24 Nov, 14 > 30 Nov, 14
7 Jul, 14 > 13 Jul, 14
27 Jan, 14 > 2 Feb, 14
13 Jan, 14 > 19 Jan, 14
11 Mar, 13 > 17 Mar, 13
21 Jan, 13 > 27 Jan, 13
23 Jan, 12 > 29 Jan, 12
5 Dec, 11 > 11 Dec, 11
24 Oct, 11 > 30 Oct, 11
17 Oct, 11 > 23 Oct, 11
3 Oct, 11 > 9 Oct, 11
15 Aug, 11 > 21 Aug, 11
28 Mar, 11 > 3 Apr, 11
7 Mar, 11 > 13 Mar, 11
21 Feb, 11 > 27 Feb, 11
17 Jan, 11 > 23 Jan, 11
10 Jan, 11 > 16 Jan, 11
20 Dec, 10 > 26 Dec, 10
13 Dec, 10 > 19 Dec, 10
29 Nov, 10 > 5 Dec, 10
22 Nov, 10 > 28 Nov, 10
15 Nov, 10 > 21 Nov, 10
1 Nov, 10 > 7 Nov, 10
25 Oct, 10 > 31 Oct, 10
18 Oct, 10 > 24 Oct, 10
11 Oct, 10 > 17 Oct, 10
4 Oct, 10 > 10 Oct, 10
27 Sep, 10 > 3 Oct, 10
13 Sep, 10 > 19 Sep, 10
6 Sep, 10 > 12 Sep, 10
30 Aug, 10 > 5 Sep, 10
16 Aug, 10 > 22 Aug, 10
5 Jul, 10 > 11 Jul, 10
24 May, 10 > 30 May, 10
26 Apr, 10 > 2 May, 10
19 Apr, 10 > 25 Apr, 10
29 Mar, 10 > 4 Apr, 10
4 Jan, 10 > 10 Jan, 10
28 Dec, 09 > 3 Jan, 10
23 Nov, 09 > 29 Nov, 09
24 Aug, 09 > 30 Aug, 09
16 Mar, 09 > 22 Mar, 09
2 Feb, 09 > 8 Feb, 09
1 Sep, 08 > 7 Sep, 08
28 Jul, 08 > 3 Aug, 08
9 Jun, 08 > 15 Jun, 08
19 May, 08 > 25 May, 08
12 May, 08 > 18 May, 08
5 May, 08 > 11 May, 08
21 Apr, 08 > 27 Apr, 08
7 Apr, 08 > 13 Apr, 08
17 Mar, 08 > 23 Mar, 08
25 Feb, 08 > 2 Mar, 08
18 Feb, 08 > 24 Feb, 08
11 Feb, 08 > 17 Feb, 08
21 Jan, 08 > 27 Jan, 08
7 Jan, 08 > 13 Jan, 08
31 Dec, 07 > 6 Jan, 08
17 Dec, 07 > 23 Dec, 07
10 Dec, 07 > 16 Dec, 07
12 Nov, 07 > 18 Nov, 07
22 Oct, 07 > 28 Oct, 07
20 Aug, 07 > 26 Aug, 07
23 Jul, 07 > 29 Jul, 07
30 Apr, 07 > 6 May, 07
9 Apr, 07 > 15 Apr, 07
2 Apr, 07 > 8 Apr, 07
26 Mar, 07 > 1 Apr, 07
5 Mar, 07 > 11 Mar, 07
26 Feb, 07 > 4 Mar, 07
12 Feb, 07 > 18 Feb, 07
29 Jan, 07 > 4 Feb, 07
8 Jan, 07 > 14 Jan, 07
30 Oct, 06 > 5 Nov, 06
23 Oct, 06 > 29 Oct, 06
16 Oct, 06 > 22 Oct, 06
9 Oct, 06 > 15 Oct, 06
2 Oct, 06 > 8 Oct, 06
18 Sep, 06 > 24 Sep, 06
28 Aug, 06 > 3 Sep, 06
21 Aug, 06 > 27 Aug, 06
10 Jul, 06 > 16 Jul, 06
26 Jun, 06 > 2 Jul, 06
12 Jun, 06 > 18 Jun, 06
5 Jun, 06 > 11 Jun, 06
29 May, 06 > 4 Jun, 06
15 May, 06 > 21 May, 06
8 May, 06 > 14 May, 06
1 May, 06 > 7 May, 06
10 Apr, 06 > 16 Apr, 06
27 Mar, 06 > 2 Apr, 06
13 Mar, 06 > 19 Mar, 06
6 Mar, 06 > 12 Mar, 06
20 Feb, 06 > 26 Feb, 06
13 Feb, 06 > 19 Feb, 06
6 Feb, 06 > 12 Feb, 06
30 Jan, 06 > 5 Feb, 06
23 Jan, 06 > 29 Jan, 06
9 Jan, 06 > 15 Jan, 06
19 Dec, 05 > 25 Dec, 05
12 Dec, 05 > 18 Dec, 05
21 Nov, 05 > 27 Nov, 05
7 Nov, 05 > 13 Nov, 05
24 Oct, 05 > 30 Oct, 05
17 Oct, 05 > 23 Oct, 05
3 Oct, 05 > 9 Oct, 05
26 Sep, 05 > 2 Oct, 05
12 Sep, 05 > 18 Sep, 05
29 Aug, 05 > 4 Sep, 05
22 Aug, 05 > 28 Aug, 05
15 Aug, 05 > 21 Aug, 05
1 Aug, 05 > 7 Aug, 05
4 Jul, 05 > 10 Jul, 05
27 Jun, 05 > 3 Jul, 05
20 Jun, 05 > 26 Jun, 05
6 Jun, 05 > 12 Jun, 05
30 May, 05 > 5 Jun, 05
23 May, 05 > 29 May, 05
9 May, 05 > 15 May, 05
2 May, 05 > 8 May, 05
25 Apr, 05 > 1 May, 05
18 Apr, 05 > 24 Apr, 05
4 Apr, 05 > 10 Apr, 05
21 Mar, 05 > 27 Mar, 05
14 Mar, 05 > 20 Mar, 05
7 Mar, 05 > 13 Mar, 05
28 Feb, 05 > 6 Mar, 05
21 Feb, 05 > 27 Feb, 05
31 Jan, 05 > 6 Feb, 05
10 Jan, 05 > 16 Jan, 05
3 Jan, 05 > 9 Jan, 05
22 Nov, 04 > 28 Nov, 04
8 Nov, 04 > 14 Nov, 04
25 Oct, 04 > 31 Oct, 04
2 Aug, 04 > 8 Aug, 04
19 Jul, 04 > 25 Jul, 04
21 Jun, 04 > 27 Jun, 04
17 May, 04 > 23 May, 04
29 Mar, 04 > 4 Apr, 04
22 Mar, 04 > 28 Mar, 04
8 Mar, 04 > 14 Mar, 04
23 Feb, 04 > 29 Feb, 04
26 Jan, 04 > 1 Feb, 04
17 Nov, 03 > 23 Nov, 03
10 Nov, 03 > 16 Nov, 03
3 Nov, 03 > 9 Nov, 03
20 Oct, 03 > 26 Oct, 03
22 Sep, 03 > 28 Sep, 03
15 Sep, 03 > 21 Sep, 03
8 Sep, 03 > 14 Sep, 03
4 Aug, 03 > 10 Aug, 03
28 Apr, 03 > 4 May, 03
Thursday, January 26, 2012
 The Engineering of Labor Markets

Topic: Commentary
We hear a lot today about "structural unemployment" in America, the notion being that unemployment in America today is related to workers not having the right set of skills for the available jobs in the economy. There is some truth to this, but the reason for this has nothing to do with any inherent realities of a modern economy, it has to do with how American capitalists have intentionally engineered the global labor markets.

The first thing to acknowledge is that every economy, including the American economy, is engineered and planned. An idea came to prominence in the 1970s among the economic elite in America that the future of the American economy was in "high skill jobs", i.e. research, design, science, analytics, etc., and that "low skill jobs" were to be something outsourced to developing foreign countries, for them to do the work that was "beneath Americans", but also so that those "low skill job" could be done more cheaply by these much more desperate foreign workers.

This idea has dominated the thinking of America's economic engineers (corporate executives, investment bankers, financiers, major investors, wealthy philanthropists, influential professors, private equity moguls, Federal Reserve members, and all of their corresponding enablers and puppets in government, etc.) for the past three or four decades, and has been a major driver in the engineering of the current American "jobs market".

The result of this has been that massive segments of occupation have been eliminated from the American jobs market by the owners and controllers of capital and transferred to foreign countries, largely Mexico and China, but many more as well of course.  In the absence (or weakness) of unions capitalists dictate the conditions of employment, and the fact is that the parameters of "the game" in America are dictated almost entirely by the owners of the capital. The reality we live in is the reality designed by these people, and their engineering efforts have been effective. They have successfully transferred a large portion of "low skill work" to foreign countries and they have successfully shifted the American occupational portfolio disproportionately toward "higher skill work", but the "low skill work" that was outsourced to foreign countries wasn't actually "low skill", it was medium skill work.

What I'm saying here is that the American "jobs market" has been distorted by the practices of capital owners and government policy (at the request of capital owners), under the guise of so-called "free trade" (which is anything but) and neo-liberal "globalization". So what are the results of this? Well the results are quite obvious, and exactly what would be predicted by market theory.

