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President Barack Obama speaks on education to the National Urban League Centennial Conference at the Washington Convention Center in Washington, D.C., July 29, 2010. He defended his education reforms, which are opposed by teacher unions and some minority groups. "It’s an economic issue when the unemployment rate for folks who’ve never gone to college is almost double what it is for those who have gone to college. It’s an economic issue when eight in 10 new jobs will require workforce training or a higher education by the end of this decade. It’s an economic issue when countries that out-educate us today are going to out-compete us tomorrow."
The English dramatist Micheál
Mac Liammóir (1899-1978; born Alfred
Willmore) who with his life partner, Hilton Edwards, founded Dublin's Gate
Theatre in 1928, is reputed to have said that America was a country you cannot
tell a lie about. In 1983, the late Harvard political scientist Samuel
Huntingdon wrote of the 1960s student radicals who he saw as part of a recurring
tradition of American puritans, enraged that American institutions didn't live
up to the country's founding principles: "[They]
say that America is a lie because its reality falls so far short of its ideals.
They are wrong. America is not a lie; it is a disappointment. But it can be a
disappointment only because it is also a hope."
To borrow from the nineteenth
century English politician,
Benjamin Disraeli, every country is an organised hypocrisy; reality never
matches the ideals and myths. Americans have much to be proud of and in recent
decades there has been recognition of past failings such as the treatment of
Native Americans and African-Americans. The framers of the Constitution which
begins: "We the
people, in order to form a more perfect union...,” recognised that
ideals were set to aspire to.
In the economic area, before the Great
Recession, the expectation that each generation would do better than the one
preceded it was under threat.
Samuel Huntingdon wrote of hope and Bill Clinton as president often referred to
his hometown, Hope, Arkansas. We at Finfacts have often covered the issue of the
growing inequality in the US and on Saturday, the Financial Times begins a
series called, The Great Stagnation. It is increasingly difficult for many to have
hope when incomes have been stagnant for so long.
While globalisation has impacted most jobs, the
pay of those towards the top of the pyramid has risen exponentially.
The Washington DC based
Economic Policy Institute think-tank said in 2008, that in 1965, US CEOs in
major companies earned 24 times more than a typical worker; this ratio grew to
35 in 1978 and to 71 in 1989. The ratio surged in the 1990s and hit 298 at the
end of the recovery in 2000. The fall in the stock market reduced CEO
stock-related pay (e.g., options), causing CEO pay to tumble to 143 times that
of the average worker in 2002. Since then, however, CEO pay has recovered and by
2007 was 275 times that of the typical worker. In other words, in 2007 a CEO
earned more in one workday (there are 260 in a year) than the typical worker
earned all year.
In Dec 2005, we
wrote that Americans feel
significantly more alienated in 2005, according to a Harris Interactive poll,
with three-quarters of US adults saying they feel the "rich get richer and
the poor get poorer," up from 68% in 2004.
Gillette CEO James M.
Kilts scooped $188m from the merger with Proctor & Gamble and he remained
employed by the group.
A Fortune magazine report
said that at a meeting with all division chiefs on Kilts' very first day at
Gillette , he had asked for a show of hands: "How many of you think our costs are
too high?" Everyone in the room immediately raised his hand. Then he asked,
"How many of you think costs are too high in your department?" Not a single
arm went up. According to Kilts, it is a common response among managers of
companies in trouble: Everyone knows there's a problem, it's just that nobody
thinks it's his problem.
The camel, like Kilts, of course
seldom sees his own hump
BusinessWeek said in 2005
that Georgia-Pacific Corp.'s CEO, A.D. "Pete" Correll, would receive a
$92m package when the company's sale to Koch Industries was completed.
A reader commented: "Only
in America. I work for Georgia Pacific: this year no raise, next year 2%, the
following year no raise, and then the next year 2%. I have 30 years of service.
