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Corporate Profits Soar as Workers’ Incomes Slump

There is yet more evidence that our economy has become a zero-sum affair, where the growth of corporate profits (and by extension the coffers of the elites) come at the expense of average workers.

With the Dow Jones industrial average flirting with a record high, the split between American workers and the companies that employ them is widening and could worsen in the next few months as

That gulf helps explain why stock markets are thriving even as the economy is barely growing and unemployment remains stubbornly high.

With millions still out of work, companies face little pressure to raise salaries, while productivity gains allow them to increase sales without adding workers.

“So far in this recovery, corporations have captured an unusually high share of the income gains,” said Ethan Harris, co-head of global economics at Bank of America Merrill Lynch. “The U.S. corporate sector is in a lot better health than the overall economy. And until we get a full recovery in the labor market, this will persist.”

The result has been a golden age for corporate profits, especially among multinational giants that are also benefiting from faster growth in emerging economies like China and India.

These factors, along with the Federal Reserve’s efforts to keep interest rates ultralow and encourage investors to put more money into riskier assets, prompted traders to send the Dow past 14,000 to within 75 points of a record high last week.

While buoyant earnings are rewarded by investors and make American companies more competitive globally, they have not translated into additional jobs at home.

And why not? There is plenty of money to go around. Companies can well afford to hire new workers and pay their current ones better, and still have plenty of profits left over for their CEOs and shareholders.

As a percentage of national income, corporate profits stood at 14.2 percent in the third quarter of 2012, the largest share at any time since 1950, while the portion of income that went to employees was 61.7 percent, near its lowest point since 1966. In recent years, the shift has accelerated during the slow recovery that followed the financial crisis and ensuing recession of 2008 and 2009, said Dean Maki, chief United States economist at Barclays.

Corporate earnings have risen at an annualized rate of 20.1 percent since the end of 2008, he said, but disposable income inched ahead by 1.4 percent annually over the same period, after adjusting for inflation.

“There hasn’t been a period in the last 50 years where these trends have been so pronounced,” Mr. Maki said.

 

The problem is simple: corporations don’t want to to pay their workers better because their standards of sufficient wealthiness are getting ever higher. Business elites are finding their growing appetites for money ever more difficult to satiate. It used to be that making a million or so dollars was more than sufficient —  but nowadays, it seems every executive wants tens of millions, if not hundreds of millions, and their shareholders and board members are no better.

When a handful of people want more and more money, the natural consequence is to make cuts (e.g. layoffs, benefits, hours) and withhold investment (e.g. raises and benefits). Otherwise, where else will all this money come from? Consider the following  case in point:

“Right now, C.E.O.’s are saying, ‘I don’t really need to hire because of the productivity gains of the last few years,’ ” said Robert E. Moritz, chairman of the accounting giant PricewaterhouseCoopers.

At 218,300 employees, United Technologies’ work force is virtually unchanged from seven years ago, even though annual revenue soared to $57.7 billion in 2012 from $42.7 billion in 2005.

The relentless focus on maintaining margins continues, even though profit and revenue have never been higher; four days after the company’s shares soared past $90 to a record high last month, United Technologies confirmed it would eliminate an additional 3,000 workers this year, on top of 4,000 let go in 2012 as part a broader restructuring effort.

“There’s no doubt we will continue to drive productivity year after year,” Mr. Chenevert said. “Ultimately, we compete globally.”

And that last sentence denotes a bit part of the problem: even if a company’s executive or board wants to be ethical and pay their workers better, they’ll come under relentless pressure by investors and shareholders to provide a bigger return on investment. Competition is cutthroat and no-holds-barred, and this country’s particular hyper-individualism and dog-eat-dog mentality only makes it worse. There is no sense of social obligation — it’s all about the bottom line and how much one can make for themselves, regardless of the costs to others, the environment, or society as a whole.

Our culture and attitudes need to change. How to do so is a different story altogether.

Why Won’t Businesses Hire?

Supposedly, it’s because the US business environment is unfriendly. Corporations want to place all the blame for our economic problems on the government. It is certainly true that the state has not been guiltless in this mess. But neither have business elites. Let us analyze the facts.

Contrary to popular belief, the United States still remains among the top ten countries in the world in terms of economic freedom, business friendliness, and competitiveness (sources include the Freedom of the World Index , the Index of Economic Freedom, the Ease of Doing Business Index, and the Global Competitiveness Report ; note that many of the countries that surpass us in these areas are what we would otherwise call “socialist” – they have higher wages, universal healthcare, more state intervention, and so on).

Yet companies are firing people, freezing wages, slashing benefits, and refusing to hire, citing the business climate as too unpredictable, unfriendly, and oppressive to facilitate investing in the economy. Really? If that is the case, how have companies managed to gather a total of $2 trillion in cash reserves, continue to pay their CEOs millions in bonuses, and consistently make profits throughout the recession (in some cases even breaking records)? By just about every measure, most businesses are clearly doing well.

The government has screwed a lot of things up, but it has little to do with business leaders deciding they want to pocket more money for themselves while pretending, despite all the evidence, that they can’t afford to do their part.

