Archive for January, 2014

Economic Costs of Income Inequality

Saturday, January 25th, 2014

As a quick summary, the huge gap between the rich and poor is a fairly recent phenomena driven by changes in government policy that started with Ronald Reagan. We are now in uncharted territory. We have never had the level of income inequality that we are currently experiencing. There has been a huge transfer of wealth from poor and middle class families with no end in sight. Poor and middle class wages over the past 15 years have gone down while the wages of the wealthy have increased.

I will do my best to stay away from discussions of morality in this post and focus on how this affects our economy.

Narrow Spending Base

A majority of economists surveyed by the AP in December felt the current level of income inequality was unhealthy.

“What you want is a broader spending base,” said Scott Brown, chief economist at Raymond James, a financial advisory firm. “You want more people spending money.”

That’s because discretionary spending by the wealthy tracks the stock market. When the market is up, they spend. When the market is down they don’t. This makes consumer spending much more volatile than it has been in decades past. This volatility leads to slower economic growth because businesses are less willing to invest as demand increases for fear that the demand spike is only temporary.

“The broader the improvement, the more likely it will be sustained,” said Michael Niemira, chief economist at the International Council of Shopping Centers.

Scott Brown agrees that the current levels of income inequality are slowing economic growth, “there’s not much denial of that … and you’re starting to see some research saying, yes, it does slow the economy.”

Warped Economy

It isn’t only that the spending base has narrowed.

The way that the wealthy spend their money is different from the way that middle and lower classes consume. That difference tends to increase the concentration of wealth at the top of the income range rather than spread it throughout the whole economy.

Here’s how that works.

Because the wealthy have already satisfied their basic needs, they spend their discretionary income on goods whose value stems from the talent of other top earners. Let me say that again in a slightly different way. The wealthy spend their discretionary income on goods and services that only they can afford. The producers of those goods and services are able to charge a premium for their services because they produce the best of whatever it is that differentiates them for everyone else. As a result, these “best of breed” producers also become wealthy.

Here’s how the NYT describes it.

Wealthy people don’t choose just any architects, artists, lawyers, plastic surgeons, heart specialists or cosmetic dentists. They seek out the best, and the most expensive, practitioners in each category. The information revolution has greatly increased their ability to find those practitioners and transact with them. So as the rich get richer, the talented people they patronize get richer, too. Their spending, in turn, increases the incomes of other elite practitioners, and so on.

Technology has also made the best performers far richer than they could have been even a decade ago. That’s because the best musicians, athletes, and artists can now reach audiences of virtually unlimited size. Artisans can ship their products anywhere in the world. Which allows them to dominate their markets in ways never imagined possible.

Education markets are warped because the wealthy can afford the tutors, camps, travel, and exclusive prep schools that provide their children a distinct advantage in the competition for slots at the world’s best colleges and universities. Hunter Prep School in NYC was created to provide a public alternative to private prep schools for NYC children. In the 70’s the demographics of Hunter pretty much reflected the demographics of NYC. Now almost 80% of the Hunter students are children of alums. Their parents DID succeed because their Hunter education got them into Ivy League schools which turned into lucrative jobs on Wall Street. They were able to send their children to exclusive elementary schools and after school programs to prepare them for the Hunter entrance exam. It’s a perfectly understandable response, but that response is effectively destroying the meritocracy on which Hunter was originally based. In its place is an oligarchy, which is what Hunter was supposed to weaken.

Finally income inequality is warping the political process. The wealthy have more access to legislators than the middle class or the poor. The 2012 Republican Primary is a great example. Two of the three candidates in the final run for the nomination (Santorum and Gingrich) received virtually all of their funding from just one person. Gingrich from Sheldon Adelson. Santorum from Foster Friess. Not surprisingly, Gingrich’s platform reflected Adelson’s strong support for Isreal. Santorum’s platform reflected Friess’ conservative Christian views.

Summary

Income inequality is real.

It has accelerated over the past 30 years to the point that the wealthy represent the only group enjoying an increasing income share. Everyone else is financing that increase with their own decreasing shares.

Concentrating so much purchasing power in the hands of such a small number of people weakens our economy and slows economic growth.

It warps the consumer economy by creating a feedback loop where the rich only spend their money with organizations and individuals who are also rich. This isn’t necessarily the overt intent of the rich, but it is the practical outcome of their rigging the system for their own benefit.

