Gilded Once More: PAUL KRUGMAN

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THE NEW YORK TIMES

OP-ED COLUMNIST

Gilded Once More

By PAUL KRUGMAN

Published: April 27, 2007

We’ve gone back to levels of inequality not seen since the 1920s.

One of the distinctive features of the modern American right has been nostalgia for the late 19th century, with its minimal taxation, absence of regulation and reliance on faith-based charity rather than government social programs. Conservatives from Milton Friedman to Grover Norquist have portrayed the Gilded Age as a golden age, dismissing talk of the era’s injustice and cruelty as a left-wing myth.

Well, in at least one respect, everything old is new again. Income inequality — which began rising at the same time that modern conservatism began gaining political power — is now fully back to Gilded Age levels.

Consider a head-to-head comparison. We know what John D. Rockefeller, the richest man in Gilded Age America, made in 1894, because in 1895 he had to pay income taxes. (The next year, the Supreme Court declared the income tax unconstitutional.) His return declared an income of $1.25 million, almost 7,000 times the average per capita income in the United States at the time.

But that makes him a mere piker by modern standards. Last year, according to Institutional Investor’s Alpha magazine, James Simons, a hedge fund manager, took home $1.7 billion, more than 38,000 times the average income. Two other hedge fund managers also made more than $1 billion, and the top 25 combined made $14 billion.

How much is $14 billion? It’s more than it would cost to provide health care for a year to eight million children — the number of children in America who, unlike children in any other advanced country, don’t have health insurance.

The hedge fund billionaires are simply extreme examples of a much bigger phenomenon: every available measure of income concentration shows that we’ve gone back to levels of inequality not seen since the 1920s.

--MORE--

Escalating Military Spending: Income Redistribution in Disguise

April 16, 2007

By ISMAEL HOSSEIN-ZADEH

Critics of the recent U.S. wars of choice have long argued that they are all about oil. "No Blood for Oil" has been a rallying cry for most of the opponents of the war.

It can be demonstrated, however, that there is another (less obvious but perhaps more critical) factor behind the recent rise of U.S. military aggressions abroad: war profiteering by the Pentagon contractors. Frequently invoking dubious "threats to our national security and/or interests," these beneficiaries of war dividends, the military-industrial complex and related businesses whose interests are vested in the Pentagon's appropriation of public money, have successfully used war and military spending to justify their lion's share of tax dollars and to disguise their strategy of redistributing national income in their favor.

This cynical strategy of disguised redistribution of national resources from the bottom to the top is carried out by a combination of (a) drastic hikes in the Pentagon budget, and (b) equally drastic tax cuts for the wealthy. As this combination creates large budget deficits, it then forces cuts in non-military public spending as a way to fill the gaps that are thus created. As a result, the rich are growing considerably richer at the expense of middle- and low-income classes.

Despite its critical importance, most opponents of war seem to have given short shrift to the crucial role of the Pentagon budget and its contractors as major sources of war and militarism-a phenomenon that the late President Eisenhower warned against nearly half a century ago. Perhaps a major reason for this oversight is that critics of war and militarism tend to view the U.S. military force as primarily a means for imperialist gains-oil or otherwise.

The fact is, however, that as the U.S. military establishment has grown in size, it has also evolved in quality and character: it is no longer simply a means but, perhaps more importantly, an end in itself-an imperial force in its own right. Accordingly, the rising militarization of U.S. foreign policy in recent years is driven not so much by some general/abstract national interests as it is by the powerful special interests that are vested in the military capital, that is, war industries and war-related businesses.


The Magnitude of U.S. Military Spending

Even without the costs of the wars in Iraq and Afghanistan, which are fast surpassing half a trillion dollars, U.S. military spending is now the largest item in the federal budget. Officially, it is the second highest item after Social Security payments. But Social Security is a self-financing trust fund. So, in reality, military spending is the highest budget item.

The Pentagon budget for the current fiscal year (2007) is about $456 billion. President Bush's proposed increase of 10% for next year will raise this figure to over half a trillion dollars, that is, $501.6 billion for fiscal year 2008. A proposed supplemental appropriation to pay for the wars in Afghanistan and Iraq "brings proposed military spending for FY 2008 to $647.2 billion, the highest level of military spending since the end of World War II-higher than Vietnam, higher than Korea, higher than the peak of the Reagan buildup."[1]

Using official budget figures, William D. Hartung, Senior Fellow at the World Policy Institute in New York, provides a number of helpful comparisons:

Proposed U.S. military spending for FY 2008 is larger than military spending by all of the other nations in the world combined.

At $141.7 billion, this year's proposed spending on the Iraq war is larger than the military budgets of China and Russia combined. Total U.S. military spending for FY2008 is roughly ten times the military budget of the second largest military spending country in the world, China.

Proposed U.S. military spending is larger than the combined gross domestic products (GDP) of all 47 countries in sub-Saharan Africa.

The FY 2008 military budget proposal is more than 30 times higher than all spending on State Department operations and non-military foreign aid combined.

The FY 2008 military budget is over 120 times higher than the roughly $5 billion per year the U.S. government spends on combating global warming.

The FY 2008 military spending represents 58 cents out of every dollar spent by the U.S. government on discretionary programs: education, health, housing assistance, international affairs, natural resources and environment, justice, veterans' benefits, science and space, transportation, training/employment and social services, economic development, and several more items.[2]

Although the official military budget already eats up the lion's share of the public money (crowding out vital domestic needs), it nonetheless grossly understates the true magnitude of military spending. The real national defense budget, according to Robert Higgs of the Independent Institute, is nearly twice as much as the official budget. The reason for this understatement is that the official Department of Defense budget excludes not only the cost of wars in Iraq and Afghanistan, but also a number of other major cost items.[3]

These disguised cost items include budgets for the Coast Guard and the Department of Homeland Security; nuclear weapons research and development, testing, and storage (placed in the Energy budget); veterans programs (in the Veteran's Administration budget); most military retiree payments (in the Treasury budget); foreign military aid in the form of weapons grants for allies (in the State Department budget); interest payments on money borrowed to fund military programs in past years (in the Treasury budget); sales and property taxes at military bases (in local government budgets); and the hidden expenses of tax-free food, housing, and combat pay allowances.

After adding these camouflaged and misplaced expenses to the official Department of Defense budget, Higgs concludes: "I propose that in considering future defense budgetary costs, a well-founded rule of thumb is to take the Pentagon's (always well publicized) basic budget total and double it. You may overstate the truth, but if so, you'll not do so by much."[4]


Escalation of the Pentagon Budget and the Rising Fortunes of Its Contractors

The Bush administration's escalation of war and military spending has been a boon for Pentagon contractors. That the fortunes of Pentagon contractors should rise in tandem with the rise of military spending is not surprising. What is surprising, however, is the fact that these profiteers of war and militarism have also played a critical role in creating the necessary conditions for war profiteering, that is, in instigating the escalation of the recent wars of choice and the concomitant boom of military spending.[5]

Giant arms manufacturers such as Lockheed Martin, Boeing, and Northrop Grumman have been the main beneficiaries of the Pentagon's spending bonanza. This is clearly reflected in the continuing rise of the value of their shares in the stock market: "Shares of U.S. defense companies, which have nearly trebled since the beginning of the occupation of Iraq, show no signs of slowing down. . . . The feeling that makers of ships, planes and weapons are just getting into their stride has driven shares of leading Pentagon contractors Lockheed Martin Corp., Northrop Grumman Corp., and General Dynamics Corp. to all-time highs."[6]

Like its manufacturing contractors, the Pentagon's fast-growing service contractors have equally been making fortunes by virtue of its tendency to shower private contractors with tax-payers' money. These services are not limited to the relatively simple or routine tasks and responsibilities such food and sanitation services. More importantly, they include "contracts for services that are highly sophisticated [and] strategic in nature," such as the contracting of security services to corporate private armies, or modern day mercenaries. The rapid growth of the Pentagon's service contracting is reflected (among other indicators) in these statistics: "In 1984, almost two-thirds of the contracting budget went for products rather than services. . . . By fiscal year 2003, 56 percent of Defense Department contracts paid for services rather than goods."[7]

The spoils of war and the devastation in Iraq have been so attractive that an extremely large number of war profiteers have set up shop in that country in order to participate in the booty: "There are about 100,000 government contractors operating in Iraq, not counting subcontractors, a total that is approaching the size of the U.S. military force there, according to the military's first census of the growing population of civilians operating in the battlefield," reported The Washington Post in its 5 December 2006 issue.

