How to Double Incomes for Millions of Workers

Raising Living Standards in America
by Ben Leet, March 2010

In my last essay I claimed to have found a way to double the incomes of 94 million out of 155 million workers. Like pouring water from a very full glass into a partially full glass, my plan is essentially an adjustment of water levels, not a creation or destruction of new income or wealth. I claimed that 1) a reinstatement of the 90% marginal income tax rate on very high yearly incomes over $400,000 combined with 2) a federal jobs program creating 18 million new jobs would be enough to double the incomes of 60% of the workforce. I claimed that just these two measures would be sufficient. (See my essay “We Can Double Incomes . . .” at this blog, or http://benL8.blogspot.com) This was simplistic. This essay will try to fill out a more comprehensive strategy for raising the incomes of the lower income earning majority.

Presently 60% of households receive just 20.3% of the national income, and that means that 40% at the top receive about 80%. The top 1% of households receives 23.5% of pre-tax national income, more than the bottom 60%. These are the two metaphorical water glasses I’m dealing with. The average yearly income for the bottom 60% of households was around $36,000 in 2005, and for the top 1% the average income was over $1,000,000. As for wealth, not yearly income, the imbalance is even greater: the bottom 50% of U.S. households own 2.5% of the national household net worth, the top 10% holds approximately 70% of wealth, with the top one percent holding 33.4%. The average wealth of the bottom 50% (60 million households) is below $23,000 per household, the average for the top ten percent (12 million households) is over $3,000,000, and for the top 1% the average household wealth is over $14,500,000.
(Most of this data is referenced at the end of “We Can Double . . .” essay)

Apparently something breaks down in the distribution of income at the very top level. Our unconscious assumption is that markets determine automatically and fairly the prices for labor, goods and services. A $800 dollar hammer will be bought only by the Pentagon. A $400 dollar an hour plumber will not find work. And the gradual sloping curve of rising incomes holds true for most jobs and professions, but at the highest level the curve breaks down, reason and logic no longer apply. I submit that the income distribution system is broken at the highest end, and it will take an exogenous force such as taxation to bring the highest incomes into line with fairness. Naturally fairness is in the eye of the beholder, so this level will be endlessly debatable. See www.lcurve.org for a graphic of wealth distribution.

How to Lift Wages
The obvious economic challenge for the nation is to create a sea change in wages; but this is like defying gravity. To counter the downward pressure on wages we have already enacted minimum wage laws, and the Earned Income Tax Credit. One boosts wages, the other boosts income. Other methods include: a tight labor market such as at the end of the 1990s, a federal jobs program such as in the 1930s and ‘40s, federal subsidies to employers to hire new employees, an Employee Free Choice Act facilitating employee unions, a legislative fix of the National Labor Relations Board enabling unions, a restructuring of corporate charters that empower workers on corporate boards as prevails in Europe, more cooperatives and joint ownership enterprises. A national manufacturing strategy, and trade agreements that insist on higher income growth among foreign export workers would recapture lost manufacturing employment. Increasing wages is an international problem. Increasing research and development credits to business would propel new technologies. There is a long list of options that would create jobs and increase wages.

The changes in corporate charters enacted in Germany allow German workers to create a GDP/capita of $44,600 a year vs. the U.S.’s $47,500 a year, while the German worker works 360 hours (or 9 weeks or 2 months) less every year. (See Germany’s Economic Engine, Eamonn Fingleton, American Prospect magazine, March, 2010) Most economists know that U.S. household income has increased by 15% over the past 30 years only because women in households are working 3 months more every year. Where the wife has not entered the workforce household income has not grown at all over 30 years.

For 40 very positive years, 1942 to 1983, the top marginal income tax rate held at 90% and 70% for two twenty year periods. The top ten percent of households never earned more than 35% of the national income. Today they earn almost 50%. This shift of 17% (1976 to 2007) could be reversed through taxation (the metaphorical glasses of water) combined with a jobs program and other measures to reduce necessary expenses, towards the goal of raising living standards for the majority of low-earning workers. That’s the basic program. If wage gains from 1976 to the present had matched the gains in worker productivity, then incomes of 94 million non-supervisory workers would be double what they are today. (See Les Leopold’s argument in The Looting of America, page 16, or my previous essay “We Must Transfer Wealth, Again.”)

Measures of Social Health
In short, all measures of social health --- the rate of poverty, of childhood poverty, of homelessness, of households living in sub-standard housing, of the population not owning assets, of inequality, of population not receiving regular health care, of functional illiteracy, of high school dropouts, of not attending nor graduating from college, of drug abuse, of incarceration, of teen-pregnancy, of non-marital birth, of divorce, --- would improve across the board with higher incomes and lower expenses for workers at the bottom of the income slope. The national happiness quotient would also jump. This proposal is based on an economics of cooperation that curtails competition. Competition is fine for sports, but for the exigencies of life and death, intelligent cooperation is superior. To think otherwise is to be a pessimist and perhaps a Scrooge.

