http://www.youtube.com/watch?v=Wnq6cD5jk1Q&eurl=http://www.afsc.org/cost/
Cost of War
Facts and Figures from the Cost of War project
On this page:
Calculations for the video and banners
Frequently Asked Questions
Sources
Calculations for the video and banners
Health Insurance for an adult costs $4,403 per year. $720 Million could cover 163,525 people.
The average cost of a new elementary school is $8,497,627. $720 Million could pay for 84 brand new schools.
It costs $624 to give a child free school lunches for a year. $720 Million could buy lunch for 1,153,846 kids.
An affordable housing unit costs around $111,061. $720 Million could buy 6,482 homes.
A year of Head Start costs $7550. $720 Million could open 95,364 new slots.
The average cost of renewable electricity for a home is $565/year. $720 Million could pay for 1,274,336 homes to have it.
An average school teacher’s salary is $57,000. $720 Million could put 12, 478 new teachers in the classroom.
The average cost of a four-year state university is $20,628. $720 Million could put 34,904 students through college.
Health insurance for a child costs $1,700 per year. $720 Million could cover 423,529 kids.
Based upon the work of Nobel Prize winning economist Joseph Stiglitz and his colleague Linda Bilmes, the per day cost of the Iraq War for the first 4 years has been $720 million.
Per unit costs are based upon research done by the National Priorities Project.
Frequently Asked Questions (Download the PDF of FAQ) Q. How did you come up with $720 million for one day of the Iraq war?The Iraq War supplemental funding bills passed by Congress comes to $410 billion for four years or about $280 million/day. The additional $440 million/day represents the costs already incurred but not yet paid for such as paying the interest on the war debt, caring for the wounded, replenishing military equipment and rebuilding Iraq. These future costs are based upon the work of Nobel Prize winning economist Joseph Stiglitz and Linda Bilmes of the Kennedy School of Government at Harvard. In a Milken Review update to an article first published in the National Bureau of Economic Research, Stiglitz and Bilmes calculated the costs that have already been incurred and will come due in the future.Q. Won’t the money that has been approved by Congress for the Iraq War pay for everything?No. That supplemental funding covers the cost of deploying troops, feeding and housing them while in Iraq, and the costs of being an occupying power, such as recruiting and training Iraqi police. Q. Other than what is being covered by the supplemental, what additional Iraq War costs have we paid for?Increased Defense Spending -- $160 Billion. Many Iraq War costs are embedded in the annual budget of the Department of Defense. Stiglitz and Bilmes estimate 30% of the increase in that department over the last four years can be attributed directly to the Iraq War. These include increased funds to recruit, activate and pay for reservists and Guard members, pay private contractors and replace military equipment. Military hardware is being used up at six times the peacetime rate and will have to be replaced. Q. What costs will we be paying for in the future?Veterans Disability and Medical Care -- $290 Billion. We have an obligation to make sure that Iraq war veterans are taken care of upon return. Thousands of military personnel have suffered severe brain and spinal injuries that will require round the clock care for the rest of their lives. Other wounds include post traumatic stress syndrome, exposure to depleted uranium, blindness, loss of limbs and severe burns. Over 25,000 were wounded in 4 years.Interest on War Debt -- $191 Billion. Since we are paying for this war during a time of tax cuts for the wealthy, we are paying for the war on credit. This interest figure is based on Congressional Budget Office calculations.Q. So, how much has four years of war really cost?These figures would put the total cost of the first 4 years of the Iraq War at over $1 trillion or $720 million per day or a half a million dollars per minute. Each day the war continues beyond those first four years costs another $720 million.Q. If this money weren’t spent on the Iraq War, can we be sure that it would have been spent on human needs?No. But it is our duty as citizens to let our government know what our priorities are for the Federal budget and for the direction of our country. Join us in advocating for an end to the Iraq war, rescinding tax cuts for the wealthy, and a commitment to meeting human needs both here and in Iraq.Sources"Economic Costs Of The Iraq War: An Appraisal Three Years After The Beginning Of The Conflict"Linda Bilmes, Kennedy School, Harvard University and Joseph E. Stiglitz, University Professor, Columbia University http://papers.ssrn.com/sol3/papers.cfm?abstract_id=832646
Faculty Research Working Papers Series "Soldiers Returning from Iraq and Afghanistan: The Long-term Costs of Providing Veterans Medical Care and Disability Benefits" Linda Bilmes, John F. Kennedy School of Government, Harvard University January 2007
Milken Institute Review, Fourth Quarter, 2006, "Encore," Linda Bilmes, Kennedy School, Harvard University and Joseph E. Stiglitz, University Professor, Columbia Universityhttp://www.epsusa.org/StiglitsBilmes10-06.pdf
Congressional Budget Office, July 13, 2006, Letter to Honorable John M. Spratt Jr., Ranking Member, Committee on the Budget, U.S. House of Representatives Washington, DC 20515 http://www.cbo.gov/ftpdocs/73xx/doc7393/07-13-IraqCost_Letter.pdf
Saturday, January 26, 2008
Saturday, January 19, 2008
Cash for Keys
The current housing & credit crunch owes its birth to a practice of greed that started several years ago by predatory lenders and some major American financial institutions that packaged subprime mortgages as AAA secured bonds. These bonds were in turn peddled to the worlds markets, but with one caveat, that; if they defaulted, they would have to be repurchased by the issuing lender. The problem that these were in reality, subprime or poor-risk-income stated loans was lost in the American housing and loan boom that followed.
“Refinance your mortgage and have the American Dream, own your own home, “the ads cried. “Refinance and get cash back. In fact, refinance at even 2% ARM rates and don’t worry about the balloon interest rate, your property value will increase by then and with even modest inflation, your spending power will be greater then, and you can always refinance your mortgage at a fixed interest rate. Besides you get cash back. Pay your bills with a lower interest rate and just use your home equity as collateral, “the ads cried. “Borrow $500,000 for $1000 a month, “the ads streamed. “Remember you get cash back,” the ads screamed.
Bankruptcy laws were modified because credit card companies and loan originators that were making record profits saw no need to ever truly write off notes permanently. “We can always repackage old bad loans and sell then as secured bonds to the markets as well and make even more money, “they maintained. And the lenders and banks contributed heavily to the good Republicans to change the laws that were keeping them for making more money, this way the economy could really boom and everybody could get cash back.
But with the similarity that gravity and markets tend to share, the mortgages started to fail. For what goes up indeed comes back down. The borrower could not meet their adjusted-rate mortgage and its balloon payment. Jobs had been outsourced, petroleum was at $100 a barrel, gasoline was over $3 per gallon and property values were falling; not rising, they were falling. The job market for the middle class was shrinking. Income ratio with the upper class was widening. It now took three jobs to pay the bills and daycare and healthcare costs were growing and jobs were disappearing and the new jobs paid less money.
“I can’t pay my mortgage, “the homeowners cried. “I have less income now and my home loan is based on higher earning power,” the small business owner cried. “I have to compete with the worlds markets and they work for pennies in third world countries,” the business man cried. But the market continued on.
“I can’t pay my mortgage; I have too many bills the working mother cried. I can’t pay my mortgage, “the working man cried. “I need to refinance, “they both cried.” I can’t buy all these defaulted loans back, I’ve spent the money and it’s leveraged heavily, “the mortgage lender cried. They needed help but still the market continued on. Lenders sought buyouts and loans and still the market continued on.
Homeowners facing foreclosure called lenders and requested help. “Well, you can’t refinance as there is no equity. You can’t reinstate or pay all the back payments that are owed, because you have no income to pay the payments that are due. You can’t do a forbearance amendment as you can’t afford either the existing the payment and you have no money to make a lump sum note payment. We cannot do a modification or apply the missed payments on the back end of the notes because you can’t afford the existing payment. We can’t do a short sale because there is no equity and the loan officers have tightened up the lending requirements and you lack the income to credit ratio necessary. Frankly, you can’t afford the house, “the lenders replied.
