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by Brian T. Lynch, MSW
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.
The cartoon below is from the great editorial cartoonist Stuart Carlson. It highlights with humor a very serious global economic condition, growing wealth inequality.
http://www.gocomics.com/stuartcarlson/2014/06/20#.U9Zns_ldXfJ (Go and enjoy his other cartoons.)
Allow me to breakdown the math for you. These figures work out to an average of $486 per poor person vs. $20 billion per rich person. This is not a measure of income but a measure of wealth, or capital.
Another important math fact from this illustration: If you have $20 billion in capital and earn an average return on investments of 4% a year, and if you lavishly spend $1 million per month on your lifestyle, at the end of 50 years you will still have $140 billion left for your children to inherit. That’s right, if you have seven children they would each get close to the 20 billion that you started out with.
This is the crisis of capital that we face. This fact is among the findings of economist Thomas Piketty in his recent book, Capital in the Twenty-First Century. Within just a few generations almost all the wealth on the planet will be handed down from parents to children. Almost no new fortunes will be made through the earnings of those who have to work for a living. We will effectively return to a feudal system even here in the United States and abroad. The phenomenon is global. The quicker national and global population stabilize or decline the faster wealth will concentrate among the wealthy.
All we have to do to return to a feudal society is… do nothing.
Someone on facebook asked me, “Is it really the zero-sum game that these breakdowns of wealth distribution always seem to imply?” Good question! Is it the case that the growing wealth of the wealthy must come at the expense of growing poverty Or, doesn’t the growth of capital lift all ships?
When you look at national and global income-to-capital averages you see what looks like fairly stable ratios. Growing capital wealth and growth in income seem to balance. But look a littler closer and you see that more of the population falls into poverty as the value of capital grows at compounded rates. So yes, there is more national income, but there is an ever larger percentage of income coming from capital investments and going to the wealthy. As capital becomes the main source of income, the real earnings of wage earners stretches and collapses at the lower end of the economic scale. For the middle class, it is like being caught between the gravitational fields of two black holes… one created by poverty and the other by capital wealth
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.
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,”
By Brian T. Lynch, MSW
Before I had a blog, before the Wall Street “privateers of equity” crashed the economy, and long before the Occupy movement occupied anything, there were seemingly crazy folks like me trying to sound the alarm on our economy. I wrote Letters to the Editor in local newspapers and sent copies to every newspapers across the country for which I had an email addresses. What disturbed me back then was that no one in the media, or even in academia, seemed to be paying much attention. Event have consequences, and the crash in 2008 caught us flat footed.
It is unknown how social problems that exist for years suddenly become public issues to be solved. No one knows what triggers these tipping points. Even when a single individual is clearly associated with a change or a movement or a discovery (Einstein, for example), that person is responding to what ever came before. Sometime it is the consequential event rather than any alarm bells that finally get our attention. The firmament that precedes public cognition before a disastrous event remains a mystery to me.
My wife just came across one of my old letters. What startled me is that I could have written this same letter today, except the statistics are far worse now.
Here below is my Daily Record Letter to the Editor published on Christmas Eve, 2006.
We never hear any reference to the working class these days. The media and our politicians only speak of the “middle class” as if that covers everyone who isn’t either poor or wealth. Even references to the poor are scarce. The working class exists. They are sandwiched between the poor and the middle class and they are being squeezed into poverty. It is cruel to ignore them and the terrible pain they are suffering. What has happened to them, aside from being ignored can only be touched on by the four graphs that follow. These were presented in a conversation I had with conservative friend of mine who has forgotten the working class exists. There are many factors hurting the working class. This conversation was only about four factors, wage suppression, the upward redistribution of wealth, working class decent into poverty and declining upward mobility. Post this is my way of addressing what I believe is the most hurtful factor of them all… public silence.
Q: I always thought of the owners as the producers of the jobs that the workers have. You say that it is the workers who are the producers. Have you ever been employed by someone on welfare?