The rise in the Pentagon contracting is, of course, a reflection of an overall policy and philosophy of outsourcing and privatizing that has become fashionable ever since President Reagan arrived in the White House in 1980. Reporting on some of the effects of this policy, Scott Shane and Ron Nixon of the New York Times recently wrote: "Without a public debate or formal policy decision, contractors have become a virtual fourth branch of government. On the rise for decades, spending on federal contracts has soared during the Bush administration, to about $400 billion last year from $207 billion in 2000, fueled by the war in Iraq, domestic security and Hurricane Katrina, but also by a philosophy that encourages outsourcing almost everything government does."[8]


Redistributive Militarism: Escalation of Military Spending Redistributes Income from Bottom to Top

But while the Pentagon contractors and other beneficiaries of war dividends are showered with public money, low- and middle-income Americans are squeezed out of economic or subsistence resources in order to make up for the resulting budgetary shortfalls. For example, as the official Pentagon budget for 2008 fiscal year is projected to rise by more than 10 percent, or nearly $50 billion, "a total of 141 government programs will be eliminated or sharply reduced" to pay for the increase. These would include cuts in housing assistance for low-income seniors by 25 percent, home heating/energy assistance to low-income people by 18 percent, funding for community development grants by 12.7 percent, and grants for education and employment training by 8 percent.[9]

Combined with redistributive militarism and generous tax cuts for the wealthy, these cuts have further exacerbated the ominously growing income inequality that started under President Reagan. Ever since Reagan arrived in the White House in 1980, opponents of non-military public spending have been using an insidious strategy to cut social spending, to reverse the New Deal and other social safety net programs, and to redistribute national/public resources in favor of the wealthy. That cynical strategy consists of a combination of drastic increases in military spending coupled with equally drastic tax cuts for the wealthy. As this combination creates large budget deficits, it then forces cuts in non-military public spending (along with borrowing) to fill the gaps thus created.

For example, at the same time that President Bush is planning to raise military spending by $50 billion for the next fiscal year, he is also proposing to make his affluent-targeted tax cuts permanent at a cost of $1.6 trillion over 10 years, or an average yearly cut of $160 billion. Simultaneously, "funding for domestic discretionary programs would be cut a total of $114 billion" in order to pay for these handouts to the rich. The targeted discretionary programs to be cut include over 140 programs that provide support for the basic needs of low- and middle-income families such as elementary and secondary education, job training, environmental protection, veterans' health care, medical research, Meals on Wheels, child care and HeadStart, low-income home energy assistance, and many more.[10]

According to the Urban Institute-Brookings Institution Tax Policy Center, "if the President's tax cuts are made permanent, households in the top 1 percent of the population (currently those with incomes over $400,000) will receive tax cuts averaging $67,000 a year by 2012. . . . The tax cuts for those with incomes of over $1 million a year would average $162,000 a year by 2012."[11]

Official macroeconomic figures show that, over the past five decades or so, government spending (at the federal, state and local levels) as a percentage of gross national product (GNP) has remained fairly steady-at about 20 percent. Given this nearly constant share of the public sector of national output/income, it is not surprising that increases in military spending have almost always been accompanied or followed by compensating decreases in non-military public spending, and vice versa.

For example, when by virtue of FDR's New Deal reforms and LBJ's metaphorical War on Poverty, the share of non-military government spending rose significantly the share of military spending declined accordingly. From the mid 1950s to the mid 1970s, the share of non-military government spending of GNP rose from 9.2 to 14.3 percent, an increase of 5.1 percent. During that time period, the share of military spending of GNP declined from 10.1 to 5.8 percent, a decline of 4.3 percent.[12]

That trend was reversed when President Reagan took office in 1980. In the early 1980s, as President Reagan drastically increased military spending, he also just as drastically lowered tax rates on higher incomes. The resulting large budget deficits were then paid for by more than a decade of steady cuts on non-military spending.

Likewise, the administration of President George W. Bush has been pursuing a similarly sinister fiscal policy of cutting non-military public spending in order to pay for the skyrocketing military spending and the generous tax cuts for the affluent.

Interestingly (though not surprisingly), changes in income inequality have mirrored changes in government spending priorities, as reflected in the fiscal policies of different administrations. Thus, when the share of non-military public spending rose relative to that of military spending from the mid 1950 to the mid 1970s, and the taxation system or policy remained relatively more progressive compared to what it is today, income inequality declined accordingly.

But as President Reagan reversed that fiscal policy by raising the share of military spending relative to non-military public spending and cutting taxes for the wealthy, income inequality also rose considerably. As Reagan's twin policies of drastic increases in military spending and equally sweeping tax cuts for the rich were somewhat tempered in the 1990s, growth in income inequality slowed down accordingly. In the 2000s, however, the ominous trends that were left off by President Reagan have been picked up by President George W. Bush: increasing military spending, decreasing taxes for the rich, and (thereby) exacerbating income inequality (see Figure 1).

Figure 1: Income Inequality in the U.S. (Gini Index), 1913-2004
Source: Doug Henwood, Left Business Observer.

Leaving small, short-term fluctuations aside, Figure 1 shows two major peaks and a trough of the long-term picture of income inequality in the United States. The first peak was reached during the turbulent years of the Great Depression (1929-1933). But it soon began to decline with the implementation of the New Deal reforms in the mid 1930s. The ensuing decline continued almost unabated until 1968, at which time we note the lowest level of inequality.

After 1968, the improving trend in inequality changed course. But the reversal was not very perceptible until the early 1980s, after which time it began to accelerate-by virtue (or vice) of Reaganomics. Although the deterioration that was thus set in motion by the rise of neoliberalism and supply-side economics somewhat slowed down in the 1990s, it has once again gathered steam under President George W. Bush, and is fast approaching the peak of the Great Depression.

It is worth noting that even at its lowest level of 1968, income inequality was still quite lopsided: the richest 20 percent of households made as much as ten times more than the poorest 20 percent. But, as Doug Henwood of the Left Business Observer points out, "that looks almost Swedish next to today's ratio of fifteen times."[13]

The following are some specific statistics of how redistributive militarism and supply-side fiscal policies have exacerbated income inequality since the late 1970s and early 1980s-making after-tax income gaps wider than pre-tax ones. According to recently released data by the Congressional Budget Office (CBO), since 1979 income gains among high-income households have dwarfed those of middle- and low-income households. Specifically:

The average after-tax income of the top one percent of the population nearly tripled, rising from $314,000 to nearly $868,000-for a total increase of $554,000, or 176 percent. (Figures are adjusted by CBO for inflation.)

By contrast, the average after-tax income of the middle fifth of the population rose a relatively modest 21 percent, or $8,500, reaching $48,400 in 2004.

The average after-tax income of the poorest fifth of the population rose just 6 percent, or $800, during this period, reaching $14,700 in 2004.[14]

Legislation enacted since 2001 has provided taxpayers with about $1 trillion in tax cuts over the past six years. These large tax reductions have made the distribution of after-tax income more unequal by further concentrating income at the top of the income range. According to the Urban Institute-Brookings Institution Tax Policy Center, as a result of the tax cuts enacted since 2001:

In 2006, households in the bottom fifth of the income spectrum received tax cuts (averaging $20) that raised their after-tax incomes by an average of 0.3 percent.

Households in the middle fifth of the income spectrum received tax cuts (averaging $740) that raised their after-tax incomes an average of 2.5 percent.

The top one percent of households received tax cuts in 2006 (averaging $44,200) that increased their after-tax income by an average of 5.4 percent.

Households with incomes exceeding $1 million received an average tax cut of $118,000 in 2006, which represented an increase of 6.0 percent in their after-tax income.[15]

Concluding Remarks: External Wars as Reflections of Domestic Fights over National Resources

Close scrutiny of the Pentagon budget shows that, ever since the election of Ronald Reagan as president in 1980, opponents of social spending have successfully used military spending as a regulatory mechanism to cut non-military public spending, to reverse the New Deal and other social safety net programs, and to redistribute national/public resources in favor of the wealthy.

Close examination of the dynamics of redistributive militarism also helps explain why powerful beneficiaries of the Pentagon budget prefer war and military spending to peace and non-military public spending: military spending benefits the wealthy whereas the benefits of non-military public spending would spread to wider social strata. It further helps explain why beneficiaries of war dividends frequently invent new enemies and new "threats to our national interests" in order to justify continued escalation of military spending.

Viewed in this light, militaristic tendencies to war abroad can be seen largely as reflections of the metaphorical domestic fights over allocation of public finance at home, of a subtle or insidious strategy to redistribute national resources from the bottom to the top.

Despite the critical role of redistributive militarism, or of the Pentagon budget, as a major driving force to war, most opponents of war have paid only scant attention to this crucial force behind the recent U.S. wars of choice. The reason for this oversight is probably due to the fact that most critics of war continue to view U.S. military force as simply or primarily a means to achieve certain imperialist ends, instead of having become an end in itself.

