The Top 0.1% Vs. Rest of Us Throughout the 20th Century

Following up on yesterday’s post about the Global Top Incomes Database, I thought I’d give an example.  Here’s what I created:

So what are we looking at?  The blue line shows almost a century of the average income of the bottom 90% of American earners (in constant, real 2008 dollars – scale on right side).  This represents the typical American worker and the fate of the working/middle classes.  Basically it shows nine different trends or periods.

  • From 1917 until 1929, there was no improvement at all (actually a dip in the 1920-21 depression).  Despite all the talk about “roaring twenties”, it wasn’t for the average American worker.
  • 1929-1933, incomes really drop precipitously as the nation falls into the Great Depression.
  • 1933-1937, incomes begin to recover based on the government spending programs of the New Deal and correction of the banking/financial crises of 1932-33.  But the progress stumbles in 1938 as Roosevelt and Congress switch course and try to balance the budget before we’re back to full employment (are you listening Obama?).
  • 1938-1943 incomes really grow dramatically as the nation regains full employment and unions gain power.  The driver of the recovery is the near unlimited willingness to spend to arm for World War II and the demand for food and other items by warring allies.
  • 1944-1949, incomes stagnate again, partly as a result of demobilization of the war effort.
  • 1949-1973 brings the Golden Age. Real economic growth in the U.S. is the strongest it’s ever been and thanks to Keynesian government policies, a productivity-sharing social contract between managements and unions, and strong world demand, the workers get their share of it.  This is the period of fastest U.S. growth.
  • 1973-1993 brings twenty years of declining real incomes for most workers.  Part of it is driven by slower growth brought on by two oil price supply shocks.  Part is inflation (although only until the mid-80’s). Part is driven by a major political shift towards conservative free market policies (“Reaganomics”).  And part is driven by a weakening of unions and union membership.  The economy, while it grows, doesn’t grow near as fast as it did in the Golden Age.
  • 1994-2000 shows a slight recovery in incomes during the Clinton administration.
  • 2001 starts another decline and it’s been pretty much downhill ever since.  Note that the graph ends in 2008 (last available data), but other more recent data indicates the time series has continued to decline significantly.

So what can we conclude from the typical worker incomes, the blue line of average incomes for the bottom 90%,?  Well, yes, as some conservatives and libertarians have been pointing out, today’s incomes are historically high – around $32,000 per worker.  And consumption by household is even higher.  But consumption has risen despite incomes stagnating recently. It’s because many, many more households now depend on two workers for incomes.  Yes today’s incomes are dramatically higher compared to 76 years ago – roughly 6 times higher. But all of the increase happened in the first 38 years after 1932.  Today’s incomes per worker are actually lower than they were in 1973 – 38 years ago.

Now let’s consider the red line.  This shows the percentage share of the national income earned received by the top 0.1%, the top one tenth of one percent.  These are the really, really rich.  There are really only three periods here.  The period before the Great Depression.  Observe that it really was a roaring twenties for the really rich.  In the decade of 1920-1929 their share of national income rose from around 3.5% to over 6.5% – all while the average American worker stagnated. The game was rigged.  As the U.S. economy grew in total GDP terms in the 20’s and as productivity soared, the benefits of that improved productivity went to the rich, not to workers.  The rich lost ground in the Great Depression because the stock market crashed and the banking system imploded.

From 1936 until 1979, the share of income taken by the top 0.1% declines rather steadily and significantly.  Why?  A dominant factor is that income tax rates were rather progressive with high rates on the very high top end.  Now this simply means that the share declined – they took a slightly smaller slice of the pie each year.  But the pie was growing very, very fast, so in dollar terms their incomes were still rising too.  Do not take away the idea that the rich suffered income declines during this period.  On contrary, they did well in absolute terms.  They just didn’t do well at the expense of others.

But in 1979 the rich strike back.  Their share of income starts rising steadily until it reaches the same very high levels today that are reminiscent of the late 1920’s.  What happened?  Well the same forces that hurt the working/middle classes during the last 30+ years worked to the rich’s advantage.  But another important shift was changes in income tax policies.  Initially Carter, but then Reagan and Bush all cut tax rates for the top end.  Reagan did even more.  He eliminated several top end brackets.  This resulted in people in the top 0.1% (multi-millionaires) now paying the same rates as people making $250,000 per year.  That didn’t happen in the Golden Age.  Back then there were special brackets for the very, very rich top end.

So what can we conclude overall?  Well, for one thing, we should definitely bury any idea of “trickle-down” tax cuts helping average workers.  When the economy grew the fastest and typical workers did best was when tax rates on the rich were high.  When tax rates on the rich are lower, the economy grows more slowly and average worker incomes stagnate.  We might also conclude that the OccupyWallStreet movement (#OWS) has a point.  The system isn’t fair and it isn’t working for average workers.  This isn’t a call for socialism, it’s a call for the vibrant capitalism we had in the mid-20th century. That Golden Age of the middle of the 20th century is the only time when we really didn’t have “class warfare”.  We had a social contract that called for sharing the gains from improved productivity. But a little over 30 years ago the really rich declared war on the rest.  It’s class warfare and the middle class has been losing. 

Quickie – Some Graphs

I’ll be talking tomorrow to a bunch of students about income distribution, student loans, and other things of interest to the #OWS crowd.  These are some graphs I’ve collected from other sources that I’ll use.  No time to write much analysis today. It’s mostly just the graphs.

From Paul Krugman:

The true age of spectacular growth in the United States and other advanced economies was the generation after World War II, with post-Reagan growth nowhere near comparable. So why do these people imagine otherwise?

And the answer, once you think about it, is obvious: growth for whom? There’s only one way in which the post-deregulation boom was exceptional, and that’s in terms of the growth in incomes at the top of the scale.

Here’s a comparison of the postwar boom with the deregulation alleged boom, using real average family income from the Census and real average income for the top 1 percent from Piketty and Saez:

If you’re looking at the average, the last generation is a poor shadow of the postwar boom. But if you’re talking about the 1 percent, wonderful things have happened.

