Another Member of the 1% As Mythbuster

Henry Blodget is co-founder, CEO and Editor-In Chief of Business Insider, one of the fastest-growing business and tech news sites in the world. Business Insider's investors include Institutional Venture Partners, RRE Ventures, and Bezos Expeditions. The site has 25+ million visitors a month. A former top-ranked Wall Street analyst, Henry is also the host of Yahoo Daily Ticker, a digital video show viewed by several million people a month.

His recent piece on his site explains exactly why rich people don't create jobs, echoing Nick Hanauer who is mentioned in the article. Healthy economic systems nurture job growth. This photo shows just how unhealthy our economy is right now.

The bottom 90 percent (the blue color in the graph) are customers and if their wealth is stagnate, our economy doesn't work the way it should.

The company's customers buy the company's products. This, in turn, channels money to the company and allows the the company to hire employees to produce, sell, and service those products. If the company's customers and potential customers go broke, the demand for the company's products will collapse. And the company's jobs will disappear, regardless of what the entrepreneurs or investors do.

Now, again, entrepreneurs are an important part of the company-creation process. And so are investors, who risk capital in the hope of earning returns. But, ultimately, whether a new company continues growing and creates self-sustaining jobs is a function of the company's customers' ability and willingness to pay for the company's products, not the entrepreneur or the investor capital. Suggesting that "rich entrepreneurs and investors" create the jobs, therefore, Hanauer observes, is like suggesting that squirrels create evolution.

Wealthy people like Mr. Blodget are realizing that they need to actively support change otherwise there won't an economy in which they can enjoy their riches.

Welfare Myths

I'm pretty sick and tired of all the myths being spread out there regarding people on welfare. Thankfully, this piece torpedoes nine of them quite well. Here are three that stand out.

Myth: “People on welfare are lazy and sit at home collecting it while the rest of us work to support them.” 

Fact: The welfare reform law that was signed by President Clinton in 1996 largely turned control over welfare benefits to the states, but the federal government provides some of the funding for state welfare programs through a program called Temporary Assistance For Needy Families (TANF). TANF grants to states require that all welfare recipients must find work within two years of first receiving benefits. This includes single parents, who are required to work at least 30 hours per week. Two-parent families are required to work 35 to 50 hours per week. Failure to obtain work could result in loss of benefits. It is also worth noting that, thanks to the pay offerings of companies such as Walmart, many who work at low wage jobs qualify for public assistance, even though they work full-time.

Right. People that get assistance are already working. Their jobs simply don't pay enough. And bitch all you want about federal spending on food stamps but the states are the ones that largely control aid to the poor.

Myth: “There’s a woman in Chicago. She has 80 names, 30 addresses, 12 Social Security cards. … She’s got Medicaid, getting food stamps and she is collecting welfare under each of her names. Her tax-free cash income alone is over $150,000″ – Ronald Reagan

Fact: Ah, the “welfare queen.” Ronny loved to tell his stories, and his welfare queen story is one of the most popular. The only problem is, the woman he talked about didn’t exist. There is some evidence that elements of this story may have been based on facts, but the descriptions of abuse by an actual woman were wildly exaggerated by Reagan.

The Right loves to make shit up (see: lie). This would be a great example.

Myth: “Most welfare recipients are minorities and illegal immigrants.” 

Fact: TANF benefits were paid out to roughly the same percentage of white and black recipients in 2010, according to the HHS report. In fact, the percentage of black families receiving welfare benefits has declined by almost 7 percent since 2000. Regarding illegal immigrants: those who are in the United States illegally are ineligible for benefits other than emergency Medicaid.

Many of those white folks are rural poor in deep red states. If they could only realize that the people they support are essentially lying to them with religion and are actively trying to fuck them, every state would basically be blue.

Welfare falsehoods really piss me off. Spread this post and the included links around and don't let the Right continue their lying.

On Stiglitz: Part Ten

In the final chapter of his magnificent work, The Price of Inequality, Joseph Stiglitz details the steps we must take as a nation if we are to fix our economic problems. Before I get to some of those, though, it's very important to note that he sees two possibilities as potential catalysts for change. He defines these avenues after asking the question, "Is There Hope?"

The first possibility is that most Americans come to realize that they are being duped by the wealthy in this country. The biggest recipients of welfare in this country are the wealthy, not "lazy" poor people. Stiglitz has demonstrated this unequivocally throughout his book. Many wealthy and powerful people in this country have essentially brainwashed Americans into thinking that any sort of talk about inequality leads to communism, internment camps, and loss of freedom. Stiglitz hopes (and so do I) that people are going to wake up to this fact and call them on their bullshit. In many ways, they are the ones that are lazy and have become a drag on our society. Addressing inequality leads to a more efficient system of capitalism and, quite frankly, fairness. Americans are realizing this more and more every day that our system simply isn't fair and it needs to change. Sooner or later, they are going to demand it and we will have a sea change in Washington.

