Archive for November, 2011

Who are the 1%?

Wednesday, November 30th, 2011

We know that we have the widest gap between the rich and poor in our history.

This has transformed a robust middle-class driven economy into a fragile, weak, wealth-driven one.

Still Republicans, who helped create this income gap through government policies dating back to the Reagan administration, continue to claim that this 1% is the economic engine that drives our economy.  According to them, the 1% are the best, brightest members of our society who have earned their reward through hard work.  If we tax these folks, we are told, we are not only punishing them for their success, but  also creating a disincentive for others who might aspire to their wealth.  Speaker of the House John Boehner says, “”The top 1 percent pay 38 percent of the income taxes in America. How much more do you want them to pay?”  In other words, a progressive tax system (where the rich pay more than the poor) is like socialist graffiti on the capitalist Mona Lisa.

The reality, however, is far removed from this fantasy.

Successful people are lucky

Malcom Gladwell studied the phenomena of success in his book Outliers.  In quick summary, what he discovered is that success is the combination of good fortune and preparation.  For example, the billionaires created by the PC revolution (Gates, Ballmer, Jobs, McNeally, etc.) were all born within approximately five years of each other.  Those who were older were already working for Mini and Mainframe computer companies when the window of opportunity opened for a disruptive change to the computing industry.  Those who were younger ended up working for these seminal start-ups rather than founding them.  So it didn’t matter how talented, resourceful, and hard working you were.  If you weren’t born at the right time and in the right place, this particular opportunity passed you by.

The other component that these successful individuals had was early access to resources which allowed them to become experts in software and hardware technology at a young age.  Expertise met opportunity and a small number became some of the wealthiest people in the world.  The tax rate that they or their parents paid did not make it easier or more difficult for them to be successful.  In other words, the window opened for a fortunate few and the first ones through that window with the appropriate skill set took advantage of the opportunity that was available.

Bill Gates’ fortune was built on the Windows “tax” that virtually every PC manufacturer from 1995 on has had to pay.  Though Microsoft made many millionaires, their flaws have also been well documented.  The original DOS operating system that IBM purchased from Microsoft, was virtually stolen from a local Seattle developer who was unaware of the IBM deal that Gates had on the table.  The only reason IBM was talking with Gates was that they couldn’t come to terms with Gary Kildall for an x86 version of CP/M.  Windows was developed on the side by a skunk works group while IBM and Microsoft supposedly were working together to develop OS/2.  Microsoft was able to establish their Windows 95 monopoly in part by sabotaging their OS/2 partnership with IBM.  Did Microsoft do anything illegal? No.  Did they lie, cheat, and steal? Yes.  Were they in the right place at the right time? Yes.

Successful people don’t create opportunities, they take advantage of them

The same thing applied to those who became wealthy through the growth in the financial industry over the last decade.   While they may claim that skill was involved, Nobel Prize winning psychologist Daniel Kahneman has proven that their only skill was capturing a certain job.  That capture was not the result of talent or intelligence, but rather the combination of the accident of birth and ruthless exploitation of others.  When you actually look at their performance, someone far less educated could have been just as successful making the same bets using a random roll of the dice.  Those who got the biggest bonuses were simply lucky.

In his book The Haves and the Have Nots, Branko Milanovic tried to discover the richest person who has ever lived. Beginning with the loaded Roman triumvir Marcus Crassus, he measured wealth according to the quantity of his compatriots’ labor a rich man could buy. It appears that the richest man in the past 2,000 years is alive today. It’s Mexican telecommunications robber baron Carlos Slim.  Carlos could buy the labor of 440,000 average Mexicans. This makes him 14 times as rich as Crassus, nine times as rich as Carnegie and four times as rich as Rockefeller.

This begs the real question of economic value Carlos Slim brings to the vast empire he built.  His critics claim that his wealth depends in part on his focus on developing countries with weak government oversight and a culture of political corruption.  His Telemex Company, for example, has 90% of the landline business in Mexico and charges some of the highest usage fees in the world.  Do greed, bribery, and worker exploitation count as valuable contributions to society?  If not, how can you justify the fact that an hour of Carlos Slim’s time is 440,000 times more valuable than an hour of work from the guy stringing the telephone lines that supports Telemex?