 

Daily News Wire 7/19/12

  • Apparently, Canada overtook the US in average net household wealth for the first time in history. Granted, much of that has to do with the effect of the 2007/2008 recession, which struck the US much harder and has lingered for far longer. But does that mean the Canadians are on to something when they balance American-style capitalism with a European-style welfare state?  They even manage to rank higher in economic freedom, in spite of the higher taxes and larger state.
  • While we’re on the subject…all this talk about American decline and being outdone by other countries has lead to more doubts about our historically high sense of Exceptionalism. Is the United States an exceptional country?  If so, how so? Was American Exceptionalism once a historical fact, but now outdated? Or was it always a myth to begin with? Read the article and/or reflect on the questions yourselves.
  • Mitt Romney, for obvious reasons, seems keen on selling the idea that business experience is vital for the office of the presidency. Indeed, this isn’t just political posturing: he’s appealing to a widespread notion that working in the private sector can make you a better functionary in the public sector. But does that claim stand the test of empirical and historical evidence?
  • Meanwhile, Paul Krugman offers his own analysis of the claim that the financial industry is good for America. The evidence suggests that, at best, it does little to benefit the American economy, and at worse, the US has done worse since “financializing” it’s economy.

Inconvenient Income Inequality

The following Times article by Charles Blow is somewhat old, but the point it makes sadly remains as topical as ever.

Is income inequality becoming the new global warming? In other words, is this another case where the facts of an existential threat lose traction among a weary American public as deniers attempt to reduce them to partisan opinions?

A Gallup poll released on Thursday found that, after rising rather steadily for the past two decades, the percentage of Americans who said that the country is divided into “haves” and “have-nots” took the largest drop since the question was asked.

This happened even as the percentage of Americans who grouped themselves under either label stayed relatively constant. Nearly 6 in 10 Americans still see themselves as the haves, while only about a third see themselves as the have-nots. The numbers have been in that range for a decade.

This is the new American delusion. The facts point to a very different reality.

An Associated Press report this week on ceound that “a record number of Americans — nearly 1 in 2 — have fallen into poverty or are scraping by on earnings that classify them as low income.” The report said that the data “depict a middle class that’s shrinking.”

An October report from the Congressional Budget Office found that, from 1979 to 2007, the average real after-tax household income for the 1 percent of the population with the highest incomes rose 275 percent. For the rest of the top 20 percent of earners, it rose 65 percent. But it rose just 18 percent for the bottom 20 percent.

And a report released in May by the Organization for Economic Cooperation and Development found that “the gap between rich and poor in O.E.C.D. countries has reached its highest level for over 30 years.” In the United States, the average income of the richest 10 percent of the population had risen to around 14 times that of the poorest 10 percent.

Our growing income inequality is a fact. So is the possibility that it could prove economically disastrous.

An April report from two International Monetary Fund researchers found that growing income inequality has a negative effect on economic expansion. The report said that long periods of high growth, which were called “growth spells,” were “much more likely to end in countries with less equal income distributions. The effect is large.” It continued: “Inequality seemed to make a big difference almost no matter what other variables were in the model or exactly how we defined a ‘growth spell.’ ”

Our income inequality could jeopardize our recovery.

Yet another Gallup report issued Friday found that most Americans now say that the fact that some people in the U.S. are rich and others are poor does not represent a problem but is an acceptable part of our economic system.

If denial is a river, it runs through doomed societies.

The amount of concern about income inequality seems to vary from poll to poll. I’ve seen data that suggests that it is indeed a growing source of worry for many Americans, including conservatives, who are traditionally more tolerant of socioeconomic disparity. We’re certainly giving it more well-needed attention than we ever have. It remains to be seen if that’ll amount to anything though.

Bad Job Leads to Bad Health

Science pretty much confirms what most of us know by experience: working at a stressful, un-fulfilling job can be pretty bad for you. ScienceDaily reports:

ScienceDaily (Mar. 14, 2011) — The impact on mental health of a badly paid, poorly supported, or short term job can be as harmful as no job at all, indicates research published online in Occupational and Environmental Medicine.

But after taking account of a range of factors with the potential to influence the results, such as educational attainment and marital status, the mental health of those who were jobless was comparable to, or often better than, that of people in work, but in poor quality jobs.

Those in the poorest quality jobs experienced the sharpest decline in mental health over time. There was a direct linear association between the number of unfavourable working conditions experienced and mental health, with each additional adverse condition lowering the mental health score.

And the health benefits of finding a job after a period of worklessness depended on the quality of the post, the findings showed. Job quality predicted mental health.

Getting a high quality job after being unemployed improved mental health by an average of 3 points, but getting a poor quality job was more detrimental to mental health than remaining unemployed, showing up as a loss of 5.6 points.

Paid work confers several benefits, including a defined social role and purpose, friendships, and structured time. But jobs which afford little control, are very demanding, and provide little support and reward, are not good for health, say the authors.

“Work first policies are based on the notion that any job is better than none as work promotes economic as well as personal wellbeing,” comment the authors. “Psychosocial job quality is a pivotal factor that needs to be considered in the design and delivery of employment and welfare policy,” they conclude.

We’ll likely need more studies to confirm this, but I think it makes a lot of sense. Human beings need something more than just getting by: the need purposes, positive reinforcement, etc. It’s harder to get that from jobs that mistreat you.

Red vs. Blue: Federal Aid and Spending

Most Americans have a poor understanding of their own political system, particularly with regards to the nature and cost of social policies. In fact, most people don’t even know whether or not they’re direct beneficiaries of the very spending they rally against. Several articles I’ve recently read have highlighted this interesting irony, while shinning light on just how much the government spends and for whom.

