Foreign Derivative Swaps

This is my first reform effort for the financial industry. I think it's thought provoking. The Americans for Financial Reform (dot org)posted a letter to the same committee stating a similar argument. I'll try to remember to link to it soon. The final concept here is that
finance has not contributed to prosperity, it has diverted our attention. It should be much smaller. The book The Great Financial Crisis is a good source of info that I should review (and I'm writing to myself, as usual). Written around May 12, 2011

To the U.S. Treasury,

Re: Regulations on international “swaps” and the exemptions rule.

This is my suggestion.

You are about to exempt international “swaps” from regulations in the Dodd-Frank Commodity Exchange Act. I object.

I surmise from my reading that the financial system is much too large, and the U.S. Treasury should do its utmost to reduce its size. I gathered the following facts from the book Epic Recession by Jack Rasmus, a professor at St. Mary’s College in northern California. He was commenting on the growth of debt in the U.S. since 1978, and he drew from Federal Reserve’s Flow of Funds Report, Q1 2009.
Total U.S. Debt, 1978 to 2008:
Government debt up 8.0 times (all are ‘78 to ‘08),
Total Consumer Debt (including mortgages) up 10.3 times,
Non-Financial Corp. debt up 9.4 times,
Financial Corp debt up 47.0 times. Financial corporate debt jumped from $412 billion in 1978 to $19.5 Trillion in 2008 — Federal Reserve Flow of Funds.
As Marshall Auerback wrote at New Deal 2.0 in May 14, 2011, “The whole boom of the last 25 years was predicated on financial deregulation, massive fraud, and a huge build up of private debt as a consequence of inadequate fiscal policy to generate full employment and rising incomes.”

I commented, “The huge increase in financial corporate debt had no matching component in real world investment. There were relatively few projects to fund, as the figures prove. But there were corporate mergers and buyouts, and CDO securitization and credit default swaps and financial engineering. Real financial intermediation which is the true function of finance and credit was replaced by financial engineering, and often that resembled gambling more than investing. How else can you explain the numbers that increased financial corporation debt by a factor of 47? Financial corporations’ profit as a portion of all corporate profit also grew, Our financial system has yet to resolve the “frozen negative assets” (a phrase ‘coined’ by H. Paulsen and B. Bernanke) that they hold, and housing prices are expected to decline another 15%. The losses must be faced and absorbed privately, not transferred to the public. Then we need an economy modeled on growth that serves the majority of citizens. “Mark to fantasy” has replaced Mark to Market. “Extend and pretend” is the new banking norm. Banks own over 60% of U.S. home equity since the recession stripped value from mortgage holders. But the book value which the banks show does not reflect the true, reduced value of these housing assets. As Auerback claims, the banks are still bankrupt.”

Another book that makes a similar argument is The Great Financial Crisis by Foster and Magdoff, two socialists. On page 20 they display a graph that shows from 1959 to 2007 two measures, “Debt as percentage of GDP” and “Total goods production as percentage of GDP”. From an index of where both items begin at 100 in 1959 the Debt figure rises to 250, the Total Goods figure falls to 65. “The search by capital for profitable outlets for its surplus despite the stagnation of investment opportunities within production, coupled with the belief that asset prices as a whole went only one way -- up --, generated a secular financial explosion.” But, they conclude with Karl Marx, “The real barrier of capitalist production is capital itself.”

Using the findings of another report we see much the same trend.
Thomas Palley (Financialization: What It Is, Why It Matters, PERI, U.Mass/Amherst, 2007) shows that financial corporation profits as a percentage of all corporate profits grew from 20% to 43% between 1973 to 2005 (Palley, page 37). Financial corporation debt as a percentage of GDP grew, 1973 to 2007, from 9.7% to 31.5%, increasing by a factor of 2.4 times (Palley, page 38) . Non-financial corporate debt decreased from 90.3% of GDP to 68.5% (Palley). Mortgage debt, 1973 to 2005 increased from 48.7% of GDP to 97.5% (Palley).

Palley's findings show a rapid growth of financial corporation debt (by a factor of 2.4), but not as rapid as the findings reported by Rasmus or by Magdoff and Yates (showing an increase by a factor of 6) in The ABCs of the Economic Crisis, page 77. The Magdoff and Yates figures align with the Rasmus figures. Perhaps Palley's definition of a financial corporation was more restricted, not including the 'shadow' banking corporations. (See also Palley's 2009 paper, America's Exhausted Growth Paradigm: Macroeconomic Causes of the Great Recession, for more analysis along this line.)

So, why ?, I ask myself, is the Treasury exempting “swaps” from regulation?

My suggestion comes from another book, The Keynes Solution by Paul Davidson. He proposes an International Monetary Clearing Union (IMCU). “All international payments, whether for imports or financial funds crossing national borders, would go through this clearing union.” (page 136) You can read the rest of the chapter for yourself. But I’ll shortly quote his three objectives:
1. Prevent a lack of global effective market demand for the products of industry from occurring due to liquidity problems whenever any nation holds excessive idle reserves by saving too much of its internationally earned income. . . .
2. Provide an automatic mechanism for placing a major burden of correcting international trade imbalances on the nation running persistent export surpluses.
3. Provide each nation with the ability to monitor and, if desired, to control movements out of the nation of:
a. Financial funds ... moved .. to avoid paying taxes on such funds.
b. Earnings from illegal activities leaving the nation.
c. Funds that cross borders to finance terrorist operations.

I want to remind you of a few uncomfortable facts: since Nov. 2009 one in four children in the U.S. get their food by way of food stamps, and now it is about 29% of all children, one in seven of all citizens, over 44 million. 24.1% of all households have “zero or negative” wealth or savings, probably almost one in three have less than $5,000. Our nation produces a GDP/capita of over $47,000. We have tremendous inequality. The top one percent now own 225 times more than the median household, an all time high. The median household has just lost over $40,000 (or 40%) in savings. (These figures come from Sylvia Allegretto’s report State of Working America, Wealth, published by Economic Policy Institute, March 2011.)

Inequality is widening, opportunities are shrinking, precarious security is infecting more and more. Various forces could tip the balance in catastrophic ways, which would really be tragic (food prices, gas prices, housing prices, more unemployment, disruptions). The people at the Treasury should have a bigger outlook than what I presently see. They seem to be protecting the private holders of financial assets, the status quo, the wealthiest people on the face of the earth who themselves created a monumental mess. The arrogance of the mighty creates suffering for those who did least to create the problem.

In addition to Foster and Magdoff, and Paul Davidson, and Sylvia Allegretto, I recommend you read the facts at inequality.org, see the side-bar links to income and wealth inequality. I also have a blog, http://benL8.blogspot.com, in Feb. 2011 I posted a 6 point program. Raise wages, increase minimum wage, increase EITC, create public jobs, impose tariffs and quotas, emplace a values added tax on multi-national corporation’s imports. I just collected ideas from scholars and writers, it’s not my own creation. I will add a 7th proposal, drawing from Rep. Jan Schakowsky’s deficit reduction plan, eliminate the interest payment deduction enjoyed by financial corporations, a savings of $77 billion a year. Raise capital gains tax to normal marginal tax levels, and if sold before 12 months raise that rate to 70%.

Lawrence Mitchell wrote The Speculation Economy, a financial history centered around the 1900s when the stock market began to overshadow productive industry. Perhaps it is time to reel-in speculation. The world lost between 2007-2009 about $35 trillion (17% of all value) because incentives were poisonous, incentives that U.S. government officials nurtured. It’s time to think deeply.

I hope this gives you a glimpse of a new world of prosperity, justice, endeavor, and growing enjoyment of life. We should all be working less, doing art, visiting friends, but not worrying that the foundation is about to crack and sink into the Ocean of Chaos. The German worker works 9 weeks less per year, the Gini level in Germany is 25, not the 41 in the U.S. Time to humanize the system.

Yours, Ben Leet, I live in San Leandro, CA, May 12, 2011
I am a retired public school teacher, not an economist.

Why the Economy Must Have Public Jobs
or Suffer a Lengthy Slump

--------The Problem-----
One in four American children get their food by way of food stamps, and among the total population one in seven or over 44 million Americans. In fact, the use of food stamps has increased by over 30% since the official end of the recession in July 2009. The rate of children getting food from charity coupons is approaching one in three. Yet, on the other hand, our economy creates over $47,000 of value each year per person. We are a very wealthy nation. These two snapshots provide a concise picture of an economy with extreme inequality. This inequality threatens our core values of personal opportunity, and it threatens the overall prosperity of our country. We are all victims of this inequality, and the economy performs far below its potential.

As the economy shrunk since January 2008, so did government revenues from taxes. Some say the government services must shrink. “We have a spending problem, not a revenue problem,” is heard. “We don’t need new taxes, we need to cut our spending.” I disagree. The problem lies in the greater economy that is shrinking because of inequality. If we attack unemployment and inequality we can have an economy that self-expands and a government that expands in tandem. To simplify my position, “Create public jobs and raise wages.” We need a spending solution.