Yet, as the U.S. military establishment has grown in size, it has also evolved in quality and character: it is no longer simply a means but, perhaps more importantly, an end in itself, an imperial power in its own right, or to put it differently, it is a case of the tail wagging the dog-a phenomenon that the late President Eisenhower so presciently warned against.

Accordingly, rising militarization of U.S. foreign policy in recent years is driven not so much by some general/abstract national interests, or by the interests of Big Oil and other non-military transnational corporations (as most traditional theories of imperialism continue to argue), as it is by powerful special interests that are vested in the war industry and related war-induced businesses that need an atmosphere of war and militarism in order to justify their lion's share of the public money.

Preservation, justification, and expansion of the military-industrial colossus, especially of the armaments industry and other Pentagon contractors, have become critical big business objectives in themselves. They have, indeed, become powerful driving forces behind the new, parasitic U.S. military imperialism. I call this new imperialism parasitic because its military adventures abroad are often prompted not so much by a desire to expand the empire's wealth beyond the existing levels, as did the imperial powers of the past, but by a desire to appropriate the lion's share of the existing wealth and treasure for the military establishment, especially for the war-profiteering contractors. In addition to being parasitic, the new U.S. military imperialism can also be called dual imperialism because not only does it exploit defenseless peoples and their resources abroad but also the overwhelming majority of U.S. citizens and their resources at home. (I shall further elaborate on the historically unique characteristics of the Parasitic, dual U.S. military imperialism in another article.)

Ismael Hossein-zadeh is a professor of economics at Drake University, Des Moines, Iowa. He is the author of the newly published book, The Political Economy of U.S. Militarism His Web page is http://www.cbpa.drake.edu/hossein-zadeh


Notes

[1] William D. Hartung, "Bush Military Budget Highest Since WW II," Common Dreams (10 February 2007).

[2] Ibid.

[3] Robert Higgs, "The Defense Budget Is Bigger Than You Think," antiwar.com (25 January 2004).

[4] Ibid.

[5] Ismael Hossein-zadeh, "Why the US is Not Leaving Iraq,".

[6] Bill Rigby, "Defense stocks may jump higher with big profits," Reuter (12 April 2006).

[7] The Center for Public Integrity, "Outsourcing the Pentagon" (29 September 2004).

[8] Scott Shane and Ron Nixon, "In Washington, Contractors Take On Biggest Role Ever," The New York Times (4 February 2007).

[9] Faiz Shakir et al., Center for American Progress Action Fund, "The Progress Report" (6 February 2007).

[10] Robert Greenstein, "DESPITE THE RHETORIC, BUDGET WOULD MAKE NATION'S FISCAL PROBLEMS WORSE AND FURTHER WIDEN INEQUALITY," Center for Budget and Policy Priorities (6 February 2007).

[11] Ibid.

[12] Richard Du Boff, "What Military Spending Really Costs," Challenge 32 (September/October 1989), pp. 4-10.

[13] Doug Henwood, Left Business Observer, No. 114 (31 December 2006), p. 4.

[14] Congressional Budget Office, Historical Effective Federal Tax Rates: 1979 to 2004, December 2006; as reported by Center on Budget and Policy Priorities.

[15] See Tax Policy Center tables T06-0273 and T06-0279 at.

Democracy is for the rich

KEVIN BARR

Friday, March 30, 2007

Democracy is a system of government where the political power rests with the nation's population either directly or through elected representatives. It is government of the people, for the people, by the people.

From this one should be able to infer that the purpose of democracy is to build a just society where the interests of all the people are cared for rich and poor, men and women, minorities as well as the majority and the economy works for the benefit of all. Democracy should be about the ordering of society to bring about justice for all. If it does not work for the common good then there is something seriously wrong.

The United States, in particular, has been a staunch promoter of democracy and has fought to have democracy entrenched throughout the world. Yet some writers have raised a number of important questions about the nature of US democracy.

For example, why is it that only those from wealthy backgrounds are able to become presidential candidates?

Why is it that the US not only champions democracy but champions extreme individualism and unbridled capitalism and has strongly opposed any form of socialism (which might spread the benefits of development more widely among people)?

Why is it that America's wealthy elites are able to exert such strong influence on political elections and economic decisions?

Alesina and Glaeser in their book Fighting Poverty in the US and Europe (2004) point out that all the American political institutions are ultimately the product of an 18th Century Constitution which was crafted by a minority of white and wealthy men of property determined to stop the State from expropriating their wealth and to limit the amount of redistribution the poor could demand of the rich.

Hence, the concerns of the rich are strongly protected and the US has a bias against welfare for the poor and redistribution of wealth. Comparing the US and Europe they note:

"Not only does government spending in the Europe favour the poor much more than in the United States, but government tax policy as well is much more distributive. Income tax rates are more progressive than in the United States."

Phillips in his book, Wealth and Democracy: a Political History of the American Rich (2002) provides hard evidence of the extreme prosperity of America's wealthy elite and shows how they are able to use their strong political influence to structure economic policy (e.g. tax policy) in their own self-interest. On the other hand, Barbara Ehrenreich in her Nickel and Dimed (2001) shows how the US economic system so adversely affects the lives of the working poor.

So, while all Americans may be able to vote in elections, does democracy in the US work for the benefit of all the people or mostly for the benefit of those with wealth and power?

If democracy is for the benefit of all the people of a nation, why is such blatant inequality tolerated? Does democracy necessarily work in the interests of justice for all?

William Blum once of the US State Department in his book Rogue State (2000:170) notes that: "Americans are raised to fervently believe that no progress can be made in any society in the absence of elections. They are taught to equate elections with democracy, and democracy with elections."

Yet, as we know, elections alone do not guarantee real democracy.

Some would say that liberal democracy in the US (and some other countries as well) has become an integral part of the capitalist system and, therefore, is class-based and not fully or truly democratic or participatory. It is "bourgeois democracy" where only the most financially powerful people have their say.

Consequently it is fundamentally un-egalitarian and facilitates economic exploitation of the poorer classes. Certainly the cost of political campaigning may mean that the system favours the rich (who may be a small minority of the total number of voters) and thus in reality the elected government becomes a form of plutocracy (or rule of the elite).

Thus, according to Marx, parliamentary elections are an opportunity citizens of a country get every few years to decide who among the ruling classes will misrepresent them in parliament.

Or again, modern democracy may be regarded as a dishonest farce used to keep the masses from getting restless by providing the hope that things might get better when they have another election.

Reforms are needed in the electoral process so that the power of big money is removed. Otherwise democracy can never be "of the people" i.e. poor or middle class people. It will always be class dominated. Democracy will be for the rich.

In this connection ownership of the media by a few of the rich elite may lead to more specific distortion of the electoral process. The media are themselves a vital element of the electoral process. They can be used to protect the interests of their own class and suppress any criticism of the status quo.

It is important for us to understand this US bias towards individualism and wealth and against welfare and redistribution because the US dominates decisions made by the World Bank and other financial institutions.

Moreover it is a key player in the decisions of the G8 countries which advise us on development.

The US will obviously side with regimes which think as it does and try to mould us in their own image. Consequently the benefits of its form of democracy will not benefit all the people but only the elite. We have seen this happen even in our own country. In this connection it is interesting to note the words of Epeli Hau'ofa (1987:101): "One very important development that we have to watch carefully is the emergence of privileged classes in the islands of the South Pacific for it is certain that the fates of the island communities are being decided by the ways in which these groups act, first, in relation to their own underprivileged people and, second, in relation to their important connections with each other and with similar groups elsewhere. It is the privileged who decide on the needs of their communities and whose rising aspirations and affluence entail worsening conditions for the poor."

Father Kevin Father is the program co-ordinator economic justice for ECREA. The views expressed are his and not necessarily that of his employer

Circuit City to Fire 3,400, Rehire Cheaper Workers

Circuit City to Fire 3,400, Rehire Cheaper Workers

Circuit City Stores Inc., the second-largest U.S. electronics retailer, will fire 3,400 sales people and replace them with employees willing to work for less.

Posted Mar 28, 2007 10:13 AM PST
Category: ECONOMY

Now, think very carefully about this. If EVERY company fires their staff and rehires at lower wages and salaries, then the consumer base as a whole (already up to their limits on their credit cards) will stop buying what Circuit City has to offer for sale.

Henry Ford was a very smart man in that he paid his workers MORE than the prevailing wages because he understood that his employees were also his customers and by making sure that Ford employees could buy the cars they were making, the cars would be seen on the roads and become his best advertising.

Ford prospered by making his community around him prosperous. That was smart.

