My Blog List

Wednesday, June 24, 2009

Myrtle Beach, S.C.

3rd Letter to Congressman Stark

Greetings to Congressman Stark, June 21, 2009

--- from Ben Leet, resident of San Leandro

Re: What if the economy slips into a Depression, have you a plan?

The Recession may not end on January 1, 2010, as many predict. It may get worse. The only author I know of who actually predicted the downturn, Warren Brussee, predicts a worsening of the economy. His book The Second Great Depression, Beginning 2007, Ending 2020, was published in 2005. He has a monthly blog at which I recommend. Almost all economists failed to see this tidal wave coming, I know of a few: Dean Baker, Jeff Faux, Richard Duncan, Nouriel Roubini, and Robert Schiller, but none of them wrote a detailed book two years prior to the onset. If you know of some other, let me know. Out the tens of thousands of professional economists, Brussee is unique. Naturally I have had his book for several years.

Now, in June, 2009, if the economy continues to shed jobs at half its rate for the last six months, that is at 300,000 jobs a month, we will be above 11% unemployed nationwide by January 2010. The highest unemployment in the 1980s was 9.6%, so we will be in 1930s territory soon for comparison. More women are working than men, and that’s a first. Foreclosures also run at about the same pace, over 300,000 a month.

You can see that we are tracking the Great Depression, see this article, A Tale of Two Depressions at web page:

I suggest that the Progressive Caucus prepare a response that includes (one) a greatly expanded public jobs program; (two) a tax increase on high incomes, either a 2% tax on wealth for only 5 years, or a Eisenhower era income tax rate of 90% on income above $3.2 million; and (three) a Clean Election campaign funding plan. When the bottom 50% of U.S. households own only 2.5% of the national wealth, according to the Federal Reserve report Currents and Undercurrents, 2006, how can real reform compete against all the campaign donations from the wealthy few? (Shame on the Democrats!)

The Democratic Party should recreate their New Deal credentials or pedigree. How bad is the economy today? Consider that 9.4% are unemployed, another 10% are either involuntary part-time workers or are discouraged workers, and 16.2% are working for wages that pay less than the poverty threshold. Add it up, 35.6% --- more than a third of the labor force, over 55 million workers in a workforce of 155 million --- are out of work, working too little, or working for too little. In all, that’s about 1/3 who can’t buy very much stuff, whose low purchasing power is crippling “the economy.” Purchasing power is also called aggregate demand, and it is the driving force of a working economy. (See for details on BLS statistics, and see Jeff Madrick’s book Why Economies Grow for an understanding of aggregate demand).

I’ve studied the U.N. Human Development Index and the U.S. ranks down at 75th place among 126 reporting nations in “Inequality of Income and Expenditure” and other inequality measures such as the Gini coefficient. We rank number 15 on the overall composite index, but we are last among developed nations in inequality. This is why I am pessimistic about recovery. “Where will the jobs come from?” ask many economists, without a good answer. Without purchasing power widely distributed there will be no rationale for rehiring workers. It’s not over-production, it’s under-consumption that is dragging down the economy today. I read that one in nine buy their food with food stamps, nationwide, so those are the people who are “under-consuming.” Children in poverty is at 27.3%, up from 17% in just one year; those parents are underconsuming. (data from People don’t have income as before, and they have “blown” their credit. As Marriner Eccles, the Chairman of the Federal Reserve from 1934 to 1948, said, it’s like a poker game, when the losers run out of credit, the game is over. “Game over,” as our Governator likes to say.

My blog is at --- I have cogent and concise essays about economics that argue these points. If you are really interested.

