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Friday, December 2, 2011





The Need for a Large Government Stimulus


The essay is below, but first a sign and some quotes. 

funny-sign-s.blogspot.com
Jimi Hendrix is attributed with this aphorism, as is Sri Chimnoy. Mohandes Gandhi also said: "
Power is of two kinds. One is obtained by the fear of punishment and the other by acts of love. Power based on love is a thousand times more effective and permanent then the one derived from fear of punishment. –Gandhi
Meher Baba said, "If men were only to become conscious of the fact that peace and happiness are not to be fought for but to be sought for within oneself, they would abandon their fighting and be at peace with themselves and the world."
__________________________________________
My (unpublished) Op-Ed to the New York Times:

Robert Shiller published an essay in the NYTimes today, Nov. 26, 2011, on "The Fire Bell of Unemployment" 
in which he states that, "First, there is a lack of scientific proof that government spending — fiscal stimulus — will do much to remedy unemployment." 

I think it is critical to deal with that assertion to have any understanding of solutions at hand. 

History of Stimulus Spending
Between 1933 and 1937 the unemployment rate dropped from 25% to 9.6% due to "government spending --- fiscal stimulus". There was the Civilian Conservation Corp, the WPA, and the PWA. Roosevelt won a landslide re-election because of his success. 
I suppose that is as close to "scientific proof" as an economic answer can be. Human sciences are in fact mostly studies, not sciences, and establishing causation is literally impossible. I refer you to the essay by Marshall Auerback at New Deal 2.0, August 30, 2010, "The Real Lesson from the Great Depression: Fiscal Policy Works" where he cites the drop from 25% to 9.6%.  

If that were not enough evidence we can look at the period 1939 through 1944 when "government spending --- fiscal stimulus" lowered unemployment from around 14% to 1.2% in 1944. "The total output of the economy in constant  prices -- the real Gross National Product (GNP) -- increased from $319.8 billion (in 1972 dollars) in 1939, the last year unaffected by the war or the prospect of war, to a peak of $561.9 billion (in 1972 dollars) in 1944." This is an increase in GNP of 76% in 6 years which is a growth rate of 10% per annum compounded. These figures originate from the book American Economic Development Since 1945 by Samuel Rosenberg, page 20. Furthermore, "Between 1939 and 1944, total civilian employment rose from 45.8 million to 54.0 million." Combining employment in the military services, the civilian employment increased by an unheard of 42% over six years. Over half that increase were women entering into the paid work force. Clearly, "government spending -- fiscal stimulus" made an enormous difference, perhaps it made all the difference. 

Ways to Raise Income at the Lower-Earner Level
Mr. Shiller cites a proposal from Edmund Phelps to "provide a subsidy of $4.50 an hour for the lowest-paid workers, with declining amounts until they earn more than $15 an hour."  This is good, but I prefer a more generous proposal that comes from the University of Massachusetts/Amherst professors Jeannette Wicks-Lim and Jeffrey Thompson, "Combining Minimum Wage and Earned Income Tax Credit Policies to Guarantee a Decent Standard to All U.S. Workers". To quote from the report: 

"Specifically, we begin by proposing a 70 percent increase in current minimum wage rates. This would raise the federal minimum from today’s rate of $7.25 to $12.30 per hour. We also propose two expansions of the EITC [Earned income Tax Credit], the federal program that provides tax relief and cash benefits for low-income working families. These include raising the maximum EITC benefits by 80 percent and the income eligibility threshold to three times the federal poverty line. The maximum EITC benefit would rise from $5,028 to $9,040 and households with incomes up to $57,000 could receive benefits.”

How Low is Low Income?

The average income for the top one percent of U.S. households was $1,370,662 in 2011 according to this report from The National Priorities Project. Half of all U.S. workers, or 75 million workers, received less than $26,362 in 2010, according to the Social Security Administration

In contrast, the Tax Policy Center shows that 28.2% of all U.S. personal income is the portion received by the lower-earning 80% of households deriving from wages and salaries. Approximately 80% of the nation's workers are non-supervisory workers (or employees). In other words, the main income of 80% of the work force is wage and salary income and their share is 28.2% of all income. 

To re-enforce this idea, note that the Social Security Administration released figures for wage and salary income for 2010, and they showed that the median income was $26,362 for the 150 million workers who had payroll income. About 1 in 6 workers, or approximately 25 million workers, received 0 to $5,000 a year, another 1 in 6 received between $5,000 and $15,000 a year, and another 1 in 6 workers received income of between $15,000 and $26,362. This chart from the SSA. Note the drop in the median/average "Ratio" from 1989 to 2010. That's growing inequality. This data does not include income from capital gains and proprietary income which, combined, equal 17% of all personal income, and if included would show even greater inequality of income. 