The first comes from Slate columnist Matthew Yglesias, in his piece, “How Blue American Subsidizes Red America.” He finds that the typical conservative state is generally more dependent on federal programs than the average liberal one, despite the former’s generally hostility to the national government. You can see a visual representation of this below:

Regardless of how it is measured, the overall picture is the same: on average, aid is transferred from high-income and politically underrepresented parts of the country, to low-income and overrepresented ones (GOP-dominated states tend to have a disproportionate presence in the Senate). Yglesias doesn’t think this is evidence of any hypocrisy on the part of conservative voters or their representatives, but there’s more on that later. He shares two assessments based on this data:

One is that high-income people living in low-income states are generally very conservative in their political ideology but probably benefit more from federal income support programs more than they realize. If you own fast food franchises in the Nashville area, for example, you’re going to form a self-perception as a self-reliant businessman but the existence of Medicaid and the Earned Income Tax Credit are helping to ensure that your customers have adequate income to sometimes eat at your Taco Bell. These chains of dependency snake even longer. If you sell luxury cars in Florida, many of your customers are probably medical professionals who are earning high incomes because other people have Medicare benefits. The aggregate geographic transfer patterns, in other words, do make a real difference to the economic life of the nation. The existence of transfer payments props up the entire local economies of low-income, low-productivity parts of the country.

The other point is that the fact that we don’t think of the issues in this way is important to making the overall country work. Voters, whether they’re liberal or conservative, don’t think about Boston subsidizing Louisiana. They think about high-income people (a disproportionately large number of whom happen to live in the Boston area) subsidizing low-income people (a disproportionately large number of whom happen to live in Louisiana) and debate the issues on broad ideological grounds. Absent that commitment to broad ideological thinking we’d be in roughly the situation that the European Union is currently in, with Boston-area people happy to participate in a joint economic undertaking with Louisiana to some extent but horrified by the notion that their hard work should subsidize Bayou indolence. You would then have the question of to what extent can people simply leave the low-wage, low-productivity places and move to the more prosperous ones. In the European case you’d find that the logistics of language make it hard for a middle class Greek person to get a good job in Finland, while in the United States severe zoning makes net migration to the highest-income cities impossible.

In other words, people are missing the bigger picture – it’s not entirely obvious who the aid goes to and how it’s all interconnected. People can easily view taxation as theft, but have a harder time seeing government assistance as putting more disposable income in people’s pockets, and thus driving the demand on which our economy depends on (especially on the local or state level).

You can read more about this at the Incidental Economist blog, from where Yglesias drew his data. Another blog found that as of 2010, seven out of ten states with the highest per capita income voted Democrat over the past five presidential elections, while, conversely, seven out of the bottom ten states in this regard voted Republican.

Overall, most of the wealthiest states in terms of per capita income tended to be solidly Democratic in their affiliation. However, we shouldn’t make too many assumptions – per capita income doesn’t capture the actual distribution of wealth and whether most residents of these states are actually well off.  It also doesn’t reveal whether these states are facing any mounting long-term socioeconomic problems.

Granted, various indexes show that comparatively speaking, conservative states have higher rates of poverty, crime, high-school dropouts, and other measures of social dysfunction. There are exceptions of course, but that’s the average picture. The significance of that correlation will be left up for you to decide.

The next two articles come from Mother Jones columnist Kevin Drum, and explore who benefits from federal aid and how much do we spend on the unemployed poor. They’re pretty similar in their subject matter, so I’ve combined their conclusions.

The first article takes its data from a recent study by the nonpartisan Center on Budget and Policy Priorities (CBPP), which showed that the amount of government benefits that go to able-bodied workers is about 9% of our federal budget.  Furthermore, one of the authors of the study, Arloc Sherman, noted that there was a lot of overlap between various social policies: Medicaid, for example, is generally seen as a program for the poor, but most of it goes to the elderly and the disabled (many of whom live in poverty).

So what percent of each program goes to the elderly, disabled, or working poor? The bulk of both Medicare and Social Security goes to the elderly and most of the balance goes to the disabled. The Earned Income Tax Credit goes almost entirely to the working poor…[83%] of Medicaid goes to the elderly, disabled, or working poor. [79%] percent of school lunches. [69%] percent of unemployment compensation. [64%] percent of SNAP (food stamps). Even TANF, the classic “welfare” program, clocks in at 46 percent—and it’s a very small program. The other 54 percent only amounts to about $6 billion, a minuscule fraction of federal benefits, and ever since the 1996 welfare reform bill those benefits have been temporary anyway. It’s not really possible to become dependent on TANF any longer.

Below is a visual representation of the different kind of recipients and their fraction of each federal program.

Overall, only about 9 percent of government benefits go to those who could be thought of as able-bodied workers who either can’t or won’t find a job. And as the study says:

Moreover, the vast bulk of that 9 percent goes for medical care, unemployment insurance benefits (which individuals must have a significant work history to receive), Social Security survivor benefits for the children and spouses of deceased workers, and Social Security benefits for retirees between ages 62 and 64. Seven out of the 9 percentage points go for one of these four purposes.

Sherman adds this:

Another point: Many of those who decry the growth of entitlement spending seem to forget the most basic of all facts about it: it continues to be driven overwhelmingly by the twin engines of an aging population and the rising cost of medical care. Neither of which has much to do with dependency among the working-age population.

This is especially true for medical care, I think. We spend a fair amount of money on health care services for the poor, but even theoretically that does nothing to make them less likely to work. They still need money for everything else, after all. All it does is provide them with a bare minimum of decent health care. We can afford that, can’t we?

In other words, the widespread perception that there are people who actually live off of “welfare” is false. You can always find anecdotes that suggest otherwise, but on the whole, it’s impossible to be dependent, let alone live comfortably, on these federal programs alone. Even accounting for additional state aid, which is being increasingly curtailed, you’d still live in considerable poverty. The welfare queen stereotype is a myth.

That covers the elderly, disabled, and working class, so what about the non-working poor? How much is spent on them?