I’m not advocating class warfare or socialism

What I am advocating is the free market in its most idealized form.  In that form every worker (rich or poor) would be paid EXACTLY based on what they contribute to the economy by choosing to work – no more and no less.  That means that the contributions of those making $30M a year deserve no more special treatment than the worker making $30K.

In this system, there is still the opportunity to become super rich.  Just produce an innovation that the world needs.  When you look at who really make up the 1% these days, most are wildly overpaid for their contributions because they are not innovators.  For every Steve Jobs, you have limousines full of corporate bigwigs, financial wheeler-dealers, lawyers, and real estate speculators.  In a study published by the journal Psychology, Crime and Law, Belinda Board and Katarina Fritzon tested 39 top paid British execs and found that they shared many traits with psychopaths.  Those who have these traits often possess great skill in flattering and manipulating powerful people. Psychopathic traits like egocentricity, a strong sense of entitlement, a readiness to exploit others, and a lack of empathy and conscience are also characteristics that companies look for.  The only difference is that poor children with these traits likely end up in jail.  Rich children with the same traits end up in the board room.

In current team-based corporate structures, paradoxically it’s the psychopathic competitive risk takers who are more likely to get promoted and rewarded.  These people make their money by getting lucky with big bets.  Companies let them take highly leveraged positions because they have also positioned the taxpayer to cover big loses.  The self-centered risk taker isn’t deterred by the potential impact that their actions have on others, so it is a perfect marriage for boards who are looking for a fall guy if the big bet fails.  As the Bank of England’s director for financial stability put it, “If risk-making were a value-adding activity, Russian roulette players would contribute disproportionately to global welfare.”

Wealth has weakened democracy

The challenge is that our democracy is warping under the influence of super-wealthy liars, cheats, and thieves.  The wealthy have created an extensive infrastructure of junk economics and pseudo academic studies.   They pay for a tide of media and legislation supporting the unprecedented concentration of capital occurring today as well as the wide safety net we’ve been convinced to fund to catch big companies when they fail.

The media, think tanks, academia, and even government are all telling us that we shouldn’t reign in the wealthy because it will limit our opportunity to become wealthy.  The truth is that the only people who will become wealthy in this economy are the ones who are ALREADY wealthy.  That’s why we have an income gap.  The door has firmly closed on upward mobility for children of middle class and poor families.

The scope of this wealth exceeds any that we have seen in human history.  They have been able to accumulate this wealth because we have allowed them to take it.  They were able to steal it from us because they convinced us that there was wisdom in their luck.  We trusted their delusional claims of superiority and believed them more trustworthy stewards of our wealth than we are.  This is what is behind the “wisdom of the free market” claims, when actually the market has been transformed into little more than a game of three card monte the wealthy play with the rest of us.  The truth is that these con artists have just bullied and bribed their way to the front of the line.  Their only success is that they have convinced everyone else that they deserve to be there.

It is past time to start rebalancing the economic scale

The Job Creation Myth

Tuesday, November 22nd, 2011

Now we finally get to the bottom line.

Why does the Republican Party perpetuate the myth that personal taxes are at all related to job creation?  Jobs right now are being created by medium sized technology and manufacturing companies, not the small LLC and partnership companies that are affected by personal income tax rates.  This isn’t a deep dark secret.  The reality just doesn’t fit with the story that the Republicans would like to tell.

Republicans used to be fiscal conservatives, rather than tax hawks.  The process in Washington used to be a debate over how to spend money.  Once that debate was settled, both parties got down to the mundane task of funding whatever spending program Congress had passed.  This method produced reliable growth and low deficits all the way through the Reagan administration. Eisenhower, Nixon, and Ford, for example, all fought for higher taxes because of increased spending.  The biggest tax cut during that period of time was passed by JFK over the OBJECTIONS of the Republican majority in the house.  Even after that cut, top wage earners were taxed at a 70% rate – double what we have today.