This is my one quote from my latest essay:
For instance, if you were to convert the wealth of Warren Buffett or Bill Gates into $100 dollar bills and make two stacks, the two stacks would rise up 30 miles high, at least they did before the stock market collapse. If you stack the wealth of the wealthiest 1% of households, 1.16 million households, their stacks would reach almost 60 feet high, on average. One percent own 33.4% of all the nation’s wealth. If you stack the average savings of the poorer half of the U.S. households then you would see 58 million stacks that reach one inch high. So imagine a circle of 116,000,000 stacks, half are one inch high and in the middle are those towers going up 30 miles into the stratosphere. This graphically describes a large disparity of savings, and the moral question, “Is this fair?” immediately arises.(1)
One percent own 33.4%, the next 9 percent own 36%, the percentiles 50 to 90 own 28% and the lower 50% of households owns only 2.5% of the net worth or savings of the nation. --- Currents and Undercurrents, Federal Reserve, 2006. This end result of our economic system should be conclusive that something “is rotten in Denmark.”

In 1938 the unemployment held at 19%, and in 1943, ‘44, ‘45, it held below 2%
--- the net result of massive “public jobs.” The effect was the resurgence of widespread purchasing power, aggregate demand, after a transfer of wealth from the rich to the unemployed poor. The lasting effect was several decades of economic vitality instead of a repeat of the 1930s. Our future in 2009 depends on a similar transfer of wealth. You might find that hard to believe. I don’t think it will happen until a certain collective change of heart takes place.

I predict a different reality than recovery. Probably the inertia of ignorance and greed, sorry to say, and political timidity will perpetuate a pitiful economic picture for quite some time. I hate to say. In about 12 months we’ll know, we’ll be able to tell from the unemployment figures.

This is what the Progressive Caucus and Pete Stark might do:
I read Dollars and Sense Magazine, and many contributors are professors at University of Massachusetts, Amherst. I think if you were to request from them a plan, they would create one. The Economic Policy Institute also has a list of public jobs that the nation needs to accomplish. Then the Progressive Caucus could show the world a well thought-out, detailed and persuasive alternative. You might then have the pleasure of an “I-told-you-so” moment.

Here are some details I carry around in my head: 7 million jobs have been lost since January, 2008, durable goods orders in the U.S. are down 35% from one year ago, housing prices have fallen 31% and have another 12% more to fall, children’s poverty rate jumped from 17% to 27.3%; international stocks dropped in value 46% in 12 month period, international trade is off by about 17% and industrial output down 12%, tracking the Great Depression. Economists do not agree about “green shoots” in the economy.

I applaud all your efforts, especially the health care reforms. But I think that we, the public, need to hear a realistic alternative to the bland and even obnoxious proposals that centrist Democrats put forth. For instance, there was no excuse for pouring $700 billion into bankrupt banks, and guaranteeing $12 trillion in their absolutely miscalculated loans. There were far cheaper alternatives that Americans by and large, conservative and liberal, did endorse. If you listen to Air America, you can hear people complain, as today I heard, after 55 years of registering Democrat one lady is switching to “Independent.” With over 70% of the population asking for a “single payer” health system, and the Dems are refusing to talk about it --- what do you expect? It’s like the late ‘60s when people just won’t take it any longer. That’s positive.

Finally, I am a believer in God. When I hear you derided for your agnosticism I am amused. You might tell the critics, “By their fruits ye shall know them.”
Keep up your good works.

Yours, Ben Leet

U.S. Ranks 75th in Inequality

The U.S. Ranks 75th out of 126 Nations in Inequality

Does inequality within a nation matter to its economic health? is the question. In the U.S.A. the top one percent of households earns more each year than the bottom 60% of households, and that wealthy one percent owns more wealth (has a greater net worth) than 91% of the households. Does this effect the workers in the U.S.? Does it lower their incomes and the quality of their lives? In June of 2009, 27.3% of the nation's children live in poverty. How is this possible when the annual sum of our productive labor (GDP) is valued at more than $40,000 per human being? How could anyone live in poverty in such a wealthy country? This is a question that too many are willing to evade.
The United Nations’ Human Development Index ranks the United States at 15th place, in 2009, out of 177 nations in its composite of rankings for human development, but in the category of “Income or Expenditure Inequality” the U.S. ranks down at 75th place. The inequality measure compares the incomes of the top 20% of households with the bottom 20% of households. All of the advanced economies rank higher than the U.S. In the top 50 nations only Hong Kong, Singapore, Argentina, Chile, Uruguay, and Costa Rica rank below the U.S. When the comparison is the top 10% vs. the bottom 10% the U.S. ranks at 81st place among 126 nations.

