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A Best of Times, Worst of Times Economy

by Brian T. Lynch, MSW

How is it possible that the investment economy is booming while the economy of ordinary citizens is still in such a slump? Stock prices are at an all time high and big time investors are getting high rates of returns while worker wages have declined and are just starting to rise. The raises in wages so far is still not keeping up with inflation. It seems like there are two separate economies not entirely connected to each other. Right?

To understand what’s happening we have to begin by acknowledging that most of the richest billionaires today have gotten much of their wealth increases at the expense of lower wages for the rest of us. This trend is more than thirty years old now in the United States. There is plenty of evidence supporting this fact for those who care to look. And this wage suppression is a global phenomenon, not just a U.S. feature.In order to increase consumer spending while wages remained flat we have had to make a series of changes, beginning with mothers entering the workforce, longer work hours followed by layaway plans, credit cards and then home equity loans to pay for spending beyond our means. These have run their course and the long hard pay down of personal debt (including college loans) means that consumer spending will be sluggish for the foreseeable future.

The impact on the economy of stagnant wages is ever slower consumption of goods and services over time. There isn’t as much money to buy things. This slower rate of consumption suppresses demand. Lower demand means fewer jobs and even lower wages for the rest of us. This is the cycle were we find ourselves today.

The consumption of goods produces the profits from with owners of capital collect returns on their investments. Lower demand due to suppressed wages would normally also lower returns on capital investments but for the factors that have kept consumption afloat. Now there are no hours left in a day, fewer household members available to work, no more capacity to borrow against future earnings. Now the impact of low wages has come home to roost and lower sales means less profit to be made.

Before the 1970’s this situation would right itself when owners shared a portion of their wealth by offering productivity raises to reward their workers. Productivity wages are based on growing productivity and are separate and above cost of living increases. Productivity raises, along with cost of living adjustments, allowed the labor/consumers to increase spending and boost demand. Increased demand would spur on manufacturing and stimulate the whole economy.

But today’s billionaires have found another way to profit without sharing their wealth with wage earning consumers. They spotted the growing ownership stake of many in the middle class and created an opportunity to take it all back. It is hard for most of us to see in our lifetime, but this is the first time in history of the world that the middle class (upper-middle mostly) has accumulated a significant stake in capital ownership. Many of us have retirement accounts, money market funds, etc. People in the upper-middle class, doctors, lawyers, middle-managers etc., have become mini-investment capitalists. Prior to the vast destruction of property caused by the world wars in the last century, wealth was concentrated at the top as is happening again today. Middle class gains in the 20th Century directly correspond to capital losses by the wealthiest owners during the two world wars.

Billionaire capitalists, the “true heirs” to wealth ownership, have responded to middle-class ownership of capital by creating a massive financial investment casino filled with elaborate new investment vehicles. The object is to entice new wealth owners to play in the billionaire’s casinos. Mortgage backed securities and swaps are just two small examples that nearly bankrupted the economy in 2008.

These new and incomprehensible investment products has spawned a whole new class of hucksters, like Bernie Madoff, who use these bewildering new instruments to create slick ponzi schemes. But the bulk of these new investment opportunities are just a big casino games in which the house (billionaire owners) always wins. Billionaires are quickly siphoning away middle class ownership stakes in capital through high finance games of chance. In this way they can boost returns on investments and entertain themselves without sharing their wealth through higher wages.

Because these billionaire owners, who make up less than .01% of the population, control the investment odds, they are sure to win back all the capital they lost in the war years of the last century. Middle class gains in the 20th Century correspond to capital losses by the wealthiest owners during the two world wars. This now explains why the stock market and investment economy seem to be booming while the economy on Main Street slumps. Billionaire capitalists don’t have to share wealth to make wealth like they use to. There are enough small investors with an ownership stake willing to gamble what little they have in this new investment casino to keep billionaire fortunes growing.

If you, the reader, are still with me at this point let me assure you that the geometrically rising gains by the wealthiest owners of capital are not an inevitability. There are difficult but concrete steps we can take to bring capitalism back into balance for everyone. A discussion of these solutions does require a much deeper understanding of problems that I can provide here. I firmly believe it is in our best interest to arm ourselves with a much better understanding of the forces creating our two economies; Forces that are threatening our democratic institutions. For a fuller understanding I recommend Thomas Piketty’s excellent book, Capitalism in the 21st Century. I encourage you to strike up conversations with others and share your thoughts and questions.

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Image Credit: (and recommended site) http://oxfamblogs.org/fp2p/is-doing-something-about-inequality-just-a-choice-between-bash-the-rich-v-tackling-poverty-some-thoughts-for-blog-action-day/#prettyPhoto-img/0/

The Worthy and Unworthy Rich

By Brian T. Lynch, MSW

How should sensible people respond to divisive attacks on the poor and vulnerable? Should we begin making similar distinctions between the worthy and unworthy rich? Should we affirm those who earned their great wealth and provide social benefit but rescind all advantages given to those who use their inherited wealth to squeeze the people and their government for still more?