The real question is not is it doable, because it has been done before. Nor is the question, “Is it a good idea?” The question is how do we effect a sea change in wages and income? How do we double the incomes of 94 million workers? I’ve listed briefly above the various means to address the problem.

Today’s Great Recession is ongoing, there are signs that it will double-dip into a full-blown Depression. Many economists in March, 2010, are viewing darkening clouds on the horizon. Many business men and women, as well as economists and politicians, investors and financial advisors are waiting for the “self-sustaining expansion,” the expansion that “gains traction” that causes employers to hire and consumers to spend. It’s like waiting for Godot. Towards the end of the Great Depression and during the World War II mobilization we did transfer wealth to workers’ paychecks, and we should do so again.

We do need a federal jobs program creating 18 million jobs (see Rutgers University professor Phillip Harvey's essay “Learning from the New Deal” at www.jobsconference.org). Last year about 140 million workers worked each day creating a product worth $14 trillion a year; each worker produces on average $100,000 a year. But half the workers earn less than $33,500, no where near the average $100,000 each worker produces. It is time to bring up the median worker income from below $33,500 a year. From the book State of Working America, 2006/2007, page 121, we see that average hourly wages for the the following percentiles: 10th = $7.20, 20th = $8.84, 30th = $10.21, 40th = $12.12, 50th percentile worker $14.29 an hour. The average of those percentiles is $10.53 an hour, which is less than $22,000 a year for half of America’s non-supervisory workers who make up 80% of the workforce.

The U.S. ranks 78th among 140 reporting nations on the United Nations’ index of income inequality. Seventy-seven nations distribute their incomes more equally. The U.S. also ranks #37 in probability of living to age 60. You, your family, your children and your neighbors are entitled as citizens to a fairer system. We can literally double the incomes of millions।

These are sources I use and recommend:

Drive for Decent Work, http://fullemployment।blogspot.com/
National Jobs for All Coalition at http://www.njfac.org/
Warren Brussee’s blog, www.wbrussee.wordpress.com/
Brussee is the author of The Second Great Depression
Robert Kuttner’s articles in The American Prospect magazine
Robert Pollin’s essays in The Nation or at http://www.peri.umass.edu
The Levy Economics Institute, http://www.levy.org
The Economic Policy Institute, http://www।epi.org/

See previous essay or essays for complete source documentation

We should Learn from the New Deal

We Can Double the Income
of 94 Million Workers,
from $30,000 to $60,000

by Ben Leet, January, 2010

Nearly one quarter, 23.5%, of the annual national income went to just 1% of the nation’s households in 2007. This is a crucial fact; it is the cause of most of our economy’s ills. It indicates that the rewards for work are way out of balance, and we need to rectify this imbalance to restore viability and health. The solution, a federal jobs program, would allow us to double the income of over 60% of households, roughly from $30,000 a year to $60,000. For a majority of Americans this would revolutionize the quality of life.

The top one percent received 23.5% of the nation’s income, and the top ten percent received 49.7% in 2007. (Saez, 2009) Looking at the earnings of the top decile (10%) of households, for 40 years, from 1942 to 1982, their share of annual national income never exceeded 35%. (Saez. 2009) In 1976 it was 33%. But since 1982 the share of the top decile has inched upwards, and now the top 10% receives 49.7%. This is an increase of 17%. (14% of the 17% went to the top 1% whose share increased from below 9% to 23.5%.) If we were to transfer that 17%, in effect restore the ratio of 1976, we would restore economic health. (See endnotes for additional source data)

A federal employment program is the method of transferring that income. More importantly, it would employ millions of idle people. The phrase “if we were to” in the previous sentence indicates something I feel will be very unlikely. All the same, “if we were to” would have the desired effect I propose. In essence, my argument derives from the argument of Marriner Eccles, former Chairman of the Federal Reserve, and his statements about the economy being like a poker game, when the losers’ credit gives out the game is over, and his statements about the distribution of national income. (See my most previous essay, “We Must Transfer Wealth, Again”, where I quote Eccles.)

Readers can review my essay on this blog of November, 2009, a letter to Obama, to find at the bottom a brief outline of Jeff Madrick’s proposal of a jobs program. He proposes a yearly investment of about $275 billion for jobs: in pre-kindergarten ($150 bn); in infrastructure ($50 bn for highways, bridges, ports, airports, energy conservation, renewable energy sources); in K-12 educational services ($25 bn); in caregiver support ($25 bn); and in unemployment expansion/trade assistance job retraining ($25 bn). The rest of his program involves $120 billion to restore solvency to Social Security, and $35 billion in college subsidies, and $2.5 billion in election finance reform. The entire program totals $432 billion. This would increase federal spending from 21% of GDP to 24% of GDP, still lower than most European economies. The jobs program would resemble the U.S. Postal Service. It would create several agencies, permanent ubiquitous government institutions, located in all communities, coordinating various employment services and projects. It would be managed locally and nationally similar to the WPA of the 1930s. Philip Harvey’s essay “Learning from the New Deal” is the most thorough description of a working program. (See jobsconference.org to download)