Reagan changed all that.  The high inflation of the 70’s pushed more middle class earners into high tax brackets.  Reagan harnessed that anger and put it to work for the rich.  He used a theory by an obscure economist called Arnold Laffer that suggested that lower taxes would stimulate economic growth.  That economic growth would increase government revenue at a rate that would exceed the loss created by the lower tax rate.  Reagan demonstrated this theory using the famous Laffer Curve.  Bottom line is that it didn’t work.  Deficits sky rocketed during the Reagan administration and Reagan himself said the $2T deficit that he created by the time he left office was his biggest disappointment.

Some conservatives, however, saw this differently.  They reasoned that if Republicans could trade on their reputation as financial conservatives and not be held accountable by voters for the deficits that they create, they could force Democratic administrations to become more conservative.  This “starve the beast” strategy was brilliant. As conceived by the right-wing intellectual Irving Kristol in 1980, the plan was that Republicans first create a “fiscal problem” by slashing taxes.  Then they foist the pain of imposing fiscal discipline onto future Democratic administrations who, in Kristol’s words, would be forced to “tidy up afterward.”

This is the point that Grover Norquist becomes a player.  He had been leading a fringe group called Americans for Tax Reform who originally formed to prevent Congress from backsliding on the 1986 tax reforms.  He created an anti-tax pledge that most every GOP candidate for office was forced by conservative voters to sign.

It is only right that the first victim of the combination of these two strategies was a Republican.  When President George HW Bush broke that pledge and raised taxes to deal with the Reagan deficits, Norquist and his supporters made sure Bush lost his re-election bid.  This turned Norquist into an overnight Republican power broker and made him a wealthy man.

The Republicans, freed by the “starve the beast” strategy from their role as fiscal conservatives and protected by their “no tax” Norquist pledge, embraced their new spending role with relish.  But they had to figure out who was going to benefit from this new freedom.  Big business lobbyists were there with an endless stream of suggestions and the Republicans implemented many of them.  From 1983 (Reagan’s first term) until 2010, reported lobbying expenses exploded from $200M to $3.5B. That’s an effective growth rate of 1750%.  To put this in perspective, one would expect corporate lobbying investments to track GDP growth, but lobby expenses grew at more than nine times the rate of the GDP.  The obvious conclusion that you can draw is that companies were getting a good return on their investment.

The Laffer Curve became trickle-down economics in the Bush administration and the deficits ballooned again.  Just as the Laffer Curve failed, trickle-down economics failed too.  They failed for the same reason.  The wealthy and big business realized very quickly that they could get a much better return on investments in changing government policy rather than building a new factory or starting a new business.  So government policy continued to tilt away from programs that benefited the poor and middle class to programs that benefited the wealthy and big business.  Middle class wages stagnated.  Union membership declined.  States began to compete with each other to see who could offer the most incentives to attract manufacturers.  The gap between the rich and the poor expanded to the point where the United States began to look like a banana republic.  The economy collapsed.

Four years after that collapse, we are still hearing the same strategy from Republicans.  It just has a new name.  Now it is all about jobs.  Rather than deal with a rational combination of revenue and spending reduction in order to address deficits that at least in part were created by Republicans, Republicans are blaming the entire deficit on Democrats and refusing to even consider any increase in taxes.  Instead they accuse Democrats of class warfare.  Republicans defend their policies by saying that the wealthy have earned their place in society through hard work.  They characterize increased taxes as a punishment for success and a disincentive to hard work instead of the necessary and fiscally responsible reaction to a decade of deficit spending.

Rather than accept at least some of the responsibility for the size of the current deficit, Republicans oppose tax increases on the wealthy.  But it’s the wealthy who helped design this economy and not surprisingly they are the only ones benefiting from it.  What’s worse, Republicans suggest to the larger electorate who have not benefited, that this wealth-biased government is really good for them too because if they are willing to put in the same work – they can be wealthy too.

Let’s next take a little bit closer look next at the wealthy and see how they got there.  Just who are the 1%?

What do the Real Job Creators Need?

