Monday, March 20, 2006

3/20 FHPN Huge income inequality due to 30-year rise of speculative finance, not just to education levels

"FHPN," "Fair, Honest, Principled News," is a regular feature which gives links and excerpts, with bold emphasis added for key points, from selected recent stories, often focused on a single important theme, and my bold italicized comments. See 3/11 "Digests of my previous posts for busy people" link for blog's core ideas.

This edition of FHPN focuses on rising income inequality. The 3/19 edition, link, focused on new media and "citizen journalism."

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3/3 Krugman, KCStar "Facing up to income inequality" link "What we’re seeing isn’t the rise of a fairly broad class of knowledge workers. Instead, we’re seeing the rise of a narrow oligarchy. Income and wealth are becoming increasingly concentrated in the hands of a small, privileged elite ... Highly educated workers have done better than those with less education, but a college degree has hardly been a ticket to big income gains. The 2006 Economic Report of the President tells us that the real earnings of college graduates actually fell more than 5 percent between 2000 and 2004. Over the longer stretch from 1975 to 2004 the average earnings of college graduates rose by less than 1 percent per year ... A research paper ... gives the details ... Between 1972 and 2001, the wage and salary income of Americans at the 90th percentile of the income distribution rose only 34 percent. So being in the top 10 percent of the income distribution, like being a college graduate, wasn’t a ticket to big income gains. But income at the 99th percentile rose 87 percent; income at the 99.9th percentile rose 181 percent; and income at the 99.99th percentile rose 497 percent ... this year the 99th percentile will correspond to an income of $402,306, and the 99.9th percentile to an income of $1,672,726 ... The notion that it’s all about returns to education suggests that nobody is to blame for rising inequality, that it’s just a case of supply and demand at work. And it also suggests that the way to mitigate inequality is to improve our educational system ... the growth of inequality may have as much to do with power relations as it does with market forces ... rising inequality is driven by the giant income gains of a tiny elite, not the modest gains of college graduates."

3/17 Roach, MS "Perils of a New Globalization" link "Economics and politics are on a dangerous collision course ... the drumbeat of protectionism is growing louder …the services economy is now on the leading edge of feeling the stresses and strains of an increasingly competitive and open world economy … Economists have long dubbed services as “nontradables” … service providers had to be in close proximity with their customers … an IT-enabled globalization that throws long-sheltered knowledge workers into the global competitive arena for the first time ever … Factory sector workers currently account for only about 15% of total employment in the G-7 … the US portion is now close to 10% … this aspect of the hollowing has just about run its course … deepening sense of anxiety that afflicts workers who have long harbored the belief that they would not have to face pressures from low-wage offshore talent pools. The persistent stagnation of inflation-adjusted wages in the developed world — even in a high-productivity-growth US economy — has shattered that sense of security … In the G-7 countries, services currently account for close to 75% of the total workforce — literally five times the share of manufacturing … IT-enabled globalization has moved at hyper-speed to the upper echelons of the occupational hierarchy … the availability of an enormous reservoir of high-quality offshore knowledge workers … the global labor arbitrage is forcing a realignment of relative wages in the world economy — with the developed world fearing a “race to the bottom” while the developing world is hoping to ride the rising tide"

3/16 Pearlstein, KCStar "Income inequality new reality" link "inflation-adjusted income for all but a tiny fraction of the wealthiest households hasn’t increased ... changes in the structure of the labor, product and capital markets are accelerating a long-term trend toward income inequality ... in 1979, the top 10 percent of households earned 33 percent of all pretax income. By 2003, their share had climbed to 44 percent. The shares of everyone else declined ... First, the share of the economic pie going to workers ... seems to have fallen, while the share going to holders of capital has gone up. The culprits here include the variety of factors that go under the heading of globalization — all of which have weakened the position of workers in negotiating for wages and benefits. Just as significant have been the decline in the influence of labor unions, the employer tilt of labor laws and the rising influence of Wall Street that now focuses corporate managers on the single-minded goal of increasing shareholder value. [Second] even while labor’s share of the economy is shrinking, the distribution of income within labor’s share has become more unequal. Until recently, most of the academic research focused [on] ... the more education you had, the better off you were. But two recent studies ... have found that most of the impact from trade and technology has shifted to workers in the middle of the wage and skill distribution ... At the high end, they have increased demand for workers with the higher-level skills needed to design and market this new technology and the new goods and services associated with it ... these newly enriched people near the top now demand more services ... boosting demand for such lower-paid workers who can’t easily be replaced by machines ... “hollowing out” the middle of the income scale"