It should be obvious that social polarity is not between Democrat and Republican, or between liberal and conservative, but rather where it has always derived, between rich and poor.

http://aattp.org/gop-senate-candidate-republicans-must-turn-poor-against-each-other-video/#comment-190804


GOP Senate Candidate: Republicans Must Turn Poor against Each Other (Video)



Watch N.C. House Speaker Thom Tillis explain: .What we have to do is find a way to divide and conquer the people who are on assistance,” 

Tillis said. “We have to show respect for that woman who has cerebral palsy and had no choice, in her condition, that needs help and that we should help. And we need to get those folks to look down at these people who choose to get into a condition that makes them dependent on the government and say at some point, ‘You’re on your own. We may end up taking care of those babies, but we’re not going to take care of you.’ And we’ve got to start having that serious discussion.”

 ATTP.ORG

 

Are You Forced to Subsidize Low Wage Workers?

by Brian T. Lynch

According to the NY Times: “As in 2011, 46 percent, or nearly half of New Yorkers, were making less than 150 percent of the poverty threshold, a figure that describes people who are struggling to get by.

Even with fewer people unemployed, the poverty rate for working-age adults working full time reached 8 percent, by the city’s measure. Fully 17 percent of families with a full-time worker lived in poverty, and even among families with two full-time workers, the rate was 5.2 percent.”

NOTE: This means that 8% of adults working FULL-TIME are at or below the poverty line, while 46% percent of all EMPLOYED New Yorkers are struggling to get by. This reinforces my analysis that NEARLY HALF of all working families must rely on some form of PUBLIC ASSISTANCE to make ends meet. Government assistance to these fully employed families = a tax subsidy on labor costs for the companies that employee them.

Put another way, people who earn more are being made to subsidize the company’s low wage employees through their federal income tax withholding. Ordinary wages have been held hostage to the 1% for almost 40 years.

AMERICANS NEED A RAISE

In, “Making the Case for a LIVING WAGE” I discussed more fully why it must be the obligation of business to compensate their employees to a level of at least minimal self-sufficiency (a living wage).  Once all wage earners realize they shoulder the burden for low wage workers there will be more activism to at least raise the minimum wage. Ask yourself, “How much does my companies low wage policies cost me in income taxes?”

Here below is the link to the New York Times article which is about New York City, but could be about any city in America.

http://www.nytimes.com/2014/04/30/nyregion/nearly-half-of-new-yorkers-are-struggling-to-get-by-study-finds.html?_r=0

Forty-six percent of New Yorkers in 2012 were making less than 150 percent of the poverty threshold, and New York City’s share of poor people appears to have plateaued since the…
THE NEW YORK TIMES|BY SAM ROBERTS

1st Qrt Report: Wages Sharply Down, Bank Profit at Record High

This is an mportant story that I want to share with readers of this blog.  I encourage everyone to watch the video. Feel free to add your comments.

The Real News Network

Bank Profits Soar, Wages Suffer Sharpest Decline in 60 Years

 Bill Black: The economy is recovering – unless you work for a paycheck. –   June 9, 2013

JAISAL NOOR, TRNN PRODUCER: Welcome to The Real News Network. I’m Jaisal Noor in Baltimore. And welcome to the latest edition of The Black Financial and Fraud Report with Bill Black, who now joins us from Kansas City, Missouri.  Bill is an associate professor of economics and law at the University of Missouri-Kansas City. He’s a white-collar criminologist and former financial regulator. And he’s the author of the book The Best Way to Rob a Bank Is to Own One.

 Thank you for joining us, Bill.

 BILL BLACK, ASSOC. PROF. ECONOMICS AND LAW, UMKC: Thank you.

NOOR: So, Bill, what can you tell us about this latest news from the first-quarter? Bank profits soared to record levels while wages suffered their sharpest decline since 1947.

BLACK: What it all adds up to, of course: it is a very good time and a very good country to be a plutocrat, because the rich are getting richer at a staggering rate and poor people are actually getting poorer, just like the same saying goes.

So we’ve got a series of news that it has just come in this week. One thing shows that we have the largest decline in wages. Boy, that’s a big win. And that follows–that’s for the first quarter of 2013. And that follows what was a huge quarter for income in the fourth quarter, in other words the last three months of 2012. But, of course, there’s a footnote on that. And that huge quarter at the end of last year was to beat the tax increase. So that was the massive payment of bonuses to the wealthiest Americans. So they made sure the wealthiest Americans got their money before the tax increases kicked in.

