Archive for December, 2011

Denmark

Friday, December 23rd, 2011

“We may have democracy, or we may have wealth concentrated in the hands of a few, but we cannot have both.” Justice Louis Brandeis

Justice Brandeis was concerned about the income inequality he saw growing in the years leading up to the great depression.  At that point, the top 1% average income was approximately 16x the median household income.  In 1980 this “Brandeis Ratio” was 12.5.  By 2006 (the most recent numbers) it had jumped to 36.

So let’s take this whole issue on.

First let’s document that income inequality is really growing.

Then let’s take up the conservative arguments for why we shouldn’t be concerned.

Let’s see if we can determine what the root causes are.

Finally, let’s dig into Justice Brandeis’ concern about the threats income inequality pose to our society.

Income Inequality

The following graph should do the trick.  The key inflection point to remember is 1980.  Up until that point the incomes of everyone in the economy from rich to poor grew at a rate that pretty much equaled the growth of productivity.  After 1980, incomes of the top 5% grew continued to track the productivity curve while the 50% percentile and the 30% percentile flattened out.  So there should be no question that income inequality has increased since Ronald Reagan took office.

It’s the Economy, Stupid

Conservative Republicans claim that the current income inequality is the result of the natural progression of economic forces.  The information revolution, globalization, and the growth of the service economy transformed the workplace.  Workers continued to be more productive, but the nature of work changed.  Manual labor was replaced by intellectual labor.  Manual labor and the manufacturing associated with it moved to those markets with the lowest cost workers.  The service economy created well paying jobs for highly skilled individuals, and low paying jobs in retail and entertainment markets for everyone else where unions were weak and workers expendable.

They also claim that the rich have earned their money through talent and hard work.  They are the ones who are creating the jobs that this economy needs.  Taxing them effectively punishes the sort of hard work and innovation we should be encouraging.  It also discourages the private sector job creation that we need.

Here are the problems with these narratives.

I’ve already posted that the majority of the top earners became rich either through inherited wealth, good fortune, or theft using unethical or pathological behavior.  I’ve also posted data which shows that the .1% and big businesses are not job creators.  Jobs these days are being created by medium size fast growing technology businesses.

As far as income inequality being the result of some natural economic evolution, the transformation we’ve seen in the US did not occur globally.  Germany for example kept its robust manufacturing-based economy complete with highly paid workers, strong unions, and a broad social safety net.  They did not experience the income inequality that we see in this country.  They also did not suffer the financial meltdown and deep recession that we experienced.

It’s the Government, Stupid

Political scientists Jacob Hacker and Paul Pierson in their book Winner Take All Politics studied why this transformation only occurred here.  They concluded that this skyrocketing inequality wasn’t the natural consequence of market forces but rather the direct result of public policy which concentrated and amplified the effects of economic transformation and directed those gains exclusively toward the wealthy.

Congress has cut tax rates on high incomes repeatedly during this period of time.  It relaxed the tax treatment of capital gains and the sorts of investment incomes that are disproportionately paid to wealthy investors.  This resulted in windfall profits that the middle class and poor didn’t see.

 

Workers’ rights to organize and bargain for a bigger piece of the pie were weakened while corporate power grew.  Corporations and wealthy individuals gained the sort of access to politicians that the middle class and poor do not have.  Based on recent Supreme Court decisions, corporations have inherited some of the same rights as individuals when it comes to funding political campaigns.  There are few practical limits to the amounts of money business and the wealthy can contribute and many of those contributions can be anonymous.

Corporate governance policies changed to enable extraordinary pay and benefits for top executives regardless of company performance.  Deregulation allowed financial institutions to merge and create organizations that were “too big to fail”.  These institutions created financial instruments that were so complicated that the market lost the ability to accurately value them.  Those managing these institutions walked away with hundreds of millions of dollars while taxpayers and homeowners paid the bill when the bubble burst.