Today if the nation embraced public job creation and made the political choice to add between 8 to 18 million more public workers, the economy would create a self-sustaining expansion, which is one way of saying “Recovery.” The purchasing power of those additional workers would inspire private employers to add more non-supervisory workers, also known as employees. This is Robin Hood economics, we “steal” from the rich to create jobs for the poor, and the economy recovers its ability to self-sustain employment and expand. Those who insist that we have a spending problem, not a revenue problem, are wrong. We have a problem with the greater economy to self-sustain.

The perfect illustration is that ten years ago, in December, 2000, there were more private sector jobs than there are today. Between 1980 and 2000 38 million private sector jobs were added to the economy; between 2000 and 2010 7 million jobs were lost. The economy has shrunk in terms of private jobs since 2000 when there were 110 million private sector jobs; today we have less than 105 million private sector jobs. So we have a ditch out of which to dig. Maybe in five, ten, or twenty years the economy by its own power will self-motivate and resume hiring and restore former employment levels --- or we could jump start it with public jobs.

There is total confusion about government spending in Congress. The Speaker of the House, John Boehner, gives speeches about cutting trillions, not billions, from the budget. He erroneously states that the “wealthy” do not have enough money to balance the budget, so thoughts of raising their taxes are futile. Wrong. The top one percent of households, as he probably knows, own 35.6% of all private property, are worth about $20 trillion, much more than $1.4 trillion needed to close the budget shortfall. The wealth of the top 10% exceeds $38 trillion, 75% of the total. (The bottom 4/5ths of U.S. households own only 12% of the nation’s wealth.) Boehner and his allies threaten to close down the government by refusing to raise taxes or the debt ceiling. These are rhetorical flourishes that just add hysteria and confusion to the atmosphere.

In 1933 Franklin Roosevelt faced a nationwide “bank holiday” -- which is a euphemism for total financial system collapse -- in the first days of his administration, the economy was on the brink of freezing up. John Maynard Keynes published an open letter in the New York Times in which he advised the President to seek recovery before he sought reform. And the method to achieve recovery was by massive government spending to re-employ the unemployed. Keynes advised, “Broadly speaking, therefore, an increase of output cannot occur unless by the operation of one or other of three factors. Individuals must be induced to spend more out of their existing incomes; or the business world must be induced, either by increased confidence in the prospects or by a lower rate of interest, to create additional current incomes in the hands of their employees...; or public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money... It is, therefore, only from the third factor that we can expect the initial major impulse.”

Roosevelt took this advice, he created the Civil Works Administration that lasted only five months but, creating 4 million jobs, is to date the largest government public employment project in our nation’s history. And then he created the Works Progress Administration (WPA) and the Public Works Administration (PWA).

This is how the nation recovered from the Great Depression. Marshall Auerback, writing in New Deal 2.0, claims (and he is seconded by Paul Davidson, prolific Keynesian scholar and author of The Keynes Solution, and by Jeff Madrick, editor of Challenge Magazine, writing in his deficit reduction report for Campaign for America’s Future, January 2011) that between 1933 and 1937 the unemployment rate decreased from 25% to 9.6%. Prematurely in 1938 Roosevelt drastically reduced government spending on jobs creation, and unemployment shot up to 13%, so he reapplied his previous policy. Again between 1939 to 1946 the federal government spent like a nation at war, creating public jobs, and unemployment dropped from 13% in 1938 to below 2% for three consecutive years during the war, 1943, 1944, and 1945. Afterwards the result was an economic expansion unheard of before. It worked. This is not socialist history, it is the history of the most productive period of economic growth in American history, bar none.
It’s a case study in a “spending solution” not a “cut spending solution.”

After hiring millions and reducing the rate of unemployment to below 2%, the national distribution of personal income held steady for about 40 years. Distribution for the years 1940 to 1980 restrained the amount received by the top 10% of households to under 35% of all personal income. Marginal tax rates in the highest brackets, that is taxes on income over and above a very high level, exceeded 90%. That lasted until 1980, when high bracket marginal tax rates dropped dramatically, and when the share of the top earning households grew and grew, and recently, 2007, the top 10% received 49.7% of all pre-tax income, in 2007 the top one percent received 23.5%, nearly 1 or every 4 dollars of income.

As a nation we can now sadly boast of having the worst, most unequal distribution of income among advanced nations. And to match that achievement, we do the worst job of transferring income to those who are in need. Chuck Marr at the Center for Budget and Policy Priorities recently reported that an OECD report “shows that the disparity in income [inequality] in the United States is more pronounced than any other country (squeaking past Poland). At the same time, U.S. tax and spending policy [social transfers] (i.e., the whole budget) does less to diminish this inequality than the policies in any other country in the OECD except South Korea.” We have the most inequality, we do the least to reduce it. Quite a record! Robin Hood had a good idea. In France, before social transfers, their childhood poverty is approximately the same as the U.S. rate, 27%. After transfers they reduce childhood poverty to 7%, we reduce it to 20%, which is about double the average in Europe.

The value of our economy, the GDP, divided equally among children, adults, and retired elders, is over $47,000 a year per person. A family of four could have an income of $186,000. Divided equally among all workers it comes to $100,000 a year. Yet more than half of U.S. workers earn less than $29,775 a year, according to the U.S.Census. The bottom 40% of households own a mere 0.03% of all private savings.

The Republicans argue that the wealthy need more money (tax cuts) to create more jobs. It didn’t work out that way 2000 to 2007, despite the enormous tax cuts to the wealthy afforded by the Bush administration and the Republican dominated Congress. Those years were called the “jobless recovery.” The top one percent, according to U.C. Berkeley economics professor Emmanuel Saez, took in two-thirds of the economic gain of that period.

Marriner Eccles, the Chairman of the Federal Reserve during the Great Depression described in 1951 the causes of the Depression in these words:

"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. [Emphasis in original.]

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. . . . Had there been a better distribution of the current income from the national product -- in other words, had there been less savings by business and the higher-income groups and more income in the lower groups -- we should have had far greater stability in our economy.”

President Kennedy described the economy in nautical terms, “A rising tide lifts all boats.” That was when we had a balanced income distribution. This apt description was to be replaced in the 1980s with “When there is more for me, there is less for you.” The top one percent of households now earns more pre-tax income than the combined income of the bottom sixty percent. Soon it will be the case that Scrooge McDuck, or Daddy Warbucks, or whoever, will own everything once and for all, and we’ll be living in feudal times again, the Dark Ages will have returned. (I have my own hysterical flourishes too, if you don’t mind.)

_________________________________________________________________

-----The Solution-----
Unfortunately, we as a society do not believe in public job creation for the purpose of balancing income distribution and repairing the economy.

Demos, a left-leaning political advocacy group, published recently a proposal “Back to Work, A Pubic Jobs Proposal for Economic Recovery” by Rutgers University professor Philip Harvey. For a net cost of $162 billion a year this plan would create 8 million new jobs, at a cost of $20,226 per new job.

Compare that cost with the cost of the Great Recession. After the financial system collapsed $11 trillion, or 17% of the nation’s private wealth evaporated, the typical or median household savings dropped from $109,000 to $65,000, a 40% drop to levels below the 1983 level.

Compare the cost of Harvey’s program with other big ticket costs to tax payers.
Economists Mark Zandi and Alan Blinder state the entire cost to the public of just the financial system bailout will be approximately $1.6 trillion, ten times the yearly cost of the Harvey proposal. Other government expenses:
--$2.5 trillion over ten years for the Bush tax cuts benefiting the wealthy
--$700 billion to bailout the too-big-to-fail banks
--$152 billion for the Bush stimulus of 2008
--$787 billion for the Obama stimulus in 2009
--$800 billion for the tax compromise of December 2010
--$150 billion to bailout AGI insurance company
---$70 billion, the replacement cost of the trident missile submarine fleet
--$664 billion, the yearly military budget costs
-- $1.2 trillion, the actual but unofficial cost of the military

Additional social costs are not included in the cost of the debacle: the cost of 10 million (or 22% of all) home mortgage foreclosures over a six year period, resulting in family and community disruption, the cost in terms of severe unemployment in the private sector, the costs to local and state government resulting in government employee (police, fire, education) unemployment --- none are included in the $1.6 trillion estimate of just bailing out the banks and other financial corporations who after self-destructing still managed to make enormous profits.

We should ask, where’s the money for workers? The bailout left 17% of the workforce in the lurch --- unemployed. If we spent $162 billion on public jobs each year, a minute fraction of the cost and damage caused by the financial system collapse, 8 million new workers would contribute to the economy, pay taxes, enjoy a steady income with security and predictability. And most importantly the private sector could regain its usual hiring practices and achieve a self-sustaining expansion. Then the misery would begin to end.

There are other proposals fully developed and painstakingly thought out to create public jobs. These jobs could be targeted to create a solar/wind renewable-energy based system for the nation’s electricity grid and transportation system -- both enormous projects; and this would reduce our foreign oil dependency, improve our trade deficit and improve our national security resulting in lower military expenses. Public workers could insulate the nation’s homes and government buildings, renew our decrepit infrastructure, and improve and enhance our childcare services, and enlarge the number of home health-care providers for the elderly.