From CBO via Krugman again:

Inequality Trends In One Picture

Just an addendum on the role of the top 1 percent versus the college-noncollege differential. Here, from the CBO report, are the changes, in percentage points, of the shares of income going to three groups. The top quintile excluding the top 1 percent – which is basically the abode of the well-educated who aren’t among the very lucky few – has only kept pace with the overall growth in incomes. Just about all of the redistribution has taken place from the bottom 80 to the top 1 (and we know that most of that has actually gone to the top 0.1).

It’s a tiny minority, not a broad class of well-educated Americans, who have been winning here.

Again from CBO via Krugman:

A Mind Is A Terrible Thing To Lose

OK, I see that some people are doubling down on the claim that rising inequality is all about education — when what the CBO report drives home is that this is all wrong, the big increase has come from gains at the very top. I have to admit that I have a sneaking suspicion that this is in part driven by KDS (DS for derangement syndrome): some people will rush to take a position precisely because I have debunked it. But anyway, it’s really, really wrong.

Here’s the CBO result:

Notice that the 81-99 percentiles have seen only modest gains; it’s really the top 1 percent that drives the story.

For comparison, here’s some data on wages of men by education from EPI:

Again from CBO via Krugman:

Graduates Versus Oligarchs

Dean Baker raises an important point here: it’s really awfully late in the game to be saying that the important inequality issue is college graduates versus non-graduates. It’s not clear that this was ever true, and it certainly hasn’t been true for a while.

wrote about this years ago, using Ben Bernanke’s maiden testimony as Fed chair as an entry point. As I said then, Bernanke — like many others — had made

a fundamental misreading of what’s happening to American society. What we’re seeing isn’t the rise of a fairly broad class of knowledge workers. Instead, we’re seeing the rise of a narrow oligarchy: income and wealth are becoming increasingly concentrated in the hands of a small, privileged elite.

I think of Mr. Bernanke’s position, which one hears all the time, as the 80-20 fallacy. It’s the notion that the winners in our increasingly unequal society are a fairly large group — that the 20 percent or so of American workers who have the skills to take advantage of new technology and globalization are pulling away from the 80 percent who don’t have these skills.

Why would someone as smart and well informed as Mr. Bernanke get the nature of growing inequality wrong? Because the fallacy he fell into tends to dominate polite discussion about income trends, not because it’s true, but because it’s comforting. The notion that it’s all about returns to education suggests that nobody is to blame for rising inequality, that it’s just a case of supply and demand at work. And it also suggests that the way to mitigate inequality is to improve our educational system — and better education is a value to which just about every politician in America pays at least lip service.

The idea that we have a rising oligarchy is much more disturbing. It suggests that the growth of inequality may have as much to do with power relations as it does with market forces. Unfortunately, that’s the real story.

Let me illustrate this point with some CBO data. First, from the new report, here are the income shares of the top 1 percent and the rest of the top quintile:

There has been no rise in the share of the 81-99 group! It’s all about the top 1 percent.

Second, even within the top 1 percent the gains are going mainly to a small minority. An earlier CBO report, using slightly different methods, looked inside the top 1 percent up through 2005. Here’s some of that data:

The big gains have gone to the top 0.1 percent.

From Menzie Chinn:

CBO on Income Inequality, and Interpreting OWS

by Menzie Chinn

Tabulating Inequality Trends

The CBO released a report on income inequality earlier this week. This means that the “inequality deniers” are having a more difficult time arguing that widening spreads an wages, compensation, or overall income are merely statistical artifacts dreamt up by liberals (see e.g. here). What is of most interest is (i) real after-tax income of the top 1 percentile has risen about 275%, and (ii) the pre-transfers/pre-tax income share of the top 1% has increased most profoundly.

SummaryFigure1.png
Summary Figure 1, Growth in Real After-Tax Income from 1979 to 2007, from “Trends in Income Distribution,” CBO Director’s Blog, 25 October 2011. SummaryFigure2.png
Summary Figure 2, Shares of Market Income, 1979 and 2007, from “Trends in Income Distribution,” CBO Director’s Blog, 25 October 2011.The CBO Director’s Blog observes:

The rapid growth in average real household market income for the 1 percent of the population with the highest income was a major factor contributing to the growing dispersion of income. Average real household market income for the highest income group tripled over the period, whereas such income increased by about 19 percent for a household at the midpoint of the income distribution. As a result, the share of total market income received by the top 1 percent of the population more than doubled between 1979 and 2007, growing from about 10 percent to more than 20 percent.

The foregoing is completely consistent with the views laid out in Lost Decades (by me and Jeffry Frieden), Add-Figure 6-1 highlighted in this post, as well as this post.

Interpreting the OWS Protests

Against this backdrop, powerful forces have been deployed against raising tax rates at all on the top one percentile (and instead want to raise taxes on the lower quintiles).[1] [2]. The OWS protests can be interpreted in ths context. From TPM:

…Harvard Government Professor Jeffry Frieden said…

“Every debt crisis leads to major political conflicts over who will pay the price of dealing with the debt burden,” Frieden wrote. “One way or another, the accumulated debts will have to be addressed — either by writing some of them off, or by paying them off. Will the burden be borne by taxpayers? Government employees? Financial institutions? … I think that, in the context of our financial difficulties, OWS may reflect the fact that many Americans feel that too much sacrifice has been demanded of working people and the middle class, and too little of the financial community and the wealthy.”

Diane Lim Rogers, Chief Economist at the fiscally hawkish Concord Coalition, made similar points about the more reckless economic policies of the past decade: Much of the distaste with both Washington and Wall Street comes back to fact that DC is simply unwilling to change course.

“The difference is that during the Clinton years the rising tide was lifting all boats,” Lim Rogers said in an interview with TPM. “Low-income households were still doing better. Even then, the rich did really well, despite their taxes being raised.”

But what’s different now is that income inequality isn’t a political tenet of the left: it’s truly hurting people. Lim Rogers said the poverty rate is actually of more concern than the rich doing better given the circumstances.

“The outrage is not that the rich are richer,” she said. “It’s that the poor have gotten poorer — the inequality has become bipolar.”

Interestingly, Lost Decades, which makes many of these points, has been cited approvingly in at least one OWS document.