“What can I do?” the homeowners cried.” Well, we can offer you something called deed in lieu, “the lenders replied. “We will give you cash for keys. You move out and we take the home, but you get cash back,” the lenders replied. “That way you can get a new start.” So in the end the homeowner takes cash for keys and the lender who is bankrupt at noon is bought by a bigger lender and the government bails them out. But remember, you got cash back.
“Cash for keys”, the new mortgage lender cried, “Cash for keys!!”
-Thomas P Love
“Refinance your mortgage and have the American Dream, own your own home, “the ads cried. “Refinance and get cash back. In fact, refinance at even 2% ARM rates and don’t worry about the balloon interest rate, your property value will increase by then and with even modest inflation, your spending power will be greater then, and you can always refinance your mortgage at a fixed interest rate. Besides you get cash back. Pay your bills with a lower interest rate and just use your home equity as collateral, “the ads cried. “Borrow $500,000 for $1000 a month, “the ads streamed. “Remember you get cash back,” the ads screamed.
Bankruptcy laws were modified because credit card companies and loan originators that were making record profits saw no need to ever truly write off notes permanently. “We can always repackage old bad loans and sell then as secured bonds to the markets as well and make even more money, “they maintained. And the lenders and banks contributed heavily to the good Republicans to change the laws that were keeping them for making more money, this way the economy could really boom and everybody could get cash back.
But with the similarity that gravity and markets tend to share, the mortgages started to fail. For what goes up indeed comes back down. The borrower could not meet their adjusted-rate mortgage and its balloon payment. Jobs had been outsourced, petroleum was at $100 a barrel, gasoline was over $3 per gallon and property values were falling; not rising, they were falling. The job market for the middle class was shrinking. Income ratio with the upper class was widening. It now took three jobs to pay the bills and daycare and healthcare costs were growing and jobs were disappearing and the new jobs paid less money.
“I can’t pay my mortgage, “the homeowners cried. “I have less income now and my home loan is based on higher earning power,” the small business owner cried. “I have to compete with the worlds markets and they work for pennies in third world countries,” the business man cried. But the market continued on.
“I can’t pay my mortgage; I have too many bills the working mother cried. I can’t pay my mortgage, “the working man cried. “I need to refinance, “they both cried.” I can’t buy all these defaulted loans back, I’ve spent the money and it’s leveraged heavily, “the mortgage lender cried. They needed help but still the market continued on. Lenders sought buyouts and loans and still the market continued on.
Homeowners facing foreclosure called lenders and requested help. “Well, you can’t refinance as there is no equity. You can’t reinstate or pay all the back payments that are owed, because you have no income to pay the payments that are due. You can’t do a forbearance amendment as you can’t afford either the existing the payment and you have no money to make a lump sum note payment. We cannot do a modification or apply the missed payments on the back end of the notes because you can’t afford the existing payment. We can’t do a short sale because there is no equity and the loan officers have tightened up the lending requirements and you lack the income to credit ratio necessary. Frankly, you can’t afford the house, “the lenders replied.
“What can I do?” the homeowners cried.” Well, we can offer you something called deed in lieu, “the lenders replied. “We will give you cash for keys. You move out and we take the home, but you get cash back,” the lenders replied. “That way you can get a new start.” So in the end the homeowner takes cash for keys and the lender who is bankrupt at noon is bought by a bigger lender and the government bails them out. But remember, you got cash back.
“Cash for keys”, the new mortgage lender cried, “Cash for keys!!”
-Thomas P Love
Economists Debate the Quickest Cure
By STEVEN R. WEISMAN and EDMUND L. ANDREWS
WASHINGTON — In trying to assemble a bipartisan package to jolt the slumping economy, the White House and Congress have turned to familiar tools that experts say have worked in the past. But there is also a lively debate among economists about which measures will best accomplish the goal.
The favorite template for addressing recession fears is a set of tax measures and spending initiatives passed in 2001 and 2002, including a personal income tax rebate in the summer of 2001 that amounted to $300 to $600 per household and a tax incentive the following year aimed at encouraging businesses to invest in new plants and equipment.
President Bush highlighted both those basic approaches on Friday in setting out his principles for a deal with Congress to address the current downturn. Democrats are also likely to seek increased spending for programs like unemployment insurance or to funnel more money to states, an approach that Mr. Bush signaled he would oppose.
“The research I’ve seen indicates that the programs in 2001 clearly worked,” Treasury Secretary Henry M. Paulson Jr. said in an interview, referring to the tax measures. “They worked quickly, and people spent the money they got. The thing we should be looking at now is how to make them even more effective.”
The nonpartisan Congressional Budget Office reported this week that each of the three elements of the 2001-2 stimulus — personal tax rebates, incentives for business investment and government spending programs — played a role in lifting the economy.
Mr. Paulson said he and his colleagues first began examining the 2001 experience before Christmas, drawing lessons for a contingency proposal if the economy continued to decelerate. The formulation of the principles put forward by Mr. Bush on Friday began two weeks ago.
Personal tax rebates are intended to put cash in the hands of consumers, in the hope that they will spend it immediately, giving a lift to stores, service providers and manufacturers of consumer goods, rather than saving it or using it to pay down debt.
Incentives for business investment are intended to prompt companies to accelerate plans to buy new equipment, increasing demand for that type of product and helping to forestall employment losses or spur new hiring.
“We looked at a lot of data and got a lot of anecdotal evidence,” Mr. Paulson said. “The discussions I had with Congress made us feel better about these measures. People on the Hill saw a need, and they are willing to put aside their pet projects and major strategic priorities to get it passed.”
All indications are that the likely package to be voted on will be a hodgepodge, but experts say that is not bad. Ben S. Bernanke, the Federal Reserve chairman, testified Thursday before the House Budget Committee that because there was disagreement among specialists on what worked, it might be best to adopt a mixture.
“A program that combined a number of elements might in some sense address the problem from a number of different angles and be more effective than one that was only a single element,” he said.
Stimulus packages of the less recent past are often cited as examples of how not to make policy. Economists say that in the recession of the mid-1970s, spending and tax cut measures were enacted too slowly, having an effect only after the economy had already picked up. In 1992 and 1993, partisan squabbling derailed plans for a stimulus package as the recession came and went.
The measures seven years ago sent a different lesson, according to John B. Taylor, a professor of economics at Stanford and a former Treasury official under Mr. Bush. “People look back at 2001 and are more positive about this kind of approach,” he added.
There continues to be a debate among economists about how best to give a kick to the economy. The Congressional Budget Office, for example, said that temporary one-time-only changes in tax policy may have only a moderate effect relative to permanent changes like lower income tax rates.
Consumption jumped after the tax rebate in 2001, it said, but researchers cannot be sure that was because of the tax rebate or the passage of the long-term tax cuts at the same time.
Joel Slemrod, professor of business economics at the University of Michigan, said his study of the 2001 tax rebates showed only 22 percent of taxpayers he surveyed spent most of their rebates. The data suggests that the effect of such rebates, he said, “wouldn’t be as big as one might hope.”
Many economists say that a drawback to Mr. Bush’s proposals, as outlined so far, is that they might not put cash in the hands of people most likely to spend it: those at the lower end of the income spectrum. Mr. Bush signaled that he would limit rebates to people who pay federal income taxes, and many low- and middle-income people pay little or no federal income tax, because they benefit from various deductions and credits.
Robert Greenstein, executive director of the Center on Budget Policy and Priorities, is one of many liberal economists urging that the tax rebate be in the form of a credit for children, or some form of credit for Social Security taxes workers pay.
Without such improvements, he said, Mr. Bush’s plan “would save fewer jobs and do less to shore up a weak economy than it should.” He asserted that the business tax incentives of 2001 and 2002 also had only a modest effect on the economy.
Matthew Shapiro, another economist at the University of Michigan, reached a similar conclusion about the proposed incentives for business — namely accelerated depreciation or what is called a bonus depreciation on capital spending. These are aimed at encouraging investment by allowing businesses to write off the costs faster.
But Mr. Shapiro estimated that the tax incentives for business investment in the past did not work broadly throughout the business sector. He said the “vast majority of investment did not benefit much” from such a measure.