Average and median wages (see table above)


The average contribution to economic output is $109,000 per worker per year according to the San Francisco Federal Reserve Bank, and our GDP per capita is almost $46,000 per year. The lower-earning 80% receive only 40% of all the personal income our economy generates, while the top 20% of households receives 60.3%, according to the Tax Policy Center. Clearly there is room for raising the incomes of lower paid employees, as a measure of economic justice. And in doing so we would stimulate the economy and create employment. 

The Federal Deficit -- Rebalance plan 
Occasionally left-wing economists state, counter-intuitively, that the government has to spend in order to reduce the deficit. The private sector is knocked out, only government spending can rekindle hiring -- that's a basic Keynesian argument. Since the economy has a shortage of purchasing demand, or aggregate demand, only "government spending -- fiscal  stimulus" targeted at low-income households will revive purchasing demand, which amounts to about 70% of the economic activity. 


Dean Baker summarizes well the lag in performance in his article of December 9, 2011: "In short, we have lost more than $1.2 trillion in annual demand. The stimulus package came to around $300 billion per year for two years. Guess what, $1.2 trillion is much more than $300 billion.
The long and short is that the economy is operating way below its potential because there is nothing to replace the gap in demand created by the collapse of the housing bubble. The lack of demand means a shortage of jobs and high unemployment. There is nothing mysterious about this picture, it is about as simple and straightforward as it gets." 

But, in contrast to the deficits-must-increase argument, there are potentially $824 billion in annual federal program cuts (such as in the military budget) and tax increases (such as higher rates to the high-earners) we could make and not spend-up the deficit, according to the Institute for Policy Studies report released this month, "America Is Not Broke". Their $824 billion annual spending cut is 7 times greater than the amount the Super Committee was charged with finding. Freeing up $824 billion annually and applying $290 billion to unemployed and  underpaid workers would generate the missing purchasing demand that causes our economy's present lackluster performance. 


A Plethora of Progressive Proposals 
The Chicago Political Economic Group also proposes spending over $900 billion a year from new taxes and cuts in this report, A Permanent Jobs Program for the United States. 


A net $824 billion of budget balancing (program cuts and tax hikes) would reduce the deficit from 37% to 13%. In other words the federal government spent $3.46 trillion, collected $2.16 trillion, and had a deficit of $1.30 trillion in 2010, and this deficit would be reduced to $476 billion if we had installed the plan's $824 billion in program cuts and tax hikes. But, as noted in earlier essays, about $300 billion is needed, and maybe more, for a public jobs program.  $824 billion amounts to 5.5% of the U.S. GDP in 2011. The federal government collected in revenues 14.4% of GDP, spent 25.3% of GDP, and had a deficit of 10.9% of GDP in 2011, according to the Table S-5 of the OMB, the President's Budget. 

The economists at University of Massachusetts, Amherst, PERI, released a plan, December 2011, to create 19 million jobs, which reduces unemployment to 5%, by 2014. The Institute for Policy Studies also released a proposal to save the economy: Jobs, A Main Street Fix for Wall Street's Failure, that revives our stricken economy. I recommend all these plans. 


Nouriel Roubini, aka Dr. Doom because of his prescient prediction of the 2008 recession, released a plan, The Way Forward, at the New America Foundation. This plan has three constructive proposals, called pillars, 1) "a substantial five-to-seven year public investment program that repairs the nation's crumbling public infrastructure, 2) "a debt restructuring program that is truly national in scope, addressing the (intimately related) banking and real estate and financial asset price bubbles" and 3) " global reforms that can begin the process of restoring balance to the world economy". Without a trade balancing remedy, all reforms are futile.  


Jack Rasmus gets the award for most foresighted thinking. At jackrasmus.com and at kyklosproductions.com you can read his proposals. Almost three years ago, in March 2009, he presented a detailed list of initiatives that would rekindle economic activity, see this article at Z Magazine. 

The core problem is inequality
We will have to discover a healthy proportionality of income distribution if we wish to have a viable and healthy economy. From 1942 to 1982 the top 10% never received more than 35% of total income, now they receive about 50%. That's the core problem of our economy, in my opinion. Most all of the gains went to the top one percent. This is neo-feudalism. 