This is of course in contrast to views such as that of Econbrowser reader Brian who commented:

I honestly fail to see why some on the left are so concerned about how much money those at the top of the income distribution earn. Why not focus instead on why poor people are poor? And please, blaming that on the rich is a non-starter. People make bad choices in life. They get pregnant before they finish school and have a career started. They use drugs. They get tattoos and body piercings all over themselves and then wonder why no one will hire them for an entry-level job. They do not take school seriously. They have parents who never should have bred in the first place. I really, honestly and truly feel for the poor people and hope they can lift themselves out of poverty. But throwing more money at the problem, and taking it from the “rich”, is not the solution.

This worldview is apparently not rare; see this quote:

I don’t have facts to back this up, but I happen to believe that these demonstrations (Occupy Together) are planned and orchestrated to distract from the failed policies of the Obama administration. Don’t blame Wall Street. Don’t blame the big banks. If you don’t have a job and you’re not rich, blame yourself! …

I think the defenders of the interests of the top income percentile will continue to harp on these arguments: The unemployed are deservedly unemployed; the poor are deservedly poor. This will help distract the electorate from the issue of whom will bear the burden of adjustment to the aftermath of the financial crisis(including stabilizing the debt-to-GDP ratio), and the response to secular trends in income inequality.See more on tax policyhere.

 

 

The Economy Has Caused Riots Before – In the Great Depression

Washington’s Blog reminds us that things got ugly during the last prolonged depression in the United States.  This interesting historical footage from the Great Depression shows what happens when large numbers of people are unemployed for years at a time, get desperate, and perceive that the game is rigged to the benefit of Wall Street.

This depression isn’t as deep or severe as the Great Depression – the bank bailouts and the 2009 Obama stimulus spending/tax cut bill (ARRA) made sure of that.  But as this week’s GDP numbers show, we simply aren’t growing enough to fully recover.  For workers, the nightmare is real.  With the #OccupyWallStreet movement (#OWS) growing stronger, spreading, and continuing now for well over 6 weeks, perhaps the Wall Street banks are having nightmares of their own about such scenarios as what happened in the video.  Could that be why JP Morgan Chase bank is making such large payoffs donations to the New York City Police department?  Yves Smith at Naked Capitalism fills us in:

Is JP Morgan Getting a Good Return on $4.6 Million “Gift” to NYC Police? (Like Special Protection from OccupyWallStreet?)

No matter how you look at this development, it does not smell right. From JP Morgan’s website, hat tip Lisa Epstein:

JPMorgan Chase recently donated an unprecedented $4.6 million to the New York City Police Foundation. The gift was the largest in the history of the foundation and will enable the New York City Police Department to strengthen security in the Big Apple. The money will pay for 1,000 new patrol car laptops, as well as security monitoring software in the NYPD’s main data center.

New York City Police Commissioner Raymond Kelly sent CEO and Chairman Jamie Dimon a note expressing “profound gratitude” for the company’s donation.

“These officers put their lives on the line every day to keep us safe,” Dimon said. “We’re incredibly proud to help them build this program and let them know how much we value their hard work.”

But what, pray tell, is this about? The JPM money is going directly from the foundation to the NYPD proper, not to, say, cops injured in the course of duty or police widows and orphans…

And look at the magnitude of the JP Morgan “gift”. The Foundation has been in existence for 40 years. If you assume that the $100 million it has received over that time is likely to mean “not much over $100 million” this contribution could easily be 3-4% of the total the Foundation have ever received.

Now readers can point out that this gift is bupkis relative to the budget of the police department, which is close to $4 billion. But looking at it on a mathematical basis likely misses the incentives at work. Dimon is one of the most powerful and connected corporate leaders in Gotham City. If he thinks the police donation was worthwhile, he might encourage other bank and big company CEOs to make large donations.

And what sort of benefits might JPM get? It is unlikely that there would be anything as crass as an explicit quid pro quo. But it certainly is useful to be confident that the police are on your side, say if an executive or worse an entire desk is caught in a sex or drugs scandal. Recall that Charles Ferguson in Inside Job alleged that the use of hookers is pervasive on Wall Street (duh) and is invoiced to the banks.

Or the police might be extra protective of your interests. Today, [Oct 5] OccupyWallStreet decided to march across the Brooklyn Bridge (a proud New York tradition) to Chase Manhattan Plaza in Brooklyn. Reports in the media indicate that the police at first seemed to be encouraging the protestors not only to cross the bridge, but were walking in front of the crowd, seemingly escorting them across…

The wee problem is that the police are in the street, and part of the crowd is also on the street (others are on a pedestrian walkway that is above street level). That puts them in violation of NYC rules that against interfering with traffic. Note the protest were aware fo the rules; they were careful to stay on the sidewalk on the way to the bridge.

…some (many?) the protestors who used the walkway and got across the bridge were also corralled and not permitted to proceed to the Chase plaza. Greg Basta, deputy director of the New York Communities for Change, told me by phone, based on multiple reports from people who participated in the march, that as soon as protestors got to the Brooklyn side of the bridge, they were kettled. Greg was under the impression that there were construction barricades at the foot of the bridge which made it impossible for the marchers not to walk on the street. Because the focus has been on the what happened on the bridge, the coverage of what happened to the rest of crowd is sparse.

Some confirmation in passing comes from MsExPat at Corrente (apparently some of the very first off the bridge were permitted to proceed):

My friends and I made it to the Brooklyn side okay–we ended up with about 350 other marchers in Cadman Plaza, a lovely 19th century park. What I didn’t find out until later is that several hundred people behind me also got kettled and barred from going all the way to Brooklyn. So I was among the lucky marchers in the middle.

But notice even then that the procession to Chase Manhattan Plaza [correction, Cadman Plaza} was effectively barred. [Note JPM may have operations nearby, Bear Stearns had much of its back office there, and if the leases were cheap, JPM may have kept the space].

We simply don’t know whether the police would have behaved one iota differently in the absence of the JP Morgan donation. But it raises the troubling perspective that they might have. …

So far, the JP Morgan donation is an isolated example. But the high odds of continuing deep budget cuts at the state and local level open up the opportunity for corporate funding of preferred services, and with it, much greater private sector influence on the apparatus of government. This is a worrisome enough possibility to warrant a high degree of vigilance by all of us.