Both parties were complicit.  Reagan and Bush cut taxes.  Clinton repealed the Glass-Steagal Act which allowed banks and investment companies to merge.

Hacker and Pierson also pointed out that the American system of separated powers makes it difficult to take the sort of dramatic and decisive action possible under parliamentary-style governments.  Once policies are enacted typically during times after the White House changes parties and voters give the new party a majority in both the House and the Senate, they become very difficult to change when government again becomes divided.

Allowing corporate execs to be compensated with stock options, for example, encouraged spikes in short-term stock price rather than long term growth.  This produced jaw dropping compensation for execs, but when these policies damage the company, it’s the employees who got laid off.  When these companies went bankrupt, it was the employee pension plans that get wiped out.  In the 1990s, the Financial Accounting Standards Board recommended changes to curtail this practice.  Corporate lobbying in general, and Joe Lieberman in particular stopped the FASB plans and ten years later we ended up with ENRON.

The following graph demonstrates that our representatives have much more in common with the .1% than they do the 99.9%

The bottom line from Hacker and Pierson’s point of view is that business interests have dominated both politics and policy for the past 40 years.  It’s that dominance, and not the natural progression of economic forces, which has produced the wealth-driven winner-take-all economy that we have today.

Inequality Damages Quality of Life

So now we come to the meat of this discussion.  We’ve established that income inequality is the result of policies that our government implemented in the transition from the FDR New Deal to Reagan-led conservatism.  It still leaves the question of so what?  What harm does income inequality cause?

The following data is taken from a wonderful talk on the subject by Richard Wilkerson.

He discovered that there is a direct correlation between income inequality in a country and life expectancy, math & literacy, infant mortality rates, homicides, imprisonment, teenage birth rates, trust, obesity, mental illness (including addictions), and social mobility.  In the industrialized world, low income inequality correlated strongly with better performance in all of these quality of life statistics.  The United States is by far the worst performing country and has one of the highest ratios of income inequality.  That same correlation exists if you use the UNICEF index of child wellbeing.  There is no correlation, by the way, between these quality of life measures and GDP.

 

What Wilkerson has discovered is that our quality of life depends on our relationships with others rather than our income.  The strength of this social fabric has a direct relationship to overall health of a society as well as the ability of that society to fully leverage the full potential of its members.  The converse is that social dysfunction driven by income inequality rips at the fabric of a society.  Status competition, envy, and anxiety increases stress at all income levels.  Stress damages health and increases violence.  A more equal society improves the quality of life for everyone across the income spectrum.

The expectation isn’t that every American has to become a millionaire to validate the American Dream.  The expectation is that every American who is willing to work hard and play by the rules will have access to both the education and those opportunities that will allow them to maximize their value in this society.

The fundamental problem is that the promise that America makes to all its citizens has been broken.  We have a pluralist democracy where every citizen has a vote.  Our promise to every citizen isn’t that they will become wealthy.  It’s that if they educate themselves and vote, this democracy will produce solid incremental changes that will inexorably move EVERY American forward toward security and a higher quality of life.  We were that country for the fifty years following FDR’s new deal.

In the last thirty years, the progress of the poor and middle class stalled.  The following graph shows how the stalled salaries of the poor and middle class ended up funding the dramatic growth of the wealthy class.

 

Conclusion

The unfortunate result is that the real American Dream is no longer possible in this economy because of income inequality.  Those who want to experience the American Dream today that the Greatest Generation created and lived,  have to move to one of those countries on the graph that have figured out that income equality is key to social mobility and quality of life  – Denmark.

Keystone Cops

Sunday, December 18th, 2011

 

The Keystone pipeline as been in the headlines lately as part of the “bargain” that the Republican Senators struck to pass an extension of the payroll tax holiday, unemployment benefits, and the current level of Medicare payments for physicians.

The Keystone pipeline is a project intended to cary crude oil extracted from tar sands in Canada to oil refineries in Texas.

