Spreading the wealth-6: Understanding the opposition

Recently, Joe Biden said it would be patriotic of rich Americans to pay more taxes and Sarah Palin chided him for it, saying that no one should pay more taxes and that everyone should want to pay less. This is the mantra of the right-wing ideologues. While I disagree with Biden’s choice of the word ‘patriotic’ (a word that has long since ceased to have any operational meaning but instead is just used as a political weapon), I cannot understand the logic of people who think that paying less taxes is always better. Even the ever-conventional New York Times columnist Tom Friedman took issue with Palin on this fetishization of lower taxes for everybody. (Thanks to Norm for the link.)

Recall that what is being proposed is to make the income tax structure more progressive by raising the rates on the highest slabs of income and reducing it for the lower tax slabs. This seems so eminently reasonable, even downright common sense, that we should try to understand the sources of the opposition to it.

One group consists of rich and greedy and callous people. Such people simply do not care about the poor. They have made (or inherited) a lot of money and it gives them a weird sense of entitlement, that this somehow makes them superior to those who have less. They seem to take pleasure in ostentation. Such people enjoy being much richer than others and think that creating a more a more progressive tax scale is somehow unfair to them.

There are also those ideologues that think that the best system is one in which there is no government at all and that all taxation should be abolished and a pure unadulterated free market should reign supreme. Of course these people are nuts. Such a system has never existed except perhaps in small isolated communities back in hunter-gatherer times. Modern societies are far too large and complex to function without significant government involvement and the only meaningful debate is about the proper balance between the private sector and government.

In fact it is the presence of government that has enabled people to be highly productive by specializing in one or two areas of activity and excelling at it, rather than having to take care of all their needs themselves.

Then there are others, who while not rich themselves, subscribe to the economic theory that says that having a few people make enormous amounts of money is good for all of us because this gives them the incentive to work, hard create new inventions, make new discoveries, and use the wealth generated by the fruits of their labors to invest in more businesses that will create more jobs and so we all benefit in the long run. This is the theory of trickle-down economics.

But does this happen? Do people who make enormous amounts of money use the excess after meeting their living needs to invest in new businesses that create well paying jobs? Or do they largely use it for ostentatious living that results in the creation of mainly low-paying service sector jobs (waiters, valet-parkers, maids) to support that lifestyle?

In other words, is trickle-down economics a good theory? That is a question that one should be able to answer empirically and I will leave it to the economists to provide a definitive answer. But there is clear evidence that the rapid rise in income inequality that started around 1980, with huge gains for the very rich has not produced a commensurate rise in the general well being.

Look at figure 2 in this paper that analyzes the rising inequality in incomes from 1980 (which is the year that the stock market started to rise like a rocket) and 2000. Notice that while the lowest four quintiles of family income have stagnated and even decreased slightly over that period, the share of the national income earned by the top 1% rose steeply, doubling its value. So we know who actually benefited from the so-called boom years of Reagan, Bush I, Clinton, and Bush II.

In fact, as we see from the graph below taken from this paper, the share of the total income of the top 1% of households rose from about 8% in 1980 to 20% in 2006.

incomeinequality.jpg

As Table 1 in the same paper shows, from 2002 to 2006, when George Bush and the Republican congress gave massive tax cuts for the rich, the income of the bottom 90% of households rose by only $1,446 (4.6%) while the incomes of the top 0.1% rose by a whopping $1,809,824 (57.6%).

Note that the only time in the past when the wealthy had this large a share of the national income was in 1928, just before the Great Depression. That is not a good indicator of what lies ahead. The idea that allowing a few to amass great wealth is good for all of us is an argument that is hard sustain.

POST SCRIPT: The people in your neighborhood

Stephen Colbert looks at the new middle class loved by McCain and Palin, which consist of those people who are identified solely by their first names and occupations, like the famous Joe the plumber and Tito the builder.

Spreading the wealth-5: Class warfare against the poor

Why do so many have a reflexive aversion to paying taxes and think that any adjustments in the tax system to shift the burden away from the poorer and towards the richer is somehow unfair? This is because class warfare has been consistently waged against the poor for so long by both parties that we have come to think of it as the norm. But when attempts are made to redress this balance, the rich are quick to shout ‘class warfare!’ to distract attention from the fact that they are the masters of it.
[Read more…]

Spreading the wealth-4: Who is in the middle class?