Using the Gini index, used by economists to determine inequality, the U.S. also ranks high on the inequality scale, 40.8, compared to western Europe and Japan, nations that score in the mid 20s. Here is a select listing of scores among a wide group of nations to compare inequality.

Nation --- Gini --- 20% vs 20% --10% vs 10% --GDP/capita
Japan------- २४.9 ------३.4 -----------------६.1 ----------------35,484
Norway -----२५.८----- ३.9 -----------------४.5 -----------------63,918
France ------३२.7 -----५.6 ------------------९.1 -----------------34,936
Germany ----२८.3 ----४.3 ------------------६.9 -----------------26,893
U.S. ---------४०.8 -----.4 ----------------१५.9 -----------------41,890
Hong Kong -४३.4 -----९.7 ----------------१७.8 -----------------25,592
Singapore --४२.8 -----९.7 ----------------१७.7 -----------------26,893
Mexico ------४६.1 ----१२.8 ---------------२४.6 -------------------7,454
Brazil --------५७.0 ----२१.8 --------------५१.3 -------------------4,271
China --------४६.7 -----१२.2 --------------२१.6 -------------------1,713
Bolivia -------६०.1 -----४२.3 ------------१६८.1 -------------------1,017

Naturally Japan scores high in the HDI, 8th in quality of life score, because it is an advanced economy and the wealth and income are shared more so than all other countries. Comparing Denmark (14th) with Singapore (25th), while their GDP per capita is roughly the same, their Gini scores and inequality scores are widely different. The benefit of high income is not shared in Singapore, it is sequestered by the ownership class and quality of life lags behind Denmark. Perhaps Singapore’s long-term strategy will change that, but perhaps not. (See Robert Kuttner’s article in Foreign Affairs, October 2008 for a review of the Danish economy as an example of economic justice and progress.)

The U.S. also ranks 2nd in GDP per capita but 13 places lower in overall HDI. In contrast Cuba ranks at 93rd in GDP per capita but 42 places higher in HDI, indicating that Cuba does a lot with a little.

Aggregate Demand --------------------------------------------

Turgor pressure we learn in school biology is the opposite of the word “wilting.” In a metaphor, aggregate demand is to an economy what turgor pressure is to a plant. That is the crux of my argument here. An economy with high inequality has low turgor pressure and will not respond quickly to slumps or wilting since a major portion of its population base is bereft, short, and lacking in economic pressure or purchasing power, and the entire system has to depend on the purchasing demand of the small wealthiest portion to keep the least wealthy section employed.

For example, the income of the "typical" worker is about one third the amount of the "average" worker. The U.S. GDP, July 2008, was $14.2 trillion, with 141 million workers actually working each day of the year; each produced on average $100,000 per worker per year. That covers "average." But the median worker or "typical" worker is in the middle of the income gradient. That is, half of the workers were earning less than $33,000 (the median income), and a good portion of the lower half much less than $33,000. This is inequality of income.

Wealth distribution is even more out of balance. The wealth of the bottom 50% of U.S. households, about 58 million households with real people living therein, is a paltry 2.5% of the total national wealth (See 2006 report of the Federal Reserve, Currents and Undercurrents). The wealth of the top one percent is over 33% of the total national wealth. The ratio of the average wealth or net worth of a household below the 50th percentile line is about one 700th of the wealth of a household in the top one percent. The average wealth for that household below the 50th percentile is less than $25,000, while the wealth of the top one percent averages around $15,000,000. That is wealth inequality.

