Category Archives: Economics

The California Drought and Inequality: So What’s New?

There was once water here

There was once water here

At first blush, the California Drought and Inequality are not intimately related. Yes, some class warfare has broken out around water usage and new conservation rules.   But that’s not what the title of the blog post is about.  What do the California Drought and Economic Inequality in the U.S. have in common?  The answer is: Neither are nearly as unique or exceptional, as we’re prone to think, because of our blinders and narrow perspectives.  In the great span of geologic time and economic history, each problem, in it’s own realm,  is more the norm, than the exception; more typical than unusual,  It’s important to know this, because, as the adage goes, you must know your enemy to defeat him.

On the Economic Inequality side, it is gradually sinking-in that the period of (relative) equality during the roughly 40 years after World War II, is an historical anomaly for the U.S; an exceptional era, when stars were aligned to create a large middle class that included a large swathe of the “working class.”

On the Drought side, you may be very surprised to learn that the period of explosive growth in Southern California (and the rest of the Southwest) — the 1970s, 80s, and 90s — occurred during the wettest decades in the last two millennia.  Yes, that’s 2000 years, or back to “ancient times.”  That’s not at all exaggerated. Scientists at the U. of Arizona and Columbia U. have built a remarkable hydrology data base dating back to ancient times, which says that the areas we know as California and the U,S. Southwest experienced numerous droughts in the past, more severe than the current one, lasting decades, not just a few years. Read about it and listen to a riveting discussion here.  If you want more technical (and cool) information, try this and this.

Thus, water conditions in Southern California (and most of the Southwest) over the last 15 years would have been considered normal, neither unprecedented nor dire, centuries ago. The situation today is dire” only because we built civilizations where nature may not have intended.  And the technology and ingenuity to overcome nature, may have reached its limits. The situation is real bad.  Here are some amazing photographs of today’s California Dust Bowl.  These are not shown much outside California, because the disaster is proceeding too slowly for the appetites of cable and network news.

Don’t hold your breath or bet on California pistachios while waiting for cheap Mega Desalinization, though MIT is trying hard to overcome the expense and impracticalities of using sea water for drinking and irrigation.  Stay tuned.  Another avenue of hope are the amazing Israeli desalinization efforts, to the point where Israel now has more water than it can use.

In terms of the economy, the several decades from the end of World War II, through the late 1970s, which liberals view as a model for compassionate capitalism, is glaringly atypical in American history, at least back to about 1910.  Piketty & Saez, have documented that, to the satisfaction of most mainstream economists.  You can find all of that data if you start from here.  There is some evidence that Inequality was also the general rule in the U.S. for most of the 19th century, but that is much harder to confirm.

The precise conditions making it possible for wider prosperity in the decades following WW II were never sustainable; some of the factors we don’t want repeated.  The special circumstances include the Great Depression, which ushered in New Deal regulatory, tax, and labor reforms; the economic boost from World War II, the mother of all stimulus packages; and America’s emergence from the Great War as the only intact industrial economy in the world.

The best advice to Drought warriors: Start looking at the Drought as something that doesn’t just end in a few years. The best counsel for Inequality warriors: Stop looking at Inequality as something that will correct itself as soon as job growth accelerates and labor markets tighten.

One difference between the California (Southwest) Drought and Economic Inequality is that lack of water in the Region is natural (going back at least two millennia); while Inequality (arguably) is not natural, not an inevitable result of capitalism, globalization, or human DNA. The leading academic behind the view that Inequality is man made, and can be lessened considerably, with the right policies, and to the betterment of all, is Joseph Stiglitz. He’s a capitalist of the Roosevelt variety (both Teddy and FDR). He’s not a communist.

Am sure you are asking whether human caused global warming is contributing to the Great Drought, which would mean it’s not totally natural. In fact, most mainstream climate scientists believe global warming caused by humans, is exacerbating the current Drought; making it worse than it would otherwise be. You can read about some of that here and here.

Whether or not you believe the Drought or Inequality is a return to a natural state of affairs, it appears there is more hope for rebuilding the U.S. middle class, than for preserving the California life style, as we’ve known it.  There may be other good reasons for not preserving all of it.

After the U.S. middle class has been rehabilitated, they may not be flocking in such large numbers to California, Arizona, Oklahoma, and Texas anymore.  If the Great Drought had happened sooner, the Dodgers might still be in Brooklyn.

