Spitting into the wind

Let me try once again to explain economics in simple terms – although I am probably spitting into the wind since it has been proven that the facts do not matter because people are as set in their beliefs as they are set in their ways (see earlier post called “Just the facts, ma’am” – NOT).

Congressional Republicans have fought against enacting all kinds of economic reforms that would have curbed corporate abuse of consumers, shareholders, or workers. They have fought all attempts to curb excessive concentration of corporate political and economic power. They have been against any measures that would increase demand for goods and services. They have been against anything that would increase small business loans (until recently when two Republican senators defected so that the small business law would be enacted).

If you think things will get better with Republicans gaining power in Congress, you should think again. They have promised to reduce Social security, Medicare, Medicaid, and Healthcare Reform in order to “slash spending by $100 billion.” At the same time, they have promised to make the tax cuts for the wealthy permanent which will cost over $700 billion in the short term and over $2 trillion during the next decade. They want to dismantle the new bank regulations so that banks can once again gamble with taxpayer’s mortgages and deposits. But it is these Republicanized policies that got us into this Great Recession.

Republicans are falsely stating that if they do not make the tax cut permanent for the upper 2% of income earners, demand for goods will be hurt and the economic downturn will be prolonged. (Either they are liars or they very stupidly believe this insanity.) The rich already have an enormous amount of money sitting idle in corporate and personal coffers. And corporations have almost $2 trillion dollars sitting idle in corporate accounts at this time.

All doubt about Republicans using the economic downturn as a path to political power has been removed by recent legislative votes. Due to their actions, it is hard not to conclude that Republicans only desire to worsen the economic downturn so that they can win the next election and get their governmental power back. The Congressional Republicans seem to have decided that sabotaging economic recovery and employment growth is their best tactic for electoral gains in the November elections.

What Republicans say about tax cuts for the wealthy is NOT TRUE.Tax cuts at the highest marginal incomes brackets concentrate wealth and political power in the hands of the wealthy. The resulting political power by the very rich pushes government policy in directions that significantly cut into the percentage of the nation’s income held by middle class Americans – reducing the ability of most Americans to buy goods and services. As a result, the middle class has been slowly shrinking since the days of Reagan. The economy continues to unwind because the average American does not have enough disposable income to keep the flow of goods and services at a healthy economic level.

Economic concentration of wealth and income are currently at levels very similar to those just before the Great Depression in 1929. The only reason our current situation has not quite deteriorated to that of the Great Depression is that the Republicans have not been completely successful in undoing the reforms put in place as a result of the New Deal.

All of the Republican policies for the past 100 years have been designed to concentrate wealth and income in the hands of the very few. Every time they reach the economic concentration levels that currently exist, we have a serious economic downturn. The current downturn is a direct result of increasingly “Republicanized” governmental policies over the previous 30 years.

So let me once again repeat some well established, provable facts:

1. Deregulation allows corporations to charge excessive prices. Not enforcing anti-monopoly laws permits price gouging.

2. Not capping interest rates concentrates wealth in a few hands and reduces spending of the average American – which in turn further cripples the economy.

3. Outsourcing jobs to foreign nations reduces incomes. Americans have less money available to buy goods and services.  Therefore, our consumer based economy takes a plunge.  (Duh!)

4. Union-busting keeps wages and benefits down which undermines the purchasing power of workers, which, in turn, depresses the economy.

5. Privatizing government services such as Social Security costs Americans more in out-of-pocket expenses (in fees and penalties) for services once provided by government. And it puts their capital at risk of market downturns. This reduces disposable income for consumers. In addition, when employers reduce benefits and increase co-pays for health insurance, it increases the cost-of-living for workers. As a result, these workers have less disposable income to spend on goods and services.

6. Middle class tax cuts help the economy because they increase the disposable income of those members of society who spend the vast majority of their incomes. The money changes hands over and over again instead of setting idle. This is the multiplier effect in economics.

7. Extending unemployment benefits helps the economy because it has a huge multiplier effect that greatly helps the economy because unemployment benefits are so little that all of it gets spent on goods and services immediately, putting it right back into the economy.