3/17 Pearlstein, KCStar "Safety net could use big repair" link "shifs the tax burden onto the rich without unduly distorting economic decisions or imposing the high marginal rates that only invite tax avoidance ... close loopholes in both the corporate and individual income taxes that benefit the rich more than everyone else ... restoration of a reasonable inheritance tax that couldn’t be bypassed through insurance scams or offshore trusts. You can construct a tax regime that, without increasing the top marginal rate beyond 35 percent, would not only balance the federal budget but also provide extra revenue to extend the social safety net and revive public services ... [Americans'] tolerance is wearing thin as they see Wall Street sharpies and corporate executives getting fabulously rich by undercutting the economic security of the working poor and middle class. Not only are job security, private pensions and employer-provided health-care coverage being cut back, but there is also a noticeable erosion in the public services that serve as a backstop ... the top 10 percent of income earners now take in an extra $750 billion a year because of their increased share of national income ... it hardly “class warfare” to suggest taking back a chunk of that good fortune and investing it in public goods ... modest steps can be taken to soften the rules of competition and rebalance the power relationship ... giving workers more bargaining leverage by restoring the right of workers to form a union ... requiring shareholders to approve executive compensation packages. Increasing the minimum wage, and indexing it to inflation ... what if all companies had to pay half the cost of catastrophic health insurance for their workers? Or if companies were required to fully fund their pension promises each year before using free cash"

3/10 Krugman, KCStar "Decisions by and for the elite" link "We’re living in a time when many Americans are feeling economically insecure, but a tiny elite has been growing incredibly rich ... U.S. workers deserve a better answer than yet another assertion that a rising tide raises all boats, because that’s manifestly untrue. We’re living in a time when most Americans are seeing little if any benefit from overall income growth, because their share of the economic pie is falling. Between 1979 and 2003, the share of overall income received by the bottom 80 percent of taxpayers fell from 50 percent to barely over 40 percent. The main winners from this upward redistribution of income were a tiny, wealthy elite: More than half the income share lost by the bottom 80 percent was gained by just one-fourth of 1 percent of the population, people with incomes of at least $750,000 in 2003. And those fortunate few are the only people Bush seems to care about. Look at what he had to offer after asserting, in effect, that workers get outsourced because they don’t have the right education: lower taxes, deregulation and fewer lawsuits. That sounds like a wish list for wealthy individuals and big corporations. Bush once joked that his base consisted of the “haves and the have-mores.”"

FHPN mini-essay: These five recent articles, two by economist Paul Krugman, op-ed columnist for "The New York Times," one by Stephen Roach, chief economist of Morgan Stanley, and two by Steven Pearlstein, columnist for "The Washington Post," come much closer to the truth about tremendous income inequality in the U.S. than most in the mainstream media (they don't discuss wealth inequality, which is actually far greater than income).

Krugman's very important contribution in the first article is in debunking the notion that the extreme level of inequality in the U.S. today is mainly due to differences in education levels. Doing so is critical if the U.S. policy debate is to get past the notion strongly peddled by both political parties for the past twenty five years that retraining and more education is going to address the issues of stagnating real wages and rising inequality.

But as helpful as these articles are, they still miss a critical point, imho. As I've noted many times already on this blog, average real (inflation-adjusted) weekly earnings of American workers have declined 17% since 1972 (see Table B-47, pg 338, "2006 Economic Report of the President," link).

Something started to change in 1972, and that something was a complete break with the post-WW II international monetary system known as Bretton Woods. It was replaced by a flexible rate currency system and increasingly deregulated financial markets.

Since that fateful change, the main economic trends have been crystal clear. There has been an almost unimaginable expansion of credit creation no longer "fettered" by the dollar's tie to gold and by financial regulation.


Shown on a graph, debt has expanded so far in excess of real GDP since 1972 that one wonders how much longer it can possibly go on, since ultimately the two must remain linked. Seeing the yawning gap between debt and real production on a graph for the first time makes one's jaw drop in wonder at how long is this sustainable?

That honest reaction is why such a graph is never, ever shown in the mainstream media, much less regularly highlighted, like other less important economic charts. If it were, it would be like pulling the curtains on the Wizard of Oz, or like saying the emperor has no clothes. The ensuing loss of public confidence in the economic/financial system might be significant.

This debt creation has been fueled by a huge increase in short-term speculative financial activity, whose demand for ultra-high short-term returns drove out investment in fixed assets, long-term basic r&d, labor contracts, etc used in highly skilled industrial manufacturing. As a result, industrial employment has sharply fallen the past few decades, while Walmart jobs have greatly increased, resulting in the declining earnings statistics I keep citing.