It comes to about $235 billion, the bulk of which is SNAP (formerly food stamps) and about one-third of Medicaid. That’s 12 percent of all federal welfare spending and about 6 percent of the whole federal budget. Once you account for the fact that some of these program dollars go to the working poor, you end up with CBPP’s estimate of 10 percent, or about 5 percent of the whole federal budget.

Is that too much? I guess you have to decide for yourself. But I’ll bet most people think we spend a lot more than 5 percent of the federal budget on this stuff. They might be surprised to know the real numbers. The CBPP’s chart is below, with spending on the nonworking poor highlighted.

Indeed, considering that most Americans believe we spend 25% of our budget on foreign aid – the real amount if 1% – I’d wager a good number of people think we give the same amount, if not more, to loafers and lowlifes. Not all poor people are unfortunates trying to make an honest buck, but nor are they parasites living gleefully off the unsuspecting taxpayer. Even if they wanted to, they couldn’t – our safety net keeps them barely above water, at best.

This leads to the final installment of this post: a long but very insightful New York Times piece that explores the ambivalence that federal aid beneficiaries have towards their dependence. There are several interviews with various families who share their confliction with government spending; you can read most of the accounts for yourself, since it would take up too much space to do so here. The article also shows the latest trend of social spending: that’s it’s increasingly headed toward middle-class families that have suffered enough to qualify.

Older people get most of the benefits, primarily through Social Security and Medicare, but aid for the rest of the population has increased about as quickly through programs for the disabled, the unemployed, veterans and children.

The government safety net was created to keep Americans from abject poverty, but the poorest households no longer receive a majority of government benefits.

A secondary mission has gradually become primary: maintaining the middle class from childhood through retirement. The share of benefits flowing to the least affluent households, the bottom fifth, has declined from 54 percent in 1979 to 36 percent in 2007, according to a Congressional Budget Office analysis published last year.

And as more middle-class families like the Gulbransons land in the safety net in Chisago and similar communities, anger at the government has increased alongside. Many people say they are angry because the government is wasting money and giving money to people who do not deserve it. But more than that, they say they want to reduce the role of government in their own lives. They are frustrated that they need help, feel guilty for taking it and resent the government for providing it. They say they want less help for themselves; less help in caring for relatives; less assistance when they reach old age.

Overall, it seems that people feel guilty relying on taxpayer money, to the extent that they vote for candidates and policies that seek to put an end to the very programs they’re relying on. These people are far from the willing welfare spongers of popular imagination. They need the money, but they don’t want to have the need for it.

The problem by now is familiar to most. Politicians have expanded the safety net without a commensurate increase in revenues, a primary reason for the government’s annual deficits and mushrooming debt. In 2000, federal and state governments spent about 37 cents on the safety net from every dollar they collected in revenue, according to a New York Times analysis. A decade later, after one Medicare expansion, two recessions and three rounds of tax cuts, spending on the safety net consumed nearly 66 cents of every dollar of revenue.

The recent recession increased dependence on government, and stronger economic growth would reduce demand for programs like unemployment benefits. But the long-term trend is clear. Over the next 25 years, as the population ages and medical costs climb, the budget office projects that benefits programs will grow faster than any other part of government, driving the federal debt to dangerous heights.

Americans are divided about the way forward. Seventy percent of respondents to a recent New York Times poll said the government should raise taxes. Fifty-six percent supported cuts in Medicare and Social Security. Forty-four percent favored both.

Columnist Paul Krugman points out that a majority of Americans don’t even realize that these social programs are government-funded and operated. Even those who are aware become uncertain when confronted about their anti-federal position:

But the reality of life here is that Mr. Gulbranson and many of his neighbors continue to take as much help from the government as they can get. When pressed to choose between paying more and taking less, many people interviewed here hemmed and hawed and said they could not decide. Some were reduced to tears. It is much easier to promise future restraint than to deny present needs.

Especially when said needs are growing, even among the middle-class:

Almost half of all Americans lived in households that received government benefits in 2010, according to the Census Bureau. The share climbed from 37.7 percent in 1998 to 44.5 percent in 2006, before the recession, to 48.5 percent in 2010.

The trend reflects the expansion of the safety net. When the earned-income credit was introduced in 1975, eligibility was limited to households making the current equivalent of up to $26,997. In 2010, it was available to families making up to $49,317. The maximum payout, meanwhile, quadrupled on an inflation-adjusted basis.

It also reflects the deterioration of the middle class. Chisago boomed and prospered for decades as working families packed new subdivisions along Interstate 35, which runs up the western edge of the county like a flagpole with its base set firmly in Minneapolis. But recent years have been leaner. Per capita income in Chisago excluding government aid fell 6 percent on an inflation-adjusted basis between 2000 and 2007. Over the next two years, it fell an additional 7 percent. Nationally, per capita income excluding government benefits fell by 3 percent over the same 10 years.

The programs are doing what they were designed to do. The problem is that policymakers didn’t anticipate so many people would require them. No one expects half the country will end up relying on government benefits, and the recession has last far longer, with growth remaining far weaker, than normal.

Few federal programs are more popular than Medicare, which along with Social Security assures a minimum quality of life for older Americans.

None are more central to the nation’s financial problems. The Congressional Budget Office projects that government spending on medical benefits, even taking into account the cost containment measures in the 2010 health care law, will rise 60 percent over the next decade. Then it will start rising even more quickly. The cost of caring for each beneficiary continues to increase, and the government projects that Medicare enrollment will grow by roughly one-third as baby boomers enter old age.

Spending on medical benefits will account for a larger share of the projected increase in the federal budget over the next decade than any other kind of spending except interest payments on the federal debt.