Our CEO and his buddies at the top get filthy rich on us. Times are tough so we
have to keep our labor rates down. Well, $92m ought to do that. What a
disgrace and what a bunch of two-face (sic) people at the top. A.D. Correll's
motto to us workers was you have the right to grow if you earn it. Now we know
what he really meant. This is a big insult to all of the working class in
says Figure 1 above presents the income share of the top decile from 1917 to
2007 in the United States. In 2007, the top decile includes all families with
market income above $109,600. The overall pattern of the top decile share over
the century is U-shaped. The share of the top decile is around 45% from the
mid-1920s to 1940. It declines substantially to just above 32.5% in four years
during World War II and stays fairly stable around 33% until the 1970s. After
decades of stability in the post-war period, the top decile share has increased
dramatically over the last twenty-five years and has now regained its pre-war
level. Indeed, the top decile share in 2007 is equal to 49.7%, a level higher
than any other year since 1917 and even surpasses 1928, the peak of stock market
bubble in the “roaring” 1920s.
it is the top 1% of earners who play a central role in the evolution of US
inequality over the course of the twentieth century. He says the
implications of these fluctuations at the very top can also be seen when trends
in real income growth per family between the top 1% and the bottom 99% in recent
years are examined, as illustrated on Figure 2 below.
From 1993 to
2007, for example, average real incomes per family grew at a 2.2% annual rate
(implying a growth of 35% over the fourteen year period). However, if one
excludes the top 1%, average real income growth falls to 1.3% per year (implying
a growth of 20% over the thirteen year period). Top 1% incomes grew at a much
faster rate of 5.9% per year (implying a 122% growth over the fourteen year
that top 1% incomes captured half of the overall economic growth over the period
Saez says, in
the economic expansion of 2002-2007, the top 1% captured two thirds of income
The share of
wage and salary income has increased sharply from the 1920s to the present, and
especially since the 1970s. Therefore, a significant fraction of the surge in
top incomes since 1970 is due to an explosion of top wages and salaries. Indeed,
Saez says estimates based purely on wages and salaries show that the share of
total wages and salaries earned by the top 1% wage income earners has jumped
from 5.1% in 1970 to 12.4% in 2007.
published by the Center for American
Progress in Washington in 2006 showed
that the chances of Americans remaining
in the same income bracket as their parents was
higher than in every other developed
country barring the UK (with which the
US was almost level-pegging).
People in Denmark and
Norway were one-third as likely as
Americans to be in the same bracket as
their grandparents. Lack of upward
mobility is matched by declining
downward mobility. Over the last
American child born in the bottom-fifth
income group had just a 1% chance of
becoming rich - - defined as the
top 5% of American earners - - whereas
someone born rich had a 22% chance of
remaining rich as an adult.
Richard Freeman, a Harvard labour economist, said in
a paper in 2006, that the economic entry of China, India, and the ex-Soviet
Union shifted the global capital-labour ratio massively against workers.
Expansion of higher education in developing countries has increased the world’s
supply of highly educated workers and allowed the emerging giants to compete
with the advanced countries, even in the leading edge sectors that the
North-South model assigned to the North as its birthright.
estimate that if China, India, and the ex-Soviet bloc had remained outside of
the global economy, there would have been about 1.46bn workers in the
global economy in 2000; There were 2.93bn workers in the global economy in
2000 because those countries joined the rest of the world; since 2.92bn is
twice 1.46bn, I have called this transformation 'The Great Doubling'
The effect of this huge increase in the world’s workforce
changed the balance between labour and capital in the global economy.
Multinational firms could suddenly hire or subcontract work to low-wage workers
in China, India, and the ex-Soviet bloc instead of hiring workers in the
advanced countries or in other developing countries with higher wages.
As result of the doubling of the global workforce, I estimate
that in 2000 the ratio of capital to labour in the world economy fell to 61% of
what it would have been in 2000 if China, India, and the ex-Soviet bloc had not
joined the world economy. The reason the global capital-labour ratio fell was
that China, India, and the ex-Soviet bloc did not bring much capital with them
when they joined the global economy. ...By giving firms a new supply of low-wage
labour, the doubling of the global workforce has weakened the bargaining position
of workers in the advanced countries and in many developing countries as well.