Since the debt has a legal claim on real production, which can't possibly grow nearly fast enough to service the burgeoning debt claims, the extra necessary cash flow must be generated by not paying the fully accounted for real costs of current and future production, including the full lifetime costs, from infancy to old age, of producing highly educated workers.

This is done by taking advantage of the much greater mobility of capital, especially the financial variety, to seek out the most "efficient," low cost, high quality methods of production, having the effect of pitting workers against each other, first within nations and then between them, i.e. outsourcing, offshoring, globalization, etc.

This uneven battle, often a rout, results in layoffs and speed-ups, stagnant real wages in developed nations and underpayment in developing ones (without ever having had to pay any of the costs of raising from childhood the literally billions of new workers entering the global market economy from outside it after the fall of the Soviet Union and opening of SE Asia, China, India, etc. a huge free subsidy to the speculative financial system), abrogating and robbing legal contractual benefits and pensions, etc., etc., etc.

It also results in not accounting for and fully paying all of the various externalities, such as environmental degradation (especially in rapidly developing nations); climate change (see my 3/14 article, "FHPN Evidence of climate change faster than modeled mounts from Arctic, Antarctica, Greenland," link); underfunding of sustainable energy development (see my 2/11 article, "The Global Speculative Financial System as “Enabler” of America’s Addiction to Oil," link and my 2/10 article, "Bush’s American Competitiveness and Advanced Energy Initiatives: “Deja Vu All Over Again” Twenty-five Years Too Late?" link);

in grossly inadequate and inequitable health care (see my 3/16 article, "FHPN Krugman's NYRB long essay, "The Health Care Crisis and What to do About It," brief excerpt," link); substandard education (see my 2/12 article "The Home-Equity ATM of Blue-State Liberals and the Lopsided Inequitable Funding of American Education," link); widespread malnutrition; extremely commercialized popular culture (see my 2/27 article, "The New, Old Thing: Silicon Valley, Hollywood, Madison Ave," link), etc. etc. etc.

And no amount of tinkering at the margin has redressed this situation, nor will it, so it will probably not change until another periodic large crisis eventually occurs, the last such crisis period being from the late 1960s to early 1980s , eventually giving way to the largest secular bull market in history.

The crises before that one were in the 1930s and 1890s, roughly every 30-35 years as the financial speculative excesses are dealth with, one way or another, with some sort of political solutions, but always poorly and always at the expense of the least culpable, least powerful, and least capable of bearing the burden.

Then a new generation of financial speculators starts the game all over again, promoting the next wave of new technologies, products, and markets, proclaimed as the latest "new new thing."

That's just built into greedy, jealous human nature since time immemorial, and won't change until the financial systems the elites construct for their benefit create ways of controlling hyper-speculative excesses while still promoting beneficial innovation.

Except for a few rare historical moments, that combination has been very difficult to achieve, sometimes innovation is too stifled, sometimes too much speculation occurs, it's been very difficult to get it even close to just right.

In response to this latest era of globalization (human history is actually the history of increasing globalization), the Democrats lost the support of their industrial worker base, and then the actual base itself, by promising the effectiveness of retraining programs, which came to be rightly derided as "funeral insurance."

As that false remedy increasingly could not be credibly peddled, the Clinton "banker" Democrats, exemplified by his Treasury Secretary Robert Rubin, tried to sell the long-term benefits of "free trade," such as Nafta, which also never materialized as promised for industrial employment, and free capital markets, to the benefit of the Citigroups and Goldmans (at both of which Rubin has held the highest positions).

To be fair to the Democrats, by far the two largest periods of very sharp declines in manufacturing employment were Reagan's first term and Bush II's first term, both times millions of jobs in that high-wage sector were lost. Also, the only sustained increase since 1972 in average real (inflation-adjusted) weekly earnings of workers was during Clinton's second term, 1996-2000, again see Table-B47 in the "2006 ERP," link given just above.

That, in a few paragraph nutshell summary, is essentially what has been going on economically and politically up until the Bush Admin, which we will cover shortly, during this more than thirty-year era of increasingly hyper global speculative finance.

Now, with the U.S. industrial work force essentially decimated, the battleground seemingly has shifted to services, as Roach notes in the article above and many others.

I have added to this essay at marked ADDED MATERIAL STARTS HERE as of the time stamp shown below, and will finish it later today or tomorrow.