A: Owners coordinate the workforce, but it the employees who do the work that makes the products or services. So in a real sense, the workers ARE the producers. And this has nothing to do with welfare at all. Jobs are not a product. Stuff is a product. Things to sell or trade is a product. Workers are key to making stuff or offering stuff yet when they want a fair share of the value they create they are treated like thieves. Read this and you will know what I am talking about even if you don’t agree:
I also just ran across this table (below) that shows were all the Hourly GDP wealth has gone since the mid-’70’s.
Q: Why should it matter how much a C.E.O. makes if their workers remain on the job? It’s one of the great things about this country. You can work where ever and for whom ever you want. Someone please explain to me why it is greed for C.E.O.’s to make deals to be paid as much as the market will bear but it is ok for workers to make deals to make as much as the market will bear.
A: It may not matter to you at all, but anyone who wonder why they can’t have collective barganing while the CEO is making 400 times their salary might have questions, especially since this is strictly a feature of the US economy and others around the world are paid better than we are relative to their economies.
Don’t forget, almost 40% of people who work full time are poor. I’m not sure what percentage of the poor they account for, but it is clear when we speak of the poor we are not speaking only of people who are disabled, elderly, retired or unemployed.
Note here that in the US, the number of working poor (blue bar in right hand column) is twice the number of non-working poor. So when you and I talk about the poor, you are defining it as welfare recipients while I broadly define it as everyone living below the poverty line, the majority of whom work full time. That’s partly why we have a disconnect on this topic. In my understanding, most poor people work.
Q: I wonder how many of the poor who are now C.E.O.’s would agree with you? Or would they say : “Work hard towards your goal, as I did, and you can achieve anything.”. Isn’t this what made our economy great? Not people who wanted a wage so they could be comfortable in the position they have today? Flipping burgers at McDonalds is not supposed to be a permanent career goal. Even the management at McDonalds wants people to move up. Or am I wrong about incentive and ambition?
A: There are 17,000 companies with 500 employees or more. There are 43 million poor. If 20% of CEO’s started out as poor children that would mean there are only about 4,200 CEO openings for 43 million potential applicants. It’s a safe bet that far fewer than 20% of CEO’s come from poverty. In fact, less than 20% of children born to poorest families will make it into the middle class in their lifetime. Less than 8% will make over $140k/year, which is approximately the income line where the richest fifth starts. Of those at the top, only the smallest fraction will become a CEO. I believe that if you really understood the economic situation in America you, of all the folks I know, would be a big supporter of the working class.
As for incentive and ambition, a good paying job that makes one economically self-sufficient is the highest motivator. But a self-sufficient wage for a single earners is over $30,000/year whereas the median wage for a single earners is less than $26,000/year. In other words, the incentives are less than optimal in today’s economy, and no amount of hard work or individual effort will make a difference for most people until even low wage workers receive a fair wage for a days work.
Rupert Murdoch, chairman and CEO of News Corp., and one of the richest men on the planet, recently claimed that free markets are morally superior to more social based ideas of morality and fairness. “We’ve won the efficiency argument,” he claimed. Now he hopes to persuade us that free markets are morally superior and that socialism fails because of its “denial of fundamental freedoms.” In Murdoch’s world the idea that market success is based on greed is a false characterization that creates confusion. He believe that markets succeeds where governments fail, not because of greed, but because people are given “… incentives to put their own wants and needs aside to address the wants and needs of others.”
It sounds great! But before you buy into this idea you should know he goes on to say, “To succeed, you have to produce something that other people are willing to pay for.”
Therein lies the rub. To succeed you must “produce.” For Murdoch, distributive justice is the natural outcome of these purely commercial transactions. He quotes Arthur Brooks at the American Enterprise Institute who defines fairness as, “… the universal opportunity to enjoy earned success”. The key words here being “earned success.” Accordingly, producers are entitled to all they earn because if their product wasn’t successful, consumers are free to not buy their product. This is a cruel argument to make in the face of an elderly person having to choose between buying food or medicine, of course. Nevertheless, in this view every sale in a free market system automatically results in a fair distribution of wealth. No other social factors should apply. In fact, to take from producers what they’ve earned to support the lives of less successful or non-producing human beings is immoral, in Murdoch’s view.