The result of this is of course a shortage of "high skill workers" in America and a glut of "low and medium skill jobs" in places like China and Mexico, and the result of this is inflated prices for high skill workers in America as well as deflated prices for medium skill workers in America.

So one would ask then, if there is a glut of low and medium skill jobs in places like China and Mexico, then why aren't the wages of low and medium skill workers in those countries rising faster? After all, a glut of jobs should mean a shortage of workers.

Two reasons: The first is obviously developmental and based on population. Places like China, India, and Mexico have been able to adsorb a massive influx of low and medium skill jobs because of their large populations and relatively undeveloped economies which afforded relatively few competing opportunities for workers. Due to the relative wealth of the West, we've been able to pay foreign workers higher for their labor than what they could earn within their own economies, even for lower skilled work than those same workers could perform in their local economies. In other words, we were able to pay a worker in China, who could have been a Chinese doctor or skilled mason or software engineer, more to put together iPhones on an assembly line than they could have otherwise earned as a doctor, etc. if "we" weren't employing them. As foreign economies develop this "should" become less and less true. In addition, the relatively small population of the West compared to China and India has meant that the labor forces of those nation's are large compared to the populations of Western consumers they serve. But now we get to the second reason for why labor prices in these foreign countries haven't risen quite so rapidly, and that has to do with the policies of their governments. American capitalists have almost universally moved American production to countries ruled by authoritarian regimes, in places with anti-worker policies that are designed to keep wages low. The ruling class in these countries benefit from Western support and wealth, from American corporations if not from government policy as well, while the workers carry the burden.

But let's get back to America, and how all of this plays into growing income inequality here.

A very interesting debate too place between Alexander Hamilton and Thomas Jefferson. Hamilton (whom I would consider an economic genius superior to Adam Smith, even though I disagree with Hamilton on a number of issues) argued that economic diversity was key to the development of the American economy, and to this end Hamilton opposed "free trade" practices (then supported by Britain) and supported government subsidies for the development of industry in America (as well as polices that encouraged the illegal (in their home countries) immigration of skilled manufacturers from Europe and the theft of intellectual property from Europe (sound familiar?)). Hamilton was a supporter of corporations and manufacturing. Jefferson, on the other hand, argued that corporations and manufacturing would result in the concentration of too much property and power in the hands of banks and wealth elites and that democracy could only be maintained by an agricultural economy rooted in widespread ownership of land with land remaining the most important form for property. Jefferson argued that unless the majority of people owned the majority of the property then the majority would become disenfranchised (this was of course especially true in Jefferson's time when property ownership was a requirement for voting, but his argument was not based solely on that requirement, but rather the power grated by property ownership, regardless of any voting requirements). Hamilton's counter, of course, was that an agricultural economy was not diverse enough to provide enough opportunities for a diverse population to make the best use of its skills.
"It is a just observation, that minds of the strongest and most active powers for their proper objects fall below mediocrity and labor without effect, if confined to uncongenial pursuits. And it is thence to be inferred, that the results of human exertion may be immensely increased by diversifying its objects. When all the different kinds of industry obtain in a community, each individual can find his proper element, and can call into activity the whole vigor of his nature. And the community is benefitted by the services of its respective members, in the manner, in which each can serve it with most effect."
- Alexander Hamilton; Report on Manufacturers
"The spirit of enterprise, useful and prolific as it is, must necessarily be contracted or expanded in proportion to the simplicity or variety of the occupations and productions, which are to be found in a Society. It must be less in a nation of mere cultivators, than in a nation of cultivators and merchants; less in a nation of cultivators and merchants, than in a nation of cultivators, artificers and merchants."
- Alexander Hamilton; Report on Manufacturers
In the end both were right. But here is where Hamilton's point comes into focus: the economy that has been engineered by America's economic elite is not diverse enough for the American population. Everyone can't be a scientist or a doctor or a engineer, everyone can't even be a college graduate, not everyone has that aptitude, and yet, just because one doesn't have the aptitude to be an engineer doesn't mean that one should be relegated to flipping burgers at a fast food joint, where, as Hamilton put it, their labor is "confined to uncongenial pursuits," but this is exactly what has happened in the American economy.

If we take a global view of the job market, what we see is that the American job market is disproportionately comprised of  "high skill jobs", while the jobs markets in "developing" countries are disproportionately comprised of  "low and medium skill jobs", yet if we look at the labor force what we find is that the American labor force is not comprised of disproportionately "high skilled workers". America is not "exceptional", we are merely "normal". The problem is that our job market is not "normal". Our job market has been manipulated in a way that has put it our of sync with the needs and skills of the population.

The result is that the demand for "high skill workers" exceeds the supply in America, while the supply of "high skill workers" exceeds the demand in most of the rest of the world. This is why so many highly skilled people immigrate to America, because prices in our labor market for high skilled workers are artificially inflated while prices for high skilled workers in most of the rest of the world are artificially depressed due to a jobs market disproportionately comprised of low and medium skilled jobs.

The result of exporting many medium skilled jobs to foreign economies has been growth in truly low skill jobs in America, and a drop in labor prices for everyone except high skilled workers, because now there is a glut of medium skilled workers in America without many jobs for them to fill.

But the thing to remember is that the lack of medium skill level jobs in America isn't a product of the fact that those skills are no longer needed or valuable, its a product of the fact that those jobs have been exported to foreign markets by American capitalists. There is still massive demand for the products of medium skilled labor, we just aren't supplying that demand with American workers.

So this is a driver of American economic inequality, and its something that has been completely engineered by the economic elite in this country. The reality is that every country has a relatively equal distribution of worker capabilities. In any given population, aside from war-torn places like Afghanistan and Somalia perhaps, there is going to be pretty much a normal distribution of aptitudes. You are going to have some really capable people and some really incapable people, and the bulk of the population is going to be of moderate capability. It's absurd to expect any nation to be able to become a nation of nothing but engineers, scientists, executives and entrepreneurs. That's never going to happen anywhere. As Alexander Hamilton laid out over 200 years ago, a productive economy is a diverse economy, that is able to take advantage of the diverse range of skills, abilities, and aptitudes of its population. What our economic engineers have done is they have engineered a less diverse economy that does not match the diverse needs and capabilities of the American population. The result is artificially inflated prices of "highly skilled labor" and artificiality depressed prices for all other labor (though there are other reasons for declines in labor compensation as well). A true global job market, or a properly functioning global job market, is one in which the distribution of jobs matches the distribution of labor skills in every location.

American policy for the past several decades, however, of both private industry and the government which does its bidding, has been to try and intentionally distort this distribution, to try to skew the occupational skill distribution and "corner the market" on "high skilled jobs". The government has seen this in part as a measure of "national security" and "national prestige", to have a disproportionate number of "intellectual" workers active in the American economy, and the economic elite has perused this goal out of a combination of naivete and economic interests, in that doing so inflates the prices of high skilled workers (themselves and their peers) and deflates the prices of low and medium skilled workers, whose work generates the profits they benefit from.

It's a grand experiment that was always doomed to fail from the beginning, especially considering the lack of support for such an agenda through other aspects of American policy and society. America's conservative populace never wanted the education required to have a population of disproportionately highly skilled workers, and furthermore, even if Americans were more accepting of science and intellectualism, the reality is that the average person is... average, and always will be. The notion that America would ever be an economy with a disproportionately highly skilled work force is founded on a belief that America could be the Lake Wobegon of the world, a place where "everyone is above average".

We need an economy that matches the needs of the population, not economic elites that ridicule the American population for not fitting into the dystopia that they engineered, and yet the engineers of American economic dysfunction are more strongly in power now than ever. Virtually all elected officials in both parties, as well as the policy "experts" that they appoint and rely on, are beholden to the interests of America's private economic engineers and buy into their vision. The fact is that America's elite are largely divorced from reality and they are pursuing a quasi-utopian vision for America's future. This includes people like Bill Gates and Warren Buffet, the so-called "good billionaires", as well as political leaders like Barack Obama, and these are the people who are pursuing this agenda for ostensibly altruistic reasons, this isn't to mention the engineers of our economy whose agenda is dictated by much more self-serving and/or elitist objectives.

The problem with utopian visions is that when the goals are set too high and are unachievable then the effects on reality are disastrous. When we engineer an economy where the path to success is only attainable by 2% of the population, and everyone who doesn't make it is discarded and ridiculed, its a recipe for social disaster and collapse, and the important thing to understand is that it doesn't have to be this way - its a product of intentional (and flawed) design.

Basically, what our economy today tells us is, "if you can't be a superstar then you are a worthless piece of shit," but that's not true. Not everyone can start the next global mega-corporation; its not possible, no matter how capable everyone is. We can't have a system where everyone is a general or a ship's admiral. Someone has to man the torpedoes and someone has to be on the front lines, it can't work any other way, and those "front line" positions, the jobs performed by average workers, are a absolutely vital to the productivity of the economy and provide the basis of wealth upon which all of civilization exists and upon which the lifestyles and opportunities of the wealthy elite are afforded.

Ultimately, the root cause of this whole situation is the loss of control over capital by the American public, and so we now come back full circle to debate between Hamilton and Jefferson. Productive opportunities in America no longer reflect to the diversity of capabilities and aptitudes of the population because property ownership has become to concentrated in the hands of banks and corporations, and thus a small wealthy elite who have undermined democracy. Hamilton and Jefferson were both right.