The second catalyst, and the one I see more likely in the near term, is that wealthy people themselves will come to realize that they can't enjoy their lifestyles if there is too great a degree of inequality. They also may act out of simple fear of the natives becoming too restless. Indeed, we see people like Nick Hanauer, Warren Buffet, Bill Gates, and Mark Zuckerberg expressing the need for change because it is in the wealthy's best interest. Stigliz sums up why this is so important.

Alex de Tocqueville once described what he saw as a chief elements of the peculiar genius of American society, something he called "self interest properly understood." The last two words were key. Everyone possesses self interest in a narrow sense: I want what's good for me right now! Self-interest "properly understood" is different. It means appreciating that paying attention to everyone else's self interest-in other, to the common welfare-is in fact a precondition for one's ultimate well being (Adam Smith understood as much. See his The Theory of Moral Sentiments (1759). See also Emma Rothschild and Amartya Sen, "Adam Smith's Economics," The Cambridge Companion to Adam Smith pp. 319-65, in particular p.347). 

Tocqueville was not suggesting that there was anything noble or idealistic about this outlook. Rather, he was suggesting the opposite: it was a mark of American pragmatism. Those canny Americans understood a basic fact: looking out for the other guy isn't just good for the soul; it's good for business.

Again, we are talking about economic efficiency here, not just fairness. Past business leaders in our nation truly understood this. Henry Ford, for example, paid his employees more money so they could afford to buy his cars. Our economy works at top speed when the engine that fuels it (the middle class) has more money. This is exactly why we need government policy that helps them to this end.

So what changes need to be made? Here are few of the many action items Stiglitz lists.

Rent seeking needs to end immediately through curbing the financial sector of our economy. The revenue we gain from this will be able to fund many programs that can help the poor and the middle class. We need to make the banks more transparent and much smaller than they are now. No more "too big or too interconnected to fail." No more predatory lending, excessive bonuses that encourage risk taking, and offshore banking centers that essentially promote tax evasion. Speaking of taxes, the entire code needs to be reformed to a more progressive system with few loopholes for corporations. I have no problem lowering the statutory rate if we lose the loopholes and far too many breaks our nation's corporations get.

In tandem with this, we have to help out the rest, as Stiglitz puts it. We have to improve access to education so we can be more competitive in the age of globalization. We should ordinary Americans save money by creating government incentive and matching programs, for example. Continuing our efforts to have health care for all will go a long way to helping people save money. Changes to government programs like Social Security need to also be made in order to strengthen efforts that have already proven to be successful in reducing poverty.

We need a monetary policy that focuses on employment and growth as well as inflation. Our trade imbalances need to be corrected further than they already are. Our goal should be full employment. Labor needs to be thought of in a completely different way than it is today. With the reality of cheap labor markets around the world, our nation's workers need to be re-educated and put on different career paths. Our growth agenda should be centered on public investment which has shown to yield fantastic returns in our nation's history (the GI Bill, research, public works).

As of right now, we are being held back by myths and ideological intransigence fueled by adolescent hubris. Those who choose to champion these lies (and there really is no other way to put it nicely) are essentially rooting for our country to fail just so they won't be proved wrong. The 1% of this nation, and in particular the financial sector, are using these people to maintain their lifestyles. Reading through my previous entries on Stigilitz, the task is very simple.

It is now time to stop them.

On Stiglitz: Part Nine

The penultimate chapter in Joseph Stiglitz's The Price of Inequality illustrates how macroeconomic policy in this country is essentially made for the 1 percent because macroecomic policy, in a broad sense, affects distribution of income. Stiglitz notes that policymakers are not often aware of this and that's why we have the problems we have. People worked hard, studied hard and played by the rules but the best most can hope for in the last decade+ is just to get by. Worse, many were not even doing that as we have seen in earlier chapters in the book. 

A basic rule of economics is that life involves tradeoffs. One alleged tradeoff is the balance between inflation and unemployment. If there is low unemployment, generally speaking, there is inflation because there are more people buying things. If there is high unemployment, inflation is low as there are less people fueling the economy. In some ways, this is exactly what the 1 percent (see: financial sector) want. They make more money if inflation is low so the bondholders interest is for the focus is on inflation, not unemployment. This is where the structural problems with our economy begin. According to Stiglitz, and I agree with him wholeheartedly, there is no such tradeoff.

Imagine, Stiglitz notes, if the focus were on unemployment instead. Finding that right number on the lower end (4%?, 5%?) of unemployment that still keeps inflation low is tricky but if you start from the other side (inflation), the policy that is made tends to benefit the least amount of people...those in the financial sector. If you start from the side of unemployment, or at the very least, look for a balance, you benefit more people and the macroeconomic policy of the country as a whole. This is why the Fed fell asleep in the collapse of 2008. They had no balance, Further, they thought the banks could take care of themselves and needed no oversight. When solutions to the crisis were presented, they focused on inflation (the interests of the bankers and the financial sector) not everyone else.

But the problem, as I have always said, was really with the regulations themselves. The obsessive focus on interest rates erroneously led to the Fed believing that they had some sort of magic "lever," as Stiglitz puts it, that can manipulate the economy.

