What’s the Matter with Kentucky?

In John Quincy Adams, the author, Harlow Giles Unger, notes that Adams was consistent throughout his very long public career in defending the rights of all, and this included strong opposition to slavery, but he seemed to believe that a large proportion of society was too ill-informed and ignorant to make decisions in its own best interest.  In other words, he was an elitist when it came to voting and governing.   Maybe he was right.  I’ve never been able to figure why so many blue collar workers are rock ribbed Republicans.  Actually I don’t understand why anyone is a Republican other than entrepreneurs, financiers and the people who provide them with services like corporate lawyers and accountants, lobbyists and trade association and think tank staffs.  On the front page of yesterday’s Washington Post (November 10, 2015) there was a picture of Dennis Blackburn, 56, of South Williamson, Kentucky.  He says he would probably be dead, if it weren’t for the health insurance he got through Kynect, the state’s response to Obamacare. In the recent election for governor, he voted for businessman Matt Bevin, who had built his campaign around a pledge to dismantle Kynect.  Go figure.

Muslims in France, Marie Le Pen and the Tea Party

Recently I mentioned a three part series on Muslims in France by Mark Lilla in an email to a friend in Singapore, Peter Kurz.  The three articles were: “France on Fire;” “France: A Strange Defeat ,” a review of  Le Suicide francais by Eric Zemmour; and “Slouching Toward Mecca,” a review of Soumission by Michel Houellebecq.  Peter read the articles and sent back his comments.  I asked and received his permission to print them here:

“I've read the Mark Lilla articles and agree with you that reading the books he reviews is not a task that I shall set myself.  Nor  will I make a point to see "The Kidnapping of  Michel Houellebecq" film, which features Houellebecq playing himself.  (Houellebecq being the author of the third book that Lilla reviews, "Soumission.")  I would not refuse a glimpse of the luscious Fatima character in the film, however - Marie Bourjala - if I could catch one!

“It's a tremendous challenge to even begin to try to comprehend what's going on in France.  I love visiting the place and searching out all its food, wine of course, countryside and people, all of them, every crook and nanny.  For so many centuries they have been so certain they are the best, but now, after overcoming the affronts of 1870, 1940, 1954, and 1962, after 1/7/2015 it would appear that the brightest are ready to accept that the country is lost to les Arabes.  Maybe it's true.  I have no idea whether there is any hope for the French.  When I think about Arabs in America, or the millions of Hispanics who have joined us in recent decades, I don't feel that way at all.  It's true we have a different, more educated "class" of Arabs and Muslims for the most part, and you could argue that the Hispanics who've come are an especially hard-working, ambitious sort.  It could just be that we still need immigrants, as we always have.  Of course we Americans face the tremendous challenge, after 150 years, of accepting our black brethren (who have been in the country longer than most of us) and meaning it, and of correcting the cruelties, injustices and outrages of the centuries, before we can even begin to imagine that we are a people blessed by God.  And at some point it will all be useless if we don't accept that we have done a splendid job of exterminating our own brothers who arrived on our shores thousands and thousands of years before us.  It's just that, from what Lilla writes, you get the feeling that the thinking classes are ready to give up on the challenge in France and hand the mess over to Marine Le Pen.  Again, I don't think the U.S. is at that point - and hopefully Lilla is wrong about the French.  