And what happened as soon as we got back to the regular economy? Well, wages haven’t simply stalled; they’ve actually gotten negative. And productivity is up, which is supposed to mean that wages are up, but wages have gone in the opposite direction. So that’s the news on the wages front.

On the bank profit front, hey, we’ve got the highest reported profits ever for the first quarter of this year. Now, the twist in all of this is that the statistics, when you look at them closely, show the banks weren’t all that profitable in their regular operations, because, of course, they’re not making all that much in the way of loans and such. They’re mostly sitting on their money.

So how did the banks report record profits, but when they were doing their day-to-day business they weren’t earning all that much in the way of super profits? And the answer to all of that is that they reversed out a whole bunch of reserves for future losses, which is the same game they played leading up to the crisis. So reserves for those massive future losses, they’ve made them lower and lower. At the end of 2006, they had gotten to the lowest level of reserves against future losses in history since the savings and loan debacle. And we all know how disastrously this ended. Well, guess what? We’re at the record low again in 2007.

And this is how the accounting works. Every dollar they take out of reserves for future losses is an additional dollar they can pay in bonuses to the top executives. So the wealthier are getting wealthier at a record rate in banking as well.

So what else is happening? Well, we have record stock market appreciation. In fact, there’s a neat headline that says that when you disregard inflation–which of course you can’t–the losses that people suffered in the Great Recession have now been made back. It took a lot of years to do it, but they’ve made it back. But, of course, there’s a footnote, and the footnote says this: well, regular people haven’t, but people who own stock have made out like bandits. They’ve had a recovery measured by $1.5 trillion, and 80 percent of that gain goes to the 20 percent of richest Americans. So, hey, stock market–great news for the wealthy.

Well, but there was also some potential good news. So housing prices have finally started to go upwards. And that’s good news for all kinds of Americans who own their homes. But, again, there’s a little hitch in all of this, ’cause it turns out that for the first time in American history, a huge portion of these gains are going to massive corporations and investment firms and hedge fund types, and they are because they’re making massive purchases of homes at distressed prices to serve as what we call in the trade vulture funds and to sell it back to regular folks when those housing prices have appreciated. So a lot of this gain in housing prices is not going to regular people; it’s going to go to the hedge fund executives, who are already the wealthiest people in the world.

And how does all of this sum it up? Well, I did a paper recently on the Nobel Prize awarded to Mr. Myerson. Dr. Myerson got this award in 2007 when the world was blowing up, and he got the award for proving that fraud couldn’t exist in the financial sector. And he proved this by assuming that fraud couldn’t exist. And his mechanism for assuming that fraud doesn’t exist is plutocracy. And indeed he says the great advantage of the market system compared to socialism is that we have billionaires, and he says that people who are not that rich, in other words, ordinary multimillionaires who are CEOs, if they act rationally–that’s his word–will loot their corporations. And so the only safe thing we can do is to make some segment of Americans billionaires–in fact, probably multibillionaires–so they can run our largest corporations and made–be made into mega-billionaires. So you get a Nobel Prize for creating a system that leads to recurrent intensifying financial crises that caused $10 billion in losses in the United States and the loss of $10 million jobs. And we are told that we’re supposed to be happy and bless the system because it creates plutocrats who have incomes in the multibillion dollars who, when there is a crisis–in the words of Myerson in another article, people who are poor should pay taxes to bail out billionaire bankers, because that will be good for the poor people. That’s the status of economics in the modern era.

NOOR: So, Bill, it would seem like the dominoes are in a row for another massive financial meltdown. Would you disagree?

BLACK: No, that’s exactly what they’re putting in place. And they’re going to make the folks wealthy on both ends, right? We’re told that they have to be made billionaires so that they can invest prudently during the expansion phase of the bubble. And as soon as they destroy the economy, we’re told that we have to bail them out and make them ever wealthier. And the way we do all of these things increases the rewards to fraud and reduces the penalty to fraud, and especially in the modern era where you can dilute with impunity under the administration’s too-big-to-prosecute-or-even-indict standard.

NOOR: And finally, Bill, where are the movements that are challenging these policies?

BLACK: Well, they’re certainly not in either of the major parties. There are, of course, progressives within the Democratic Party, and they do some things, but in truth, both parties’ leadership are heavily dependent on funding from the largest banks and from other plutocrats. You’ve just seen the the Obama administration put a Pritzker in a cabinet position where the Pritzkers have a terrible reputation. And you saw that the Republicans, who usually block anyone that Obama nominates, were more than happy to have one of those wealthy folks, who is one of their kind, in a cabinet position.

So the dissent remains on places that are not typically found in the mainstream media, the Occupy movements and such. And, you know, it’s going to be the next crisis before there’s any serious chance of serious reform.