“What’s fair about taking money from people who’ve earned it and giving it to people who didn’t,” Murdoch asks.
But Murdoch’s whole notion, which closely mirrors that of Ayn Rand, ignores the whole complex social economy in which commerce and every other human activity actually takes place. It rejects the wisdom that markets only exist to serve societies needs. Markets are manmade entities and not a natural phenomenon, but Murdoch’s narrow view treats markets as natural entities that are morally superior to society. It limits the meaning of production to that which has a monetary exchange value. It assigns social value to the creators of products according to their market success, measured in material gain. It does not account for the material contributions of the public domain in making commerce and stable markets possible. Even though the monetary value of a product is co-dependent on a consumers’ willingness to pay, it does not assign any social value to the consumer. Only the source of a buyers money gives them any social status.
This leaves open the question of how, or even whether, to assign social value to those not immediately involved in commercial production. These folks include children, the disabled, the elderly, the unemployed, those who care for children, woman on maternity leave, all government employees, military personal, clergy, law enforcement, etc. Murdoch’s view begs the question; What is a person worth when their value to society cannot be directly measured by their market place success?
Murdoch’s views are shared by many of today’s corporate elite. It is the makers vs. takers mentality. It is a view that can only be described as anti-social at best, sociopathic at its extreme. It opposes all government interventions in the market place and opposes most government regulations. It is a philosophy designed to restricts the ability of ordinary citizens (i.e. government) to assure that our markets and commerce works for the good of society and not just for the benefit of the economically powerful. It implicitly confers ownership and control of the markets to the most powerful market makers while failing to acknowledge the corrupting effects of power on financially successful human beings. By denying the humanity of markets it denies the vulnerability of markets to human weaknesses. This puts society at risk and cripples humanity from solving some of the really big challenges we face as a species. How we chose to define distributive justice is arguably the most important economic question of our time. How we ultimately marshal our economic resources to solve our really big problems depends on how we ultimately organize our economy.
[Ruppert Murdoch’s views as expressed can be found at the following URL: http://nation.foxnews.com/rupert-murdoch/2013/04/22/rupert-murdoch-op-ed-case-market-s-morality?utm_source=feedly&utm_medium=feed&utm_campaign=Feed%3A+FoxNation+(Fox+Nation)]
A recently published analysis by Thomas L. Hungerford (see highlights below) looks at factors driving the growth of income inequality for the period between 1991 to 2006. Hungerford looked at the contributing impact of three factors, tax policy, labor wages and capital income. During the studied period he found that capital income (capital gains, interest income, business income and dividends) was by far the largest factor contributing to rising income inequality. Wages and salaries alone were not a factor and tax policies were only a minor contributor during this period, largely due to the more favorable tax treatment of capital gains.
This report doesn’t trace the history of income inequality prior to 1991 where changes in wage growth in the late 1970’s and the collapsing of upper income tax brackets in 1980 and 1985 were more dramatic.
It is worth remembering that for most of the past 100 years capital gains was treated as ordinary income for tax purposes. In recent times, capital gains have be treated as a separate class of income with a more favorable tax treatment. Capital ownership has always been more concentrated at the upper end of the income/wealth continuum. Capital is, of course, an ownership stake in our economy whether through stocks, bonds, property or business ownership. The income generated when these capital investments are bought and sold is currently taxed at 15% (if it is held for more than a year). That is less than half the top tax rate for wages and salaries. And how is capital ownership distributed in America?
Who Owns What In America?
The distribution of wealth ownership, as opposed to income inequality, is even more skewed towards the wealthy as the pie chart below shows. The whole pie represents the total wealth in America. Each of the five slices of the pie represent 20% of the US population according to how much wealth they own.
The slice of ownership for the poor and working poor are barely visible. Eighty-percent of all Americans own just 15.6% of America’s wealth. The number of people who slipped into poverty in 2010 was at an all time high of 46.2 million, so the poorest 20% of all Americans, in terms of wealth ownership, includes 15.5 million who are technically above the income poverty line. The poorest 40% of Americans essentially own almost nothing while the top 20% own almost 85% of everything. As a result, favorable tax policies for capital gains income has a highly disproportional benefit for the wealthiest Americans. Capital income for this wealthy segment is what drives rising income inequality today.