Our economic problem is not a federal deficit problem, spending too much or a taxing too little, our core problem is distribution of income and wealth. We have the most unequal distribution of annual income among developed nations. The recent CBO report shows (page 8) that the top one percent of households have a post-tax and post-transfer income greater than the income 44% of the nation's households (both groups receive about 17% of all income, post-tax and post-transfer). The highest one percent of households in the wealth scale own more than 225 times the median household net worth, an all time high. The one percent also received 64% of the economic gains 2001 to 2007, and over 50% of the nation's gains over the past 30 years, according to U. C. Berkeley professor Emmanuel Saez. The marginal income tax rate on the very top incomes over $379,000 a year is nominally 35%, but as a group they pay 30.8% in overall and effective taxes (overall means to all government agencies, and effective means as a portion of their income.) See the report by Citizens for Tax Justice for confirmation, "All Americans Pay Taxes". The average overall effective rate for the lower 99% averages to 28.2%. Households with incomes around $40,000 pay 25.3% per year.  

On November 29, 2011, the Democrats introduced a bill to extend the Social Security Payroll tax cut. The extension would be paid by a higher tax on very high income earners. See this article. In my opinion, good, but only a temporary fix. 


The Economic Policy Institute has an article with many graphs that illustrate the title:
"Occupy Wall Streeters are right about skewed economic rewards in the United States", October 26, 2011, by Josh Bivens and Lawrence Mishel. The graph agrees with another report that shows from 2007 - 2009 the top 20% of households increased the size of their  wealth pie from 85% to 87.2%. (See Sylvia Allegretto's report State of Working America's Wealth, page 5) Here's a graph from the EPI article showing the growth and drop-off of wealth for the top 1% and the bottom 90% of households over 1983 - 2009  -- but note that if we could extend the graph to 2011, the wealth of the lower 90% that is mostly housing price wealth would still be below 1983 levels, while the wealth of the top 1% would be restored to around 80% on this chart, because corporate stock prices have recovered, see the stock graph here:  



Figure J
In the coming year we will all be playing the amateur economist. I want the NYTimes to present divergent views. 
I recommend the University of Mass/Amherst professors who run PERI, James Boyce, Robert Pollin, Thomas Palley, and others. 
I don't have any credentials at all. I don't expect publication. But I have convinced myself, if no one else, that economists are a sad lot, and quite often have less understanding than the average Joe. See my blog, http://benL8.blogspot.com where I present a plethora, a raft, a compendium of data on inequality.   --- I can provide reference citations for the figures in this short essay. 

Thanks, Ben Leet  
 ________________________________
And now, December 9, 2011, President Obama finally gets his message straight. 
I wonder why he took so long. This quote comes from a Robert Reich article. 


President Obama:


This kind of inequality – a level we haven’t seen since the Great Depression – hurts us all. When middle-class families can no longer afford to buy the goods and services that businesses are selling, it drags down the entire economy, from top to bottom. . . .

Inequality also distorts our democracy. It gives an outsized voice to the few who can afford high-priced lobbyists and unlimited campaign contributions, and runs the risk of selling out our democracy to the highest bidder. . . . 


More fundamentally, this kind of gaping inequality gives lie to the promise at the very heart of America: that this is the place where you can make it if you try. . . .


It’s heartbreaking enough that there are millions of working families in this country who are now forced to take their children to food banks for a decent meal. But the idea that those children might not have a chance to climb out of that situation and back into the middle class, no matter how hard they work? That’s inexcusable. It’s wrong. It flies in the face of everything we stand for.  



Occupy Wall Street Protest Signs

Letter to NYTimes, Why a stimulus is needed



Why a fiscal stimulus is needed 
-- I sent this to the New York Times as an op-ed. 
They haven't published it yet, and I wonder how long should I hold my breath. 
  **   ***   ***   ***   ***   ***   ***   ***  **   
Robert Shiller published an essay in the NYTimes today, Nov. 26, 2011, on "The Fire Bell of Unemployment" 
in which he states that, "First, there is a lack of scientific proof that government spending — fiscal stimulus — will do much to remedy unemployment." 

I think it is critical to deal with that assertion to have any understanding of solutions at hand. 

Between 1933 and 1937 the unemployment rate dropped from 25% to 9.6% due to "government spending --- fiscal stimulus". There was the Civilian Conservation Corp, the WPA, and the PWA. Roosevelt won a landslide re-election because of his success. 
I suppose that is as close to "scientific proof" as an economic answer can be. Human sciences are in fact mostly studies, not sciences, and establishing causation is literally impossible. I refer you to the essay by Marshall Auerback at New Deal 2.0, August 30, 2010, "The Real Lesson from the Great Depression: Fiscal Policy Works" where he cites the drop from 25% to 9.6%.  