I still believe that our Tea Party reactionary, ignorant, white-supremacist fellow citizens will not succeed in achieving their goals and will gradually and blessedly die out.  However to keep new ones from springing up in their place, we need desperately to retool how we educate kids.  And more and more I am thinking we need to revise our Constitution.  And no, I have no idea how we can do it if three-quarters of the states will have to ratify a new one.  It will be a life-long piece of work for someone.  Lee Kuan Yew made Singapore his life-long piece of work and he succeeded by many yardsticks, although he ruined more than a few lives and left a bitter legacy whose taste will linger long into the future in the memories and writings of those he drove away from his pet project.  Lee was certainly the father of this country in a way that Washington was not the father of ours.  I think old George just did not have the drive to put his own exclusive stamp on the project.  He was actually interested in other things, like farming and family, science and horses and real estate and wealth.  Pretty normal.  Also, he knew he had a lot of young, brainy, ambitious sorts around him who would put it all together.  His job was to win the war, which he was eager to do and did.  Luckily he had Nathaniel Greene and a few others to help get things started and then finish the job.  Plus those Froggies at Yorktown, of course!  I've read that Washington and the others in our founding fathers bunch were very disappointed once the government got off the ground after 1788.  They had thought we could get along without all the infighting, but very soon things got nasty and spiteful.  It's gotten bad again now and I just think something will have to be done about it.  The system the fathers devised wasn't meant to be abused by greed and narrow-mindedness.  Who will lead us away from all this?  We need an LKY for our own time, but one equipped with something other than a club.  Corkscrew, perhaps!  If only it were that easy - when the sun goes down, you open a bottle and everyone is friends with everyone else.  A few "soft pillow" drinks and we are all brothers.  Say, are the shadows lengthening, or is it just my heat-rattled brain here in the tropics?

PK       

A Financial Plan for Max

An electrician named Max rescued us from the cold one recent Sunday morning after our power went out.  I've been reading and thinking a lot lately about wealth distribution and retirement, and while I was writing out the check to pay him, I asked if he had an IRA.  He said he’s never heard of IRAs -- he may have been putting me on, but I don't think so.  Max is 53 and has a wife and some children, a good job as an electrician plus his own electrical business.  Here’s what I’d like to tell Max:

1.  Start reading Michelle Singletary in the Washington Post to build up what you know about handling your finances and your future.

2.  Google Roth IRA’s; this site seems to have good information:  www.rothira.com/  Open a Roth IRA at Fidelity or Vanguard.  Decide how much you can afford to invest up to the allowed maximum and then put all of it into stock index funds based on Nasdaq, the S&P 500 or the total stock market.  (Index funds minimize the fees you pay to manage the money).  You can start with as little as $500, but you should try to put in the maximum each year. If you and your wife have enough to fund an IRA for each of you, you should do it.  She doesn’t have to have any earned income herself to have an IRA as long as you do.

3.  If you have a mortgage, make sure you have a stream of income that will enable you to make every payment on time.

4.  Never pay any credit card interest.  If you want something and don’t have the cash to buy it, wait until you do.

5.  Open a savings account to create a “rainy day” fund that would cover 3 to 6 months expenses.

6.  Never be without health insurance.

How Obama Enriched the 1% and what the Koch Brothers Plan to Do About It

How much of a hypocrite does one have to be to stand up in front of a group of voters and claim that Obama has ignored the interests of the middle class and deliberately enriched the 1%?  I do fault the Democrats for not doing a better job with their economic message before the election last November, and I suppose that left them open to this cynical posing by Republicans, who have suddenly discovered the middle class.  The Republicans real sympathies seem to have been on display when four potential Republican candidates for President attended the soiree put on by the Koch brothers.  The billionaires set a target of $889 million to finance the 2016 campaign.  It looks like the Kochs are setting out to buy a President who will look after the interests of the 0.1%, and the candidates seem to be all for it.  If the Kochs succeed, I don’t see much coming out of this other than John Boehner and Mitch McConnell saying over and over again: “Jobs, jobs, Jobs, echoed by whoever is over at the White House.  And as nothing happens, the rich will get richer.

On January 22 erudite sports writer, George Will, strayed off the diamond and read something by Nicholas Eberstadt in “National Affairs quarterly.” (sic)  It seems that “America’s welfare state transfers more than 14 percent of gross domestic product to recipients, with more than a third of Americans taking ‘need-based’ payments.”  (sic again)   He gives readers a lot of figures, and with each one it becomes clearer that there is something seriously wrong with the American economy.  If a third of us are in need, and those needs have to be met by government programs, I think we can say that the free market system has failed us.  How did this happen?