The problem with discussing the distribution of wealth and income in the US is that politicians of both parties have for years been pandering to the ‘middle class’ and courting their votes by promising to improve their condition.

The rich have exploited this by giving small income tax benefits to the middle class while giving themselves huge tax benefits, and then claiming that the entire middle class has benefited. David Cay Johnson in his book Perfectly Legal: The covert system to rig our tax system to benefit the super rich – and cheat everybody else (2003) describes how this spreading the wealth in favor of the rich is done. The title of his book says it all. Then the rich (and the middle class dupes who have been taken in by this scam) get outraged and scream ‘socialism!’ when someone comes along to try and spread the wealth in the opposite direction.

They have been getting away with this because the phrase ‘middle class’ has been bandied around a lot without being defined by politicians and the media. As a result, we have the curious phenomenon that almost everyone, from the quite poor to the quite rich, thinks of themselves as middle class. Thus someone who is earning $30,000 a year feels they are in the same class as, and feel a sense of class solidarity to, someone earning $250,000 a year. Hence they react with a sense of grievance when someone with much higher income than them doesn’t come out ahead because of any change in fiscal policies.

The word class has become perceived as based not only on income but also as a proxy for family background, the nature of one’s job, the social circle one moves in, and lifestyle practices. This vagueness has enabled almost everyone to think of themselves as middle class because in at least one area of their life they may overlap with those much better off than them. So someone who has a good formal education but now works at minimum wage job may still consider himself middle class because he reads newspapers and books, listens to classical music, and is involved in arts and community activities.
[Read more…]

Spreading the wealth-3: Meeting a hierarchy of needs

My view is that one should formulate tax policy based on the extent to which one meets a hierarchy of needs.

The first level of needs is to provide food, shelter, clothing, and medical care for oneself and one’s family. That undoubtedly takes priority over everything else. People who are struggling financially just to get by even if they live frugally, would tangibly benefit from paying less taxes and should pay less. In fact, there is no reason why such people should pay any taxes at all. Tax cuts or policies that result in higher incomes meet that level of need very well.

But once those needs are met, the next level of needs consist of safe neighborhoods, well-lit and well-maintained streets and sidewalks, parks and recreational areas for children and adults to enjoy, well-stocked libraries, and good schools. Those are very real and tangible needs that I would directly and personally benefit from but it beats me how giving me a tax cut is going to help me attain any of them. This level of needs cannot be met by tax cuts or even higher income, unless the increased income is so large that I can live in a gated communities, send my children to private schools, hire private security services, and otherwise pretty much cut myself off from most of humanity. [Read more…]

Spreading the wealth-2: Why this benefits all

What is interesting about the flap over Obama telling Joe the plumber about the benefits of spreading the wealth around, is that if you listen to the exchange between Joe and Obama, what Obama is saying not only makes absolute sense, its truth should be blindingly obvious to anyone.

What Obama said was that while he was happy for Joe’s success, he also cared about the waitress and the teacher and the store clerk and the policeman and all the others in that community who do not earn anything close to $250,000 per year and were currently struggling and who needed a break. He pointed out that if they were able to do better in life, then they were more likely to be able to afford the services of a plumber like Joe and he would do better too.

That is exactly right. I myself hate plumbing chores. Even though I do not earn anywhere near the $250,000 that Joe is hoping to earn, fortunately I still can afford it so that when something goes wrong in our home I call Nate the handyman and he comes along and promptly takes care of it, while shooting the breeze with me, exchanging information about our families. It is all very pleasant.

As a result, my plumbing problems get solved by an expert professional, Nate gets my business and some income, and this frees up my time and energy to do the things that I enjoy, such as reading and writing. We are both better off.

If I could not afford Nate’s services, I would have to learn to do the plumbing work myself and spend a lot of my spare time on it and would probably end up doing a lousy job if not actually flooding the house. And if that fails, I would have to ask friends who know more about plumbing to help me out. A lot of poor people do exactly that. They sacrifice their own time and energy to do such things, bartering their own skills and services for those of others. That is perfectly fine, but it does not help the neighborhood plumber’s business.

This example can be multiplied over and over. I pay people to work on my car, to repair the roof, to trim the tress in my yard, to plow my driveway in winter, and so on, because I can afford to. And we all benefit from that in different ways.