Medicare’s starring role in the nation’s financial problems is not well understood. Only 22 percent of respondents to the New York Times poll correctly identified Medicare as the fastest-growing benefits program. A greater number of respondents, 27 percent, chose programs for the poor. That category, which includes Medicaid, is slightly larger than Medicare today but is projected to add only half as much to federal spending over the next decade.

Medicare’s financial problems are much worse than Social Security’s. A worker earning average wages still pays enough in Social Security taxes to cover the benefits the worker is likely to receive in retirement, according to an analysis by the Urban Institute. Social Security is still running out of money because the program must also support spouses who do not work and workers who earn lower wages. But Medicare’s situation is even more dire because a worker earning average wages still contributes only $1 in Medicare taxes for every $3 in benefits likely to be received in retirement.

A woman who was 45 in 2010, earning $43,500 a year, will pay taxes that will reach a value of $87,000 by the time she retires, assuming the money is invested at an annual interest rate 2 percentage points above inflation, according to the Urban Institute analysis. But on average, the government will then spend $275,000 on her medical care. The average is somewhat lower for men, because women live longer.

Medicare is often described as an insurance program, but its premiums are not nearly high enough. In simple terms, Americans are getting more than they pay for.

In fact, the cost inflation for Medicare, at around 400%, is far lower than that of private insurance, which has climbed to 700%. The private sector is far less efficient in cost-controls, but however comparatively efficient Medicare is, it’s taxpayers funded, so it’s still a drain on our treasury. Finally, the article reinforces something that was established in the beginning of this post:

One of the oldest criticisms of democracy is that the people will inevitably drain the treasury by demanding more spending than taxes. The theory is that citizens who get more than they pay for will vote for politicians who promise to increase spending.

But Dean P. Lacy, a professor of political science at Dartmouth College, has identified a twist on that theme in American politics over the last generation. Support for Republican candidates, who generally promise to cut government spending, has increased since 1980 in states where the federal government spends more than it collects. The greater the dependence, the greater the support for Republican candidates.

Conversely, states that pay more in taxes than they receive in benefits tend to support Democratic candidates. And Professor Lacy found that the pattern could not be explained by demographics or social issues.

Chisago has shifted over 30 years from dependably Democratic to reliably Republican. Support for the Republican presidential candidate has increased relative to the national vote in each election since 1984. Senator John McCain won 55 percent of the vote here in 2008.

Residents say social issues play a role, but in recent years concerns about spending and taxes have predominated.

Given the prevalence of this mentality, it’s difficult to say how would deal with these problems. Clearly, we need to reign in on government spending. But the growing cost of these programs – most of which don’t take up much of the federal budget, except for Medicare and Social Security – is indicative of a larger socioeconomic problem: the rising cost of living coupled with overall stagnation in wages and income for most Americans. It’s not just our attitudes towards the role of government that need to change, but the way our economic system functions. One thing is for certain though, as one interviewed beneficiary noted:

“I’m glad I’m not a politician…We’re all going to complain no matter what they do. Nobody wants to put a noose around their own neck.

The Plight of the American Middle-Class

As America’s intractable economic malaise continues along unabated, there’s been a lot of introspection and debate about why it all went wrong, why it isn’t getting better, and what we can do – if anything – to fix it. Much attention has been focused on the stagnation – or even outright decline – of the middle-class, historically the bedrock of the US economy and a powerful symbol of the equitable prosperity provided by quintessentially American values of hard work, liberty, and entrepreneurial spirit. The pursuit of the middle-class lifestyle – well-defined throughout popular culture, television sitcoms, and commercial advertisements – was an inseparable component of the American Dream – a goal that was realistic, wholesome, and fulfilling.

Most importantly, a growing and vibrant middle-class is both the indicator, and the enabler, of a healthy economy and society. People make enough money to buy the goods and services that drive the growth of businesses, and that in turn leads to more expansion and hiring, more people joining the middle-class, and thus more people continuing this virtuous cycle of mutual beneficence. Granted, no economic system is ever this idyllic, but the point is that we once had a economic system that was as close to ideal as we could’ve hoped for. It produced a solid-middle class that defined our culture, values, social and economic trends, and national success. That foundation of contemporary American power and progress is now, by many accounts, crumbling.

Unfortunately, time constraints restrict me from committing to the more voluminous research that I tend to prefer; though in a way, that suits me fine, sine my intention isn’t to throw out a lot of charts and figures, but rather to raise awareness and start a dialogue about the issue. I find that people are far less receptive to just a string of data then they are to a combination of some basic statistics and a well-developed argument about their significance. People are given something to think about and analyze, and with either develop grounds for disagreement -and thus useful dialectical discussion – or get spurred to do further research, perhaps bolstering the validity of the claims and assertions.

Therein lies the main article I’m focusing on in this post, a piece titled “The Limping Middle Class published in the  New York Times written by Robert Reich, a former Labor Secretary in the Clinton Administration  In it he highlights the troubling trends that are weakening Middle-class America and threatening the economic future of this country. I find his argument compelling, especially in light of other data that also shows the pervasiveness of shrinking incomes, stagnant wages, and higher debt among the once commercially active middle-American. Most crucially, he is not just making a moral argument, but a practical one as well:

THE 5 percent of Americans with the highest incomes now account for 37 percent of all consumer purchases, according to the latest research from Moody’s Analytics. That should come as no surprise. Our society has become more and more unequal.

When so much income goes to the top, the middle class doesn’t have enough purchasing power to keep the economy going without sinking ever more deeply into debt — which, as we’ve seen, ends badly. An economy so dependent on the spending of a few is also prone to great booms and busts. The rich splurge and speculate when their savings are doing well. But when the values of their assets tumble, they pull back. That can lead to wild gyrations. Sound familiar?

