Nel's New Day

June 16, 2014

Decline of the U.S.: Brandeis, Warren, Reich

Louis Brandeis’ book, Other People’s Money and How the Bankers Use It, was published 100 years ago, but it has a strong parallel to Elizabeth Warren’s latest book, A Fighting Chance, according to reviewer Jill Lepore. Brandeis contends “that the country was being run by plutocrats and, especially, by investment bankers, who, by combining, consolidating, and aggregating the functions of banks, trusts, and corporations, controlled both the nation’s credit and the majority of its resources—including the railroads—and yet had not the least accountability to the public or any sense that the functions they had adopted were essentially those of a public utility.” He wrote:

“The power and the growth of power of our financial oligarchs comes from wielding the savings and quick capital of others. The fetters which bind the people are forged from the people’s own gold.”

One hundred years ago, the Gilded Age plutocrats used savings in banks to build giant, monopolistic conglomerates controlled by the shareholders instead of the people who had deposited their money into bank accounts. Brandeis’ book originally appeared in Harper’s as essays. Its compilation of facts and figures shows the massive control that banks wielded:

J. P. Morgan and the First National and the National City Bank together held “341 directorships in 112 corporations having aggregate resources or capitalization of $22,245,000,000,” a sum that is “nearly three times the assessed value of all the real estate in the City of New York” and “more than the assessed value of all the property in the twenty-two states, north and south, lying west of the Mississippi River.”

When Brandeis republished Other People’s Money in 1933 at a cost of $.15, the book was designed to influence President Roosevelt’s administration. The result was a number of anti-trust reforms and financial-industry regulations that grew the middle class during the middle decades of the last century.

While Brandeis’ book deals with the banks’ use of savings, Warren’s A Fighting Chance shows how banks today use the massive debt of the middle class to make money and wield control. With the repeal of financial reforms starting in the 1980s and the loss of the wall between commercial and savings banks from investment banks came the fetters on people from excessively-high interest rates on credit cards and mortgages. People were lured into a sense of false security with “teaser” rates before they faced the shock of skyrocketing interest rates.

Warren first published about bankruptcy in a monograph with Teresa A. Sullivan and Jay Lawrence Westbrook, As We Forgive Our Debtors: Bankruptcy and Consumer Credit in America (1989). Studying 2,400 bankruptcy petitions filed in 1981, they discovered that many of them belonged to the middle class. Over half were homeowners, and many were women rearing children. In The Fragile Middle Class: Americans in Debt, published six years later, Warren reported on personal-bankruptcy filings a decade after her first study. She found that between 1979 and 1997, the number of these filings had increased by 400 percent.

Part of Brandeis’ work led to abolishing child labor and establishing maximum-hour and minimum-wage laws. These laws lost the power to help the middle class, starting with insufficient increase in minimum-wage during the late 1900s. Warren’s work concluded that women holding jobs and raising children become more economically vulnerable, not less. “For middle-class families, the most important part of the safety net for generations has been the stay-at-home mother,” Warren and her daughter, Amelia Warren Tyagi, wrote in The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke (2003). As wages grew stagnant for the middle class in the early 1980s, married women, like Warren’s mother decades earlier, were forced to get a job to help the financial crisis. Once the family grew dependent on the second income, there was no cushion for wages that continued to be stagnant.

stagnant wages

The only answer for struggling families was to spend savings. Once those were gone, they took on huge debts. The final step was filing for bankruptcy. Financial crisis for a two-income family is the loss of one of these jobs. Warren and Tyagi reported, “Having a child is now the single best predictor that a woman will end up in financial collapse.” Between 1981 and 2001, the number of women filing for bankruptcy rose more than six hundred per cent.

During the battle for Massachusetts senator in 2012, Scott Brown tried to paint Warren as an Ivy League elitist. A Fighting Chance shows a far different picture. The divorced Warren was a single mother when she worked to get her college degrees and a registered Republican until the mid-1990s. It was her study of bankruptcy that destroyed her faith in unfettered market systems and “crony capitalism.”