But if most people are impoverished and barely making ends meet, and the more concentrated wealth becomes, the less likely it is that small businesses will succeed since fewer people will be able to afford their services. It is far better for a plumber to have a hundred middle class people in his neighborhood than one multimillionaire and a hundred poor people, since a single rich person will not have a hundred times the plumbing needs of a hundred homeowners.

Henry Ford discovered this many years ago when he realized that if he and other employers like him did not pay their employees good wages, there would not be a large enough market of consumers who would be able to afford to buy the cars he made. So while higher wages reduced his profits in the short run, it increased the viability of his business in the long run.

But this basic truth has to be obscured in order that the rich can benefit by impoverishing others, The rich have always depended upon duping the poor to support their lifestyles. As Voltaire said, “The comfort of the rich depends upon the abundance of the poor.” But they also have to persuade the less well-off that that this exploitation is good for them. They do this by using their wealth and power to make the political structure serve their needs, then suggest that the resulting structure that redistributes wealth to benefit the rich is ‘natural’ and that reversing that change to benefit the majority is somehow unfair. What is amazing is that so many poor and middle class people actually believe that argument.

This English nursery rhyme (c. 1764) captures the idea of how the laws have always favored the wealthy. (Thanks to blog reader RCarla.)

They hang the man and flog the woman
That steal the goose from off the common.
But let the greater villain loose
That steals the common from the goose.
The law demands that we atone
When we take things we do not own.
But leaves the lords and ladies fine
Who take things that are yours and mine.

‘Spreading the wealth’ means taking the commons back from those who have taken it for their private benefit. It has so many benefits for so many people that one has to wonder why there is so much fierce opposition to the idea from the very people who would benefit.

In the next post, this question will be explored further.

POST SCRIPT: The other Palin for president

Spreading the wealth-1: Introducing Comrade Bush

By now, practically everyone must be sick of hearing about Joe the Plumber. But bear with me for a minute as he provides me with a peg on which to hang a point I wish to make. I thought his interaction with Obama was quite interesting and was planning to comment on it even before Joe became John McCain’s BFF.

What I found most amusing is how the right wing has seized upon Obama’s comment to Joe about the need to ‘spread the wealth around’ and has thrown one of their by now patented manufactured outrage hissy fits, screaming “There, I told you! Obama is a socialist!” and warning that if he is elected president he is immediately going to take all our money and give it to winos and panhandlers and make us wear grey tunics and work on collective farms.
[Read more…]

Solving the mortgage mess

Now that we have the subprime mortgage mess, solving it is inevitably going to create a sense of injustice in some quarters. During the second Obama-McCain debate, I was startled by McCain’s sudden revelation of a new plan to address the mortgage crisis:

“As president of the United States…I would order the secretary of the treasury to immediately buy up the bad home loan mortgages in America and renegotiate at the new value of those homes — at the diminished value of those homes and let people be able to make those — be able to make those payments and stay in their homes.

“Is it expensive? Yes. But we all know, my friends, until we stabilize home values in America, we’re never going to start turning around and creating jobs and fixing our economy.”

He emphasized that this was his very own plan, not Obama’s or Bush’s. But it turns out that Obama had said something seemingly similar in a speech given on September 23, saying:

“For example, we should consider giving the government the authority to purchase mortgages directly instead of simply purchasing mortgage-backed securities. In the past, such an approach has allowed taxpayers to profit as the housing market recovered.”

But while the broad details of the McCain and Obama plans appear similar, apparently the details McCain’s plan, released later, are different enough from his own that the of Obama camp is now criticizing the McCain plan as mainly benefiting the financial institutions that caused this mess.

What McCain seems to be suggesting is this. Suppose someone has a $200,000 mortgage on a home that is now worth only $100,000. McCain’s plan would purchase the mortgage from the banks at the full value ($200,000), and then renegotiate the mortgage with homeowner for $100,000. This enables the banks to be fully bailed out of the consequences of their reckless lending, and also bails out the homeowners. It is the taxpayers who foot the bill for the remaining $100,000.

Critics have argued that there is no reason that the banks should be bailed out this way by buying the mortgages at face value. Instead they should pay them the ‘real’ value of the mortgages. But determining the ownership and real value of individual mortgages is not going to be easy since they have been bundled and sliced and diced on their way to being transformed into easily marketable securities.