Advertisements

Channeling Elizabeth Warren: What an Uncensored Liz Might Say About the Hillary Clinton Announcement

What was Elizabeth Warren thinking as Hillary Clinton formally announced her candidacy for President?   What would Liz be saying if she was not a realistic and committed Democrat?  Let’s channel the more aggressive, less practical side of the Massachusetts Senator, imagining what she might tweet.  On the Sunday morning talk shows, Liz says she too is “ready for Hillary.”   Perhaps she really is!  The line that stood out most from Hillary’s announcement yesterday was: “the deck is still stacked in favor of those at the top.” That’s vintage Warren.

Nonetheless, here are five imaginary, edgy Warren tweets that were never sent. And won’t be.

1. Over more than two decades, the Clintons advanced and accelerated fundamental policies which have helped America edge closer to oligarchy than it’s been in more than a 100 years.

[Ed. Note: This process began well before the Clintons arrived on the scene. The U.S. is perhaps at a quarter to twelve on that clock; not yet mid night].

2. Bill and Hillary drank a lot of the post 1970s De-regulation Kool-Aid, some of which was sound and needed; but overall (in its zealotry) harmed a lot of average people.

[Ed.Note: The post 1970s De-regulation Movement, reversed a lot of Progressive era and New Deal policies aimed at (harmful) concentrations of wealth and power and protections for consumers and labor. While some deregulation fostered more competition, a good (rhetorical question) looms: “Is there a single example of consumer prices going down and market competition increasing after deregulation of a U.S. industry?”]

3. Speaking of deregulation, the Clintons were totally on board to gut decades old financial regulations in 1999 which had protected average people’s money from being squandered in risky big bank investments.

[Ed. Note: In 1999, Democrats led by Bill Clinton and Republicans by Senator Phil Gramm, repealed the Glass-Steagall Act, which had (among other things), separated commercial and investment banking. That enabled big banks to use the money of average people and (barely) middle class home buyers to make risky investments. The ensuing crash decimated the wealth in the middle.  Repeal of Glass-Steagall was of course not the only reason for the crash, but it played a big part].

4. The Clintons have been gung-ho NAFTA style free traders, and brought a lot of other Democrats with them. The form of free trade they supported helped decimate the wages and benefits of U.S. workers.

[Ed. Note: For U.S. multinational companies, in particular, NAFTA has been a way to keep a lid on worker wages and benefits, and avoid thorny regulations (which presumably restrain trade).  This is not your father’s, nor David Ricardo and Adam Smith, Classic Free Trade. There is evidence that trade pacts help nations avoid conflict. That’s good. But that has costs which need to be borne by all of society, not just average people].

5. Clintonian Welfare Reform left many poor people with no work or low wage, subsistence jobs. Democrats’ support for “welfare reform” helped feed Republican ideology around “free-loading” and Romney’s 47 percent theory.

[Ed. Note: New Deal and Great Society welfare (public assistance) needed to be reformed. But Clinton policies were long on getting people off welfare rolls (and maybe into work), and short on providing the right training (or apprenticeships) to find decent paying jobs. These are the main criticisms of Clinton welfare reform.  Arguments that trumpet the policy’s success are represented here].

Channeling Elizabeth Warren’s aggressive side as it might view the Clinton presidential candidacy was a revelation.  It was soon clear that most of the words pouring out didn’t do a very good job of separating Hillary from Bill. Is that sexist?  And unfair?  Perhaps both,  though surely not intentionally.

The problem is that we don’t know very much about Hillary’s position on wage stagnation, inequality, financial sector regulation, free trade, the condition of the middle class, and many  other core and defining financial and economic issues of our time.

That’s partly because Hillary dealt mostly in foreign affairs during the years these issues have been front and center.  But she has also avoided saying much about them, beyond high level generalities.  She won’t be able to continue doing that much longer.

If she watched the video announcing Hillary’s presidential run, am sure that Warren appreciated her saying “the deck is still stacked in favor of those at the top.”  That is, indeed, vintage Warren!   But it still falls in the platitudinous category.  It will be fascinating to see how the cross word puzzle is filled-in over the next twenty months.