Posted by at 6:30 AM EST | Post Comment | View Comments (9) | Permalink
Updated: Thursday, January 26, 2012 6:48 AM EST
Monday, December 5, 2011
 Income Inequality - the Heart of the Matter

Topic: Commentary
There is a fundamental misunderstanding of income in America, and this misunderstanding of income is at the heart of differences of opinion about income inequality. I came to this conclusion long ago, but it has been increasingly reinforced over recent months as the Occupy Wall Street movement has sparked more conversations about income inequality.

A fundamental tenet of neoclassical capitalist economics is the notion that "everyone is paid the value of their contribution". Not only is this a very fuzzy notion but it breaks down in all kinds of ways. Nevertheless, this concept, this idea, that in our economic system everyone's pay is an inherently exact measure of the value of their contributions is the core foundation of our entire economic system. The assumption that this is true is the foundation upon which every aspect of our economic social contract is built.

Yet, this foundational tenet is wrong, and understanding this is the key to everything; not just understanding that this tenet is wrong, but understanding that belief in this tenet is essential to the acceptance of our economic system, and that acceptance or non-acceptance of this tenet is the primary driver of public perception and disagreement on essentially every aspect of economics in America.

This starting assumption, that incomes precisely reflect contributions, drives all downstream views of economic justice. If the exact same logic is applied under two different starting assumptions, 1) that all incomes always accurately reflect the value of the contributions of the individual or 2) that incomes do not necessarily accurately reflect the value of the contributions of the individual and that there can be massive disconnects between contributions and incomes, two completely different conclusions will be reached.

This is, to a large extent, the only thing that really separates Marxists from libertarians. Marxists and libertarians essentially apply the exact same set of logic to two different starting assumptions, the libertarian assumption being that incomes are inherently accurate reflections of contributions, the Marxist assumption being that incomes can be greatly distorted and tend to be distorted in favor of the wealthy, or more precisely, tend to be distorted favor of capital owners.

The position of both Marxists and libertarians is that "redistribution is unfair". That is the driving logic of both worldviews, the difference is that Marxists argue that redistribution happens between the creation of value and the realization of incomes, while libertarians argue that incomes are inherently fair, and that thus taxing different levels of income differently is a form of unfair redistribution.

The evidence against the assumption that incomes inherently reflect contributions is, however, overwhelming. But even when people acknowledge that incomes don't always accurately reflect contributions the full implications of this fact are seldom fully comprehended. People still generally don't understand the fact that if someone receives more income than is warranted by their contributions then it necessarily means that someone else has to receive less. Many people take the view that, well even if CEOs are over paid, good for them, it does me no harm. But that's not true (for mulitple reasons).

Every business operates on a fixed budget. Ignoring borrowing, basically everyone is paid a portion of the revenues. If the net revenues are $1,000,000 and there are 10 employees, that can be divided up lots of different ways, but however its done the amount that can be paid to any employee is relative to the amount paid to the other employees.  Divided evenly, all ten employees would be paid $100,000, but if one employee is paid $500,000 then that means everyone else has to be paid out of the remaining $500,000, which means that if the remaining employee's income were distributed evenly from the remaining revenue they would each be paid $55,555, a lot less. It's no different in any business or corporation.

When one person is paid more everyone else has to be paid less. That's not a problem if incomes accurately reflect contributions, but if anyone is over-paid, i.e. paid more than the value of their contributions, then that means everyone else has to be under-paid, and that's exactly what's happening in our economy right now, and it goes well beyond that when we start talking about capital income vs. wage income.

But let's address this notion that incomes accurately reflect contributions head on. This idea is based on market theory, and, as is so often the case, the conclusion that compensation accurately reflects contribution only holds true in market theory under ideal market conditions. And this is the crux of the whole matter.  Market theory itself doesn't say that incomes magically automatically always reflect the value of contributions, market theory says that theoretically this will be true, only under ideal market conditions, which, of course, never exist! What today's so-called "conservatives" (they aren't actually conservative at all, they are radial market liberals) and apologists for the super-rich do is they pull a scam; their arguments proceed from the unstated assumption that we are operating under ideal market conditions, and not only that, but they also tend to infer that if market conditions are less than ideal then market conditions result in a redistribution of income from high to low, when in fact market theory itself (classically developed as a critique against the the rich feudal aristocracy) states the opposite.

An obvious example of this is provided by the recent study on executive compensation which found that executive compensation at top American corporations is set by board members, many of whom are picked by the executives whose compensation they determine, and through a system of always automatically setting pay packages above the industry average. Basically this means that executive compensation isn't determined by market principles at all, indeed the determination of executive compensation completely violates every market principle. Executive compensation is in fact set along the lines of the corrupt system of interpersonal relationships and favoritism that economists and philosophers like Adam Smith and John Locke railed against. And this is just the tiniest tip of the iceberg.

I believe that if we were able to do a study in major American corporations, where we recorded the actual work-products of every employee, executive and board member, and we removed the names of the people from the list, then we attempted to objectively evaluate the "market value" of each work-product itself, and then we tied those work products back to the employees and totaled up the values by employee, what we would find is that no one's actual compensation would match the value of their work products. In fact what we would find is that there would be huge disparities between pay and actual value creation across the board with many people creating more value than their pay and many people creating less than their pay, but most importantly what we would find is that the biggest disparities would be for those with the highest pay.

The reality is that redistribution takes place within any business that has more than one "employee" (self-employed), and I would estimate that the amount of redistribution that takes place within large corporations is tremendous, with the overwhelming majority of that redistribution being redistribution from lower level workers to executives. If a corporation with 10,000 employees underpaid every worker by an average of just $500 a year that would amount to $5,000,000, which could then be paid to the CEO. You think this isn't happening?

Let's again consider an obvious example: the case of the Washington Mutual CEO who received almost $20 million in compensation while on the job for only 17 days, during which time the bank collapsed and had to be taken over by the government. It is obvious in this situation that the CEO, Alan Fishman, didn't create $20 million in value, which means that his pay was a form of redistribution. The only way to pay someone more than the value that they create is to redistribute value that was created by someone else.

That's an extreme example, but executives at major corporations across the board are over compensated. They've established a system where executive compensation is completely shielded from market forces, while average workers are put into competition with computers, machines, foreign workers and each other to drive compensation down. And again that's just the start of it, and doesn't even begin to approach the issue of  folks like hedge fund managers and the entire financial industry, who not-only clearly benefit from market inefficiencies, but who actively work to create and expand market inefficiencies, both through government influence and the engineering of the private financial system.

But this is the issue, in America we are taught that the measure of someone's contribution is their income. The concept that someone's income might not actually reflect their contributions is totally foreign to many Americans. This belief that incomes always reflect contributions is reflected in the fact that in virtually every situation people in America use the term "earned" or "made" to describe income, even when decrying incomes as unjustified! There were dozens of articles written about how Alan Fishman had "earned" $20 million for only 17 days of "work", virtually all of which decried the income as an example of out of control executive compensation practices, yet it not one single article that I've read about this did anyone even address the fact that this money had to have come from someone else, nor did they clearly state that he didn't actually "earn" that money. We also see this reflected in the way that everyone, and I mean everyone, who covers the individuals on Wall Street always talks about how smart they are. In any article, documentary, or broadcast you see on the subject of high finance there is always an obligatory statement about how  these guys are "wizards", or the "smartest guys in the room", or "geniuses", yet these obligatory statements aren't made even when discussing the work of major pioneers in computer engineering or biological science or chemistry, etc.

There is an instinctive need to justify the incomes of the super-rich by attributing super-human capability to them, but the reality is that they aren't super-human, they aren't thousands of times smarter than the average guy, no one is.

The underlying assumption in America, however, is that all income is eared all the time... but it isn't!

The notion of even objectively evaluating an individual's contribution in any way other than simply citing their income is so foreign to many Americans that when you even raise the subject they get so flustered and confused by it that you can't even proceed. We've established income as the self-definition of contribution in this country, with no way to objectively evaluate contribution by itself, under the assumption that "markets" always correctly establish the value of every individual's contributions, and all incomes are determined under perfect market conditions (even though we all know that perfect market conditions don't now, never have, and never will exist).

The result is that we have a situation where when someone like John Paulson brings in over $5 billion that people just scratch their heads and "Wow". But the notion that John Paulson "made" $5 billion in a single year is totally absurd. For that to be true John Paulson would have to have created as much value as 100,000 workers with an income of $50,000 each. It's like saying that John Paulson built 200,000 cars all by himself in a single year, while the "average American" can build about 2 cars a year.

The "cult of the super-rich", the worship of the super-rich, the belief that the super-rich are exponentially superior to the average person, is all a result of the belief that incomes accurately measure individual contribution. If that were actually true then it would in-fact mean that some individuals are thousands of times "better" and "more productive" than the average person, but no one is 1,000 times smarter or 1,000 times harder working than the average person, they simply aren't. Maybe 2 time or 3 times or maybe even 10 times, but not 1,000 times, not even 100 times.

