Concentrating the Wealth, Pt. 1

Last week I ventured into the "spreading the wealth" discussion [1] with a post [2] attempting to unpack one aspect of why even some people who might be helped by the kind of economic policies Obama is proposing are against them anyway. It was a rather long post, so I wrapped it up without getting into another aspect of the debate that I alluded to briefly and hoped to get back to in another post.

Never mind that it takes an utter lack of an “irony gene” to speak of “steal-from-the-rich,” when only after the taxpayer-funded $1 trillion bailout of the financial sector that got us into the current economic mess — welfare for the wealthy, essentially — was passed has Washington started talking about a stimulus package for the rest of us. It takes Joe himself to bring it on home.

While the McCain/Palin campaign attempts to whip people into a lather with a liberal use of the "socialism" label, invoking fears of a wealth transfer, it's easy to forget that a huge wealth transfer has been underway for a while and is going on even now. We call it "the bailout."

You know, the one that passed without any help for homeowners on the verge of homelessness? Yeah. That one. But the transfer started long before that. We're just living in the aftermath.

I can't claim to have figured it out all on my own. Paul Krugman did that [3], two years ago. (Maybe that's one of many reasons why he has a Nobel Priz [4]e and I don't.)

America has never been an egalitarian society, but during the New Deal and the Second World War, government policies and organized labor combined to create a broad and solid middle class. The economic historians Claudia Goldin and Robert Margo call what happened between 1933 and 1945 the Great Compression: The rich got dramatically poorer while workers got considerably richer. Americans found themselves sharing broadly similar lifestyles in a way not seen since before the Civil War.

But in the 1970s, inequality began increasing again -- slowly at first, then more and more rapidly. You can see how much things have changed by comparing the state of affairs at America's largest employer, then and now. In 1969, General Motors was the country's largest corporation aside from AT&T, which enjoyed a government-guaranteed monopoly on phone service. GM paid its chief executive, James M. Roche, a salary of $795,000 -- the equivalent of $4.2 million today, adjusting for inflation. At the time, that was considered very high. But nobody denied that ordinary GM workers were paid pretty well. The average paycheck for production workers in the auto industry was almost $8,000 -- more than $45,000 today. GM workers, who also received excellent health and retirement benefits, were considered solidly in the middle class.

Today, Wal-Mart is America's largest corporation, with 1.3 million employees. H. Lee Scott, its chairman, is paid almost $23 million -- more than five times Roche's inflation-adjusted salary. Yet Scott's compensation excites relatively little comment, since it's not exceptional for the CEO of a large corporation these days. The wages paid to Wal-Mart's workers, on the other hand, do attract attention, because they are low even by current standards. On average, Wal-Mart's non-supervisory employees are paid $18,000 a year, far less than half what GM workers were paid thirty-five years ago, adjusted for inflation. And Wal-Mart is notorious both for how few of its workers receive health benefits and for the stinginess of those scarce benefits.

Right now, inequality is up worldwide. But the U.S. has the dubious distinction of being among the countries with the highest rate of inequality [5]. In fact, we're number three on income inequality, beaten out by Mexico and Turkey.

The gap between rich and poor in most wealthy nations has widened, the Organisation for Economic Co-operation and Development (OECD) has said.

Across the 24 OECD countries where data was available, the cumulative rise in inequality was 7% over the past 20 years, the Paris-based group said.

But this was not as large a rise as had been expected, it said.

Since 2000, income inequality had risen sharply in the US and Germany and declined in the UK, Mexico and Greece.

...The report found that the income of the richest 10% of people was, on average, nearly nine times that of the poorest 10%.

But the size of the income differentials varies, with the greatest disparity in Mexico, which has a ratio of 25 to one, followed by Turkey and the US. 

Iif current trends continue, it's likely to to get much worse. Already companies are cutting costs and slashing jobs [6], as the economic consequences of the last few decades continue to ripple outward from Wall Street. More than 80% of the states [7] — 41 out of 50 — reported jobs lost in September 2008, more than double the the number of states reporting jobs lost in the previous month. The same month, mass layoffs reached their highest point since 9/11 [8]. Meanwhile, state unemployment funds are drying up. [9] (Even the postal service is considering the possibility of first-time-ever layoffs [10].) And indications suggest we're soon to face a tsunami of pink slips [11]. 