We suffer from a failure to analyze and execute. It’s time to lift a page from our historical past. “Happy Days” would be here again if we could break through the barrier that prohibits direct government created jobs as an economic remedy when the private sector is not up to the task.

Overall Effective Tax Rate, and Why Public Jobs

I read from Paul Davidson’s 2009 book The Keynes Solution this morning, April 15,2011. It has to be one of the best economics books ever written for a general audience. I am posting two little essays in the spirit of simplicity. The first was inspired by the debate around President Obama’s speech in which he concedes the need to cut spending, but offers very little in terms of solution. And the second deals with my perspective on taxes, and general information everyone should have about our system. B.L.



Why the Economy Must Have Public Jobs
or Suffer a Lengthy Slump

Essentially, since 2007 the economy has lost about 10% of its workers, and it's difficult to re-employ all those people. --- If you look at the employment as a percentage of population (EPOP) rate, which includes the number who have dropped out of the labor market, and combine it with the increased rate of unemployment, about 15 million workers have been lost. I don't like to guess on a blog like this, but it's in that neighborhood. It is unfortunate that this data is not easier to access. But, the exact number is large, and "exact" is not necessary for us to know in this essay. ---- An economy only produces what people will buy, that's an iron law, and now an additional 10% have stopped buying. Private sector employment employs about 5% fewer workers than in 1999, eleven years ago, a drop from 110 million to about 105 million. Total unemployment is down between 15 to 20% depending. Moreover wages for non-supervisory workers (80% of the workforce) are artificially low, they don't reflect the value of their labor input. Their share of the nation's personal income --- income going to the bottom 80% of households due to labor --- is only 28.6%, as I've mentioned before. We have almost one in three working adults either unemployed, under-employed or working full-time and year-round for below poverty level wages. Add it all up, we have very low consumer purchasing power, also called aggregate demand. Wages have to be increased and jobs need to be created. We must look to government to intervene, the private enterprise of the nation's economy is not performing. Nor will it ever adequately perform, that's why we have minimum wage standards and the Earned Income Tax Credit -- all of which I've written about. Re-employment will indicate recovery and that will occur slowly by 2018 or 2028 or perhaps never, let's be realistic. My perennial thesis --- and the subject of Philip Harvey's paper published at Demos, "Back to Work, A Public Jobs Proposal for Economic Recovery" --- is to create public jobs. The proven method to accelerate re-employment is direct government employment. Nothing else will create much change -- not by cutting the government spending (the Republican position), not by defending social programs (the Democratic position) -- neither will work.

The only quick way to afford to pay for all the "level of life-style security", including "social security", "income security", Medicaid and Medicare, and "military defense security" is to employ all those up to 20% who are not working. As I noted, private industry is employing 5% fewer workers than 10 years ago, according to Hughes and Seneca at Rutgers University writing in July 2010. (See hyperlink above) Four years ago people were spending borrowed money. Then the credit collapsed, finance self-destructed literally, and the workers were fired. The credit collapsed because 1. people were gaming the system for phantom profits, and 2. because we do not pay most people properly. Our economy generates $46,000 per year per human being, children and elders included, yet half the workers earn less than $30,000 a year! ($29,755 or $26,261 according to the U.S. Census or Harold Meyerson in the American Prospect, January, 2011.)

Our income distribution is non-functional, 1% of families' incomes is larger than the combined incomes of 60%, the rich take too big a share of the entire personal income pie. The bottom 80% only receive 28.6% of the income pie from their labor (State of Working America, 2006-2007, page 79), therefore they borrow beyond their means to buy the stuff they themselves make. The top one percent take 21% of all income (Sylvia Allegretto, The State of Working America's Wealth, April 2011, Economic Policy Institute) while in 1980 their share was below ९%.

Our economy is incapable of employing everyone because we do not pay the 80% who are employees (non-supervisory workers) the portion they must have -- and therefore the majority of the people cannot afford to buy the services and goods they produce. This is the explanation Marriner Eccles, the Chairman of the Federal Reserve 1934 - 1948, gave to explain the cause of the Great Depression. He said that when the losers in a poker game exhaust their credit, the game is over. When the structural shape of income distribution is so bad, government must create the missing purchasing power, it does so by hiring millions. Marshall Auerback claims (and he is seconded by Paul Davidson, author of The Keynes Solution and prolific Keynesian scholar, and by Jeff Madrick in his deficit reduction report for Campaign for America’s Future, January 2011) that between 1933 and 1937 the unemployment rate decreased from 25% to 9.6%. Roosevelt drastically reduced government spending on jobs creation in 1938 and the unemployment shot up to 13%, so he reapplied his previous policy. Again between 1939 to 1946 the federal government spent like a drunken sailor, and unemployment dropped from 13% in 1938 to below 2% for three years during the war, 1943, 1944, and 1945. Afterwards the result was an economic expansion unheard of before. It worked.

Today we need to add about 8 to 18 million more workers at $40,000 to $60,000 per job, and that would cost between $320 billion to $1 trillion spread it over a 5 year period. (I calculated from Philip Harvey's proposal and came up with an astounding figure: it would cost $171 billion a year to re-employ 8 million workers. The bailout for AGI insurance came to $150 billion. But we don't have the money for workers? Harvey cites a paper by two prominent economists who estimate the entire cost of the bailout will cost the public $1.6 trillion. But that still leaves 20% unemployed. Couldn't we spend $171 billion just to employ our own citizens who are in desperate need? I have to write more about this.) Many economists today have detailed plans to accomplish what I've been talking about, see my essay of February 2011 at this blog. We suffer from a failure to analyze and execute. You will not understand all that I've said because it takes more background than I have described, but there you have it. It's time to brush up on my copy of The Keynes Solution.




The Overall Tax Rate

We all pay taxes to the federal, the state and local governments. Did you ever wonder what the actual rate was when you put them all together? To find out the effective overall tax rate for different income levels -- what the top earners pay and everyone else pays when you count up all taxes to all governments -- visit Citizens for Tax Justice and enter "burdensome" in their search window. You'll discover that the top 1% of earners, who make over $450,000 a year and
own about $14 million on average, but can make as much as $1 billion in a year or own as much as $50 billion -- they pay 30.9% in total on their yearly incomes. The bottom 80% of households pays 24.5% on average.

We face budget shortfalls for all governments. It's time to raise the effective rate on the richest The nominal rate in 1950 to 1960 was 91%, while today it's 35%. Congresswoman Jan Schakowsky proposes to raise the highest bracket to 49%. The top one percent own $20 trillion in savings (35% of everything private), and the top 10% own over $38 trillion (70% of everything). When you consider that the top one percent have yearly incomes approximately equal to the combined amount of the bottom 60% of households, and that the ratio between the median income and the top one percent has never been higher, it is 1 to 225 (Sylvia Allegretto writing in State of Working America, Wealth, April 2011, Economic Policy Institute) you sense that they should carry more of the tax burden than they do. (Visit U.C. Berkeley professor Emmanuel Saez' site and look at "Striking It Richer" for details about income distribution.) You also sense that wages and salaries for the bottom 80% of households should be higher. The lower 80% of households only earn 28.2% of all the nation’s income through their labor. (Source: Brookings/Urban Institute report published in State of Working America, 2006-2007, page 79, Income Sources and Distribution)

But more than this, we need to create jobs with our tax dollars, yes, a direct job creation
program just as in the 1930s. The nation needs much work done in infrastructure, building insulation, green energy projects, childcare, and other unfunded projects. Those jobs are very affordable with proper taxation, and we could repair the entire economy so everyone would be working and the need for public jobs would be diminished, perhaps eliminated. This happened after World War II, after public jobs decreased the unemployment rate to below 2% for 1943, 1944, and 1945.

See National Jobs for All Coalition and their program Drive for Decent Jobs; Demos, Campaign for America's Future, the American Prospect, Political Economic Research Institute at Univ. Massacusetts Amherst, the Economic Policy Institute; and various economists such as Dean Baker, Robert Pollin, Robert Kuttner, Philip Harvey, that promote such a federal jobs creation plan. Congresswoman Jan Schakowsky advocates this. See http://fullemployment.blogspot.com and inequality.org, and connect with this information campaign: the Institute for Policy Studies, and their program Inequality and the Common Good.
And then you can feel patriotic again.

by Ben Leet, http://benL8.blogspot.com

Create Public Jobs

CREATE PUBLIC JOBS
and RAISE TAXES ON THE RICH

Send this letter to your elected representative, mayor, city council member, state legislator:

Dear Congress Member, or Senator, March 29, 2011

Illinois Congresswoman Jan Schakowsky has presented a bill to raise taxes on extremely high incomes, incomes over $450,000 a year, the top one percent. That is, 99% of Americans are unaffected with higher taxes. (You can learn more about it at http://www.faireconomy.org or at her web page.) Schakowsky sat on Obama’s deficit reduction commission; she brought forward an alternative plan that would cut $400 billion from the federal budget and also provide $200 for a public jobs program. The Bush Recession left the federal budget with an immense hole, the job market reeling, the housing market and construction industry in misery, while the worst offender, the financial system, self-destructed.