If that were not enough evidence we can look at the period 1939 through 1944 when "government spending --- fiscal stimulus" lowered unemployment from around 14% to 1.2% in 1944. "The total output of the economy in constant  prices -- the real Gross National Product (GNP) -- increased from $319.8 billion (in 1972 dollars) in 1939, the last year unaffected by the war or the prospect of war, to a peak of $561.9 billion (in 1972 dollars) in 1944." This is an increase in GNP of 76% in 6 years which is a growth rate of 10% per annum compounded. These figures originate from the book American Economic Development Since 1945 by Samuel Rosenberg, page 20. Furthermore, "Between 1939 and 1944, total civilian employment rose from 45.8 million to 54.0 million." Combining employment in the military services, the civilian employment increased by an unheard of 42% over six years. Over half that increase were women entering into the paid work force. Clearly, "government spending -- fiscal stimulus" made an enormous difference, perhaps it made all the difference. 

Mr. Shiller cites a proposal from Edmund Phelps to "provide a subsidy of $4.50 an hour for the lowest-paid workers, with declining amounts until they earn more than $15 an hour."  This is good, but I prefer a more generous proposal that comes from the University of Massachusetts/Amherst professors Jeannette Wicks-Lim and Jeffrey Thompson, "Combining Minimum Wage and Earned Income Tax Credit Policies to Guarantee a Decent Standard to All U.S. Workers". To quote from the report: "Specifically, we begin by

 proposing a 70 percent increase in current minimum wage rates. This would raise the federal minimum from today’s rate of $7.25

 to $12.30 per hour. We also propose two expansions of the EITC [Earned income Tax Credit], the federal program that provides

 tax relief and cash benefits for low-income working families. These include raising the maximum EITC benefits by 80 percent and

 the income eligibility threshold to three times the federal poverty line. The maximum EITC benefit would rise from $5,028 to

 $9,040 and households with incomes up to $57,000 could receive benefits.”

The Tax Policy Center shows that 28.2% of all U.S. personal income is the portion received by the lower-earning 80% of households deriving from wages and salaries. Approximately 80% of the nation's workers are non-supervisory workers (or employees). In other words, the main income of 80% of the work force is wage and salary income and their share is 28.2% of all income. To re-enforce this idea, note that the Social Security Administration released figures for wage and salary income for 2010, and they showed that the median income was $26,362 for the 150 million workers who had payroll income. About 1 in 6 workers, or approximately 25 million workers, received 0 to $5,000 a year, another 1 in 6 received between $5,000 and $15,000 a year, and another 1 in 6 workers received income of between $15,000 and $26,362. The average contribution to economic output is $109,000 per worker per year according to the San Francisco Federal Reserve Bank, and our GDP per capita is almost $46,000 per year. The lower-earning 80% receive only 40% of all the personal income our economy generates, while the top 20% of households receives 60.3%, according to the Tax Policy Center. Clearly there is room for raising the incomes of lower paid employees, as a measure of economic justice. And in doing so we would stimulate the economy and create employment. 

Occasionally left-wing economists state, counter-intuitively, that the government has to spend in order to reduce the deficit. Since the economy has a shortage of purchasing demand, or aggregate demand, only a fiscal stimulus targeted at low-income households will revive purchasing demand, which amounts to about 70% of the economic activity. But, in contrast to the deficits-must-increase argument, there are potentially $824 billion in annual cuts we could make and not spend-up the deficit, according to the Institute for Policy Studies report released this month, "We Are Not Broke". Their $824 billion annual spending cut is 7 times greater than the amount the Super Committee was charged with finding. Freeing up $824 billion annually and applying it to underpaid workers would generate the missing purchasing demand that causes our economy's present lackluster performance. 

We do not have a spending problem or a taxing problem, our problem is distribution of income and wealth. We have the most unequal distribution of annual income among developed nations. The highest one percent of households in the wealth scale own more than 225 times the median household net worth, an all time high. The one percent also received 64% of the economic gains 2001 to 2007, and over 50% of the nation's gains over the past 30 years, according to U. C. Berkeley professor Emmanuel Saez. The marginal income tax rate on the very top incomes over $379,000 a year is nominally 35%, but as a group they pay 30.8% in overall and effective taxes (overall means to all government agencies, and effective means as a portion of their income.) See the report by Citizens for Tax Justice for confirmation, "All Americans Pay Taxes". The average overall effective rate for the lower 99% averages to 28.2%. Households with incomes around $40,000 pay 25.3% per year.  

In the coming year we will all be playing the amateur economist. I want the NYTimes to present divergent views. 
I recommend the University of Mass/Amherst professors who run PERI, James Boyce, Robert Pollin, Thomas Palley, and others. 
I don't have any credentials at all. I don't expect publication. But I have convinced myself, if no one else, that economists are a sad lot, and quite often have less understanding than the average Joe. See my blog, http://benL8.blogspot.com where I present a 
plethora, a raft, a compendium of data on inequality.   --- I can provide reference citations for the figures in this short essay. 