Circuit City's managers are making themselves prosperous by keeping all the money to themselves, and when enough companies follow suit, they will destroy their own customer base.

By Mike Rivero

Who's Gorging and Who's Getting Roasted in the Economic Barbecue?

Not since the Gilded Age of the late 19th century has America witnessed such a rapid shift in the distribution of economic wealth as it has in the past 30 years.

By James M. Cypher, Dollars and Sense
Posted on March 26, 2007

Economic inequality has been on the rise in the United States for 30-odd years. Not since the Gilded Age of the late 19th century -- during what Mark Twain referred to as "the Great Barbeque" -- has the country witnessed such a rapid shift in the distribution of economic resources.

Still, most mainstream economists do not pay too much attention to the distribution of income and wealth -- that is, how the value of current production (income) and past accumulated assets (wealth) is divided up among U.S. households. Some economists focus their attention on theory for theory's sake and do not work much with empirical data of any kind. Others who are interested in these on-the-ground data simply assume that each individual or group gets what it deserves from a capitalist economy. In their view, if the share of income going to wage earners goes up, that must mean that wage earners are more productive and thus deserve a larger slice of the nation's total income -- and vice versa if that share goes down.

Heterodox economists, however, frequently look upon the distribution of income and wealth as among the most important shorthand guides to the overall state of a society and its economy. Some are interested in economic justice; others may or may not be, but nonetheless are convinced that changes in income distribution signal underlying societal trends and perhaps important points of political tension. And the general public appears to be paying increasing attention to income and wealth inequality. Consider the strong support voters have given to recent ballot questions raising state minimum wages and the extensive coverage of economic inequality that has suddenly begun to appear in mainstream news outlets like the New York Times, the Los Angeles Times, and the Wall Street Journal, all of which published lengthy article series on the topic in the past few years. Just last month, news outlets around the country spotlighted the extravagant bonuses paid out by investment firm Goldman Sachs, including a $53.4 million bonus to the firm's CEO.

By now, economists and others who do pay attention to the issue are aware that income and wealth inequality in the United States rose steadily during the last three decades of the 20th century. But now that we are several years into the 21st, what do we know about income and wealth distribution today? Has the trend toward inequality continued, or are there signs of a reversal? And what can an understanding of the entire post-World War II era tell us about how to move again toward greater economic equality?

The short answers are: (1) Income distribution is even more unequal that we thought; (2) The newest data suggest the trend toward greater inequality continues, with no signs of a reversal; (3) We all do better when we all do better. During the 30 or so years after World War II the economy boomed and every stratum of society did better -- pretty much at the same rate. When the era of shared growth ended, so too did much of the growth: the U.S. economy slowed down and recessions were deeper, more frequent, and harder to overcome. Growth spurts that did occur left most people out: the bottom 60% of U.S. households earned only 95 cents in 2004 for every dollar they made in 1979. A quarter century of falling incomes for the vast majority, even though average household income rose by 27% in real terms. Whew!

The classless society

Throughout the 1950s, 1960s, and 1970s, sociologists preached that the United States was an essentially "classless" society in which everyone belonged to the middle class. A new "mass market" society with an essentially affluent, economically homogeneous population, they claimed, had emerged. Exaggerated as these claims were in the 1950s, there was some reason for their popular acceptance. Union membership reached its peak share of the privatesector labor force in the early 1950s; unions were able to force corporations of the day to share the benefits of strong economic growth. The union wage created a target for nonunion workers as well, pulling up all but the lowest of wages as workers sought to match the union wage and employers often granted it as a tactic for keeping unions out. Under these circumstances, millions of families entered the lower middle class and saw their standard of living rise markedly. All of this made the distribution of income more equal for decades until the late 1970s. Of course there were outliers -- some millions of poor, disproportionately blacks, and the rich family here and there.

Something serious must have happened in the 1970s as the trend toward greater economic equality rapidly reversed. Here are the numbers. The share of income received by the bottom 90% of the population was a modest 67% in 1970, but by 2000 this had shrunk to a mere 52%, according to a detailed study of U.S. income distribution conducted by Thomas Piketty and Emmanuel Saez, published by the prestigious National Bureau of Economic Research in 2002. Put another way, the top 10% increased their overall share of the nation's total income by 15 percentage points from 1970 to 2000. This is a rather astonishing jump -- the gain of the top 10% in these years was equivalent to more than the total income received annually by the bottom 40% of households. To get on the bottom rung of the top 10% of households in 2000, it would have been necessary to have an adjusted gross income of $104,000 a year. The real money, though, starts on the 99th rung of the income ladder -- the top 1% received an unbelievable 21.7% of all income in 2000. To get a handhold on the very bottom of this top rung took more than $384,000.

The Piketty-Saez study (and subsequent updates), which included in its measure of annual household income some data, such as income from capital gains, that generally are not factored in, verified a rising trend in income inequality which had been widely noted by others, and a degree of inequality which was far beyond most current estimates. The Internal Revenue Service has essentially duplicated the Piketty-Saez study. They find that in 2003, the share of total income going to the "bottom" four-fifths of households (that's 80% of the population!) was only slightly above 40%. Both of these studies show much higher levels of inequality than were previously thought to exist based on widely referenced Census Bureau studies. The Census studies still attribute 50% of total income to the top fifth for 2003, but this number appears to understate what the top fifth now receives -- nearly 60%, according to the IRS.

A brave new globalized world for workers

Why the big change from 1970 to 2000? That is too long a story to tell here in full. But briefly, we can say that beginning in the early 1970s, U.S. corporations and the wealthy individuals who largely own them had the means, the motive, and the opportunity to garner a larger share of the nation's income -- and they did so.

Let's start with the motive. The 1970s saw a significant slowdown in U.S. economic growth, which made corporations and stockholders anxious to stop sharing the benefits of growth to the degree they had in the immediate postwar era.

Opportunity appeared in the form of an accelerating globalization of economic activity. Beginning in the 1970s, more and more U.S.-based corporations began to set up production operations overseas. The trend has only accelerated since, in part because international communication and transportation costs have fallen dramatically. Until the 1970s, it was very difficult -- essentially unprofitable -- for giants like General Electric or General Motors to operate plants offshore and then import their foreign-made products into the United States. So from the 1940s to the 1970s, U.S. workers had a geographic lever, one they have now almost entirely lost. This erosion in workers' bargaining power has undermined the middle class and decimated the unions that once managed to assure the working class a generally comfortable economic existence. And today, of course, the tendency to send jobs offshore is affecting many highly trained professionals such as engineers. So this process of gutting the middle class has not run its course.

Given the opportunity presented by globalization, companies took a two-pronged approach to strengthening their hand vis-à-vis workers: (1) a frontal assault on unions, with decertification elections and get-tough tactics during unionization attempts, and (2) a debilitating war of nerves whereby corporations threatened to move offshore unless workers scaled back their demands or agreed to givebacks of prior gains in wage and benefit levels or working conditions.

A succession of U.S. governments that pursued conservative -- or pro-corporate -- economic policies provided the means. Since the 1970s, both Republican and Democratic administrations have tailored their economic policies to benefit corporations and shareholders over workers. The laundry list of such policies includes:

• new trade agreements, such as NAFTA, that allow companies to cement favorable deals to move offshore to host nations such as Mexico;
  
• tax cuts for corporations and for the wealthiest households, along with hikes in the payroll taxes that represent the largest share of the tax burden on the working and middle classes;
  
• lax enforcement of labor laws that are supposed to protect the right to organize unions and bargain collectively.

Exploding millionairism

Given these shifts in the political economy of the United States, it is not surprising that economic inequality in 2000 was higher than in 1970. But at this point, careful readers may well ask whether it is misleading to use data for the year 2000, as the studies reported above do, to demonstrate rising inequality. After all, wasn't 2000 the year the NASDAQ peaked, the year the dot-com bubble reached its maximum volume? So if the wealthiest households received an especially large slice of the nation's total income that year, doesn't that just reflect a bubble about to burst rather than an underlying trend?

To begin to answer this question, we need to look at the trends in income and wealth distribution since 2000. And it turns out that after a slight pause in 2000-2001, inequality has continued to rise. Look at household income, for example. According to the standard indicators, the U.S. economy saw a brief recession in 2000-2001 and has been in a recovery ever since. But the median household income has failed to recover.* In 2000 the median household had an annual income of $49,133; by 2005, after adjusting for inflation, the figure stood at $46,242. This 6% drop in median household income occurred while the inflation-adjusted Gross Domestic Product expanded by 14.4%. When the Census Bureau released these data, it noted that median household income had gone up slightly between 2004 and 2005. This point was seized upon by Bush administration officials to bolster their claim that times are good for American workers. A closer look at the data, however, revealed a rather astounding fact: Only 23 million households moved ahead in 2005, most headed by someone aged 65 or above. In other words, subtracting out the cost-of-living increase in Social Security benefits and increases in investment income (such as profits, dividends, interest, capital gains, and rents) to the over-65 group, workers again suffered a decline in income in 2005.

