 21.8 percent of all pre-tax income in 2005, more than double what that figure was in the 1970s." (The top one percent's share of total income bottomed out at 8.9 percent in 1976.) This is the greatest concentration of income since 1928, when 23.9 percent of all income went to the richest one percent. (Piketty and Saez).
This 21.8% of the national income exceeded the incomes of 60% of U.S. households.

Somehow Americans have to put people above profits. We have to let wages and income soar for the majority. That will be the solution. Perhaps 30% of our households are suffering economic hardship. Profits derived from work must be shared broadly among all who work, not just among a small minority of owners. This process will be the Justice Revolution.

Ownership has monopoly power to distribute profit according to the ownership claims, even though they are a minority of the group who produce the product. Taking the population of the U.S. as a corporation, 44.7% of all income generated by the U.S. economy in 2006 went to the top 10% of households. (See State of Working America, 2006/2007, p.79) The average income will be $585,438 for the 11.4 million households in the top 10% of households in 2008, given the same rates as 2006. (I am asserting that 44.7% of the national income from a GDP of $14.2 trillion dollars (GDP as of July 31, 2008) will be averaged, evenly divided, among the top ten percent.) The median household income will be near to the $48,200 of 2006, a twelve fold difference.

National income is derived from three sources: 64.5% is wages and salaries,; 18.1% is business and capital,; and 17.3% is “other”, mostly pensions and welfare. The top 10% earned on average per household $303,762 in salaries and wages, $188,000 from business and capital sources, and $72,719 in pension income, totaling to $564,461 per household. Of the income derived from business or capital from U.S. corporations 83.4% went the top 10% of American households in 2006.

The U.S. median household income in 2006 was $48.200. (U.S. Census, August 28, 2007, press release) The majority of households derive income from wages and salaries. So to compare, half of households earn less than $48,200 and the top 10% average $564,461, it’s a difference of almost 12 times more, to repeat myself. The ten percent minority also set the wages for 90% of Americans who sell their labor competitively to the group called a corporation. Because of this ownership cum competitive wage system we are impoverishing the majority of workers.

Solutions:

There are simple steps to spread income and wealth. Here are several strategies.

The ultimate solution is to tie the minimum income to the maximum income. The book Good and Greed by Sam Pizzigati presents a strong case for this and posits a ten-times rule. Ten-times or twenty-times, the two income groups are inseparable, tied together. The Inaugural Address by FDR in 1944, as quoted in my essay Economic Rights for the 2 of 7 Who Are Not Making It, explains why economic rights are values consistent with the American sense of independence and justice. During Eisenhower's presidency the top marginal income tax rate was above 90%. We should return to that standard.

We need to progressively raise the minimum wage over a ten to twenty year period. Minimum wage should be a percentage of average production, or GDP. Government should supplement the incomes of low-income workers. Just as payroll deductions are withdrawn from paychecks, payrolls can be increased for low earners. This would relieve the burden from small business owners who otherwise could not stay in business paying higher wages. Eventually the payroll burden would be re-assumed when levels of spending and income were brought up.

We need a larger Earned Income Tax Credit program.

We need to create tax incentives to corporations that pay high wages.

We need to combine a wealth tax with an asset development program for the 30% of Americans who have less than $10,000 in net worth.

We need to target a wealth gradient for the nation and work to accomplish a fair distribution of wealth.

We need public alternatives to monopolistic ownership. The books The Soul of Capitalism by William Greider and America After Capitalism by Gar Alperovitz, and The Ownership Solution by Jeff Gates explore this concept.

The U.S.A. has a $14.2 trillion annual GDP produced by a workforce of 141 million (July 31, 2008). The average product is $100,000 per worker. Yet half the workers earn less than $33,000. As before stated, 64% of the national income goes to wages and salaries, 18% go to capital gains and business ownership, 17% go to “other” being mostly pensions and welfare. So in fact the average wage or salary is 64% of $14.2 trillion, or $9.1 trillion, divided by 141 million workers, or $64,453. So median wage is half the average. Ownership income is 18% of $14.2 trillion, $2.57 trillion.