Mr. Paulson, in the interview, acknowledged that if businesses were losing money, a tax incentive for investment would not work as well. But he said that in the current economy, “businesses are operating at fuller levels so this program would be more effective than in the past.” After the last downturn in 2001, business investment slumped for several years after Congress passed tax incentives , in part because many companies had vast amounts of extra production capacity.
Although Democrats have begun to embrace the idea of tax relief for families and businesses, they also insist that the government should provide aid to states to forestall budget cutbacks, extend unemployment benefits and possibly channel money to individuals through programs like food stamps.
Republicans are reluctant to embark on that kind of spending, in part because they do not want federal funds to pay for state government programs over which Washington has no control. But all sides agree that if speed is of the essence, so is the likelihood of compromise.
Economists say that one lesson from past efforts is that there is no point in doing something too late. This time, however, a consensus is emerging that Congress can pass something as early as March and that money can get into the hands of consumers, businesses and states shortly thereafter.
Copyright 2008 The New York Times Company
http://www.nytimes.com/2008/01/19/business/19stimulus.html?exprod=myyahoo
WASHINGTON — In trying to assemble a bipartisan package to jolt the slumping economy, the White House and Congress have turned to familiar tools that experts say have worked in the past. But there is also a lively debate among economists about which measures will best accomplish the goal.
The favorite template for addressing recession fears is a set of tax measures and spending initiatives passed in 2001 and 2002, including a personal income tax rebate in the summer of 2001 that amounted to $300 to $600 per household and a tax incentive the following year aimed at encouraging businesses to invest in new plants and equipment.
President Bush highlighted both those basic approaches on Friday in setting out his principles for a deal with Congress to address the current downturn. Democrats are also likely to seek increased spending for programs like unemployment insurance or to funnel more money to states, an approach that Mr. Bush signaled he would oppose.
“The research I’ve seen indicates that the programs in 2001 clearly worked,” Treasury Secretary Henry M. Paulson Jr. said in an interview, referring to the tax measures. “They worked quickly, and people spent the money they got. The thing we should be looking at now is how to make them even more effective.”
The nonpartisan Congressional Budget Office reported this week that each of the three elements of the 2001-2 stimulus — personal tax rebates, incentives for business investment and government spending programs — played a role in lifting the economy.
Mr. Paulson said he and his colleagues first began examining the 2001 experience before Christmas, drawing lessons for a contingency proposal if the economy continued to decelerate. The formulation of the principles put forward by Mr. Bush on Friday began two weeks ago.
Personal tax rebates are intended to put cash in the hands of consumers, in the hope that they will spend it immediately, giving a lift to stores, service providers and manufacturers of consumer goods, rather than saving it or using it to pay down debt.
Incentives for business investment are intended to prompt companies to accelerate plans to buy new equipment, increasing demand for that type of product and helping to forestall employment losses or spur new hiring.
“We looked at a lot of data and got a lot of anecdotal evidence,” Mr. Paulson said. “The discussions I had with Congress made us feel better about these measures. People on the Hill saw a need, and they are willing to put aside their pet projects and major strategic priorities to get it passed.”
All indications are that the likely package to be voted on will be a hodgepodge, but experts say that is not bad. Ben S. Bernanke, the Federal Reserve chairman, testified Thursday before the House Budget Committee that because there was disagreement among specialists on what worked, it might be best to adopt a mixture.
“A program that combined a number of elements might in some sense address the problem from a number of different angles and be more effective than one that was only a single element,” he said.
Stimulus packages of the less recent past are often cited as examples of how not to make policy. Economists say that in the recession of the mid-1970s, spending and tax cut measures were enacted too slowly, having an effect only after the economy had already picked up. In 1992 and 1993, partisan squabbling derailed plans for a stimulus package as the recession came and went.
The measures seven years ago sent a different lesson, according to John B. Taylor, a professor of economics at Stanford and a former Treasury official under Mr. Bush. “People look back at 2001 and are more positive about this kind of approach,” he added.
There continues to be a debate among economists about how best to give a kick to the economy. The Congressional Budget Office, for example, said that temporary one-time-only changes in tax policy may have only a moderate effect relative to permanent changes like lower income tax rates.
Consumption jumped after the tax rebate in 2001, it said, but researchers cannot be sure that was because of the tax rebate or the passage of the long-term tax cuts at the same time.
Joel Slemrod, professor of business economics at the University of Michigan, said his study of the 2001 tax rebates showed only 22 percent of taxpayers he surveyed spent most of their rebates. The data suggests that the effect of such rebates, he said, “wouldn’t be as big as one might hope.”
Many economists say that a drawback to Mr. Bush’s proposals, as outlined so far, is that they might not put cash in the hands of people most likely to spend it: those at the lower end of the income spectrum. Mr. Bush signaled that he would limit rebates to people who pay federal income taxes, and many low- and middle-income people pay little or no federal income tax, because they benefit from various deductions and credits.
Robert Greenstein, executive director of the Center on Budget Policy and Priorities, is one of many liberal economists urging that the tax rebate be in the form of a credit for children, or some form of credit for Social Security taxes workers pay.
Without such improvements, he said, Mr. Bush’s plan “would save fewer jobs and do less to shore up a weak economy than it should.” He asserted that the business tax incentives of 2001 and 2002 also had only a modest effect on the economy.
Matthew Shapiro, another economist at the University of Michigan, reached a similar conclusion about the proposed incentives for business — namely accelerated depreciation or what is called a bonus depreciation on capital spending. These are aimed at encouraging investment by allowing businesses to write off the costs faster.
But Mr. Shapiro estimated that the tax incentives for business investment in the past did not work broadly throughout the business sector. He said the “vast majority of investment did not benefit much” from such a measure.
Mr. Paulson, in the interview, acknowledged that if businesses were losing money, a tax incentive for investment would not work as well. But he said that in the current economy, “businesses are operating at fuller levels so this program would be more effective than in the past.” After the last downturn in 2001, business investment slumped for several years after Congress passed tax incentives , in part because many companies had vast amounts of extra production capacity.
Although Democrats have begun to embrace the idea of tax relief for families and businesses, they also insist that the government should provide aid to states to forestall budget cutbacks, extend unemployment benefits and possibly channel money to individuals through programs like food stamps.
Republicans are reluctant to embark on that kind of spending, in part because they do not want federal funds to pay for state government programs over which Washington has no control. But all sides agree that if speed is of the essence, so is the likelihood of compromise.
Economists say that one lesson from past efforts is that there is no point in doing something too late. This time, however, a consensus is emerging that Congress can pass something as early as March and that money can get into the hands of consumers, businesses and states shortly thereafter.
Copyright 2008 The New York Times Company
http://www.nytimes.com/2008/01/19/business/19stimulus.html?exprod=myyahoo
Don’t Cry for Me, America
By PAUL KRUGMAN
Mexico. Brazil. Argentina. Mexico, again. Thailand. Indonesia. Argentina, again.
And now, the United States.
The story has played itself out time and time again over the past 30 years. Global investors, disappointed with the returns they’re getting, search for alternatives. They think they’ve found what they’re looking for in some country or other, and money rushes in.
But eventually it becomes clear that the investment opportunity wasn’t all it seemed to be, and the money rushes out again, with nasty consequences for the former financial favorite. That’s the story of multiple financial crises in Latin America and Asia. And it’s also the story of the U.S. combined housing and credit bubble. These days, we’re playing the role usually assigned to third-world economies.
For reasons I’ll explain later, it’s unlikely that America will experience a recession as severe as that in, say, Argentina. But the origins of our problem are pretty much the same. And understanding those origins also helps us understand where U.S. economic policy went wrong.
The global origins of our current mess were actually laid out by none other than Ben Bernanke, in an influential speech he gave early in 2005, before he was named chairman of the Federal Reserve. Mr. Bernanke asked a good question: “Why is the United States, with the world’s largest economy, borrowing heavily on international capital markets — rather than lending, as would seem more natural?”
His answer was that the main explanation lay not here in America, but abroad. In particular, third world economies, which had been investor favorites for much of the 1990s, were shaken by a series of financial crises beginning in 1997. As a result, they abruptly switched from being destinations for capital to sources of capital, as their governments began accumulating huge precautionary hoards of overseas assets.