Apparently there are only two periods in history when the middle class fared well, the second half of the 14^th C and the post WW II period up to about 1980, or if one wants to be snotty, up to Reagan.  In the former case, the Black Death had wiped out a third or more of the population of Europe and those who were left were able to bargain for higher wages.  After WW II, if I recall correctly, over a third of workers in the US were unionized, and all workers, even those who professed to hate unions, benefitted from the unions ability to bargain with management for better wages and benefits.  Businesses didn't go broke when they had to share some of their earnings with their workers.  They prospered and grew.  After 1980 that all changed.  The economic pie kept growing but at a slower rate.  The rich got richer by keeping virtually all of the growth for themselves, but they might have done even better by taking a smaller piece of a bigger pie.

Where do we go from here?  The talking heads on MSNBC seem to think it will be 2022 before the Democrats can produce a majority in the House of Representatives.  In the meantime there’s no telling how much damage our Republican politicians can do as they pay off the billionaires who bought them their seats and try to solve the nation’s economic problems by promoting a Chicago School market economy with perfect competition, small government and low taxes.  Grover Norquist will be happy and may feel he can retire.  The rest of had better be thinking ahead to how work can be organized in this new information age so that everyone can be gainfully employed.  The workforce has adjusted to innovations in production methods many times over the last two centuries, but this time it may be different.  I’m not sure there is a role for many of us, unless we revise our ideas about how the working world should be organized and how its participants should be compensated.

CEO Pay, Let’s Keep It a Secret

A few days ago there was an article in the Washington Post about a study that showed that most people think CEO pay is about thirty times higher than the medium wage while in fact it is over 300 times higher.  More precisely the ratio is 354 to 1, there are 28 companies where it is over 500 to 1 and one company where it is 1795 to 1.  Companies really don’t want those numbers out there.  They think they mislead investors and Harvard Business School Professor Michael Norton is quoted as saying they are a disincentive for workers.  Well, yeah.  In 1950 GM chairman “Engine” Charlie Wilson was paid $663,000, roughly  $5  million  in  today’s  dollars,  and  about  40  times the annual wage of his average assembly line worker. Corporate ethic frowned on CEOs taking stock grants as unfair “competitive avarice.” Economists call this period “The Great Compression” because the income gap between the rich and the middle class was at its narrowest in the twentieth century.  If you divide $663,000 by 40, you get $16,575 and if you do the same for $5 million you get $125,000.  The friendly old Heritage Foundation estimates that GM workers still get about $75 per hour in wages and benefits but they add in the legacy costs of retired GM workers.  GM itself puts the figure at $59 per hour.  It might be worth mentioning that Engine Charlie’s marginal tax rate in 1950 was 91% instead of 35% like now and that the average growth rate of the US economy in the 1950s and 1960s was over 4%, dropped to around 3% in the 70s and 80s and has averaged below 2% over the last 10 years.  In fairness I have to note that the marginal rate on that $16,575 was 47%.  If corporations are people, don’t they have some social responsibility along with the rest of us? 

Building Wealth for Retirement: Social Security, IRA’s and a TSP

We have been bombarded for several years by conservatives who believe the only way to “save our country” is to cut back on entitlements.  Many have Social Security in their crosshairs and have suggested various privatization plans.  Meanwhile Senator Elizabeth Warren is saying that there should be no unnecessary cuts or risky privatization schemes (July 2012), that modest changes will save Social Security, not privatization (Apr 2012), and that she opposes investing part of the payroll tax (in the private sector). (Oct 2012).  Senator Warren is not alone in her position.  I mention her specifically because she has been the subject of some op-ed columns on the Social Security question. 