In other words, our economy cannot sustain itself on just the purchasing power of a relative handful of Americans. If most Americans see their income shrink or stagnant, then that means fewer purchases, less domestic business growth, and higher unemployment. All this will in turn kick of a vicious and self-fulling cycle: people aren’t buying goods and services because they aren’t making enough money, and they aren’t making enough money because companies won’t hire anyone, or won’t pay high enough wages to those they  do employ,since they can’t sell their products in the first place.

A perverse but often overlooked detail in all this is the fact that many corporations are in fact making plenty of money- overseas. After decades of outsourcing jobs, companies are also finding plenty of consumers abroad too, tapping into fast-growing emerging economies that are flush with cash. More and more Fortune 500 companies, among the largest employers in the nation, are making over 50% of their profits outside the US, meaning that the fortunes of Americans – including the once crucial middle-class consumer – are no longer a factor in their success. This decoupling between worker and employer, and buyer and sell, makes the chances for a recovery very bleak. If businesses can do more with less, and don’t need to hire or pay higher wages to sustain their sales, then what could possibly incentivize them to help drive the economy with all those resources they have?

Of course, big business is hardly the culprit in all this. The government has done it’s share of damage with ruinous policies, sleazy collusion with industry, and considerable fiscal irresponsibility. As Reich notes:

Most telling of all, Washington deregulated Wall Street while insuring it against major losses. In so doing, it allowed finance — which until then had been the servant of American industry — to become its master, demanding short-term profits over long-term growth and raking in an ever larger portion of the nation’s profits. By 2007, financial companies accounted for over 40 percent of American corporate profits and almost as great a percentage of pay, up from 10 percent during the Great Prosperity.

Some say the regressive lurch occurred because Americans lost confidence in government. But this argument has cause and effect backward. The tax revolts that thundered across America starting in the late 1970s were not so much ideological revolts against government — Americans still wanted all the government services they had before, and then some — as against paying more taxes on incomes that had stagnated. Inevitably, government services deteriorated and government deficits exploded, confirming the public’s growing cynicism about government’s doing anything right.

Indeed, it used to be that there was a relatively successful social contract between government and the people, and most importantly between worker and employer. Wealth and income used to grow across all income levels; employees had more job security, better benefits, and wages that actually grew with productivity; for a brief time, government used to spend more within it’s means, or wrack up debts that weren’t nearly equal to 60% of GDP. But the last 40 years have seen this stability get shaken up like never before, and quickly. As this chart shows, economic growth is eluding most Americans and making long-term prosperity highly questionable.

None of this is inevitable either. It’s been argued that all this is the unavoidable consequence of globalization, technological innovation, and greater competition abroad. Indeed, America was at it’s most prosperous during a time when it was the dominant economic power, and once emerging economies started to rise most prominently in 1990s, are economy started showing signs of strain. But as the data shows, growing inequality and economic stagnation were occurring long before the rise of economic rivals. The growth of China, India, Brazil, and others has merely exacerbated the situation. It is not inconceivable to adapt and grow in response.

Some say we couldn’t have reversed the consequences of globalization and technological change. Yet the experiences of other nations, like Germany, suggest otherwise. Germany has grown faster than the United States for the last 15 years, and the gains have been more widely spread. While Americans’ average hourly pay has risen only 6 percent since 1985, adjusted for inflation, German workers’ pay has risen almost 30 percent. At the same time, the top 1 percent of German households now take home about 11 percent of all income — about the same as in 1970. And although in the last months Germany has been hit by the debt crisis of its neighbors, its unemployment is still below where it was when the financial crisis started in 2007.

How has Germany done it? Mainly by focusing like a laser on education (German math scores continue to extend their lead over American), and by maintaining strong labor unions.

I would also add that relations between the public and private sector is far more amiable in Germany. There’s a stronger culture of collaboration, better coordination between business and state, and more formal structures for dialogue between workers, bosses, and politicians. Everyone has their skin in the game, and everyone has a voice, preventing the drift between entire segments of society that is starting to occur in the US.

Keep in mind that I am not trying to oversimplify this problem – I know multiple factors are involved, and there is more going on with the middle-class – and by extension the economy – then what is touched upon in this brief article. My overall point is that average Americans are finding it harder and harder to get by, and this will make obtaining an education or finding a decent job all the more difficult, in turn making US prospects as a whole more precarious, as each generation finds itself more overworked, more indebted, and less able to carry the weight of the American economy (and by extension the American government, which will see tax revenues falls with taxable income). We’ve spoken far more about debt and deficit, and devoted far less public discourse on what is arguably a more pressing and crucial issue.

Sensible Policies and Reasonable Priorities

Unsurprisingly, big companies are abusing the public’s concern about the economy for their own interests. Every time a new regulation of some sort is proposed, there are always cries from business lobbies – and their colluding political allies – that it will “kill jobs” and “weaken growth.” Business health is important, sure, but so is reigning down on abuses in finance, ensuring public health, protecting the environment and water supply, and maintaining worker safety.

Obviously, there are good regulations and bad ones, and we need to discern between the two.  Any regulatory regime or legislation dealing with the private sector must be crafted cleverly and cautiously, balancing the interests of business with that of the public as a whole. We can’t overdue it either, given that freedom breeds innovation. But there’s more to the well-being and health of a society than happily profiting corporations, and it’s absurd that we can’t even propose these things without either visceral demonizing or vacuous claims of malfeasance.