It warps our educational system by limiting access to the best schools to those who parents can afford to send them to the best elementary and prep schools. The wealthy aren’t any smarter than anyone else. They are just way better educated, financed, and connected.

It warps our political process by making the votes of the wealthy more valuable that the votes of everyone else. Those votes have supported a system of lower taxes and reduced regulation which became the foundation for their success.

Next up, a brief analysis of how moral foundations also warp our view of the rich. Then a discussion of the economic value of a more level playing field and then finally what government can do to encourage a more level playing field.

When Ideology Confronts Personal Reality

Friday, January 17th, 2014

Increasing Healthcare Costs

I was getting my hair cut the other day. The guy doing the work owns the salon. He was complaining that his bill for healthcare insurance almost doubled from last year. He purchases his insurance through a well-respected local insurance broker. He has conservative verging on libertarian political views, so his immediate reaction was to blame the Affordable Care Act in general and President Obama in particular.

He was also upset at what he felt was poor service form his broker. They met in November and the broker couldn’t provide any detailed information about what it would cost for him and his wife to renew their policy. The next thing he knew, he received a bill in the mail in late December that he had to pay immediately if he wanted to continue his coverage.

I asked him some questions about the nature of his previous coverage. From his description, the silver plans might work just fine for him. I asked if he had gone to healthcare.gov to check out other options. He was surprised that you could do that sort of comparison shopping without creating an account. I assured him that he could and that he could also probably cancel his existing plan if he found something better. We agreed to check back in a couple of weeks.

Just out of curiosity, I checked the site too. I found that the MOST expensive plan listed there from his current insurance company was $200 less a month than the bill that he received. I found silver plans from other companies could REDUCE what he paid LAST YEAR by as much as $300/month.

It will be interesting to see what he thinks about the Obamacare the next time I see him and who he feels is to blame now for the sticker shock he experienced in December.

Long Term Unemployment Insurance

As we’ve been discussing in previous posts, Republicans are opposed to extending long term unemployment benefits because they feel that those benefits reduce the incentive of the unemployed to find a job. They believe that those who are unemployed CHOSE to collect their benefits rather than look for another job. They argue that eliminating those benefits will be just the encouragement that the unemployed need to get back to work.

Republicans have been under a lot of pressure from Democrats who don’t share their beliefs and feel that cutting off benefits is both cruel and bad economic policy. Republicans said they would consider passing an extension if the Senate could find a way to pay for it. Senate Democrats did find a way to pay for it, but Republicans didn’t like it. So now I guess the Republicans are saying that they would consider passing an extension if the Democrats could find a way to pay for it that caused the Democrats some pain. The result is another impasse with more people every week finding themselves without any benefits. Not surprisingly, some of those people are Republicans.

Here are a couple of quotes.

The standoff infuriates people such as Lita Ness, who lost her job as a civilian contractor at Peterson Air Force Base in August 2012 and just received her final check from the unemployment office.

“I’m registered as a Republican, but if they continue to use this not extending our (aid) I’m probably changing to Democrat,” Ness, 58, said as she took a break from a computer training class at the Pikes Peak Workforce Center. “People in our district who vote `No’ on this, I’m not going to support them.”

And

Others feel that after having contributed to society, they are now being abandoned by the government. “I paid my taxes. I’ve helped people my whole life,” said Barbara Greene, 59, who lost her job as a medical secretary in a hospital last year and expects her jobless benefits to end in March, “and now they’re just throwing me to the side.”

The spokesman for Republican Rep. Doug Lamborn who represents that district said, “It’s $6 billion, doesn’t do anything to create jobs. House Republicans remain focused on creating jobs and improving the economy.” It is easy for him to say this because he HAS a job. His constituents who are losing their benefits don’t share his belief that money spent on unemployment benefits is wasted on the unemployed.

The unemployed know this claim isn’t true. So do economists. The data that I quoted in an earlier post shows that unemployment insurance actually DOES create jobs. That’s because the benefits are spent immediately on goods and services. That spending flows into the hands of grocers, landlords, gas station owners, and other retailers. Every dollar of unemployment insurance generates $1.55 dollars of benefit to the local economy where that dollar is spent. No other private or government program is as efficient.

