Tag Archives: income inequality

How the 1% runs America. Runs us. The answer points to 2 futures for us.

Summary:  How does the 1% influence the daily running of America? Not the high level politics and business, but the broad influence on our social institutions which is almost as significant. The answer says much about America, the New America quickly rising around us, and how to save what we have before it’s lost.

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Darth Vader

As the distribution of power changes in America, the shape of our society must change as well. So after 40 years of income and wealth concentrating, CounterPunch asks “Is the American social contract breaking?” Listen; you can hear the answer in the wind.

“I am altering the deal. Pray I don’t alter it any further.”
— Darth Vader, “The Empire Strikes Back” (1980)

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America is changing. On the 4th of July 2006 I wrote about the death of the Constitution. And in the following years I wrote about the rise of the New America on the ruins of the Second Republic. Scores of posts discuss ways to reform America. This political evolution results from the rise of the 1%, as they  gather into their hands more of America’s wealth and income.

Taking this from the abstract to the specific was the July 2013 post described how I have seen the New America in my experience working with local social service charities. The power of the 1% exerts an invisible but overwhelming power over people. They rearrange a community like a magnetic field reorients everything metal in a room.

But how does this happen? How does the 1% exercise control in their community (beyond their direct commercial and political power)?

This is America. They don’t send the police (or their legions of private security) to lean on those who argue with them in the boardrooms of the local United Way or Girl Scouts. Except in cases of great importance, they don’t threaten reprisals. For those with real power, they seldom need use force.

They can reward cooperation. But the rich are famously stingy. Peons should be subservient, without the bother of rewarding them. Besides, it’s better style. So they routinely rely on another lever.

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The 1% won a counter-revolution while we played. We forgot that we are the crew of America, not passengers.

Summary: Now inequality has become too extreme to ignore. Now that the 1% has crushed all opposition, we begin to see the results of their successful counter-revolution. But we do not yet see the battle. Until we understand our past others will build our future. Here’s a first cut doing so.

The Universe was 5 miles long, and 2,000 feet across. Men scoffed at the legends of such things as stars, or the demented idea that the Ship was moving… for the Ship was the Universe, and there could be nothing outside. Then one man found his way into a forgotten room, and saw the stars – and they moved….

— Summary of Orphans of the Sky by Robert Heinlein (1951; based on two 1941 short stories), one of the early stories about a generation ship

Phoenix

Somewhere in our future lies the Third Republic

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(1)  A recap of the plot so far

During the long halcyon days of the post-WW2 summer America forgot about economic classes — and their cousin, social mobility. The reforms of the New Deal, the post-WW2 social programs (especially the GI bill, the ample funding to education (from primary to graduate-level), the civil rights legislation, and sustained growth of GDP and wages — all these fertilized the rise of a middle class and modest degree of social mobility. We came to consider that our due as Americans. We came to consider that as America.

All this culminated with the long boom (the debt-fueled expansion from 1982 – 2000, the fall of the Berlin Wall in 1989 and the late 1990’s tech boom. America was exceptional, a new moment in history. Marx became a comic figure. “The only Marxists live in Berkeley and Albania.”

We forgot the century-long struggle that laid the political foundations for the middle class, a slow low-violence revolution.  That meant we forgot that this was an unnatural state requiring work to maintain. We forgot we were the officers and crew of America, not passengers on the Love Boat.

But not everybody was happy with summer, and the core New Deal and civil rights reforms with made it possible.  They planned a counter-revolution. They had patience, long-vision, and vast resources.

(a)  Starting with Goldwater, the Republican Party’s “Southern Strategy” slowly returned the antebellum ideologies of racial separatism, States Rights, etc — to break the New Deal coalition, forging an instrument to wage the counter-revolution. There was no plan, just a “run to daylight” strategy of exploiting the internal contradictions and discontents that triumphant liberals had allowed to develop in their coalition.

(b) The Powell Memorandum: Sent by Lewis F. Powell, Jr. on 23 August 1971 (2 months before his nomination to Supreme Court) to Eugene B. Sydnor, Jr., Chairman of the Education Committee of the U.S. Chamber of Commerce. Titled Attack On American Free Enterprise System, it outlined a strategy for large corporations to rollback much of the New Deal reforms on business and crush the unions (perhaps the key brick in the New Deal coalition and the middle class structure).

(c) The article creating the mythology of tax-cuts as the magic elixir: “Taxes and a Two-Santa Theory“, Jude Wanniski, National Observer, 6 March 1976

(d) In his 14 July 1978 testimony to Congress (9 years before becoming Fed Chairman), Alan Greenspan first described the “starve the beast” strategy: “Let us remember that the basic purpose of any tax cut program in today’s environment is to reduce the momentum of expenditure growth by restraining the amount of revenue available and trust that there is a political limit to deficit spending.”

The great New Deal coalition built a new America. But the flower children of the boomer generation forgot that they were in a vessel. They thought they were frolicking in a meadow. Their political activism was limited to groups working to benefit themselves — such as ending the draft, opening the work world to women, rights for gays. Issues the 1%, as a class, don’t care about. Nobody bothered with the boring work of staffing the engine and control rooms, and running the ship.