Please support, co-sign, and PUBLICIZE this bill. The Republican message is to "Cut taxes and cut government spending." Will the Democrats support an alternative?

You know, Rep. ____________, your constituents deserve to know that the most wealthy 400 Americans (the Forbes 400) own more property than the least wealthy half of Americans, 155,000,000 Americans, and that the bottom 40% of families or households own a mere 0.3% of the nation's private assets and on average these households have savings of less than $2,200 (according to Edward Wolff at the Levy Economics Institute, writing March 2010). He concludes that the least wealthy 24.1% (76 million Americans in the world's wealthiest nation) have no savings at all --- despite the fact that our economy creates $46,000 of value per human being and over $125,000 per household each and every year.

The top one percent earn more income than the bottom 60% (each group earns approximately 20% of the nation's income). This sounds incredible but it is supported by numerous scholars, and repeated by many economists. See the report “Striking It Richer” by U.C. Berkeley economist Emmanuel Saez (available on the Internet). While a small minority do very well, one of every seven Americans eats food purchased with food stamps (over 45 million Americans) and one in four children since November of 2009. Our income distribution does not match our ideals, it resembles the ratios of many failed nations.

There are fewer private sector jobs today than 10 years ago, about 4.8% fewer, according to Professors Hughes and Seneca at Rutgers University, July 2010. From 1980 to 2000 the economy added 38 million private sector jobs, only to shrink by 5 million during 2000 to 2010. How can we use the word “recovery” when 25 million adults are idle and our industrial capacity is 72% utilized?

Only 1 in 2 workers (half the workforce) has a full-time full-year job paying above the poverty level; the other half are either out of work but looking (9%), working part-time (32%), or working full-time full-year for below poverty wages (10%) -- See njfac.org for confirmation on these figures. Yet again our economy generates over $46,000 per person or over $125,000 per household.

How is it possible to have poverty in such a wealthy nation? Under these conditions poverty is possible only by a stunning mismanagement of the economy by the government. We should create jobs, raise wages, raise the Earned Income Tax Credit, and tax the wealthiest who have more money than they can use productively. Banks and corporations are sitting on a Himalayan hoard of cash. Private wealth has no productive outlet as consumer demand has been crushed. Government should create jobs as it did successfully between the years 1933 and 1936 when the unemployment rate fell from 25% to under 10% (according to Marshall Auerback writing for New Deal 2.0, 9.21.10 and 8.30.10). He concludes, “the Roosevelt administration reduced unemployment from 25 per cent in 1933 to 9.6% per cent in 1936.” It rose up to 13 per cent in 1938, but then again government job creation further pushed down unemployment to below 2% during the war years 1943, ‘44, and ‘45. Following this period we continued with very high taxation on extremely high incomes, a rate of between 70% and 90% for forty years plus (1938 to 1984) on very high incomes. Extraordinary prosperity and growth resulted. The wealthiest 10% never in 40 years received more than 35% of the nation’s income, but now they receive around 50%. This program I suggest is not socialism, it is the American record of the most prosperous economic growth in American history.

The wealthiest 1% of households, about 1.2 million households, earn on average $1.3 million a year and own on average $18 million in savings; the sum of their wealth exceeds $20 trillion or 37% of all private wealth. With the extra tax revenue from Rep. Schakowsky’s plan we could create a massive public jobs program as advocated by the Economic Policy Institute, the Chicago Political Economy Group, National Jobs for All Coalition, economists Dean Baker, Robert Pollin, Robert Kuttner, Phillip Harvey, Senator Bernie Sanders and many others.

I suggest you use numbers when you explain to your constituents, just saying "unequal" hardly conveys the gravity and extent of inequality. A consequence of ignorance is that voters vote against you and other progressives. Any person in his right mind knows that one person out of 100 does not do the work of 60, and CEOs do not do the work of 300. Support the Schakowsky plan and her deficit reduction plan as well. Thank you for reading. You can contact me here:

Thanks. Ben Leet http://benL8.blogspot.com -- 3.30.11

Could We Double the Median Income?

Could We Double the Typical Income?

The answer is “Yes”, and it’s not magic. We could simply increase the income tax on extremely high incomes and then redistribute it to lower incomes. Let’s suppose one group is earning 28.2% of all the nation’s income, and systematically we transfer to them another 14%, increasing to 42.8% their total income portion. That would increase by 50% their yearly earnings. That is not doubling, but it’s a good start. The lower 80% of families in 2006 received through salaries and wages 28.2% of the nation’s income (according to the Tax Policy Center of the Brookings/Urban Institute, quoted page 79 in State of Working America, 2006/2007). If the one percent of households who received 23.5% of the nation's pre-tax income in 2007 were to receive 9%, a drop of 14%, then they would be back to their 1976 level. Returning back to 1976 does not seem too radical an idea. So realizing this ‘transfer’ is one method of substantially raising non-supervisory workers’ incomes. Though it does not double their incomes.

If the determined reader wants to read a real scholarly report superior to this report I suggest the Chicago Political Economy Group’s paper “Toward a New Political Economy” January 2010. But to continue . . .

The rich will detest the idea, of course, but they are a minority in a democracy. Research shows that the top one percent has captured 56 percent of the economy’s growth in the 20 years leading to the Great Recession. (See "Striking It Richer") It is time they give some of it back. Our U.S. economy generates about $46,000 per person per year, yet strangely many, many families are very insecure. One in seven eat food purchased with food stamps, over 44 million citizens, and one in four children get their food from food stamps. To qualify for stamps one must have less than $2,000 in savings. Obviously there is something awry with the entire economy.

TAX RATES
For 13 years during the 1950s and a little beyond, the top tax rate was 91% on incomes over $3 million (in 2009 dollars); for 45 years, 1936 to 1981, the top rate averaged 78% on incomes ranging between over $750,000 to over $3,500,000 depending on the year. To double the typical worker’s income today, which is $26,261, would require increasing the top marginal income tax rate to 78% on incomes over $450,000.

The typical U.S. worker, including (32%) part-time and (68%) full-time workers, receives $26,261 per year income; typical full-time workers receive $40,000, and households typically receive around $50,000. These typical or median incomes could be 50% higher simply by restoring the income distribution of 1976.

Between 1940 and 1980 the incomes of top ten percent of households never exceeded 35% of the total national income. In 2007 they received 49.7%, according to U.C. Berkeley Professor Emmanuel Saez' report "Striking It Richer". Very likely it is very damaging to the society and the economy to have such one-sided distribution, at least Marriner Eccles, the Chairman of the Federal Reserve from 1934 to 1948, the period of the Great Depression, argued as much in his auto-biography of 1951, Beckoning Horizons.

Productivity vs. Wages
Or, a second way to approach this problem is to conjecture that if workers’ wages had equaled rising productivity rates since 1973 then typical incomes would be double their present day amounts cited above. Our U.S. society would be another world. Could we double the typical income? Maybe, but we could easily restore the previous decades’ distribution ratio, and increase incomes by 50%: to $39,391, $60,000 and $75,000 respectively. Let’s look at doubling it. That would move the “typical” to $52,000 for individuals, $80,000 for full-time workers, and $100,000 for families:
Professor Robert Pollin, writing in the Boston Review, states that
“The drop in average wages since 1973 suggests the seriousness of this problem. In 2009 the average non-supervisory worker in the United States earned $18.62 an hour (in 2009 dollars)—7 percent below the 1972 peak of $20.20 per hour (also in 2009 dollars). But this is only half the story. While wages fell, average labor productivity in the United States rose by 105 percent. In exchange for being twice as productive as they were in 1972, American workers took a 7 percent pay cut.”

In fairness, Lawrence Mishel recently writing somewhere states that the productivity rate increased by 80% not 105%. Do we really care? It all went to a few select people.

Squeezed family incomes
Much of our nation’s social problems derive from squeezed family budgets, some being extremely squeezed. It’s little known that the bottom 40% of households have on average less than $2,200 in savings (see page 33). Their budgets are squeezed. It does not have to be that way. Another, statistic shows that between 1950 and 1984 the personal savings rate averaged around 9%. It sank to below zero in 2007, and has been well below 4% since 1998. (This is a marvelous link to see all the inequality numbers.) After the Great Recession, 2007 - 2009, the median household wealth amount dropped to 1983 levels, to $65,400 from $102,000. (Much of these data come from Edward Wolff’s report of March 2010 writing for the Levy Economics Institute, available on the Internet.)

Less than $3 out of every $10 dollars (28.2%) that we generate, the economy generates, goes into the wages and salaries of the lower earning 80% of households deriving from their work. We could raise wages politically, it does not take the “free market” to do it, and see my previous essay to see “how”. Or see the report by the Chicago Political Economy Group.