When the dot-com and housing bubbles burst, it was easy to see what types of jobs would disappear. But these days as nervous lenders cower and credit contracts, virtually every industry is likely to be scathed in the widely predicted downturn starting this autumn. Nearly every business relies on credit to operate—just as they need customers to have spending power.

With lending trimmed, and companies and consumers tightening their belts (BusinessWeek, 10/9/08), jobs will be cut across broad swaths of the economy, from the tech sector to investment banking, and from manufacturing to soft drinks.

Rippling out from there are further consequences. Tapped out consumers [12], many jobless just before the holidays due to mass layoffs, are cutting back as the credit crisis completes the journey from Wall Street to Main Street. (Especially since those stimulus checks have long since been handed to banks and creditors to pay down debt [13]. Thus completing the loop, ulimately putting tax dollars into private hands, with consumbers as the middle-man.) More people are getting food stamps [14], and finding out that food stamps buy less than before [15]. More are struggling with energy bills [16], and cutting back on needed medications [17] (like medicines for high blood pressure and osteoperosis), as the basic necessities become more difficult to afford [18]. The states' welfare caseloads have been rising [19] since mid-2007, after declining for more than a decade.

Job losses could also impact foreclosures [20], which are up 21% from a year ago [21]. The rise in foreclosures is fueling an alarming rise in homelessness [22], and a rush on soup kitchens [22] that are dealing with their own shrinking budgets [23] even in the face of an increase in the number of people needing their help. More and more people are living out of their cars [24], and some cities are setting aside special parking lots [25] designated for the new population of auto-dwellers.

The postponing of health care is even more distressing when you consider that the financial crisis is causing higher levels of anxiety and despair [25], keeping people awake at night [26], causing some to turn to desperate measures. While the epidemic of "jumpers" after the Great Crash of 1929 was a myth [27], because relatively few people on Wall Street leapt from windows [28], the "jumper" became a symbol of the anxiety and despair caused by the 1929 crash. Much in the same way, though relatively few may attempt it, the "Main Street suicides" of the 2008 meltdown may become a symbolic of today's anxiety as the "Wall Street jumper" was 79 years ago.

When people look back on this event, they may remember stories like that of Raymond and Deanna Donaca [29].

Raymond and Deanna Donaca had fought foreclosure on their home and lost, but had dropped strong hints they wouldn't leave the three-level dwelling alive.

On Tuesday, Crook County sheriff's deputies went to the home east of Prineville after neighbors called with concerns that they were not answering their door, and their dogs were missing.

They walked up the driveway and smelled gas. Inside the attached locked garage, a 1981 Cadillac Eldorado sat empty, its engine running.

Then they entered the house.

They found the bodies of Raymond Donaca, 71, and three golden retrievers. Upstairs they discovered the bodies of Deanna Donaca, 69, and a fourth dog.

Or Carlene Balderrama [30].

"By the time you foreclose on my house, I'll be dead."

So read the note that 53-year-old Carlene Balderrama of Taunton, Mass., faxed to her mortgage company, according to Taunton Police Chief Raymond O'Berg.

The message turned out to be tragically prophetic. According to local reports, PHH Mortgage Corp. -- the company foreclosing on Balderrama's home -- notified police of the message less than an hour and a half before the home was to go on the auction block. By the time officers arrived at Balderrama's house, they found she had fatally shot herself with her husband's rifle.

O'Berg said Balderrama's death has been officially ruled a suicide. But though the case is closed, he notes that the tragedy underscores a problem that is affecting many in the community of about 60,000, which lies roughly 40 miles south of Boston.

"It has a lot of people talking, because there are a lot of homes in foreclosure here," O'Berg told ABCNews.com. "It's just a tragedy. Then again, someone told me that these financial stresses are tough."

And with no end in sight to the country's economic downturn, some psychological experts say that cases like these may become more common.

Or Addie Polk [31].

A 90-year-old Ohio woman, facing eviction from the home she has lived in for 38 years, shot and wounded herself this week, becoming a grim symbol of the U.S. home mortgage crisis.

