One of the enduring mysteries is why so many struggling poor people in the US are opposed to government programs that would assist people just like them. The Economist reports on recent studies that shed new light on this odd phenomenon. (via Boing Boing)

Economists have usually explained poor peoples counter-intuitive disdain for something that might make them better off by invoking income mobility. Joe the Plumber might not be making enough to be affected by proposed hikes in tax rates on those making more than $250,000 a year, they argue, but he hopes some day to be one of them. This theory explains some cross-country differences, but it would also predict increased support for redistribution as income inequality widens. Yet the opposite has happened in America, Britain and other rich countries where inequality has risen over the past 30 years.

Instead of opposing redistribution because people expect to make it to the top of the economic ladder, the authors of the new paper argue that people don’t like to be at the bottom. One paradoxical consequence of this “last-place aversion” is that some poor people may be vociferously opposed to the kinds of policies that would actually raise their own income a bit but that might also push those who are poorer than them into comparable or higher positions. The authors ran a series of experiments where students were randomly allotted sums of money, separated by $1, and informed about the “income distribution” that resulted. They were then given another $2, which they could give either to the person directly above or below them in the distribution.

In keeping with the notion of “last-place aversion”, the people who were a spot away from the bottom were the most likely to give the money to the person above them: rewarding the “rich” but ensuring that someone remained poorer than themselves. Those not at risk of becoming the poorest did not seem to mind falling a notch in the distribution of income nearly as much. This idea is backed up by survey data from America collected by Pew, a polling company: those who earned just a bit more than the minimum wage were the most resistant to increasing it.

Poverty may be miserable. But being able to feel a bit better-off than someone else makes it a bit more bearable.

I came across this interesting chart from Visualizing Economics that shows how marginal tax rates have varied over the last 100 years or so.

A nice summary of the current state of affairs.

(Via reader Richard)

The actual law that was passed in the wake of the debt ceiling deal is a very detailed and complicated 28-page document. Given that the deal was supposedly agreed upon on Sunday, July 31 and was passed by both chambers and signed into law just two days later, I am amazed at how such a complex legal document could have been prepared in such a short time, even allowing for the massive resources the government has at its disposal. Now that the dust seems to have settled on the debt ceiling deal, let’s see what it says and what is likely to happen. As I said, it is quite complicated and I am not certain that I have all the details right. [Read more…]

I have been on a crash course to try and understand the arcane details of what options are available if the current debt ceiling is reached with no action taken to raise it and the balance in the government’s account actually becomes zero. I thought I would share what I have learned so far.

We tend to think of the US government as having a checking account, just like many of us, and of the debt ceiling like a loan given to us by a bank. This is mostly true, except in one significant way that I will get to below. This informative article by John Carney says that the government does have something that looks like a checking account in which all the money it receives continuously (tax receipts, air transport security fees, the postal service, Medicare premiums, etc.) is deposited and from which all its payments (federal employee salaries, income tax refunds, NASA, interest on our debt, unemployment insurance benefits and paying defense contracts) goes out. To get an idea of the scale of transactions in that account, at the beginning of last Friday, the account had $83 billion and during the day it received $7 billion in deposits and paid out $13 billion in withdrawals, leaving it at the end of the day with $77 billion. When the debt ceiling is raised, the balance of money available for use in that account is effectively increased by that amount.
[Read more…]

I read the book The End of Poverty: Economic Possibilities for Our Time (2006) by Jeffrey Sachs, a professor of economics and director of the Earth Institute at Columbia, some time ago and much of it consisted of him jetting around the globe meeting with heads of state and helping them solve their economic problems. He put out the hopeful message that global poverty could be eradicated and as an establishment liberal working within the system, he was high profile and you would find articles by him and about him all over the place. Then a couple of years ago, he seemed to suddenly disappear from the op-ed pages of the major newspapers.

I think I now know why. Yesterday an opinion piece written by him appeared in the Huffington Post and reveals that he has come to the conclusion that the political system is inherently corrupt, with both parties serving the oligarchy (though he does not use that term) and guilty of swindling the public.

Here’s a sample:

The Democrats of the White House and much of Congress have been less crude, but no less insidious, in their duplicity. Obama’s campaign promise to “change Washington” looks like pure bait and switch. There has been no change, but rather more of the same: the Wall-Street-owned Democratic Party as we have come to know it. The idea that the Republicans are for the billionaires and the Democrats are for the common man is quaint but outdated. It’s more accurate to say that the Republicans are for Big Oil while the Democrats are for Big Banks. That has been the case since the modern Democratic Party was re-created by Bill Clinton and Robert Rubin.