I am going to repeat the first paragraph again: In 1976 the top one percent received less than 9% of the nation’s income, in 2007 it received over 23%. This almost 15% shift, if added to the 28.2%, would bring to about 43% the amount going to the bottom 80% due to labor, and to 65% in total national income. The top 20% would receive not 60% but 35% of all income. This shift would jump the typical income from $26,261 to $39,391, and full-time workers would earn $60,000 typically, and households would receive $75,000, not $50,000.

DOUBLING INCOMES ?
But to double incomes, we have to re-configure economic history, and match productivity gains with wages. It is sort of a fantasy, but a productive fantasy, I hope. I don’t think it’s that far-fetched; the average worker generates over $100,000 of value, and that includes the 32% of all workers who are part-time workers. Our GDP is over $14 trillion, and when divided by the labor force’s 140 million active workers, they on average generate $100,000 per worker. Doubling the median worker’s income raises it to $52,500, well under $100,000 and still leaving plenty for owners’ income, capital gains income and “other” which are mostly pension incomes.

This quote comes from Economics for the Rest of Us page 113 by Moshe Adler (2010, thenewpress.com):
“In 2007, U.S. workers produced $95,000 worth of goods and services per worker. [he cites a BEA web page] If each of them, whether CEO or worker on the shop floor, whether in the financial industry or in agriculture, earned this wage, all families could live not only well but also in affluence. But this is, of course, not the case. Nationwide, 25 percent of workers earn wages that with full-time work put them below the poverty line. [He cites State of Working America, 2006/2007] In New York City, 24 percent of retail workers must rely on some form of welfare payments while they are working full-time. What workers do not get, executives do. In 2007, average CEO compensation for S&P 500 CEOs was $10.5 million, 344 times the pay of the average worker.

We have to discover ways to balance our dysfunctional income distribution ratio. I say “dysfunctional” because 9% unemployment is dysfunctional; having over 30% of the workforce either “out of work” or with “not enough work” or “working full-time full-year for below poverty wages” is dysfunctional and wasteful; one in four children eating food bought with charity coupons is dysfunctional; the lower 40% of households owning 0.3% of the nation’s wealth is dysfunctional. This may sound like rhetoric, but I mean it objectively and clinically. It does not work, it’s dysfunctional.

DISTURBING REPORTS
Recently I came across some disturbing reports, and I wrote a comment to someone about it:

I read a report on corporate governance at PERI, http://www.peri.umass.edu — “On Uneven Ground, How Corporate Governance Prioritizes Short-Term Speculative Investment, Impedes Productive Investments, and Jeopardizes Productive Growth”. It shows that corporate net investment since 2008 is at 1% of GDP, much below its normal rate 1950 to 2000 of 3% and above. The report also presents a graph showing corporate reinvestment in stock buybacks and dividends exceeding 100% of after-tax profits since 1980. Before that time the average was around 35%. And to round out this comment, I also read a report from Rutgers University on unemployment (by Hughes and Seneca, their most recent report, Post-Recession America, a New Economic Geography?). They show that since December 2000 the number of private sector jobs has declined by 4.7%, about 5 to 6 million, so that a little more than 10 years after January 2001 the nation has fewer private sector jobs. Between 1990 and 2000 the nation created 20 million jobs in the private sector, and between 1980 and 2000 38 million were created. If the private sector is not creating jobs, who is?

Robert Brenner, in Economics in the Age of Global Turbulence, also studies these economic phenomenon. Are we eating our “seed corn”? Is this a clear indication that our ‘captains of industry’ are selling our ship down river? I’m afraid so.

Warren Brussee (Feb. 1, 2011, WBrussee.wordpress.com) states that the manufacturers of a new battery for electric cars, previously U.S. owned, was just sold to a Chinese company for untold millions.
The exact quote follows:
"The Economic Policy Institute’s report on U.S. jobs lost due to the trade deficit with China shows 2.4 million jobs lost since 2001. That means that an increase of the trade balance with China of $195 billion cost the U.S. 2.4 million jobs. Since the table above shows that by 2016 our balance of trade with China will go up another $222 billion, we can expect to lose another 2.6 million jobs by 2016. It is always risky to extrapolate a trend, but will someone please tell me what we are doing to reverse this?

I had mentioned before a company that makes batteries that completely recharge in less than 10 minutes, work in extreme temperatures, are safe, and last for 25,000 cycles. Well, just last week the U.S. approved the sale of 51% of this company to a Chinese firm. This is despite the fact that this company has worked on many military contracts testing the use of this battery in several military applications, and despite the fact that this battery is used in the stimulus-supported Proterra bus that just last week got all kinds of accolades from the Obama administration for being the type of energy savings project America can be proud of."

_________________________________________________________________

This array of 19 facts came to me in my high school reunion newsletter, and I cannot verify the sources or the facts, but they sound about correct.

Here are 19 stunning facts about the deindustrialization of America:

#1 The United States has lost approximately 42,400 factories since 2001. About 75 percent of those factories employed over 500 people when they were still in operation.

#2 Dell Inc., one of America's largest manufacturers of computers, has announced plans to dramatically expand its operations in China with an investment of over $100 billion over the next decade.

#3 Dell has announced that it will be closing its last large U.S. manufacturing facility in Winston-Salem, North Carolina in November. Approximately 900 jobs will be lost.

#4 In 2008, 1.2 billion cell phones were sold worldwide. So how many of them were manufactured inside the United States? Zero.

#5 According to a new study conducted by the Economic Policy Institute, if the U.S. trade deficit with China continues to increase at its current rate, the U.S. economy will lose over half a million jobs this year alone.

#6 As of the end of July, the U.S. trade deficit with China had risen 18 percent compared to the same time period a year ago.

#7 The United States has lost a total of about 5.5 million manufacturing jobs since October 2000.

#8 According to Tax Notes, between 1999 and 2008 employment at the foreign affiliates of U.S. parent companies increased an astounding 30 percent to 10.1 million. During that exact same time period, U.S. employment at American multinational corporations declined 8 percent to 21.1 million.

#9 In 1959, manufacturing represented 28 percent of U.S. economic output. In 2008, it represented 11.5 percent.

#10 Ford Motor Company recently announced the closure of a factory that produces the Ford Ranger in St. Paul, Minnesota. Approximately 750 good paying middle class jobs are going to be lost because making Ford Rangers in Minnesota does not fit in with Ford's new "global" manufacturing strategy.

#11 As of the end of 2009, less than 12 million Americans worked in manufacturing. The last time less than 12 million Americans were employed in manufacturing was in 1941.

#12 In the United States today, consumption accounts for 70 percent of GDP. Of this 70 percent, over half is spent on services.

#13 The United States has lost a whopping 32 percent of its manufacturing jobs since the year 2000.

#14 In 2001, the United States ranked fourth in the world in per capita broadband Internet use. Today it ranks 15th.

#15 Manufacturing employment in the U.S. computer industry is actually lower in 2010 than it was in 1975.

#16 Printed circuit boards are used in tens of thousands of different products. Asia now produces 84 percent of them worldwide

#17 The United States spends approximately $3.90 on Chinese goods for every $1 that the Chinese spend on goods from the United States.

#18 One prominent economist is projecting that the Chinese economy will be three times larger than the U.S. economy by the year 2040.

#19 The U.S. Census Bureau says that 43.6 million Americans are now living in poverty and according to them that is the highest number of poor Americans in the 51 years that records have been kept.

So, how many tens of thousands more factories do we need to lose before we do something about it? How many millions more Americans are going to become unemployed before we all admit that we have a very, very serious problem on our hands? How many more trillions of dollars are going to leave the country before we realize that we are losing wealth at a pace that is killing our economy? How many once great manufacturing cities are going to become rotting war zones like Detroit before we understand that we are committing national economic suicide? The deindustrialization of America is a national crisis. It needs to be treated like one.

And to underscore the above: 11/9/10: The largest private employer in Saginaw, Michigan will soon be the city government of Beijing, as a 104-year-old unit of General Motors will be sold to new owners from China. The $450M purchase received little attention this summer, but it is a landmark deal - the first time Chinese investors have bought a U.S. industrial operation of such scale and history.
______________________________________________________________


To quote Moshe Adler again, his last sentences: “The economy is us, and we are not doing well. We need to turn economics from a weapon that is being used against us into a science that will show us how we can do better.”

There are some solutions, read the following essay. Read the Chicago Political Economy Group’s essay. Read Josh Holland’s book The 15 Biggest Lies about the Economy. We have our homework to do.