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I agree in principle with Senator Warren on each of her three points. Certainly we should not be reducing Social Security payments for those who have little or no other income, but Social Security alone is not enough for a dignified retirement.  Until recently most of us thought of retirement income as a combination of Social Security and a defined pension from our employer and, since the late 1970s or early 1980s some income from IRAs and the like.  Now those private pensions are disappearing.  Supposedly they are being replaced by 401(k)s and by Keough Plans and Salary Reduction Simplified Employee Pension Plans (SAR SEPs).  I don’t know anything about SAR SEPs, but everything I’ve heard and read tells me that a 401(k) is not a viable substitute for a defined pension plan.

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The problem is that very few people understand the importance of making and then managing their private investments.  From what I read, most working people “dump” some money into the 401(k) offered by their employer and then leave it there.  The stocks or funds chosen by the employer are more likely to be for the benefit of the employer than the employee.  When they retire, they find they don’t have much.  That same money invested in index funds over the course of a working career could produce a substantial nest egg and some real income to top off their Social Security checks.

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Toward the end of my career as a federal employee I had access to the Thrift Savings Program (TSP) which was set up when the federal government changed its whole retirement system.  The TSP offered a limited range of index funds, at first just stocks, bonds or government bonds.  I went all in for the stock fund, got burned in 1987 but had recovered nicely by the time I retired in 1993.  My account continued to grow until I got to be 65 when I had to choose between taking a defined monthly income for life or rolling the whole principal over into an IRA.  I chose the latter and it’s still growing.  (Because I had the option of staying in the old federal retirement system and exercised it, the government did not match my contributions to the TSP, but what I put in from my own income grew to a substantial amount).

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On her website Senator Warren says she would be opposed to taking funds from Social Security to invest in a government guided fund like the TSP, and I agree.  However, I do think something like the TSP should be offered to everyone who works, either alongside of 401(k)s or as a replacement for them.  As I said above, I don’t know anything about SAR SEPs, so I don’t know if there is the same problem with them that there is with 401(k)s.

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In the media we hear a lot about personal choice, and how people want to manage their own affairs without government interference, but I don’t think it is arrogant or condescending for me to say that most people do not understand how to handle their financial planning.  It took me my whole life and lots of good advice from friends and, lately, from financial advisors, to figure it out and at nearly 80 I’m still learning.  The sample of younger people I have talked to about financial planning is very small, but it certainly confirmed my view that they need some serious help – and I don’t think they can find it in the private sector.  The people who wrote those mortgages are still out there.

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Unfortunately everything I’ve said above has no meaning for people working at the minimum wage level or even twice that.  There’s no way they can find the money to max their IRAs or invest in a TSP fund.  Life is only fair to some of us.

The $24 Billion -- Where to Send the Bill?

It’s estimated that the government shutdown from October 1 to 16 cost the economy $24 billion.  One commentator noted that that would have been enough to hire 400,000 teachers.  After a little long division, I figured that their average salaries would have been $55,400 or $26.52 per hour.  That’s a lot of teachers and the average is only a little below the national median, unless it’s dropped some more lately, so it would have been a useful thing to do.  I should note that we’re talking here about one year.  To keep those teachers working a second year would cost another $24 billion minus the income tax paid by the teachers out of their $55,400 salaries.  Maybe it would have been better to invest some of the phantom $24 billion in infrastructure and research which might have had a medium rather than a long term payout.  We will never know, because the $24 billion is lost forever.  Or is it?  Couldn’t we send the bill to Senator Cruz and John Boehner?  Perhaps they could send it on to the Koch brothers.  I’m sure the brothers are realists who believe in the axiom that you get what you pay for, so shouldn’t they be willing to kick in at least a few billion?

An Exchange of Views on Off-Shoring, and Globalization and Income Distribution II

To John:  To continue this conversation..

Musing on the term “offshoring” makes me wonder if this is the same thing as “globalization”. Both could have the same effect for individual small towns but not for the country as a whole.  In my view “offshoring” really only reflects a local portion of the aggregated economic effects and “globalization” would count the total economic flows, both into and out of the country.  Every analysis I’ve seen suggests the globalization has produced a greater overall economic benefit (per capita GDP) rather than less.  The “social cost” is actually a surplus.