Is the “Exploding” Federal Debt Still a Crisis?

chart_gross-federal-debtHas “the debt crisis” gone the way of the domestic ebola scare?  Here today gone tomorrow? Or is it a ticking time bomb, as some hyper vigilant purveyors of the dismal science still warn?  With stronger economic growth, low interest rates, and six consecutive years of diminishing deficits, the (accumulated) federal debt problem seems less acute or urgent. But, it would be foolish to say it’s gone away, or that “it doesn’t matter,” as Dick Cheney proclaimed in 2002, before the debt approached World War II proportions as a percent of the economy (or GDP).

Economists use the Gross Domestic Product [GDP] as the denominator in computing the key “ratio of debt to the size of the economy.”  That ratio is a lot more informative than the absolute size of the debt.

The debt ratio has stabilized at about 100% of GDP, after soaring from 54% to 95% between 2001 and 2011, or more than $6 trillion.  The long history can be seen here.   Most of this explosion was due to financing two wars and a buildup of homeland security, while allowing generous tax cuts to upper income Americans.  On top of that was the TARP bail out of financial institutions and plummeting revenue resulting from the Great Recession. The later actually dwarfs the other factors. Public debt didn’t cause the Great Recession; it was the other way around.

All of this was set in motion, and well underway, before President Obama took office in 2008. The President’s contribution to the deficit was an $800 billion “stimulus” package, a second TARP,  and refusing to brake hard on federal spending, which would have sunk the economy into even deeper recession.

The most important fact in this essay is that the debt ratio has stabilized at around 100% of GDP.  Except for WWII, that is the highest ratio since the inception of the Republic (1787).

Debt at 100% of GDP means the total amount owed by the U.S. to holders of U.S. Treasury securities, is roughly equal to the value of all goods and services produced in the U.S. economy in a year, like 2014. That’s not good, but it’s not as horrible as it sounds either. Analogies to family budgets here can be misleading, but it is useful to point out that if you own a $300K home and still owe $100K on it, and your annual household income is $100K, not an atypical scenario, you are not in deep trouble.   (Though you may be one bad life event away from real tsouris).

The critical GDP to debt ratio reached 120% of GDP at the end of WWII, but phenomenal post-war economic growth brought it down in just 15 years to 50% of the total economy, about where it had been before WWII. It has since remained in the 30% to 60% range until the 2008 Great Recession.

This time, however, conditions after the latest Hurricane Katrina Category III economic stress are different. The economic recovery from two costly wars and a great recession has been slow, till recently, when it surged into the 4 to 5 percent range in the last half of 2014.
But nobody thinks U.S. GDP will grow at that rate for the next decade or two, which is what it would take to duplicate the post WWII feat (dropping the debt ratio from 120% to 50%).

In fact, most purveyors of the dismal science think the ratio will rise above the current 100% plateau after about 2018, even without another economic downturn.  Why? The non partisan Congressional Budget Office (CBO) says its because of four factors:

• The retirement of the baby-boom generation,
• The expansion of federal subsidies for health insurance,
• Increasing health care costs per beneficiary, and
• Rising interest rates on federal debt.

We may not need to worry about bullet point #2 when the U.S. Supreme Court strikes down federal subsidies for health insurance later this year, but that’s a digression.  CBO bullet point #4 is the most pertinent to the question at hand.

If debt at 100% of GDP is the new normal, there is little room for anything to go wrong without really upsetting the applecart. That’s the main reason I’m not quite as sanguine about the debt as astute economists like Jared Bernstein (see a great article by him here) and Paul Krugman, who sound very close to saying “fogettaboutit” (the debt) for awhile. OK, but how long is “awhile?”

Just like CBO bullet point #4 says, as the Federal Reserve recedes from its easy money policy, interest rates will rise on the debt. What this means is that interest payments on the debt will crowd out other spending.  The U.S. isn’t Greece, Italy or even Japan, but those basket-cases show what happens when debt service is so large that it materially affects core government services.  It makes any ambitious reforms, like the President’s proposals in his state of the union speech to revive the middle class, all but impossible.

debt_interest2Interest payments on the debt have also stabilized at “only” about 6% of federal outlays, but that’s mainly because interest rates have been so (artificially) low – at rock bottom — for so long.  As recently as the year 2000, interest payments on the debt were 15% of total federal outlays. The U.S. is unfortunately more than capable of getting there again, quick.