8. Tax cuts for the wealthy create huge pools of money for the rich to gamble with investments but it does not create jobs. The Republican Right’s economic theory – that economic prosperity and employment “trickle-down from the wealthy” – has been proven to be WRONG by recent historical experience over the last 30 years. Jobs are not created by just having large pools of investment money sitting around. There must be the opportunity to invest in a business that will have customers who can buy the goods and services before the investment money flows into job creation activities.

Sound economics says government should run surpluses in good economic times (saving the surpluses for bad times) and run deficits, if necessary, during economic downturns. This policy is taught in the Bible, for heavens sake! Remember the story of Joseph helping the Egyptian Pharaoh put back enough supplies during the seven years of abundance to take care of the predicted seven years of famine? Following this advice helps reduce the severity of economic cycles. But under the Republican Presidencies of Reagan and both George Bushes, we did exactly the opposite. This is what created the current downturn and the debt crisis! The vast majority of our total national debt was created under these three conservative Republican Presidents. But Republicans will deny this fact.

I repeat: excessive concentration of wealth and income is what harms our economy! No, I am not advocating a Marxist theory of spreading all wealth out evenly. I do believe that the wealthy should be able to enjoy the fruits of their “labor”. But I also believe that with wealth comes the responsibility of giving a bit more to support the country that made it possible for them to create their wealth. What’s an extra $100,000 in taxes to a multi-millionaire or a billionaire? They still get to have their huge yachts, several mansions, expensive cars, etc.

I would like to remind the wealthiest among us that they did not acquire their wealth all by themselves. They needed competent workers (educated at public expense), transportation and communications networks, laws and regulations (yes, regulations, such as those making their rarefied air fit to breathe) ... and for this vast web of support, the rich do in fact have a greater debt to society than the poor or even the middle class. So stop whining, stop being so damn greedy, shoulder your responsibility to this nation and pay up!

But I am just spitting into the wind, aren’t I? The majority of Americans don’t get it. Even after reading this, they just don’t get it. And they will very stupidly vote Republicans back into power (against their own best interests) because the Democrats did not fix things fast enough to suit them – regardless of the fact that it was the Republicans who flushed the economy down the toilet in the first place.

American voters gave the Republicans years to ruin the economy but expect the Democrats to fix it in less than two years.

Sheesh….

The ebbing tide

Economic inequality is growing in the United States, jeopardizing the American Dream of social mobility just as the world enters a recession, said a 30-nation report by the Organization for Economic Cooperation and Development released on October 21, 2008. The United States has the third highest inequality and poverty rates in the OECD, after Mexico and Turkey, and the gap has increased rapidly since 2000, the report said. Coincidentally, that is the year that the Bush administration began to govern.

George Bush and the ultra-conservative wing of the Republican party have a unyielding belief in trickle-down economics and therefore did all they could to remove taxes and regulations for the wealthy corporations, including the financial sector. At the same time, they did very little for all other citizens, except for a couple of "stimulus" packages which gave the average family around $600 to $1200 – a tiny drop in the bucket compared to the billions raked in by the CEOs of oil, financial, and pharmaceutical companies. Indeed, the “rising tide” did not lift all boats as promised by Presidents Reagan and George W. Bush. Remember: although the wealthy love trickle-down economics, President George H.W. Bush called it “voodoo economics.”

And just how well did “voodoo economics” work? Rich households in America have become much richer, leaving both middle and poorer income groups behind. This has happened in many countries, but nowhere has this trend been so stark as in the United States. The average income of the richest 10% is $93,000 in purchasing power, the highest level in the OECD. However, the poorest 10% of U.S. citizens have a purchasing power of $5,800 per year – about 20% lower than the average for OECD countries.

The main reason for widening inequality in America is that the distribution of earnings between rich and poor in the United States has widened by 20% since the mid-1980s, more than in most other OECD countries. This is partly because the level of spending on social benefits, such as unemployment benefits, and family benefits, like Medicare, is very low – equivalent to just 9% of household incomes, while the OECD average is 22% of household incomes.

This widening inequality causes a low level of social mobility in the United States. Children of poor parents to be less likely to become rich, much less middle class, than children of rich parents. Wealth is distributed much more unequally than income: the top 1% control some about 33% of total money in the U.S. The top 10% hold 71% of the wealth. This is just the opposite in countries such as Denmark, Sweden and Australia where social mobility is high due to a low inequality level.