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Tom Perkins tells us about the 1%’s vision of a New America

Summary: Every day the New America grows on the ruins of the America-that-once-was. Every day our apathy weakens the Republic. Every day powerful people — each wielding wealth greater than millions or tens of millions of other Americans — add new brinks to the new plutocracy that will govern our children and their children. They’re doing so openly. To minimize our fear and guilt we laugh at them. They smile at our folly; the Founders cry silently.

The oligarchy club

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Content

  1. Telling us about the coming New America
  2. Tax rates on the wealthy at post-1930s lows. They’re not grateful…
  3. America’s exceptional inequality
  4. For More Information

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(1)  Telling us about the New America

Tom Perkins’ big idea: The rich should get more votes“, CNN, 14 February 2014 — Tom Perkins speaking at the Commonwealth Club in San Francisco. Everybody has words to live by, that justify their actions. Perkins shared his with us. He’s not joking, and their increasing power brings his vision closer to fruition every day, as the 1%’s command of all levels, all parts of the governing mechanism means that our votes have less effect than his dollars.

Listen, and be afraid. Unless we develop backbones and cohesion, Perkins vision will come true.  One way or another.

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Tax rates on the wealthy are at post-1930s lows. They’re not grateful…

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The state of the American middle class: are we thriving or sinking?

Summary: One function the FM website performs for readers is assembling data into pictures that show how our world works. Today we look at three factors of American households: income, spending, and debt — and how they relate to one another. It’s not a pretty picture, but one we can change if we work together.

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One powerful measure of America’s recovery from the crash is real disposable personal income (aka after-tax income). Let’s look at it in pure form, after adjusting for population growth and inflation: Real Disposable Income per capita. It has risen a pitiful 0.7% per year over the five years from the start of the recession. Slow movement in the right direction.

Real Disposable Income per Capita

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But that’s an aggregate number, and such numbers hide as much as they reveal. How has this tiny income gain been shared? Have all classes gained income? Note inflation (CPI) was 1.5% in 2010, so gains less than that are negative in real terms.

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Consequences of growing inequality in wealth, income, and power.

Summary: Part One looked at America’s rising inequality. Today we look at the resulting wide range of ill effects, a major driver building a New America. A rising concentration of income and wealth quickly becomes self-perpetuating as the 1% exploits their control of the government to gain yet more money and power. At some point we will have (or already have) a new political regime.

“In a state which is desirous of being saved from the greatest of all plagues — not faction, but rather distraction. There should exist among the citizens neither extreme poverty, nor, again, excess of wealth, for both are productive of both these evils.”
— Plato’s Laws.

“Avarice, the mother of all wickedness, who, always thirsty for more, opens wide her jaws for gold.”
— Claudianus, De Laudibus Stilichonis (~400 AD).

Fed Survey of Consumer Finance

Fed Survey of Consumer Finance

Contents

  1. Causes of income inequality.
  2. “The Impact of Inequality on Growth”.
  3. Wasting our human resources.
  4. Concentrating political power.
  5. Pushback.
  6. For More Information.
  7. Another perspective.

(1)  Causes of income inequality.

Inequality over the Past Century“, Facundo Alvaredo, Finance & Development, September 2011 — “After declining in the first half of the 20th century, income inequality makes a comeback”. Excerpt:

Sources of Income of the 1%

IMF’s Finance & Development, September 2011

In the United States, average real incomes grew at a 1.3% annual rate between 1993 and 2008. But if the top 1 percent is excluded, average real income growth is almost halved, to about 0.75% a year.

Incomes of the top 1% grew 3.9% a year, capturing more than half of the overall economic growth experienced between 1993 and 2008.

… The new data call into question the standard relationship between economic development and income distribution—that growth and inequality reduction go hand in hand. But that relationship, postulated by economist Simon Kuznets, appears to be less certain — especially in English-speaking countries, which had a period of falling inequality during the first half of the 20th century followed by a reversal of the trend since the 1970s.

(2) The cost to America of wasting our human resources.

Becoming a better America paid off after WW2; stopping has cost us dearly: “The Allocation of Talent and U.S. Economic Growth“, Chang-Tai Hsieh et al, 22 February 2013. — Summary:

In 1960, 94% of doctors and lawyers were white men. By 2008, the fraction was just 62%. Similar changes in other highly-skilled occupations have occurred throughout the US economy during the last 50 years. Given that innate talent for these professions is unlikely to differ across groups, the occupational distribution in 1960 suggests that a substantial pool of innately talented black men, black women, and white women were not pursuing their comparative advantage.

This paper measures the macroeconomic consequences of the remarkable convergence in the occupational distribution between 1960 and 2008 through the prism of a Roy model. We find that 15 to 20% of growth in aggregate output per worker over this period may be explained by the improved allocation of talent.

(3)  “The Impact of Inequality on Growth”.