Another bit of evidence is the number of millionaire households -- those with net worth of $1 million or more excluding the value of a primary residence and any IRAs. In 1999, just before the bubbles burst, there were 7.1 million millionaire households in the United States. In 2005, there were 8.9 million, a record number. Ordinary workers may not have recovered from the 2000-2001 rough patch yet, but evidently the wealthiest households have!

Many economists pay scant attention to income distribution patterns on the assumption that those shifts merely reflect trends in the productivity of labor or the return to risk-taking. But worker productivity rose in the 2000-2005 period, by 27.1%. At the same time, from 2003 to 2005 average hourly pay fell by 1.2%. (Total compensation, including all forms of benefits, rose by 7.2% between 2000 and 2005. Most of the higher compensation spending merely reflects rapid increases in the health insurance premiums that employers have to pay just to maintain the same levels of coverage. But even if benefits are counted as part of workers' pay -- a common and questionable practice -- productivity growth outpaced this elastic definition of "pay" by 50% between 1972 and 2005.)

And at the macro level, recent data released by the Commerce Department demonstrate that the share of the country's GDP going to wages and salaries sank to its lowest postwar level, 45.4%, in the third quarter of 2006. And this figure actually overstates how well ordinary workers are doing. The "Wage & Salary" share includes all income of this type, not just production workers' pay. Corporate executives' increasingly munificent salaries are included as well. Workers got roughly 65% of total wage and salary income in 2005, according to survey data from the U.S. Department of Labor; the other 35% went to salaried professionals -- medical doctors and technicians, managers, and lawyers -- who comprised only 15.6% of the sample.

Moreover, the "Wage & Salary" share shown in the National Income and Product Accounts includes bonuses, overtime, and other forms of payment not included in the Labor Department survey. If this income were factored in, the share going to nonprofessional, nonmanagerial workers would be even smaller. Bonuses and other forms of income to top employees can be many times base pay in important areas such as law and banking. Goldman Sachs's notorious 2006 bonuses are a case in point; the typical managing director on Wall Street garnered a bonus ranging between $1 and $3 million.

So, labor's share of the nation's income is falling, as Figure 3 shows, but it is actually falling much faster than these data suggest. Profits, meanwhile, are at their highest level as a share of GDP since the booming 1960s.

These numbers should come as no surprise to anyone who reads the paper: story after story illustrates how corporations are continuing to squeeze workers. For instance, workers at the giant auto parts manufacturer Delphi have been told to prepare for a drop in wages from $27.50 an hour in 2006 to $16.50 an hour in 2007. In order to keep some of Caterpillar's manufacturing work in the United States, the union was cornered into accepting a contract in 2006 that limits new workers to a maximum salary of $27,000 a year -- no matter how long they work there -- compared to the $38,000 or more that long-time Caterpillar workers make today. More generally, for young women with a high school diploma, average entry-level pay fell to only $9.08 an hour in 2005, down by 4.9% just since 2001. For male college graduates, starter-job pay fell by 7.3% over the same period.

Aiding and abetting

And the federal government is continuing to play its part, facilitating the transfer of an ever-larger share of the nation's income to its wealthiest households. George W. Bush once joked that his constituency was "the haves and the have-mores" -- this may have been one of the few instances in which he was actually leveling with his audience. Consider aspects of the four tax cuts for individuals that Bush has implemented since taking office. The first two cut the top nominal tax rate from 39.6% to 35%. Then, in 2003, the third cut benefited solely those who hold wealth, reducing taxes on dividends from 39.6% to 15% and on capital gains from 20% to 15%. ( Bush's fourth tax cut -- in 2006 -- is expected to drop taxes by 4.8% percent for the top one tenth of one percent of all households, while the median household will luxuriate with an extra nickel per day.)

So, if you make your money by the sweat of your brow and you earned $200,000 in 2003, you paid an effective tax rate of 21%. If you earned a bit more, say another $60,500, you paid an effective tax rate of 35% on the additional income. But if, with a flick of the wrist on your laptop, you flipped some stock you had held for six months and cleared $60,500 on the transaction, you paid the IRS an effective tax rate of only 15%. What difference does it make? Well, in 2003 the 6,126 households with incomes over $10 million saw their taxes go down by an average of $521,905 from this one tax cut alone.

These tax cuts represent only one of the many Bush administration policies that have abetted the ongoing shift of income away from most households and toward the wealthiest ones. And what do these top-tier households do with all this newfound money? For one thing, they save. This is in sharp contrast to most households. While the top fifth of households by income has a savings rate of 23%, the bottom 80% as a group dissave -- in other words, they go into debt, spending more than they earn. Households headed by a person under 35 currently show a negative savings rate of 16% of income. Today overall savings -- the savings of the top fifth minus the dis-savings of the bottom four-fifths -- are slightly negative, for the first time since the Great Depression.

Here we find the crucial link between income and wealth accumulation. Able to save nearly a quarter of their income, the rich search out financial assets (and sometimes real assets such as houses and businesses) to pour their vast funds into. In many instances, sometimes with inside information, they are able to generate considerable future income from their invested savings. Like a snowball rolling downhill, savings for the rich can have a turbo effect -- more savings generates more income, which then accumulates as wealth.

Lifestyles of the rich

Make the rich even richer and the creative forces of market capitalism will be unleashed, resulting in more savings and consequently more capital investment, raising productivity and creating abundance for all. At any rate, that's the supply-side/neoliberal theory. However -- and reminiscent of the false boom that defined the Japanese economy in the late 1980s -- the big money has not gone into productive investments in the United States. Stripping out the money pumped into the residential real estate bubble, inflation-adjusted investment in machinery, equipment, technology, and structures increased only 1.4% from 1999 through 2005 -- an average of 0.23% per year. Essentially, productive investment has stagnated since the close of the dot-com boom.

Instead, the money has poured into high-risk hedge funds. These are vast pools of unregulated funds that are now generating 40% to 50% of the trades in the New York Stock Exchange and account for very large portions of trading in many U.S. and foreign credit and debt markets.

And where is the income from these investments going? Last fall media mogul David Geffen sold two paintings at record prices, a Jasper Johns ($80 million) and a Willem de Kooning ($63.5 million), to two of "today's crop of hedge-fund billionaires" whose cash is making the art market "red-hot," according to the New York Times.

Other forms of conspicuous consumption have their allure as well. Boeing and Lufthansa are expecting brisk business for the newly introduced 787 airplane. The commercial version of the new Boeing jet will seat 330, but the VIP version offered by Lufthansa Technik (for a mere $240 million) will have seating for 35 or fewer, leaving room for master bedrooms, a bar, and the transport of racehorses or Rolls Royces. And if you lose your auto assembly job? It should be easy to find work as a dog walker: High-end pet care services are booming, with sales more than doubling between 2000 and 2004. Opened in 2001, Just Dogs Gourmet expects to have 45 franchises in place by the end of 2006 selling hand-decorated doggie treats. And then there is Camp Bow Wow, which offers piped-in classical music for the dogs (oops, "guests") and a live Camper Cam for their owners. Started only three years ago, the company already has 140 franchises up and running.

According to David Butler, the manager of a premiere auto dealership outside of Detroit, sales of Bentleys, at $180,000 a pop, are brisk. But not many $300,000 Rolls Royces are selling. "It's not that they can't afford it," Butler told the New York Times, "it's because of the image it would give." Just what is the image problem in Detroit? Well, maybe it has something to do with those Delphi workers facing a 40% pay cut. Michigan's economy is one of the hardest-hit in the nation. GM, long a symbol of U.S. manufacturing prowess, is staggering, with rumors of possible bankruptcy rife. The best union in terms of delivering the goods for the U.S. working class, the United Auto Workers, is facing an implosion. Thousands of Michigan workers at Delphi, GM, and Ford will be out on the streets very soon. (The top three domestic car makers are determined to permanently lay off three-quarters of their U.S. assembly-line workers -- nearly 200,000 hourly employees. If they do, then the number of autoworkers employed by the Big Three -- Ford, Chrysler, and GM -- will have shrunk by a staggering 900,000 since 1978.) So, this might not be the time to buy a Rolls. But a mere $180,000 Bentley -- why not?

Had enough of the “haves”?

In the era Twain decried as the "great barbeque," the outrageous concentration of income and wealth eventually sparked a reaction and a vast reform movement. But it was not until the onset of the Great Depression, decades later, that massive labor/social unrest and economic collapse forced the country's political elite to check the growing concentration of income and wealth.