The reason that the pipeline has been delayed is because it’s initial construction path took it through environmentally sensitive areas in Nebraska. Specifically, any oil spill in that area would threaten one of the largest supplies of underground water in the country. This aquifer supplies water to much of the upper Midwest.

Here’s what FactCheck.org said about the current status.

The president issued a statement supporting the delay, which the State Department announced Nov. 10, citing the need for an “in-depth assessment of potential alternative routes in Nebraska.” On Nov. 14 the developer announced it would change the route of the pipeline to avoid Nebraska’s sensitive Sandhills area, and said it was confident the project would ultimately be approved. On Nov. 15, Nebraska Gov. Dave Heineman (a Republican) praised the State Department’s action and called the re-routing a “common sense solution.”

The Nebraska governor recently signed two bills that enacted the compromise agreed upon with the pipeline builder to move the route, and approved up to $2 million in state funding for an environmental study of alternate routes.

So what is it that the Republicans want?

There is a deal in place with the Republican governor of Nebraska to find a route that doesn’t put the Ogallala Aquifer at risk. Nebraska has agreed to foot the bill for the study. The pipeline company has agreed to change the route pending the outcome of the study. The study of alternate routes should take about a year.

It appears that the Republicans are attempting to force President Obama into a public declaration of his position on this project. If he approves the project, he will upset environmentalists. If he cancels the project he will upset economic voters who are interested in jobs growth. Right now he can remain on the fence and I think has a strong defense for letting Nebraska work this out.

The President has already said publicly that he would veto any legislation requiring him to approve the Keystone pipeline project before the planned environmental study is done. The current proposed language in the payroll tax extension passed by the Senate gives him an easy out. He simply has to declare that it is not in the national interest to approve the project today.

I think that this proves how desperate the Republicans are becoming to develop substantive issues that they can use in the 2012 election.

Paul Begala recently published an interesting analysis in Newsweek.

 I cannot think of a time when the economy declined but the president was not blamed—but this may be the first. If the Republicans were smart, they would do on taxes what they did on trade: quietly pass Obama’s proposals, knowing full well that even a million new jobs will not be enough to climb out of the hole Obama inherited. (Fourteen million Americans are unemployed.) The economy isn’t giving Obama enough jobs, but the Republicans are giving him the next best thing: a villain to blame for the poor economy. By killing Obama’s jobs agenda, Republicans may just save his presidency.

It will be interesting to see how this plays out, but so far the Obama team seems to be winning the tactical narrative battle. On the issue of jobs, the country wants the government to take action to create them. This is counter to the Republican claim that only private industry can create jobs. The country also appears perfectly fine with the concept that higher taxes on those making more than $1M a year should fund an expanded government jobs program. This is counter to the Republican claim that higher taxes on the rich will increase unemployment.

In this most recent payroll tax extension, for example, Obama successfully positioned himself as a supporter of tax cuts for the working man while Republicans were forced to oppose that tax cut if it meant raising taxes on the rich.

I think that this is going to be drumbeat from here through the election next year. Obama will continue to position Republicans as defenders of the rich and the status quo. He is certainly vulnerable to the attack that he is shirking his own responsibility for the past four years of economic pain, but as Paul Begala has pointed out, so far he has been successful in forcing the Republican party into positions where their actions confirm Obama’s narrative that they are the real villains.

Intuitive Small Business Hiring Plan

Saturday, December 10th, 2011

We’ve already proven that small business is not the employment engine of the economy, but it is still interesting to determine what small businesses need.

We continue to hear Republicans claim that small business is in need of lower personal taxes and less regulation.

The problem is that when asked to provide some examples of small business people who support that view, they can’t seem to find any.

NPR asked Republican senators and congress people for help.  They asked the business groups that have been lobbying against the proposed “millionaires’ surtax” and they couldn’t come up with any either.