The bottom 60% of households received 20.3% of the national income in 2004. (Mishel. 2007) This is less than 23.5% received by the top 1%. By transferring the 17% gained by the top ten percent to the lower 60% of households, we would increase to 37% (20.3% plus 17%) the income share of the bottom 60%. This would nearly double their incomes. The income ratio of 1942 to 1982 would be restored, and the economic health of that period would return. This would vastly improve the quality of life for all Americans. Not only would the distribution ratio change, the economic pie would grow. Furthermore, the growth would not be the freakish sort that occurred over the 7 year period, 2000 to 2007,when 1% of the households received 65% of the economic gains (and ९९% received ३५%). Nor would it be the strange fruit where the top 1% received 50% of all gains, as occurred between 1983 to 2007. (Wolff, 2001 and Saez, 2009)

If the nation were to enact a 90% marginal income tax rate on incomes over $400,000 a year (the top 1%) --- the same rate we had from 1943 to 1963 --- and a 70% rate on incomes over $200,000 --- the rate we had from 1963 to 1983 --- we could easily pay for this program. And 25% of our children would not live in poverty as will happen in 2010, and one in four children will not eat food purchased with food stamps as happened in December, 2009. Just the shame and waste of this last data should cause heightened concern.

There are others who call for a federal employment program: the Economic Policy Institute, economists Jeff Madrick, Robert Pollin, L. Randall Wray, James Galbraith, Philip Harvey, Joe Persky, the National Jobs for All Coalition, and many others. I recommend especiallyProfessor Harvey's "Learning from the New Deal." To read details of the jobs program you may download some at www.jobsconferernce.org, http://fullemployment.blogspot.com, or see Madrick’s book The Case for Big Government. Madrick asserts that by augmenting federal expenditures by 3% of GDP (an additional $420 billion), and dedicating those funds to social services, we would bring the U.S. economy more closely in line with the other advanced nations of the world.

We have transferred wealth before through federal job creation, during the period 1940 to 1946, the War Mobilization effort. The federal government ran deficits between 14.5% to 31.3% of GDP during the war years 1942 to 1945, moving private savings out of idle wealthy accounts into war bonds, and then into workers’ paychecks. (Miller.2009) This transfer of wealth broke the lock of the Great Depression, and set the foundation for an economy that doubled incomes of all households, not just 60% as I am suggesting, in 26 years, 1946 to 1973 --- when the 90% marginal income tax rate was in force.

This is not socialism, it is American history. Unemployment peaked at 25% in 1933 and averaged over 18% for ten years. Capitalism needed changing or our society would have revolted. During the past decade, 2000 to 2010, a net 1.7 million private sector jobs were lost to the U.S. economy. This after two decades, 1980 to 2000, when 35 million private sector jobs were created. (Hughes. 2009) The future portends even greater job loss with off-shoring manufacturing and out-sourcing tele-communication services. Perhaps a quarter of all U.S. jobs will leave to other nations. Our nation will have to come to grips with disappearing job opportunities.

In the world some 475 rich individuals own more property than half of humanity, and in the U.S. some 400 of the richest own more than half the U.S. population. (see extremeinequality.org and inequality.org) The central problem is the huge imbalance of rewards for work. Many people are underpaid and underemployed: more than one in three workers (37.1%) are (1) out of work, (2) can’t find enough work, or (3) are working for below poverty wages. (see njfac.org/unemployment for January, 2010) While a small fraction, the top-most fraction of households, are grossly over-compensated. The depressing effect radiates onto the entire workforce and provokes the current recession we experience.

These proposals will be enacted in time, but the corrupting influence of wealth on politics will delay enactment. Many European nations have moved in this direction due to the influence of labor unions, and the cooperative enterprise movement also seeks to ensure a juster distribution of rewards for labor.

This short essay is meant to serve as an introduction to my longer essay “We Must Transfer Wealth, Again.” (see http://benL8.blogspot.com) The title of this essay derived from an idea I found in the book The Looting of America by Les Leopold.

Sources:

Hughes, James, and Joseph Seneca, “America’s New Post-Recession Employment Arithmetic”, Rutgers University, September, 2009

Miller, John “How I Learned to Stop Worrying and Love the Deficit”, Dollars and Sense magazine, November, 2010.