A parallel to Elizabeth Warren’s work is Robert Reich’s research that has been recently promoted in the documentary, Inequality for All based on his book Aftershock: The Next Economy and America’s Future.

Income-Inequality-Graph-from-Robert-Reichs-New-Film

A recurring visual during the film is a suspension bridge superimposed over a graph of wealth concentration of wealth during the 20th century. The two high points are 1928 and 2008 when equality peaked in the United States. Immediately following both these peaks were crashes—the Great Depression and the Great Recession. At both these high points, the top 1 percent took home over 23 percent of the national income. Currently, 400 people in the United States have more wealth than the bottom half of people in the U.S. That’s 400 people with over $2 trillion who have the same wealth as over 150 million people in the United States.

share in income 1

The Golden Age from 1945 to about 1975 disappeared with the anti-union legislation and rapid increase in college tuition. Taxes were also high during this period of time, as much as a 70-percent marginal rate, but they shrank rapidly starting with 1980. At the same time, taxes on the middle class such as sales taxes and payroll taxes (including Social Security) rose.

During the time shown by the suspension bridge, other trends parallel the suspension bridge concept in reverse. Wages grew during the middle of the 20th century as did union memberships. By the 1980s, wages stayed stagnant and union membership shrank.

In his work, Reich goes farther than Warren to show how the rigged system destroys not only the people but the corporations. When workers lose an adequate share of the nation’s income, they can’t buy anything. Lower consumption equals lower corporate earnings. In a vicious cycle, resulting layoffs causes even lower corporate earnings and more layoffs. In short, it is the majority of people who are the job creators, not the wealthy.

share in total income

A common perception among conservatives is that people are poor because they won’t work. As more and more people struggle, that perception is gradually changing. The following chart shows that during the past two decades, more and more people understand that people who work hard cannot climb out of poverty. By 2012, less than one-fourth of the people blame “not working” instead of “not earning enough.”

chart poor people in us

Reading A Fighting Chance and watching Inequality for All (http://inequalityforall.com/) provide a great background for the problems we face and the ways that we can move forward.

December 25, 2012

Fixing the Economy

The social decline facing the United States made possible by the loss of revenue during the two terms of George W. Bush has steadily moved the country lower and lower among the countries of the world. Both political parties want the American dream for everyone, giving all people the opportunity to escape poverty. According to James Gustave Speth in his new book, American the Possible: Manifesto for a New Economy (Yale University Press, 2012), a fair and equitable society in the U.S. is possible.

Speth uses the definition of “the American dream” from James Truslow Adams  in his 1933 book The Epic of America: “It is not a dream of motor cars and high wages merely, but a dream of a social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position.”

Equality is vital for economic growth, according to the Center for American Progress. As Robert Reich explains in his 2010 book Aftershock: “Unless America’s middle class receives a fair share, it cannot consume nearly what the nation is capable of producing. . . . The inevitable result is slower economic growth and an economy increasingly susceptible to great booms and terrible busts.

Because today’s high productivity and economic growth stem largely from scientific and technological knowledge, most of which is inherited from the past, the greater portion of income and wealth “comes to us through no effort of our own,” as Gar Alperovitz and Lew Daly point out in their book Unjust Desserts.  Herbert Simon observed, “[If] we are very generous with ourselves, I suppose we might claim we ‘earned’ as much as one fifth of [our income].” The major question comes from how to share the wealth that no one living today has created.

In the 20th century, both political parties were concerned with eradicating poverty, creating universal health care, providing high-quality and affordable education for all, guaranteeing meaningful and living-wage employment opportunities, and devising a just and fair tax system. Yet conservatives increasingly increased opportunities for the wealthiest in the nation while eliminating the possibility for the bottom 99 percent through the destruction of unions, lessening of minimum wages, and allowing the costs of health care and education to astronomically increase.