Clearly the banks want to get as high a price as they can. But they have no real leverage in this situation except for what they have by virtue of their influence with the government partly purchased through their lobbyists’ contributions to politicians.

The government should use its leverage to say that they will not bail out the banks but will instead take them over (partially or wholly) by purchasing their stock and thus gaining control. Then they will be able to benefit when home values eventually rise and the banks become more stable and their stock values go up. The government can then sell its stock and get out of the retail banking business. But in the interim, they will have effectively nationalized these institutions, the way they have already nationalized Fannie Mae, Freddie Mac, and AIG.

This is the model being practiced by the European countries led by England and is based on the Swedish solution to their 1992 crisis.

Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.

That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.

It now seems that the US government is adopting this very solution. Of course, this move smacks of socialism and adopting it will be a tacit concession that capitalism has at least partly failed. It will thus be anathema to those ideologues who do not see problems as requiring pragmatic solutions based on whatever realistic options are available but as requiring actions based on an ideological template. The true free-market believers will say that the government should do absolutely nothing and let the chips fall where they may, irrespective of however many banks go under.

But the people who run the US are neither socialists nor free-market capitalists. What the current crisis reveals only too plainly is that they are ‘state capitalists’, who think that the government should serve the interests of the big corporations and financial institutions.

But facing a real chance of public revolt over a blatant giveaway to the very financial institutions and people who created this mess, the government seems to be reconciling itself to the fact that it must adopt some variant of the Swedish/English model, and Paulson’s revised plan seems to reflect that.

However, the way the US government has been itself lurching from one plan to another does not inspire much confidence. As Josh Marshall points out: “[T]he fact that [Paulson] rammed through his bailout bill as absolutely essential to saving the economy, only to decide a few days later that we need something dramatically different, does not inspire me with great confidence in his grasp of the nature of the crisis.”

POST SCRIPT: Tone deafness by the McCain camp

McCain has been getting hammered by Obama for advocating policies that seem to ignore the middle class and cater to the rich. Presumably feeling the need to respond to this charge, the McCain campaign has produced a new tax proposal they say is aimed at the middle class.

What is it? They are proposing a capital gains tax cut!

What are they thinking? It is mostly the rich who worry about capital gains taxes or even know what it is. They are the ones who are constantly asking for cuts in the capital gains tax and even its elimination.

Second, with the current stock market and housing market downturns, people are facing huge capital losses, not gains, so they are unlikely to be paying any such taxes soon.

While this may be just another effort to use the crisis to ram through a policy that will eventually favor the rich when the economy recovers, it is another sign that the McCain has no sensitivity to what concerns ordinary people.

Retirement savings losses

Like most people who have retirement accounts, the beginning of October saw the arrival of my quarterly statements and they did not make for pleasant reading. Mine showed a drop of 12% since the beginning of the year.

I have heard many people express dismay over similar losses. It is, of course, not pleasant to see ones savings drop so sharply. But at the same time, we have to realize that what we may be seeing is a drop from an artificially high and inflated value. Over the past few years, those same retirement accounts have grown at a rapid clip due to the galloping stock market prices.

While reading the quarterly statements back in the good old days (i.e., last year) were fun, I never thought of that as ‘real’ money or wealth, the way I view the money in my bank account. It is like the value of my home. It may go up or down but as long as I am not selling it or trying to borrow against it, it has no effect on my life except psychologically.

Talking of the good old days, wasn’t it was just this summer that $150 billion was given away as $600 to each taxpayer and that this ‘stimulus package’ was supposed to solve all our financial problems by the simple expedient of having people go shopping? Ah, those were the good times.

As I have mentioned before, if we think of the virtual economy of the stock market as being a measure of the real economy, then the Dow Jones Index should only be about 5,500, still below its current value. So, except for people who are forced to convert their stock assets into actual cash, there has been no tangible loss.

What is extraordinary is the effort by some to blame the whole subprime mess on what they claim is the effort by the government to provide loans to poor and minority communities to encourage them to buy homes. They say that this is what encouraged risky lending practices. This is flat-out false.