Rep Lamborn may still be re-elected to represent Colorado Springs in November, but fewer people are going to vote for him because they are beginning to realize that his ideology (smaller government and lower taxes) is not delivering the prosperity for middle class folks that he told them it would.

Climate Change

Three interesting studies came out recently with regard to climate change.

In the first, researchers found that opposition to the concept of climate change varied based on the weather. The hotter it was, the more support there was for the concept of human driven climate change. The colder it was, the more opposition to the concept. This has to do with the discovery that when it is hot, our memory reminds us of all of the other times we’ve experienced heat. Same thing when it’s cold.

What climate scientists predict, however, is that climate change will drive more extreme weather. Here in the upper Midwest that means MORE precipitation particularly in the winter and particularly at night.

But clearly that didn’t stop climate change deniers like Donald Trump who proved the studies point by tweeting, “We are experiencing the coldest weather in more than two decades-most people never remember anything like this. GLOBAL WARMING anyone?”

The reality, however, is that climate change is threatening Donald Trump’s home in NYC, his Casino’s in Altantic City, and his golf courses in Florida.

A second study documents the dramatic rise of sea levels on the east coast. They rose eight inches over the past 130 years. They are projected to rise another eight inches in the next 35 years. By 2100 that eight inches will become 36-39 inches.

Hurricane Sandy had a peak storm surge of 14 feet and caused $65B in damage. As the sea levels rise, less powerful hurricanes will cause similar damage more frequently.

Rising sea levels have already inundated barrier islands which protect the mainland from storm damage. An additional three feet of sea level change will eliminate most of the barrier islands on the east coast including Hatteras.

We are already seeing the financial consequences of this creeping disaster. Those with property in the expanding flood zone can’t get 30 year mortgages. Flood insurance has already going up dramatically and in some areas is no longer available from private sources. The federal flood insurance program is $24B in the red. Some Republicans, in an interesting turnabout, are demanding that the government DO MORE to protect commercial and residential interests in their districts.

The reaction in states like NC is to simply deny these changes. In 2012, the state legislature passed a bill banning state agencies from reporting sea-level data. Two weeks after that bill passed, a study from the US Geological survey documented that sea levels along the coast line from Cape Hatteras to Boston were rising at four times the global rate. You may have guessed by now that since 1980, NC leads the world in disappearing shoreline.

Same thing is going on in Virginia where the legislature budgeted money to study the problem, but only after all references to sea-level rise and climate change had been removed. In towns like Norfolk — where neighborhoods are already flooding repeatedly even in the absence of storms, and where some homes have become unsaleable — people are starting to pay attention.

“In the last couple or three years, there’s really been a change,” said William A. Stiles Jr., head of Wetlands Watch, a Norfolk environmental group. “What you get now is people saying, ‘I’m tired of driving through salt water on my way to work, and I need some solutions.’ ”

In the third study, an Iowa state poll of farmers added a question last year about whether or not farmers believed that climate change was real and human caused. Clearly this is a group that is politically conservative, deeply religious, and highly dependent on weather patterns for their living. Last year 67.7% answered yes. This year that jumped to 74.3%

Conclusion

We are finally seeing what happens when political positions arrived at through emotional decisions based on moral choices confronts undeniable reality.

Obamacare DOES save people money regardless of whether you are a liberal, a conservative, or a libertarian. The only difference is that it is difficult for conservatives and libertarians to accept that fact.

The unemployed AND the economy benefit from assistance. During times of economic downturn when job seekers outnumber jobs, unemployment benefits do not increase the unemployment rate. Putting money into the hands of the unemployed actually REDUCES the unemployment rate. Unemployment benefits help everyone regardless of whether you are a liberal, a conservative, or a libertarian. The difference is that it becomes increasing difficult for conservatives to claim that the long term unemployed have only themselves to blame, when they themselves join the expanding ranks of the long term unemployed.

Increasing sea levels is a fact. The sea doesn’t care if you are a liberal, a conservative, or a libertarian. The people who do care are those who finance and insure property. Their actions speak volumes about whether or not climate change is real. Property values in the affected zones are dropping. Banks are unwilling to make new long term loans. Insurance companies are raising rates, or canceling policies. Conservative evangelical Iowa farmers are including climate change predictions in their agricultural and livestock planning. Conservatives and libertarians are having to come to grips with the reality that ideology cannot hold back the tide or make it rain no matter how hard you try.