Reply  Did you notice in today's post that the Brits are starting to make some decent wine.  What are we going to do?  I'm not sure we can find an example of comparative advantage as clear as Ricardo's wool and wine trade. 

I agree with you about the distinction between "off-shoring" and "globalization," but I don't quite see how social cost is a surplus, especially for the people bearing the social cost.  As for globalization, it seems clear that Ricardo's wool and wine works, but my question is: For whom?  Maldistribution of wealth in this country is a growing problem.  If the fruits of globalization are all picked by the top 1% and their attorneys in the top 5%, the overall effect on society may be negative.

Domestic economic growth is a function of domestic demand.  If the hollowing out of mid-level jobs and salaries continues (it has even started to hit the healthcare industry), demand will stagnate or even decline.  Multinational corporations will continue to be profitable to the extent they have sales in non-US markets, but perhaps not in the US.  What will come back to us will be profits to the 1% and cheap stuff to be sold at Walmart to keep the bed makers, lavatory cleaners and hamburger flippers alive.

FYI:  Here's a website on economic questions that I have just begun exploring.  You might want to check it out.

http://conversableeconomist.blogspot.com/

NOTE:  At this point the Reinhard-Rogoff study and Larry Summers criticism of it was injected into the dialog by a third party and the dialog continued:

To John:  This is one of those relatively rare cases where, for a bit of research, you can get to the bottom of the issue.  I attach the results of my investigation.  The first part is a direct rebuttal of RR.  Bottom line is that while there was an error in processing the means of GDP growth, no error occurred in the medians which was the basic parameter used for study conclusions.  So in fact the study conclusions about the deleterious impact of Debt/GDP ratio were not changed although the magnitudes of the averages were reduced.  Plot on second page gives a good graphical overview of all results

I think the Samuelson article from the Washington Post says much the same thing.  I wish all economic issues were this simple to research!  Note: Charts omitted

Reply:  Hans, interesting charts.  From the beginning I have thought that the whole R&R controversy was sort of missing the point.  It's probably correct that debt levels affect growth levels, but I'm not sure that's where the debate should be.  We had the stimulus and it had some effect but not enough.  It just wasn't big enough.  Krugman and the other Keynesians haven't suggested that we ignore debt, but rather that we increase debt in the short term in order to restart growth and deal with debt when we have the economy moving again.  (I have to admit that Krugman can go overboard at times about ignoring the significance of debt.  I think most Keynesians would more cautious).

Since it's a closely related topic, I'll give you some feedback here on Fred Bergston and globalization.  You wrote:

"This is the basis of my statement that, overall, there is no net social cost.  But you have to look at the entire economy to see this."

It is certainly correct to say that globalization (and off-shoring) have increased total GNP and are likely to continue to do so.  The problem for me is the distribution of those gains.  The share of the nation's economy constituted by wages has sunk to its lowest level since WW II, and US median household income continues to decline.  To me this is "social cost."  If I thought that the increased share that is going to millionaires and billionaires was going to be taxed at levels that would enable increased investment in education, infrastructure and basic research, I could live with it, but there are no indications that that's going to happen.  I repeat myself when I say you have to have demand if you want to have growth and that demand has to be for more than corporate jets, third homes and BMW 700s.  I'm waiting for the econometricians to give us some charts that relate distribution or maldistribution of wealth to political stability and economic growth.

To John:  I've seen no information that globalization has contributed to income inequality. It is interesting that income inequality has increased in many counties.   

 I'm always on the lookout for interesting correlations between economic factors. If you find such, let me know.

Reply:   I just googled "offshoring income distribution" and the first two articles of 563,000 are the ones below.  The first is from the San Francisco Federal Reserve Board Branch and the second is from the New School.  The Federal Reserve piece is a short summary of some regression research which identifies three probable factors for changes in income distribution: "skill-biased technological change" or SBTC, offshoring, and immigration.  It's short, and the references to the math behind it will be easier for you than for me.  I did not read through the 33 pages of the New School paper, but I will if I can stand sitting in front of the terminal long enough to do it.  Economists at the school do have a certain bias and it is certain that they will find lots of problems with offshoring.