The result, said Mr. Bernanke, was a “global saving glut”: lots of money, all dressed up with nowhere to go.
In the end, most of that money went to the United States. Why? Because, said Mr. Bernanke, of the “depth and sophistication of the country’s financial markets.”
All of this was right, except for one thing: U.S. financial markets, it turns out, were characterized less by sophistication than by sophistry, which my dictionary defines as “a deliberately invalid argument displaying ingenuity in reasoning in the hope of deceiving someone.” E.g., “Repackaging dubious loans into collateralized debt obligations creates a lot of perfectly safe, AAA assets that will never go bad.”
In other words, the United States was not, in fact, uniquely well-suited to make use of the world’s surplus funds. It was, instead, a place where large sums could be and were invested very badly. Directly or indirectly, capital flowing into America from global investors ended up financing a housing-and-credit bubble that has now burst, with painful consequences.
As I said, these consequences probably won’t be as bad as the devastating recessions that racked third-world victims of the same syndrome. The saving grace of America’s situation is that our foreign debts are in our own currency. This means that we won’t have the kind of financial death spiral Argentina experienced, in which a falling peso caused the country’s debts, which were in dollars, to balloon in value relative to domestic assets.
But even without those currency effects, the next year or two could be quite unpleasant. What should have been done differently? Some critics say that the Fed helped inflate the housing bubble with low interest rates. But those rates were low for a good reason: although the last recession officially ended in November 2001, it was another two years before the U.S. economy began delivering convincing job growth, and the Fed was rightly concerned about the possibility of Japanese-style prolonged economic stagnation.
The real sin, both of the Fed and of the Bush administration, was the failure to exercise adult supervision over markets running wild.
It wasn’t just Alan Greenspan’s unwillingness to admit that there was anything more than a bit of “froth” in housing markets, or his refusal to do anything about subprime abuses. The fact is that as America’s financial system has grown ever more complex, it has also outgrown the framework of banking regulations that used to protect us — yet instead of an attempt to update that framework, all we got were paeans to the wonders of free markets.
Right now, Mr. Bernanke is in crisis-management mode, trying to deal with the mess his predecessor left behind. I don’t have any problems with his testimony yesterday, although I suspect that it’s already too late to prevent a recession.
But let’s hope that when the dust settles a bit, Mr. Bernanke takes the lead in talking about what needs to be done to fix a financial system gone very, very wrong.
Copyright 2008 The New York Times Company
http://www.nytimes.com/2008/01/18/opinion/18krugman.html?em&ex=1200891600&en=9f416ba352b8c507&ei=5087%0A&exprod=myyahoo
Mexico. Brazil. Argentina. Mexico, again. Thailand. Indonesia. Argentina, again.
And now, the United States.
The story has played itself out time and time again over the past 30 years. Global investors, disappointed with the returns they’re getting, search for alternatives. They think they’ve found what they’re looking for in some country or other, and money rushes in.
But eventually it becomes clear that the investment opportunity wasn’t all it seemed to be, and the money rushes out again, with nasty consequences for the former financial favorite. That’s the story of multiple financial crises in Latin America and Asia. And it’s also the story of the U.S. combined housing and credit bubble. These days, we’re playing the role usually assigned to third-world economies.
For reasons I’ll explain later, it’s unlikely that America will experience a recession as severe as that in, say, Argentina. But the origins of our problem are pretty much the same. And understanding those origins also helps us understand where U.S. economic policy went wrong.
The global origins of our current mess were actually laid out by none other than Ben Bernanke, in an influential speech he gave early in 2005, before he was named chairman of the Federal Reserve. Mr. Bernanke asked a good question: “Why is the United States, with the world’s largest economy, borrowing heavily on international capital markets — rather than lending, as would seem more natural?”
His answer was that the main explanation lay not here in America, but abroad. In particular, third world economies, which had been investor favorites for much of the 1990s, were shaken by a series of financial crises beginning in 1997. As a result, they abruptly switched from being destinations for capital to sources of capital, as their governments began accumulating huge precautionary hoards of overseas assets.
The result, said Mr. Bernanke, was a “global saving glut”: lots of money, all dressed up with nowhere to go.
In the end, most of that money went to the United States. Why? Because, said Mr. Bernanke, of the “depth and sophistication of the country’s financial markets.”
All of this was right, except for one thing: U.S. financial markets, it turns out, were characterized less by sophistication than by sophistry, which my dictionary defines as “a deliberately invalid argument displaying ingenuity in reasoning in the hope of deceiving someone.” E.g., “Repackaging dubious loans into collateralized debt obligations creates a lot of perfectly safe, AAA assets that will never go bad.”
In other words, the United States was not, in fact, uniquely well-suited to make use of the world’s surplus funds. It was, instead, a place where large sums could be and were invested very badly. Directly or indirectly, capital flowing into America from global investors ended up financing a housing-and-credit bubble that has now burst, with painful consequences.
As I said, these consequences probably won’t be as bad as the devastating recessions that racked third-world victims of the same syndrome. The saving grace of America’s situation is that our foreign debts are in our own currency. This means that we won’t have the kind of financial death spiral Argentina experienced, in which a falling peso caused the country’s debts, which were in dollars, to balloon in value relative to domestic assets.
But even without those currency effects, the next year or two could be quite unpleasant. What should have been done differently? Some critics say that the Fed helped inflate the housing bubble with low interest rates. But those rates were low for a good reason: although the last recession officially ended in November 2001, it was another two years before the U.S. economy began delivering convincing job growth, and the Fed was rightly concerned about the possibility of Japanese-style prolonged economic stagnation.
The real sin, both of the Fed and of the Bush administration, was the failure to exercise adult supervision over markets running wild.
It wasn’t just Alan Greenspan’s unwillingness to admit that there was anything more than a bit of “froth” in housing markets, or his refusal to do anything about subprime abuses. The fact is that as America’s financial system has grown ever more complex, it has also outgrown the framework of banking regulations that used to protect us — yet instead of an attempt to update that framework, all we got were paeans to the wonders of free markets.
Right now, Mr. Bernanke is in crisis-management mode, trying to deal with the mess his predecessor left behind. I don’t have any problems with his testimony yesterday, although I suspect that it’s already too late to prevent a recession.
But let’s hope that when the dust settles a bit, Mr. Bernanke takes the lead in talking about what needs to be done to fix a financial system gone very, very wrong.
Copyright 2008 The New York Times Company
http://www.nytimes.com/2008/01/18/opinion/18krugman.html?em&ex=1200891600&en=9f416ba352b8c507&ei=5087%0A&exprod=myyahoo
Saturday, January 5, 2008
Wednesday, January 2, 2008
The Frayed American Dream
Economic Mobility, U.S. Poverty, Inequality, Children & Families, Income Distribution
Julia B. Isaacs, Child and Family Policy Fellow, Economic Studies
Isabel V. Sawhill, Senior Fellow, Economic Studies
The Brookings Institution
November 28, 2007 —
A sharp rise in income inequality in the United States over the past few decades has created large gaps between the haves and the have-nots. Yet public tolerance—if not acceptance—of these gaps is still widespread. One reason may be the belief on the part of many Americans that plenty of opportunity exists to get ahead, especially for one’s children. But what is the evidence that children do better than their parents, giving them a true shot at the American dream?
Based on some interesting new research conducted at Brookings, and released by the Pew Economic Mobility project, most of today’s adults are better off than their own parents were when they were growing up. Specifically, two out of three people have higher family incomes than their parents did in the late 1960s and early 1970s. The converse: one third remains worse off.
Moreover, much of the gain in income across generations is due to the fact that far more families now have two earners. Men’s earnings have grown little, if at all; but women have entered the labor force in record numbers and their earnings have risen along with their greater involvement in the work world. So, yes, today’s families are better off than their own parents were in the late 1960s or early 1970s. But they are also working more and struggling with the greater time pressures of juggling work and family responsibilities.