So now what we have is a situation where we have two conflicting sets of beliefs, and what happens is that people will rationalize one set of beliefs in order to maintain the other. In order to maintain the belief that our economic system is even remotely fair, or that incomes are even remotely reflective of contributions, you have to believe that some people are thousands of time more productive than the average person. If some people aren't thousands of time better than the average person then our economic system can't possibly be justifiable, because our economic system rewards some individuals thousand of time more than the average individual.

What we see regarding beliefs about our economic system is very similar to what we see in religion and other areas of strongly held beliefs, like beliefs about loved ones, etc. where some people's beliefs are so important to them, so central to their entire worldview, that they automatically rationalize anything that would contradict their core beliefs, and one of the core foundational beliefs of "America" is the belief that we have a "fair" economy.

So, the situation that we face is that for many people, the belief that America has a fundamentally fair economy is so central to their worldview that anything that would undermine this belief is vehemently attacked, denied, rationalized, or ignored. Its just like a parent that may never be able to accept the fact that their son raped and murdered their daughter, or something horrific like that, where they would come up with all kinds of explanations in contradiction to the facts to rationalize in their mind how it had to have been someone else. Or how a religious person who believes that god rewards good people and punishes bad people on earth will conclude that everyone "deserves" every bad thing that happens to them and everyone who does well is an inherently "good person". When faced with examples of nice young children that are stricken with cancer such a person will rationalize that the child had a "bad soul" or something because the belief that peoples' conditions are a result of god's grace is so central to their worldview that they can't accept anything that would call that belief into question.

This is where we are in America today, and we have to acknowledge that and understand it. We have a fundamentally unjust economic system, where incomes are not necessarily reflective of contributions, in which the biggest incomes in this country are the most unjustifiable. At the same time we essentially have a national religion in which the belief that everyone's income is "earned" is central to the worldview and people don't want to believe that their worldview is fundamentally wrong. People don't want to believe that we have a fundamentally unjust economic system. Economic fairness and the superiority of our economic system so are central to the identity of America, that for many Americans its a belief that they cannot challenge, no matter how many facts they have to deny or what other beliefs they have to hold in order to rationalize it.

Posted by at 1:04 PM EST | Post Comment | View Comments (7) | Permalink
Updated: Tuesday, December 6, 2011 10:39 AM EST
Friday, October 28, 2011
 Occupy Wall Street for President

Topic: Semi-random Thoughts

The Occupy Wall Street movement is more popular among Americans than either President Obama or any of the Republican candidates. It's been said that if Occupy Wall Street were running for president it would win... Well, in that case, let's write it in! (Actually I think that "The 99%" is better, but Occupy Wall Street is more recognized)

Here is the deal, voting in the 2012 presidential elections is meaningless, as long as you vote for either the Democratic or Republican candidate. Yes, its true that Obama isn't as bad as whomever  the Republicans are going to put forward, but its also true that no matter who is elected president in 2012 the following 4 years are going to be total gridlock anyway.

So one question here is, "Would you really not vote for Obama if you genuinely thought he could lose and we'd end up with a Republican president?" Yes, I would still not vote for Obama even under those circumstances, because sending a message about the failures of our political system is more important than whoever wins the presidency for the next 4 years.

In addition, I'm not convinced that we wouldn't be better off today if John McCain had won the presidency in 2008, because if McCain had won it's very doubtful that many of the regressive policies that Obama has been able to usher through Congress with the support of the Democrats would have been possible with the Democrats in opposition to McCain instead of being pulled along by Obama, such as the pro-insurance industry health care "reform" laws pushed through by Obama. We'd be better off in the long run with no reforms than what we got with the misleadingly titled "Affordable Health Care Act". Yes there are a few good provisions in it, but ultimately it entrenches for-profit interests and does nothing to bring down costs, all it really does is prevent denying coverage to people, which is good, but in the grand scheme of things its put us on a path that makes reforms that would bring down the costs of health care and improve quality more difficult and has even paved the way for the dismantling of Medicare.(Republicans have already come out with plans to basically eliminate Medicare and transition it to the "ObamaCare" model). Basically, I think McCain would have faced a similar situation of gridlock to what Obama faces, and he may in fact have been less inclined and able to lead Congress down path of doing Wall Street's bidding, which is exactly what Obama has done. How can anyone who supports Occupy Wall Street vote for Obama? He is Wall Street's candidate!

My point is this, right now, no matter who wins the presidency in 2012, we the people lose. Voting for the lesser of two evils is no solution, it just prolongs the suffering.

What we should do is all write in Occupy Wall Street for president, and if you want some insurance, vote Democrat in all of the Congressional elections. Why? I believe that all we have to do is get Occupy Wall Street to come in 3rd place in the elections and that alone would be a powerful statement. It would force news coverage of the issue. It would send a powerful signal to our own government and elites, as well as the rest of the world, that we are deeply unsatisfied with our political system, and that we have lost faith in our political system to represent the will of the people

The reality is that either a Democrat or a Republican is going to win the presidency in 2012. Voting for a 3rd party (unless something radical happens in the next few months) isn't going to do anything.  Voting for a 3rd party candidate isn't going to be a protest vote that matters. Right now all we have is a protest vote, that's all we can do. Voting for either the Democrat or the Republican is just giving legitimacy to the failed and corrupt system. The challenge is how to register a protest vote that matters, and if any protest vote can matter then this is one that can. If you vote for a 3rd party candidate, be it a Green Party candidate or a Libertarian one, etc., all that's going to happen is they are going to get like 1% or 2% of the vote at max and they will be a foot note. 

At most we'd have a Ralph Nader situation all over again, and you see the lessons people drew from that, they blamed it on Ralph Nader said 3rd parties were stupid. But if Occupy Wall Street comes in 3rd place, even if it is with only 1% of the vote, it would still be a major story and a major signal saying, "NO ONE IN THE POLITICAL CLASS REPRESENTS US, THE SYSTEM HAS FAILED!"

And what if Occupy Wall Street got 5% of the vote or more? That would be massive. Even if a 3rd party candidate got 5% it would just be a side note news story for a few days and then it would be forgotten, but if Occupy Wall Street got 5% it would be clear, this is the vote of the disenfranchised people.We don't like either one of you at all!

Voting  for Occupy Wall Street is better than voting for a 3rd party person, because that's part of how the system is supposed to work, that just looks like you like that person, but that's not the point here, the point is that we are disenfranchised altogether.

Voting for either the Democrat or the Republican isn't going to do anything to fix our system, the election of 2008 just proved that. Millions of progressives voted for Obama hoping for change that would reform the corruption and inequalities of our system and Obama not only failed to deliver, he has in fact sided with the status quo, for whatever reason. It doesn't matter if he's siding with the status quo because he wants to or because he has no choice, its irrelevant, the fact is that he can't do anything other than entrench the status quo, his years in office have proven that.

Let's all vote for Occupy Wall Street on November 6, 2012, and make an effort between now and then to get as many people as possible to do the same.

Posted by at 11:24 AM EDT | Post Comment | View Comments (13) | Permalink
Updated: Friday, October 28, 2011 11:49 AM EDT
Thursday, October 20, 2011
 We are all Eloi

Topic: Commentary
As you may or may not know, the Eloi are the leisurely class of H.G. Well's Time Machine, who live above ground and depend on the production of the "working-class" Morlocks for their survival.

I've been following the Occupy Wall Street movement and reading a lot of the statements coming out of it and related blogs and articles, etc. and one thing that's struck me is, I believe, a prevalence of unrealistic economic expectations. This doesn't just apply to the Occupy Wall Streeters though, its prevalent throughout American society and just as bad or worse among conservatives.

One thing that really stands out is when people complain about rising costs of living. Now I understand where these folks are coming from, but we also need to be very clear about something, which is that right now Americans have among the lowest costs of living of anyone in the world. American costs of living are a little different than for many other people. Here in America the costs of living are distributed differently than in most other countries. Here the costs of health care and education are relatively high, while the costs of food, clothing, energy, housing, and yes taxes, are relatively low.

My point is this: expecting our costs of living to go down is not realistic. While neoliberal globalization has had a great many negative impacts on American society and the American economy, we aren't the only victims, and we aren't even the worst victims. While globalization and other aspects of the neoliberal economic reforms of the past 30 years have had a dramatic impact on economic inequality in America, the one thing they have done is result in cheap commodities. Yes, this has been driving a race to the bottom, but expecting incomes for the 99% to rise and costs of living to be unaffected simply isn't realistic.

The truth is that while the 99% in America is surely exploited by our own top 1%, all Americans are among the top 1% in the world, and whether we know it or not, we are all benefiting from the exploitation of billions of much poorer people around the world, as well as illegal immigrants here in our own country.

While the American economy may be a pyramid scheme with 99% of us under the 1% capstone at the top, the truth is that the entire American economy is at the top of a global pyramid scheme. The American working class is merely at the base of the peak of the pyramid. We're all Eloi, whether we realize it or not. Sure the top 1%, or really the top 0.5% to 0.1% are the true and pure Eloi, the true leisurely class, but Americans as a whole are still at the top of the global pyramid, we still benefit massively from the exploitation of the global Mortlock population, but just as in Time Machine, the Mortlocks of the developing world aren't feeding us and giving us cheap commodities for nothing, they are feeding upon us too. We have allowed ourselves to become captives of a system from which there is no easy escape, from which there isn't going to be any "nice" solution, where we make a few tweaks and everything just gets better. Its not going to happen. Yes, American capitalists are the one who got us into this mess, but the fact is that now we're all in it together.