Today, it does not appear that there are, as yet, any viable forces at work to put the brakes on the current runaway process of rising inequality. Nor does it appear that this era's power elite is ready to accept any new social compact. In a recent report on the "new king of Wall Street" (a co-founder of the hedge fund/private-equity buyout corporation Blackstone Group) that seemed to typify elite perspectives on today's inequality, the New York Times gushed that "a crashing wave of capital is minting new billionaires each year." Naturally, the Times was too discreet to mention is that those same "crashing waves" have flattened the middle class. And their backwash has turned the working class every-which-way while pulling it down, down, down.

But perhaps those who decry the trend can find at least symbolic hope in the new boom in yet another luxury good. Private mausoleums, in vogue during that earlier Gilded Age, are back. For $650,000, one was recently constructed at Daytona Memorial Park in Florida -- with matching $4,000 Medjool date palms for shade. Another, complete with granite patio, meditation room, and doors of hand cast bronze, went up in the same cemetery. Business is booming, apparently, with 2,000 private mausoleums sold in 2005, up from a single-year peak of 65 in the 1980s. Some cost "well into the millions," according to one the nation's largest makers of cemetery monuments. Who knows: maybe the mausoleum boom portends the ultimate (dead) end for the neo-Gilded Age.

James M. Cypher is profesor-investigador, Programa de Doctorado en Estudios del Desarrollo, Universidad Autónoma de Zacatecas, Mexico, and a Dollars & Sense associate.

© 2007 Independent Media Institute. All rights reserved.

Bush Reorients Rhetoric,Acknowledges Income Gap

By GREG IP and JOHN D. MCKINNON

March 26, 2007; Page A2

WASHINGTON -- Until January, President Bush seldom acknowledged the widening gap between the rich and the middle class. Then, in a speech, he declared: "I know some of our citizens worry about the fact that our dynamic economy is leaving working people behind. ...Income inequality is real." He has raised the subject several times since.

This isn't a sudden change in Mr. Bush's economic philosophy, but rather a change in tactics forced by the changing political environment, say current and former administration officials and outsiders in touch with the White House.

Top White House economic officials still don't consider today's inequality -- the growing share of income going to those at the top -- an inherently bad thing; they believe it simply reflects the rising rewards accruing to society's most skilled and productive members. Nor do they see merit in various Democratic proposals to reduce inequality, such as ending Mr. Bush's tax cuts on the highest-earners, raising the minimum wage, making it easier to form unions and including labor standards in trade agreements.

But Democrats' takeover of Congress makes avoiding the issue difficult, particularly if the president is to win congressional backing for free-trade pacts and for extending his authority to negotiate new ones.

Pushed by Treasury Secretary Henry Paulson, who raised the inequality issue in his first big speech after taking office, the administration is reorienting its rhetoric. Treasury has framed Mr. Bush's health-care proposal as a form of income redistribution, because it caps the tax break for employer-provided health insurance for more affluent workers in order to finance tax breaks for individuals who buy it on their own.

In his January speech, Mr. Bush cited several education initiatives he thinks are particularly important in addressing inequality -- making schools more accountable for their performance; improving math and science education; and making it easier for lower-income students to afford college.

To offset globalization's impact, the administration is pondering improvements in Trade Adjustment Assistance, a federal program to aid workers hurt by trade. That program is up for renewal this year.

But the administration hasn't yet offered any sweeping proposals to resist the market forces producing inequality -- and probably won't. Indeed, skeptics say the administration will address inequality only as much as needed to win votes in Congress, where the widespread public belief that globalization benefits only a small share of Americans has become an obstacle to Bush-backed efforts to liberalize trade and foreign investment.

The election wasn't "a wake-up call" in which the White House discovered " 'people are worried about wages and we have to get on board,' " says Howard Rosen of the Peterson Institute for International Economics, who has a longstanding interest in programs to aid dislocated workers. Rather, he says, the White House realized: " 'We have a new Congress, and it will be harder to get our agenda through.' "

Top administration officials, however, play down the election result as a factor in their new rhetoric.

Income inequality by most measures has been growing since the 1970s, and is one reason the typical worker's pay has grown only 0.3%, adjusted for inflation, since the expansion began at the end of 2001 while the economy has grown 16%. The share of total income going to the richest 1% of Americans rose to a postwar record of 17.4% in 2005, according to economist Emmanuel Saez of the University of California at Berkeley. And the premium employers paid to hire the most-educated workers has grown.

Until recently, talking about inequality was considered almost taboo among administration officials. Even raising the issue was seen as handing Democrats an advantage. When Bush advisers discussed inequality, it was often to play down negative connotations.

'The term 'income inequality' is a bit misleading because it suggests in a somewhat pejorative way that the rich are getting richer at the expense of the poor," Edward Lazear, a Stanford University labor economist who is now chairman of Mr. Bush's Council of Economic Advisers, said last May. While it's a concern that some people are being left behind, he said, "There is some good news...most of the inequality reflects an increase in returns to 'investing in skills.'"

Mr. Lazear has nurtured his relationship with Mr. Bush. His office is decorated with photos of the two mountain biking. When he gave Mr. Bush a copy of the Economic Report of the President this year, Mr. Bush gave him a bear hug and kissed the top of his bald head, according to people who were present.

Some economists question Mr. Lazear's assertion that, for instance, raising taxes on higher-wage earners will reduce individuals' incentive to acquire new skills. Lawrence Katz, a Harvard University labor economist who served in the Clinton Labor Department, says there's "not a shred of evidence" lower taxes boost educational attainment. "That's first-order goofball."

Even before Republicans' November defeat at the polls, some administration allies were warning that economic insecurity was eroding Republican support. A business coalition hired pollster David Winston to figure out why voters remained so dissatisfied with the economy. His focus groups of middle-income voters in Cincinnati and Pittsburgh found voters going deeper into debt to keep up with rising costs of health care and energy. Executive compensation "is getting to the point where it's obscene," said one focus-group participant.

The more politicians talked about how good the economy was, the worse these voters felt. "It's almost as if these folks are floating around in the ocean, watching the yachts and speedboats go by, thinking, 'Hey, I'm here, someone notice me,'" says Dirk Van Dongen, a co-chairman of the coalition and president of the National Association of Wholesaler-Distributors. Mr. Winston advised Republicans: "Our message should be that while the economy is getting back on track, we need to do more to help people with the cost of living."

But Republican strategists largely ignored the findings. Led by Karl Rove, they wanted to avoid blunting one of their few advantages in the 2006 campaign -- the economy's broad strength. One adviser adds that Iraq would have overshadowed any new economic proposals. Mr. Rove notes the president did talk about health care, college and other pocketbook issues during the campaign.

Over the past several months, debate inside the administration has shifted some. When he ran Goldman Sachs Group Inc., Mr. Paulson had invited former Clinton aides Gene Sperling and Princeton University labor economist Alan Krueger to brief him on the impact of globalization on wages and inequality. At a staff meeting soon after taking the Treasury post in July, he expressed puzzlement about the administration's opposition to raising the minimum wage, a person familiar with the meeting says. He has dispatched Undersecretary Robert Steel, another Goldman alumnus, to scout for ideas to boost the lower middle class.

Other officials -- including White House international-economics aide David McCormick and Matthew Slaughter, until recently a member of Mr. Lazear's council -- argued internally that addressing inequality was needed to damp protectionist sentiment fueled by voters who believe they are hurt, not helped, by globalization, insiders say.

Mr. Bush's acknowledgment that inequality is widening and the renewed focus on health care and revamping aid to dislocated workers suggest the administration appreciates the issue's political potency. "Voters' perceptions of economic health are very different than they used to be," said Mark McKinnon, Mr. Bush's former media adviser and now an adviser to Sen. John McCain, the Arizona Republican seeking to succeed Mr. Bush. "The old indicators that we reliably counted on -- unemployment, the stock market -- don't seem to matter much anymore. And other things do -- health care and pensions."

Adds former Treasury Secretary John Snow, now chairman of private-equity buyout firm Cerberus Capital Management: "The Democrats sense they have an issue here and are going to try to push it, and the Republicans are going to have to have an answer."

Write to Greg Ip at greg.ip@wsj.com and John D. McKinnon at john.mckinnon@wsj.com

Gold-Plated Indifference: PAUL KRUGMAN - Bush & Health

THE COMPLETE ARTICLE
The New York Times
OP-ED COLUMNIST

Gold-Plated Indifference

By PAUL KRUGMAN

Published: January 22, 2007

President Bush is someone with no sense of what it’s like to be uninsured.