Income Inequality Facts

Monday, January 13th, 2014

I’ve been looking for a way into this whole discussion of income inequality.

The challenge, based on what I’ve already discussed regarding liberal and conservative moral foundations, is that it can’t be solely a fact-based discussion.

That’s because the fundamental reason why there is the largest gap between the rich and poor in our history is BECAUSE conservatives believe in the concept of a Utopian Free Market. More importantly, they believe that it is the solution to ANY economic or political challenge we face in this country.

Too many people unemployed? Cut long term unemployment benefits and the unemployed will be forced to find a job or starve. This satisfies the moral “cheating” outrage conservative feel when it seems somebody is getting something they don’t deserve. Conservatives feel comfortable eliminating unemployment benefits because they believe that the Utopian Free Market will automatically create jobs because supply will drive down wages. Everyone who wants a job will be able to find one in this system. The only reason why people are unemployed is because they are lazy or stupid, in which case it’s their own fault if they starve.

But I’m putting the cart before the horse. There will be plenty of time to examine the emotional arguments about things like this.

The first thing we need to establish are the facts about economic inequality. Then we can discuss the causes and remedies.

The facts are best displayed in these graphs. They show how income was distributed between rich and poor from when we first started to collect income tax in 1917 up through the latest data available in this study, 2008. All of this data comes from a study done by Cal Berkeley economist, Emmanual Saaz.

These graphs are wonderful snap shots from an interactive graph posted by the Economic Policy Institute. Feel free to go there yourself and move the start and end points to see how income over that period was distributed.

The math on the first graph looks OK. Income gains over 90 years are basically split between the top 10% and the bottom 90%. That means that the top 10% got 5x more money than their demographics would command.

income-inequality-1917-2008

But the graph itself isn’t flat. If you look at the flat part of the graph from 1917 – 1981, the top 10% got only 31% of the income growth over that period of time. 69% of that growth went to the bottom 90%. That distribution was pretty consistent over that whole period. After 1981, this began to change dramatically.

income-inequality-1917-1981

From 1981 to 2008 the top 10% got 96% of the income gains generated by the economy. The bottom 90% got 4%.

income-inequality-1981-2008

Now here’s the real story, and it only tracks to 2008. The last six years it has only accelerated.

From 1997 – 2008 ALL of the income growth went to the top 10%. The incomes of everyone else DECLINED.

income-inequality-1997-2008

What is so important about 1981? That’s when Ronald Reagan and “voodoo” economics showed up. That’s when this whole unregulated low tax conservative economic experiment started. 30 years later, we are witness to the outcome. A massive transfer of capital from the middle class and the poor to the wealthy.

Middle class wages have been more or less flat for 45 years, but costs continue to go up. The result is that all except the top 10% are becoming poorer even though they are working hard and playing by the rules.

There are likely a whole list of causes besides the economic theories typified by de-regulation, low taxes on the rich, and erosion of labor rights. The issue is not cause, at this point, but simply the fact that this condition exists.

Next up, the economic perils of income inequality.

Men (and Women) for Others

Wednesday, January 8th, 2014

First a little bit of disclosure. I graduated from an all-boys Jesuit prep school in Omaha called Creighton Prep. Among other things, they taught me to be a man for others.

This term represents the basic educational philosophy of the Catholic Jesuit order. What it means is that those who attend Jesuit schools are taught that love of God includes love for the poor. You can’t have one without the other. They are also taught that this love is best expressed in action rather than talk. That action is characterized by the term “Social Justice”. What that means is that Jesuit philosophy regards ANY system that oppresses the poor as unjust. That includes both political and economic oppression.

The term “Social Justice” was coined by Jesuit Priest Luigi Taparelli in the 1840’s. It refers to the ability people have to realize their potential in their particular country or society. In broader terms those who advocate for Social Justice are encouraging the creation of institutions which ensure fair distribution of wealth and equality of opportunity. Those institutions typically include education, health care, social security, labor rights, as well as a broader system of public services, progressive taxation, and regulation of markets.

Gross income inequality is an example of a condition which exists in a society which lacks Social Justice. Racial discrimination, political oppression, and religious persecution also occur in some societies which lack Social Justice.