Just as the aristocrats fell with the French Revolution and plantation owners lost virtually everything after the Civil War and the emancipation of the slaves, there isn't going to be a solution to the global economic condition in which the super-rich retain their wealth, there can't be. Like it or not, lots of the super-rich are going to lose what they've got, but here is the thing, in the global scheme of things, all Americans are super-rich. We're all gonna lose out economically over the next few decades, there simply isn't any other way given the nature of the global pyramid of exploitation, not to mention the ecological pressures of a growing and industrializing global population. We've been living off of credit and the exploitation of developing nations and illegal immigrants for decades now, it can't go on, its not going to go on.

What we see in American politics and society right now is the first phase of coming to grips with tragedy. We're still in the denial phase. We are operating under denial politics right now, and the denial is pervasive throughout society and across the political spectrum.

So, my point, however bleak it may be, is this: What we need to be talking about is how we are going to prepare for an American future where prices rise and the costs of living for everyone in America goes up significantly. Redistribution? Damn right we need to be talking about redistribution, we need to be talking about taking back the wealth that has been stolen from the American working class by the super-rich for the past 30 years. But we also need to remember that a portion of the wealth of the American super-rich is wealth that has been stolen from the global working class as well, that's part of the reason that income inequality has risen so much so rapidly, because its not just Americans who are getting screwed by the American super-rich (or the super-rich in other countries), its the global working class.

Americans spend among the lowest portion of their income on basic necessities like food and housing of anyone in the world, and we've been able to maintain this for decades based on whole systems of global and domestic exploitation. Its been good for all of us, we've all taken advantage of it. Don't think that we're gonna get out of this without all of us paying the price.

See also: American Prosperity: Made in China

Posted by at 10:25 AM EDT | Post Comment | View Comments (6) | Permalink
Wednesday, October 5, 2011
 Now a proven fact that executive pay is a form of theft

Topic: Commentary

There is a new article out in the Washington Post about executive pay. The article does a good job of laying out the basic facts, but I'm going to put the basic facts into a larger context.

What this article basically states is that based on recent data that has come from government regulations that went into effect in 2006 forcing public corporations to disclose more information about executive pay practices, we now have hard facts that tell us how executive pay is determined at major US corporations and to a lesser degree how those practices have changed over time. Much of this is stuff that we already knew in the general sense, but we now have much more concrete information.

As we know, executive pay is set by boards of directors and boards of directors are essentially picked by share holders, but not exactly. The reality is that the pool of folks at the top is rather small and incestuous, meaning that a lot of corporate executives either currently sit on the boards of other companies or they are former board members of other companies, and the number of individuals or institutions that hold enough shares to be able to determine board members is relatively small and spans many companies. In practice in many cases executives themselves play a large role in who gets onto the board of the companies that they are leading, which is to say that executives are in many cases picking the very people who will set their pay. These board positions are themselves largely ceremonial positions that pay nice sums of money, and individuals can easily serve on multiple boards. In the example given by the Washington Post, board members for Amgen are paid $350,000 a year.

For smaller companies, like start-ups, board members are often direct investors themselves, but for large companies board members are not typically direct investors, they are people appointed by institutional investors. They do also hold shares, but these shares are often given to them as a result of becoming a board member, instead of becoming a board member because they hold lots of shares.

At any rate, what has been discovered by these disclosures since 2006 is that 90% of corporate boards explicitly decide to set executive compensation at or above average. In other words, when determining executive pay they look at the the average compensation for comperable executives then they set a compensation package above that average value, 90% of the time! Obviously, if everyone is setting a value above average then pay is just going to shoot up over time, which is exactly what we have seen.

But let's put this in a bigger context now. What we are really saying is that executive pay is not determined by labor markets. This is a huge deal, because the whole underpinning of the capitalist wage system is labor markets, and let's look at the difference between how labor markets work vs. how this "peer benchmarking" system works for executives.

Labor markets inherently drive compensation down, while the executive pay system inherently drives compensation up. In a labor market "labor prices" are determined by the lowest amount of pay that individuals will accept for a given set of labor. The labor market system for determining compensation is at the heart of the criticisms of capitalism noting that the labor market system compels a race to the bottom and deprives workers of the value of their labor by pitting them against one another in a bargaining war over who will agree to taking the lowest compensation to get a job. At the same time, defenders of capitalism and market theory have defended labor markets as efficient means of determining the value of a worker's contributions.

So what we have here is that there are two completely different systems and sets of principles in place for determining compensation for corporate employees, and that the compensation for executives is not determined by markets. While the hypocrisy is overwhelming, this isn't just a matter of hypocrisy, its a matter of real money and real wealth. While these corporate and financial elite and their defenders have been extolling the virtues of markets, and have been portraying the compensation of those at the top as a product of "fair and balanced" market forces, the reality is that they have engineered a system where executive compensation is not determined by market forces at all, indeed the system of executive compensation violates every market principle.

And the important thing to understand is that this is made possible due to the massive concentration of private capital ownership. It is the consolidation of capital ownership that makes this all possible, because decision making is in the hands of relatively few powerful people.

The justification for the growing economic inequality in America has always been that the high incomes of those at the top are justified because they are determined by the same market principles that determine everyone's income. We now have not just theoretical arguments or anecdotal claims, but solid proof that this is not true. This shows that the real mantra of the corporate elite is, "markets for thee, but not for me."

When we combine this with the recent reporting on the raiding of corporate pension accounts to help fund growing executive compensation the case becomes clear that the corporate elite (the executives, board members, and major investors) have in fact been involved in decades of direct theft from the working class (domestic and foreign). This isn't theoretical, we are talking about concrete systems that have been in place for 30 years that have directly transferred wealth created by the working class to an undeserving elite minority who we can factually prove never earned it.

While economics as a whole may not be a zero sum game, accounting is. A corporation's revenue is a finite value. The only way that one individual in a corporation can be paid more is if someone else is paid less. This means that inflation of executive compensation has to be at the expense of the other employees, there is no way around it.

And here is the kicker, the thieves have accumulated so much wealth and power that they now control the political system. So at this point the theft hasn't just taken place due to the actions of the executives and capital owners, the politicians are accomplices to the crime, which is why what has been done isn't against the law, because the thieves control the people who write the laws. This is why we have politicians and corporate media pundits repeating the claim that raising taxes on high incomes "punishes achievement". It's total nonsense. The reality is that these high incomes are virtually all entirely unearned and undeserved, even though those receiving them may themselves think they deserve it. And its not just that they are unearned and undeserved, these high incomes come at the expense of the rest of us, at the expense of the other 99% of the population, the "working class". And on top of it all, it also turns out that the worst perpetrators of these crimes are those in the health care industry! Surprise, surprise.

If people understand the full implications of what that Washington Post article is saying, it should cause a revolution. While the article doesn't state it, the real conclusion that we can draw from the evidence it presents is that we now have solid proof that trillions of dollars have been stolen from the working class by the corporate elite over the past 30 years, that the high incomes that have been justified on the basis of "market theory" are in fact products of complete violations of market principles in ways that funnel value created by corporate employees to corporate executives, their cronies, and capital owners.

The ultimate lesson here is that "we the people" have lost control of the nation's capital. Indeed there is no such thing as "the nation's capital", the capital is owned and controlled by an elite minority of people, few of which have any national allegiance or sense of responsibility. Virtually all of our nation's economic problems stem from this fact. The capital that our society depends upon is owned and controlled by a small minority of people whose interests in direct conflict with the interests of the working class, and it is that minority of people who have the majority of political power.

Posted by at 10:02 AM EDT | Post Comment | View Comments (16) | Permalink
Updated: Wednesday, October 5, 2011 10:12 AM EDT
Wednesday, August 17, 2011
 On Corporations & Alien Invasions

Topic: Commentary

This is just a quick post on a few interesting topics that have popped up. I haven't been posting lately because I'm focusing on finishing my article on American capitalism.

The first thing I want to comment on is Mitt Romney's recent remark on corporations. Not that I care about Mitt Romney, but the remark is an instructive one.

Mitt Romney recently said, "Corporations are people," and, "Everything corporations earn ultimately goes to people. Where do you think it goes?"

Romney's second remark is true, everything corporations earn does ultimately go to people, at issue, however, is the manner in which it goes to people and to which people it goes.

Here is the thing about corporations, they are legal entities whose function and design is literally to shield owners and operators from responsibility and to redistribute value. That is their precise legal function, that is why they exist.

Corporate entities take on liability such that the liability isn't held by the owners and operators of the corporation, thus it removes responsibility from people. And while it is true that everything corporations earn ultimately goes to people, it can take a long time for that value to get any person (right now American corporations are sitting on over $2 trillion in liquid assets) and the people that the value goes to are the not the same people who create it.

Corporations are collectively held legal entities, with owners holding shares of the corporation. The value goes from the workers to the share holders. That is the whole point of the corporation. The whole point of the corporation is to redistribute value from workers to owners, if it weren't then there would be no point in being an owner.The entire incentive for being a share holder is to get value from the corporation without having to do the work yourself. The claim is that the share holders take on the risk in exchange for a cut of the value created by the workers, but even this is largely bogus since we go right back to point #1 which is that corporations are legal entities designed to shield owners from risk! Do share holders take on some risk? Yes they do, but it is extremely limited.