Mishel, Lawrence, Jared Bernstein, Sylvia Allegretto, State of Working America, 2006-2007, page 79, , Economic Policy Institute, Cornell University Press, 2007

Saez, Emmanuel, “Striking It Richer” August 2009 Update, University of California, Berkeley

Wolff, Edward, “Where Has All the Money Gone”, Milken Institute Review, Fall 2001

Readers interested in the “94 Million Workers” number can go to these web sites
to “guess-timate” how close my title is to the truth. The 94 million comes by subtracting the professional and managerial workers from the total workforce, as reported in the Statistical Abrstract of the U.S., and it comes from Les Leopold’s book, where he uses this number (page 16, see most previous essay on this blog). See Urban Institute, Brookings Institute Tax Policy Center, Table T09-0344, that shows that 52.2% of tax filers (78 million workers/filers) receive 14.9% of national income, and 0.9% receive 16.5% for 2009. See http://www.taxpolicycenter.org/numbers/displayatab.cfm?Docid=2419

Also see Congressional Joint Committe on Taxation, pdf JCX-1-10, January 13, 2010, “Individual Income and Social Insurance Taxes . . .2010 and 2011.” page 29, that shows that 58% of tax filers/workers (92 million workers) receive 18.1% of the reported national income for 2010, while 0.6% (or 1.05 million filers) receive 14.9% of national income. Let’s simplify: six tenths of one percent of tax filers earn 15% of national income in 2010, while almost 60% of filers earn 18%.
You may argue with the “94 million” number, but use recognized data sources.

Senator Kent Conrad argues that the national debt is too large, and the type of federal jobs program I and many others propose cannot be afforded. See Dean Baker, Feb. 10, 2010, Center for Economic and Policy Research for a rebuttal argument, “The Budget Deficit Crisis Crisis.”

Oregon Lake

We Must Transfer Wealth, Again
by Ben Leet

I’ll try to explain why the economy crashed and what is needed to repair it.
To understand the greatest economic shock in 80 years one has to look at the systemic problems building up over the past 30 plus years.

According to Professor Robert Pollin,
“Given the immediate calamity, it is easy to neglect that the crisis for U.S. workers began long before the recession. As of 2007 --- prior to the recession --- the average nonsupervisory worker in the U.S. earned $17.42 an hour. This figure is 11 percent below the 1972 peak of $19.34 per hour (in 2007 dollars). And this is only half the story.

The other half is that average labor productivity in the United States rose by more than 90 percent over this 34-year period of declining wages. That is, the total basket of goods and services that average U.S. workers produced in 2007 is 90 percent larger than what they could manage in 1972. The workers’ reward for producing 90 percent more goods and services in 2007 than 1973 is an 11 percent pay cut.” (Pollin, May, 2009: 1)

Over the past three decades, 1973-2007, labor productivity has increased by 90 percent. In the simplest terms an employee was creating $10 of value for every hour of work in 1973, now he creates $19 dollars of value per hour in 2007. He earns 11 percent less.

Data from The State of Working America, 2006/2007 closely tracks this conclusion; between 1973 and 2004 productivity grew by 75.7% while real average weekly earnings for non-supervisory workers went down by 6.5%. (Mishel et al, 2007: 48 and 119) These two changes increased the incomes of the owners of enterprise. As “unit labor cost” dived, profits soared, wealth accumulated at the top, investments spread overseas, and financial markets exhausted real investment opportunities and created phantom investments that eventually self-destructed. The purchasing economy could not keep up with the producing economy; it finally broke by trying.

There is much more than fairness at question in the distribution of income and wealth. Holistic sustainability (not to mention fairness) requires that high wages be maintained. Capitalism has an inherent contradiction: each enterprise requires profits for survival, and profits require sales and purchases. But purchases depend on workers’ incomes, a labor cost to enterprise. When labor costs (wages) across the entire system are reduced, consumption is reduced system-wide. This fall off of purchasers, revenues, and profits leads to systemic contraction. It should be no surprise that when your workers produce 90% more each hour and you pay them 11% less --- you are headed for disaster.

Marriner Eccles, the Chairman of the Federal Reserve Bank during the Great Depression, the position held by Greenspan and now Bernanke, explained the cause of the 1930s depression in his 1951 memoir,
As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery.
Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations.
But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants.
In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.
(Beckoning Frontiers, by Marriner Eccles, 1951)

Our economy is very active and productive. It generates over $45,000 of value each year per human -- man, woman and child -- with a population of 305 million humans. With an average of 144 million workers working everyday of the year, workers create an annual product (GDP) worth $14.2 trillion. Each worker is producing almost $100,000 per year. Yet 67.2 percent of workers earn less than $38,000 a year, and 40.7% earn less than $24,000 per year. (Mishel, 2007: 126) And furthermore, of that 144 million daily workers only 92 million -- 64% -- are working full time. Some 36% of workers work part-time. So each full time worker can be said to create over $100,000 of value. (See U.S. Census, 1999, Occupations and Earnings)

As Professor Pollin stated, productivity went up 90% and wages fell by 11% between 1973 and 2007. The highest earning one percent of households in 1973 received less than 9% of the national income, while in 2007 they “took home” 23.5%. The top ten percent of households in 1973 received 33% of the national income, in 2007 it was 49.7%. ( Saez, 2009) According the the Brookings/Urban Institute Center for Tax Policy report the incomes of American households broke down in the following distribution, from 1st quintile (20% of households) on up to 5th quintile: 2.5%, 6.4%, 11.4%, 19.8%, 60.3%. So 60% of the households received 20.3% of the national income. (Mishel, 2007: 79) Combining the two studies, Saez and Mishel et al, the top one percent “took home” 23.5%, the bottom 60% “took home” 20.3%.