Addie Polk was found lying on the floor [32] of her home with what appeared to be a self-inflicted gunshot wound to her shoulder when police came to the home on Wednesday to serve an eviction notice, Akron police spokesman Lt. Rick Edwards said on Friday.

Polk survived the shooting and is being treated in a hospital.

It was the latest attempt by sheriff's deputies to evict Polk from her modest single-family home because she could not keep up with her mortgage.

"It appears they're evicting her over her mortgage. She's lived in the house, the neighbors said, something like 38 years and in the last couple of years fell prey to some predatory lending company or financial institution," Edwards said.

(Polk's mortgage was later forgiven [33].)

Or Karthik Rajaram [34].

Sorrento Pointe, Calif., does not look like the setting for the death of the American Dream. From outside the tasteful guardhouse stationed at the entrance of this gated community about 23 miles from downtown Los Angeles, all seems peaceful. The manicured lawns are a verdant oasis within the surrounding sun-scorched mountains. The only sound disturbing the quiet is the gentle swish of luxury cars — Mercedes, BMWs and Porsches — as their drivers turn homeward.

However, that sense of well-being was shattered brutally on Monday, Oct. 6, when police discovered the bodies of the Rajaram family in their home on Como Lane. Karthik Rajaram, 45, had shot his mother-in-law, wife and three children to death before killing himself [35] sometime between Saturday evening and Monday morning.

Rajaram, a former financial analyst at PricewaterhouseCoopers and Sony Pictures, left two suicide notes — one for police and another for family and friends — and a will. "I understand he was unemployed, his dealings in the stock market had taken a disastrous turn for the worse," said Los Angeles deputy police chief Michel R. Moore. "This was a person who had been quite successful in this arena." Amid news of the global financial crisis and the credit crunch, this murder-suicide has become emblematic of the times — in its way parallelling the deathly plunges of Wall Street stockbrokers in 1929.

...Despite his record of success at holding executive-level jobs and making highly profitable investments, Rajaram had apparently been unable to find work. Meanwhile, he began to accumulate financial losses which took their toll on his saved-up profits. Suddenly having an M.B.A., working one's way up in finance and using one's business acumen to make solid investments offered little protection and security. "The essence of it was that this was a man's emotional spiral downward due to financial difficulties. He saw it as a tragedy, a disaster that had befallen him. He lost perspective," said the LAPD's Moore. "He thought his life circumstances were because he was a failure. He got caught up in a rabbit hole, apart from reality."

By wiping out his family, Rajaram also wiped out the seemingly bright future of his children. "His family was healthy, his son [Krishna] was on a Fulbright scholarship at UCLA, his 7-year-old was at a magnet elementary school, a high-performing student, as was his 12-year-old," Moore said. He described their home as "organized and nicely adorned" with drawings by the children and photos of a smiling family. In short, there was nothing to suggest the violence that ended the suburban idyll.

To understand how we got here, or how the last eight years effectively accelerated greased the incline on a slide that started back in the 70s, we have to go back to Krugman [36].

During the 2000 election campaign, George W. Bush joked that his base consisted of the "haves and the have mores." But it wasn't much of a joke. Not only has the Bush administration favored the interests of the wealthiest few Americans over those of the middle class, it has consistently shown a preference for people who get their income from dividends and capital gains, rather than those who work for a living.

Under Bush, the economy has been growing at a reasonable pace for the past three years. But most Americans have failed to benefit from that growth. All indicators of the economic status of ordinary Americans -- poverty rates, family incomes, the number of people without health insurance -- show that most of us were worse off in 2005 than we were in 2000, and there's little reason to think that 2006 was much better.

So where did all the economic growth go? It went to a relative handful of people at the top. The earnings of the typical full-time worker, adjusted for inflation, have actually fallen since Bush took office. Pay for CEOs, meanwhile, has soared -- from 185 times that of average workers in 2003 to 279 times in 2005. And after-tax corporate profits have also skyrocketed, more than doubling since Bush took office. Those profits will eventually be reflected in dividends and capital gains, which accrue mainly to the very well-off: More than three-quarters of all stocks are owned by the richest ten percent of the population.