Monday, November 14th, 2011

First of all, big companies are not job creators.  In fact, big companies grow these days primarily through acquisition which tend to eliminate jobs rather than create them.  “It’s the job of big firms to shed jobs,” says Carl Schramm, CEO of the Kauffmann Foundation, which promotes entrepreneurship. “Big firms want to lower costs, which means lowering labor costs.”

It also isn’t what Republicans have been calling “small business”.  These are the businesses that are incorporated as LLC’s or partnerships where the profit from the business flows directly to the owners and is taxed as income.  These are the service and professional businesses that you can find in virtually every community.  They are often owner-operated, and as a result are limited to how much the owner can accomplish in a day.  They aren’t interested in growth as much as they are interested in providing good service to their customers.   According to most recent Labor Department statistics, these businesses (less than 20 employees) eliminated 34,000 jobs during the last reporting period (Q3/2010).  That’s because while start-ups do hire people, a lot of start-ups also fail.

Where jobs ARE being created is in firms that are 500-999 employees.  During that same period they created 37,000 jobs.

These are new growing companies and account for virtually all of the net job creation in the US over the past thirty years according to Schramm.  That’s because, just like new families who need houses, appliances, and cars; new companies need accountants, receptionists, warehouse people, marketing people, sales people, as well as developers and executives.  The difference is that while new families might buy products that ultimately create jobs in China; these companies are primarily creating jobs here in this country.  The key issue here is that these “new” companies don’t need tax relief as an incentive to hire people.  They are driven by the market opportunities that they are chasing.  They need to move quickly.  They aren’t asking for relief from Washington because they don’t want to be encumbered by the processes associated with getting that help.  These days they are technology driven companies like Facebook, Twitter, Groupon, and LinkedIn.

They also aren’t particular influenced by the local tax climate when they choose a place to start their business.  They are influenced most by where the founders would like to live.  So quality of life issues like good schools, nice neighborhoods, culture, and natural beauty are more important.  Besides access to talented people, access to investment capital also affects where these sorts of start-up flourish.

So what have we learned?

First, contrary to Republican claims, small business is NOT the engine of job growth in this country.  Right now it is the recovery of the manufacturing economy and technology businesses that are supplying almost all of the job growth.

Second, the growing technology businesses that ARE creating the jobs in this country are generally not affected by the “race to the bottom” that many states are running in an effort to attract businesses.   They would do better to invest the money that they currently are giving away in tax breaks in making their state a better place to live, a better place to go to school, and a better place to invest in start-ups.

So why would Republicans perpetuate this myth that individual tax rates for the wealthy affect job growth?

We’ll tackle that next.

Comparing Job Plans

Sunday, November 6th, 2011

Senate Republican Plan – The Republicans call this plan the “Jobs Through Growth Act”.  Rand Paul said that it would create 5M jobs, but didn’t say how long it would take to reach that goal.  Economists have said that there just isn’t enough information in the plan to determine whether it could accomplish its goals in the long term.  There is no short term help for jobs or the economy in the plan.

Gus Faucher, the director of macroeconomics at Moody’s Analytics, commented, “Should we look at regulations and make sure they make sense from a cost benefit standpoint? Certainly. Should we reduce the budget deficit over the long run? Certainly.  But in the short term, demand is weak, businesses aren’t hiring, and consumers aren’t spending. That’s the cause of the current weakness — and Republican Senate proposals aren’t going to address that in the short term.”

“In fact, they could be harmful in the short run, if the focus is on cutting spending,” Faucher continued. “They don’t say explicitly when they would cut spending, but the Republican focus is on cutting spending sooner and later.”

“Putting the emphasis on balancing the budget now is likely to push the economy back into recession,” he said. “We’re seeing the impacts of that in Europe, where governments are undertaking fiscal austerity and their economies are struggling.”

Republican leaders have also said that Congress needs to pass their plan on reassure investors that the government has a plan that will work.  Faucher said he had no way to evaluate the idea that the release of the plan itself could create confidence and certainty.