As for wealth, the top 1% of households owns 33%, the next 9 percentiles own 36.4%, the following 50 to 90th percentiles 28%, the bottom 50% own 2.5%.(Kennickell, 2004: 11)

This is the key to the economy’s troubles, and it is magnified by the credit and financial debacle of the past two years.

Over the past decade the economy has been sustained by three factors, 1) an asset bubble in the stock market, 2) an asset bubble in the housing market, and 3) a trade deficit resulting in foreign national reinvestment in U.S. treasury bonds. The imbalance in income distribution can be compared to your body putting 60% of your blood into just 20% of your vital tissues, and boycotting the rest (80%) of your body’s organs and tissues. It’s like trying to survive on a diet of pure megavitamins or pure profits with no other nourishment, you’re apt to be dead in a month. This serious addiction to profits and accumulation at the expense of wages leads to fatal intoxication. Recovery and “detox” calls for putting income and profits into the hands of the low income (non-supervisory) workers.

Let’s take a comparative look at two U.S. periods, 1947 to 1973 (26 years) compared to 1973 to 2004 (31 years). In the first 26 year period productivity grew by 103.7%, and median family income grew by 103.9%. In the second period, 31 years, productivity grew by 75.7% and median family income by 21.8%. Women and wives joined the workforce in the second period, increasing their participation from 44.7% to 59.3%. (Mishel et al, 2007: 48, 60, 233) That raised the family income. Hours worked per family increased by about 25%, which is greater than the increase in family income.

Now we’ll compare the two periods --- 1947-1973 and 1973-2007 --- in terms of income growth. Taking the dollar income of the 20th percentile income, in 1947 and comparing it with the same percentile in 1973, income grew by 96.8%. From 1973 to 2005 it grew by 10.7%. The 40th percentile: 101.3% growth vs. 17.8%. The 60th percentile: 107.1% vs. 28.2%, and the 80th percentile, 100.7% vs. 40.7%. And finally comparing the 95th percentile in those two periods, 90.7% vs. 61.5%.

Income and productivity growth matched in the 1947 to 1973 period. In the second period, as the lead theme of this essay says, productivity growth and income drop were out of balance. Income was distributed with even growth among all workers in the economy during the first period, sadly it was very uneven during the second.

Les Leopold in his book The Looting of America also concludes with similar findings.
“There are 94 million non-supervisory workers [in a labor force of 159 million] out there who are not getting their fair share of their increased productivity. An estimate for just the most current year --- one year --- of the gap between what workers should have gotten and what they actually received (in wages and benefits) is a staggering $3 trillion [in an economy generating $14.2 trillion of value] --- equivalent to about $32,000 per worker in the United States. Most of that money went instead to the investor class all over the world.” (page 16)
“In 1973 the top one percent of earners took in 8 percent of the nation’s total income. By 2006, the top 1 percent got nearly 23 percent of the pie, the highest proportion since 1929.” (page 16)
By 2007, real wages (in today’s dollars) had slid from their peak of $746 per week in 1973 to $612 per week --- an 18 percent drop. Had wages increased along with productivity, the current average real wage for non-supervisory workers would be $1,171 per week --- $60,892 per year instead of today’s average of $31,824.” (page 15)

This is a staggering fantasy. Imagine the lower earning 80% of the workforce earning $60,892 a year per worker. It sounds like the . . . 1950s? When one worker’s income was sufficient to raise a family and purchase a house. Naturally with incomes of a majority of workers almost doubling we are talking about a vastly improved quality of life for the U.S.A.

The distribution of national income between 1976 and 2007 changed markedly. In ‘76 the top 1% of households received less than 9% of income, and in ‘07 they received 23.5%, a gain of 14%. The top 10% took in 33% in ‘76 and 49.7% in ‘07, a gain of 17%. So, 14 % vs 17%; it is obvious what group made the exorbitant gains. (See Saez, 2009 and inequality.org) If today that 17% were re-allocated or redistributed among Leopold’s 94 million nonsupervisory workers (and that figure is debatable), the gain per worker would be over $25,000, somewhat less than Leopold’s $29,000 increase. The general drift though is absolutely clear.

In my opinion, this downward pressure on wages, this invisible hand or drift of poisonous gas, is squeezing the life out of the U.S. and world economy. If one wants to read more go to Low-Wage Capitalism by Fred Goldstein, Laboring Below the Line by Frank Munger, Gloves-off Economy by A Bernhardt et al, and SuperCapitalism by Robert Reich. .

This leads to an obvious solution: a return to a 90% marginal income tax on extremely high incomes as prevailed during the 1940s and 1950s (when the economy made such a stellar performance).