Thanks, Ben Leet  

Sunday, November 20, 2011

Half of Households Own 2.2%, Half of Workers Earn 12.3%,  and Half of Households Receive 19% of the Nation's Income.
(see below, in blue) 
Smaller share for 90%  -- Household Income Distribution

Growing share of income for the rich


Inequality in the U.S. has has grown steadily since the 1970s, following a flat period after World War II. In 2008, the wealthiest 10 percent earned almost the same amount of income as the rest of the country combined.

SHARE OF NATION'S INCOME  Including capital gains
The top 0.1 percent of the population (those making about $1.7 million or more) saw the sharpest increase in income share, taking home 2.6% of the nation’s earnings in 1975 and 10.4% in 2008. (See the source here.)

The best years for the U.S. economy were 1942 to 1982, and the graph from U.C. Berkeley professor Saez also shows this distribution. (See here, page 6, Figure #1)


A Congressional Budget Office report of October 2011 showed (page 8) in 2007 the income percentages for household quintiles  (groups of 20% each representing 23 million households) before and after all taxes and transfers. Before: 2%, 7%, 12%, 19%, and 60%. Meaning, the top-earning households in percentiles 81% to 100% took in 60% of all pre-tax income. The after-tax-and-transfer income shares were: 4%, 9%, 14%, 20%, 53%. Meaning the top-earning 81% to 100% took in 53% of all income after all taxes and transfers.  This also shows that half the households receive 19% of all income, the other half receives 81%. It also shows that 44% of lower-earning households as a block received the same share of total income as the top-earning 1%, each group received about 17% of total income. 

The top-earning 1% of households received 21% of before-tax income and 17% after-tax-and-transfer income. 
In 1979 the share for the top-earning 1% was 8%. Their share grew from 8% to 17%, after-tax, 1979 to 2007 (page 6). 


The Congressional Budget Office report in October 2011, "Trends in Household Income Distribution 1979 to 2007" concluded, "For the 1 percent of the population with the highest income, average real after-tax household income grew by 275 percent between 1979 and 2007 (see Summary Figure 1)."




Gini Inequality Index
The pre-tax inequality Gini coefficient was reduced from 0.590 to after-tax 0.483 (see Appendix B). What that means is Brazil has a Gini of 55.0, Argentina of 48.8, Mexico of 51.6 at the top end, while Japan's is 24.9, Germany's is 28.3, and France's is 32.7. The U.S. has the greatest inequality among developed nations. 
   

Tax Rates for all Income Groups
In another report, the tax rate for different household income quintiles is shown, "All Americans Pay Taxes", by the Citizens for Tax Justice. The top 1% pay an overall effective tax rate of 30.8%, while the lower 99% pay an average 28.2%. (the middle quintile of households pays 25.3% the lowest quintile pays 16.0%.) "Overall effective" means -- the actual amount paid relative to total income, and to all government agencies. 

Household Inequality, Wage Inequality, Wealth Inequality 
About the CBO report, they show that half of U.S. households receive 19% of all income, the other half 81%. 
The Social Security Administration, reporting on wage and salary income, reports half of all workers receive 12.3% of wage income, the other half receive 87.7%. 
Sylvia Allegretto, a U.C. Berkeley economy professor, reporting in State of America's Wealth, reports that half of the U.S. households own 2.2% of all wealth, (not 22% but two point two percent) the other half own 97.8%. The top 1% own 37%. (See Table 3.)

See the make-up of the top one percent here.  The threshold income was $343,927 in 2009, and the average income was $1,300,000 plus. See this paper that reports the income share of the top 0.1% grew from 2.2% to 8%, 1981 to 2007. The graphs at the bottom are easy to read. 

Any politician callous to these inequalities, who insists on a "no tax increase on the rich" position, such a politician deserves retirement. 

Transferring from the Top 1% to the Lower 60%

If the top-earning 1% of households received 8% of post-tax income, as they did in 1979, instead of 17% as they did in 2007, according to the CBO, and their loss of share (9%) was transferred to the lower-earning 60% of households, about 70 million households (out of the total 117 million U.S. households), the incomes of all the lower-earning 60% would increase by 50%. Those with incomes of $12,000 would increase to $18,000, and those with $50,000 would receive $75,000, and so forth across the spectrum. It's time to return to the 1950s, in my opinion, when the tax rates on high income were over 90%. The nation needs it.    