Lower the interest rate and the economy expand; raise the interest rate and it slows down. And though there are times and circumstances in which the interest rate may have those effects, at other times the links are at beast weak and other instruments might have been more effective. For instance, in response to the real estate bubble , it would have made more sense to raise the down payment requirements for mortgages than to raise the interest rates; one didn't want to slow down productive investments, just to dampen the bubble. Such regulations were anathema to the Fed, with its religious devotion to the price system and the wonders of the market.

Exactly. We're talking about a massively rigid ideology here that sadly, to this day, has not been broken.

Getting back to unemployment, such a high level of joblessness doesn't simply hurt those who are unemployed. It also hurts the rest of us because a natural effect of this is lower wages. People entering the work force for the first time are forced to take a salary that they simply can't live on. Less money goes into the economy as consumer confidence and spending shrinks due to a lack of aggregate demand. The financial sector may enjoy this "labor market flexibility" but the rest of us do not. And it's clear that the economy has suffered due to these magnanimous gifts bestowed to bankers from our monetary policy. This policy, supported by both Republicans and Democrats, has been a disaster.

The Fed's low interest rate policy hadn't led to the resurgence of investment as it had hoped. It did encourage those who were planning investments to substitute cheap capital labor. Capital was, in effect, at a temporary artificially low price , and one might as well take advantage of an unusual situation. This reinforced distorted patterns of innovation that focused on saving labor at a time when it was increasingly in abundance. It is curious that at a time when unemployment among the unskilled is so high, grocery and drug stores are replacing checkout clerks with automatic machines. The Fed was making it more and more likely that, when recovery set in, it would be a jobless one.

My only gripe about this line of thought is that it really isn't a good thing to fight progress. This is the same complaint I have about the Right on issues such as energy, climate change, and education. Our nation has one direction: forward. If low skilled workers are losing their jobs to innovation, then it's time that we retrain them and give them the skills they need to compete in the age of globalization. Other than that, though, Stiglitz is spot on.

How did we get such a crappy monetary policy? Deregulation. I've talked about this extensively so there's no need to repeat myself. Instead, let's take a look at the consequences, via Stiglitz.

This deregulation had two related consequences. First, it led to the increasing financialization of the economy-with all its distortions and inequities. Second, it allowed the banks to exploit the rest of society-through predatory lending, abusive credit card fees, and other practices. The banks shifted risk toward the poor and toward the taxpayer: when things didn't go as lenders had predicted, others had to bear the consequences. The Fed not only didn't discourage this; it encouraged it. It is clear that, from a social perspective, the banks did not help people manage their risk; they created it. But when it came to managing their own risk, the bankers were more successful. They didn't bear the consequences of their actions. 

Stiglitz identifies a common ground here where liberals and conservatives could work together. At the time of the crisis, there wasn't really a choice in terms of letting the banks fail. It would have collapsed the economy. Now, however, we can regulate the industry so that none of these institutions are "too big to fail" or, better yet, too interconnected to fail. In short, Glass-Steagall for the 21st Century. Dodd-Frank is a start but it still gives the Fed responsibility for implementing the new regulations. Its track record thus far has shown that it is less than average in doing this.

At this point in the chapter I realized that Mr. Stiglitz should be the new Fed Chair! Obviously, it's never going to happen especially now that we have Janet Yellin but we do need someone who will kick the inflation obsession.

It should be apparent at this point that the banks should be focusing on banking and not macroecomic policy. How did we get to this point? More importantly, can we ever break free of this framework and have government leaders who are not influenced by the financial sector of this country? Even the evidence that the Fed was forced to reveal, which showed that the large banks were both borrowing substantial amounts of money from them while also claiming publicly that they were in great shape, was not enough to change the system. Indeed, our problem, as Stiglitz notes, is "more ideological conviction than economic analysis." This, of course, comes directly from the NUMERO UNO free market fundamentalist himself, Milton Friedman, a colleague of Stiglitz.

I remember long discussions with him on the consequences of imperfect information or incomplete risk markets; my own work and that of numerous colleagues had shown that in these conditions, markets typically didn't work well. Friedman simply couldn't or wouldn't grasp the results. He couldn't refute them. He simply knew they had to be wrong. He, and other free market economists, had two other replies: even if the theoretical results were true, they were "curiosities," exceptions that proved the rule; and even if the problems were pervasive, one couldn't rely on government to fix them.

Sounds familiar, eh?:) Many of the problems we have with our modern economic policy can be attributed directly to Mr. Friedman. His cult-like worship of the free market has led to far too many people turning brain dead in terms of economic analysis.

Recall that the Fed's main purpose should be focused on inflation, employment and growth. The second of these three has fallen by the wayside as the bankers have more or less taken over the show. So, the government is the problem but not in the way conservatives would have you believe. It's not that it's too big. It's that it simply doesn't function in the way it is supposed to function due to monetarists' obsession with inflation and their complete ignorance of unemployment. This obsession is based on three very questionable hypotheses. First, inflation is the supreme evil. Second, maintaining low and stable inflation is necessary and almost sufficient for maintaining a high and stable real growth rate. Third, everyone benefits from low inflation. Stiglitz wraps up the chapter explaining that none of these beliefs are true and that inflation hawks have been basically telling tales out of school.