How big is 15% of the federal budget?  Fifteen percent is more than what’s spent on all safety net programs other than medicare, medicaid, and social security.  Unbelievably, it’s not much less than the 19% devoted to national defense.

If you can still remain blasé about the 100% debt to GDP ratio after hearing that,  please tell me what you’re smoking. (Cannabis is still illegal in California).

That said, it is utter folly to try fixing the problem overnight, the way radicals in the House Republican caucus and far right demagogues in the blogosphere would still prefer. Getting a handle on the problem without the severe pains of a German imposed Greco-Roman austerity (now, there’s a trifecta) is still well within our reach. But that’s possible only with a Grand Bargain that includes both a slow down in spending and new revenue, and which takes at least a few baby steps, sooner than later.

Alas, even toddler steps will require serious regime changes (across all branches in D.C.) and major attitude adjustments. The longer that takes, the harder it gets to find even a long term solution that doesn’t inflict great pain.

How Burdened Are We By Taxes?

One answer to the question of how burdened we are by taxes is: “Ask people how they feel, and if they feel burdened, they are.”   Period!  To heck with the facts. That would be the Dick Clark, American Bandstand,  approach, which is what we use a lot these days to make big decisions. Another answer is to look at some facts….if they can be found. You may be surprised that finding good data on tax trends is difficult.  (Perhaps deliberately so).

Laborious data gathering and imputations by Picketty and Saez notwithstanding, we don’t really have the full picture. But what we do have is helpful, if not conclusive.  Much to its credit, a little over two years ago, the New York Times (NYT), using data from several non partisan sources, came close to answering the question on the table.   But because it was the NYT, and thus deeply mistrusted by half the population, perhaps everyone West of the Hudson, the work got lots of attention in the NYT, but not much elsewhere. And it wasn’t pithy or edgy.

Here is a paraphrase of what the NYT researchers found:  The total effective tax rate for ALL income groups is about the same today as in 1980; actually a bit lower for eight of nine income groups across the spectrum; materially lower for the highest income category. (Effective tax rates” are all taxes paid, after deductions and exemptions, as a percent of income.

Yet tax rage is still widespread.

Alas, we really don’t have enough clear, complete, and trustworthy data on the subject. You really need to start a couple of decades earlier to understand a tax revolt in the U.S. that was already mature by the 1970s.  But a 30+ year view isn’t bad.  Here is the main table from the NYT report.

TAX BURDEN2

Source: New York Times Report based on Census Bureau, Office of Management and Budget, and Congressional Budget Office Data

For low and middle income groups, the overall drop is small, probably less noticeable to the families than to the statisticians. It is more noticeable and consequential for the two or three highest income categories. The NYT lumps all households earning $350K or higher into one group, so we can’t tell how the effective tax rate has changed for the top 1% of earners.

There is not much help in these data for politicians who claim there’s a lot of room to raise taxes, unless, perhaps, if we could break down the rates for the highest income bracket into a lot finer detail.

The really interesting story here is the stark contrast between the widespread belief that taxes have been soaring for decades, and the ho hum truth that the effective tax rate for all income groups is about the same or less than in 1980.

It would be nice to have, good “effective tax rate” data going back to 1960. I suspect you would see a rise in rates across the board if that year was the starting point. Back then, federal payroll taxes were low; and state and local governments weren’t medicating, incarcerating, and educating nearly as much as today.

We have a clue from one source of good data going back to the Eisenhower and JFK years.   In 1960, payroll taxes accounted for about 15% of total federal revenue. That was pre Medicare, and before we realized Social Security wouldn’t be able to meet its obligations forever without some tinkering (or more).  By 2013, payroll taxes accounted for about 35% of federal revenue; rivaling the federal income tax (which is 45% of the pie).  I’ll bet few Americans know that payroll tax revenues are not much lower than the take from the federal income tax.  You can read more about it here,

Even if the best explanation for tax rage rests on a look back to 1960 (if not 1860), it’s still puzzling that Americans are (by and large) furious about taxes, even though “effective tax rates” have hardly budged in more than 30 years.

What accounts for the wide gap between fact and belief?