Bush wasn't directly responsible for the stagnation of wages and the surge in profits and executive compensation: The White House doesn't set wage rates or give CEOs stock options. But the government can tilt the balance of power between workers and bosses in many ways -- and at every juncture, this government has favored the bosses. There are four ways, in particular, that the Bush administration has helped make the poor poorer and the rich richer.

Well, he's right. The rich did get richer [37].

In a new sign of increasing inequality in the U.S., the richest 1% of Americans in 2006 garnered the highest share of the nation's adjusted gross income for two decades, and possibly the highest since 1929, according to Internal Revenue Service data.

Meanwhile, the average tax rate of the wealthiest 1% fell to its lowest level in at least 18 years. The group's share of the tax burden has risen, though not as quickly as its share of income.

The figures are from the IRS's income-statistics division and were posted on the agency's Web site last week. The 2006 data are the most recent available.

The figures about the relative income and tax rates of the wealthiest Americans come as the presumptive presidential candidates are in a debate about taxes. Congress and the next president will have to decide whether to extend several Bush-era tax cuts, including the 2003 reduction in tax rates on capital gains and dividends. Experts said those tax cuts in particular are playing a major role in falling tax rates for the very wealthy.

That was from a report published in July of this year, based on 2006 data. It turns out, the rich got even richer in 2007 [38], and their wealth more concentrated in the hands of an increasingly small percentage of the population. The poor did indeed get poorer [39], and the middle class stagnated.On the other end of the spectrum, the poor have seen their gains reversed since the 1990s [40], and more of them are living in concentrated areas of poverty.

One less visible aspect of the economic boom of the 1990s was a decline in the number of low-income working people who lived in very poor neighborhoods.

But that trend has reversed during the first five years of this decade, according to a new analysis by the Brookings Institution, a nonpartisan think tank in Washington. It found that the number of poor people who live in areas of concentrated poverty increased by 41 percent since 1999.

"Many of these neighborhoods that made these great gains in the 1990s – with the downturn in the beginning of this decade and the weak recovery – have been hit hard by this economic change," says Elizabeth Kneebone, lead author of the report and a senior research analyst at Brookings' Metropolitan Policy Program. "We've lost a lot of ground and see poverty again increasing in these neighborhoods."

Such increases in concentrations of poor people in specific neighborhoods create a kind of self-perpetuating economic segregation, says Ms. Kneebone. That's because low-income neighborhoods generally have lower-performing schools, less access to good jobs, poorer health outcomes, higher crime rates, and less economic investment.

"As people try to work their way out of poverty, they don't find as many of the opportunities they need in very low- income neighborhoods," she says. "All of this creates the cycle that perpetuates poverty."

The consequence has been concentrating an increasing amount of wealth in the hands of an increasingly small group of people. And, the fairly tale of supply-side economics [41] — an article of faith for conservatives over the last 30 years or so — turned out to be just that, a fairy tale.

When Ronald Reagan first ran for president of the United States in 1980, he promised to cut taxes in what seemed, at the time, a magical way. Tax revenue would go up, not down, he said, as the economy boomed in response to lower rates.

Since then, supply-side economics, as it was called - first with derision but then as a label embraced by its supporters - has become a central tenet of Republican political and economic thinking in the country. The big supply-side tax cuts of the 1980s and the 2000s did not work as advertised, even supporters admit, but the concept has reappeared in this year's U.S. election campaign anyway, in an amended form.

"What really happens is that the economy grows more vigorously when you lower tax rates," said Kevin Hassett, an adviser to the presumptive Republican nominee, John McCain, and the director of economic policy studies at the conservative American Enterprise Institute. "It is beyond the reach of economic science to explain precisely why that happens, but it does."

But even with a growing economy, the promised boon in tax revenues never materialized.

Even with the economic growth of the Bush era, the prosperity never made it into the hands of "those who work for a living," as Krugam puts it. Wages stagnated as they had been doing all along. Jobs, rather than being created, disappeared at an alarming rate, and don't seem to have been replaced with an equal number of jobs, or jobs that offer the same (or better) benefits and compensation.