Finally they resorted to the NPR facebook page where they asked anyone affected by this tax to please step forward.  Now admittedly this isn’t a scientific survey, but it is just as relevant anecdotally as Republican Senator John Thune’s explanation for his opposition.

“It’s just intuitive that, you know, if you’re somebody who’s in business and you get hit with a tax increase, it’s going to be that much harder, I think, to make investments that are going to lead to job creation,”

Fortunately the responses from the NPR Facebook small business people who were willing to come forward were even more intuitive than Senator Thune.

In summary, they said that demand is what drives their business growth.  They make the investment to hire new workers, for example, in response to increased demand for their products or services.  It doesn’t matter how low their taxes are.  If there is no demand, they will not invest.  Similarly, the profits generated from increased demand far outweigh the small amount of additional taxes they may incur if they end up in a higher tax bracket.

The same “logic” has been applied by Republicans to deregulation.

The owner of a mechanic shop recently wrote a piece in support of government regulations.  He pointed out that government regulations forced the car manufactures to share their diagnostic codes with independent repair shops.  Clean air regulations and the inspections that some states require force owners to keep their cars in good repair.  Yet Republicans are promoting their latest attempt to deregulate big business as a benefit for small business.

The REINS act effectively transfers oversight from the agencies created by Congress to create and enforce regulations, to Congress itself.  Given the polarized political climate in Congress, this would grind the enforcement process to a halt.

Vince Siciliano, CEO of a community bank in San Francisco said, “We need safeguards that prevent misleading and dangerous mortgage products from being sold to borrowers who can’t afford them. We need standards that prevent piles of bad loans from being packaged and sold as if they were top quality. Under these standards, we would never have had the near-meltdown of the major banks, the credit squeeze that resulted, the trillion-dollar bailout, and the millions of homeowners who are underwater on their mortgages and unable to spend much on anything.”

“If the REINS Act had been law in 2009, banks like mine would not be doing as well or lending as much to small business as we are today because we likely wouldn’t have the market rules that help us compete. For example, when the Federal Reserve passed rules (the so-called “opt-in/opt-out rules”) requiring banks to get customers’ permission for overdraft fees, it allowed customers to see the true cost of my bank’s products as compared to the bigger banks. Furthermore, the insurance assessment rules instituted by the F.D.I.C. after Dodd-Frank passed actually reduced the cost of insurance for 98 percent of community banks by making large banks pay their fair share.”

During the first half of 2011, less than one-quarter of 1 percent of U.S. job layoffs was due to regulations, according to the Bureau of Labor Statistics. In contrast, 30 percent of layoffs were due to poor “business demand.” At least five other surveys, including ones commissioned by the Chamber of Commerce and the McClatchy News Service, found that lack of consumer demand and economic uncertainty were the most important reasons that small businesses are not expanding and hiring.

So if increased demand is what is going to drive small business to hire, what is it that the government can do immediately to increase demand for small business people?

The answer is also logical, put more money into the hands of consumers.

That’s exactly what President Obama has proposed in his extensions of the payroll tax holiday and unemployment insurance.   The bulk of that money is going to go to working people who will spend it.  That money flowing into the economy will drive demand for small business goods and services.

The Christmas Gingrich

Tuesday, December 6th, 2011

Newt is the latest, anybody-but-Romney GOP Presidential candidate.

Everyone agrees that he is a very smart person.

Everyone also agrees that he has accumulated a lot of baggage from his long time in the political spotlight.

He has admitted to having an extra-marital affair with a 23-year old staffer while he was publically calling for President Clinton’s impeachment for lying about (wait for it)…..  an extramarital affair with a 23-year old staffer.  Newt’s affair caused him to divorce his wife while she was in the hospital fighting cancer.  He famously said his wife, “isn’t young enough or pretty enough to be the President’s wife.”  She later had to take him to court to enforce his child support responsibilities.