What is clear to me is that there are no definitive answers to the question of the relationship of offshoring to income distribution, and I doubt that further research could provide a definitive answer.  Unlike science, economics rarely if ever produces a definitive answer, so perhaps your gut instinct that offshoring is not related to the change in income distribution is just as valid as mine that it is.  The one thing that neither of us can quarrel with is that the change has occurred and that the rich are getting richer and the rest of us are not -- well, maybe I've gotten a little richer in the current stock market, and I hope you have too.

http://www.frbsf.org/publications/economics/letter/2007/el2007-28.html
http://www.newschool.edu/scepa/publications/workingpapers/SCEPA%20Working%20Paper%202006-3.pdf

No doubt the third of the 563,000 articles says that offshoring has not been a factor in changes in income distribution.

To John:  Thanks for the articles on the effects of offshoring.  I did some work on the FRBSF article and have prepared a summary of that work as an attachment to this message.  Sorry but I was unable to determine the focus of the New School article.

The FRBSF article was very straightforward but, unless I’ve missed the boat (always a possibility) I think it does not say what you presumed.  It shows offshoring to be a minor factor in income inequality.

In my research travels I came upon an article by Greg Mankiw, former Harvard Economics Chair, specifically directed at off shoring as a focus of John Kerry’s 2004 election campaign.  It’s long but very interesting description of how the issue was handled in the election (he was an advisor for Bush).  Mankiw wrote my macroeconomics text book and is a neo-Keynesian.  The paper is the second attachment.  I include here parts from the conclusion:

Outsourcing will create winners and losers, and the pain of dislocation will be real

for workers and their families. Taken together, however, these conclusions suggest that

offshore outsourcing is likely to be beneficial for the United States as a whole. This

presents a challenge of how to best assist people affected by offshore outsourcing without

retreating from international engagement and thereby giving up the economic gains that

trade in services makes possible. As is the case with more familiar forms of trade, in the

long run, outsourcing is likely to be a good thing for the U.S. economy.

Reply:  I read the whole Mankiw paper, learned quite a bit and I'm sore where I sit.  I have no problem with the statement which you quote from his conclusion.  It’s accurate  but:

Outsourcing will create winners and losers, and the pain of dislocation will be real

for workers and their families. …….

I think we distinguished in our earlier dialog between firms that manufacture overseas for consumption overseas, e.g., GM, and firms that send most of what they manufacture overseas back to the US, a mixed bag economically and socially, including those dead towns in Ohio. 

Mankiw does an excellent job of stating the case for outsourcing services, especially since we apparently run a trade surplus in this area.  I'm still left with the distribution of income problem.  I guess we can take care of that by giving unemployed workers vouchers to go up to the community college and take some courses.  I hardly think we are going to get more generous than that, when over on the playing field next door the debate is how we are going to cut Social Security and Medicare benefits because we just can't afford them. Oh, and the food stamp thing has gotten out of control and needs to be cut back.

It's easy to write from the comfort of an office at Harvard or on K St. that "the pain of dislocation will be real for workers and their families" but the overall US economy will benefit.  I just learned a new word, "eusociality," coined in 1966 by Susan Batra, a biologist specializing in bees.  Edward O. Wilson picked up on it and used it in his work on ants and now is writing about eusociality in the development of human society, The Social Conquest of Earth.   I recommend it, although I learned more about ants than I really wanted to know.  Eusociality is a concept that seems to be lacking in boardrooms these days, and that does not bode well for our future.   Wilson's ideas can be suggested by this:  Selfish individuals always win against altruistic individuals.  Altruistic groups always win against selfish groups.

This country used to be a little bit altruistic.  Are we still?