President Bush's Saturday radio address was devoted to health care, and officials have put out the word that the subject will be a major theme in tomorrow's State of the Union address. Mr. Bush's proposal won't go anywhere. But it's still worth looking at his remarks, because of what they say about him and his advisers.

On the radio, Mr. Bush suggested that we should "treat health insurance more like home ownership." He went on to say that "the current tax code encourages home ownership by allowing you to deduct the interest on your mortgage from your taxes. We can reform the tax code, so that it provides a similar incentive for you to buy health insurance."

Wow. Those are the words of someone with no sense of what it's like to be uninsured.

Going without health insurance isn't like deciding to rent an apartment instead of buying a house. It's a terrifying experience, which most people endure only if they have no alternative. The uninsured don't need an "incentive" to buy insurance; they need something that makes getting insurance possible.

Most people without health insurance have low incomes, and just can't afford the premiums. And making premiums tax-deductible is almost worthless to workers whose income puts them in a low tax bracket.

Of those uninsured who aren't low-income, many can't get coverage because of pre-existing conditions — everything from diabetes to a long-ago case of jock itch. Again, tax deductions won't solve their problem.

The only people the Bush plan might move out of the ranks of the uninsured are the people we're least concerned about — affluent, healthy Americans who choose voluntarily not to be insured. At most, the Bush plan might induce some of those people to buy insurance, while in the process — whaddya know — giving many other high-income individuals yet another tax break.

While proposing this high-end tax break, Mr. Bush is also proposing a tax increase — not on the wealthy, but on workers who, he thinks, have too much health insurance. The tax code, he said, "unwisely encourages workers to choose overly expensive, gold-plated plans. The result is that insurance premiums rise, and many Americans cannot afford the coverage they need."

Again, wow. No economic analysis I'm aware of says that when Peter chooses a good health plan, he raises Paul's premiums. And look at the condescension. Will all those who think they have "gold plated" health coverage please raise their hands?

--MORE--

Economic Apartheid Kills

Dec 13, 2006

By Joel S. Hirschhorn

To be successful in overturning our elitist plutocratic system we should add economic apartheid to our semantic arsenal. Better than economic inequality, economic injustice and class warfare, because apartheid is loaded with richly deserved negative emotions. Sadly, in South Africa, economic apartheid has taken over from racial apartheid.

How ironic that the Bush administration successfully talked up the global threat from terrorism while it pursued domestic and foreign policies promoting economic apartheid, a far greater and more pervasive threat to national and global stability.

The human race on planet Earth, taken as an aggregate mass abstraction, may be getting richer. But a new report from the World Institute for Development Economics Research of the United Nations University shows that wealth creation is remarkably – one might say criminally – unequal. Follow this hierarchy at the top of the wealth pyramid: The richest 1 percent of adults alone owned 40 percent of global assets in the year 2000; the richest 2 percent owned more than half of global household wealth; and the richest 10 percent of adults accounted for 85% of the world total. That leaves very little for the remaining 90 percent of the global population. Could it be any worse? Yes, the rich are still getting richer, more millionaires are becoming billionaires.

As to the world’s lower class: the bottom half of the world adult population owned barely 1 percent of global wealth, defined as net worth: the value of physical and financial assets less debts. Over a billion poor people subsist on less than one dollar a day. Every day, according to UNICEF, 30,000 children die due to poverty – that’s over 10 million children killed by poverty every year! Global economic apartheid is killing people.

Here are data showing some of the variations among nations. Average wealth amounted to $144,000 per person in the U.S. in 2000, not as good as the $181,000 in Japan, but better than most others: $127,000 for the U.K., $70,000 for Denmark, $37,000 for New Zealand, $1,400 in Indonesia and $1,100and in India. Averages, of course, are very deceiving.

As to wealth inequality, the richest 10 percent of people in the U.S. have 70 percent of the wealth, compared to 40 percent in China. In other words, China has much more economic equality, though that is changing quickly.

To be among the richest 10 percent of adults in the world required $61,000 in net wealth, and more than $500,000 was needed to belong to the richest 1 percent, a group with 37 million members worldwide according to the study. Recall, all these data are for 2000, and would be much higher now, because of the steady trend of the rich becoming richer.

The statistical measure of inequality is the Gini value, which measures inequality on a scale from zero (total equality) to one (complete inequality). For income, it ranges from .35 to .45 in most countries. Wealth inequality is usually much greater, typically between .65 and .75. This reflects the greater difficulty in accumulating wealth (capital) than increasing income. Two high wealth economies, Japan and the United States, show very different patterns of wealth inequality, with Japan having a low wealth Gini of .55 and the U.S. having around .80. The incomes of the top fifth of the Japanese population are only about three times that of the bottom fifth, compared to more than nine times in the U.S. Japan has little economic apartheid compared to the U.S. Yet both countries have a huge number of wealthy people. Of the wealthiest 10 percent in the world, 25 percent are Americans and 20 percent are Japanese. These two countries are even stronger among the richest 1 percent of individuals in the world, with 37 percent residing in the U.S. and 27 percent in Japan. The point is that despite high numbers of very wealthy people, economic apartheid is absent in Japan and abysmal in the U.S.

We can explain the difference between Japan and the U.S. People can save and accumulate wealth for future economic security, or can borrow and spend like mad to accumulate possessions. According to a 2006 report, only 41 percent of American families save regularly, making wealth creation difficult. America’s national savings rate -- which includes corporate savings and government budget deficits -- is only about 13.6% of gross domestic product, compared to 25 percent in Japan.

Global wealth inequality is higher still. The study estimates that the global wealth Gini for adults is .89. The same degree of inequality would be obtained if one person in a group of ten takes 99 percent of the total pie and the other nine share the remaining 1 percent. To a limited degree, elitist powers can engineer modest improvements in income among the global poor, but stark wealth inequality will probably worsen, considering the political power of the rich. As worldwide communications increasingly make the obnoxious wealth of the upper class more visible, even modest increases in income are unlikely to satisfy the vast majority of the global population without wealth.

U.S. economic apartheid shows that a self-proclaimed great democracy with considerable personal freedoms can risk deep social instability from class warfare as it approaches a two-class system. We need to see economic apartheid as lethal and repulsive as racial apartheid.

How much proof do you need? Here are some recent examples of economic obscenities:

The Tucson-based Miraval Life in Balance Resort is now completing a 41-story wellness tower community on Manhattan’s Upper East Side. Three-bedrooms in the new luxury development will run from $1.4 million to $3.65 million, with monthly maintenance charges almost twice the Manhattan high-rise average.

If Goldman Sachs, the Wall Street financial giant, distributed all its compensation dollars equally among the company’s 25,647 workers, every employee in the firm would have received just about $500,000 so far this year. But compensation at Wall Street’s biggest firms gets divided anything but equally. A new federal report says the top-heavy income distribution is squeezing out the middle class. Wall Street’s top 1,000 investment bankers will average somewhere between $2 million and $3 million in bonuses this year, more than 10 times their $100,000 to $250,000 salaries.

Is overpaying CEOs a crime? A five-judge panel in Germany punted on that question by accepting a settlement in the first case ever to bring criminal charges against corporate directors for lavishing excessive pay on company executives. Deutsche Bank CEO Josef Ackermann, Germany’s most powerful banker, will pay out of his own pocket a $4.2 million fine, without having to plead guilty to charges that he helped engineer a $31 million bonus six years ago for Klaus Esser, the top executive at Mannesmann, a German mobile phone company. Ackermann and other directors at Mannesmann, prosecutors charged, had violated their fiduciary duty to watch out for shareholders. If convicted, Ackermann could have faced 10 years in jail.

An impressive new study by IRS and Ernst and Young researchers has produced reliable new data on how things have changed for the worse in recent years. Back in 1979, a mere $233,539 placed an American taxpayer in the rarified air of the top 0.1 percent. By 2004, things had changed considerably – it took a whopping $1,639,047 to rate in the top 0.1 percent, an over 600 percent increase above the 1979 threshold. Wealth shifted. The share of nation’s income going to the top 0.1 percent more than tripled, from 3.28 percent in 1979 to 10.49 percent in 2004. Disgraceful!

In 2004, another analysis of IRS data found the 130,500 U.S. taxpaying households that made up the top 0.1 percent averaged about $4.9 million each in income. The 300,000 Americans in these top 0.1 percent households took home significantly more pretax income combined than the poorest 120 million Americans. In 1979, by contrast, the 120 million Americans at the bottom took home three times more than the 300,000 at the top. Economic apartheid is really all about economic slavery, even if the slaves don’t quite comprehend their terrible situation. After all, that’s why the elites gave them Wal-Mart to pacify them.