Income for the top 10% of households:
U.S.A.’s GDP, July 31, 2008, $14.2 trillion
Wages and salaries --- 64.5% of $14.2tr GDP = $9.16 trillion
37.8% to top 10% = $3.46tr, ------------------------$303,726 per household
Business and capital income --- 18.1% of $14.2tr GDP = $2.57 trillion ----
83.4% to top 10% = $2.14tr, -------------------------$188,016 per household
“Other” -- pension and welfare --- 17.3% of $14.2tr GDP = $2.47 trillion
33.6% to top 10% = $0.83tr, ------------------------$72,719 per household

$303,726 Incomes of the top ten percent group
$188,016
$ 72,719
_______
$564,461 average annual income for top 10% of households.
while half of households earn less than $48,200
__________________________________________________________________
total = $14.20trillion GDP, 2008
(Go to Wikipedia and you see a different set of numbers. They place the average for the top 10% around $250,000 annually. Why? I don't know, yet. Probably incomplete data. The US Census also shows income to the top 20% at 50%, not 60% that Urban-Brookings Institution Tax Center places it.)

Assume that half the U.S. workforce earn on average $30,000 (the average is actually lower), then their total payroll expense is $2.13 trillion. Assume everyone earned what half earn, the total payroll expense for the nation would be $4.26 trillion. What would we do with the remaining $10 trillion we produced? We can easily afford to raise the minimum and the median incomes, $6.25 an hour and $16.50 an hour respectively. The mean average production value per worker per hour is $50.00, or $100,000 a year. Why shouldn’t the median and the average be the same amount? Some workers would still earn higher and some lower, but median and average could be approximately the same.

Spartacus and his band of rebellious slaves were not content chained to a Roman slave gang for life. Wage slaves are also at a point of resistance. We are on the verge of a new global understanding that will shift profits back to workers, and that will eliminate slave-like working conditions worldwide. We are prepared to support industries that incorporate economic justice in their charters and accord with our standards of fair treatment.

Part Two --- International Solutions

Towards an International Convergence of Fairness Standards

After solving the domestic economic problem we have to solve the international economic problem. Here are some thoughts on this.
I’m typing on a computer made for Apple Corporation; it’s an iMac. The workers in China have a minimum wage. In 1999 in Shanghai the minimum wage was $0.21 an hour, and in Guangzhou it was $0.26 an hour. For Shanghai, $0.21 an hour works out to $1.68 a day, $8.40 a week, and $436 a year. Should I buy a product made by slaves? Are we all supporting and enabling slavery? Are we the new plantation owners who set the rules for the whip-lashing field bosses? Is this the type of world we wish to promote? It’s quite an irony that a hedge fund director earning $1.7 billion a year will use a computer made with $0.21 an hour labor, or accept a pizza delivered by a man who would have to work 10,000 years to earn what he earned in one year.
New trade treaties can be implemented to enable countries that pay high incomes to workers to receive special trade considerations. I’ll buy my computer from a worker enterprise that pays a respectable income, the government will support my values by enacting trade barriers to slave-like conditions. China-U.S. trade agreements are in danger of my line of thinking.

Paying the Worker -- How to Evaluate Foreign Standards

In this vein I will now try to analyze payment to workers relative to the size of a national economy.
Reading from Michael D. Yates book, Naming the System: Inequality and Work in the Global Economy, we find, (page 111)
The International Trade Administration, a U.S. government agency that promotes U.S. exports, has made estimates of average manufacturing wage rate, converted to U.S. dollars for a large number of countries. Table 4.6 shows these wage rates, along with the GDP per capita, for the 1997. The countries are listed in the order of their GDP per person, from the lowest to the highest. And the table follows.

This table will show us how much each country is producing per capita, and how much goes to the workers (at least the manufacturing workers). By comparing the size of a national economy, gdp per capita, with the dollar compensation for labor we should arrive at a picture of just compensation for each nation. I divide gdp per capita into the yearly average wage rate. If a large economy pays a pittance to its workers, the fairness rating is low. If a small economy pays a large compensation, the fairness rating is high.
(I assume all workers work 1,600 hours a year, the average among OECD countries. To make my table more accurate I would have to find the actual number of hours for each country.) Kenya pays the highest rate. Each Kenyan worker earns more per product value relative to per person income. Mexico is the lowest.

Country ------
average hourly wage rate, yearly income -----------
gdp per capita per year ---------
ratio of wage to gdp ------
fairness?