Student Loans and the Building Crisis

Student loans are gradually becoming a crisis.  At the macro level, student loans are the only sector of consumer finance that is growing since the recession began 3 years ago.  Federal student loans outstanding now total more than $1 trillion.  That’s more than total credit card debt.  From Mybudget360.com:

Student loan debt only segment of household debt expanding

The Federal Reserve tracks federally backed student loan debt and the figures are astounding.  The only sector of household debt that has expanded in manic fashion during this recession is with student loans:

debt growth by sectors

Every sector has taken a hit including:

-Home equity revolving debt

-Automobile loans

-Credit card debt

-Other debt

Yet there goes student loan debt saddling countless students with back breaking debt.  Make no mistake, much of the for-profits are growing simply because of the government:

“(USA Today) For profit-schools. The highest default rates are at for-profit schools that tend to serve lower-income students and offer courses online. The University of Phoenix, the nation’s largest, got 88% of its revenue from federal programs last year, most of it from student loans.”

This is absolutely nonsense and shows how the coupling of Wall Street and the government have simply turned education into another commodity to water down and gamble on.  Like the multiple card game tables in Las Vegas higher education is the hottest game in town.

But unlike credit card debt, student loan cannot be reset or forgiven in bankruptcy court.  It’s a permanent burden on the former student.

In theory, the loan shouldn’t be a burden because it was an investment in greater earning power of the former student and now potential worker.  But since this current era of lesser depression or workers depressionbegan, incomes for the college educated have actually declined.  CalculatedRiskBlog quotes from the New York Times recent analyses of U.S. household incomes: (bold emphases are mine)

From the NY Times: Recession Officially Over, U.S. Incomes Kept Falling. A few excerpts:…

And on education:

Median annual income declined most for households headed by someone with an associate’s degree, dropping 14 percent, to $53,195, in the four-year period that ended in June 2011, the report said.

For households headed by people who had not completed high school, median income declined by 7.9 percent, to $25,157. For those with a bachelor’s degree or more, income declined by 6.8 percent, to $82,846.

What’s more, the unemployment rate is also up for graduates (and all other categories). Mybudget360.com puts a graph to the income dynamics:

 Yet if we look at the earnings potential during the bubble years we see a very troubling picture:

earnings-of-college-grads-and-cost-of-college

Source:  BusinessWeek

Since 2000, in real terms college costs are now up by 23%

Since 2000, in real terms real pay for college graduates is down by 11%

This means potential disaster for graduates and other former students. From Leo Komfield at New America Foundation’s Higher Ed Watch:

The Department of Education recently announced that the national student loan default rate has risen to over 8 percent and we know that this measure provides only a limited view of the troubles that borrowers are having repaying their student loan debt. In the current economy, we can only expect things to get worse unless the Education Department tackles this problem head-on.

Among the defaulters are a large percentage of unemployed college students. It’s bad enough to be unemployed; however, when you add to this difficulty with being classified as a defaulter, you are really in trouble. Defaulting on federal student loans results in a lifetime of financial purgatory — it destroys your credit, making it impossible to obtain a credit card, car loan, and home loan, and it puts you at risk of having your wages garnished, and your tax refunds intercepted by the IRS.

The student loan market is back in the news as it makes its unrelenting march to the $1 trillion mark.  This crippling figure comes in the face of a decade of lost wages for middle class Americans.  Just like the housing bubble people were supplementing a disappearing middle class with more debt.  The allure of housing was that never in our history have we seen national home prices fall, until they did in dramatic fashion.  The same cultural nostalgia for education in every respect has created a zombie higher education system that is now expanding like the mortgage markets at the height of the housing bubble.  Why?  For-profit schools have largely lured in countless Americans into a system that has provided very little economic gains for students while enriching these Wall Street listed companies.  It should come as no surprise that the highest default rates stem from the for-profit system and most of these loans are federal loans.  In 2010 there were $100 billion in student loan originations, the highest ever in the midst of the deepest recession since the Great Depression.

But it also spells a crisis on a much larger scale.  Reports are showing that the OccupyWallStreet movement (#OWS) is partially made up of significant numbers of young people and recent graduates in particular.  These are not the “dirty hippies” and “degenerates” that many conservatives have labeled them.  Rather, they are the people who followed the “rules”. They studied. They went to college.  In large numbers they took responsbility for their future by taking on student loans and investing in their human capital – all things society has told them to do.  Now, almost 4 years since the recession began, there aren’t any jobs for them.  They’ve graduated and now face payments on those loans.  But the jobs simply don’t exist.  When young people are educated and then are denied opportunity, there’s danger for society.  That’s the recipe for revolutions as we’ve seen in Tunisia and Egypt already this year.

 

Some Other Interesting Perspectives on OccupyWallStreet

I’ve already mentioned my initial thoughts on the Occupy Wall Street movement (#OWS).  Here’s some snippets from a couple of others with some interesting insights.  First, historian William Hogeland writes at his blog Hysteriography.  He notes how the #OWS movement is a deeply American movement.  It has roots in the American revolutionary period as much as any Tea Party. He also reminds us that the Revolution wasn’t simply Americans vs. the tyrannical English. It was just as much about pure economic equality and fairness.   It was also about elitist rich Americans vs. populist American farmers and workers oppressed by taxes, foreclosures, and debts.

… I write about the deep, founding roots of rowdy, American populist protest and insurrection, often visionary and even utopian, yet informed and practical too, specifically over money, credit, and the purpose and nature of public and private finance. …most people still don’t connect the American founding period with a rugged drive on the part of ordinary people for equal access to the tools of economic development and against the hegemony of the high-finance, inside-government elites who signed the Declaration and framed the Constitution and made us a nation.

Sometimes people even ascribe democratic ideas to the famous upscale American Revolutionaries, who to a man actually hated democracy and popular finance. Paine, the exception, was ultimately rebuked and scorned by all of the others. [UPDATE: Anyway, Paine wasn’t one of them; I threw him in defensively because consensus-history types like to “include him in” on the basis of “Common Sense,” while including his social/economic radicalism out.]