If we accept Eccles’ explanation for the cause of the Great Depression, what then rescued the Great Depression? So often peope say “The New Deal did not solve the Great Depression.” Robert Kuttner points out that the key to turning around the Great Depression were the federal deficits of the 1940s that went as high as 30% of GDP, which is equivalent to deficits of $4.26 trillion annually in 2009. (Kuttner, 2009) In fact, total 2009 government spending --- federal, states and local government --- do not amount to 30% of GDP.

Unemployment in 1938 rose to 18% and then dropped regularly to less than 2% during the war years of 1943, ‘44, and ‘45. Massive federal job programs for the war effort transfered wealth out of idle accounts into war bonds and then into workers’ paychecks. This was a transfer of wealth. Note: the top one percent held 44.2% of all net worth in 1929, 36.4% in 1939, and 27.1% in 1949. (inequality.org/by the numbers) This reinforces my contention that wealth was transfered to the workers. This was combined with very low consumer debt creation (few families were buying anything) and very low consumer production (as products -- bombs, bombers, battleships, destroyers, submarines, etc. -- were created to destroy property). All the same, income and wealth accumulated in the hands of workers working at full employment who for ten years had survived with 17.4% average unemployment and a drop of 29% of GDP from 1929 to 1933.

This is why today we need a federal jobs program, and an increase in the Earned Income Tax Credit, a living wage for the minimum wage, a labor union Employee Free Choice Act, and Individual Development Accounts to abet savings and asset formation among low income families. We need to reduce expenses also in the areas of health, education, and housing through political policy. That would recapture the misappropriated productivity gain and the wage loss.

Our economy generates over $45,000 of value for every human in the nation, yet one of eight families buy food with food coupons, one in six cannot afford medical treatment, and one in three workers are either unemployed, under-employed or working full time for poverty level wages. (NJFAC)

Since 1983 over half the economic gains of the U.S. economy has gone to the top one percent of households. (Wolff, 2001, 23; and Saez, 2009) Wolff states, “My core results are worth repeating: more than half of the gains in wealth from 1983 to 1998 accrued to the top 1 percent of households, and more than 90 percent went to the top 20 percent. The number of millionaires doubled from 1983 to 1998, and the number of deca-millionaires quadrupled, with most of the growth in their ranks occurring after 1989.” Saez repeats in his 2009 report the same in regards to half the gains going to the top 1 percent, and between 2000-2007 65% of the economy’s gain went to this top one percent of households. The top 400 individuals have about the same net worth as the bottom 150,000,000 individuals, half the population.(extremeinequality.org)

Where does a very rich person invest when there are so few real economy growth opportunities? Finance created a gambling house of cards with labrynthian and infinitely scalable wagers, complete with billion dollar annual salaries taxed at 17% and replete with powerful political lobbying muscle. Trillions of taxpayer dollars have been spent resurrecting a financial system that orchestrated its own self-destruction. We can call it Aid to Banks with Dependent Bankers. Obama’s economic team has wasted its resources, and taxpayer money, trying to raise Lazurus from the dead, the dead financial system, instead of putting the unemployed to work. Obama has dedicated insignificant funds to a jobs program.

The financial system deserves a brief analysis in this essay. The financial system has exploded in size over the past decades. In 1970 the debt of financial corporations relative to GDP was 10 percent. Today it is 123%, or it increased by a factor of 12.3. In the same period the total debt of the country --- including debt of all governments, households, non-financial corporations and financial corporations --- increased by a factor of 2.3. Since 1989 financial corporate profits have exceeded non-financial profits. (Dowd, 2009: 123) In the short 7 years, 2000 to 2007, financial corporation debt increased by 81%. (Foster and Magdoff, 2009: 121) This was the era of CDOs and Credit Default Swaps, the topic of Leopold’s book The Looting of America. Today we have elephantiasus of the financial system. The correct size of the financial system and its debt is an open question, but smaller is most likely the best trend at this point. The idea that an unregulated insurance firm like AIG could make good on debts that exceeded the net worth of the entire country was ludicrous, and a serious dereliction - an intentional abandonment - of regulatory authority. Tax payers bought AIG for $263 billion. I’m not sure if the board of directors was replaced, or if its bondholders escaped financial damage. How many teachers, police, or civil servants would $263 billion employ? (Dowd, 2009:136)

I may have some of my facts off in this essay (but I tried to double check them all and provide detailed source citations), and some ideas may sound screwball, like transferring wealth to the low-income households, but I hope I helped to open your eyes to some of our problems that are on-going.

Currently I am reading a great report by Philip Harvey, professor at Rutgers University, titled “Learning from the New Deal.” I downloaded it from http://fullemployment.blogspot.com on December 1, 2009. He does a masterful job of explaining the New Deal’s job programs, and outlines a proposal to implement an annual $552 billion jobs program. That is about 4% of GDP. Jeff Madrick in his book The Case for Big Government advocates a program that invests an annual added 3% of GDP. Joe Persky and the Chicago Political Economy Group advocates a program costing annually $877.5 billion program (6% of GDP). These reports (except Madrick’s) are available at the above web site. I plan to research the various proposals and write a summary essay.