To further illustrate just how absurd Mitt's statement about corproations is, all we have to do is substitute the word governmet for corproations thusly, "Governments are people," and, "Everything governments collect in taxes ultimately goes to people. Where do you think it goes?"

This statement is equally as true as Mitt's statement about corporations, yet Mitt had just finished denouncing "big government" prior to his statement on corporations. This isn't a defense of government, it is meant to point out the fact that just because everything "goes to people" has nothing to do with how it goes to people, and to whom it goes, which is the central complaint that conservatives have with "big government", which is really the exact same problem with "big corporations". Indeed it is in fact much worse, as can be demonstrated with the following chart:


This is from 2000 (I haven't been able to find a newer version of this), but it's relatively the same today as it was back them. What we see here is that income from capital is over 3 times larger than income from government transfers (Welfare & social Security), which by the way Social Security isn't really even redistributive. Most of the income from capital is realized through corporations. Both the transfer income and the capital income are redistributions of value that was originally created by labor. Clearly far more income is being redistributed through capital than through government transfers. And let's see how this income is redistributed.

Government transfers, including Social Security, are actually relatively evenly distributed across the income spectrum, while capital income goes overwhelmingly disproportionately to the richest part of the population. And redistribution through corporations is only partly achieved through capital income, lots of redistribution takes place within corporations through wages, salaries and benefits. Hence the redistribution that takes place through corporations is exponentially higher than the redistribution that takes place through government.

So yes Mitt, what you say is true, everything corporations earn ultimately goes to people, the issue is that it goes to the wrong people. It goes from workers and consumers to corporate cannibalizing free loaders like yourself. The primary problem with our economy is that corporations have become massive instruments of redistribution of value, so much so that they are in the process of destroying the middle-class and the entire economy due to the severity of redistribution that is now taking place.

And now on to Paul Krugman's remark about the economic stimulus of an alien invasion, which has gotten a few people talking. I really don't see what the big deal is, it's a pretty basic remark, but unfortunately the sound bites allocated to commentary didn't give Pr of. Krugman time to explain himself, not that he always explains himself that well anyway, but.

The central fact is this, that what Keynesian economics says, and what World War II proves (to a degree, and a lesser degree than Krugman usually grants), is that short term government funded jobs programs, funded through increased taxes and deficit spending, in the face of lagging economic demand, can be stimulative to the economy, break an economy out of a depression/recession and lead to long-term economic growth when the cause of the depression/recession is lack of aggregate demand.

Arguably that's the situation we find ourselves in now and that's why Krugman recommends a massive stimulus program, and claims that even if we paid people to dig holes it would still be better than doing nothing.

All of this is true, but the interesting thing is what didn't get said, and what Krugman often implies but doesn't quite get around to saying (typically because he doesn't have time in a 30 second sound bite), is that while it is true that tax increases, borrowing, and massive government spending can stimulate the economy, it's very difficult to get people to agree to do it. (This is also why Keynes famous said that his general theory was better suited to command economies). But the problem isn't with the policy, its with the people. The policy will work, the problem is that people typically don't want to do it, kind of like a surgery that will fix an injury but someone not wanting to go through with it because they are scared of surgery or don't trust the doctor, etc.

Not only that, but the policy will work even better if, instead of digging holes in the ground, we actually build something useful. But here is the problem, convincing people to build something useful is often even more difficult than convincing them to dig holes in the ground! The reason for this is that building something useful invariably results in "redistribution".

So this is where wars and alien invasions come in. People will agree to Keynesian type activity in the face of eminent threats, like a war or an alien invasion, and they will agree to have their taxes raised and for the government to borrow tons of money if they think that they will die if they don't do it, even though the spending in such cases actually largely produces "nothing useful" (this is where Krugman overstates the case for WWII though, since a lot of long-term useful stuff was actually produced).

However, if the proposal was to simply raise taxes and engage in a massive jobs program to do something like build free housing for the poor, install solar panels on everyone's house, and build lots of new state-of-the-art schools, then most people would balk at it and it wouldn't be possible to get the political will to engage in such a plan, even though doing so would be far more beneficial to the economy than preparing for war or an alien invasion.

Clearly, from a purely economic perspective, the best thing to do would be to engage in a massive jobs program, on the scale of World War II, but directed toward producing things of domestic value instead of weapons, most of which ended up getting shipped to Europe and destroyed (effectively digging holes in the ground from an economic perspective). The problem is that, even though that is the best thing to do, it is the politically least likely to happen. Hence, Krugman's alien invasion statement, saying that if the threat of an alien invasion could just generate the political will to act, the government has the ability to end the "recession" and high unemployment tomorrow. We have high unemployment by choice. There is a known surgery that can fix it, we've just decided that we don't want to undergo the surgery.

We have massive untapped potential for economic growth and it remains untapped purely due to political will, not due to any technical reason or lack of ability.

Having said that, I'm not in favor of such a scheme anyway because the reality is that Keynesianism is a means of temporarily propping up an inevitably collapsing system. What Krugman proposes is a crutch, which has to be applied in capitalist economies every time economic inequality inevitably gets out of control. It's like driving a car that pulls to the right and then jerking it back onto the road every so often as it veers too far off the shoulder of the road.  Yeah, if you are gonna drive with a car that is out of alignment then it is good to jerk it back onto the road instead of letting it go off into the ditch (as we continue to do now), but the solution is to get the car aligned to it doesn't keep pulling to the side to begin with.

Posted by at 5:57 PM EDT | Post Comment | View Comments (11) | Permalink
Updated: Thursday, August 18, 2011 10:17 AM EDT
Wednesday, March 30, 2011
 Why I support intervention in Libya

Topic: Commentary
I was in favor of international intervention in Libya pretty much as soon as it became apparent that the revolutionary forces there wouldn't be able to survive without foreign assistance. I've seen people make arguments against intervention in Libya from just about every angle, and have intended to write a post on the subject for about two weeks, but I'm just now getting around to it.

We need to be clear about one thing, which is that we have every reason to believe that without foreign assistance there would be absolutely no hope of any revolution in Libya. Claims that the pro-democracy movement in the Arab world would be better off without Western intervention make sense on insofar as those pro-democracy movements would be successful. I think we can all agree that it is better for a country to be able to liberate itself from tyranny than to have some external force come in and get involved, but what's even worse than foreign intervention is total failure. There was no potential for success in overthrowing Gaddafi in Libya without foreign intervention, period.

But why support intervention at all? The two main reason why I support intervention are humanitarian and strategic.

I am convinced that without foreign intervention Gaddafi's forces would have ended up killing at least tens of thousands of people, if not hundreds of thousands. Libya has one of the largest military forces in Africa, and while much of the military equipment at Gaddafi's disposal is old, dated, and perhaps poorly maintained, it is still a heck of a lot better than what the rebel forces have. The rebel forces pretty much, from what I can gather, have only small arms and meager hand held rockets and a few heavy vehicles they have been able to take over. Gaddafi's forces, however, have Soviet tanks, Soviet fighter jets and bombers, a moderate 1970s era navy, and plenty of artillery and small arms, along with plenty of mines, bombs, and rockets, not to mention critical access to infrastructure which allowed Gaddafi to do things like shut off water and power to entire cities and regions.

Gaddafi has clearly demonstrated on multiple occasions that he is a megalomaniac that isn't entirely in touch with reality, who is more than willing to use brutal force and kill people. He's been a sponsor of international terror for decades and has taken action against Libyans before. In fact, from a purely "brutal dictator" position Gaddafi was clearly a bigger threat than Saddam Hussein was, and I'd argue that Iraq was a target of the neo-cons instead of Libya because Iraq, despite Saddam being less of  a threat, was of much more strategic interest to the neo-cons.

So we know that Gaddafi had both the means and the track record for large scale violence. There was every reason to believe that without foreign intervention we were about to see a bloodbath in Libya, and there wasn't time to try and work on other "options". My understanding of the situation (which may be flawed, but its all I can go on) is that without immediate intervention the killing of Libyans would have been under way within a day or two of when the air strikes began. And regardless of whether or not tens of thousands plus would have been killed, what is certain is that the revolution in Libya would have been over. Gaddafi's forces were already taking back ground one taken over by the rebels, and the revolution looked to be on its way to collapse within days. As it is we already know that from hundreds to thousands of Libyan rebels were killed by Gaddafi's forces prior to foreign intervention.

I have no doubt that despite whatever civilian casualties may be caused by foreign intervention,  intervention will ultimately both save more lives and more likely lead to a better future for Libya than not intervening.

Now on to the strategic reasons to support the intervention. I view the intervention in Libya as an excellent opportunity to get the international community and international institutions re-engaged in global security and to assume greater responsibility for needed military intervention.

The fact is that the United States currently shoulders far too high a burden when it comes to global security. We should be looking for ways to get the Europeans and our other allies more involved in international security, especially when it comes to areas in their own region of the world. For one thing the United States simply cannot afford to police the whole world, and for another thing I don't trust the United States, or any country for that matter, to have such a disproportionate amount of power.

I'd like to see the Europeans (and the Japanese for that matter) increase their military spending and take on greater responsibility for global security, which would allow the United States to decrease military spending. This action in Libya is a good exercise in moving toward this objective, and, despite whatever criticism I have about Obama in regard to many of his policies, it does appear that he shares a similar objective.