The difficulty in dealing with our founding battle for democratic economics arises in part because the movement was not against England but against the very American banking and trading elites who dominated the resistance to England. That complicates our founding myth, possibly unpleasantly. Also, it was a generally losing battle. With ratification of the Constitution, Hamiltonian finance triumphed, and people looking to Jefferson and Madison for finance and economic alternatives to Hamilton are barking up the wrong tree, since what those men knew, or even really cared, about finance could be written on a dime. (Anyway, in pushing for creating a  nation, Madison supported Hamiltonian finance down the line. Their differences came later.) When Occupy Wall Street protesters say “It’s We the People!”  they’re actually referring to a preamble, intending no hint of economic democracy, to a document that was framed specifically to push down democratic finance and concentrate American wealth for national purposes. Not very edifying, but there it is.

…Amid horrible depressions and foreclosure crises, from the 1750′s through the 1790′s, ordinary people closed debt courts, rescued debt prisoners, waylaid process servers, boycotted foreclosure actions, etc. (More on that here and here.) They were legally barred from voting and holding office, since they didn’t have enough property, so they used their power of intimidation to pressure their legislatures for debt relief and popular monetary policies. Their few leaders in legit politics included the visionary preacher Herman Husband, the weaver William Findley, and the farmer Robert Whitehill.

They had high hopes for American independence. In the 1770′s, their “out-of-doors” collaboration with the famous elites was critical to enabling the Declaration of Independence — even though none of their names appears there (well, Benjamin Rush’s does, but by then he’d become unradicalized). Their democratic, egalitarian hopes dashed, in the 1780′s, in western Massachusetts, they marched on the state’s armory in Springfield to reverse regressive finance policies that had again plunged ordinary people into debt peonage and foreclosure while bailing out rich creditors (elites called that populist action, reductively, Shays’s Rebellion). In the 1790′s, with the Constitution in force, and Hamilton’s economics the law of a powerful new nation (partly in direct reaction to the Shays action), populists took over the militia and debt-court system throughout western Pennsylvania and western counties of neighboring states, flew their own flag, and tried to secede from the United States and form an economically egalitarian country. Hamilton dubbed that action, again in a successful effort to reduce it, the Whiskey Rebellion, and he and President Washington responded, naturally enough, by occupying western Pennsylvania with federal troops.

It is my possibly vain hope that reading up on such historical matters might inspire efforts like Occupy Wall Street to greater cogency and a deeper, more solid foundation in longstanding (if embattled and problematic) American values than they now seem to possess. You don’t have to look as late as the 19th-century Populists and the 1930′s labor movement, for example, to find an American left deeply immersed in both economic issues and an ambitious vision of a better country. Those things were present at the creation.

Hogeland also recommends an “Occupy Wall Street” Reading List.

Next up is John Quiggin at Crooked Timber.  He first observes that much of the eventual outcome of the #OWS movement depends on the “19%” – the folks that are in the top quintile, the top 20%, but aren’t part of the top 1%.  As we know powerfully from a graph I posted a few days ago:

First, economix at the New York Times reported on the basic income distribution data recently:

The graph below shows how much income is earned by a household at any given percentile in the income distribution, based on these new numbers for 2011:

DESCRIPTIONTax Policy Center

Incomes grow much, much faster at the top end of the income distribution than in the middle or at the bottom end. That is, the disparity in income between one percentile and a consecutive percentile is bigger among the very rich.

The top quintile, the top 20% may be rich compared to the rest, but not very much.  It’s really the top 1% and the top 0.1% where the income scale is truly distorted and outrageous.  Quiggin makes the point that the 19% is politically influential and powerful.  Perhaps not as powerful as the 1%, but clearly politically influential.  To keep the redistribution of income to the top game going, the top 1% has to keep the 19% on their side.  Without them, there’s clearly no legitimacy.  [bold emphases mine]

The top quintile as a whole commands the great majority of US income, and virtually all financial wealth – few households outside this group own much beyond their homes and perhaps some money in a pension fund….

The 19 per cent also have a disproportionate political weight, since they are much more likely than Americans in general to register, vote and engage in political activity. So, it makes a big difference whether, as as implied by ‘We are the 99 per cent’ their interests are aligned with the mass of the population or with the top 1 per cent…

The top quintile as a whole has done very well over the past few decades, and (despite some silly claims to the contrary), high-income earners have mostly voted Republican, in line with their economic interests. Certainly there are plenty who don’t vote their interests, but that is also true of many people in the top 1 per cent, not to mention bona fide billionaires like Buffett and Soros. [but]… a closer look at income growth figures suggests that, while the 19 per cent have enjoyed rising incomes, they’ve only barely maintained their share of national income. The redistribution of the past three decades has gone from the bottom 80 per cent to the top 1 per cent.

That suggests the possibility of a policy response in which the main redistributive thrust would be to reverse this process.  This would almost certainly involve higher tax payments, but this would be offset by the restoration of public services, which are in economic terms a ‘superior good’, valued more as income rises. The top 1 per cent can buy their own services, and are largely unaffected by public sector cutbacks, but that’s not true of the 19 per cent.

Another important factor is the growth of economic insecurity. The myth of the US as a land of opportunity for upward mobility has been replaced by Barbara Ehrenreich’s Fear of Falling (another good source on this is High Wire by Peter Gosselin). Even if people in the top 19 per cent are doing well, they are less secure than at any time since the 1930s, and their children face even more uncertain prospects.

Finally, there is the alliance of the 1 per cent with the forces of rightwing cultural tribalism. The 1 per cent can only rule by persuading lots of people to vote against their interests, and that requires a reactionary and anti-intellectual agenda on social, cultural and scientific issues. As a result, educated voters have increasingly turned against the Republican Party.

I don’t want to make too much of this last point. As Allan Grayson said during his memorable takedown of PJ O’Rourke recently, the 1 per cent own the Republican Party outright, but they also own much of the Democratic Party, and can rule satisfactorily through either. Also, having a college degree isn’t the same as being educated – Tea Party supporters are more likely than the average American to have a degree, and college-graduate Republicans are even more prone to various delusional beliefs on issues such as climate change.

Nevertheless, taking account of all the factors listed above, even the most comfortably affluent members of the professional class, looking at the alliance of plutocrats and theocrats arrayed to defend Wall Street could reasonably conclude that it was in their own interests to support the 99 per cent and not the 1 per cent.