His huge ego tends to consume all of the oxygen in the room.  As a result, he has burned a lot of bridges in Washington, not only with Democrats, but also with Republicans.  Former GOP colleague Sen. Tom Coburn (Okla.), for example, stated publicly over the weekend he is not “inclined to be a supporter” of Gingrich due to that past experience.

Newt was one of the members of congress that bounced checks in the 1992 House banking scandal.

In 1995 Rupert Murdoch approached him with a $4.5M book deal in return for his help with a complaint from NBC that Fox was a foreign-owned media outlet which is against US law.  When questioned by the press, Gingrich first said that he knew nothing about the meeting.  Then he admitted that Murdoch and he met on a park bench.  Then he admitted that Murdoch’s lobbyist was at the meeting too, explaining that he hadn’t mentioned the lobbyist previously because no one asked.  Then he said that the book deal wasn’t his idea, but the literary agent involved told the press that Newt’s associate had actually approached her.  Finally, Gingrich gave up the $4.5M advance in return for an even more lucrative royalty deal.

Where Newt really got into trouble, though, was when it was discovered that he was using GOPAC, his political action committee as his personal piggy bank.  This prompted an investigation of the House Ethics Committee.  That investigation was dropped shortly before Newt resigned in 1998.

In his time out of office Newt was paid millions of dollars as a consultant in Washington.  None of his companies ever registered as a lobbyist firm, but as an “expert” he provided those who contributed to his various organizations access to the halls of power that they wouldn’t have otherwise had.  He also advocated policies that now are at odds with his own Republican party.  In particular he was a big supporter of the individual mandate that later because one of the most controversial provisions of the Obama healthcare reform bill.  There is a YouTube video of a commercial that Newt and Nancy Pelosi shot for Al Gore about the dangers of climate change.  His consulting clients included Freddie Mac and Fannie May who paid his firm $1.6M and $1.8M respectively.  On the Presidential campaign trail he along with many of the other Republican candidates has criticized Freddie Mac and Fannie May as evidence of liberal excess.  Republicans though, appear to have a short memory.  They seem to be willing to even give him a pass on his historic flip flop on Libya.

Democrats generally would be overjoyed if Republicans nominated Newt.

Barney Frank said, “He would be the best thing to happen to Democrats since Barry Goldwater”

Nancy Pelosi said, “When the time is right. … I know a lot about him. I served on the investigative committee that investigated him, four of us locked in a room in an undisclosed location for a year. A thousand pages of his stuff.”

The recent drop in unemployment was already a nice early present for the Democrats.  Newt Gingrich’s recent rise in the polls in advance of the votes in Iowa and New Hampshire could make it a very good Democratic Christmas indeed.

Prostitution to Falsehood

Sunday, December 4th, 2011

Jefferson commented on media bias two hundred years ago.  He admitted that media is going to behave unethically if profit was their primary goal.  He recommended what later became part of the journalistic code of ethics, but also worried that ethical media was going to struggle in the marketplace because readers prefer information that re-enforces their own individual bias.

Here’s what he wrote to John Norvell in 1807.

To your request of my opinion of the manner in which a newspaper should be conducted, so as to be most useful, I should answer, “by restraining it to true facts & sound principles only.” Yet I fear such a paper would find few subscribers. It is a melancholy truth, that a suppression of the press could not more completely deprive the nation of its benefits, than is done by its abandoned prostitution to falsehood. Nothing can now be believed which is seen in a newspaper. Truth itself becomes suspicious by being put into that polluted vehicle.

That seems to be the state that we are in today.  Truth does appear to be hard to come by because there is so much suspicion regarding its source.

I’ve posted in the past about why we find ourselves in this state.  It is an outgrowth of the generational dynamics described in the book The Four Turnings.  The book predicts the current conflict in the phase the authors call The Unraveling.  It’s why we have the growth of narrow cast unethical media and the general distrust of any information source that may call you own personal beliefs into question.  It is much easier to simply discount news sources that you don’t agree with as biased rather than dig down into an issue to determine what the facts really are.