In nearly all countries studied, the gap between rich and everyone else has widened over the last 20 years, even as trade and technological advances have spurred rapid growth in their economies. In a 20-year study of its member countries, the OECD found inequality had increased in 27 of its 30 members as top earners' incomes soared while others' stagnated. Rising inequality threatens social mobility: Children will have great difficulty doing better than their parents; the poor will no longer improve their lot through hard work – in fact, hard work will barely keep their heads above water, if at all.

Why is the gap between rich and poor growing? Wages have been improving for those people who were already well paid, while employment rates have been dropping among less educated people. Also, there are more single-adult and single-family households than ever before.

Who is most affected? Statisticians and economists assess poverty in relation to average incomes. Poverty among young adults and families with children has increased. On average, one child out of every eight living in an OECD country in 2005 was living in poverty. In the U.S., the trend is exactly the opposite: Child poverty – that is, children in a household with less than half the median income – has fallen since 1985, from 25% to 20% but poverty rates among the elderly increased from 20 to 23%.

What can be done? In some cases, government policies of taxation and redistribution of income through programs such as Medicare and Social Security have helped to counteract widening inequalities, but this cannot be their only response. Governments must also improve their policies in other areas. Active employment policies are needed to help unemployed people find work. Access to paid employment is key to reducing the risk of poverty, but getting a job does not necessarily mean you are in the clear. The OECD found that over half of all households in poverty have income from work. Therefore, education policies should aim to equip people with the skills they need to find better paying jobs in today’s labor market.

What will happen if the next decade is not one of world growth but of world recession? The widening gap between wealthy households and all other income earners in countries such as the U.S., Canada, and Germany, has potentially ominous consequences if the global financial crisis sparks a long recession. With job losses and home foreclosures skyrocketing, many of these countries now face a deep recession that could last as long as five to ten years.

Oxford University economist Anthony Atkinson said it well:

"If a rising tide didn't lift all boats, how will they be affected by an ebbing tide?"

Judgment Day

Republicans, including John McCain, believe regulation of the markets to be anathema. Deregulation goes hand in hand with the belief that tax cuts for the wealthy benefit everyone in the long run, because, they say, the wealthy are the ones who provide the jobs for this country (although it is said that small businesses drive much of the employment growth). They believe that it’s the wealthy who make the big investments in big business that benefit everyone. This is called “trickle down economics,” supply-side economics, or Reaganomics.

The first and foremost principle of Reaganomics that the current Bush administration and his Republican team have so loyally followed is blind faith in the market. The idea is that if the market is allowed to work, without oversight, the economy will naturally stay healthy. Trickle-down (also called supply-side) theorists believe that pumping money into the hands of the wealthy will cause them to invest in business, which will in turn cause the economy to grow, which will create jobs, which will eventually get money into the hands of the average working man. This theory is behind the Bush tax cut which greatly favored the wealthy and which John McCain has said he will make permanent.

Reality is quite different from the theory.

Deregulation caused greed and a high level of opportunism to come to the forefront. The economic market got out of control. During the credit boom between 2002 and 2006, both financial institutions and American households took on too much debt. Now many of those borrowers can't pay back the loans, which causes the credit market to not be able to make loans to anyone for any reason, which, in turn, chokes economic growth. This problem is exacerbated by the collapse in housing prices at a time when many Americans took out equity loans to finance a more extravagant lifestyle.

In his interview with PBS's News Hour on September 15, Nouriel Roubini, professor of economics at New York University, said the root cause of the economic problem is that “in the last few years, the approach has been the one of laissez-faire [a phrase literally meaning allow to do)…a financial market without appropriate rules and regulations …gets crazy, [with] asset bubbles, credit bubbles…self-regulation means no regulation....” He was speaking of fully uncontrolled, unregulated laissez-faire capitalism, a separation between government and economics, that has been promoted by the Republicans.

A Century Foundation report on the effects of Republican deregulation and tax policies that favor the rich reveals that:

• The supply-side economics theory makes the assumption that if you cut corporate tax rates, corporations are more willing to do things with their money. This is unlikely, for a host of reasons, starting with the fact that all a corporation is supposed to do is make money for expansion and for its shareholders. Additional savings incurred by a lessened tax burden does not mean corporations create more jobs. It does mean that these companies may have a better bottom line enabling them to pass out more money to shareholders and give CEOs ridiculously larger paychecks.