NOOR: Thank you for joining us, Bill.

BLACK: Thank you.

NOOR: And thank you for joining us on The Real News Network.

Bio – William K. Black, author of THE BEST WAY TO ROB A BANK IS TO OWN ONE, teaches economics and law at the University of Missouri Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. He has taught previously at the LBJ School of Public Affairs at the University of Texas at Austin and at Santa Clara University, where he was also the distinguished scholar in residence for insurance law and a visiting scholar at the Markkula Center for Applied Ethics. Black was litigation director of the Federal Home Loan Bank Board, deputy director of the FSLIC, SVP and general counsel of the Federal Home Loan Bank of San Francisco, and senior deputy chief counsel, Office of Thrift Supervision. He was deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement. Black developed the concept of “control fraud” frauds in which the CEO or head of state uses the entity as a “weapon.” Control frauds cause greater financial losses than all other forms of property crime combined. He recently helped the World Bank develop anti-corruption initiatives and served as an expert for OFHEO in its enforcement action against Fannie Mae’s former senior management.

CLASS WARFARE – OVERVIEW OF WAGES, TAXES and WEALTH IN AMERICA

Since Reagan in 1980’s Tax Rates for the wealth were cut in half and capital gains tax (where most make their money) was cut in half again. http://j.mp/ZFFQHB

Wages and GDP rose together until wages were suppressed in the 70’s, otherwise median income today would be greater than $100K instead of $51K http://j.mp/14MoT67

The combination of wage suppression and the collapse of the upper income tax brackets is the cause of our wealth and income inequality today. http://j.mp/102YbAk and http://j.mp/10DVrLn

A majority of American’s don’t make enough money to support a robust economy because a handful of us have more money than they can spend. http://j.mp/16E3zOT

Current US policy is creating permanent income inequality.  Income mobility is shrinking as income caste system forms. http://t.co/nK5uFGyCaG

We know what victory looks like in Class Warfare. It’s the formation of an income caste system where birth determines your level of success. http://j.mp/Y1HwQP

Obama’s proposed raise in min. wage from $7.20 to $9/hr would mean a person working 40hr/week at min. wage would still be below poverty line. http://j.mp/10DwY7V

If the minimum wage was raised to $18/hour the Federal Government could eliminate almost all aid to the working poor, saving tons of money.  http://j.mp/10DVrLn

Every tax dollar paid to assist the working poor is a tax subsidy providing their employer a federally funded labor discount. http://j.mp/16Bml7r

God! When are we going to wake up?

Permanent Inequality Rising Over Past Two Decades

A Spring 2013 BPEA paper by Vasia Panousi, Ivan Vidangos, Shanti Ramnath, Jason DeBacker and Bradley Heim

http://www.brookings.edu/about/projects/bpea/latest-conference/2013-spring-permanent-inequality-panousi

Disadvantaged Becoming Worse Off Long-term; Tax System Has Helped But Not Significantly

Income inequality in the US has increased in recent decades, and this increase is of a permanent nature, according to a new paper presented today at the Spring 2013 Conference on the Brookings Papers on Economic Activity (BPEA).

In “Rising Inequality: Transitory or Permanent: New Evidence from a Panel of U.S. Tax Returns” …  [the authors] use new data to closely examine inequality, finding an increase in “permanent inequality” — the advantaged becoming permanently better-off, while the disadvantaged becoming permanently worse-off. The paper has important public policy implications because rising income inequality will lead to greater disparity in families’ well-being that is unlikely to reverse, whereas “transitory inequality” or year-to-year income variability would imply greater income mobility—those who fare worse today might be able to do better in later years. The authors are among the first to examine various measures of income in great detail, including earnings from work activities as well as broader measures of family resources such as total household income. [SNIP]

Looking at the impact of tax policy on inequality, the paper finds that although the U.S. federal tax system is indeed progressive in that it has provided some help in mitigating the increase in income inequality over the sample period, it has, however, not significantly altered the broadly increasing inequality trend. All told, the results suggest that rising income inequality will likely lead to greater disparity in families’ well-being and reduce social welfare in the long-run.

 

Rising Inequality: Transitory or Permanent?

New Evidence from a Panel of U.S. Tax Returns

Click to access 2013a_panousi.pdf

Abstract

We use a new, large, and confidential panel of tax returns to study the permanent versus-transitory nature of rising inequality in individual male labor earnings and in total household income, both before and after taxes, in the United States over the period 1987-2009. We conduct our analysis using a wide array of statistical decomposition methods that allow for various flexible ways of characterizing permanent and transitory income components. For male labor earnings, we find that the entire increase in the cross-sectional inequality over our sample period was permanent, that is, it reflected increases in the dispersion of the permanent component of earnings. For total household income, the large increase in inequality over our sample period was predominantly, though not entirely, permanent. For this broader income category, both the permanent and the transitory parts of the cross-sectional variance increased, but the permanent variance contributed the bulk of the increase in the total. Furthermore, the increase in the transitory component reflected an increase in the transitory variance of spousal labor earnings and investment income. We also show that the tax system partially mitigated the increase in income inequality, but not sufficiently to alter its broadly increasing trend over the 1987-2009 period.