Income for the lower-earning 90% of households drops by 6.4% --- a negative 6.4% --- over a 35 year period. (While the income for the top-earning one percent increases by 275 times, see above. Really, this is no way to run an economy in a democracy.)
See this study from the Chicago Political Economy Group to confirm, and the table below from another report

INCOME LEVELNUMBER OF PEOPLEAVERAGE INCOMEOVERALL CHANGE 1970-2008
Top 0.1%152,000$5.6 million+385%
Top 0.1-0.5%610,000$878,139+141%
Top 0.5-1%762,000$443,102+90%
Top 1-5%6.0 million$211,476+59%
Top 5-10%7.6 million$127,184+38%
Bottom 90%137.2 million$31,244-1%








THIS BLOG: My February 2011 essay, the Six Point Program, is a comprehensive proposal to restore prosperity. I recommend it. Go the the column at the right, click-on February, 2011. Look for the Contents page also, December of 2010. We can do two major things in this nation: we can create jobs for all workers, and we can assure all jobs pay a decent wage. We achieved this in 1943 and 1944, but the motivation of a war is not necessary.  From American Economic Development Since 1945, by Samuel Rosenberg, page 20: "By 1944, the unemployment rate had fallen to a low of 1.2 percent, a level never again achieved in the postwar period." Between 1939 and 1944, the number of people working increased from 45.8 million to 65.0 million, an increase of 42%, and GDP rose by 75% during the same years. Today we need to increase employment by 9.0%, so we face a much smaller challenge. 

Friday, November 11, 2011


 

16.0% of Americans lived in official poverty in 2010, according to the updated poverty report. But the poverty rate would be 12% higher, at 28.6%, except for government programs like Social Security and Earned Income Tax Credits.   
                 and 
Half of the U.S. Households Have $1 of Income while the other Half Has $4, after all taxes and transfers, according to a CBO report. 
                and
Half of all the 150 million workers earn $1 while the other half earn $7 according to a Social Security Administration report. I know that sounds preposterous, but if you take a long look, though incredible, it's true.  
I know it looks like a difficult read, and it is. You just saw links to 3 reports. It get complicated. These figures are worth the effort if only to convince you of the need for a government jobs program. 
When one looks into the inequality issue one finds some astonishing things. 


On average, while half of US households receive $1 of income, 
another half of US households receives $4 of income. This is after government taxes and transfers according to the CBO. 


This ratio, 1 to 4, comes from the Congressional Budget Office report of October 2011, "Trends in Distribution of Household Income Between 1979 and 2007". (See the summary and the full report.)


Before taxes and transfers the ratio is 1 to 6.3 (per the CBO report). 
Before taxes and transfers, the poverty rate in the U.S. would be 28.6%, not 15.2% (see this report -- just above figure 2, or see updated report linked at top paragraph). The Social Security program reduces the overall poverty rate by 6% (see this report). Imagine, two of seven Americans would live in poverty, but for the transfer programs even though the nation's economy generates $46,000 per human being every year.   


The income ratio of the lower 50% to the upper 50%  stands at 1 to 6.8 if one took the pre-tax figures from the IRS (as reported by the Tax Foundation here -- see Adjusted Gross Income of Taxpayers in Various Income Brackets, 1980-2009) that show the AGI, adjusted gross income, for the lower half of tax filers was, on average, $15,291 and the average income for the "above 50%" tax filer was $98,128 -- this is a ratio of 1 to 6.8.


But the pre-tax and pre-transfer incomes from the CBO report yields a ratio of 1 to 5. (see page 8) But after all taxes and transfers, the 1 to 4 ratio holds. The pre-tax and pre-transfer incomes per ascending quintiles is 2, 7, 12, 19, and 60. That is, the highest quintile received 60% of all income, pre-tax. The highest 1% received 21% of all income. The post-tax and post-transfer income share per ascending quintiles is 4, 9, 14, 20, and 53. That is the highest 20% of households received 53% of all income, post-tax. The highest 1% received 17%
_________________________________
Inequality Strangles Economic Growth 
Now almost 1 in 6 live in official poverty. It would be 2 in 7 except for government transfers and programs. We have fewer private sector employees in 2011 than we had in 2000, 110 million then and 109 million now.

Chart 3. Private Sector Job Growth (10-year moving average annual percent growth)
Chart 3. Private Sector Job Growth (10-year moving average annual percent growth)
Source: Calculated from All Employees: Total Private Industries (USPRIV), downloaded from St. Louis Federal Reserve FRED database, http://research.stlouisfed.org.

