Current Events

Thursday, June 23, 2011

Is the Deficit Only a Sideshow?

I’ve been wracking my brains to try to recall the source for a scene where Marie Antoinette returns to Versailles and someone in the crowd shouts: “But there is the deficit.”  I tried Googling and didn’t find it, but I was reminded that she was known as “Madame Deficit.”  In any event, we know how it came out, including her apology for stepping on the executioner’s foot.  We certainly have a deficit, and there are those who would maintain that it was caused by expenditures as silly as buying too many frocks.  There is no question that we have to deal with it, but the task is impossible if we don’t deal with the larger problem of the structure of the US economy and the distribution of wealth within it.
Here are some basic facts about the economy:
The total wealth of the United States is about $75 trillion or about $215,000 for each and every one of us 350 million people
51% of Americans don’t pay income tax.
Average wages have been declining.
Wealth is increasingly concentrated among the top 0.1%, 1% and 10%
Manufacturing jobs continue to be exported and other types have begun to follow  
The deficit in our trade balance is huge and seemingly permanent
Our debt to the Chinese and others runs into the trillions
In America, globalization seems to have long-term benefits only for the wealthy
When ultra conservatives look back nostalgically at their imagined vigorous, free-spirited America of the past where the market was allowed to flourish and every man was his own master, they ignore the changes in social structure and economic power that have resulted from economic development.  Today none of us is self sufficient; we are all interdependent.  The safety net of the extended family and the village has virtually disappeared from America life
The security in old age that these institutions provided has been replaced by Social Security, IRAs and an ever more unreliable pension system
The palliative health care that families, small communities and charities provided has been replaced by Medicare and Medicaid.  Now that science has developed previously unimagined capabilities to preserve the quality of life and extend its duration, we are unwilling to forego its benefits no matter what the cost.
As a result of economic and scientific development, we have come to expect more from life, including good health.  The cost of providing this to ourselves continues to spiral upward.
The first question is: Does the economy create enough value to provide every American with decent housing, an adequate diet, medical care and a dignified retirement when we are too old to continue in our lifetime occupations?   Let’s call these the basic necessities of life.   I think it does, but the fruits of our labors are not distributed in a way that will provide those necessities to everyone.  The next question is how can they be distributed in a way that will satisfy most people’s sense of fairness?  Obviously it takes jobs that pay well so that individuals can contribute individually and as a group to the wealth creation necessary to provide them.  Conservatives can wring their hands about the 51% of households that don’t pay federal income tax, but they need to understand that that 51% doesn't make enough to provide an acceptable middle class lifestyle.  Many don't make enough for any kind of acceptable lifestyle.
In 1970 the minimum wage was $1.60 an hour. If you inflate that figure using various indices, you find that the relative worth in 2010 of $1.60 in 1970 is:
Wage per hour            Index used                                           Annual salary at 40 hrs per week
$8.98                           Consumer Price Index                         $18,678
$7.28                           GDP Deflator                                       $15,142
$8.88                           Unskilled wage                                     $18,407
$10.80                         Production Worker Compensation       $22,464
$14.90                         Nominal GDP per capita                      $30,992
$22.60                         Relative share of GDP                         $47,424
$9.28 (2009)                Value of consumer bundle                   $19,302 (2009)
 My preference for figuring the equivalent value of the 1970 minimum wage in 2010 would be “relative share of GNP,” because labor is one of the factors of production and its productivity has grown continually over the past 40 years.  Here is the calculation for annual salary using Relative share of GDP:  
52 weeks x 40 hours = 2080 hours; 2080 hours x $22.60 = $47,424
Current median income is $49,777 or hardly more than what I think the minimum wage should be.  In other words, if you accept my choice of price inflators, Relative share of GDP, then almost half the US population is living on the equivalent of the minimum wage of 40 years ago.  If I took my hourly minimum wage rate of $1.60 and derived annual income it would come to $3328.  In 1970, median family income for 51.4 million households was $9870 or three times the minimum wage.  There were 7.214 million households earning less than $4,000 so 14% of families were living on incomes ranging from just above the minimum wage to something less than that.  Is that better or worse than 2010?  It depends on which index you choose.
True, productivity has grown because of investment (public and private and individual efforts at self-improvement) but the return to private investors has taken virtually all of the growth without any growth in the return to labor.  
Annual Growth Rate of Real Income across the Family Income Distribution:
                        Bottom 5th         2nd 5th           3rd 5th              4th 5th        Top 5th          Top 5%
1947 to 1973      3.1%               2.7                2.8                  2.8              2.5                2.2
1973 to 2005      0.2                   0.4                0.65                0.9              1.6                2.1
Source: U.S. Census Bureau, Historical Income Tables, table F3,, updated September 15, 2006, Percentages are approximate because I took them from bar graphs.
If one has any understanding of compound interest, it is clear that the rewards have shifted radically in favor of the very wealthy. 
When I was researching the question of income distribution, one of the best things I found was:  “Wealth, Income, and Power” by G. William Domhoff, September 2005 (updated January 2011) at