Minimum Wage Proposal A Small Step

In his State-of-the-Union Address President Obama proposed raising the federal minimum wage to $9.00 per hour and indexing it to inflation. He said a family of four with two children still lives below the poverty line when one parent works full-time at minimum wage. The proposed increase would lift them out of poverty, he said.


by Google Images

What a welcome suprise! Virtually no attention was given to the working poor in the last election. In the past decade real wages rapidly declined for the working poor, driving ever more citizens into the grip of intractable poverty.

When a person works full-time for a profitable company their compensation should enable them to care for their family. When this isn’t the case, they must rely on taxpayer-subsidized housing, food stamps, medical care, daycare, or other supportive services. This takes a toll. It  can erode a person’s dignity and self-worth. It can foster a sense of inadequacy or self-loathing.

On a social level the working poor are often labeled and marginalized. They are deemed to be less worthy. They are less likely to be promoted or rehired after a layoff. Any economic hardship at all can lock them into a cycle of poverty where their hope for a better life evaporates with each passing year. Escaping poverty in America  today is the exception, not the rule.

Many wealthy companies are just as dependent on government subsidies for cheap labor. Without taxpayer assistance for their workers these companies would have to pay a living wage in order to maintain a stable workforce.

And what is wrong with that? Shouldn’t adequate compensation be part of the cost of doing business? Why should business owners be allowed to pad their profits by cutting labor costs at taxpayer expense?

We can expect the pro-business lobby to oppose an increase in low-wage pay while calling for more spending cuts and lower business taxes. Austerity can’t create more jobs and spending cuts will never result in more pay for low-wage earners. Only an increase in the minimum wage or a living-wage law can do that.

Pro-business economists will claim that a higher minimum wage will increase unemployment and hamstring businesses, especially small businesses. Much evidence suggests the opposite. Higher minimum wages have a simulative effect on the economy. The extra $1.75 per hour will be spent immediately, boosting business profits and sparking more demand.

The pro-business lobby will claim the proposed increase is excessive, but here the facts are against them. Even President Obama got this wrong. The poverty wage for a family of four is current $10.60 per hour. If passed, President Obama’s proposal would still means a minimum-wage worker would have to work overtime, take another part-time job, or have their spouse work part-time to reach the poverty line.

And what does it really mean to be at the poverty line? Does this make a family economically self-sufficient?

No, it does not. A living wage to lift a family of four above the need for taxpayer subsidies is considerably higher. In Wyoming, for example, a living wage for this family is $16.93 per hour. In Virginia it is $20.88 per hour, and in California it is $22.15 per hour. These figures are not government artifacts. They are actual costs based on local free-market economies.

While business owners and corporations may squeal at the size of the proposed increase in the minimum wage, they would still benefit greatly from taxpayer subsidies for their low-wage employees. Raising the minimum wage shifts some of the burden of caring for employees to the employers, but not much. It still doesn’t hold wealthy corporations responsible for their low-wage workers or for the harm that poverty wages inflict on their families.

“Free Market” Social Services Fail to Deliver

Where do you turn when your aging mother can’t be by herself anymore or you notice your baby seems a little delayed?  Imagine that your teenager start  skipping school and staying out all night or imagine you are suddenly diagnosed with a serious illness or disabled in an accident.  Where do you go for help?

Sooner or later we all knock on the door of our community’s social service network.  What greets us may be far less than we expect.  And sadly, the help available to us will depend a lot on where we live and how much money we make.   The confusing patchwork of private, public and non-profit social service agencies through which we must navigate is the natural, unintended consequence of the free market model we’ve created to deliver social services.

We are all only temporarily able bodied.  We don’t give much thought social services.   We are content knowing that free market competition is efficiently keeping down the cost of publicly financed services for the needy.

It isn’t until we seek help ourselves that we encounter a labyrinth of agencies with confusing components and cutesy sounding acronyms for their names.  Agencies often list the types of services they offer (counseling, for example) without listing the types of problems they serve (such as adolescent issues).   Consumers are expected to know which services work best for their problems.  Some agencies over promise results in their marketing or take on people with problems that would be bettered resolved elsewhere.   Access to services are often restricted by bewildering eligibility requirements based on age, gender, geography, diagnosis, income, insurance provider, religion, ethnicity, funding source or hours of operation.