Harvard’s Howard Gardner argues that “no single person should be allowed annually to take home more than 100 times as much money as the average worker in a society earns in a year. If the average worker makes $40,000, the top compensated individual may keep $4 million a year. Any income in excess of that amount must be contributed to a charity or returned to the government, either as a general gift, or targeted to a specific line item (ranging from the Department of Veterans Affairs to the National Endowment for the Arts).” He further proposed that no individual would be permitted to pass more than $200 million to his or her heirs, and that any excess must be contributed to charity. “To those who would scream ‘foul’ to such limits on personal wealth,” he concludes, “I would remind them that just 50 years ago, this proposal would have seemed reasonable, even generous.”

Another good idea is a reverse income tax, as recommended in Aftershock. Using the negative income tax idea examined in the 1960s and today’s earned income tax credit, he urges that “full-time workers earning $20,000 or less (this and all subsequent outlays are in 2009 dollars) would receive a wage supplement of $15,000. This supplement would decline incrementally up the income scale, to $10,000 for full-time workers earning $30,000; to $5,000 for full-time workers earning $40,000; and then to zero for full-time workers earning $50,000. The tax rate for full-time workers with incomes between $50,000 and $90,000–whether the source of those incomes is wages, salaries, or capital gains–would be cut to 10 percent of earnings. The taxes for people with incomes of between $90,000 and $160,000 would be 20 percent, whatever the income source.”

Reich also promotes higher taxes for the wealthy. He said, “I propose that people in the top 1 percent, with incomes of more than $410,000, pay a marginal tax of 55 percent; those in the top 2 percent, earning over $260,000, pay a marginal tax of 50 percent; and those earning over $160,000, roughly the top 5 percent, pay 40 percent. These taxes, when added to the modest amounts contributed by taxpayers who earn between $50,000 and $160,000 under my plan, would raise $600 billion more than our current tax system per year.”

Another major step forward should be to implement the important proposal put forward by Bruce Ackerman and Anne Alstott in The Stakeholder Society: “As a citizen of the United States, each American is entitled to a stake in his country: a one-time grant of eighty thousand dollars as he reaches early adulthood. This stake will be financed by an annual 2 percent tax levied on all the nation’s wealth. The tie between wealth-holding and stakeholding expresses a fundamental social responsibility. Every American has an obligation to contribute to a fair starting point for all. Stakeholders are free [to] use their money for any purpose they choose: to start a business or pay for more education, to buy a house or raise a family or save for the future. But they must take responsibility for their choices. Their triumphs and blunders are their own.”

The federal government should spend more on social and jobs programs, environmental protection, and neglected needs abroad while our annual federal budgetary deficits should be brought down to sustainable levels. High growth rates will not provide sufficient revenue to the government. There are many ways to raise new revenues–closing down tax breaks for the rich, shifting taxes from things we want to encourage to things we want to discourage, taxing luxury items, closing corporate tax loopholes, strengthening the estate tax, and moving toward a more progressive tax structure.

A 2009 report by John Cavanagh and his colleagues at the Institute for Policy Studies proposed the following plan that would raise an additional $3 trillion in federal revenues over a five-year period without slowing the economy. That’s over double what President Obama currently proposes.

1. Repeal tax breaks for households with annual incomes over $250,000: $43 billion per year.

2. Tax financial transactions: $100 billion per year.

3. Eliminate the tax preference for capital gains and dividends: $80 billion per year.

4. Levy a progressive estate tax on large fortunes: $40–60 billion per year.

5. Establish a new higher tax rate on extremely high incomes: $60–70 billion.

6. End overseas tax havens: $100 billion per year.

7. Eliminate subsidies for excessive executive compensation: $18 billion per year.

Making sure that the bottom 99 percent of the population has a living wage makes the economy grow. They are the ones who spend the money that they get, not the top 1 percent.

 

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