This comes from the Monthly Review article by Fred Magdoff, June 2011. The next comes from Business Week magazine, Sept. 2009
privatejobgrowth.gif


There are 154 million workers, 140 million are working on a daily basis (with 9% unemployed). Together they create an output product worth $15 trillion, and each worker on average contributes $109,000, (according to the Federal Reserve Bank of San Francisco). 


There are 312 million humans, and 150 million salary and wage earners, and 117 million households
The average household income for the middle quintile is $40,400
The average income for the lower-half of households is $23,040 according to Citizens for Tax Justice 
The higher-half average is 114,760.
The ratio is 1 to 5. 
And the household average for all is $68,900. Excluding the top one percent the average is 56,200. 


Not to confuse the reader, the median individual worker median is, according to the Social Security Administration, $23,632/year among 150 million workers. Half earn less than $23,632, and that lower  half earn only 12.3% of all wage and salary income. A quick look may prove to the disbelieving reader that assertion. (I discussed this report in the previous blog post. It is worth looking at because, as I mentioned, it shows that half or 75 million workers, have $1 of wage and salary income while the other half earn $7. This is a long and difficult issue which I will write about in future blog postings.) 


But for now, I'll use the average income for the middle 20% of households, from Citizens for Tax Justice, $40,400/year, while their average (not median) household income amount is $68,900. The SSA median for individual workers, $26,362, reflects worker payroll income only. The $40,400 figure is apparently an average for the middle quintile of households. This amount is also near the average mean annual income of full-time year-round workers, $44,410, according to the US Census, while they report a median hourly rate of  $16.27, equivalent to $33,840 a year if working full-time, which is generally not the case. Half of workers earn less than $26,362 and earn only 12.3% of all payroll income.  

Using the figures from the Citizens for Tax Justice, the average for the middle 20% is $40,400, and the average income is $68,900. (The U.S. Census also reports a "mean total income" of $68,827 for 2009. Their median for households is $49,777. 


The average income for the lower 50% of households is $23,040 according to CTJ figures. And the average income for the households in the higher-earning 50% is  $114,760. This is the 1 to 5 ratio I mention above. This is pre-tax income and is consistent with the CBO report. 

The main issue and question is: how can the lower earning workers afford to buy the products they are creating? 
If the worker earns $1 while creating output worth greater than $1, how can he buy what he creates?  Owners must layoff  workers. And the cycle spirals to destruction.  


Bureau of Labor Statistics reports between 2007-2009  8.8 million workers lost their jobs, 5.7% of the labor force. Some 15.43 million were "permanently dislocated from" their jobs and only 49% found re-employment, according to this report. The recovery as of October 2011, 2.3 million jobs have been recovered. When enough workers are laid off, falling income and falling purchasing power "destroys capital". "Income destroys capital" -- meaning that capital assets --- plant, machinery, equipment, real estate,  hardware and software --- are lost, and the asset base (capital) begins to shrink. 
Martin Wolff used this phrase in an interview with Doug Henwood, and it stuck with me. "Income destroys capital" Wolff said as a last and worst possible outcome to our economic downturn. 


The last option is a public jobs program such as this one by Rutgers professor Philip Harvey, or this one by "Dr. Doom" aka Nouriel Roubini. The Great Depression did end in 1937 with the WPA and the New Deal, according to this report. After the unemployment rate dropped from 25% to 9.6%, Roosevelt cut back on the program and the unemployment rose back to 18%. 
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Gini Coefficient Index - Measuring Inequality


Before taxes and transfers the US Gini coefficient (that rate of inequality where the higher number means greater inequality) stands at 0.590, according to the CBO study, Appendix B. In comparison the Gini for Brazil stands at 0.55 (see this report). After taxes and transfers US gini stands at 0.483 according to the CBO, still the highest inequality among developed nations.  


This CBO report states that pre-tax Gini coefficient was 0.590, and the post-tax Gini was 0.483. (page Appendix B) It further states, in so many words, if the top 1% share of post-tax income were reduced from 17% to 16%, and then added to the income of the lowest 20% of households, that shift would "boost income in the bottom quintile by almost 50 percent."  Average household income for the lower-earning 20% of households in 2010 would rise from $12,000 to $18,000. 


Following this same redistribution logic, if the top 1% were receiving their 1979 share of 8%, and their 9% reduction were applied to the lower 80%, then 80% of households would receive almost a 25% increase in income (their share would increase from 40% of all income to 50% of all income). The household median would rise from $49,775 to $62,500, and 80% of households would enjoy a 25% boost. Boosting incomes like this would restore growth and create a self-sustaining recovery, as it did after World War II. Morally it would create a more just society. It might empty the prisons. Perhaps one third of the deaths are a result of inequality, according to one study. So perhaps such a shift in income would raise the life-span as well as the quality of life for a great majority. But the only way to get there, I believe, is through government public employment programs.  