“That’s not an economic argument,” he said. “I do think the lack of confidence is a problem, but again, the way to get over that problem is by having strong near term growth, and this proposal isn’t focused on that.”

Mitt Romney – Romney took 161 pages to outline his jobs plan, but it was curiously unspecific on big topics like individual income tax reform.  The Romney campaign said they want to do it and that everyone will like it, but that the specifics will depend on how spending reform and corporate tax reform work out.

According to his campaign, by the end of Romney’s first term, his proposals would lead to GDP growth averaging 4 percent per year over four years; 11.5 million additional private-sector jobs; an unemployment rate reduced to 5.9 percent and a reduction in spending of $1.6 trillion less than the projected amount under the current administration.  The problem is that when you assume GDP growth averaging 4 percent over four years, everyone agrees that a LOT of good things could happen.  The fact that his plan requires that level of growth has caused some economists to question the whole plan.

The CBO estimates that growth will average 3.6 percent from 2012 – 2016 and some economists think even that is optimistic.  The McKinsey Global Institute report that was quoted in a previous post suggests that unless the right policies are in place to encourage business expansion, exports, and innovation that the US economy would follow a low-growth path with less than half as many new jobs as Romney has projected.  To his credit, the Romney plan does address some of the points that McKinsey listed, like retraining, higher visa caps for highly skilled workers, and expanded trade agreements.  Unfortunately, it also included a repeal of Healthcare reform, tax reductions on savings and investments, eliminating the Death Tax, Cut and Cap the Federal Budget, and Reducing the Federal Workforce.

Healthcare costs represent one of the major barriers for companies that would like to hire, and healthcare benefits tied to employment is one of the major impediments to existing employees starting their own businesses.

Encouraging people to save at a time when weak consumer demand is hurting the economy also seems counterproductive.

Estate taxes are only an issue when there is a business involved.  Otherwise it is just a drain on government revenue that does not have a net effect on job growth or job loss.  That’s because it is just a transfer of funds from one generation to another.

Cutting the federal budget and reducing the Federal workforce adds to the rolls of the unemployed.

So net-net, this plan may have some positive impact in the medium to long term, but likely would increase unemployment in the short term.

Rick Perry – He claims that he has a plan to create 1.2M jobs in the energy business and save 2.4M jobs that he says will be lost by 2020 if existing EPA regulations aren’t changed.  The foundation of this plan is to drill for oil in every place imaginable and roll back clean air and endangered species regulations. Perry’s projected 1.2 million new jobs come from a Penn State University study that was financed by the Pennsylvania Marcellus Natural Gas Industry. More than half of those 1.2 million jobs were indirect or induced.  That means that those getting new jobs in the industry end up having to move and buy a new house which results in more construction workers getting hired.

University of Montana economics department chair Thomas Power said that Perry’s plan “is not going to make a dent in the unemployment rate, because the vast majority of people who have those skills are very busy right now pursuing oil and gas.”  That’s in part due to the fact that drilling in the Gulf has already quietly returned to peak levels seen prior to the Deepwater Horizon oil spill.  So the rate of employment growth in this industry is already limited by the availability of skilled workers and not access to new drilling locations.

Barack Obama – Contrary to all of the Republican proposals, Obama’s plan is the only one that puts people to work now.  According to a Bloomberg News survey of 34 economists, Obama’s plan would likely increase gross domestic product by 0.6 percent and create/retain 275,000 jobs next year. In 2013, his plan would add 13,000 jobs, bringing the total over two years to 288,000 jobs created.  That would bring down the unemployment rate .2%.

One other interesting aspect of this act is that all 50 states would be able to establish Self-Employment Assistance (SEA) programs, enabling aspiring entrepreneurs to utilize unemployment insurance money to fund their businesses for up to 26 weeks —providing roughly $10,000 to $13,000 in assistance.  Not a bad deal when you consider that the cost of most startups, especially most service-based businesses and tech ventures, have relatively low startup and operating costs. In essence, the president’s plan will create a guaranteed source of startup capital for businesses without any of the traditional credit and collateral requirements as barriers — or the need to give away equity to investors.