This brings us around to the discussion of Pope Francis and Social Justice.

Pope Francis is a Jesuit. He is the first Jesuit to ever be elected Pope. This is a big deal in the politics of the Catholic Church. The basic reason is that the Jesuits, in simplest terms, are fearless take-no-prisoners warriors. They are beloved because of their willingness to go anywhere and do anything to advance the cause of Christ and the poor. Jesuits have typically recruited the best and brightest in Catholic clergy because of this “no hold barred” attitude. These sorts of people are also attracted to the Jesuit order because Jesuits believe in education and scholarship. They believe that you can better understand God through academic study of His creation. Since the Jesuits operate some of the best colleges in the world, those who go through the Jesuit system have access to the institutions which prepare them to be intellectual “shock troops”. This commitment to a fact-based life of action as well as a faith-based life of prayer regularly put the Jesuits at loggerheads with the Vatican. The most recent example of deep disagreement between Jesuits and the Vatican was the emergence of Jesuit Liberation Theology in Latin America in the ‘70’s.

The fact that the Catholic Church has finally embraced a philosophy that as little as 50 years ago they condemned as radical is truly breath taking. It also speaks to the Catholic Church’s recognition that they need to be leading the charge for Social Justice.

In the finest tradition of the Jesuits, Pope Francis “walks the talk” and as a result is a fearless man on a mission. It is no accident that this man chose the patron saint of the poor, St. Francis as his namesake. In Brazil he visited the poorest most dangerous sections of Rio on foot by himself almost daily. He took public transportation rather than a chauffeured car. He lived in a modest apartment a short walk from the grand Cathedral rather than in the opulent archdiocese residence next to it. He has continued that policy in Rome where he lives in a simple guest house rather than the opulent papal palace.

His economic message regarding the poor is also simple, direct, and undeniable. It’s based on what Jesus told the righteous man in Matthew 25. If we care about our own salvation, we should welcome the stranger, clothe the naked, visit the sick and imprisoned, feed the hungry, and provide water to the thirsty. We are supposed to do these things without reservation or concern about need, worthiness, or consequence. God will take care of that.

He criticized “trickle down” economics as an ““opinion, which has never been confirmed by the facts, [that] expresses a crude and naïve trust in the goodness of those wielding economic power.” He also criticized the “idolatry of money” and unbridled capitalism as “a new tyranny.” As far as the benefits that supposedly were going to accrue to the poor from de-regulation and free markets, Pope Francis observed that the poor are “still waiting”.

Clearly this populist message flies in the face of anti-spending, anti-big government conservative Republicans who appear more concerned about fraud than hunger and dependency than poverty.

Here’s how some of representatives of conservatism responded to Pope Francis’ call for generosity and compassion.

Rush Limbaugh said the Pope’s comments were “pure Marxism”.

Fox News’ Adam Shaw called him the “Catholic Church’s Obama.”

Worst of all, Sarah Palin called him a “liberal”.

Others took another common conservative tack. People that disagree with them must either be confused, ill informed, or the victim of some liberal media distortion.

Rep. Peter King, a devout Catholic, said of the Pope’s use of the term “trickle-down” that a “liberal speechwriter stuck it in.”

Sen. Pat Toomey, who is also Catholic, said “It’s easy to draw I think what could be mistaken, superficial conclusions from some of the things that he said. I think he’s a wonderful leader for the church.”

Finally, Paul Ryan, also a devout Catholic simply suggested that Pope is confused. “The guy is from Argentina, they haven’t had real capitalism in Argentina,” Ryan said. “They have crony capitalism in Argentina. They don’t have a true free enterprise system.”

The Pope isn’t confused, misinterpreted, uneducated, or being manipulated by his speech writers.

One example is his response to being accused of being a Marxist. Pope Francis said, “The Marxist ideology is wrong, but I have met many Marxists in my life who are good people, so I don’t feel offended.”

The Pope is simply commenting on the facts. We are now three decades into a failed experiment in this country with unregulated capitalism. The results shouldn’t surprise anyone. There has been a massive transfer of wealth from the poor and middle class to the wealthy.

In the future, I’ll discuss some of the underlying moral structures which support these points of view. We’ll also examine the economic consequences of some of these choices.