March 2, 2011

A Six Point Solution to Inequality

Seven Policies to Reverse
America's Inequality Story . . . and Beyond

The Inequality Story:
"America's Inequality Story," to give it a name, is copiously documented; State of Working America has web pages that show many graphs that quickly and easily demonstrate rampant inequality; UC Berkeley Professor Emmanuel Saez reports in "Striking It Richer" that the top 1% of households “captured slightly more than half of the overall economic growth over the period 1993-2008. . . in the economic expansion of 2002-2007, the top 1 percent captured two thirds of income growth.” The period 1940 to 1980 stands in contrast; the portion going to the top 10% never exceeded 35% of the nation's income, while in 2007 they captured 49.7%, an all-time historical record. Almost all the shift of income went to the top one percent. Another source, Edward Wolff, published a report, March 2010 for the Levy Economics Institute, showing, like the Saez report, the top one percent received more income annually than the bottom 60% and owned more assets than the bottom 90%. Inequality.org also is a rich source of data on, of course, inequality. For instance they note, "In 1979, the average income of the top 5 percent of families was 11.4 times as large as the average income of the bottom 20 percent. In 2005, the ratio was 20.9 times. (EPI, State of Working America 2006-07, Figure 1J )".

Our rich economy annually creates $46,000 of value for every human being in the nation. Yet the distribution of income, according to the Brookings/Urban Institute Tax Policy Center, shows the following distribution by quintile (or 20% of households group) from bottom to top for 2006: 1 - 2.5%, 2 - 6.4%, 3 - 11.4%, 4 - 19.8% (the total for the bottom 80% of households is 40.0% of the nation’s total pre-tax income for 2006) and the fifth quintile, 5 - 60.3%. The bottom 80% receive 40% of the nation’s income; the top 20% receive 60%. The bottom 80% of households’ income from salary and wages is 28.2% of the nation’s total income.

The Citizens for Tax Justice also breaks down income distribution according to quintiles, showing average annual income for the 5 quintiles of tax filers: 1 - $13,000, 2 - $26,100, 3 - $42,000, 4 - $68,800, 5 - $210,375. This ratio roughly duplicates the ratio from the Tax Policy Center. I'll try to make it simpler: The bottom-earning 60% on average receive $27,000 per household, the households in the range of 60% to 80% receive the nation's mean average income, $68,800, and the last to 20% receive over $200,000. These are the average pre-tax incomes for each 20% of households from bottom to top. The average income of the top 20% is five times greater than the average income for the lower 80%. One worker receives $5.61, while four workers’ average income is $1.00. I know I’ve thrown out too many numbers, but I’m trying to make a strong point. It’s hard to believe how skewed our economy’s income distribution is.

The U.S. has the most unequal distribution among industrial nations (the OECD nations), and among all nations in the world we rank at #73 in inequality behind such nations as Morocco, Ethiopia, Pakistan, Bangladesh, India, Russia, Egypt and Romania. The U.S. also has the highest childhood poverty rate among all developed nations. France has about the same child poverty rate as the U.S. before government interventions. France reduces childhood poverty to 7%, we reduce it to 20%.

Searching for solutions, Demos and Campaign for America's Future published a report written by Jeff Madrick on “Jobs, Deficit Reduction and America’s Economic Future.” He presents a very detailed program. I cannot rival Madrick’s erudition, but I will present here a six step program:

The Seven Policies: 
1. create tariffs and quotas on foreign imports combined with new trade treaties designed to bring back manufacturing jobs; the nation has fewer private sector jobs in 2011 (see America'sNew Post-Recession Employment Arithmetic ) than it had in 1999 and we had better stop exporting our jobs’; this proposal comes from William Greider's book Come Home, America, page 103; and since our trade deficit is so high, the World Trade Organization allows the U.S. to impose these tariffs; read this November 2010 article by Greider. The American Prospect devoted the December 2011 issue to US manufacturing. Also view the six proposals from the Campaign for America's Future. And review the proposals and plans by William Lazonick and Jon Rynn at New Deal 2.0. The common theme is to end the trade deficit and restore manufacturing employment which pays about $70,000 per year per job.

2. impose taxes on value-added imports of multi-national corporations who assemble products like Ford trucks at $15 a day labor cost in northern Mexico; this tax again would return manufacturing work to the U.S.; the key focus is to seal our marketplace and our purchasing dollars from low-wage exploitative labor markets and stanch the investment flow of U.S. investment wealth into low-wage countries, the race to the bottom; this idea is elaborated by William Greider in his book, page 104, "Applying a general emergency tariff (or similar devices like import certificates) would put a temporary collar around the size of US trade deficits and then gradually shrink them."

3. install a full employment program as presented by Professor Phillip Harvey of Rutgers University, “Learning from the New Deal”; see National Jobs for All Coalition, njfac.org; Philip Harvey, a law professor at Rutgers University, has published through Demos a more recent version of his jobs program, "Back to Work" January 2011. His program touts the creation of 1 million jobs for the price of $28 billion, which comes to $224 billion for 8 million jobs. Think about eliminating the expense for wars in Iraq and Afghanistan, cutting the military by 1/5th, and restoring an economy to the 37.1% of Americans who have less than $12,000 in savings (24.1% who have no savings at all). To be clear, 2 of 8 Americans live in a family with no savings, and another 1 in 8 live in a family with  less than $12,000. The economy creates $47,000 of output per year per human being, and $109,000 per year per worker.  On November 25, 2011, this excellent article on public jobs was posted at Truthout.com.

4. raise the minimum wage to $12.30 an hour and increase by 80% the maximum benefit of the Earned Income Tax Credit according to a plan by two University of Massachusetts professors J. Wicks-Lim and J. Thompson to balance the income distribution ratio (see peri.umass.edu or my summarizing essay of January 2011);

5. authorize Professor Robert Pollin’s program, UMass/Amherst, that suggests a federal government guarantee of private bank loans to local and state governments for local jobs programs, mostly insulation work on government building and then private housing stock; Pollin's program would create 18 million jobs. He also presented a more recent article series in the Boston Review. Banks are sitting on $1 trillion of mostly tax payer money and not making loans; the S and P 500 corporations achieved record profits in the third quarter of 2010 of $1.66 trillion, yet still they are not adding new jobs;

6. create a free childcare policy per the program "Why Obama Should Care about Care" at Levy Economics Institute. This would employ many women in a government jobs program that tends to employ mostly men; it would relieve family budgets of many low-income parents.

These six new policies would restore employment and create a healthy, balanced economic growth.

My essay of September 8, 2011, on the financial system offers
7 proposals to reform finance. Add public banking and finance to the indispensable changes to our economy. Here are two sites devoted to public banking, one and two.
Also see this interview on The Real News Network about the European banking crisis, with University of London economist Costas Lapavitsas advocating public banking. "For the last half-century, as noted above, the financial explosion was behind much of the economic growth. The total debt in the U.S. economy went from around 150 percent of the GDP in the mid-1980s to well over 300 percent by the beginning of the Great Recession in December 2007." states Fred Magdoff in this essay at the Monthly Review. Between 2001 - 2007 aggregate debt increased 5 times faster than GDP growth, $3 trillion per year vs. $600 billion per year, according to Magdoff. There was a rapidly expanding supply of savings or wealth competing for ownership of a stable or slowly growing asset base, and this led to over-valuation and speculation, in essence financial fragility, not to mention unproductive use of resources. How can the financial sector grow at 12% a year while the overall economy grows at only 3% a year?

Unequal and Unstable is a fine article, with excellent graphs, January 2012, making the argument that
"the history of the past century reveals a striking correlation between income inequality and financial crises. Our analysis suggests that this is no coincidence: income inequality generates financial fragility by increasing leverage ratios among lower- and middle-income households, fostering a pool of idle wealth that increases the demand for investment assets and financial innovation, and allocating asymmetrical political power which reduces regulation and threatens financial instability." This from Thaker and Williamson at The New America Foundation.

From the essay by Stephen Dunn in Challenge magazine, November 2011, "Was Galbraith Right?", he states, "According to the McKinsey Global Institute, the ratio of global financial assets to annual world output has tripled from 109 percent in 1980 to 316 percent in 2005 (Wolf, 2007). By 2005, the global stock of core financial assets had reached $140 trillion." In perspective the annual world GDP in 2005 was around 4 times the US GDP of $12.6 trillion, meaning the global GDP stood at under $50 trillion, with financial assets at $140 trillion.

Jack Rasmus in Epic Recession, page 220, using Federal Reserve Bank data, shows that between  1978 and 2008 while financial corporation (banks, hedge funds, etc.) debt increased by 47 times, debt for government, non-financial corporations, and consumers increased by 8.0 to 10.3 times.

In the Great Financial Crisis, page 121, by Magdoff and Foster, they show that financial firm debt grew from 10% of GDP in 1970 to 116% of GDP in 2007. Why did financial assets and debt increase so much? Had incomes, growth rates, and ability to repay loans increased similarly, or was there a surplus of wealth bidding up prices accompanied by unbridled speculation? In my view there was a glut, an excess of wealth hoarding, that produced unproductive wealth distribution benefitting a small minority -- read 1% --  who had no productive outlet for all that capital. At a minimum the Glass Steagall separation of investment and commercial banks is needed.