If your family has one or two very common problems, chances are you will find the help you need.  But if your problems are uncommon or complex, your search will not go smoothly. And if you also happen to be poor, live in an under served community or don’t have transportation, the prospects for getting effective help are slim.

This is the character of our social service networks today.  They are not based on matching service availability and capacity to the needs of local communities.  They are loosely coordinated networks created by free market forces and competition between private or non-profit agencies scrambling for dollars.

For over thirty years we have been privatizing public social services in the belief that free markets are more efficient than government in providing the best services at the lowest cost.  Little attention is given to the inescapable fact that market driven systems create uneven results by their very nature.  This is true in commerce but especially true in public social welfare.  Larger agencies are more politically connected and better positioned to compete for public dollars.  Wealthier communities have a higher profit potential so they attract more and better competitors.   Smaller agencies and program models that incorporate innovative ideas are less able to compete for government money.

Innovative approaches to helping people are usually funded in small trials by private foundations.  Even when these trials prove successful, bringing them up to scale is almost impossible.  Agency competition actually works against it because social service providers are competing on an artificial playing field.

Governments create the playing field on which agencies compete, but the government departments responsible for developing and funding social service contracts are often under staffed and ill equipped to monitor service outcomes.  They also lack the personnel and special expertise it takes to design better programs.  The time and effort involved in researching literature, writing contract proposals, putting contracts out for bid and guiding the implementation of new programs is enormous .  Politicians don’t want to spend what it would cost to create real free market competition for high quality services.

To overcome the uneven distribution of services problem,  governments develop specially targeted service contracts with extra financial incentives to serve specific areas.  But these initiatives are expensive and tax revenues are declining.  Targeted service contracts are usually limited in size and scope because of their higher costs.

We have come to the point where the availability and quality of essential services, to treat an abused child for example,  becomes an accident of birth.  How often have I seen children getting excellent services in one county while children with identical needs have no such services in another.

Commercial markets are efficient in distributing products according to demand when profits are distributed according to merit.   This method breaks down when applied to funding social services.  Competition discourages inter-agency coordination and inadequate  funding increases agency competition in more profitable locations while discouraging them from entering less profitable communities.  This causes unacceptable inequalities in meeting the basic human needs of our people.

There are many pressing issues that demand attention.  How we fund social services is rarely among them, yet the wisdom of distributing social services through artificially created free markets cries out for public debate.

Do Pro-business Policies Reduce Poverty?

President Calvin Coolidge once said, “… the business of the American people is business”.  He was quoted out of context at the time.  His remarks were aimed at newspaper reporters who were inept at covering business news, but this intentional misquotation seemed to sum up his economic policies.

Today this misquote seems prophetic. Political leaders from both parties speak as if whatever benefits business benefits the people.  State governments offer tax breaks and business friendly regulations to attract companies that might bring in more jobs.  This is especially true in less wealthy states where poverty rates are high.  President Lyndon Johnson’s “War on Poverty” has been transformed into pro-business politics and the promise of work for the worthy.

It is true that the poor need jobs, but the causes of poverty are more complex.  There is little regard for other factors such as the need for quality daycare, health care access, job training or transportation. Journalists rarely asks politicians how they plan to help the poor.  When they do, candidates talk about their plans to grow the economy.  This has some become an acceptable answer.

The insurgent idea that serving business interests is the best way to fight poverty arguably arose in the mid 1970s when corporate interest groups were forming and the business lobby became a powerful influence on Congress.   This was the high water mark of American unions as organized business groups launched campaigns to turn Congress and public opinion against them.

At the same time, these industry lobbying groups began fermenting hysteria over the growing “welfare state.”  The poor were poor, they argued, because anti-poverty programs make people dependent on government handouts while government regulations restrict the ability of companies to create jobs for those willing to work.  According to their narrative, government needed to spend more resources supporting commercial interests and deregulating markets.  President Reagan road these pro-business, anti-union, anti-government sentiments to the White House in 1980.

The success of the pro-business movement is evident.  In this past election Mitt Romney’s entire presidential campaign centered around the idea that business prosperity was key to growing jobs and the economy. The California Republican Party explicitly incorporates this thinking in their core beliefs:

“” each person is responsible for his or her own place in society. The Republican philosophy is based on limiting the intervention of government as a catalyst of individual prosperity” Republicans believe free enterprise has brought economic growth and innovations that have made this country great. Government should help stimulate a business environment where people are free to use their talents. “[California Rep Committee Philosophy http://cagop.org/inner.asp?z=585A]

In other words, it is the role of government to facilitate the business economy but each individual’s responsibility to avail themselves of the opportunities businesses provide.

The sufficiency of robust commerce to lift all boats isn’t just a conservative or partisan idea. It is expressed and pursued often by Democrats as well. In this last election even President Obama avoided talking about the poor by referring to them as “those aspiring to be middle class.”  There was almost no mention by either party of how they would accomplish this beyond trying to grow the economy.