The Impact of Inequality on Growth“, Jared Bernstein, Center for American Progress, December 2013. — Summary:

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Growing inequality powers the rise of New America

Summary: Five years ago I wrote my first article about the problem of rising inequality in America. Now it’s become big time following a speech by President Obama. Today we review the evidence about the problem Additional information added Sunday morning, and the post broken into two. This is now part one. Part Two looks at its effects, and the inevitable pushback.

Wealth distribution of USA
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Contents

  1. Comparing America with our peer nations
  2. “Being Smart Isn’t Always Enough to Make it in America”
  3. Even worse news: a trend of greater inequality
  4. For More Information
  5. Another perspective

(1)  Comparing America with our peer nations

The Rise and Consequences of In equality in the United States, Alan B. Krueger Chairman, Council of Economic Advisers, 12 January 2012 — Introduces the Great Gatsby Curve.

Recent work by Miles Corak finds an intriguing link between the Intergenerational Income Elasticity (IGE) and in come inequality at a point in time. Countries that have a high degree of inequality also tend to have less economic mobility across generations. We have extended this work using OECD data on after-tax income inequality, as measured by the Gini coefficient.

This next figure shows a scatter diagram of the relationship between income mobility across generations on the Y-axis (measured by IGE) and inequality in the mid-1980s, as measured by the Gini coefficient for after-tax income, on the X- axis [Figure 7]. Each point represents a country. Higher values along the X-axis reflect greater inequality in family resources roughly around the time that the children were growing up. Higher values on the Y-axis indicate a lower degree of economic mobility across generations.

I call this the “Great Gatsby Curve.” The points cluster around an upward sloping line, indicating that countries that had more inequality across households also had more persistence in income from one generation to the next.

Great Gatsby Curve

2012 Economic Report of the President

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For more about this see “Income Inequality, Equality of Opportunity, and Intergenerational Mobility“, Miles Corak (Prof of Economics, U of Ottawa), Journal of Economic Perspectives, Summer 2013. See his other research here.

(2)  “Being Smart Isn’t Always Enough to Make it in America”

Being Smart Isn’t Always Enough to Make it in America“, Kevin Drum, Mother Jones, 12 December 2013, about  a chart from “Seven Steps Toward Social Mobility in President Obama’s Speech“, Richard V. Reeves and Kerry Searle Grannis, Brookings, 6 December 2013:

The chart below is a little tricky to read, but basically it shows how likely you are to make more money than your parents. You’d naturally expect smart kids to do better than dimmer kids, so it tracks that too.

Take a look at the green column on the far left. It’s for kids who grow up in the very poorest families. If you have high cognitive ability, you have a 24% chance of becoming a high earner as an adult. That’s not too bad. But if you come from a high-income family, you have a 45% chance of becoming a high earner as an adult. Same smarts, different outcome.

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Learning not to trust each other in America, and not to trust America

Summary: Strong social cohesion distinguishes successful from failed States, and has long been a strength of America. A side effect of the 1%’s successful programs to build a New America on the ruins of the America-that-Once-Was is erosion of our social cohesion. From that, should it continue, we can expect bitter fruit. Today we look at three telling articles about this evolution.

Conservatives fret that we will get inflation and devaluation — like Argentina. In fact Argentina’s fall came from its plutocracy’s greed, the loss of social cohesion, and the resulting social conflict.
Perhaps we should worry about becoming like Argentina.

Trust

Contents

  1. America’s system of High, Middle, & Low Justice
  2. Trust no promises by institutions in America
  3. Falling apart: decreased social cohesion
  4. For More Information
  5. Wide circles of trust make strong nations

(1) See America’s system of High, Middle, and Low Justice at work

Kozlowski Is Granted Parole“, New York Times, 3 December 2013 — 100 months served, the last six were at home. Excerpt:

Come January, L. Dennis Kozlowski’s long tenure in New York State’s penitentiary system will near its end. The state’s Board of Parole granted parole to Mr. Kozlowski, the former chief executive of Tyco International …

Now the onetime multimillionaire will take another step toward freedom, more than eight years after he was found guilty of essentially using Tyco as his own piggy bank. His conviction in 2005 of grand larceny, conspiracy and fraud cemented his status as an symbol of corporate greed and earned him a sentence of 8-1/3 to 25 years in prison.

… In July of this year, Mr. Kozlowski’s status was upgraded to “day reporting” status, which required him to briefly report to Lincoln twice a week. Since then, he has been sleeping at his home and going to work every day, though his lawyer declined to identify his current location or job.

Parole still carries some restrictions for Mr. Kozlowski, including regular check-ins with his parole officer, a curfew and refraining from alcohol. But he can apply for permission to leave the state, among other things.

(2)  Trust no promises by institutions in America; get what you are owed in cash now

Many State and local governments have underfunded pension plans. Now we learn how some will solve the problem: “Detroit Ruling on Bankruptcy Lifts Pension Protections“, New York Times, 3 December 2013 — Excerpt:

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