For inflation hawks economy is always at the edge of a precipice: once inflation starts, it will be difficult to control. And since the cost of reversing inflation-disinflation, as it's called-is so large, it is best to address it immediately. But these views are not based on a careful assessment of the evidence. There is no precipice, and mild upticks in inflation, if they look as if they might become persistent, can easily be reversed by tightening credit availability. In short, it was simply wrong that the best way to maintain high employment and strong growth as to focus on inflation. The focus on inflation distracted attention from things that were far more important: the losses from even moderate inflation were negligible in comparison to the losses from financial collapse.

So, we need to remove ourselves from the shackles of obsession over inflation. Our monetary policy should strive for the best possible balance between inflation, employment, and growth. We can't continue to make trickle down policy that is made specifically for the benefits of the banks. In a preview of the last chapter, Stiglitz argues that there is no single best policy. Certainly the obsession with inflation has proved that. Further, there is nothing natural about our currently very high state of unemployment or the low level of aggregate demand. It is the result of policy that caters to serve the small number of people in the financial sector in this country and they have scammed us into thinking that any changes will result in another economic collapse.

Therefore, the first step in changing the system is to not believe them anymore.

On Stiglitz: Part Eight

The next chapter in Stiglitz's book, The Price of Inequality, is called "The Battle of the Budget." Written around the time of the 2011 budge battle (see also: When the Right Lost the 2012 Election Due to Moonbattery), it's frustrating that in 2013 we are still having the same fight and have not progressed.

This budget brinksmanship obscured the real economic challenges facing the country: the immediate problem posed by the high level of unemployment and the gap between the economy's potential output and its actual output, and the long term problem of growing inequality. The brinksmanship shifted attention away from these fierce problems to the issues of deficit and debt reduction.

Stiglitz describes this shift as being caused by what he terms " debt and deficit feitishists." Ironic that these people ignored the actual causes of our debt and deficit and, instead, ascribed the cause to their emotional feelings (see: psychosis) about government spending. I'll get to spending later but as he notes correctly, the four main causes of our debt and deficit are: the Bush Tax Cuts, the wars in Iraq and Afghanistan, the Medicare D (a huge rent for the drug companies) and the underperformance of the economy itself due to contraction. The figures for each of these causes are: $3.3 trillion dollars, $2.5 trillion dollars, $500 billion dollars, $900 billion dollars. Given that we have made some small improvements in the tax structure earlier this year, these numbers aren't quite as bad anymore but they still illustrate the need for improvement.

But we still have a fundamental and systemic problem with our tax structure. The people that contribute the least to our economy (the financial sector) are taxed at a ridiculously low rate for the amount of money they make. As Stiglitz notes, the lower tax rates on capital gains did not lead to higher, sustainable growth but rather, two speculative booms (1997, early 2000s) in the technology sector and the housing sector.

Bush argued successfully in 2003 for a (temporary) cut on the tax on dividends, to a maximum of 15 percent, less than half the rate paid by someone who receives a comparable income in the form of wages and salaries. The claim was that it would lead to more investment by firms in plant and equipment, but it didn't. Arguably, it may have had the opposite effect. Firms were, in effect, encouraged to pay out dividends while the tax rates were low, leaving fewer funds inside the corporation for a good investment project, should have turned up.

Stiglitz goes on to argue the need for stiffer taxes on rents and how we need to put more taxes on the toxic things in our economy. He makes a very interesting point that considering the fact that the financial sector nearly brought down the world economy, they are "polluters" and need to be taxed accordingly. For those of you unfamiliar with basic economic theory, taxing good things distorts markets and can do harm. Taxing bad things corrects the erosion of consumer surplus and inefficiency of markets due to the public expense of something like pollution. The public has born a great deal of expense as a result of the financial collapse and the people in those markets should be taxed at a higher rate.

In addition, the financial sector (along with many other sectors of our economy ), no longer need subsidies. It continually amazes me that the Right argues vociferously for less social welfare but wants corporate welfare to continue in earnest. The tax breaks we give to the multi-billion dollar oil industry are ridiculous.

So, Stiglitz has six action items in regards to our tax system'

1. Raise taxes on the people at the top
2. Eliminate loopholes and special treatment for upper incomes
3. Eliminate subsidies
4. Tax rents at higher rate
5. Tax pollution
6. Tax the financial sector similar to the ways we tax pollution given the costs they impose on the rest of society.

As I stated above, the deal on the budget reached earlier this year is a beginning down this path but it's not enough.