We need a return to multilateral international institutions when it comes to issues of global security and military intervention both for the sake of democracy and checks on power (and here I mean American abuse of power) as well as for the sake of the American budget. Even conservative critics of international cooperation have to acknowledge that trying to maintain American military supremacy is hugely, and in many respects needlessly, costly. Some conservative critics of the Libyan international intervention have complained about American involvement with the UN and NATO and have complained that the US should do this alone or take the lead. These same critics of course also complain about the national debt. You can't have it both ways. Being the world leader in all things military is hugely expensive and needlessly so. We do have allies, and not only can they help, but we should expect them shoulder far more of the burden than they currently do.

But what about some of the many complaints directed at the Libyan intervention, such as the following:

Why Libya, when we didn't intervene in places like Rwanda, etc? Well, first of all, I think we should have intervened in Rwanda, but I also think that the case for intervening in Libya is even greater than Rwanda, primarily because the international community has a larger responsibility for the conditions in Libya. Gaddafi's wealth and power comes almost entirely from outside Libya, from the oil money and from weapons acquired from foreign countries. Since Gaddafi's power comes from external sources, and is hugely unmatched by the citizens of Libya, the international community has to play a role in putting a check on his power. In Rwanda this wasn't the case. In Rwanda, and in several other such conflicts, the atrocities were not inflicted by a powerful military state against civilians, it was a war of civilians against civilians, using mostly low tech home grown weapons, like machetes, not fighter jets and tanks.

Why Libya and why not Syria or Yemen? Well, to be frank, Libya has a lot to do with opportunity. Gaddafi has very few allies, he isn't a partner of the US, he has a 40 year track record of violence and repression, and the scale of the violence is much, much larger. Yes, protesters are being killed in Syria, but as of yet there is no expectation that tens of thousands or hundreds of thousands would be killed, and the Syrians aren't engaged in military assaults on cities. In Syria what we have are conflicts between protesters and military forces, in Libya what we had was the military coming in and just laying siege to whole towns. Likewise, the rebel forces in Libya had taken huge amounts of territory and were significantly challenging the regime. In other words, they had taken significant steps toward overthrow by themselves already. In Syria and other such places this isn't the case.

If Libya, why didn't you support the war in Iraq? For many of the same reasons above. In Iraq there was no revolution going on at the time. There were no significant forces inside Iraq asking the US or the UN to help them overthrow Saddam with military force. It is true that some Kurds were asking for this, but it was also clear that they were a minority in the country and they themselves weren't in a position to be able to do it. We had already been providing them air cover in the form of a no-fly zone as it was, and there was no possibility that the Kurds would have been able to overthrow Saddam or that the rest of Iraq would have supported such an action by the Kurds anyway.

But, we don't know who these rebels are, maybe they are "bad guys" too! To this I say "so what?" Look, if you turn down an ally and you see a known mobster with some guy in a headlock punching him in the face with brass knuckles, assuming that you have the ability to stop the mobster you should. You don't ask who the guy is that's getting his face punched in first. If you know that the guy doing the assault is a "bad guy", you don't stop to figure out who the victim is first before you help them. Maybe some of the rebel forces are Al-Qaeda, maybe some of them fought against us in Iraq. Maybe, but what we do know for sure is that Gaddafi is a murdering dictator, so who cares? The chances that whoever comes to power in Libya will be worse than Gaddafi are virtually zero. Maybe they won't be great, but there is no reason at all to back Gaddafi in this situation.

But America is just an imperialist country that's greedy for oil and must have ulterior motives in this! Well first of all, all the more reason for an international coalition. Even if America and France and Italy and the Arab League all have reasons to try to take advantage of Libya, the fact that so many players are involved reduces the chance that anyone will be able to exert too power influence over the situation.

And let's not forget, the American Revolutionary War was only won because of the aid provided by the French. In fact, the French supplied more troops than the American colonies did, they supplied almost all of the warships, they funded the entire thing, and they suffered more casualties than the American colonists did. The reality is that without the French there would have been absolutely no hope at all for a successful American Revolution. It was 100% impossible for the American colonists to defeat the British on their own, 100%. The idea that revolutions need to be fought only by domestic forces in order to be legitimate is just plain absurd. If that were true, America wouldn't exist today.

And when the French helped America defeat the British, guess what? The French were imperialists with ulterior motives. They weren't helping us for the cause of democracy, the French were a monarchy at the time, they only helped us in order to weaken the British, it was purely for selfish reasons. My point here is that, who cares why some countries, including the US, may be taking this action, even if it is for ulterior motives, the fact is that this intervention has a far greater potential for good than doing nothing and letting Gaddafi slaughter his own people does. Who cares if the intervention in Libya is hypocritical, who cares if it is inconsistent? Better to provide hypocritical and inconsistent help than none at all.

We have basically two options. Option one is to take no military action, in which case the almost certain outcome is that Gaddafi will kill thousands and thousands of Libyans and retain power. Option two is to intervene militarily to stop or slow down Gaddafi's forces. The outcome of this action is uncertain. Maybe we will be able to force Gaddafi out of power, maybe we won't. Maybe thousands will still be killed, maybe they won't. Maybe this will lead to democracy in Libya, maybe it won't. Maybe it will take a year to resolve, maybe it won't.

We don't know the outcome of intervention, but we do know that the outcome of not intervening is a very bad one, and that alone is a good enough reason to intervene.

Posted by at 10:52 AM EDT | Post Comment | View Comments (28) | Permalink
Friday, March 11, 2011
 What people say about Social Security...

Topic: Commentary

In the grand scheme of things Social Security isn't one of the most important issues at the moment in terms of budgetary concern. The program is relatively secure, well funded, and well liked, however the way in which people talk about Social Security is an extremely important indicator of their overall approach to dealing with America's fiscal issues, their understanding of America's budget problems, and the ways in which they are likely to address other budgetary and fiscal issues.

How people address Social Security is such a important indicator of their overall knowledge and approach to budgetary and fiscal issues because the finances of Social Security are so simple and straight forward. It is an easy system to understand, with well defined inflows and outflows, and no complex budgeting.

Before we go any further we have to keep in mind that Social Security is funded by the FICA tax (which also includes the 2.9% tax for Medicare as well), and the Social Security portion of the FICA tax has always only been applied to payroll income up to a certain limit. That limit changes over time and is currently $106,800, which means that the 12.4% FICA tax rate is only applied to income from wages and salaries, not capital gains, etc., and it only applies to income below $106,800. Thus, the FICA tax is the most regressive tax in the country, and right now the total revenue raised from the FICA tax is roughly equal to the total revenue raised from the income tax. This means that the taxes raised from payrolls under $106,800 is virtually the same as the taxes raised on all other income. Over the past 30 years this has not generally been due to increasing levels of Social Security taxation, but falling levels of taxation on individual income and corporations. During this time, excess revenue from Social Security has served as a major source of revenue for the federal government, essentially offsetting tax cuts on higher incomes and corporations. It has essentially been a highly regressive stealth income tax.


We often hear people claim that addressing America's long-term deficits will require "reforming entitlement programs", including Social Security and Medicare. While future Medicare spending is projected to grow significantly, which will likely lead to future budget problems, Social Security does not currently, and never will, contribute to America's deficit. In fact, Social Security is forbidden by law from ever running a deficit. Social Security cannot legally ever go into debt or add to the deficit, and so, regardless of anything else, Social Security is not now, and will never be, a contributor to the federal deficit. If Social Security revenues are insufficient to pay promised benefits, the system is required by law to pay lower benefits, not to borrow to pay promised benefits.

There are in fact two completely different issues that have to be considered when talking about Social Security finances, paying back the "Trust Fund" and long-term budget shortfall forecasts. First lets address the Social Security "Trust Fund" issue.

When many people talk about Social Security adding to the deficit, what they are talking about is the "repaying" of the Trust Fund. What "repaying" the Trust Fund actually involves is "selling" the securities held by the Trust Fund. How this is exactly done can make a big difference. Over the past 30 years $2.5 trillion in excess Social Security taxes have been collected and "put into the Trust Fund", which essentially means that they have been buy long-term government bonds, thus that $2.5 trillion served to finance the national debt. It is a debt owed to American workers and retirees who paid excess taxes for the past 30 years in order to establish a "savings" for payment of Social Security benefits to the baby boomer generation.

What is important to keep in mind is that the Social Security system is not the cause of the debt, the Social Security system was used to finance debt that was already being incurred. If either the Social Security Trust Fund didn't exist or the money for the Trust Fund was put into something else, like for example invested in the stock market, either that debt would still have been incurred or income taxes would had to have been raised in order to avoid the debt, which means that total tax rates would had to have been higher for the past 30 years had the Trust Fund not existed in its current form.

To say that any strains placed on the budget due to the redeeming of securities in the Trust Fund are "caused" by Social Security would be like saying that the Chinese are a cause of our deficits due to the fact that we have to pay them back for the money we borrowed from them. Or, as a more individual example, it would be like borrowing money from your 401K (which you are legally required to pay back), and then when you have to pay the money back, stating that your 401K is the cause of you not having enough money.