Madrick asserts that this 3% of GDP shift to social benefits would restructure the U.S. economy to resemble other developed nations’ economies. For decades only 13% of the U.S. economy has targeted social benefits, while other nations dedicate between 50% to 100% more of their GDP to these concerns. One can only wonder what would happen to our world if the same energy that fought World War II, when resources built destructive tools to destroy people and civilizations, could be redirected to a similarly selfless attack on social poverties.

Advocating for a jobs program Professor James Galbraith says, “And in a larger economic sense, it would be much cheaper. You’d save the cost of the dole. And you’d get three things out of it -- economic goods that the entire country could enjoy, solutions to some of our most pressing problems, and a working population that would be working, acquiring skills, getting on with life -- and no doubt happier, into the bargain.” (Galbraith, 2009)
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NOTES:

Dowd, Douglas: Inequality and the Global Economic Crisis,
Pluto Press, 2009, New York, NY

extremeinequality.org, and inequality.org, and toomuch.org, and njfac.org

Foster, John Bellamy and Fred Magdoff: The Great Financial Crisis, Causes and Consequences, Monthly Review Press, 2009, New York, NY

Galbraith, James: “Jobs, What Can We Do?” a policy roundtable from the New American Contract Policy Paper, New America Foundation, October 18. 2009)

Kennickell, Arthur: Currents and Undercurrents, 2004, Federal Reserve Bank,
Survey of Consumer Finances

Kuttner, Robert, March 2009, “Surviving the Great Collapse,” International
Herald Tribune, quoted in Dowd, page 262

Leopold, Les, The Looting of America, 2009,Chelsea Green Publishing

Mishel et al: Mishel, Lawrence, Jared Bernstein, Sylvia Allegretto, State of Working America, 2006/2007, Cornell University, 2007,
Cornell University Press, An Economic Policy Institute book,
Ithaca, NY

NJFAC: National Jobs for All Coalition, njfac.org, see web page for Bureau of
Labor Statistics on unemployment

Pollin, Robert: Standard of Living Must Be Raised, Roll Call (on web)
May 18, 2009, distributed at the Sumner Rosen Memorial Lecture,
Columbia University

Wolff, Edward: “Where Has All the Money Gone,” Milken Institute Report,
3rd Quarter, 2001, page

Library of Congress Photo

Bernanke should not be reappointed

Dear Senators Feinstein and Boxer, December 8, 2009

I recommend a No vote for Chairman Bernanke’s
re-appointment.

Did you know that the household wealth in the U.S. has declined by 26% in the
past two years. 2007-2009? It collapsed from $65 trillion to $49 trillion. That involved a lot of retirement accounts and home mortgages. You should know. This comes from a report by the Brookings Insititute derived from the Survey of Consumer Finances, a report of the Federal Reserve Bank. Most of this was financial wealth, fortunately. Millions of families have suffered.

I am drawing from the report “The Wealth of Older Americans and the Subprime Debacle” by Barry Bosworth and Rosanna Smart, Nov. 2009, Brookings Institute, page 33. One can also look to Edward Wolff’s report “The Squeeze Before the Storm” in Pathways, Stanford University Institute on Poverty and Inequality, Fall 2009. Wolff states, “According to my estimates, while mean wealth (in 2007 dollars) fell by 17.3 percent between 2007 and 2009 (to $443,600), median wealth plunged by an astounding 36.1 percent (to $65,400), about the same level as in 1992.” (Page 1) This reduces the private net worth, or the wealth of the nation, from $63 trillion to $52 trillion, in rough numbers. The collapse follows a very rapid asset price bubble resulting from financial corporations’ extremely toxic innovations. Treasury Secretary Paulson and Chairman Bernanke eventually called them “negative frozen assets” --- meaning essentially unsaleable worthless junk. Mean net worth returns to 2002 levels, median returns to 1992 levels which is not much greater than 1983 levels. These two reports differ in markedly, Wolff states 17.3 percent decline, Bosworth and Smart say 26 percent decline.

I suppose what should be noted, and underlined, is that most American families now have 36% less savings than they had two years ago.

The Federal Reserve is charged with two missions, price stability and maximum employment. Bernanke played a failing role in both the charges.

Between 1997 and 2007 the median house sales price increased by 84% above the growth of inflation. And the sales volume of mortgages, 1994 to 2005, increased by 6 times, from $200 billion to over $1,200 billion. (See The Looting of America, Les Leopold, page 116, quoting the Case-Shiller Index and the Flow of Funds Account of the U.S.) Bernanke never warned us, and that’s a major bad mark for him.