Now, seeing the word "tax" is sure to cause the mouth foamers' blood to rise. They will caterwaul and bloviate about how it hurts businesses and they won't hire people but they are pushing a myth, which is a polite way of saying they are lying, as Stiglitz notes on page 225. Suppose you own a business and calculate that hiring a worker will yield you a return of $100,000. $50,000 of that will go to costs the firm has to pay (including taxes, salary, other costs etc). This leaves a profit of $50,000. Now, you had to pay an extra tax of $2500 (5 percent) on that employee, would you still hire? Of course you would. Taxes don't prevent people from hiring if there is profit involved. What prevents people from hiring is a lack of demand (discussed many times on this site) which would push that $100,000 figure downwards. If they don't have the business coming through the door, they won't hire.

Moving past the issue of revenue, let's turn our attention to spending. Stiglitz argues for more spending to really get the economy going again. He dismisses the deficit/debt fetishes and notes...

The United States is an especially good position to pursue this strategy, both because returns to public investments are so high, as a result of underinvestment for a quarter of a century, and because it borrow so cheaply long term. Unfortuneately, especially among the Right (but, even, alas, among many in the center) deficit fetishism has gained ground. The ratings agencies-still trusted despite their incredibly bad performance in recent decades-have joined in the fray, downgrading US debt. But the test of the quality of debt is the risk premium that investors demand. As the book goes to press, there is a demand for US T-bills at interest rates near zero (and, in real terms, negative)

Exactly right. The fetishists don't get to determine the quality of our debt. The free market does. It simply isn't justified on the basis of economic principles. Stiglitz goes on to note that economic stimulus can be achieved through a long standing principle called the balanced budget multiplier (increasing taxes and expenditures simultaneously while taking care to not add any more to the current deficit). He argues that if this happens, GDP would increase two to three times the rate of spending. This growth would decrease the national debt over the intermediate term (pages 217-218).

But won't all this spending make us "like Greece?" No, says Stiglitz...and everyone else who doesn't let their emotions about spending dictate policy (side note: why is it that the Right cite power hungry human nature as the reason why people in the government should not be allowed to spend money yet believe, in the same head, that people are little angels when they make financial decisions privately?). Greece owes money in euros of which they have no direct control. US debt is in dollars and we control the printing presses. The idea that we would default is pure moonbattery. Sure, you'll hear bloviating about inflation but, again, the free market does not see that happening.

One can infer that both from the very low interest rate that the government has to pay on its long-term debt and even more from what it has to pay for inflation-protected bonds (or more accurately, the difference between the returns on ordinary bonds and inflation protected bonds). Now, the market could be wrong, but then the rating agencies giving a downgrade to the United States should have explained why the market was wrong, and why they believed that there is a much higher risk of inflation than the market believed. The answers have not been forthcoming.

Likely because it was politically motivated. The United States knows that the Fed will buy government bonds. Greece has no idea if the ECB will buy their bonds at all. Essentially what's going on here is that the adolescents are playing make believe and saying that there is less faith in the US government than there actually is. Considering they are big believers in the free market, this makes no sense to me.

Some other bits from the chapter...

Reagan supply side economics, which held that lowering tax rates would increase economic activity, so much so that tax revenues would actually increase, has (as we noted in chapter 3) been disproved by what happened after both the Bush and the Reagan era tax cuts.

Ah, but we should never let reality get in the way of a good fantasy, right?

No deficit reduction group suggested a frontal attack on corporate welfare and the hidden subsidies (including the financial sector) that we've stressed in this book, partly because the Right has succeeded in convincing many Americans that an attack on corporate welfare is "class warfare." 

Of course, when Reagan said it, it was okey-dokey.

Regarding Social Security and Medicare...

In the most hopeful scenarios, the Right would privatize both services. Privatization, of course, is based on yet another myth: that government run programs must be inefficient, and privatization accordingly must be better. In fact, the transaction costs of Social Security and Medicare are much, much lower than those of private sector providing comparable services. This should not come as a surprise. The objective of the private sector is to make profits-for private companies, transaction costs are a good thing; the difference between what they take in and what they pay out is what they want to maximize. 

Social Security and Medicare can be fixed quite easily with very simple adjustments phased in over time (increasing retirement age, means testing etc). Unfortunately, no one in Congress seem willing to move towards that end. Privatization is absolutely the wrong answer and we all know the real reason why the Right wants to get their hands on that money. As Stiglitz notes..

The agenda for privatization of Social Security was not about providing more money to America's retirees or more security or about increasing efficiency. It was about one thing only: providing more money to the 1 percent at the expense of the 99 percent-more money to Wall Street. The magnitudes involved are potentially enormous. Think of the $2.6 trillion in the Social Security Trust fund. If Wall Street could get just 1 percent per year for managing that money, that would be an extra bonanza for the managers of $26 billion dollars a year.

It's about as obvious as the smell of pig shit.

Stiglitz round out the chapter with a discussion of how the Right likes to blame the victim (in this case, the middle class) for our economic woes. Cuts in wages reduce economic demand so, again, it makes no sense to blame your average worker, especially considering how well the wealthy have done despite the contraction. On the last few pages of the chapter he offers a scathing indictment of austerity (pages 230-231) as well as an evisceration of the myth of the failed stimulus (page 232)., explaining in detail just how awful it would have been had we not had it and how the Obama administration failed to note just how deep the hole was that we dug ourselves.