L. Randall Wray writes in the Cambridge Journal of Economics, 2009, after the wave of mortgage defaults, bank bankruptcies and bailouts, emloyee lay-offs,  declining profits, and government interventions had begun, "Total commitments by the US government (including loans, guarantees, capital injections and fiscal stimulus packages) already approach $9 trillion. Note that securitised subprimes totalled just $2.5 trillion. Clearly the losses are not simply a matter of bad mortgage loans made to low income borrowers to buy unaffordable suburban mansions. Rather, this is a crisis of the money manager system. And because so much of it is unregulated, unreported and off balance sheet, there is no way to guess the ultimate scale of losses. A secret report is rumoured to estimate that Euroland’s banks hold $25 trillion of questionable assets. To repeat, it is a global crisis. . . . It is time to take finance back from the clutches of Wall Street’s casino.

What will replace money manager capitalism? Only time will tell." 

Inequality at the Root
A targeted and calibrated ratio of income and wealth distribution may be the ultimate solution for capitalism. For instance, Sam Pizzigati in his book Good and Greed proposes a maximum income no greater than 10 times the minimum income. For example, every worker earns between $20,000 and $200,000. Other ratios are conceivable. We are apt to be living in a Neo-feudal world at the rate we are going, nationally and internationally. The only lasting solution is an appreciation of the inescapable, ineluctable conclusion that capitalism requires balance between trading parties. Challenge Magazine, September/October issue has an article by Robert Wade pointing to this conclusion, "The Ongoing Costs of Global Inequality." (Not available by Internet) But this Robert Wade article is available.

And, to make it too complicated, I’ll toss in 3 more policy meassures: pass the Employee Free Choice Act for workers who want unions; require corporations to place non-shareholder representatives on their boards of directors; create more legally mandated vacation days for the over-worked U.S. workforce. There is no end to reforms. Everyone has their favorite. My favorite is to outlaw money. But until that time comes, we have to pay for these reforms.

As for paying for these programs, you know the top one percent of U.S. households own 37.1% of all private assets in the nation, and that comes out to $20 trillion. The top 10% own 70%, and that comes to about $38 trillion. These people don’t pay “overall” an effective tax rate that is much higher than most people. The Citizens for Tax Justice shows that the top one percent pay an effective overall tax rate of only 30.9% on incomes averaging $1,445,000 a year and wealth averaging $18,500,000. The average overall effective tax rate for the bottom 80% of income earners is 24.5%. By raising the capital gains tax rate from 15% to the normal income tax rate of 35%, government revenues would grow by an additional $200 billion to $266 billion. A tax on financial speculation could bring in $100s of billions. Closing a tax expenditure to financial corporations’ interest payments brings in another $77 billion. Congresswoman Jan Schakowsky has a plan to cut the deficit by $400 billion and still have $200 billion for a jobs program. Spending $200 billion federal dollars can create 5 million jobs at $40,000 per job. She suggests following the outlines of the Local Jobs for America Act. One can download her program at her web page.
The People's Budget from the Progressive Caucus also includes public jobs and claims to balance the budget by 2021.

To reach the pre-recession, late 2007, rate of unemployment, 5.0%, the economy needs 11 million jobs. The Economic Policy Institute reported that, “This means the labor market is now nearly 11 million jobs below the level needed to restore the pre-recession unemployment rate (5.0% in December 2007). So, despite the job growth of 2010 [of 91,000 new jobs per month], we remain near the bottom of a very large hole. To achieve the pre-recession unemployment rate in five years, the labor market would have to add nearly 300,000 jobs every month for the entire period.” At our present growth rate, 91,000 per month, it will take until 2026 to create the same number of new jobs. Do you believe the economy will triple its 2010 rate of job creation for the next 5 consecutive years?

Creating federal jobs would get the economy cooking again, and the other policy changes in regards to imports would help balance the income distribution ratios.

Robert Reich, a professor at U.C. Berkeley, has published his multi-point plan, as of July 15, 2011. See this article.

The Nation Magazine presented an issue devoted to Reimagining Capitalism, where you'll find twelve proposals that would reform our system substantially. The German nation after all has approximately the same per capita national income, but their distribution rates 25 on the Gini Index, ours rates 41 or 46, depending, and workers work nine weeks less, 45 fewer days, each year than U.S. workers on average. They have prosperity, leisure, and economic justice. Potential improvement is vast for the U.S.A.

There are many solutions, and the best ones begin with adjusting how the nation's income is distributed. We have to understand our condition and find broadly based support for fair change. Ben Leet

see http://benL8.blogspot.com, toomuchonline.org, epi.org, njfac.org, cbpp.org, newdeal20.org, inequality.org, cebr.org, Campaign for America's Future.
kyklosproductions.com

Increase the Minimum Wage and EITC

A Proposal to Raise Minimum Wage to $12.30 an Hour
and to Double the Earned Income Tax Credit

For each and every human in the U.S. our economy each year generates about $46,000. For each and every worker, full-time and part-time, the economy generates over $100,000 a year. Should any worker receive a below poverty income in this wealthy nation? Should any worker receive an inadequate income? The official poverty level and the “basic budget” adequacy level are two separate levels. The adequacy level is about twice the poverty level. Should economic insecurity be the persistent curse and nemesis of all low-income workers in an economy so rich? This report by the two scholars at University of Massachusetts, Amherst, articulates a solution to these problems that plague the families of low-income workers in the U.S.A.

The report: Combining Minimum Wage and Earned Income Tax Credit Policies to Guarantee a Decent Living Standard to All U.S. Workers, by Jeannett Wicks-Lim and Jeffrey Thompson, PERI, Political Economy Research Institute, University of Massachusetts, Amherst, October 2010

Jeannette Wicks-Lim and Jeffrey Thompson propose to raise the incomes of all working low-income families by two methods. “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.”



This chart comes from Center on Budget and Policy Priorities, a report from 2011.

It is important to note at the outset that this program would raise the incomes of only 4 percent of the nation’s families, out of 26 percent whose incomes are below adequacy. Incomes would rise sufficiently to provide a “basic budget” for their living expenses. Twenty-six percent of the nation’s families live below the “basic budget” adequacy level, and owing to the fact that part-time work is typical of these households, raising their incomes based primarily on their work participation only raises one in six of these families’ incomes to the adequate level. The authors claim if full-time employment were available to all families and workers then not 4 percent but 15 percent of the nation’s low income households would be benefit enough to raise their incomes to the adequate level, leaving 11 percent still below adequacy.

The current minimum wage income of $7.25 an hour provides an annual income of $15,080 to full-time full-year workers. Wicks-Lim’s plan would raise that base income to $25,584, a 70 percent increase. Coupled with a maximum $9,040 EITC benefit, certain eligible families would achieve a $34,624 base annual income. Currently the maximum minimum wage annual income with benefits is $20,108. This present $20,108 maximum is still $2,000 below the official poverty level for a family of four. And it is far below, about half, an adequate level. A $14,500 boost to low incomes to $34,624 would effect a large sector of American families. But “poverty level” and “adequacy” level are two different levels.

The Citizens for Tax Justice provides this break down of incomes according to income tax filers in 2009:

A Tale of Two Payroll Tax Breaks
Making Work Pay 2% payroll tax rate cut
(I apologize that his chart is difficult to reproduce. Read the five income groups, their range of income and their average income.)
Lowest 20% Less than $20,000 --- $ 13,000
Second 20% $20,000 – 33,000 --- 26,100
Middle 20% $33,000 – 53,000 --- 42,000
Fourth 20% $53,000 – 88,000 --- 68,800
Next 10% $88,000 – 127,000 --- 104,800
Next 5% $127,000 – 177,000 --- 147,300
Next 4% $177,000 – 458,000 --- 256,500
Top 1% $458,000 or more --- 1,397,100

Source: All tax cut figures are from the ITEP Tax Model, Dec. 7, 2010
Citizens for Tax Justice, Dec. 7, 2010

The effect of this plan would raise income for all full-time workers into the middle quintile of the nation’s income bracket. But most below poverty level wage earners do not work full-time year-round. “In 2009, the U.S. Census Bureau reported that 42 percent of nearly 21 million poor households [18 percent of all U.S. households] had at least one member working full-time year-round.” Restated: of the 21 million below poverty households, 42 percent had someone working full-time. Raising them to above poverty does not raise them to “income adequacy.” Only 4 percent are raised to adequacy by this W-L and T proposal. (footnote: “U.S.Census Bureau, 2009 Detailed Poverty Tables http:/www.census.gov/hhes/www/poverty/detailedpovtabs.html; accessed March 19, 2010. We use the Census Bureau’s tabulation of households below 200 percent of the federal poverty income threshold for this figure.”)

This deserves another look. About 1 in 6 households are poor, about half have someone working full-time. That indicates 1 in 12 (8.3%) of U.S. households with someone working full-time are still living in official poverty. There is some data here complicating my interpretation. If 8.33%, or 1 in 12, have their incomes raised by a doubling of EITC and a 70% increase in the minimum wage, yet still Wicks-Lim and Thompson state that only 4% of households will be raised to an adequate level? Perhaps the increase in wages and EITC is still not sufficient to rise to adequacy.