So how well is our pro-business politics working out for the poor? This should be an empirical question that can be tested by examining the data. Are business interests and the interests of the poor perfectly aligned? Are there points of departure where the needs of some folks cannot be met without compromising some business interests?  Most importantly, does the data show that when businesses are doing well there are more jobs and better wages?

Profits, Employment and Wages 

Corporate profits are a measure of how well businesses are doing, so conventional wisdom would say wages and employment should rise and fall commensurate with corporate profits.    The hypothesis is that when companies do well there are more good paying jobs and therefore less poverty.  Is there evidence to the contrary?

In June of 2012, the St. Louis Federal Reserve released data showing a number of economic indicators over the last 71 years.  Using their report, the graph below plots corporate profits (CP) as a percentage of gross domestic product (GDP) from 1940 to 2011. GDP is total value of all the goods and services sold and a good measure our economy. The shaded areas represent periods of recession.  This graph shows that corporate profits rebounded since the 2007 recession and are at the highest level since 1940. The recession is clearly over for corporate America.


Corporate Profits to GDP by St. Louis Federal Reserve

Does it therefore hold true that robust corporate profits mean more jobs?  The next graph plots the number of employed Americans as a percentage of our population. This graph uses an employment per population percentage because the population doesn’t stop growing during recessions.  A fair comparison over time has to incorporate population growth for the same reason dollar comparisons over time have to factor in inflation.


Civilian Employment to Population Ratios by St. Louis Federal Reserve

This above graph shows that there are actually fewer people working today as a percentage of the population than at any time in the past thirty years. Last June, in an article related to this graphs, Business Insider magazine speculated that one reason corporations are so profitable is that they aren’t employing as many Americans.

Does it also hold true that robust corporate profits means better wages?  The next graph depicts the total amount of U.S. wages paid as a percentage of the value of all goods and services sold (GDP). It shows that wages are at an all-time low relative to the wealth being generated.  If jobless recoveries are one reason for record corporate profits, the decline in wages pictured in this next graph may be the other.

US Wages as a percentage of GDP by St. Louis Federal Reserve

It turns out that the null hypothesis is true.  Corporate profits are at a record high, employment and wages are at a record lows and the notion that what is good for business is good for people is false. The stock markets have recovered.  Corporate profits have recovered, but the financial well-being of families have declined. Median incomes are shrinking and prospects for the poor are increasingly dismal.

Are Measures of Business Competitiveness Compatible with the Interests of Individuals? 

When considering what factors make businesses more competitive it’s best to take a broad global view. A global survey of business competitiveness was recently conducted and released by the World Economic Forum. The study on global business competitiveness ranks 144 nations according to indicators grouped in 12 general categories.

Overall, the United States is very competitive, ranking 7th out of 144 countries. When you drill down in some of the 12 categories, however, you find indicators favorable for business that are clearly at odds with worker interests.  For example, In the area of “Labor Efficiency” the U.S. labor “redundancy” costs are low, which means it doesn’t cost as much here to fire employees.  This makes us more competitive (12th place) on this measure. This variable includes the estimated costs of providing advance layoff notices, severance payments any penalties that other countries might impose on employers for terminating “redundant” workers. The U.S. may be more competitive in this measure, but is this factor good for individual workers?  Does it reduce poverty?

The U.S. also did well (8th) when it comes to the ease of hiring and firing people. All of this makes for a “flexible” work force, which is good for business, but does it stabilize the workforce or encourage employers to try and weather out minor economic storms?

Are the states with the most competitive business environments doing better at lifting people out of poverty?

Every year for the past five years CNBC has scored all 50 states on 43 measures of business competitiveness.  This survey was developed with input from business groups including the National Association of Manufacturers and the Council on Competitiveness. States receive points based on their rankings in each factor and the factors are organized into broader categories. I was unable to locate a detailed list of factors within each category, but  CNBC has published general descriptions of each category. In the category of “Workforce” for instance, they indicate that the prevalence of unions in a state is a negative factor for business competitiveness, while lower costs of doing business is a positive factor. Among the factors creating low costs for doing business are lower tax rates and tax incentives or tax abatement for business.  The general category findings for each state are published.

The hypothesis, again, is that when companies are doing well there are more good paying jobs and less poverty.  So it follows that the states with the most competitive business environments should also be the states with the lowest rates of poverty.