He challenges anyone to find historical examples of austerity actually working in more than just rare cases in countries that are small and had trading partners experiencing a boom. He blows apart the myth of how a government budget should be like a household budget. Considering that the former can change the macro-economy and the latter counter, one would think the differences are obvious.

So, as this latest round of budget battles gets underway, Stiglitz is correct when he says government spending can be very effective. Funds directly spend on high productivity, structural reform, and basic infrastructure will increase productivity which will include an increase in demand. One need only look at examples from the past like Grand Coulee Dam or the current return on government investment in research to see that this is true.

(Note: the link to The Price of Inequality in the first line of this post takes you to Amazon.com where you can look inside and read the entire book and source material)

Still Stagnate

Emmanuel Saez from UC Berkeley has released his latest report on inequality and it reminds me that I need to finish off my last three installments of Joseph Stiglitz. I'll have Part Eight up sometime next week, perfectly timed as well as the title of that chapter is "The Battle of the Budget."

Saez's latest report has quite a bit of useful information, including...

Top 1% incomes grew by 31.4% while bottom 99% incomes grew only by 0.4% from 2009 to 2012. Hence, the top 1% captured 95% of the income gains in the first three years of the recovery. From 2009 to 2010, top 1% grew fast and then stagnated from 2010 to 2011. Bottom 99% stagnated both from 2009 to 2010 and from 2010 to 2011. In 2012, top 1% incomes increased sharply by 19.6% while bottom 99% incomes grew only by 1.0%. 

So, what does all this mean?

Top 1% incomes are close to full recovery while bottom 99% incomes have hardly started to recover. 

Shocking, I know:)

Saez notes that after the Great Depression, there were policy changes that reduced this income concentration. Today, however, there have been none. Again, I'm shocked.

On page seven, the data shows that during the Clinton administration, the wealthy did quite well, increasing their income by 98 percent! Yet, so did the 99 percent, who saw their income increase by 20 percent. Now, take a look at the Bush Years. It's apparent that the policy changes under his administration favored the wealthy and even then, underperfomed compared to Bill Clinton. The collapse of 2008 seems to have permanently stagnated the income of 99 percent of Americans.

We simply can't have an economy like this. Two thirds of our economy is consumer spending and there just aren't enough people spending. They don't have any extra money.

So, what do we do now? Well, any policy changes are going to be nearly impossible to pass with the Republicans hell bent on the president failing. They certainly don't want any successes on his watch as that would really drive home the contrast between the utter failure of George W. Bush and any potential gains under Barack Obama. In fact, our economy is doing mildly better and that's just about all they can tolerate as they still have to have something negative to caterwaul about.

In some ways, I hope that we elect a moderate Republican so he or she can do all the things that Barack Obama was not allowed to do because of adolescent temper tantrums.

We're Number On.....oh...wait a minute...Number Twenty Seven!

Conservatives like to sing about how wealthy our middle class is compared to the rest of the world. After all, look at how everyone has flat screens, X Boxes and cel phones? Never mind the fact that all of that is really cheap shit made in China and in no way a measure of wealth (see: it's not the year 1982 anymore where the family with the cool hi-fi set up is king)

The reality is our middle class isn't number one. In fact, we are number 27.

This opulence is supposed to trickle down to the rest of us, improving the lives of everyday Americans. At least that's what free-market cheerleaders repeatedly promise us. Unfortunately, it's a lie, one of the biggest ever perpetrated on the American people. Our middle class is falling further and further behind in comparison to the rest of the world.

So how do we compare to other countries?

Pretty craptacular if you ask me. Australia is number one? Even with their strict gun laws? I'm surprised that the middle class is doing so well considering that we have all been told by those "in the know" that gun bans lead to totalitarianism. Where is the suffering under communism that was promised?

So how is all of this measured?

Wealth is measured by the total sum of all our assets (homes, bank accounts, stocks, bonds etc.) minus our liabilities (outstanding loans and other debts). It the best indicator we have for individual and family prosperity. The most telling comparative measurement is median wealth (per adult).

Just north of $38,000. Like I said, pathetic.

Of course, any sort of discussion about addressing this problem jumps immediately to a mouth foaming rant about communism and merrily we go on avoiding how, in some very key ways, we are falling behind the rest of the world.

As a country, we can't go on with a government that represents only the wealthy citizens. While this article presents nothing new (Stiglitz says much of it in his book), all of its bullet points are truly depressing and make me sick. When is it going to end?

More importantly, which party is going to have the guts to change the system we have now?

On Stiglitz: Part Seven

The next chapter in Joseph Stiglitz's The Price of Inequality is titled "Justice For All? How Inequality Is Eroding The Rule Of Law?" Even though it is the shortest chapter of the ten in the text, it takes sharp aim at how our justice system has helped to further inequality in this country. The rule of law is supposed to protect the weak against the powerful yet in today's society, if someone is suing a corporation, we have all been conditioned to view that person as "gold digger" and the corporation as a "victim" (This simple fact is covered extensively in the stunning film Hot Coffee).