First, stories, like the NYT report, are buried, while daily blasts, blaring with phony charts showing taxes going through the roof, with inflammatory captions, like this one, from the fiercely partisan, pseudo think tank, Heritage Foundation (HF), ultimately reach millions on propagandist media. People who don’t know about the HF “study” or listen to radio, hear about it second and and third hand from Uncle Harry. Uncle Harry hasn’t heard about the NYT report; and if did, he wouldn’t believe it.

Meanwhile, political leaders, some beholden to the same monied interests that captured the radio “public” airways, or bullied by Howard Jarvis and Grover Norquist, have for decades been cowed into silence. Not malicious censorship; but “benign silence” about declining tax burdens (especially for higher income groups) and the related vanishing of the middle class.

In Washington State, where I had the privilege to mange a well respected research shop, all but one of six Governor’s we helped staff (five of them Democrats) discouraged the circulation of good data showing tax burdens were at historic lows (by 2010), and, that oh yes, the middle class is disappearing.    “Uh, well, let’s keep it in-house, maybe post it (inconspicuously) on the website, but let’s not go out of our way to talk about it, OK?”  (That’s pretty close to a quote from one of my bosses). Not censorship, but “benign” silence and neglect.  They were afraid talking about the real tax situation would signal an intent to raise taxes; and that mentioning the woes of the middle class would elicit cries of class warfare.  They were cowed,

It may be unfair to blame the gap between fact and belief about taxes entirely on propagandist media and pusillanimous politicians. We all know the U.S. and state tax codes are maddeningly complex; and way too hard for average people (or small businesses) to “game,” the way General Electric does with its army of 900 accountants.

So even if Uncle Harry is paying the same or less to Uncle Sam today as 30+ years ago, we are burdened by a horribly opaque and unfair tax code. For households that haven’t seen their real income (or wages) increase for a few decades, paying 30% today to Uncle Sam feels a lot more taxing than 33% in 1980.   If they feel burdened, they are.

OK, So We All Agree Inequality Has Gotten Out of Hand: What Next?

No one said anything last night about black smith wages

No one said anything last night about black smith wages

Almost everybody now agrees we have an acute problem (in the U.S. and in most advanced economies) around income inequality, wage stagnation, and the disappearance of the middle class.  President Obama made these issues the centerpiece of yesterday’s State of the Union message. The other day, the President’s 2008 opponent, Mitt Romney, said he may run for President again because he wants to help the poor, the disadvantaged, workers, and the beleaguered middle class.  Mitt was a “severe conservative” before he became a severe liberal.  Go Mitt!

Here is the best single chart — heretofore called, “The Chart” —  I’ve seen depicting the inequality and wage stagnation problem.  (Thank you to my friend and colleague Kurt Lightfoot for sharing  this).

Workers’ Hourly Compensation Versus Productivity

The upper line tracks “productivity” in the U.S. economy since 1948.  Productivity represents the combined effects of technology and harder/better work to (potentially) raise prosperity and the standard of living.  The lower line shows the trend in the compensation of workers. The two lines tracked perfectly from the end of World War II to the mid 1970s. Since then, workers haven’t shared in the prosperity.  You can see full analysis and discussion here.

So, what might Mitt do if he becomes President?  Am afraid the things which need to be done are anathema to Mr. Romney’s party and even to many (a majority?) of Americans, at this point in time.  Mitt and his party will support their usual remedies for greater prosperity (and for any other ailment):  lower taxes on the rich and corporations, less regulation, and more “freedom” for all. Of course, not all of that is bad. But is there any evidence it works?  Maybe giving lip service to wage stagnation is a step forward; but it can just as easily be a bait and switch.

Obama’s State of the Union address proposed other remedies, which could help move the lower line on The Chart a little higher, like a raise in the minimum wage and better access to education, but those won’t (and really can’t) by themselves get us back to the trend of shared prosperity.

If we want compensation to track closely again with productivity, It will take reviving organized labor (with reforms), tempering the effects of “free trade,” genuinely repairing an unfair tax system, and seriously containing health care costs (so that some of employers’ premium costs can move to the wage column).

Regarding “free trade,” the President last night championed the Trans Pacific Trade Agreement (some call it NAFTA on steroids). Those agreements, which Democrats supported as heartily as Republicans, have contributed greatly to the dismal trend in wages.