Firms threaten to move facilities to lower wage locations or to import products
made by low-wage workers if their current work force does not accept lower wages
or less favourable working conditions, demands to which there is no strong labour
response. The result is a very different globalization than the International
Monetary Fund, the World Bank, and other international trade and financial
organizations envisaged two decades ago when they developed their policy
recommendations for the integration of the world economy."
Freeman said it seemed that all US workers had to do to benefit from
globalization was to invest more in human capital. The proponents also promised
that the ensuing boom in Mexico would reduce the flow of illegal immigrants to
the United States, and thus lessen labour competition at the bottom of the US job
However, the economist said instead, countries around the world,
including the new giants, have invested heavily in higher education, so that the
number of college and university students and graduates outside the United
States has grown rapidly relative to the number in the United States.
In 1970 approximately 30% of university enrollment worldwide was
in the United States. In 2000, the US proportion of university enrollment
worldwide was 14%. Similarly, at the PhD. level, the US share of
doctorates produced globally has fallen from about 50% in the early 1970s to a
projected level of 15% in 2010. Some of the growth of higher education overseas
has been the result of European countries rebuilding their university systems
following the destruction of World War II, and of Japan and South Korea
investing in university education. By the mid-2000s, several European Union
countries and South Korea were sending a larger proportion of their young
citizens to university than was the United States (OECD 2005). But highly
populous low-wage countries have also invested heavily in higher education.
Brazil, China, India, Indonesia - - almost any country you can name - - have
more than doubled university student enrollments in the 1980s and 1990s.
Is it fair for the government
to increase taxes on couples who make more than $250,000? Christopher Metzler, a
law professor at Georgetown, and Boyce Watkins, a finance professor at Syracuse,
debate the topic:
Power of money grows as Middle America declines
Coincident with the declining fortunes of Middle America, the power of money and lobbyists on Capitol Hill has grown.
In 2009, Senator Dick Durbin of Illinois said in a radio interview in Chicago: “Hard to believe in a time when we are facing a banking crisis, that many of the banks created, that the banks are still the most powerful lobby on Capitol Hill. They frankly own the place.“
The Center for Responsive Politics says the finance, insurance and real estate sector has given $2.3bn to candidates, leadership PACs (political action committee) and party committees since 1989, which eclipses every other sector. Nineteen per cent of total contributions from the employees and political action committees across all sectors came from the financial sector.
The CRP says the financial sector has also been a voracious lobbying force, spending an unprecedented $3.8bn since 1998, while sending an army of lobbyists to Capitol Hill to make its case. That's more money than any other sector has spent on influence peddling. Not even the health care sector, which spun up a lobbying frenzy this year over health reform, has spent more. In all, federal lobbyists’ clients spent more than $3.47bn last year, often driven to Washington, D.C.’s power centers and halls of influence by political issues central to the age: health care reform, financial reform, energy policy.
That figure represents a more than 5 percent increase over $3.3bn worth of federal lobbying recorded in 2008, the previous all-time annual high for lobbying expenditures. And it comes in a year when a recession persisted, the dollar’s value against major foreign currencies declined and joblessness rates increased.
Sign on Washington DC's K Street - - home of slippery lobbyists and the epicenter of American corruption, where vast opportunities for legal corruption exist in a system, where bribery has been almost defined out of existence.
Kevin Phillips wrote in Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism, of the "revolving door" in America's capital: "The English-speaking peoples, when filling in new lands, had a certain naiveté about the power of entrenched interests and how these could be subdued by locating a political capital in a remote federal preserve far from the existing centers of (corrupting) urbanity and wealth. The capitals were thus located in backwaters at a time when geography trumped media (Washington, D.C., Ottawa, and Canberra); but today, those names have become shorthand in their respective electorates for (1) metropolitan areas with strikingly high (and recession-resistant) per capita incomes; and (2) hothouses of seething interest-group concentration where elected representatives, shedding whatever grassroots fealty they may once have possessed, often train to retire after ten or twelve years to triple or even quintuple their salaries by becoming lobbyists." Photo: dcra.dc.gov
The New York Times reported in April 2010 that from anonymous midlevel workers to former House and Senate majority leaders, more than 125 former Congressional aides and lawmakers were working for financial firms as part of a multibillion-dollar effort to shape, and often scale back, federal regulatory power, data shows.