We are therefore (surprisingly to me) suddenly back in a situation where a progressive movement can reasonably claim to act in the interests of a group that is:..
(a) the overwhelming majority of the population
(b) responsible for nearly all the productive activity (as against the 1 per cent’s incomes drawn from a parasitic financial sector)
(c) economically desperate or at risk of becoming so.

Can all of this be sustained? I don’t know, any more than anyone else. But #OWS has already achieved things that most people would have regarded as impossible a month ago, and for the moment at least, the momentum is still growing.

The #OWS movement appears to be spreading and  growing in a way the Tea Party never did.  It’s clearly, as Hogeland points out, deep in the tradition of American politics.  And as Quiggin points out, the 19%, the top quintile folks  have had income gains in recent years but they’ve also had a dramatic increase in economic insecurity, diminished prospects for their children, and a reduction in the public services they value such as top-notch public universities and infrastructure.  It’s interesting times, especially since no presidential candidate from either party appears to align with the interests of the #OWS movement.

The Fraudulent Flat Tax Pitch – A Rich and Powerful Tactic

Power and riches go together. But nowadays, they need political spin. Throughout history the very rich have usually also been the very powerful.  And usually the very rich use that power to both protect themselves from the less well-off and to figure out ways to further enrich themselves.  Often the enrichment comes at the expense of the less well-off.  When you’re powerful, redistribution of income away from the poor towards yourself is often a lot easier and more lucrative than trying to be productive and creative.  It’s been this way largely since the start of history.  But getting the poor and middle classes to go along it can be a challenge.  Of course blatant power, threats, and coercion were the means of choice for centuries.  The pure power dynamic gave way over the centuries to class, the idea that somehow the rich were different people, better people. The poor and middling classes were taught that it was the natural way of things.

Then the American and French revolutions brought out that dangerous idea: people really are fundamentally the same and they should have the same political rights.  It was a very dangerous idea for the rich and powerful classes. It leads to questioning why the rich are rich and the poor aren’t.  More importantly, this equality idea gave rise to a democratic governments.  Democracy is a challenge for the rich and powerful.  As historian William Hogeland has powerfully explained, the U.S. Constitution was actually created as a reaction by the rich and powerful against democratic finance well after the American Revolution.

So how do the rich and powerful today attempt to overcome democratic impulses and further enrich themselves at the expense of the others?  In other words, how do the rich and powerful get the poor and middle classes to go along with proposals that ultimately are only in the interest of the rich and powerful? 

One tactic is to simultaneously promote the idea that anybody can get rich and that success is purely a function of individual merit and effort.  One blatant example of this is Republican presidential candidate Herman Cain’s statements that “If you don’t have a job and you’re not rich, blame yourself.”   The unstated, but necessary assumptions behind such a statement are that sufficient opportunities exist instead of an economy where there is only 1 job opening for every 4+ job seekers.  It also assumes that all power is benign and that the rules are truly fair and balanced.  There’s a pernicious micro-economic theory called marginal resource productivity pricing (the MRP=MRC idea) that falsely provides a patina of cover for such ideas.  I won’t deal with that here but I hope to in a future post.

A second tactic is political spin.  Proposals that are really attempts to use the government to further entrench the rich and powerful at the expense of the 99% are dressed up in language that is carefully chosen to sound like it’s fair and populist.  But it’s a faux populism.  It’s an attempt to fool voters. Flat tax proposals are just such attempts to fool voters into supporting proposals that will hurt them. Let’s look at how and why flat tax proposals are neither “fair” nor beneficial to the majority of voters, workers, or taxpayers.

Inevitably, all flat tax proposals represent an attempt to raise taxes on the poor and middle classes while reducing taxes on the extreme rich, the top 1%. I’ve already analyzed and explained just how much Herman Cain’s “flat tax” proposal, the “9-9-9” plan would raise taxes on at least the 80% while providing a huge tax cut for the top 1% and even more for the top 0.1%.  If there were truth in political advertising, Cain’s plan should be described as the “9+9+9=27% tax plan”.

Why are all flat tax proposals some kind of tax increase on the poor & middle class while providing tax cuts for the rich?  It’s because we already have a mildly progressive tax system.  Progressive means that the higher your income is, the higher your tax rate is.  In other words, under a progressive system, the rich pay higher rates and the poor lower rates.  Under a regressive system, the poor pay higher rates than the rich.  In the U.S., the federal income tax system is moderately progressive, although it’s been flattened a lot in the last the 33 years.  The progressiveness of the federal income tax system is offset partially by the regressive nature of a lot of other taxes like Social Security and Medicare payroll taxes, state and local sales taxes, and some property taxes.  The net effect is a mildly progressive tax system.  I quote from a post I made about this topic last spring:

 the folks at  Citizens for Tax Justice  used 2008 data for all federal, state and local taxes combined to do the analysis.  Here’s their analysis (via New York Times – warning paywall):

It found that the average effective tax rate is 29.8 percent, and that including state and local taxes makes the tax curve look much  less steep:

INSERT DESCRIPTION
Source: Citizens for Tax Justice Horizontal axis shows the income group. Vertical axis shows the percentage of income that the average member of that group pays in taxes. Taxes include all federal, state and local taxes (personal and corporate income, payroll, property, sales, excise, estate, etc.). Incomes include cash income, employer-paid FICA taxes and corporate profits net of taxable dividends.

So what do we learn from this?  It shows us that if we look at the overall tax system in the U.S., the complex patchwork system of federal-state-local income taxes, payroll taxes, property taxes, sales taxes, etc., we are pretty close to having a flat tax system.  The poorest, lowest income folks pay 18.7% of income as some type of tax while the the richest 5% do pay more, but they only pay 32.2%.

What is really stunning is how the top 1%, the really-really rich multi-millionaires actually pay less average tax rate than the those who are only rich enough to make the top 5%.  It must really be nice to be so rich that Congress tweaks the tax code just for you.

So the system is very, very mildly progressive.

Flat tax advocates don’t make this “tax increase on the poor/middle class with tax cut for rich” aspect clear.  They try to hide it and obfuscate it.  They use terms like “flat” and “fair”.  They are really trying to tap into our collective memories of childhood when the idea of everybody getting the same percentage of the birthday cake seemed like an obvious “fair” solution.  They don’t want us to pay attention to the actual numbers.