The major portion of the U.S. population that is lacking in purchasing demand is the lower 60% whose combined annual earnings amounts to 20% of the GDP, and whose combined wealth is, approximately, less than 5% of the national wealth. The article “Striking It Richer” by Emmanuel Saez, professor of economics at U.C. Berkeley, indicates that the top ten percent of annual earners now receive about 50% of the total earnings, compared to 28 years ago when they received only 35%. The top 10% also own about 70% of everything that has a price tag.

Consider this:
16.2% of the labor force earns less than the poverty threshold for a four person family (see, employment analysis from Bureau of Labor Statistics ),

17.7% of workers will be under-employed (involuntary part-time workers) by 2010 -- predicted by the Economic Policy Institute,

10.2% will be unemployed (predicted by EPI).
Depending on the overlap of low-income and part-time workers, in a matter of months between 28% to 44% (call it 33% for convenience) of the labor force will earn very little. The turgor pressure for the economy will be low, to say the least. Let’s see, out of work, not working enough, earning lousy wages --- what does that equal for 28% to 44% of the population and the U.S. economy? That's between 45 million to 70 million workers in a workforce of 160 million.

I’ve recently read (March 2009) the predictions of Warren Brussee about the stock market, how it depends on the ratio of dividends to prices, and the conclusion is that the value of stocks will continue to languish. (Brussee wrote the book The Second Great Depression, Beginning in 2007, Ending in 2020, published in 2005.) The economic commentator John Mauldin also predicts the same in his newsletter of March 4, 2009, titled “While Rome Burns.” And, also consider that the European banks are facing a blow-up owing to the collapse of the economy in eastern Europe. Multiple signs of a very weak and slow world economy. A few years ago I read in a Charles Schwab Company report that about 53% of China’s economy was devoted to export production, and now massive layoffs are occurring in China. Their export market has stopped buying.

Wealth Tax and Public Jobs -- a solution of sorts
A 2% tax on the wealth of the top 1% of U.S. households would yield (.02 X $17 trillion) $340 billion a year. This could be a temporary tax for five years or until the current recession/depression subsides. The tax could be graduated from 0.5% to 2.5%, meaning it would take from 200 years to 40 years to significantly reduce the total wealth of those taxed. We need to create approximately 15 million jobs, and at $30,000 per job, the total annual expense would be $450 billion yearly. Therefore we could not afford to create all those jobs immediately, but would have to do it in steps as the private economy rehires its unemployed workers.

I believe that capitalism functions this way: aggregate demand --- the wages and savings of consumers that give rise to their expenditures --- determines the number employed and their wage rate. Often news commentators announce that 70% of the economy is "consumer driven." That means that 30% is driven by government (public) demand, and the remainder by private demand. In times of sagging private demand, government has a responsibility to revive consumer demand by maintaining high employment. In World War II the government war bond financed employment. In 1939 the unemployment rate held at 20%, and in 1942 it dropped to 2%. Either the government sells bonds to the wealthy households or it must tax away wealth at the top so that workers at the bottom can stay employed, and in times of recession/depression this is an emphatic demand. We have schools, ports, rivers, sewage systems, water quality systems, energy efficiency work and road improvements. The list is very long.

It's time to use the money that is now idle in private accounts --- through a tax on wealth or by raising the income tax to where it was under President Eisenhower (91% tax on income over $3.2 million) --- to improve the country and rebuild aggregate demand in the economy. This is the intelligent use of our human, natural, and capital resources. Whose picture is shown on the dollar bills? Is my picture, your picture, Bill Gates' picture, or some wealthy person's image gracing the currency? No, the money belongs, ultimately, to the ones who printed it --- that is, to the people. It time to engage that wealth in productive enterprise and labor, and avoid having millions of people sitting idle as they watch their lives break into irreparable pieces.