Not only are these gains in family income primarily the result of a second paycheck, they are not equally distributed across the population. The good news is that those who started out in the bottom fifth of the income distribution have a good chance of surpassing their parents’ incomes. We find that 82 percent of those born into poverty are absolutely better off than their parents in the sense that they have higher incomes in inflation-adjusted terms, though the gains are usually quite small. In fact, only 36 percent of them make it into the middle class or higher (that is, the top 60 percent in terms of family income) and a paltry 6 percent reach the top rung on the ladder where one fifth of their contemporaries reside.
If one happens to have been born into a family that was both black and poor, the odds that one will move up the economic ladder are even worse. Moreover, one of the most provocative findings of the new research is that African-American parents in the middle class have great difficulty in passing on their affluence to their children, who often end up falling below their parents in income and economic status.
Is a 36 percent chance of making it into the middle class or higher enough to sustain the hope embodied in the American dream? Will the one-third who are downwardly mobile continue to support open borders and the other hallmarks of a market economy? And, should African-Americans be content with having less opportunity than whites to improve their lot and pass on the achievements of one generation to the next?
Our answer is that America could and should do better. Many members of the middle class are only one earner away from poverty. Children from poor and minority families are not achieving economic success in large numbers. Research done at Brookings and elsewhere shows that outcomes for children can be improved through home visiting to new parents, early childhood education, more qualified teachers in every classroom, along with more access to health care and to a college education, all of which could help families across the country realize their aspirations. Opportunity does exist in America. It is the opportunity to repair a frayed American dream.
http://www.brookings.edu/opinions/2007/1128_econgap_isaacs.aspx?p=1
Julia B. Isaacs, Child and Family Policy Fellow, Economic Studies
Isabel V. Sawhill, Senior Fellow, Economic Studies
The Brookings Institution
November 28, 2007 —
A sharp rise in income inequality in the United States over the past few decades has created large gaps between the haves and the have-nots. Yet public tolerance—if not acceptance—of these gaps is still widespread. One reason may be the belief on the part of many Americans that plenty of opportunity exists to get ahead, especially for one’s children. But what is the evidence that children do better than their parents, giving them a true shot at the American dream?
Based on some interesting new research conducted at Brookings, and released by the Pew Economic Mobility project, most of today’s adults are better off than their own parents were when they were growing up. Specifically, two out of three people have higher family incomes than their parents did in the late 1960s and early 1970s. The converse: one third remains worse off.
Moreover, much of the gain in income across generations is due to the fact that far more families now have two earners. Men’s earnings have grown little, if at all; but women have entered the labor force in record numbers and their earnings have risen along with their greater involvement in the work world. So, yes, today’s families are better off than their own parents were in the late 1960s or early 1970s. But they are also working more and struggling with the greater time pressures of juggling work and family responsibilities.
Not only are these gains in family income primarily the result of a second paycheck, they are not equally distributed across the population. The good news is that those who started out in the bottom fifth of the income distribution have a good chance of surpassing their parents’ incomes. We find that 82 percent of those born into poverty are absolutely better off than their parents in the sense that they have higher incomes in inflation-adjusted terms, though the gains are usually quite small. In fact, only 36 percent of them make it into the middle class or higher (that is, the top 60 percent in terms of family income) and a paltry 6 percent reach the top rung on the ladder where one fifth of their contemporaries reside.
If one happens to have been born into a family that was both black and poor, the odds that one will move up the economic ladder are even worse. Moreover, one of the most provocative findings of the new research is that African-American parents in the middle class have great difficulty in passing on their affluence to their children, who often end up falling below their parents in income and economic status.
Is a 36 percent chance of making it into the middle class or higher enough to sustain the hope embodied in the American dream? Will the one-third who are downwardly mobile continue to support open borders and the other hallmarks of a market economy? And, should African-Americans be content with having less opportunity than whites to improve their lot and pass on the achievements of one generation to the next?
Our answer is that America could and should do better. Many members of the middle class are only one earner away from poverty. Children from poor and minority families are not achieving economic success in large numbers. Research done at Brookings and elsewhere shows that outcomes for children can be improved through home visiting to new parents, early childhood education, more qualified teachers in every classroom, along with more access to health care and to a college education, all of which could help families across the country realize their aspirations. Opportunity does exist in America. It is the opportunity to repair a frayed American dream.
http://www.brookings.edu/opinions/2007/1128_econgap_isaacs.aspx?p=1
A History of America's Disappearing Middle Class
By Paul Krugman
Economist and New York Times columnist Paul Krugman explains in simple terms how the American economy went from having the world's most dynamic middle class to being on the verge of a rich-poor state in only 30 years.
The following is excerpted from the keynote speech delivered by Paul Krugman at the Economic Policy Institute's recent conference on The Agenda for Shared Prosperity.
... One thing I've been noticing on multiple debates in public policies - climate change is another one - is there seems to be an almost seamless transition from denial to fatalism. That for 15 or 20 years the people would say, "No, what you're saying is not happening." And then almost immediately they'll turn around and say, "Well, yeah, sure it's happening, but there's nothing that can be done about it."
And that's kind of the way a lot of the discussion now goes on inequality. That there is really nothing you can do to arrest this. That it's all the invisible hand driving this growth in inequality, and there's nothing you can do to really change it - well, maybe better education. But while education is very much a good thing, it's the all-American way of dodging problems. Since everybody approves of it, you say we should have better education but wave away the pretty strong evidence that while it's a good thing, it won't make very much difference. So there's this general sense that you can't do anything.
And I don't think that that's what the historical record suggests. That in fact when we look at it, there appears to be quite a lot that the political process can do about inequality. Just to say, there's the obvious. Obviously, even if you look at the United States right now, the tax and social insurance system makes an enormous difference.
But the amount of inequality in the United States is substantially less than it would be if we did not have still at least somewhat progressive taxation, and still a pretty extensive, though not nearly extensive enough, system of social insurance. And that makes a big difference. Certainly if you're looking at say the United States versus Canada, a lot of the difference between the two countries is just that Canada has more of a better safety net financed by somewhat higher taxation.
And if you're looking for a progressive agenda, certainly from my point of view, a large part of that ought to be straightforward orthodox stuff, which is still very hard to do politically. It would be essentially restoring progressivity of the tax system, and using the revenue to improve social insurance and, above all, health care.
So, if you say what would I really like if I went into a Rip Van Winkle sleep and woke up ten years from now, I'd like to wake up and discover that we have a national health care in some version with the necessary funding supplied in part by higher taxes on me, or actually, the top two percent of the income distribution. But people a lot richer than me, of course. But it's not the whole story that the only thing you can do is taxes and social insurance. And the arc of history for the United States suggests that there's actually a lot more that can happen.
If you look back across the past 80 years or so of the United States, what you see is that in the 1920s, we were for practical purposes still in the gilded age. That may not be the way the historians cut it, but in terms of the actual distribution of income, so far as we can measure it in terms of the role of status and general feel of the society, we were still an extremely unequal royalist society.
By the time World War II was over, we had become the middle-class society that the baby boomers in this audience grew up in. We had become a much more equal society. That high degree of equality began to go away - depending on exactly which numbers you look at - during the late 70's, maybe a little earlier than that. And at this point we're basically back to pre-tax and transfer to the levels of inequality that we had in 1929.
So there is this great arc to the middle class, away from gilded age to middle-class society and then back to the new gilded age, which is now what we're living in. And there are really two puzzles about that. One of them is a political puzzle, which is why instead of leaning against these trends, politics has actually reinforced them. Why it is that U.S. politics moved left in the age of a relatively middle-class society, and moved right as society got more unequal?
A naïve view of politics would say that, "Gee, when a few people are winning a lot and most people are lagging behind, people ought to be voting for more social insurance and more progressive taxation, not less." And we have some understanding of why that doesn't happen. It has to do with the role of money, organization and all of these other things that affect politics. That story also helps us understand why politics gets so nasty.
If you actually look at some of the measures - I'm really into quantitative political science these days - of political positions that political scientists calculate, it does look as if what the main thing that moves actually over time is in fact the Republican party. The Democratic Party has not - at least with northern Democrats - gotten significantly more liberal over the past. They haven't moved much at all over the past 30 years.