But even a “flat” tax rate isn’t really fair. There’s a phenomenon that’s described in economics as the “diminishing marginal utility of money”.  In plainer English, it simply means that the richer you are, the more income you have, the less valuable any particular increase in income is to you.  The reverse is also true, when you’re poor and don’t have much money, the value or utility of money is very, very high.  An obvious example is to consider two extremes and look at the value or utility of having an additional dollar bill.  To an unemployed person with no assets and no money, a dollar bill is very, very valuable.  It may well represent eating vs. not-eating today. Life is dependent upon it.  Now contrast that to a hedge-fund manager who has a tens of millions of dollars in income each year and even more cash in the bank.  A single additional dollar doesn’t mean much.  If a strong wind blows the dollar out of the hand of the unemployed, they will no doubt chase it.  If it blows it out of the hand the hedge-fund manager, they’re much less likely to chase it.

But some critics may point out that my example is using dollar amounts not percentages.  Surely percentages would be the same.  Not really.  This time let’s consider someone working full-time at minimum wage.  They earn $296 per week – gross. But after payroll taxes they’re closer to $275.  That’s close to $1100 per month. One percent of that is $11.  That one percent could easily represent the difference between bus fare or gasoline and not having it.  In other words, that 1% represents the very ability to get to work and earn their income.  It’s extremely valuable.  It can be the difference between making it and not making it.  For many seniors on social security, 1% is the difference between life-maintaining prescriptions and not. But let’s look at that hedge-fund manager again.  The one with the $16 million dollar a year income.  The monthly income is $1.33 million.Now yes, 1% for our hedge fund manager is $13,333 each month. It seems like a huge amount of money to us (I’m assuming not many of the 1% read my blog), is how big of a sacrifice will it mean to the hedge fund manager?  Would paying an additional $13,333 per month really change the hedge fund manager’s life much?  Not likely.  It’s not likely to change the choice of first or second house.  I’ll grant it might affect the choice of whether to have a third home or how big it would be. The point is that the sacrifice represented by 1% of income is greatly different depending upon your income.  A flat tax does not represent equal sacrifice.  

The flat tax advocates also make much of the idea that a flat tax would simplify the tax code. Again the reason for claiming simplification is to get middle class voters to support  something that isn’t  It won’t.  First, while some flat tax proposals start out as recommending the elimination of all deductions, exemptions, and tax credits, they rarely do in practice.  Even Herman Cain has backtracked from his original proposal of eliminating all exemptions.  It’s the personal exemption that gives the current federal income tax system much of it’s progressiveness.  When push comes to shove, the political pressures and special interests that pushed for the deductions and credits originally rise up and force some kind of inclusion in the new proposal.  Herman Cain, I understand has now already backtracked and decided to add back personal exemptions.  That ends the “flatness” of his flat tax.  Now it’s just a tax cut for the rich proposal. In the real world of politics and special interests, no flat tax proposal will stay that way.  There are too many legitimate reasons why we don’t have a flat system now and they will inevitably reassert themselves.  Charitable deductions (think churches and universities, not homeless shelters) and home mortgage deductions have powerful interests behind them. Besides, much of the complexity in tax forms comes from simply trying to determine what’s income and what isn’t.  That won’t change.  Simplicity is just false promise to make flat tax proposals attractive to the middle class.

Flat tax advocates also claim it would treat all taxpayers the same.  But the current system already does that. As Robert Reich points out:

The truth is the current tax code treats everyone the same. It’s organized around tax brackets. Everyone whose income reaches the same bracket is treated the same as everyone else whose income reaches that bracket (apart from various deductions, exemptions, and credits, of course).

For example, no one pays any income taxes on the first $20,000 or so of their income (the exact amount depends on whether the person is married and eligible for tax credits like the Earned Income Tax Credit of the Family Tax Credit.)

People in higher brackets pay a higher rate only on the portion of their income that hits that bracket — not on their entire incomes.

So when Barack Obama calls for ending the Bush tax cut on incomes over $250,000, he’s only talking about the portion peoples’ incomes that exceed $250,000. He’s not proposing to tax their entire incomes at the higher rate that prevailed under Bill Clinton.

Republicans have tried to sow confusion about this. They want Americans to believe, for example, that if the Bush tax cut ended, small business owners with incomes of $251,000 a year would suddenly have to pay 39 percent of their entire incomes in taxes rather than 35 percent. Wrong. They’d only have to pay the 39 percent rate on $1,000 – the portion of their incomes over $250,000.

Get it? We already have a flat tax – flat within each bracket.

Flat tax advocates also deceive by only focusing on federal income taxes.  Payroll taxes, the Social Security and Medicare taxes, are regressive.  People with incomes over $104,000 don’t pay any tax on the income above that threshold.  People whose income comes from capital gains and not wages don’t pay any Social Security or Medicare taxes.  Yet they are eligible for Medicare.  State sales taxes are highly regressive.  Flat tax advocates don’t want to change those systems because the real objective is to shift taxes to the poor and middle class and give tax cuts to the top 1%.

Finally, the biggest deception in most flat tax proposals is that capital gains, dividend income, and hedge fund management fees (called “carried interest”) are usually still provided special treatment.  Herman Cain does this.  He claims to want all income taxed at 9%, but in reality he proposes that capital gains and dividend income be totally exempt from taxes.  In other words, the way that the top 1% generally earns most of their money would be tax free.  How fair is that?  It’s the current loopholes about taxing capital gains, hedge fund managers, and dividends at lower rates that results in the top 1% paying less than anyone else in the top 10% (see graph at top).

Flat tax proposals aren’t about flattening tax rates. They’re about flattening the majority of taxpayers.  But that doesn’t sell politically so they have to be wrapped in political spin to be something they aren’t.