• Rich people did not get rich by sharing their money. When you give rich people more money, they don't necessarily provide someone a job with it. Instead, they may take a cruise or buy a new BMW or Mercedes. McCain, for example, apparently has 13 cars and seven houses.

• The current U.S. tax policy, begun by Reagan and continued by George W. Bush, has aggravated the growing gap between rich and poor, with tax cuts disproportionately rewarding those at the top while doing little for the middle class or the poor. The top 5 percent of income recipients in the United States have on average 5.5 times the income of the remaining 95 percent, but in terms of accumulated wealth, the top 5 percent have on average 23 times that of the remaining 95 percent. The average income on Wall Street last year was about $280,000, or nearly five times as high as the average of all other workers in the United States.

One of the best measures to demonstrate the failure of Reaganomics is to look at the growth of median household incomes. In 1980, when Ronald Reagan was sworn in, the median household income was $17,710. The U.S. Census shows the median income in 2005 was $46,326. When adjusted for inflation, the purchasing power of median American income for 2005 was only 85% of what it was in 1980. Even worse is that under George W. Bush, since 2006, the median income has actually been driven down while the cost of gas, groceries, utilities, and health care has drastically risen.

The current economic catastrophe has “trickled down” from Wall Street, tightening credit for consumers and businesses who have played by the rules. This is not just impacting the people who took out subprime mortgages to buy homes they could not really afford, but Jane and John Doe who has done everything correctly, by the book, paying their mortgage and other bills on time. The Hope Now Alliance, the lenders’ group put together at the urging of Treasury Secretary Henry Paulson, estimates the number of foreclosure proceedings that begin nationally in each month. The latest figures, for July, put the number at 197,000, the highest for any month since they started keeping track in July 2007. Of those that failed, 105,000 were normal mortgages, and 92,000 were subprime.

A word about the credit default swaps you have been hearing about: Credit default swaps, a kind of insurance, could be directly exchanged between banks. This supposedly spread out the risk, making it safe for banks to take on ever riskier forms of debt. These credit default swaps turned into the perfect vehicle to fuel a Wall Street boom. No one ever had any idea what these things were actually worth, they were traded directly from bank to bank without being administered or regulated by any exchange. Credit default swaps, in allowing banks to share risks, caused them to compete with each other in an effort to chase higher profit through risky loans. This “insurance” made it possible for the down payment on homes to become as low as 0% - nada, nothing, zip. The illusion of "safety" that CDS derivatives provided allowed the sub-prime mortgage market to be possible.

Now the chickens have come home to roost: So far in 2008, 11 federally insured banks and thrifts have failed, compared with three last year. The country's largest thrift, Washington Mutual Inc., is faltering. The taxpayers are being asked to bail out the big banks and investment firms that were involved in the subprime mortgage game. The plan would enable the government to buy bad mortgages and other troubled assets held by endangered banks and financial institutions. The idea is that getting those debts off their books would ease one of the biggest choke points in the credit crisis, making them more inclined to lend money to the average Joe. The most infuriating part of all this is that we taxpayers have no choice but to agree to the $700,000,000,000 (billions) rescue plan or risk what the Bush administration warns would be a financial crisis of the type that will wipe out savings of retirees, make mortgages or college loans impossible to get, and send the economy into a downward spiral causing very high unemployment. If we don’t bail out Wall Street, our entire economic structure will collapse – taking the world down with us.

They are throwing around the term “severe recession” on the news programs – translate that into “Depression” – like what was experienced in the 1930s.

It is clear that regulations will be needed to avoid allowing greed to dominate Wall Street which puts self-interest before the public good. It is time to reject the idea that we all gain from enabling the accumulation of wealth in the hands of a very few. In his September 15 interview with PBS's News Hour, Roubini added, “Now we have to move towards appropriate rules, not excessive rules, but strong regulation, supervision of finance system. That’s what’s necessary.”

It is time to reject Reagan’s trickle-down theory. It just plain doesn’t work.

If you want a nice, simple explanation on the supply-side theory, how it only helps the wealthy, go here: http://rationalrevolution.net/war/trickle_down.htm