This coincided with the spectacular ascendency of CDOs (collateralized debt obligations) and their off-spring CDSs (credit default swaps). The amount of CDSs is unknown but estimates run from $40 trillion to $600 trillion worldwide.
AIG insurance company was said to have insured about $48 trillion of CDSs. How could AIG make good on $48 trillion of bad debts when the entire private net worth of the nation stood at about $50 trillion -- is a question Senators should ask Mr. Bernanke. Greenspan and Bernanke advised against regulating these unregulated insurance “credit default swaps.”

The debt of financial corporations grew astronomically since 2000, by $18 trillion. The composite debt for the nation, including consumer, government and corporate debt grew by $22 billion, from $27 trillion to $49 trillion. This rapid growth in financial “assets” was matched by their rapid decline. (See Professor Jack Rasmus’ essay The Obama Stimulus vs. an Alternative Plan, page 4, at www.kyklosproductions.com, and also in The Great Financial Crisis, Foster and Magdoff, page 121)

Bernanke was at the heart of the Federal Reserve, his record shows bad judgment and regulatory mismanagement is clear. Who else would have and should have known of these unusual anomalous growth figures but the heads of the Federal Reserve? Greenspan gave his “irrational exuberance” speech in 1996, but he failed to act on it. He suppressed interest rates long after the recession of 2001 and asset values went crazy, and look at the result. For one thing today it’s reported that California has 22.5% under- and unemployment. That’s misery for nearly a quarter of the workforce in California, and U6 Unemployment is at 17.5% in the nation. I do not think the worst news has happened yet, we still are hanging by a thread. You know, a record like this does not merit reappointment.

You should run these skeptical facts past some of your economic aids. You should read Les Leopold’s book The Looting of America. It reads like a fascinating dectective novel.

There are economists who saw it all coming. Notably economists who are called neo-Keynsians were sending out reports. The Levy Institute of Bard College, the PERI (Political Economic Research Institute) of University of Massachusetts, Amherst. In California Jack Rasmus, professor of economics at St. Mary’s College in Moraga. At U.C. Berkeley you can find Harvey Shaiken and others. Emmanuel Saez at U.C.B. has reported that the top one percent of households received 23.5% of the national income in 2007, just below the 23.9% they got in 1928. He also reports that the top one percent received 65% of the economic gains 2000-2007. Read that again, and take a deep breath --- 65% went to just one percent of households, the bottom 99% received 35%. (See “Striking It Richer, August, 2009, Update.”) Bernanke’s view of the cause of this recession amounts to a rebuttal to the Keynsian explanation. And he was and is wrong.

Now the Economic Policy Institute in Washington D.C. is advocating for a federal jobs program. The National Jobs for All Coalition has a larger plan to create full employment and eventually a guaranteed job for all. These pro-jobs-program economists are credentialed academics. See http://fullemployment.blogspot.com,
and njfac.org.

I’ll end with a quote from Richard Duncan’s book The Dollar Crisis, 2005. In 2002 the Bank of Japan had been following Bernanke’s advise to expand the monetary supply. “Interest rates are zero and the monetary base is growing at 30% a year. It is a situation that goes far beyond a monetarist’s wildest fantasy. The question is IS IT WORKING? and the answer is: CLEARLY NOT! In his speech, Mr. Hayami [Governor of the Bank of Japan] acknowledged that the Japanese economy remains weak and clearly stated the “it is extremely difficult to revitalize Japan’s economy solely by monetary easing when it faces various structural problems.” In light of the Bank of Japan’s “decisive monetry easing . . . unprecendented in the history of central banking,” that statement should be engraved in all future economic history books as the final nail in the coffin of monetarism. . . . But central banks cannot cure deflation in a post-bubble economy regadless of how decisive their monetary easing. Pushing on a string is a waste of time.”

The problem in the U.S. is a wage cut of 11% combined with a 90% rise in productivity over a 34 year period. “Given the immediate calamity, it is easy to neglect that the crisis for U.S. workers began long before the recession. As of 2007 --- prior to the recession --- the average nonsupervisory worker in the U.S. earned $17.42 an hour. This figure is 11 percent below the 1972 peak of $19.34 per hour (in 2007 dollars). And that is only half the story.
The other half is that average labor productivityy in the United States rose by more than 90 percent over this 34-year period of declining wages. . . . The workers’ reward for producing 90 percent more goods and services in 2007 than 1973 is an 11 percent pay cut.”
(See Robert Pollin, professor of economics at University of Massachusetts, “Standard of Living Must Be Raised, published in Roll Call, May 18, 2009.)

I’m going to include a short essay by Steven Roach, a banker for Morgan Stanley, who heads their Asia office. He advises against Bernanke.
(Readers can google this article titled “The Case Against Bernanke” by Stephen Roach, Chairman of Morgan Stanley Asia, Financial Times, August 25, 2009)

That’s all for today. Thank you. I hope you send this on to economic advisors you rely on, and have them weigh some of these arguments.

Yours,

see my blog, http://benL8.blogspot.com

Sparks Lake