Changes in Income Inequality Among U.S. Tax Filers Between 1991 and 2006: The Role of Wages, Capital Income, and Taxes
Thomas L. Hungerford
January 23, 2013
Electronic copy available at: http://ssrn.com/abstract=2207372
HIGHLIGHTS FROM THIS REPORT:
Research has demonstrated that large income and class disparities adversely affect health and economic well-being (see, for example, Marmot 2004, Wilkinson 1996, Frank 2007, Singh and Siahpush 2006).
Research has shown, however, that income mobility [in the United States] is not very great and the degree of income mobility has either remained unchanged or decreased since the 1970’s (Hungerford 2011, and Bradbury 2011).
Earnings inequality has been increasing since at least the late-1960s (Kopczuk, Saez, and Song 2010). [The] CBO (2011) has documented that income inequality has been increasing in the United States over the past 35 years.
Three potential causes of the increase in after-tax income inequality between 1991 and 2006 are examined in the analysis: changes in labor income (wages and salaries), changes in capital income (interest income, capital gains, dividends, and business income), and changes in taxes.
Increased salaries paid to CEOs, managers, financial professionals, and athletes, is estimated to account for 70 percent of the increase in the share of income going to the richest Americans (Bakija, Cole, and Heim 2010).
A declining real minimum wage could affect lower income tax filers (the inflation-adjusted minimum wage fell from $6.57 per hour in 1996 to $5.57 per hour in 2006).
Income of the richest 0.1 percent of taxpayers is sensitive to changes in asset prices and this may have been especially important in the increase in the income share of those at the top of the income distribution (Bakija, Cole, and Heim 2010).
Frabdorf, Grabker, and Schwarze (2011) also find that capital income’s share in disposable income has increased in recent years in the U.S. and show that capital income made a large contribution to income inequality in relation to its share in income.
While the individual income tax system is progressive and has been since it was introduced in 1913, the trend has been toward lower marginal tax rates and a less progressive tax system (Piketty and Saez 2007, and Alm, Lee, and Wallace 2005). As a result, the tax system may be less able to equalize after-tax incomes.
The major tax changes between 1991 and 2006 were (1) the enactment of the Omnibus Budget and Reconciliation Act of 1993 (OBRA93), which increased the top marginal tax rate from 31 percent to 39.6 percent, and (2) the enactment of the 2001 and 2003 Bush tax cuts, which reduced taxes especially for higher-income tax filers. The Bush tax cuts involved reduced tax rates, the introduction of the 10 percent tax bracket (which reduced taxes for all taxpayers), [it also] reduced the tax rates on long-term capital gains and qualified dividends. In 1991, long-term capital gains were taxed at 28 percent (15 percent for lower-income taxpayers) and all dividends were taxed as ordinary income. The next year, the
long-term capital gains tax rate was reduced to 20 percent. By 2006, long-term capital gains and qualified dividends were taxed at 15 percent (5 percent for lower-income taxpayers). Tax policy changes that affect progressivity will affect after-tax income inequality (Kim and Lambert 2009, and Hungerford 2010).
Hungerford (2010) notes, however, that about 75 percent of families contain just one tax unit (another 17 percent contain two tax units with the second tax unit usually a cohabitating adult or a working child that cannot be claimed asa dependent on another tax return). Consequently, most of the tax units likely represent a family.
Piketty and Saez (2003) argue that capital gains are not an annual flow of income and have large aggregate variations from one year to another; they exclude capital gains from much of their analysis. Blinder (1980) argues that capital gains should not be included in income because what is important is real accrued capital gains [cashed out]. Also, that capital gains represents partial maintenance of in an inflationary world. [in other words, gains shouldn’t be taxed as it serves as an inflation adjustment for capital]
capitals gains have increasingly become an important source of compensation for corporate executives (through stock options), and private equity and hedge fund managers (carried interests). Consequently, income from capital gains is included in the analysis.