I went to the Economic Policy Institute and looked at their Basic Family Budget Calculator to find that across the nation different incomes are needed to achieve adequacy. For instance, in Pine Bluff, Arkansas, a four member household needs just $25,933 for adequacy, and the official U.S. poverty level is a little above $22,000 in 2009. Other locations naturally differ: Madera, CA $31,177; Salt Lake City, UT, $31,898; Asheville, NC, $33,673; Akron, OH, $34,290; Philadelphia, PA, $36,810; Los Angeles, CA, $40,770; Oakland, CA, $53,590; NYC, NY, $56,257; the same family in Washington, D.C. needs $58,942. (The EPI’s Basic Family Budget amount is very close to 200% of the federal poverty level.)

In all, 24.8 million families receive the EITC benefit, about one in five of all families in the U.S.. All these families would benefit from the Wicks-Lim and Thompson plan. Presently EITC benefits are lowest for the lowest income earners --- and if you have no earned income, you receive no EITC benefit. Beginning from one earned dollar, the benefits reach a maximum plateau at $12,000 to $16,000 a year income, the benefit adds about $5,000. After $16,000 the benefits are reduced, they then taper down to zero benefits at $40,000 a year.

The larger picture is drawn clearer in the conclusion that states only 4 percent of the 26 percent of households with inadequate income will be raised above inadequacy.
From the conclusion:
“Our policy proposals address one of the crucial elements of an economic policy framework that aggressively pursues the goal of raising all U.S. households to a decent living standard: decent pay. . . . [T]he degree to which these policies can move families toward a decent living standard hinges on the number of hours they actually work.” As to the question of how great an improvement this proposal would make, “We estimate that our proposed expansion will reduce the percentage of low income families with inadequate incomes from 26 percent to 22 percent.”
And if full-time year-round employment were available? “If all household heads and their spouses (if present) in low income households worked full-time year-round, we would expect a drop off of close to 15 percentage points, so that the percent of low-income households would fall from 26 percent to 11 percent. Inadequate employment is clearly a significant barrier to families achieving a decent living standard.”

Two concepts are important here: There are not enough jobs, and many workers have too few hours of work. It would take both parents working to achieve adequacy. This is why policy advocates for full-employment through federal government job creation programs have long fought for full-employment laws. The effect of World War II government employment programs brought the unemployment rate to below 2 percent for the years 1943, 1944, and 1945. Full employment is achievable, though it is not popular with “free market” capitalists and the advocates of high inequality.

The Wicks-Lim and Thompson plan devotes analysis to the tipping point maximum increase in the minimum wage before it creates harmful effects on hiring. Much of the report details the effect on business. “The overall body of empirical evidence suggests that past minimum wage and living wage increase have not lead to significant job losses. In fact, Doucouliagos and Stanley (2007) concluded after analyzing over 64 separate studies on this question published between 1970 and 2007 that there is 'little or no evidence of a negative association between minimum wages and employment...’ Their conclusion is consistent with Harvard economist Richard Freeman’s assessment of the state of knowledge on this question 15 years earlier, ‘The debate is over whether modest minimum wage increases have ‘no’ employment effect, modest positive effects, or small negative effects. It is not about whether or not there are large negative effects.’”

By raising the minimum wage level, a two income family could earn up to $51,168 if both workers held full-year full-time employment. But in some high-expense localities this income would not achieve the basic income level. In single adult families, 1 adult with either one or two children, the minimum wage income alone would not achieve the basic budget level. For these exceptions the EITC is the policy method for lifting incomes to the basic level in certain geographical localities.

(The maximum EITC benefit for childless workers is currently less than $500 a year. A shortcoming of the report is its failure to address this minor issue. Millions of single, unmarried workers are paying child support payments without the benefit of the EITC, and even if not paying child support, their incomes are not commensurate with their work value. This is to say, the market wage rates are artificially low and do not adequately provide. There is no reason the nation could not systematically raise the minimum wage to $20 an hour or higher after two decades of system-wide wage increase. It is simply a political decision of our democracy. I should remind the reader, each of the 140 million workers who work each day of the year, including the 36% who are part-time workers, on average generate over $100,000 of value per year. But politically low-wage, low-income workers do not have political supporters.)

Currently, even in a family with two full-time full-year working adults with one child, their combined income is still $10,000 below the necessary basic budget amount --- $30,000 when they need $40,000. If they have two children they are short $16,000. Single parent families with one or two children fall short by $18,000 and $25,000, respectively. The top EITC benefit of $5,028 does not bridge that gap.

In today’s economy 36 percent of workers, about 50 million, are part-time workers. Not all want full-time work, only about 10 million state that preference.

The cost to the government of an increase in the EITC would equal $51 billion, and would about double the current expense to about $100 billion a year. In perspective, according to the report, about 45 percent of the Bush tax cuts were received by the top income 5 percent of households. If one fifth of the Bush era tax cuts were repealed, the taxes raised would fund this program. Therefore, just cutting the top 5 percent’s tax cut by half would fund the program.

Another perspective: The recession beginning in December of 2007 resulted in a total of over $1 trillion of lost income accrued to the families who lost work due to the recession. Eight million jobs were lost. The employment drop-off since the beginning of the recession, January, 2008, will effect a family income drop-off of approximately $1 trillion over a five year period, January 2008 to January 2013, about $200 billion a year. Raising the EITC by $51 billion would help the still employed, but not the unemployed. With $200 billion a year we could fund a federal jobs program costing $150 billion a year, employing 3.75 million unemployed workers at $40,000 a year, and double the EITC benefit and still see a net savings. This September, 2009, report,by Dean Baker and John Schmitt, “A Trillion Dollar Wage Deficit”, from the Center for Budget and Policy Research, draws its data from CBO income and employment projections. Corporations are said to be sitting on $2 trillion of savings, and the wealthiest 1 percent of households hold over $20 trillion in assets, most of which is stuck in unproductive speculative financial markets. The nation can chose, if it wishes, it is not a matter of not enough funds, it is a matter of lack of political will.

Achieving full employment is a more powerful method of poverty reduction than the EITC increase coupled with the minimum wage increase. But in 1968 the minimum wage stood at $9.86 an hour in present day dollars, so increasing it to $12.30 an hour is just a 27 percent increase. And the increase in the EITC program amounts to a 1.8% increase in the federal budget.

This plan makes a powerful impact on American lives, it is money well spent. In 2006 the bottom 80% of households earned in wages and salaries only 28.2% of the entire national income. This is not wise nor is it fair. It is arbitrary.

The bottom 20% of households received only 2.5% of the nation’s income, the next 20% received 6.4 percent, and the middle 20 percent received 11.4 percent, for a total of 20.3 percent going to the bottom 60 percent of households (the income of the top one percent of households nearly equaled the income of the bottom 60%, they received 18.4% of the nation's total income versus 20.3% going to the bottom 60% of households)(See Table 1.17, stateofWorkingAmerica.com, chapter one, 2006-2007, Mishel, Bernstein and Allegretto, from Tax Policy Center Microsimulation Model, page 79 in the book State of Working America, 2006/2007). Moreover, this same bottom 60 percent of households owns only 2.3 percent of the nation’s household wealth (Edward Wolff, see Levy Economics Institute, March 2010). The average net worth of families in the bottom 40%, according to Wolff, per household in 2007 was $2,200. That was before the recession.

We may be the chintziest nation on earth and in recorded history. Low income workers need a pay raise and a savings plan. This plan by Wicks-Lim and Thompson importantly advances the discussion and at last provides some economic justice. As they point out, “In 2009, the U.S. Gross Domestic Product per capita was $45,918 (www.bea.gov).” Multiply $45,918 by 310 million Americans to reach a Gross Domestic Product of $14.2 trillion. Each day 140 million Americans go to work, each year each worker (including part-time workers) produces over $100,000 in value. We can afford to pay every full-time full-year working man or woman a higher income than $15,080 a year (the minimum wage) or $20,108 with the maximum EITC benefit (if they qualify). And then, we can afford to provide every willing adult a full-time job that pays a decent income. And then we can afford to provide incentives so that all families can have wealth, not the measly average of $2,200 of savings that the bottom 40% of families (comprised of 124 million Americans) now has. ("Moreover, the average wealth of the poorest 40 percent declined by 63 percent between 1983 and 2007 and, by 2007, had fallen to only $2,200.” From Edward Wolff's report, Levy Economics Institute, March 2010, page 33.) As an adjunct, see this report, Why President Obama Should Care About “Care”: An Effective and Equitable Investment Strategy for Job Creation
In his State of the Union address President Obama acknowledged that “our most urgent task is job creation”—that a move toward full employment will lay the foundation for long-term economic growth and ensure that the federal government creates the necessary conditions for businesses to expand and hire more workers. According to a new study by Levy scholars Rania Antonopoulos, Kijong Kim, Thomas Masterson, and Ajit Zacharias, the government needs to identify and invest in projects that have the potential for massive, and immediate, public job creation. They conclude that social sector investment, such as early childhood education and home-based care, would generate twice as many jobs as infrastructure spending and nearly 1.5 times the number created by investment in green energy, while catering to the most vulnerable segments of the workforce.