Bangladesh ---- $0.21/hour $336/year ------ $335 -------1 : 1.0 ------- medium

Kenya ----------- $0.49 /hour $784/year ------ $365 ----- 1 : 2.1 ------ highest !

India ---------- $0.19/hour, $304/year ------ $374 -------- 1 : 0.8 ----- medium

South Africa -- $3.81/hour, $6,096/year ----- $3,371 -----1 : 1.8 ----med/high

Poland -------- $1.58, $2,528/year ----------- $3,510 ----- 1 : 0.72 ------- low

Mexico ---- $1.02, $1,632/year ---------- $ 4,250 --------- 1 : 0.38 ------- lowest !

South Korea -- $7.26 , $11,616/year ------$9,620 --------1 : 1.2 ------- med/high

Canada -- $12.13 /hour, $19,408/year -- $20,145 -------- 1 : 0.96 ------- med

Germany --- $10.73/hour, $17,168/year ------- $25,55--- 1 : 0.67 ----- low

Sweden --- $15.19/hour, $24,304/year ---- $25,714 ------1 : 0.95 ----- medium

United States -- $13.17/hour, $21,072/year --- $29,278 ----- 1 : 0.72 --- med/low

Singapore -----$8.72/hour, $13,952/year ------ $31,161 --- 1 : 0.45 ---- low !

Denmark --- $24.54/hour, $39264/year ------ $32,153 ---- 1 : 1.22 -- med/high

Japan ------ $12.36/hour, $19,776/year ------- $33,234 ----1 : 0.60 ------ low

Norway ---- $15.00/hour, $24,000/year ------ $34,840 --- 1 : 0.69 ----- med/low

Switzerland --- $20.07/hour, $32,112/year ---- $35,894 ----- 1 : 0.89 --- medium


Why should we allow goods into our market from a nation-producer that denigrates its workforce by paying very low wages? It is our market place, and we have ideals about economic justice. We can improve conditions for millions by exercising these ideals.

Look at the difference between Denmark and Singapore. In Denmark the individual wage income is high, the gdp is high. The wage in Singapore almost 1/3rd the wage of Denmark, yet gdp per capita is almost the same. Where does the extra amount of income go in Singapore? Not to the workers. In which of the two countries would you chose to work? Why should South Africa pay almost 4 times what Mexico does for wages, and have a gdp per capita lower than Mexico?

The Justice Revolution is about this ratio, how much of the profit from work goes to the worker. Kenya is in the lead, South Africa is next, then Denmark and South Korea. Mexico and Singapore are at the bottom. A popular movement for economic justice would be a tidal shift in U.S. foreign policy. Instead of seeking expanding markets and profits for the U.S.A. we would seek to expand across the world economic equality, self-sufficiency, democracy and justice. The first law of capitalism would be broken, the law that says you must get rich, you must maximize profits. The stock markets of the world know no other law. People power must break it. Only people power can suffice to brake it and then break it.

My figures here may not hold up to scrutiny, especially for Kenya, but that’s not the point. The democratic process should and some day will promote economic fairness, not the elitism it promotes today.

United Nations Human Development Index

The United Nations compares nations with a Human Development Index, it measures “Inequality by income and expenditure” calculating a Gini coefficient for the 177 nations. The U.S. Gini places the U.S. at #78 among nations, though its HDI is #12. Denmark receives a 24.7, the lowest coefficient, followed by most of northern Europe. Norway, Denmark, Germany are in the 20s, France and Italy are in the 30s, the U.S., Singapore, and Mexico are in the 40s, Brazil, Chile, Argentina are in the 50s, Bolivia, Botswana, Lesotho are in the 60s. Haiti is 59.9. A movement that promotes a democratic economy would focus on this measure to ensure economic rights for all.

Some day even corporations could (and should) be rated with a Gini coefficient, and consumers would chose to buy products made with the lowest Gini number. Many U.S. consumers shop at Costco instead of WalMart for this very reason. An independent rating organization could stamp products with the Gini approval rating, like the “organic” foods label. The effect of such a practice would be revolutionary. When consumers buy a Chevy truck they have no idea that the workers in Ciudad Obregon live in homes without running water. If they knew? If you knew that your carrots were harvested by children would you purchase them? This is why the Justice Revolution is such a powerful idea; it’s not limited to government action.