As Stiglitz notes,

As the old poem goes, "No man is an island." In any society what one person does may hurt, or benefit, others. Economists refer to these effects as externalities. When those who injure others don't have to bear the full consequences of their actions, they will have inadequate incentives not to injure them, and to take precautions to avoid risks of injury. 

The Right has a real cognitive dissonance problem with the sentiment above. They want to live in a society where everyone is a "rugged individualist" yet still want all the trappings of a modernism. They can't accept the fact that in any sort of society one person's actions has a direct effect on another's life. and that's with or without government interference.

Stiglitz writes that one of the big reasons why American corporations have been so successful in the last 30 years is they have been able to avoid the consequences of their actions by rigging the game in their favor. This has never been more true than in the financial sector, specifically the banks. There were no real consequences for the predatory lending and fraud committed by the banks in the run up the financial crisis of 2008. Stiglitz notes that some states like Georgia tried to enact laws that would have stopped this sort of behavior in the first place.They were repaid by Standard and Poor's threatening them to not rate any of their mortgages. This would be the same Standard and Poor's who downgraded the US credit rating. This would also be the same S & P labelled "A" what turned out to be "F" rated mortgages. So, any attempt to stop predatory lending by government entities was met with (ahem) corporate force.

Stiglitz goes on to discuss how bankruptcy law has also become massively corrupted in a similar way. He touches on the student loan problem and how banks seem intent trapping young people into impossible situations with insurmountable, lifelong debt. This helps to cement the inequality in this country.

Stigliiz then turns to the mortgage crisis that was the driving force behind the 2008 economic crisis. In a nutshell, he asserts that "rule of law" was tested in this country and the results clearly showed that there was no justice for all. In fact, there was justice for very few people in the financial sector.

The banks wanted a speedier and less costly way of transferring, so they created their own system called MERS but like so much of what the banks had done in the gold rush days, it proved to be a deficient system, without safeguards, and amounted to an end run around a legal system designed to protect debtors. 

So, the banks unilaterally decided to rewrite property law. When the crisis hit, they were supposed to be able to prove how much they actually owed. They couldn't and it was largely because there was no oversight to make sure they did. It didn't really matter to them anyway. There was so much money flying all over the place that they knew the government would have no choice but to bail them out. What were they going to do? Let the economy collapse?

Worse, Stiglitz points out that if corporations were indeed people, they should have been prosecuted for fraud as they were unable to prove that there financial records were valid. There still has not been any significant pursuit, by the government, towards foreclosure fraud. This is a complete and total failure by the US government, specifically Eric Holder. It's amusing how much people on the right bitch about him for the phantom things he's done but not the main thing that he has neglected to do. Recall that the DOJ prosecuted over one thousand cases in the S & L scandal in the early 1990s.

Stigliz notes a Wall Street Journal piece which also uncovered discrimination on the basis of income regarding the foreclosure process. On average, it took banks two years and two months to foreclose on mortgages over one million dollars, six months longer than on those under one hundred thousand dollars. Banks were bending over backwards to accommodate bigger debtors and their team of lawyers that were the best money could buy. The little guy had none of this, of course, and worse, considering just how much the law had been eroded.

We've come to a point in our society where the government does more to protect the interests of corporations and less to protect the rights of individuals. People in Congress are being paid large quantities of money to look the other way and allow the private sector, especially the financial sector, massive leeway in their business. We don't need a "bigger" government. What we need are elected officials who can quickly recognize factors such as externalities and market power in the private sector and intervene quickly to prevent another crisis such as the one we had in 2008. A good place to start is the financial sector and we have, at least, taken steps down that path with the Dodd-Frank bill.

The people who are elected to Congress have to understand that they are performing a public service. They aren't the extended legal staff of the various corporations in the United States.

Amen

Here is the full statement of Nick Hanauer, venture capitalist billionaire, given on June 5th of this year before the Subcommittee on Economic Policy (Senate Committee on Banking, House, and Urban Affairs).

For 30 years, Americans on the right and left have accepted a particular explanation for the origins of prosperity in capitalist economies. It is- that rich business people like me are “Job Creators” - That if taxes go up- on us or our companies, we will create fewer jobs. And that the lower our taxes are, the more jobs we will create and the more general prosperity we’ll have. Many of you in this room are certain that these claims are true. But sometimes the ideas that we know to be true are dead wrong. 

For thousands of years people were certain, positive, that earth was at the center of the universe. It’s not, and anyone who doesn’t know that would have a very hard time doing astronomy. My argument today is this: In the same way that it’s a fact that the sun, not earth is the center of the solar system, it’s also a fact that the middle class, not rich business people like me are the center of America’s economy. I’ll argue here that prosperity in capitalist economies never trickles down from the top. Prosperity is built from the middle out. As an entrepreneur and investor, I have started or helped start, dozens of businesses and initially hired lots of people. But if no one could have afforded to buy what we had to sell, my businesses would all would have failed and all those jobs would have evaporated. That’s why I am so sure that rich business people don’t create jobs, nor do businesses, large or small. 