An analysis by the think-tank, Public Citizen, found that at least 70 former members of Congress were lobbying for Wall Street and the financial services sector last year, including two former Senate majority leaders (Trent Lott and Bob Dole), two former House majority leaders (Richard A. Gephardt and Dick Armey) and a former House speaker (J. Dennis Hastert).
"You've got all these industries protecting their turf," said Lawrence Baxter, a law professor at Duke University whose research focuses on regulation of financial services. Baxter previously held senior positions at financial firm Wachovia Corp. "It's amazing how some industries can stay in the game when common sense says they clearly need to be regulated. But then you look at their campaign contributions and you understand why. Campaign contributions are very effective at slowing down reforms that need to be done from a public interest perspective."
In an article in The Wall Street Journal last April, titled, Economy of Liars (Cato Institute link), Irish-American Gerald P. O'Driscoll, a former vice president of Citigroup, wrote: "Congressional committees overseeing industries succumb to the allure of campaign contributions, the solicitations of industry lobbyists, and the siren song of experts whose livelihood is beholden to the industry. The interests of industry and government become intertwined and it is regulation that binds those interests together. Business succeeds by getting along with politicians and regulators. And vice-versa through the revolving door.
We call that system not the free-market, but crony capitalism. It owes more to Benito Mussolini than to Adam Smith."
As if there wasn't enough of a money stranglehold on American politics, in January 2010, by a 5-to-4 vote, the Supreme Court ruled that corporations had a First Amendment right to spend money to support or oppose political candidates, overturning the Tillman Act of 1907.
"With all due deference to separation of powers, last week the Supreme Court reversed a century of law that I believe will open the floodgates for special interests - - including foreign corporations - - to spend without limit in our elections," President Obama said in his State of the Union address, as justices of the Supreme Court were seated in front of him. "I don't think American elections should be bankrolled by America's most powerful interests, or worse, by foreign entities. (Applause.) They should be decided by the American people. And I'd urge Democrats and Republicans to pass a bill that helps to correct some of these problems."
Days of Henry Ford's business economics over
"Henry Ford realised that
his company would only prosper if his own workers earned enough to buy Fords,"
the journalist Barbara Ehrenreich wrote in 2001.
"Wal-Mart, on the other hand, never figured out that its cruelly low wages would
eventually curtail its own growth, even at the company's famously discounted
“A year or two ago the
issue of median wage stagnation was on the margins of the debate because most
people were expecting American wage growth to catch up with the productivity
growth and inflation,” said Jared Bernstein in 2006,
when he was at the Economic Policy Institute in Washington.
“Since that has not occurred, a lot of people are starting to realise we are
looking at something new here.”
Bernstein is now Vice President Joe
Biden's chief economic adviser.
US studies estimate that the 500,000
immigrants who enter the US illegally each year have depressed wages in
low-skilled jobs by anything from 1% to 8%. At the other end of the scale,
technology has helped multiply the earnings of the super-rich. Film and sports
stars, Wall Street's 'best and brightest' and well-connected duds, are in clover
and they gain from a cosy consensus among the elite on division of the spoils
The Indian born Raghuram Rajan who is
Professor of Finance at Chicago’s Booth School and author of
a new book, Fault Lines: How Hidden Fractures still
Threaten the World Economy, writes that the political
response to rising inequality - - whether carefully planned
or the path of least resistance - - was to expand lending to
households, especially low-income households. The benefits -
- growing consumption and more jobs - - were immediate,
whereas paying the inevitable bill could be postponed into
the future. Cynical as it might seem, easy credit has been
used throughout history as a palliative by governments that
are unable to address the deeper anxieties of the middle
class directly. Rajan says there is a "need to look beyond greedy bankers and
spineless regulators (and there were plenty of both) for the
root causes of this crisis. And the problems are not solved
with a financial regulatory bill entrusting more powers to
those regulators. America needs to tackle inequality at its
root, by giving more Americans the ability to compete in the
global marketplace. This is much harder than doling out
credit, but more effective in the long run."
