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News : US Economy Last Updated: Feb 21, 2011 - 6:24 AM


America: A country you cannot tell a lie about
By Michael Hennigan, Founder and Editor of Finfacts
Jul 30, 2010 - 5:08 AM

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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 America."

US per capita personal income (personal income divided by population) fell 2.6% nationally in 2009 to $39,138, after rising 2.0% in 2008. It was the first decline in 40 years.

Professor Emmanuel Saez of the University of California, Berkeley, has produced several studies on inequality in America.

Prof. Saez 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.

Saez says 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 period).

This implies that top 1% incomes captured half of the overall economic growth over the period 1993-2007.

Saez says, in the economic expansion of 2002-2007, the top 1% captured two thirds of income growth.

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.

A paper 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 generation, an 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.

"I 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' (Freeman 2005b).

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 market.

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.

The number of registered lobbyists in Washington DC, has grown 31% since 1998, to 13,600 while spending on lobbyists has grown by 140%.

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 prices."

“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 amongst themselves.

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.

As for 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?

Finfacts articles:

Gordon Gekko returns to a Wall Street that has brought misery to millions

American Divide: Wall Street and Main Street

Wall Street firms set to break new records in 2009 with pay rising to $140bn; Bailed-out insurance giant AIG paid “retention bonuses” to kitchen staff

Globalization and Asia’s return to economic supremacy

US may concede its 1890 crown as the world's top manufacturer to China in 2013/14

US Manufacturing: Even the best innovators can struggle to raise funding at home

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© Copyright 2011 by Finfacts.com

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