This could have a particularly interesting impact among young workers who are having the most difficult time getting into the current job market.

So which plan will have the most positive impact on those that create jobs?

The best way to answer this question is to determine who these job creators really are.

That’s next up.

New Jobs Plan

Tuesday, November 1st, 2011

What do we have to do long term to move from the failing wealth-based economy that we have today to a robust middle-class driven economy that we know from past history is sustainable?

Fortunately McKinsey Global Institute recently published a study which suggests four things that we can do to transform our economy.  If we accomplish all four of these, they project that we will add 21M new jobs by 2020 and drive the unemployment rate down to 5%.  That 5% number is recognized generally as the goldilocks number for unemployment.  Wages should increase at the rate of productivity.  Everyone is working, but demand for new workers isn’t outstripping supply.   Inflation is under control.

Here’s what McKinsey recommends.

Develop New Skills

McKinsey predicts that there will be a shortage of 1.5M college-educated workers in 2020 unless we take some action.  We also face having 6M unemployable workers who failed to finish high school.  The solution is closer local collaborations between employers and educational institutions.  85% of the jobs in 2020 will be in these six sectors – health care, business services, leisure and hospitality, construction, manufacturing, and retail.

Think Globally, Act Locally

Attract foreign companies to move their manufacturing operations closer to their customers in the US.  Increase exports from US manufacturers, particularly small businesses.  That means money to both encourage exports as well as the sorts of connections/distributors that small business needs to find international customers.  Repatriate the service operations that many large companies have moved offshore.


New industries which create new opportunities for growth and employment are almost always driven by three things: breakthroughs in basic research, access to talented people, and access to investment capital.   The key to future growth is to make sure that these businesses start in the United States rather than China or India.

Regulations, Patents, and Investment

Making it easier to build new factories, patent new discoveries, and deliver new products to customers as quickly in this country as it can be done in China or India will encourage investments in new product development in this country.

You’ll notice that there is nothing in here about deficits or taxes – only regulations that affect the speed at which we can build new facilities, protect new discoveries, and deliver new products.

Here’s one way to get from where we are today with lots of laid off workers and businesses with open requisitions for skilled positions to a situation where workers have the skills that businesses need and are located where businesses need them.

We have to both assist the unemployed as well as retrain them.  One way is by having unemployment insurance cover part time work as well as full time and provides transition assistance to move from areas where unemployment is high to areas where there is demand for jobs.  Communities need similar transition assistance when a major employer leaves.  That assistance can also focus on retraining the workforce and retooling the existing infrastructure.

Big companies can also be asked to bear the burden of closing facilities by paying workers severance, committing to outplacement and retraining, and funding the community transition as well as the transitions of individual workers.  This seems a reasonable commitment given the tax breaks that many large employers are able to extort from communities in return for considering them as a site for a new plant.

The minimum wage could be pegged at half the median wage in this country and we could insist that those we trade with do the same.  That prevents jobs from hoping around the globe to the lowest cost labor markets.  It also provides workers in offshore facilities sufficient income to buy American made goods.

We have to make education as important and accessible in this country as healthy food and clean water.  Business has to be an active participant in the education process, particularly at the junior college and vocational school.  There should be tax incentives for businesses who commit to hire graduates from programs that they help design.  Citizens should only be limited by their abilities and not their pocketbooks with regard to the level of education they achieve.  All of the other major industrial countries that we compete with take this approach to higher education.

We have to support our research institutions with public money which frees our best and brightest to pursue innovation without the bias of short term return on investment or the burden of the time consuming granting process.

Healthcare has to be disconnected from employment so that best and brightest CAN take a chance on forming a new company without putting their family at risk.  Workers can give themselves promotions by finding new and better jobs if their current employer doesn’t pay them well, provide them training, or reward them for their performance.  Workers can take time off to get the education and training they need to be all that they can be without fear of loss from illness or accident.

Finally, workers have to have the right to organize.  Unions and government are the two institutions that the working man has to balance against the power of large companies.  Strong unions inevitably lead to a strong middle class.

Next up comparing current jobs plans