Nevertheless, while upskilling will help, the days of inevitable rises in
inter-generational income are over.
inequality, while a majority of Americans polled do not give credit to President
Obama for his stunning achievement in extending health coverage to 43m
uninsured Americans, it is a success of historic proportions. He faced down implacable Republican opposition.
Thomas Frank author of What's the Matter With Kansas? (2004) about the red-state mindset, recently commented in The Wall Street Journal on a national poll which found that 55% of the sample believed the term "socialist" fits the president well.
However, Frank said many Americans, in his experience, think it means someone who supports basic welfare-state provisions like unemployment insurance, Medicare and Social Security - - a standard by which socialism is immensely popular and most politicians fit the description.
Meanwhile, the likes of former House Speaker, Newt Gingrich, is trying to appeal to the victims who have been cheated by a lopsided system. He warned in a recently published book: "The secular-socialist machine represents as great a threat to America as Nazi Germany or the Soviet Union once did."
Thomas Frank writes: "So: We've just come through the grandest series of market
failures that most of us will ever experience. The things that Americans spent
the last few decades celebrating were the very things that did us in. Incentives
incented CEOs to drive their companies into the ground. Financial innovations
innovated us right into recession. Creative accounting gave us Enron.
Our market-minded rulers, meanwhile, spent
years stuffing the government with industry-friendly hacks. Their deregulatory
efforts, once thought to be the mandate of historical inevitability itself,
ensured that the financial chicanery would go uncovered. And the time-honored
model of pro-business governance - - in which 'the best public servant is the
worst one' - - is still paying disaster-dividends today.
But what we are anxious to debate, it now
seems, are the pros and cons of the Soviet system. And whether a given policy,
or a person, and sometimes even a sport - - is 'socialist' or 'capitalist.'"
Meanwhile given the American myth that any US-born citizen has the
potential to move from the log cabin to the White House, it is inevitable
that the top 1% of earners will continue to grab the lion's share of
economic growth while demands for trade protectionism grow.
The Coming Collapse of the Middle Class: Higher Risks, Lower Rewards, and a Shrinking Safety Net; Elizabeth Warren, the Leo Gottlieb Professor of Law at Harvard Law School, gave the Jefferson Lecture Series at the University of California, Berkeley, March 2007:
Update: Economist Arthur Laffer, who was a prominent advocate of supply-side economics during the Ragan Administration, argues in an article in The Wall Street Journal on Monday Aug 02, 2010, that since 1978, the US has cut the highest marginal earned-income tax rate to 35% from 50%, the highest capital gains tax rate to 15% from about 50%, and the highest dividend tax rate to 15% from 70%. President Clinton cut the highest marginal tax rate on long-term capital gains from the sale of owner-occupied homes to 0% for almost all home owners. We've also cut just about every other income tax rate as well.
During this era of ubiquitous tax cuts, income tax receipts from the top 1% of income earners rose to 3.3% of GDP in 2007 (the latest year for which we have data) from 1.5% of GDP in 1978. Income tax receipts from the bottom 95% of income earners fell to 3.2% of GDP from 5.4% of GDP over the same time period.
Laffer says when President Kennedy cut the highest income tax rate to 70% from 91%, revenues also rose. Income tax receipts from the top 1% of income earners rose to 1.9% of GDP in 1968 from 1.3% in 1960. Even when Presidents Harding and Coolidge cut tax rates in the 1920s, tax receipts from the rich rose. Between 1921 and 1928 the highest marginal personal income tax rate was lowered to 25% from 73% and tax receipts from the top 1% of income earners went to 1.1% of GDP from 0.6% of GDP.
However, when the top 1% are monopolising most of the economic gains, why wouldn't they end up paying more tax?