But the Republican Party, which had largely converged on the Democrats in the age of Eisenhower, has moved sharply to the right. And so that one party, in effect, moves with the income of the top 5 percent or 1 percent of the population. So that seems to be the story. I mean, we can think about reasons why that might be true. But the other puzzle, and this comes to the question of the conference, is what drove these changes? How did we become largely middle class?
Why have we become a much more unequal society once again? And the standard, what economists like to say, is "Well, it's all invisible hand. It's all market forces." The history doesn't seem to look like that, if we ask how did the society we had in 1947, which is when a lot of our data start, come into existence.
Was it a gradual process whereas the economy developed and we got out of the early days of the American industrial revolution, we gradually moved towards middle classness? Well, no, historically it happened in an eye blink. In this Claudia Golden and Bob Margot classic paper, they call it the great compression. As late as the late 30s, the income distribution appears to be highly unequal.
By the time you wake up in 1946 or so, it's highly equal. And how did that happen? A lot of it was more or less deliberate compression of wage differentials during World War II. But if you were or had standards, supply and demand for different types of labor, you'd say that should last only as long as the wage controls lasted. It should have sprung back to where it was, but it didn't. It actually stayed quite equal for another 30 years at least. You ask, what buttressed that? Well, partly it's the rise of a powerful union movement, which is at least in large part a change in the political climate, but then remained in place for several decades more.
Other things we're not sure. But it looks more or less as a leveling of the income distribution. Obviously we want to be careful about the words. No one presumably in this room, and certainly not me, is advocating Cuba. We're not calling for a flat income distribution. But the relative equalization that seems to have taken place was engineered by a combination of top-down politics and grassroots organization that made people want a more equal society in the 30s and the 40s, and they got it.
And it remained for quite a long time. Now, that started to come apart roughly 30 years ago, and there's been a large increase in inequality since then. As people probably know, I've written about the part that is sort of polite to talk about, which is the rising premium for highly educated workers. But that's only part of it. Even more spectacular is the increase in inequality of the far-right tail of the income distribution.
The CEOs and high school teachers who got roughly the same number of years of formal education haven't exactly had the same growth in income over the past 30 years. So, there's this vast increase in inequality at the top. What do we think caused that? I actually just had to do a class on that. It was in my international trade class, but we were doing the trade and inequality stuff.
And the question is what do we think is underlying the rise in inequality in the United States? And searching for metaphor, I actually ended up with the "Murder on the Orient Express." Not for what actually happened but for the way we described it. In "Murder on the Orient Express," somebody is killed and there are 12 suspects. The question is which of them did it and the answer actually is all of them. The official economic story about rising inequality is one in which we have a whole bunch of villains, which all seem to be playing a role.
So we've got skill bias and technological change, which is shifting demand towards highly educated workers. We've got growing international trade with increased imports of labor-intensive products further reducing demand for less educated workers. We have immigration, possibly similar in its effect to trade. We have the falling real value of the minimum wage contributing at the bottom end. We have some affected unionization driving the change in income distribution.
Finally, in terms of at least the after-tax distribution, we have changes in taxes which have, in general, reinforced rising inequality. It could be true, but it's kind of funny that all of these different things should be working in the same direction. In "Murder on the Orient Express," there is an elaborate conspiracy that means that all 12 of the potential suspects were actually in collusion. It's a little hard to see how all of these factors and economics are in collusion.
Okay, I think that what we can say is that the political climate matters more for the distribution of income than the economic models that we know how to work with and would seem to suggest more than our models capture. If you ask me practically what I want done now, I think that the most important agenda thing right now is, in fact, to work on the taxes and social insurance side, because that is concrete and you can get stuff.
But there is a lot of reason to believe that a change in the political climate in various ways can do a lot more than you would think just from looking at the taxes and social insurance. Let me give you two pieces of evidence that I looked at. One is that there is some really interesting, though intellectually disturbing, work by my colleague, Larry Bartell who is in the Princeton Politics Department and has just looked at what happens to income growth at different points in the income distribution under administrations of the two parties.
Now there shouldn't be a big difference really because at any given historical period, the visible policies are not all that different. Certainly there is a pretty significant shift from Clinton to Bush and there was, in fact, a pretty significant shift from Bush to Clinton previously. But it's in taxes and it really shouldn't be very obvious at pre-tax distribution of income. And yet what Bartell finds is actually there is a really striking difference. Inequality on average rises under Republicans. At least in the bottom 80 percent of the income distribution, it's stable or falling under Democrats. The top 1 percent just kept on rising right through, but there is at least a surprising, fairly robust correlation.
The other thing I would say is timing. There's a very clear co-movement over time between income inequality and both the political polarization and the rightward tilt of our politics. It's pretty clear that the rising inequality over the past 30 years has been associated with a rightward shift of the political center of gravity, mainly because of the Republican Party shifting to the right.
You might say that's the causation running from income distribution to politics. But if you actually then just start to look at it through history, the timing actually seems to be reversed. The rise of an aggressive or rightwing movement and the rise of a really major assault on the New Deal great society legacy both come before the big shift in income distribution takes place.
The emergence of the modern right is something that obviously dates back to Goldwater, but really becomes a political force in the '70s. You don't really see the big changes in income distribution until the '80s. So it looks almost as if, just in this crude sense, politics is leading the economic changes. How could that operate? I just want to talk about two things. I suspect that there are quite a few channels that we don't really perceive, but there are two that are fairly clear. One of them is unionization.
Obviously, private sector unions were very important in the U.S. 30 years ago and have very nearly - not completely, but very nearly - collapsed, and they are down to eight percent of private employment. Why did that happen? You will often see people saying - well, that's because of de-industrialization, and because of the decline of manufacturing. But that is actually not right. It's not right in two ways.
First of all, arithmetically, most of the decline in unionization is a result not of the decline in manufacturing share, but of the decline of the unionization of manufacturing itself. So the big thing that happens is that there is a collapse of unionization within the manufacturing sector and then of course also a smaller share of manufacturing in the economy, but it's much more dramatic on the collapse within the sector.
The other is that there is no law that says that unionization should be a manufacturing phenomenon. What it really is, to the extent that there is a story, is that large enterprises are more likely to be to be unionized. The reason why the high tend of unionization was also a period when manufacturing was the core of the union movement, is that at that time, large enterprises were largely a manufacturing phenomenon.
Now we have a service economy in which there are a lot of large service sector enterprises. Not to put too fine a point on it, but why exactly couldn't Wal-Mart be unionized? It doesn't face international competition. There is no obvious reason why it wouldn't be possible to have a strong union in Wal-Mart and in the big box sector and other parts of the economy. And just think of how different the whole political economy would look if the service sector enterprises were unionized.
Not necessarily all the effects would be positive, but it would certainly be very, very different. What happened? Why did manufacturing unionization collapse? Why didn't the emerging service sector get unionized? And the answer is actually pretty straightforward and pretty brutal. It's politics and aggressive employer behavior enabled by politics.
I have seen estimates of a fraction of workers who voted for a union and who were fired in the early '80s. They range from a low of one in 20 to a high of one in eight. There is no question that aggressive, often illegal, union busting is the reason the union movement declined. And the change in the political climate that began in the '70s clearly played a role in making that possible.
Now how important is all of that? You may have seen that there have been a number of estimates of the effects of unions on income distribution. It's funny. People will often say that those estimates are small and actually they typically are roughly comparable in size to typical estimates to the effect of international trade on income distribution. So these are both in secondary and the standard accounting to technological change, but both fairly significant.
What is more, there are a lot of reasons to think that those estimates are not capturing a lot of the story. As the people who do them will concede, what they basically do is say: What if the workers were paid, unionized and non-unionized workers were paid the same as they are now, and just do a sort of shift share analysis. What that doesn't capture - and they know it, but there is just no way to do it better - is the effect of a strong union movement on the bargaining position of workers who are not unionized, but might be.
It doesn't capture the effect of a strong union movement and possibly disciplining insider behavior by executives and so on down the line. So it is likely that that is a much more important story than we typically give it credit for being. Let me just give you my other piece of the story, executive compensation. There's a raging debate now of how much of the soaring executive compensation is insider self-dealing, and how much of it is just market forces.