As this blog has voiced many times, we need a new paradigm and intellectual basis for “free trade” agreements,  which doesn’t make them bobsled vehicles for race to the bottom.  That said, this blog doesn’t champion “protectionism,” nor yearn for Smoot-Hawley II.

“Why Turn Health Care System Topsy Turvy and Raise Costs for All, Just to Help 15% of the People?”

critterThe question in the blog post title is now being asked even by Obamacare/ACA supporters, including some Democrats, like the erstwhile Senator Charles Schumer, from New York, who thinks health care reform distracted his party from taking care of the middle class.

But, the premises of the question are all wrong.

In the same vein, Republican Mike Huckabee was even more to the point than Schumer about the “irrelevance of health care reform” to average Americans. Here is what Huckabee, soon to be a presidential candidate, had to say in an interview:

Q: What about ObamaCare? Is reaching those 30 million uninsured people a priority?

HUCKABEE: It ought to be a priority. But the priority should have been to deal with the 15% of people who didn’t have insurance rather than disrupt the system for the 85% who did and who were largely satisfied with insurance…..

It still matters what the facts are, even if that’s become a quaint concept.  Let’s start with the “15% uninsured” fact-let that’s implanted in Huckabee’s and everyone else’s brain. It’s very misleading. It persists because the true picture is harder to explain.

The “15% percent uninsured”  figure is a snapshot, taken at a point in time.  Over a materially longer period – more than six months, to one, two, or ten years – anywhere from 25% to 50% of Americans experience a significant spell without individual or family coverage.  That’s very large.  It’s a lot more than just “the poor.”

An even higher number of people are in perpetual fear of losing health care coverage, which keeps them in dead end jobs and contributes to  the “dead wood” we complain about in the next cubicle.    None of that may be disturbing to Huckabee or Schumer, who probably have never had to think about going without health insurance for their families, even for a few months; and haven’t worked in a cubicle for decades.

The much better count of how many people have lacked health insurance in the U.S. is documented here and here, by the non partisan Congressional Budget Office and by career analysts at the U.S. Treasury Department.

What about Mr. Huckabee’s point that Obamacare turns the health care system upside down?   Many would say, “If only it were so.”  The ACA went way out of its way to preserve the main pillars of the old health care system – private insurers, pharmaceutical companies, hospitals, and other private providers in a $3 trillion dollar system,  which leads the world in cost per client, but with worse health outcomes.  Whether you like it or not, ACA falls well short of turning the health care system upside down.

As for recent U.S. health care costs, the ACA munificently provides an alibi for anyone who raises insurance premium or shifts higher costs onto workers. Insurance companies, hospitals, and employers have been doing that for decades at rates that far outstrip general inflation and growth in worker wages or middle class income.

So, yes, health care costs have been rising, but since the ACA passed, health care inflation has actually slowed down. That is more likely due to the great recession than to ACA; but it’s a lie that health care costs have soared since the passage of ACA.

Let’s close the loop regarding Schumer’s Monday morning quarter-backing about the ACA and the middle class,  Soaring premium costs over decades have been a big factor in wage stagnation and middle class economic woes.  It’s elementary that the more a business pays for worker health insurance, especially when premium costs outpace profits, the less it can pay in wages. At the time Democrats were in control of Congress in 2010, “health insurance for all,” at affordable prices, was the single most effective and practical way of helping American workers and the middle class.

Perhaps Senator Schumer thinks Congress could have more easily attacked the other causes of middle class doldrums?  It would have been a snap to: (1) reverse NAFTA (and maybe block TPTA negotiations, while they were at it); (2) overturn “right to work” laws in about 25 states, (3) restore marginal tax rates to 90% for high income earners; and (4) put the brakes on technological advances which replace workers and lower their value. Maybe they could have done that in six days and rested on the seventh?

I will give Schumer this: The President and supporters of ACA did a horrible job explaining what they were trying to do; while conservatives have been spectacularly effective persuading a lot of middle Americans and small business folks that ACA is the bane of their existence.

Corrected Link to More Info on Dynamic Scoring

Wonder Where the Numbers Come From?

Wonder Where the Numbers Come From?

In a recent, brief blog post about Dynamic Scoring and “Voo Doo Economics,  I included a defective link to a prior article on the subject, with more detailed information. Thank  you to several readers who found the error. 

If you want to read the prior article, please continue.

 

Continue reading