Thus, at every crucial opportunity, Obama has failed to stand up for the poor and middle class. He refused to tax the banks and hedge funds properly on their outlandish profits; he refused to limit in a serious way the bankers’ mega-bonuses even when the bonuses were financed by taxpayer bailouts; and he even refused to stand up against extending the Bush tax cuts for the rich last December, though 60 percent of the electorate repeatedly and consistently demanded that the Bush tax cuts at the top should be ended. It’s not hard to understand why. Obama and Democratic Party politicians rely on Wall Street and the super-rich for campaign contributions the same way that the Republicans rely on oil and coal. In America today, only the rich have political power.
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Who runs America today? The rich and the multinational corporations. Who runs the White House? David Plouffe, whose job it is to make sure that ever word, every action of the president is calculated for electoral gain rather than the country’s needs. Who runs the Congress, on both sides of the aisle? The lobbyists, who win in every negotiation. And who loses? The American people, who have said repeatedly that they want a budget that sharply cuts the military, ends the wars, raises taxes on the rich, protects the poor and the middle class, and invests in America’s future not just in Obama’s speeches but in fact.

That kind of view quickly gets you booted out of the mainstream media and government circles. Sachs now joins a growing number of former establishment intellectuals who are increasingly being described as ‘shrill’ because they express views outside that narrow slice of so-called respectable opinion that requires you to pretend as if the two parties represent widely divergent interests. They have seen through the charade of politics in the US and talk about where power really lies and that is simply not allowed.

Dean Baker, co-director of the Center for Economic and Policy Research (CEPR), issued a statement on the latest budget plan that Obama seems to be enthused about, although there is still some confusion about what the plan calls for since it is still in outline form. Baker’s statement is worth reading in full but here is his conclusion:

The budget plan produced by the Senate’s “Gang of Six” offers the promise of huge tax breaks for some of the wealthiest people in the country, while lowering Social Security benefits for retirees and the disabled.
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It is striking that the Gang of Six chose to respond to the crisis created by the collapse of the housing bubble by developing a plan that will give even more money to top Wall Street executives and traders.

Obama seems to be actually proud that he is going along with the long-sought-after dream of the oligarchy to cut the safety net of older and poor people, saying that the plan is ‘broadly consistent’ with what he has been advocating, adding that “We have a Democratic President and administration that is prepared to sign a tough package that includes both spending cuts, modifications to Social Security, Medicaid and Medicare that would strengthen those systems and allow them to move forward, and would include a revenue component.”

The wingnuts seem to be mobilizing against the plan too so it may not go anywhere.

During any budget debate, politicians who want to cut spending on salaries and benefits for the middle classes and on public services never fail to invoke the family budget as a model for how the government should deal with its own finances. We are repeatedly told that just as families have to make hard choices about what to spend their money on in order to stay within their income, so should the government. This comparison invokes the cozy image of thrifty families getting together around the kitchen table and making decisions about what they can afford based on their income, and making painful cuts when necessary.

This is a fantasy, especially in America, a country in which the general public has a notoriously low savings rate and exists on credit card debt and has nowhere near enough money saved to meet their retirement needs. In fact, living beyond their income seems to be the norm in families, not the exception.

Actually there are good reasons for not trying to balance the budget right now. High unemployment is a huge problem right now. The devastating effects it could be ameliorated by government spending a lot of money on projects that put people back to work. While increasing the debt is not good as a permanent policy, there are times when it makes the most sense in the short term and this is one of them. Even families realize that going into debt to purchase a home or paying for college can be a good thing.

So in reality, the federal government’s budgeting process is already like that of the average family. Just not in the way the moralizing speakers intend.

Dean Baker, co-director of the Center for Economic and Policy Research (CEPR), exposes all the myths and lies about Social Security being in crisis and requiring a radical overhaul.

Fortunately, the program is fundamentally solid. While you can sound really smart in Washington by saying that Social Security is going bankrupt, the facts say the opposite. According to the Social Security trustees’ report, if we did absolutely nothing the program could pay every penny of scheduled benefits through the year 2036.

Even if we never did anything, Social Security could always pay near 80 percent of scheduled benefits.
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Social Security is a great program that does exactly what it was supposed to do. It provides a core retirement income as well as insurance against disability and support for survivors. It has extremely low administrative costs and little fraud. The only problem is the politicians who say they want to save it.

… in two minutes, 15 seconds. He does a nice job. His cartooning skills are pretty good, too.