There were of course many people who did buy homes and made other major purchases based on a false sense of wealth and it is they who are now really feeling the pain. There are those people who bought homes they could not really afford before the real estate market went sour, for which they now owe more money than the house is worth and hence have now defaulted. It is uncertainty both about the scope and extent of this default problem and the worth of the securitized investments made out of bundled mortgages that seems to fueling the loss of confidence in banks and the stock market.

To be sure, many individuals were greedy and took advantage of the chance to buy expensive homes at inflated values based on artificially low introductory rates. Many of them also spent way more than they should have on credit, maxing out their cards. Have we forgotten that people have long been strongly urged to shop, and that it was almost their patriotic duty to do so in order to keep the economy going? Credit card offers were plentiful and so easy to obtain that we were regaled with stories of even cats and dogs obtaining them. Now it seems that credit card debt was also ‘securitized’ like home mortgages were and those debts are also in danger of default, and suddenly people are being lectured to sternly for their thriftless ways.

People seemed to have had an unrealistic sense of what they could and could not afford. Such people are by no means blameless. But what they are guilty of is greed. They cannot be blamed for the mess because they are not the ones who were in control of the situation.
It should also not be forgotten that not all home mortgage or credit card defaults are due to greed. Some people default because of factors outside their control, like loss of their job or a major illness. In fact, the largest factor in personal bankruptcies is due to the cost of medical care.

It is the banks that we expect to be the grown ups in this situation, who should understand what risks are reasonable. They are the professionals. They are not obliged to give loans to whoever asks for them. It is they who are supposed to check on the value of the homes that are being bought and the ability of the purchaser to pay back the loans before they lend money.

But the banks did not practice the kind of due diligence that was called for. So while they, like the homeowners, are also guilty of greed, they definitely bear the major responsibility for the mess.

POST SCRIPT: Crazy prayers

The idiocy of some religious believers never ceases to amaze me. Take this invocation given by Rev. Arnold Conrad, past pastor of the Grace Evangelical Free Church at a McCain rally in Davenport, Iowa.

“I would also pray, Lord, that your reputation is involved in all that happens between now and November, because there are millions of people around this world praying to their god — whether it’s Hindu, Buddha, Allah — that his opponent wins, for a variety of reasons,” Conrad said.

“And Lord, I pray that you would guard your own reputation, because they’re going to think that their god is bigger than you, if that happens. So I pray that you will step forward and honor your own name with all that happens between now and Election Day,” he said.

Apart from the pastor’s ignorance (he mixes up the names of gods with the names of the religions) he is warning his Christian god that this election is being seen as a grudge match between him and his competitor gods and that if he doesn’t act to make McCain win, he wont be able to show his face in the neighborhood again. Unbelievable.

Government of the Dow, by the Dow, for the Dow

The recent financial crisis and the frantic (and finally successful) attempt by the government and Wall Street to strong-arm the public to provide immediate relief to the very institutions that caused the crisis is striking evidence, if anyone needed it, of exactly for whose benefit the government is run: Wall Street. You can ignore all the blather about how this bailout was needed to prevent ordinary people from financial ruin. That may or may not be true. What is indubitable is that if Wall Street interests were not at stake, nothing would have been done.

As was clearly evident in the past week, while the government can drag its feet for decades, say it is too expensive, and take no action to solve urgent problems like health care, when it comes to giving away nearly a trillion dollars to the financial industry, it can act with lightning speed. And you can be sure that when this money runs out (as it surely will as Wall Street institutions get their greedy hands on it) and next financial ‘crisis’ appears, we will be asked to cough up even more, and told that otherwise the sacrifices we have already made will be ‘wasted’. This is the same argument given for continuing the war in Iraq.
[Read more…]

Crisis? What crisis? Which crisis? Whose crisis?

In the midst of all this panic about a financial meltdown, it is hard to get a sense of how to actually measure if there is a crisis or not. Clearly there are various measures that can be used: the number of houses foreclosed, the number of personal bankruptcies, the number of banks going under, the amount of credit available, the state of the stock market, and so on. While they are all connected in some way, which ones should we be paying most attention to?

Deciding which measures are being used to say there is a crisis is important because that will drive the efforts to resolve it. Clearly what is concerning the political leadership is the state of the financial market, and the current bailout efforts seemed to be aimed at reassuring the banking, insurance, and other financial sectors and propping up the stock market. People are being scared and told that if the stock market declines their retirement savings will go down the tubes.
[Read more…]