I went back and was looking at what people said about executive compensation when it was low, just 40 or 50 times the average worker salary. [Here are] some quotes: "Managerial labor contracts are not, in fact, a private matter between employers and employees." "Parties such as employees' labor unions, consumer groups, Congress and the media create forces in the political media that constrain the types of contracts." And so on down the line.
A lot of discussion was of the role of the political climate that was basically hostile to outrageous paychecks and constrained it. Where are these quotes from? They are actually from [economists] Michael Jensen and Kevin Murphy writing, saying people have complained that there are not enough incentives in executive pay. They are saying that what we really need is to have executives get more stock options and stake in the firm - in other words, all of the stuff that has happened since then.
So back when executive pay was low, 40 or 50 times average pay, it was actually the defenders of higher executive pay that complained that it was actually non-market forces that were constraining executive pay. Now of course that disclosing of pay has happened, the same side of the debate says it's ridiculous to claim that social norms and political forces have any role in this. But I think it's actually quite clear that it did. We can argue about which is the natural market outcome. But the point is, in fact, that we had a society 25 years ago in which there were some constraints imposed by public opinion, by strong unions, by a general sense that there were things that you don't do.
And maybe that led firms to make a decision to think of there being a sort of tradeoff between a "let's have a happy high morale" workforce, or let's have a super star CEO and squeeze the workers for all we can. There were some things that tilted the balance in that decision.
Okay, are we going to do another great compression? Hopefully not. The reason I say hopefully not is even FDR needed World War II to be able to carry out that sort of wholesale social engineering that took place. I am not looking forward to having a replay of that. I think that if we get serious, as some of us hope we do, and we actually do have a swing back in the political pendulum that - in addition to the direct stuff - we can do a lot to change the climate in the many small ways that add up to a lot of impact on the bargaining power of workers.
The ability of the bottom 80 percent of the population to get a bigger share of the total pie - I think that if we get there, we may be surprised at just how successful we are at moving ourselves back, at least part of the way, to the kind of middle-class society that people like me grew up in.
http://www.truthout.org/issues_06/030907LA.shtml
Economist and New York Times columnist Paul Krugman explains in simple terms how the American economy went from having the world's most dynamic middle class to being on the verge of a rich-poor state in only 30 years.
The following is excerpted from the keynote speech delivered by Paul Krugman at the Economic Policy Institute's recent conference on The Agenda for Shared Prosperity.
... One thing I've been noticing on multiple debates in public policies - climate change is another one - is there seems to be an almost seamless transition from denial to fatalism. That for 15 or 20 years the people would say, "No, what you're saying is not happening." And then almost immediately they'll turn around and say, "Well, yeah, sure it's happening, but there's nothing that can be done about it."
And that's kind of the way a lot of the discussion now goes on inequality. That there is really nothing you can do to arrest this. That it's all the invisible hand driving this growth in inequality, and there's nothing you can do to really change it - well, maybe better education. But while education is very much a good thing, it's the all-American way of dodging problems. Since everybody approves of it, you say we should have better education but wave away the pretty strong evidence that while it's a good thing, it won't make very much difference. So there's this general sense that you can't do anything.
And I don't think that that's what the historical record suggests. That in fact when we look at it, there appears to be quite a lot that the political process can do about inequality. Just to say, there's the obvious. Obviously, even if you look at the United States right now, the tax and social insurance system makes an enormous difference.
But the amount of inequality in the United States is substantially less than it would be if we did not have still at least somewhat progressive taxation, and still a pretty extensive, though not nearly extensive enough, system of social insurance. And that makes a big difference. Certainly if you're looking at say the United States versus Canada, a lot of the difference between the two countries is just that Canada has more of a better safety net financed by somewhat higher taxation.
And if you're looking for a progressive agenda, certainly from my point of view, a large part of that ought to be straightforward orthodox stuff, which is still very hard to do politically. It would be essentially restoring progressivity of the tax system, and using the revenue to improve social insurance and, above all, health care.
So, if you say what would I really like if I went into a Rip Van Winkle sleep and woke up ten years from now, I'd like to wake up and discover that we have a national health care in some version with the necessary funding supplied in part by higher taxes on me, or actually, the top two percent of the income distribution. But people a lot richer than me, of course. But it's not the whole story that the only thing you can do is taxes and social insurance. And the arc of history for the United States suggests that there's actually a lot more that can happen.
If you look back across the past 80 years or so of the United States, what you see is that in the 1920s, we were for practical purposes still in the gilded age. That may not be the way the historians cut it, but in terms of the actual distribution of income, so far as we can measure it in terms of the role of status and general feel of the society, we were still an extremely unequal royalist society.
By the time World War II was over, we had become the middle-class society that the baby boomers in this audience grew up in. We had become a much more equal society. That high degree of equality began to go away - depending on exactly which numbers you look at - during the late 70's, maybe a little earlier than that. And at this point we're basically back to pre-tax and transfer to the levels of inequality that we had in 1929.
So there is this great arc to the middle class, away from gilded age to middle-class society and then back to the new gilded age, which is now what we're living in. And there are really two puzzles about that. One of them is a political puzzle, which is why instead of leaning against these trends, politics has actually reinforced them. Why it is that U.S. politics moved left in the age of a relatively middle-class society, and moved right as society got more unequal?
A naïve view of politics would say that, "Gee, when a few people are winning a lot and most people are lagging behind, people ought to be voting for more social insurance and more progressive taxation, not less." And we have some understanding of why that doesn't happen. It has to do with the role of money, organization and all of these other things that affect politics. That story also helps us understand why politics gets so nasty.
If you actually look at some of the measures - I'm really into quantitative political science these days - of political positions that political scientists calculate, it does look as if what the main thing that moves actually over time is in fact the Republican party. The Democratic Party has not - at least with northern Democrats - gotten significantly more liberal over the past. They haven't moved much at all over the past 30 years.
But the Republican Party, which had largely converged on the Democrats in the age of Eisenhower, has moved sharply to the right. And so that one party, in effect, moves with the income of the top 5 percent or 1 percent of the population. So that seems to be the story. I mean, we can think about reasons why that might be true. But the other puzzle, and this comes to the question of the conference, is what drove these changes? How did we become largely middle class?
Why have we become a much more unequal society once again? And the standard, what economists like to say, is "Well, it's all invisible hand. It's all market forces." The history doesn't seem to look like that, if we ask how did the society we had in 1947, which is when a lot of our data start, come into existence.
Was it a gradual process whereas the economy developed and we got out of the early days of the American industrial revolution, we gradually moved towards middle classness? Well, no, historically it happened in an eye blink. In this Claudia Golden and Bob Margot classic paper, they call it the great compression. As late as the late 30s, the income distribution appears to be highly unequal.
By the time you wake up in 1946 or so, it's highly equal. And how did that happen? A lot of it was more or less deliberate compression of wage differentials during World War II. But if you were or had standards, supply and demand for different types of labor, you'd say that should last only as long as the wage controls lasted. It should have sprung back to where it was, but it didn't. It actually stayed quite equal for another 30 years at least. You ask, what buttressed that? Well, partly it's the rise of a powerful union movement, which is at least in large part a change in the political climate, but then remained in place for several decades more.
Other things we're not sure. But it looks more or less as a leveling of the income distribution. Obviously we want to be careful about the words. No one presumably in this room, and certainly not me, is advocating Cuba. We're not calling for a flat income distribution. But the relative equalization that seems to have taken place was engineered by a combination of top-down politics and grassroots organization that made people want a more equal society in the 30s and the 40s, and they got it.
And it remained for quite a long time. Now, that started to come apart roughly 30 years ago, and there's been a large increase in inequality since then. As people probably know, I've written about the part that is sort of polite to talk about, which is the rising premium for highly educated workers. But that's only part of it. Even more spectacular is the increase in inequality of the far-right tail of the income distribution.
The CEOs and high school teachers who got roughly the same number of years of formal education haven't exactly had the same growth in income over the past 30 years. So, there's this vast increase in inequality at the top. What do we think caused that? I actually just had to do a class on that. It was in my international trade class, but we were doing the trade and inequality stuff.