 

 

 

 

 

Herman Cain’s 9-9-9 Plan and the 99%

In the constantly churning pool of Republican Presidential candidates, a seemingly political newcomer has risen to the top (for now): Herman Cain.  Mr. Cain, the former CEO of Godfather’s Pizza where he engineered a leveraged buy-out from Pillsbury, isn’t really a political newcomer or outsider, though.  He only appears to be because he personally has never won an election despite several attempts.  (see Wikipedia biography). In fact, he’s been a campaign insider and advisor for many Republican candidates going back to at least Bob Dole in 1996. He also played a key role in defeating President Clinton’s attempts to reform healthcare in the 1990’s.

Herman Cain has risen to the top (some recent polls show him essentially tied with Mitt Romney) largely because of his “9-9-9” tax plan.  So what’s it all about and what are the likely consequences? Let’s explore what the plan is first.

I will summarize here.  A more in-depth analysis (pdf) is available from the Tax Policy Center.  The Cain campaign’s page on the plan is here. Cain is proposing to eliminate the existing corporate income tax and payroll taxes. I assume that this includes eliminating the Social Security tax and Medicare taxes, although the Cain campaign avoids saying that clearly by referring only to “payroll taxes”.  He then proposes to radically reform the existing individual income tax system and adding two new taxes.  The result is that the existing triad of corporate income tax, payroll tax, and individual taxes is replaced by a triad of three taxes which each have a 9% tax rate, hence the name for the plan.

  • Change existing Individual income tax system – charge a flat 9% on gross income with the only deduction allowed being for charitable contributions.  Home mortgage interest deduction is gone.  Personal exemptions are gone.  This means a single person with no dependents and $50,000 income pays $4,500 (9%), the same exact amount as a family of four with two small children and a $50,000 income.  It is unclear whether deductions for the expense of earning income are allowed or not such as sales representative deducting business expenses.  I presume they are not.  Only earned income from employment is taxed, not dividend income. It is unclear whether Cain would tax pension income or Social Security benefits.  He doesn’t clarify those.  My guess is they would be taxed.
  • A new national sales tax of 9% on everything.  Although most states currently exempt food and other essentials from sales tax, Cain does not.  Plan to add 9% to whatever you buy. The consumer pays the sales tax directly at the time of purchase.
  • A new national business tax of 9%. This is a modified form of value-added tax (VAT) commonly called a business transfer tax.  It essentially means that all businesses pay a 9% tax on everything they sell minus a deduction for whatever purchases they have made, not counting purchases of labor. I find the enthusiasm among Republicans for this part for the tax kind of strange.  The state of Michigan had a similar business transfer tax called the Michigan Business Tax (MBT) in recent years and it was the #1 target of Republicans to repeal when they came into office.  The MBT was absolutely hated.  That makes me skeptical that Cain either could actually get a a national business tax or that it would survive for longer than a year or so.  I expect that in implementation, the national business tax would soon be eliminated in favor of a higher individual income tax and/or higher sales tax and/or larger deficit. A business transfer tax like Cain’s proposed national business tax requires significant accounting and record-keeping.  Businesses would no doubt attack such a tax as a “heavy regulatory and reporting burden”.

Overall, estimates of the immediate effect of the 9-9-9 plan on tax revenues to the government show it would be largely neutral.  That is, the plan, when applied to today’s economy this year, should produce approximately the same revenue as today’s tax system produces.  In that sense, the plan represents neither a tax cut nor a tax increase in the overall macro sense.  At the individual  level, though, it’s a different story.  The 9-9-9 plan is either a really heavy tax increase or a really huge tax cut depending upon how high your income is.

For people who are in the lower 80% of the income distribution, meaning the poor, the working class, and the middle class, Cain’s plan represents a very, very serious tax increase.  Even households in the lowest 20% of the income distribution would pay an average of $1,854 more in taxes than they do currently each year.  The typical or normal household, the folks that are in the middle, the 60% of us that are neither in the top 20% or the bottom 20% (which most likely means you!), would pay more than $4,000 more each year in taxes.  That’s a serious tax increase.  How? Why? Currently people in these brackets, the majority of us, pay around 23-30% of our income in the form of all taxes to the all levels of government. Of those 23-30% points, approximately 10% points are taxes for state and local government.  Those taxes remain under Cain.  So currently the middle income ranks pay between 13-20% of their incomes to the federal government.  That initially sounds like it’s higher than Cain’s 9%.  But remember, Cain’s plan is a 9-9-9 plan.  You will pay a 9% income tax.  You’ll also pay 9% sales tax on everything you buy.  Let’s say you’re fortunate and prudent and only spend 90% of your income, that sales tax still equates to being 8% on your income.  But the sales tax is being applied to goods that have already been marked up in price by 9% by the retailer to pay for the business tax.  In effect, you’ll pay an 18% sales tax. That means that your real tax burden for the federal government will be closer to 9+9+9.  I expect the effective federal taxes paid by individuals in the middle income ranges under the Cain plan to be 24-27% depending on how much you save vs. spend.  Add in the 10% for state and local and you’ve got an individual tax burden in the 34-37% range – much, much higher than today.  The Tax Policy Center graphs out the actual expected change in your taxes in dollars by income quintile here:

Now what about the top 20%?  They come out ahead.  The average household in the top 20% gets a $14,442 tax cut.  If you’re not one of these fortunate rich people to get this large tax cut from the 9-9-9 plan, remember Herman Cain says it’s your fault you’re not rich.

In summary, the Cain 9-9-9 is a massive redistribution of the tax burden away from rich households onto the backs of poor and middle-income households.  As Jared Bernstein notes:

Conclusions:

–to implement the 9-9-9 plan would truly be the most dramatic and regressive shifting of the tax burden in the history of our nation;

–based on this policy, Herman Cain’s campaign is deeply out of touch with the challenges facing the American middle class;

But we haven’t really looked at the impact on the top 1% or the top 0.1%, the really, really rich folks, the Wall Street CEO’s and big hedge fund managers, the ones who have gotten large bonuses in recent years paid for by government bank bailouts.  The top 1% (which includes Herman Cain himself) will save on average $238,422 in taxes.  The top 0.1%, the 150 thousand or so households that are really, really rich and powerful, will get even more.  They will see an average cut of $1,356,078 in their taxes.  I also have a properly scaled graph to show this too, but it’s only after the jump for formatting reasons.  So click and take a look to see what Herman Cain calls making the tax system more fair.  It should add fuel to the Occupy Wall Street fires.

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