 It has some useful tables.  I didn’t reproduce them because I’m not sure that’s allowed, but here is something I derived from them:

 If total financial wealth is $100 and there are 100 people, then one person has $42.70, 19 people have $2.63 and 80 people have 9.4 cents.  Derived from data in Table 1 in Domhoff’s article, which he based on work by Edward N. Wolff at New York University (2010).

I applied the 2007 financial wealth breakdown to income and tax return data from 2000 and got the following result:  People in the top 1% averaged $2,100,906.  The next 19% averaged $130,256 or 6.2% of what the top 1% earned and the remaining 80% averaged $49,201 or 2.34% of what the top 1% earned.  I used the 2000 data because it was readily available and I was interested in orders of magnitude more that perfect accuracy.  Coincidentally 2010 Census Bureau statistics show current median income as $49,477 or almost the same as my average for the bottom 80%

Unemployment is at 9.1% and new jobs are not being created at a rate that will reduce unemployment much in the foreseeable future.  Neither political party seems to have any workable ideas.  Part of the bad news is that many US companies haven’t created many (or any) jobs since the1980s.  Perhaps it is a misnomer to call them US companies simply because some percent of the owners are US citizens or residents.  Tax and regulatory policies that would favor corporate interests are offered by both parties, but one could question whether these incentives toward productive investment would result in jobs in the US or someplace else.

It’s pretty clear that globalization has hollowed out the US economy.  It’s an exaggeration to say that there’s nothing left here but high finance on one end and bed making and burger flipping on the other, but if you are looking for a job it may seem that way – and all he high finance positions are taken.  It’s clear that we can’t all work in education and health care.  The maldistribution of income, which has the lion’s share of rewards from the economy flowing to the top 1% of earners, has left the middle class with insufficient income to purchase the goods the economy can produce and as a result economic activity spirals down; jobs are lost and not easily recovered.
Our Republican Congressmen and Senators keep promising us that if we cut taxes, cut government spending and eliminate “over restrictive government regulations,” the private sector will come forth and invest and create jobs for everyone.  When the business leaders stand up in Reston and say that the current Dulles Airport extension can only be completed if the requirement for use of union labor is withdrawn, one can wonder where we are going to find taxpayers who make enough to provide the increased revenue promised after tax cuts for the rich.
I think the numbers would show that we can’t get rid of the deficit and national debt by just taxing the rich.  It’s going to take an economy that provides rewards to all its participants.  The problem is how to create the jobs that will generate the incomes that will generate the revenue to pay for entitlements and whatever else we agree government should do.  It looks very much like businesses are gaming us.  While they are holding trillions, they are creating almost nothing.  I very much doubt that those trillions will be invested here, when the short and medium term gains seem to be abroad.  One would have to take a long term view to realize that building up a prosperous middle class again would be the one sure way to long term success for American business.  It assumes a well trained and productive workforce of people who are also consumers.

The German model seems to be working for Germany.  Workers’ representatives sit on corporate boards and corporate decisions are taken after considering the interests of workers and stock holders alike.  The country is highly unionized, but apparently the various interests have recognized that they all must work together if all are to succeed.  One wonders if union busting hasn’t been the biggest mistake made by American business.  Boeing’s North Carolina debacle is a perfect example of self-defeating corporate greed.

I’m sure there are some good ideas out there that would stimulate domestic investment.  One of those is the proposal for an infrastructure bank.  This makes so much sense that it is hard to see how anyone could oppose it – and it couldn’t be more business friendly.  Go figure.

The Republican mantra is that with lower government expenditures and lower expenditures on entitlements and lower tax rates, revenues will actually increase and the deficit will magically disappear by 2040 or so.  It’s an exercise in self delusion. 

In any event, whatever government is going to do and pay for, the revenue has to come from taxpayers.  That’s either going to be rich people only or rich people and well paid workers.  And remember: “There is the deficit!”

No comments:

Post a Comment