It was, we were told, supposed to "trickle down." [42]

"Trickle-down economics" and "trickle-down theory" are terms of political rhetoric that refer to the policy of providing tax cuts or other benefits to businesses and rich individuals, in the belief that this will indirectly benefit the broad population.[1] The term has been attributed to humorist Will Rogers, who said during the Great Depression that "money was all appropriated for the top in hopes that it would trickle down to the needy."[2]

Proponents of these policies claim that if the top income earners invest more into the business infrastructure and equity markets, it will in turn lead to more goods at lower prices, and create more jobs for middle and lower class individuals.[citation needed] This sentiment is captured in John F. Kennedy's argument, "a rising tide floats all boats." Proponents argue economic growth flows down from the top to the bottom, indirectly benefiting those who do not directly benefit from the policy changes. However, others have argued that "trickle-down" policies generally do not work,[3] and that the trickle-down effect might be very slim.[4]

Today "trickle-down economics" is most closely identified with the economic policies known as Reaganomics or supply-side economics. Originally, there was a great deal of support for tax reform; there was a dual problem that loopholes and tax shelters create a bureaucracy (private sector and public sector) and that relevant taxes are thus evaded. Reagan repeatedly cut taxes overall by modest amounts, but dramatically de-progressivized the income tax system, cutting the marginal tax rates on the highest-income tax bracket of joint-filed couples from 70% to 28%. [5]

Except, that it didn't. I'm not an economist, so I probably can't effectively explain why it didn't. But the census data released [43] in August paints a pretty stark picture of the "economic Katrina" [44] left in the wake of the Bush administration and the Republican congress during about 7 1/2 years of one-party rule, and too little opposition from Democrats. Real median income for working families has gone down $2000 below its 2000 level, while the costs of food, fuel, health care, etc., have only gone up. The number of families in poverty increased by 5.7 million. And, as if often the case, minorities fared even worse.

As for why  the "recovery" of the Bush era didn't reach many other than the "haves and have-mores" [45] the best explanation I've read punches a hole in the "rising tide lifts all boats" canard [46]. (Which always struck me as odd, because it doesn't account for people who don't have boats, etc.)

President John. F. Kennedy is credited with the following quote: “A rising tide lifts all boats.” This quote is often used to justify the reduction of income tax rates for the already wealthy, because of the belief that the wealthy will invest their additional funds in job creating activities, increasing the number of the employed and their incomes.

In reality, a rising tide will lift all boats in a harbor an equal distance, but it will not increase the size and power of any of the smaller boats. A twelve-foot sailboat will be lifted the same distance as a forty-foot yacht, but it will not transformed into a forty-foot yacht.

There has been a great deal of interest in the growing income and wealth inequality both in the US and in the rapidly growing economies of Asia. The effects of globalization on this issue are also being examined. Much of the increase in wealth has not only resulted from the substantial increase in executive salaries, but also from wealth generated by capital gains, dividends, new publicly traded firms, technology development (Google, for example) and appreciation in real estate and other similar assets. Both Alan Greenspan and Ben Bernanke, the former and current chairman of the Federal Reserve Bank, have warned about the destabilizing effects of too much concentration of wealth and income on our economy and the related social consequences. Simply put, trickle down economics doesn’t work, but trickle up economics is alive and well.

I'll get back to Alan Greenspan later, but I have my own theory about what happened to what didn't trickle down. Much of the "wealth generated by capital gains, dividends, newly traded firms, technology development, and appreciation in real estate," was simply invested in more of the same, rather than put back into the economy by people buying boats, or redecorating their kitchens, etc., as is to be expected in an economy that rewards "people who get their income from dividends and capital gains, rather than those who work for a living." (Remember, the president's roots and the Bush family's wealth go back to Wall Street speculation [47].)

The result is a concentration of wealth, rather than "spreading the wealth," and — as Krugman points out — concentrating the wealth requires a transfer of wealth from the bottom of the economic ladder to the top.

In other words, it's a "rising tide" that leaves most of us floundering in the surf as the S.S. Economy goes town, and we're supposed to believe that the lifeboats will be back for us as soon as the "first class" passengers have been saved. We just have to wait.