What does lead to more employment is a “circle of life” like feedback loop between customers and businesses. And only consumers can set in motion this virtuous cycle of increasing demand and hiring. That's why the real job creators in America are middle-class consumers. The more money they have, and the more they can buy, the more people like me have to hire to meet demand. So when businesspeople like me take credit for creating jobs, it’s a little like squirrels taking credit for creating evolution. In fact, it’s the other way around. Anyone who's ever run a business knows that hiring more people is a capitalists course of last resort, something we do if and only if increasing customer demand requires it. Further, that the goal of every business- profit-, is largely a measure of our relative ability to not create jobs compared to our competitors. In this sense, calling ourselves job creators isn't just inaccurate, it's disingenuous. 

That’s why our current policies are so upside down. When you have a tax system in which most of the exemptions and the lowest rates benefit the richest, all in the name of job creation, all that happens is that the rich get richer. Since 1980 the share of income for the richest 1% of Americans has tripled while our effective tax rates have by approximately 50%. If it were true that lower tax rates and more wealth for the wealthy would lead to more job creation, then today we would be drowning in jobs. If it was true that more profit for corporations or lower tax rates for corporations lead to more job creation, -then it could not also be true that both corporate profits and unemployment are at 50 year highs. There can never be enough super rich Americans like me to power a great economy. I earn 1000 times the median wage, but I do not buy1000 times as much stuff. My family owns three cars, not 3,000. I buy a few pairs of pants and a few shirts a year, just like most American men. Like everyone else, we go out to eat with friends and family only occasionally. I can’t buy enough of anything to make up for the fact that millions of unemployed and underemployed Americans can’t buy any new clothes or cars or enjoy any meals out. Or to make up for the decreasing consumption of the vast majority of American families that are barely squeaking by, buried by spiraling costs and trapped by stagnant or declining wages. This is why the fast increasing inequality in our society is killing our economy. 

When most of the money in the economy ends up in just a few hands, it strangles consumption and creates a death spiral of falling demand. Significant privileges have come to capitalists like me for being perceived as “job creators” at the center of the economic universe, and the language and metaphors we use to defend the fairness of the current social and economic arrangements is telling. For instance, it is a small step from “job creator” to “The Creator”. When someone like me calls himself a job creator, it sounds like we are describing how the economy works. What we are actually doing is making a claim on status, power and privileges. The extraordinary differential between the 15-20% tax rate on capital gains, dividends, and carried interest for capitalists, and the 39% top marginal rate on work for ordinary Americans is just one of those privileges. We’ve had it backward for the last 30 years. 

Rich businesspeople like me don’t create jobs. Rather, jobs are a consequence of an eco-systemic feedback loop animated by middle-class consumers, and when they thrive, businesses grow and hire, and owners profit- in a virtuous cycle of increasing returns that benefits everyone. I’d like to finish with a quick story. About 500 years ago, Copernicus and his pal Galileo came along and proved that the earth wasn’t the center of the solar system. A great achievement, but it didn’t go to well for them with the political leaders of the time. Remember that Galileo invented the telescope, so one could see, with ones own eyes, the fact that he was right. You may recall however, that the leaders of the time didn’t much care, because if earth wasn’t the center of the universe, then earth was diminished-and if earth was diminished, so were they. And that fact- their status and power- was the only fact they really cared about. 

So they told Galileo to stick his telescope where the sun didn’t shine –and put him in jail for the rest of his life. And by so doing, put themselves on the wrong side of history forever. 500 years later, we are arguing about what or whom is at the center of the economic universe. A few rich guys like me, or the American Middle class. But as sure as the sun is the center of our solar system, the middle class is the center of our economy. If we care about building a fast growing economy that provides opportunity for every American, then me must enact policies that build it from the middle out, not the top down. Tax the wealthy and corporations-as we once did in this country- and invest that money in the middle class-as we once did in this country. Those polices won’t just be great for the middle class, they’ll be great for the poor, for businesses large and small, and the rich. 

Since when did investing in our country's infrastructure becoming communism?

Did They Miss It?

Interesting piece from Martin Sandbu about the Occupy Movement. To a certain extent, I agree with him. They had a chance to become the left's equivalent of the Tea Party but the very structure of the organization lent itself to not quite get there. With the "no leader" pledge, they pretty much set themselves up to be irrelevant in the current socio-political framework.

Yet, they did leave behind the "Legacy of the Percent" meme which ended up defining Mitt Romney (the 47 percent). I think Sandbu and many people who chuckle at the "death" of the Occupy Movement aren't reflecting on just how much awareness they raised about inequality in this country. It's part of our political vernacular and has about as much chance of going away as the words "bloated and ineffective" being used in juxtaposition with "government."

And they remained true to their vision and did not sell out to corporate interests unlike the Tea Party. I certainly thought they would so I was clearly wrong on that one. My chief frustration with them still remains their insistence that physical protesting in the age of social media is still relevant. It isn't. If they want to truly "occupy," something, it should be the next version of Twitter or Instagram. That would get people's attention.

How about an Occupy App? :)