Income for half is $1, and the income for the other half is $4 (post tax and transfer, CBO data). The U.S. has the highest inequality, as measured by the Gini coefficient, of all industrially developed countries. The recent Congressional Budget Office report states (page 8) the post-tax Gini is 0.489 and pre-tax of 0.590. The U.N. rates nations according to income Gini. Our imbalanced ratio is falling to the levels of Argentina - 48.8, Brazil - 55.0, Costa Rica - 48.9,  Mexico - 51.6, China - 46.9. The U.S. level is the highest among developed nations with Japan at 24.9 and Germany at 28.3 and France at 32.7. I have to warn readers that more recent U.N. reports differ from those stated at Wikipedia. But the CBO figure, 0.489, is for 2007 reported in November 2011. We are much closer to Mexican inequality levels than French inequality levels.  

To further emphasize the point. Look at the ratios between the lower-earning 10% of households vs. the highest-earning 10%. The U.S. ratio is 15.9. The Japanese ratio is 4.5. Germany's is 6.9, and France's is 9.1. Mexico - 21.6, China - 21.6, Brazil 40.6, Argentina - 31.6, Costa Rica - 23.4. We are about half-way between the French inequality and Mexican inequality.  


And a further emphasis comes with a look at wealth distribution from a study in 2008 by the UN University World Institute. Wealth is not so unequally distributed in any country save a bare few. The U.S. gini is 0.801, other's gini range in the 0.6 or 0.7 level. 
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Below a Congressional Budget Office graph, courtesy of Inequality.org 


Average After Tax Income by Income Group 1979-2007
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CBO Report on Income Distribution
The recent report from the Congressional Budget Office, "Trends in the Distribution of Household Income Between 1979 and 2007" is the best report to date on income distribution. Their distribution figures match those of the Tax Policy Center from 2006. The breakdown of pre-tax income is on page 8, Box 2, with an explanation of the Gini coefficient, which for 2007 was 0.489. The distribution of pre-tax "market" income per ascending quintile (on page 8) was 2%, 7%, 12%, 19%, and 60% (the last 20% of households received 60% of pre-tax income). The post-tax distribution per ascending quintile was 4%, 9%, 14%, 20%, and 53%. (The highest-earning 20% of households received 53% of post-tax income.) The pre-tax income of the top 1% equaled 21% of the total income, which is also the exact pre-tax income of the lower-earning 60% of households. The post-tax income of the top 1% was 17%, which is approximately equal to the combined incomes of the lower-earning 44% of households. Consistent with this distribution is the statement, "For every $1 of income received by the 51 million households in the lower-earning 44% of households, the 1.2 million households in the top-earning 1% of households receives $44 of income. The two groups received equal incomes, 17%  and 17% of post-tax income." 

This is the fuel of recent occupy Wall Street and other protests. It's also the rot that will bring down the entire economy. 
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Hard Times  --- the Musical Version 

As Stephen Foster sang, "Many days you have lingered around my cabin door, Oh, hard times, come again no more."
Listen to James Taylor sing "Hard Times Come Again No More", with Yo Yo Ma accompanying Taylor ---

1.
Let us pause in life's pleasures and count its many tears,
While we all sup sorrow with the poor;
There's a song that will linger forever in our ears;
Oh hard times come again no more.

Chorus:
Tis the song, the sigh of the weary,
Hard Times, hard times, come again no more
Many days you have lingered around my cabin door;
Oh hard times come again no more.

2.
While we seek mirth and beauty and music light and gay,
There are frail forms fainting at the door;
Though their voices are silent, their pleading looks will say
Oh hard times come again no more.
Chorus

3.
There's a pale drooping maiden who toils her life away,
With a worn heart whose better days are o'er:
Though her voice would be merry, 'tis sighing all the day,
Oh hard times come again no more.
Chorus

4.
Tis a sigh that is wafted across the troubled wave,
Tis a wail that is heard upon the shore
Tis a dirge that is murmured around the lowly grave
Oh hard times come again no more.
Chorus


This graph is inaccurate. In 1937 unemployment had dropped to 9.6% because of WPA employment that has not been properly assessed according to this source at New Deal 2.0


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Complex Addendum Note

U.S. Census, Mean Total Income, 2009 = $68,827
The Census data is grouped by household, not individual worker income, but the mean average of both are identical. The medians are much different, $49,777 for households, $40,400 for individuals. Yet multiplying 117 million households times their median income of $49,777 yields approximately the same outcome as multiplying 150 million workers times their median income of $40,400. 

Nice inequality graph, CBO,  

CBO report ---