Besides, what’s good for business isn’t always good for the average American. Many companies have been making record profits throughout this recession, but this hasn’t translated into more jobs and higher wages (indeed, average wages have only grown 2% since the economy first faltered, versus the growth of executive salaries by 24%).   Reports have found that most industries don’t even contribute to domestic job growth or economic well-being: only healthcare, government, retail, and hospitality have contributed anything meaningful with respect to jobs; even then, most jobs in the last two are low-paying, while the public sector is scaling back positions. 

The fact is, our understandable concern about jobs and economic health is presenting a major long-term risk: that we’ll do anything and everything in the name of raw economic prosperity, at the cost of neglecting the many other crucial elements that make up a successful and progressive society. Do we really want to scale back on protections against pollution, water-contamination, and environmental degradation? Do we really believe that canceling the billions of dollars of taxpayer money that go into key corporations will lead to economic ruin, especially when that money could be more beneficially spent on things like job training centers?

Any and all regulations cost something. Business will always take some sort of hit no matter how well-designed a policy or oversight regime is. But we must apply a cost-benefit analysis: at what cost to society will we help the interests of businesses who’s success rarely benefit ourselves? How much are we willing to give up in order to “grow jobs” and “strengthen the economy,” even if neither is guaranteed to happen (indeed, taxes in the US are among the lowest in the world, and in our own history, and that hasn’t satisfied the cost-cutting instincts of modern day companies; heck, the markedly business friendly period under George W. Bush -2001 to 2007 – had some of the lowest job creation since World War II).

Ultimately, we need to stop framing policies in such zero-sum terms. Let’s be honest and admit that most laws and regulations will have some costs but some benefits too; some folks will benefit more than others, or even not at all. But let’s determine the best way to meet at the middle, and look at the bigger picture. Financial regulations might restrict corporate profits, but they might also restrict the next recession too (Canada, New Zealand, and Germany had some tight rules, but they also got away relatively unscathed by the recent global financial crisis).

Sure, environmental regulations can be a pain to abide by, but if it keeps the air and water clean, you make the area a far more attractive place for people to move to and live in; you might even create a whole new industry of eco-tourism (in fact, my state of Florida was historically bi-partisan when it came to being pro-environmental, largely because we realized how crucial our ecosystems were to attracting visitors and thus industries).

The countries that top lists relating to standard of living, economic growth, and high employment – such as the Scandinavian nations, Germany, Canada, and Australia  – are those that have found the proper balance between sensible policies and regulations. Public and private sector come together to devise policies that serve both their respective interests while giving some ground; business and labor leaders work to keep employers profitable without making employees miserable (and the other way around); rigorous means-testing, experimentation, and pragmatic open-mindedness facilitate the introduction of effective policies, as well as ensure their efficiency. None of this yields perfection of course, but it’d certainly help to address what we’re contending with: low job growth, crumbling infrastructure, stagnant public education, and widening income disparity.

But as long as our political and social cultures continue to breed conflict and confrontation: – between workers and bosses, public and private sector, business and government, rich and poor – we’ll never be able to set aside ideological and factional biases and try to hammer out what actually works. Desperation and crisis should breed cooperation and a willingness to do what it takes to address our mutual concerns – but lately, the opposite seems to be happening, and the long-term costs will just get higher and higher.

Will Americentrism Be Our Undoing?

Perhaps the title was a bit melodramatic, as most headlines tend to be, but my point is a sincere one: is our sense of importance and superiority – what is known as American exceptionalism – contributing to the many woes afflicting this country? To take it a step further, could our relative isolationism from the rest of the world eventually lead us into the decline that some see as inevitable, if not already ongoing?

I began dwelling on this after reading an article in Foreign Policy that touched on the fact that most Americans failed to scrutinize the flaws in their own economic system, or to question the established notion of the superiority of free markets – all except for mostly foreign-born American citizens, such as George Soros, Nouriel Roubini, Raghuram Rajan, and Mohamed El-Erian. The author goes on to suggest that the “outside” experiences and values of these thinkers is what allowed them a more clear-eyed perspective on what was really going on in this country.

To be sure, there were non-foreign Americans who also called out the flaws in finance, mortgage lending, and the notion of laissez-faire capitalism as well. And United States continues to be an incubator for many innovative ideas and concepts, attracting the best and brightest from across the world.

However, I am beginning to detect a sense of complacency in this country, a sense that despite all that has gone wrong – and is continuing to go wrong – the American way of doing things remains unquestioningly the best way.

Worse still, anyone who questions this – who raises doubts about our economic or political system, society and it’s values – is not only dead wrong but “un-American.” We’ve developed an informal social policy of shunning and demonizing those who criticize this country, stifling the sort of critical thinking and public debate that could better allow us to adapt to these changing and challenging times.

Look at how those who opposed the Iraq War were framed as traitors, or how those who questioned the abuse of civil liberties or the treatment of terrorist suspects were seen as “soft” on national security. Heaven forbid that one makes any critique of American-style capitalism, which earns you the viscerally applied label of an immoral socialist or communist.

Hell, why should being those things even be so intrinsically evil? Can’t good and well-meaning people, however misguided you may think them to be, think socialism and communism are okay, without having their morality and ethics automatically doubted? Can’t we at least debate these things on their own terms, rather than essentially censoring people from even bringing it up in anyway? I don’t doubt that even writing this is enough for some readers to think I’m some sort of communist pinko.

In any case, I’m somewhat digressing. Going back to my original point, I think we’ve become too entrenched in this chauvinistic notion that the “American way” is the be all, end all, the rest of the world be damned. We’re so convinced that other cultures, countries, political practices, and economic systems are inferior to our own, that we scarcely bother with trying to understand them, let alone attempt to find any merits to them. The average American seems to think that the world outside our borders is decadent, violent, backward, and otherwise inferior to our own.