When we speak of media bias, I think there is a practical response and a philosophical one.

The Practical

There is a spectrum of news sources.  There are unbiased sources.  There are sources that have a point of view but also adhere to a set of journalistic principles that require them to determine what the facts are and report on them.  Then there are sources with no journalistic principles that appear to be driven only by the profit potential of appealing to a particular audience.

Unbiased Sources

The CS Monitor does not have a political point of view.  They are probably the only major US newspaper who has publically taken that position.

FactCheck.org and Politifact.org (and its spinoffs) are unbiased websites who also have taken a public politically neutral position.  Their funding is transparent so you can make sure that they aren’t being influenced financially.  They also have a transparent review process to make sure that they don’t suffer internal political “creep” based on the issues that they are addressing.  These are NOT news sites.  They are sites that hold politicians and the media accountable for factual accuracy.

Ethical Sources

Most of the major newspapers in this country can reasonably be considered ethical sources.  Exceptions include those owned by Rupert Murdoch’s News Corp.  The code that the ethical sources follow means that they are only going to report as fact those things that they can corroborate from multiple named sources.   They will do their best to give those with a point of view an opportunity to tell their side of the story.  The paper expresses its opinion on the editorial page and that is clearly a separate section of the newspaper.  Opinion columnists are clearly labeled as such so even casual readers don’t mistake a columnist’s opinion for a news story.  Media organizations who adhere to this ethical standard earn the right to have an opinion because that opinion does not bias the way they report the news.  I also suggest that NPR follows this ethical standard.

Unethical Sources

These are organizations where the lines between opinion and fact are deliberately blurred.  From their perspective, everything is opinion and everything is fact.  Murdoch is a pioneer in this form of yellow journalism and it has made him a wealthy man.  That’s because there is a hunger in the marketplace for media sources which champion conservative causes.  In my opinion, though, no matter how noble the end might be, it can’t justify the means of unethical reporting.

The whole “birther” movement is a perfect example of an Internet conspiracy theory that had no basis in fact, needlessly divided the country, and was the subject of supportive “news” stories in the Wall Street Journal (a Murdoch property), The Washington Examiner (owned by conservative billionaire  Philip Anschutz), and the Investor’s Business Daily (another news source that jumped on the anti-Obama bandwagon).

Philosophical

The claim that there are no unbiased news sources is a red herring that basically serves the interests of those who would prefer that condition.  Claiming that all news sources are biased frees unethical sources to continue to blur the line between fact and opinion without the fear of being held accountable.  Just one example of this tactic is described in great detail at factcheck.org regarding a claim of bias at snopes.com.

It also frees those who happen to share the opinions promoted by unethical media sources to discount the criticisms/corrections coming from unbiased fact checking organizations or ethical sources.  The “Obama is a Muslim” movement is a great example.  That particular conspiracy theory was widely debunked and discredited years ago by unbiased and ethical sources.  It still is a regular topic of conversation by Rush Limbaugh, Glenn Beck, and even some Republican presidential candidates.  This whole conspiracy was able to protect itself from the unanimous distain it received from the unbiased and ethical media because those invested in this conspiracy believed that all opposing sources were politically biased.  The only shred of fact in this whole “big lie” is that President Obama has a Muslim-sounding name.

Truth and Democracy

Jefferson believed an informed electorate was key to an effective democracy.

Whenever the people are well informed, they can be trusted with their own government; that whenever things get so far wrong as to attract their notice, they may be relied on to set them to rights.

I believe that the dysfunctional government that we have today is a direct result of our failure to hold unethical news sources accountable for their actions.

It is our responsibility as a society to demand media sources that meet Jefferson’s criteria of “true facts & sound principles”.  It is also our responsibility to hold accountable those who fail this measure because their actions DO weaken the fabric of our democracy.