Though the United States economy has seen GDP growth averaging 3.1 percent annually from 1980 to 2005, the benefits of this growth have gone overwhelmingly to the richest 10 percent of families, and among this group, disproportionately to the richest 1 percent.

And let’ set the record straight about upward economic mobility. The United States has the lowest share of low-income workers that exit their low-income status from one year to the next (29.5 percent). This perpetuates economic apartheid. The corresponding rates in several European countries are greater than 50 percent: Ireland (54.6), the Netherlands (55.7), the United Kingdom (58.8), and Denmark (60.4).

We should be asking: Why are Americans at the top of America’s income distribution raking in so much more income today than they did a generation ago? The American Bar Association reports that “fewer law school graduates are going into public-interest law or government jobs.” In medicine, where doctors can now make millions evaluating drugs for bio-tech start-ups, the Medical Group Management Association “says the nation lacks enough doctors in family practice, where the median income last year was $161,000.” “The bigger the prize, the greater the effort that people are making to get it,” sums up New York University economist Edward Wolff. “That effort is draining people away from more useful work.”

The December 1, 2006 New York Times editorial, When the Joneses Can't Keep Up noted:

“…the very richest earners are increasing their earnings at twice the rate of their onetime peers, and the average-rich are taking resentful note. Investment bankers are jealous of hedge-fund wunderkinds and, from the sound of it, almost every last person in Silicon Valley is envious of the founders of YouTube (with the likely exception of the Google billionaires who bought their company). …Neither policymakers nor society at large need sympathize with the longing of millionaires to become billionaires. But we do need to worry about the effects on society as a whole when members of the educated elite think they are grossly underpaid. The more they feel as if they are losing ground against their peers, the more likely they are to ditch professions in which the pay is only good — like delivering babies — in favor of less useful careers in which the compensation is off the charts — like eliminating lines from wealthy people’s foreheads.”

The Education Trust charges in a new study that the nation’s top public universities are rapidly becoming “enclaves for the most privileged of their state’s young people.” These flagship universities’ spending on financial aid for students from families that make over $100,000 a year jumped 400 percent between 1995 and 2003. Over that same period, spending for students from families making less than $40,000 increased just 20 percent. The financial aid grants that major state universities are now handing students from $100,00-and-up families — $3,823 on average — larger than the grants given to students from low- or middle-income families. How’s that for economic apartheid?

Families with over $1 million in nonresidential assets — make up a tiny fraction of the world’s population, less than a hundredth of 1 percent, but hold 28.6 percent of global wealth. Thank you globalization.

How long will the vast majority of people stay submissive and peaceful as American and global economic apartheid keep worsening? Here in affluent America there are 37 million people living in poverty, 35 million could not put food on their table at least part of the year, and over 45 million lack health insurance. Dr. Gar Alperovitz says that top 1 percent of our population now own 98 percent of the nation’s wealth. There is a war on the middle class, and it is going well.

Dr. John David wisely observed recently: “Without an internal economic restructuring, the nation now at war in Iraq will evolve into a nation at war within itself. Economic apartheid will not create a sustainable society. Violence will increase and democracy will fail unless this issue of increased wealth inequality is addressed.” What is wrong has been known for a long time. Plutarch wrote almost 2000 years ago, "An imbalance between rich and poor is the oldest and most fatal ailment of all republics."

Is anyone listening? Can we learn from the Japanese? Or is the Second American Revolution being nucleated now?

As compulsive consumers, Americans are spending their way deeper into economic apartheid. The more that Americans spend, rather than save, they make the rich richer and themselves poorer. How smart is that? Freedom to spend is not the same as political freedom; not with two-party control of our elitist, non-populist political system and democracy.

If Americans take back their government and economy and end their economic apartheid, then they can work on erasing global economic apartheid. That’s a big IF.

Americans See Widening Rich-Poor Income Gap as Cause for Alarm

By Matthew Benjamin

Dec. 13 (Bloomberg) -- Americans overwhelmingly say the growing gap between rich and poor has become a serious national concern, a sentiment that may bolster Democrats' plans to narrow the income divide when they take control of Congress.

Almost three-quarters of Americans believe inequality is a major issue, versus 24 percent who don't think so, according to a new Bloomberg/Los Angeles Times poll. Most of the concern is among Democrats and independent voters, though a majority of Republicans -- 55 percent -- also called the situation serious.

``Income inequality is widening quite rapidly,'' said Alice Rivlin, a former vice chairwoman of the Federal Reserve who's now a public policy professor at Georgetown University in Washington. ``It does matter to people that there are such unequal chances to get ahead.''

A month after Republicans lost their majority in Congress, poll respondents generally expressed optimism about the economy, with about three in five saying it's doing well. They were divided over how effectively President George W. Bush is managing the economy, with almost half saying they approve of the job he's doing and about the same number saying they disapprove.

There's little concern about a housing-market collapse, with only 15 percent of respondents saying they expect home values in their neighborhoods to fall during the next six months. And while more than a third expect to spend less money on gifts this holiday season, 68 percent called their personal finances secure.

Anxiety

Still, anxiety about the growing rich-poor divide unites Americans, crossing income and political divisions. Among those earning less than $40,000 a year, 84 percent called the gap a serious problem, with more than half saying it's ``very serious.'' Among those earning more than $100,000, more than three in five said it's a serious concern. Those in the middle- income group making between $40,000 and $60,000 were almost as concerned as the least wealthy.

``The ultra rich and the rich continue to have mechanisms to make money like the stock market and executive salaries,'' Kevin Godsea, an employee with the U.S. Fish & Wildlife Service, said in a follow-up interview. ``And the wages of middle class workers are stagnant,'' said Godsea, 30, a registered Republican in Fort Myers, Florida, who considers himself middle class.

Rich Get Richer

Income growth has begun to pick up, with average hourly wages gaining 4.1 percent over the last 12 months, the biggest increase since February 2001. Still, Census Bureau data point to a long-term trend of the rich taking home a larger slice of U.S. income every year.

The portion of national income earned by the top 20 percent of households grew to 50.4 percent last year, up from 45.6 percent 20 years ago; the bottom 60 percent of U.S. households received 26.6 percent, down from 29.9 percent in 1985, according to the Census Bureau. Meanwhile, average pay for corporate chief executive officers rose to 369 times that of the average worker last year, according to finance professor Kevin Murphy of the University of Southern California; that compares with 131 times in 1993 and 36 times in 1976.

``We are creating have and have-not classes in this country,'' said Jane Huntley, 77, a retired elementary school teacher from Brunswick, New York.

Democrats are considering proposals to shrink the income gap, such as boosting the minimum wage, scrutinizing executive pay, increasing tax credits available to the poor, and making health care and higher education more affordable.

Stagnation

Several of those ideas, if implemented, can provide immediate relief to the working poor, said Gene Sperling, a former economic adviser to President Bill Clinton and now a senior fellow at the Center for American Progress, a Democratic research group in Washington. More difficult, he said, is dealing with the ``insecurity in the middle class. People want to know where the new middle class jobs are coming from,'' said Sperling, who is a Bloomberg News contributor.

Americans have become more optimistic about the state of the economy, with those saying it's doing well rising to 61 percent from 54 percent in September. That may reflect the drop in gasoline prices in the last several months and the burst of wage growth, analysts say.

Marks Improving

Bullishness rose with household income, with more than three-quarters of those earning more than $100,000 a year saying the economy is doing well. Those earning less than $40,000 were the only group in which a majority said the economy is doing badly. About seven in 10 respondents said they expect the economy to be about the same six months from now.

The poll of 1,489 adults was taken Dec. 8 to Dec. 11 and had a margin of sampling error of plus or minus 3 percentage points.

Bush's marks on the economy also improved since September, with 48 percent of respondents saying they approve of how he's handling it, up from 43 percent three months ago. An equal percentage said they disapprove, down from 51 percent in the last poll.

``I don't take issue with his domestic policy, just his foreign policy,'' said Jon Jackson, 32, of Raleigh, North Carolina.

Jackson, a registered Republican who works as an operations manager at a snack food company, said he will spend less this holiday season than last year on gifts, mostly because he's got a new baby and health-care costs are crimping his budget.

About one in five of those surveyed said they expect to spend a lot less money on gifts this year. Almost half said they will spend the same amount and only 15 percent said they plan to increase spending.

``It's time to be really, really careful with our money because the economy is overrated,'' said Francisco Garcia, 50, a computer systems architect in Houston and an independent voter. ``With so many jobs that have been outsourced, the only thing I can compute is that a lot of people are just spending on credit cards, and that's going to cave in.''

To contact the reporter on this story: Matt Benjamin in Washington at mbenjamin2@bloomberg.net

Last Updated: December 12, 2006 18:35 EST