Granted, in a lot of ways, we Americans do have a lot of wonderful ideas and practices. After all, we wouldn’t be one of the richest, most powerful, most innovative countries in the world for all these decades if we didn’t get something right. And as I’ve argued many times before, the doom-saying about this country’s history  is often quite exaggerated or misplaced. But with all that said, the events of the last decades have shown that this inflated sense of exceptionalism is starting to unwind.

We’re still on top by quite a margin, but we’re teetering. Our economy is sclerotic, with a hollowed out manufacturing base, a relative slowdown in innovation, and a job market mostly resting on relatively low-paying “service sector” occupations. Our healthcare system is not only uniquely “un-universal,” but it still somehow manages to be among the most inefficient and expensive in the world. Our income inequality puts us on par with Russia and Turkey, and is still worsening, while our society continues to become fatter, more indebted, and more educationally stagnant.

In other words, even though things aren’t as bad as a lot of cynics would have it, this country’s accomplishments still remain fragile. Yet despite this, we refuse to question conventional wisdom, or dare to look abroad and study the success of other nations. Ironically, a lot the countries cited as rising powers – China, Brazil, India, Turkey, and so on – credit a lot of their success, in part, to American ideas or to leaders with educated in American universities. These countries saw their domestic problems, and simply looked around for solutions to fix them.

I’m not saying we need to emulate the entire world without question, or give up everything we have and start from scratch. But we need to follow their example of open-minded pragmatism, borrowing or adopting the ideas floating around the larger world beyond our borders; at the very least, we should do more to study them, instead of treating any such “internationalist” outlook as being in conflict with American values.

In a globalized world such as ours, ideas – and even the thinkers and institutions that produce them – transcend nationality or culture. We must make the most of what’s out there, and stop staking our collective egos on believing that doing so is somehow weak or even damaging. After all, what is America today but a historical melting pot of values, inventions, ideas, and people from all across the world?  Why abandon the formula for success that has, in part, made us what we are?

Perhaps the title was a bit melodramatic, as most headlines tend to be, but my point is a sincere one: is our sense of importance and superiority – what is known as American exceptionalism – contributing to the many woes afflicting this country? To take it a step further, could our relative isolationism from the rest of the world eventually lead us into the decline that some see as inevitable, if not already ongoing?

 

 

How Bashing China Won’t Make Any Difference

With politics being as polarized as they are, it always nice to see a rare bit of bipartisanship in Congress. It’s just a shame that what unites the two parties is often ill-conceived and populist in nature, and nothing meets both criteria so well as China bashing.

There is no doubt that, lately, China has become a byword for American decline and economic insecurity. From our politicians to public interest groups, the consensus among policymakers seems to be that China is either a direct cause for all this country’s ills or a rapidly rising competitor whose gain is automatically our loss. This sentiment however, like the tariffs and China bashing that it predicates, is at worst dangerously distracting, and at the very least unhelpful.

Prior to adjourning for the midterm elections, Democrats and Republicans in the House of Representatives passed a bill aimed at retaliating against China for undervaluing its currency. This would’ve likely translated into higher tariffs on Chinese exports, though last I checked, the bill has remained stalled in the Senate.

In any case, the House was hardly alone in its concerns on China. Timothy Geithner, the United States Secretary of the Treasury, pressured the International Monetary Fund, which oversees the global financial system, to urge China to take on a “more flexible, more market-oriented exchange-rate management” system. This is basically a fancy way of telling China to stop keeping its currency so cheap.

In these past mid-terms elections, many candidates ran ads attacking opponents for allowing jobs to be shipped to China, or for otherwise being too soft on the Chinese. Citizens Against Government Waste, a self-described government watchdog, ran an ad depicting a future where China is basically running the US.

The idea is that if Chinese exports become more expensive, domestic producers of similar goods could finally compete in an even playing field, providing jobs and invigorating the economy. If only it was that simple (economics rarely is).

To be sure, China isn’t innocent. Its government does indeed keep the cost of its currency artificially low, so as to keep its vital exports cheap and it’s economy globally competitive. From a national-interest and strategic perspective, this actions makes sense, whatever harm it may do to other manufacturers. Certainly, such cheap exports do cause some damage to domestic production – up to a point. There is no denying that manufacturing has declined precipitously in this country. And it’s certainly true that most of what we once made is nowadays being built in China.

But Chinese dominance in manufacturing is a by-product of our decline, not the cause of it. After all, manufacturing has been weak for decades, long before China’s rise began in the 1990s; they merely sped up the process. Forcing the Chinese to make their goods more expensive or slapping on tariffs to that effect, won’t suddenly revitalize our economy.  At best, it will just shift the problem somewhere else. Vietnam, Bangladesh, the Philippines, and a slew of other nations all have plenty of cheap labor and even cheaper currency.

We should also take a lesson from history. Back when Japan was in China’s place and US manufacturing was beginning to peak, we pressured them to raise their cheap currency too, for the same reasons (and with the same expectations).  Obviously, it didn’t work, since industrial activity remains in decline to this day.

At the end of the day, the problem with manufacturing is a domestic issue that requires a domestic solution. It’s unrealistic and unfeasible to expect other countries to change their ways for our sake. Like it or not, globalization is a reality that must be adapted to, not fought against.  We should focus less on foreign scapegoats and more on supporting polices that will strengthen industry at home –more investment in infrastructure and green technology, support for job training programs, and incentives for companies to keep jobs in the US, to name a few ideas.

We need to tap into the innovation that has long made us the world’s most dynamic economy, rather than distract ourselves with petty trade wars. Too bad that, as with most things, that’s far easier said than done. How to become more innovative and competitive is a discussion for a whole other post.