And the question is what do we think is underlying the rise in inequality in the United States? And searching for metaphor, I actually ended up with the "Murder on the Orient Express." Not for what actually happened but for the way we described it. In "Murder on the Orient Express," somebody is killed and there are 12 suspects. The question is which of them did it and the answer actually is all of them. The official economic story about rising inequality is one in which we have a whole bunch of villains, which all seem to be playing a role.
So we've got skill bias and technological change, which is shifting demand towards highly educated workers. We've got growing international trade with increased imports of labor-intensive products further reducing demand for less educated workers. We have immigration, possibly similar in its effect to trade. We have the falling real value of the minimum wage contributing at the bottom end. We have some affected unionization driving the change in income distribution.
Finally, in terms of at least the after-tax distribution, we have changes in taxes which have, in general, reinforced rising inequality. It could be true, but it's kind of funny that all of these different things should be working in the same direction. In "Murder on the Orient Express," there is an elaborate conspiracy that means that all 12 of the potential suspects were actually in collusion. It's a little hard to see how all of these factors and economics are in collusion.
Okay, I think that what we can say is that the political climate matters more for the distribution of income than the economic models that we know how to work with and would seem to suggest more than our models capture. If you ask me practically what I want done now, I think that the most important agenda thing right now is, in fact, to work on the taxes and social insurance side, because that is concrete and you can get stuff.
But there is a lot of reason to believe that a change in the political climate in various ways can do a lot more than you would think just from looking at the taxes and social insurance. Let me give you two pieces of evidence that I looked at. One is that there is some really interesting, though intellectually disturbing, work by my colleague, Larry Bartell who is in the Princeton Politics Department and has just looked at what happens to income growth at different points in the income distribution under administrations of the two parties.
Now there shouldn't be a big difference really because at any given historical period, the visible policies are not all that different. Certainly there is a pretty significant shift from Clinton to Bush and there was, in fact, a pretty significant shift from Bush to Clinton previously. But it's in taxes and it really shouldn't be very obvious at pre-tax distribution of income. And yet what Bartell finds is actually there is a really striking difference. Inequality on average rises under Republicans. At least in the bottom 80 percent of the income distribution, it's stable or falling under Democrats. The top 1 percent just kept on rising right through, but there is at least a surprising, fairly robust correlation.
The other thing I would say is timing. There's a very clear co-movement over time between income inequality and both the political polarization and the rightward tilt of our politics. It's pretty clear that the rising inequality over the past 30 years has been associated with a rightward shift of the political center of gravity, mainly because of the Republican Party shifting to the right.
You might say that's the causation running from income distribution to politics. But if you actually then just start to look at it through history, the timing actually seems to be reversed. The rise of an aggressive or rightwing movement and the rise of a really major assault on the New Deal great society legacy both come before the big shift in income distribution takes place.
The emergence of the modern right is something that obviously dates back to Goldwater, but really becomes a political force in the '70s. You don't really see the big changes in income distribution until the '80s. So it looks almost as if, just in this crude sense, politics is leading the economic changes. How could that operate? I just want to talk about two things. I suspect that there are quite a few channels that we don't really perceive, but there are two that are fairly clear. One of them is unionization.
Obviously, private sector unions were very important in the U.S. 30 years ago and have very nearly - not completely, but very nearly - collapsed, and they are down to eight percent of private employment. Why did that happen? You will often see people saying - well, that's because of de-industrialization, and because of the decline of manufacturing. But that is actually not right. It's not right in two ways.
First of all, arithmetically, most of the decline in unionization is a result not of the decline in manufacturing share, but of the decline of the unionization of manufacturing itself. So the big thing that happens is that there is a collapse of unionization within the manufacturing sector and then of course also a smaller share of manufacturing in the economy, but it's much more dramatic on the collapse within the sector.
The other is that there is no law that says that unionization should be a manufacturing phenomenon. What it really is, to the extent that there is a story, is that large enterprises are more likely to be to be unionized. The reason why the high tend of unionization was also a period when manufacturing was the core of the union movement, is that at that time, large enterprises were largely a manufacturing phenomenon.
Now we have a service economy in which there are a lot of large service sector enterprises. Not to put too fine a point on it, but why exactly couldn't Wal-Mart be unionized? It doesn't face international competition. There is no obvious reason why it wouldn't be possible to have a strong union in Wal-Mart and in the big box sector and other parts of the economy. And just think of how different the whole political economy would look if the service sector enterprises were unionized.
Not necessarily all the effects would be positive, but it would certainly be very, very different. What happened? Why did manufacturing unionization collapse? Why didn't the emerging service sector get unionized? And the answer is actually pretty straightforward and pretty brutal. It's politics and aggressive employer behavior enabled by politics.
I have seen estimates of a fraction of workers who voted for a union and who were fired in the early '80s. They range from a low of one in 20 to a high of one in eight. There is no question that aggressive, often illegal, union busting is the reason the union movement declined. And the change in the political climate that began in the '70s clearly played a role in making that possible.
Now how important is all of that? You may have seen that there have been a number of estimates of the effects of unions on income distribution. It's funny. People will often say that those estimates are small and actually they typically are roughly comparable in size to typical estimates to the effect of international trade on income distribution. So these are both in secondary and the standard accounting to technological change, but both fairly significant.
What is more, there are a lot of reasons to think that those estimates are not capturing a lot of the story. As the people who do them will concede, what they basically do is say: What if the workers were paid, unionized and non-unionized workers were paid the same as they are now, and just do a sort of shift share analysis. What that doesn't capture - and they know it, but there is just no way to do it better - is the effect of a strong union movement on the bargaining position of workers who are not unionized, but might be.
It doesn't capture the effect of a strong union movement and possibly disciplining insider behavior by executives and so on down the line. So it is likely that that is a much more important story than we typically give it credit for being. Let me just give you my other piece of the story, executive compensation. There's a raging debate now of how much of the soaring executive compensation is insider self-dealing, and how much of it is just market forces.
I went back and was looking at what people said about executive compensation when it was low, just 40 or 50 times the average worker salary. [Here are] some quotes: "Managerial labor contracts are not, in fact, a private matter between employers and employees." "Parties such as employees' labor unions, consumer groups, Congress and the media create forces in the political media that constrain the types of contracts." And so on down the line.
A lot of discussion was of the role of the political climate that was basically hostile to outrageous paychecks and constrained it. Where are these quotes from? They are actually from [economists] Michael Jensen and Kevin Murphy writing, saying people have complained that there are not enough incentives in executive pay. They are saying that what we really need is to have executives get more stock options and stake in the firm - in other words, all of the stuff that has happened since then.
So back when executive pay was low, 40 or 50 times average pay, it was actually the defenders of higher executive pay that complained that it was actually non-market forces that were constraining executive pay. Now of course that disclosing of pay has happened, the same side of the debate says it's ridiculous to claim that social norms and political forces have any role in this. But I think it's actually quite clear that it did. We can argue about which is the natural market outcome. But the point is, in fact, that we had a society 25 years ago in which there were some constraints imposed by public opinion, by strong unions, by a general sense that there were things that you don't do.
And maybe that led firms to make a decision to think of there being a sort of tradeoff between a "let's have a happy high morale" workforce, or let's have a super star CEO and squeeze the workers for all we can. There were some things that tilted the balance in that decision.
Okay, are we going to do another great compression? Hopefully not. The reason I say hopefully not is even FDR needed World War II to be able to carry out that sort of wholesale social engineering that took place. I am not looking forward to having a replay of that. I think that if we get serious, as some of us hope we do, and we actually do have a swing back in the political pendulum that - in addition to the direct stuff - we can do a lot to change the climate in the many small ways that add up to a lot of impact on the bargaining power of workers.
The ability of the bottom 80 percent of the population to get a bigger share of the total pie - I think that if we get there, we may be surprised at just how successful we are at moving ourselves back, at least part of the way, to the kind of middle-class society that people like me grew up in.
http://www.truthout.org/issues_06/030907LA.shtml
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