To test this I used the CNBC business competitive findings to compare ten states with the highest poverty rates and ten states with the lowest poverty rates. The high poverty states, starting with the highest poverty rate, are Mississippi, Arkansas, Kentucky, Louisiana, New Mexico, West Firginia, Oklahoma, Texas, Alabama, and South Carolina. The ten states with the lowest rates of poverty, starting from the top, are New Hampshire, Mariland, Alaska, New Jersey, Hawaii, Connecticut, Wyoming, Utah, Minnesota and Massachusetts.  The results of this analysis are found in the table below.


State poverty levels and business competitiveness by Brian Lynch.  Business Competitiveness Rankings are from CNBC’s Top States for Business Special Report: ttp://www.cnbc.com/id/100000994 

It is striking that states with the highest poverty levels are also states that are more business competitive. The average rank in “Overall Business Competitiveness” for high poverty states is 7 points higher (more business friendly) than the rank for low poverty states.  In the “cost of business” category, high poverty states have an average rank of 18 versus 37 for low poverty states.  In the “workforce” category, which includes the prevalence of unions in a state, the high poverty states have an average rank of 20 versus 32 in low poverty states. 

Despite being “business friendly”, the ten high poverty states have over eight million poor citizens while the ten low poverty states have just over three million poor. There may be some political asymmetry as well since 7 out of 10 states with the high poverty rates have conservative Republican governors, while 6 out of 10 low poverty states have Democratic governors.

Conclusions

It is clear that pro-business politics, which puts commercial interests above the individual’s interests, isn’t working for the poor or for most Americans.  While a healthy economy is necessary for individual prosperity, it is clearly not sufficient.   What is best for business may be good for some, but not for all of our citizens.  There are certain business interests at odds with individual interests. Our political leaders need to acknowledge this when making policy.

The total dominance of pro-business politics has successfully crowded out meaningful debate on how to help the poor, the ranks of whom are swelling every year.  The poor are more marginalized and invisible than ever.  Almost no one speaks for them.  There is no hope for them in the more competitive business policies being proposed.  In fact, business prosperity is no longer well correlated with job growth or adequate pay, so plans to grow the economy ring hollow. The social contact that once pegged wage increases with increased productivity is broken. As a result, big business can flourish while the welfare of workers and the poor decline. This is unacceptable.

The ascendance of pro-business politics has given rise to commerce without conscience and too many ordinary citizens are being left behind.  We need to change the dialogue and strike a better balance.  We need to reclaim the role that government must play in meeting the needs of all our people.

Graphic View of Wealth Distribution in America

Who Owns What In America?
Imagine lining up everyone in America according to what they own, starting with those who own nothing and continuing down the line to those who own a lot.  Now divide that line of people into five equally long segments.  Each segment would include 20% of the total population, or about 61.7 million people.  Next, add up the total amount of what everyone owns in each segment.  The result is represented by the pie chart below.  The whole pie represents the total wealth in America.  The size of each slice represent the ratio of how much each segment owns of America’s wealth.  The slice of ownership for the poor and working poor are barely visible.  80% of all Americans own just 15.6% of America’s wealth.

The number of people who slipped into poverty in 2010 is an all time high of 46.2 million, so the poorest 20% in terms of wealth ownership includes 15.5 million folks who technically don’t meet the poverty criteria, based on income levels.  The poor essentially own almost nothing.   The working poor own twice of almost nothing.


When I first plotted the distribution of wealth in America in this pie chart it reminded me a little of that Pac-Man character.  The richest Americans own 84.6% of everything while the remaining 80% of us have 15.4% left.  The statistical middle of what I labeled the “Middle America” owns just 4% of America’s wealth assets.

This raises an interest question.  How do we define middle class?  Is Middle America, as I’ve labeled it here the same as middle-class?

No,  We usually define middle class by income levels, not wealth ownership.  As of 2011 the median family income has declined to just over $51,000 per year.  If we were to define middle class based on 10% of families above and below the median income (as I have done here for wealth ownership, the narrow and very low income range would not fit most peoples conception of “middle class”.

But this pie chart displays the distribution of wealth, not income.  It includes all equity ownership in everything from homes to 401K’s, stocks, bonds, businesses, etc.  This chart cannot be directly converted to income levels. There are people with equity but not much income and people with large incomes but not much equity.

However, from a visual perspective the median income (middle most income) will still fall somewhere near the center of the red colored slice, about where the label line is drawn. Individuals in that group made about $26,364 per year, or about $52,000 per household in 2010.  Beyond that it is difficult to superimpose income brackets on this pie chart

This graphic really make clear just how compressed wealth distribution is in America.  Missing from the public dialogue over the past few decades is mention of the working poor.  Politicians and the media seem to focus on the middle class or the poor as if there were no working poor.

The other conclusion I come away with is that there is plenty of wealth here in the still wealthiest nation on Earth.  Telling ourselves that we can’t afford social services for the poor or good public schools or what ever else we desire as a nation is simply not true.  As a nation we can afford a much better society than we have now.