Several recent studies estimate that most or all (in some cases more than 100 percent) of the burden of the corporate income tax falls on labor through reduced wages [while] other evidence suggests that most or all of the burden of the corporate income tax falls on owners of capital. [So take your pick!]
Federal individual and corporate income taxes had an equalizing effect on inequality regardless of the inequality measure. Federal taxes had a slightly greater equalizing effect in 2006 than in 1991—taxes appear to have been slightly more progressive in 2006 than in 1991. The top marginal tax rate in 1991 was 31 percent compared to 35 percent in 2006; the lowest tax marginal rate was 15 percent in 1991 and 10 percent in 2006. However, the increased equalizing effect of the individual income tax is likely due to bracket creep—more income is taxed at the highest rates—than to tax law changes. Tax policy changes appear to have played a direct role: OBRA93 tended to have an equalizing effect on after-tax income while the 2001 and 2003 Bush tax cuts tended to have a disequalizing effect.
Tax policy may have also have had an indirect effect on rising income inequality, especially between 2001 and 2006. The reduction in the tax rate on long-term capital gains and qualified dividends may have led to the increased importance of this source in after-tax income.
Overall, changes in [wage] labor income does not appear to be a significant source of increased income inequality between 1991 and 2006. Wages had no or a small disequalizing effect when other inequality measures are used.
By far, the largest contributor to increasing income inequality (regardless of income inequality measure) was changes in income from capital gains and dividends. Capital gains and dividends were less equally distributed in 1991 than in 2006, though highly unequally distributed in both years.
Thomas L. Hungerford currently works at the Congressional Research Service (CRS) which is part of the Library of Congress. The CRS provides the policy and legal analysis to Congressional committees and Members, regardless of their party affiliation. CRS staffers sometimes do reports on their own. Hungerford says this report, “… [does] not reflect the views of the Congressional Research Service or the Library of Congress.” Hungerford is well-published in the professional literature. He has worked for the Social Security Administration, the Office of Management and Budget, and the General Accounting Office in the past. The excerpts highlighted here are of my own. You are encouraged to read the full study at the URL address provide above.
It seems so obvious that consumption is the fire that powers an economy and money is the fuel. It doesn’t matter from where the spending comes in the short run, but it must come from ordinary people in the long run. Wages paid are dollars spent and a dollar spent is a dollar earned in a free economy. Just as you can dampen consumption by raising the cost of borrowing, you can also dampen consumption by suppressing wages, which is exactly what we have been doing for more than 30 years. Corporations have become cash rich but customer poor. They could end this sluggish economy tomorrow by raising wages.
Here are the facts: The federal minimum wage = $7.25 /hr. President Obama wants to raise it to $9.00 /hr. The current US Poverty wage = $10.60 /hr. The current living wage rate averages $16 to $23 /hr depending on where you live. The poverty wage rate and living wage rates are based on a 40 hour work week.
Profitable companies paying workers, or their out sourced or supply chain workers, less than a living wage are financially benefitting from government aid to the working poor. We need a stable work force to be competitive. We also can’t have people starving to death in the wealthiest nation on Earth. Companies take advantage of this and let state or federal governments step in to help care for their workers. This amounts to a labor discount. Cheap labor! Corporations are padding their profits at taxpayer expense.
At least 45% of working households require some form of government subsidy to maintain their financial stability. The cumulative effect of wage suppression over the past 40 years has become a huge taxpayer drain on households making more than the median income. While almost everyone’s wages are suppressed relative to GDP, the ranks of the working poor have grown to almost half of the work force. Business profits that have not been shared with workers over the years has gone instead to the wealtiest 1% of American’s creating the huge income inequality we have today.
In effect, profitable corporations and companies are making their higher paid employees subsidize part-time workers and full-time works who make less than a living wage.
So the next time you see that cleaning lady at work, remember your employer is expecting you to subsidize her family though income taxes rather than pay her the living wage she needs just to make ends meet. Every conservative argument against raising the minimum wage is just a smoke screen for the real culpret behind unemployment and our sluggesh economy, Wage Suppression!!!