International Minimum Wage

In Richard Duncan’s ground-breaking work, The Dollar Crisis, he advocates for a minimum wage for workers who work in exporting industries. Duncan was an officer of the World Bank working in Thailand and predicted the Asian meltdown in the 1990s.

Proposal: Raise the wage rates of industrial workers employed in export industries in developing countries through coordinated government intervention. At present, factory wages are approximately US$4 per day (2001) or less in most developing countries. An increase of US$1 per day each year would cause the earnings (and purchasing power) of industrial workers to more than triple to US$14 per day over a 10-year period.
. . .
For centuries, as challenges in the economic sphere arose, interventionist solutions were formulated to resolve them. So it must be today. The sudden emergence of a global economy has made it possible to pay industrial workers in the developing world very low wages to produce things for consumption in the economically wealthy parts of the world. Not surprisingly, that development has resulted in very large trade imbalances, as the rich buy more from the poor than the poor buy from the rich. Those trade imbalances have created credit bubbles that have destabilized the global economy and resulted in a rash of systemic banking failures around the world and intense deflationary pressures. The economic challenge facing this generation is that this global economic disequilibrium is about to unwind in a severe deflationary depression unless a new source of aggregate demand can be found to replace the demand that the United States’ overheated economy has been generating up until now but which it is incapable of continuing to generate in the future. Leaving the resolution of this challenge up to market forces is certain to produce a very painful outcome. We can do better than that. Foresight, imagination, courage, and willpower --- in other words, effective leadership --- would do the trick.
(pages 237, 244)

Conclusion

As I have shown elsewhere, the average annual value of production per worker in the U.S.A. in 2008 is over $100,000. That is 141 million full-time workers create $14.2 trillion in value, the GDP for 2008. Yet half earn less than a third this amount, $33,000 of $100,000. Yet employers can rightly claim that paying $25.00 an hour, half the average annual worker production value of $100,000, will put them out of business. Capitalism cannot save itself. Inequality is squeezing economic health to death, and a democratic force must come to the rescue. Workers must grasp the basics of distribution of income so that their consumer demand can keep in step with productive capacity. It is a sensible way to run a global economy, and it can be broken down reasonably nation by nation. Trade treaties can be arranged that promote these values and encourage growth. The workers must democratically assume responsibility for what they produce globally. This democratic movement will fairly distribute the surplus of production, its profits, so as to grow the world’s economy. Then we will see justice and an advancing standard of living for everyone on planet Earth. Instead of ransacking the world for lower labor costs, we can converge our energies and goodwill to build hospitals, universities, roads, sewage and water and energy facilities and bring the amenities of modern technology to everyone. The crisis of the climate and the world economy are twin crises, and we have to take charge, innovate radically, and share our resources equitably.

August 20, 2008
3,174 words -------- See http://benL8.blogspot.com for additional essays.

Wealth Distribution, once more:
50 individuals at the bottom have a nickel (50 times $0.05 = $2.50)
The next 40 each have $0.70 of wealth (40 times $0.70 = $28.00)
(Above the median, you’d think they’d have more than $1.00)
The next 9 each have $4.00 of wealth (nine times $4.00 = $36.00)
The last richest individual has $33.40 (one times $33.40)

Combined, you have $100.00.

For a thorough analysis of a previous Federal Reserve report go to the analysis of Professor Edward Wolff, “Where Has All the Money Gone?” He shows that over a 15 year period, 1983 to 1998, 53% of the gains in wealth were captured by the top one percent of U.S.A. households.

See a slide show from the Urban Institute that reproduces the facts on inequality in the U.S.A.
Rising Economic Inequality and Tax Policy, Len Burman, Senior Fellow, Director, Tax Policy Center, Urban institute
http://www.taxpolicycenter.org/press/upload/inequality%20and%20taxes.Burman.5-07.swf

1 comment:

Paid to BE Rich said...

Some of the solutions you mention are simplistic. Jack the minimum wage above the market minimum wage and you get unemployment. Note how we haven't had high unemployment since the early 80s -- about the time the real minimum wage dropped.

The market minimum wage can be boosted dramatically. Just need to boost the amount of capital and usable land chasing the same pool of labor. In other words, implement and anti-Keynesian economic program.