The fact is that Social Security taxes have been financing the deficit for the past 30 years. Over the next 30 years there won't be a Social Security surplus to continue financing the deficit, and on top of that, either money will have to be raised from general revenue to pay for the securities that are redeemed from the Trust Fund each year to pay for Social Security benefits, which would reduce the national debt, or those securities will have to be sold to other debt holders, thus doing nothing to reduce the debt, just transferring it from the Trust Fund to private debt holders.

Any attempt to "reduce the deficit" by making changes to Social Security necessarily means defaulting on the debt, or at the very least extending the terms of the loan agreement in such as way as to defraud those who paid in the extra taxes in the first place. Social Security itself will never ever add to the deficit, it legally can't. The only thing that can happen is that it can have insufficient funds to pay the scheduled benefits, but it can't run a deficit.

Any talk of raising the retirement age or reducing benefits in order to "reduce the deficit" really equates to defaulting on the securities held by the Trust Fund, not paying back money that is owed the Social Security system, ultimately the American retirees who paid into it. But those who claim that reductions in benefits are needed to "reduce the deficit" don't put it that way. What they are really saying, however is, "our plan to reduce the deficit is to not pay back our creditors," and in this case, "our creditors" are us. Framing the issue as deficit reduction is just a way of tricking the public into agreeing to being defaulted on by the federal government.

The federal government currently has a debt of over $14 trillion, of which $2.5 trillion is held by the Social Security system. Of that $14 trillion in debt, the $2.5 trillion held by Social Security is the money we should be most obligated to pay back in a timely way. The other $11.5 trillion is owed disproportionately to wealthy individuals, institutions, and foreign governments, those who least need it. The $2.5 trillion owed to Social Security is owed  disproportionately to America's least advantaged, the disabled and elderly, and mostly to those in the poor and middle class. Make no mistake, what those advocating "reducing the deficit through adjustments to Social Security" are talking about is writing off a portion of that $2.5 trillion which is owed to America's poor and middle class retirees, in order to make it easier to pay back the $11.5 trillion owed to wealthy bond holders and foreign governments.

The simplest way to think about it is that the Social Security Trust Fund, for the past 30 years has forced America's poor and middle-class to become one of the largest financiers of the national debt. Of all of the national debt, the debt financed by the Social Security Trust Fund is the portion of the national debt most heavily paid for by poor and middle-class Americans.

Claiming that paying back the money owed to Social Security will "add to the deficit" is no different than saying that paying back any of the debt we owe will "add to the deficit". The lenders aren't the cause of the deficits, the borrowing is the cause. The Social Security system (financed by taxes levied entirely on low and middle incomes) has been one of the major lenders to the federal government for 30 years, now the bill is due.

Now let's move on to issue number two, the long term funding of Social Security.

The Social Security system is currently on track to exhaust the money allocated to the Trust Fund and be unable to meet the currently projected benefit obligations in about 30 to 50 years. That's a pretty long way off. At that time the Social Security system, according to current projections, would not have enough money coming in to pay out the promised benefits. At that time it is estimated that if nothing at all is done, Social Security would be able to pay out approximately 75% of the currently scheduled benefits indefinitely, meaning that if no changes are made, in about 40 years the benefits would be about 75% lower than what the currently promised benefits for those retirees are. However, also keep in mind that the way that benefits are calculated also means that in about 40 years the currently promised benefits would be higher, even after adjusting for inflation, than what current recipients receive. This is because benefits grow faster than the rate of inflation (which is a potential problem with the benefit calculation), so the fact that we wouldn't be able to pay the fully promised benefits in 40 years doesn't even mean that people in 40 years would be getting less than people now, it means they would probably be getting the same amount as people now, because the promised benefits for people retiring in 40 years are higher, even after adjusting for inflation, than what people get today (according to projections, which are so far off they could be largely meaningless).

So even doing nothing at all is no tragedy. But the real question is, why do we have this projected shortfall in the first place, since back in 1983 the National Commission on Social Security Reform, appointed by Ronald Reagan and headed by Alan Greenspan supposedly "fixed" Social Security for good by significantly raising the FICA tax (from 6% to 12.4%) and eliminating various exemptions, etc.?

The biggest factor in the projected shortfall of Social Security has been increasing income inequality. When the calculations were made for funding Social Security they were made based on the assumption that both the ratio of payroll income to capital gains would stay the same and the distribution of payroll income would stay the same. After all, these ratios were relatively stable for the 30 years that preceded the action of the Social Security Commission (which began meeting in 1982). The data that they had to look at showed stable income distributions for 30 to 40 years. However, beginning in the 1980s income distributions began shifting dramatically, both the portion of Gross National Income going to payrolls and the distribution of income within payrolls.

What has happened over the last 30 years is that the portion of national income subject to the FICA tax  has steadily decreased. It is sometimes noted that back in 1983, then the revisions to Social Security were made, that 90% of payrolls were subject to the FICA tax, and today that has dropped to around 84%, but what most people fail to also point out is that payrolls themselves, as a percentage of national income, have been falling as well.

In 1983 close to 60% of Gross National Income was subject to the FICA tax, whereas today that has dropped to around 53%.


Comparing the percentage of national income subject to Social Security taxation prior to 1983 is largely meaningless since the rates were much different, the caps were different, and there were many different exemptions from the program, etc., so it's simply not comparable.

This is the the fundamental root cause of the long-term funding issues with Social Security. Anyone who attributes the long-term funding issues with Social Security to any other cause, such as declining number of workers to retiree, people living longer, etc., etc., is either lying or doesn't know what they are talking about, period, it really is that simple.

The number of workers per retiree has been stable at around 3 workers per retiree for 40 years, and is projected to fall to 2 workers per retiree by 2030. While this is a decrease in the number of workers per retiree, productivity per worker has also increased dramatically over this time as well and can be expected to continue in the future. The problem is simply that over the past 30 years 98% of that economic increase has been captured by the highest 10% of income recipients, and thus virtually all of the increased productivity over the past 30 years has been untaxed by FICA, and without any changes will continue to be untaxed by FICA in the future. We could easily support an increasing number of workers per retiree if all, or at least more, economic growth were taxed by the Social Security system. The way the system currently works it is as if we are trying to support an increasing number of workers per retiree in an economy with zero economic growth. That, of course, wont work. The taxes being paid into the Social Security system over the past 30 years have been capped in such a way as to not capture any economic growth, only population growth, it is as if Social Security in 2011 is still being funded by the economy of 1970.

There are three ways to address this problem. The first is to get income distributions back to the way they were in 1980 and keep them there forever. The second is to change the formula for calculating the FICA tax cap so that it is pegged to the percentage of payroll income needed to fund Social Security instead of to a wage index (meaning that if we need to tax 90% of payrolls to fund the program, then set the cap to whatever will capture 90% of payrolls each year). The third would be to fully eliminate the cap on the FICA tax and apply the FICA tax to capital income as well as payroll income.

The first option is obviously the least likely to ever happen. That's pretty much a non-starter, even if you are in favor of lower income inequality. We can't rely on lowering income inequality to fix the system. That option is out.

The second option is workable, and unfortunately is probably along the lines of what would most likely be done. It still isn't perfect and will still have problems dealing with a changing ratio of capital and fringe benefit income to payroll incomes. If the portion of national income going to capital gains continues to increase, even this fix will eventually run into the same problem that we are currently facing. In addition, this would also mean preserving the currently exorbitantly high FICA tax rate of 12.4% on all payrolls below the cap.

The third option is to remove the FICA taxation cap entirely, and apply the tax to capital income in addition to payrolls. This also necessarily implies keeping the benefits the same as what they are now, even though people with high incomes would be contributing much more into the system. However, by doing this it would effectively solve the problem of income distribution leading to shortfalls, and it would allow for a significant reduction of the FICA tax. The current FICA tax of 12.4% could be cut roughly in half to around 6% and still bring in more money than currently, if the cap were removed and it were applied to capital income as well.

This means that someone with an average income of $5 million a year for 30 years would pay $9 million in FICA taxes, but still only receive roughly $2,000 a month in retirement benefits.

The third option, or at least the option of removing the taxation cap, is also by far the most popular option among America. Every poll for the past 5 years that asks about ways to fix Social Security funding and gives the option of "remove the taxation cap" has shown that removing the taxation cap is favored overwhelmingly by roughly 70% of Americans and is always the number one option selected as the best way to fix Social Security finances. See as one example: Poll: Fix Social Security by Taxing Wealthy

When the Social Security Commission met they combined the OASI (Old Age and Survivorship Insurance) and DI (Disability Insurance) programs into OASDI. The 12.4% FICA tax now goes toward OASDI combined. Of that 12.4% tax, however, 1.8% of it goes to the DI program. Even president Obama's conservative deficit commission has listed eliminating the cap on the DI portion. So, if nothing else at least that should be done, and be done quickly. By eliminating the cap on the DI portion the DI tax rate could probably be reduced to 1.4% (cutting the total FICA tax to 12.0%) and still bring in more revenue.

As it stands right now, we have a situation where essentially the entire burden of paying for the disabled falls entirely on the poor and middle class, while those with high income pay virtually nothing toward the care of the disabled. This, of course, is completely ludicrous.

To sum things up here, the fact is that the finances of the Social Security system are not a pressing issue, but nevertheless what people say about the finances of the Social Security system can tell you a lot about both their understanding of the federal budget and their ideological biases.

Anyone who claims that "fixing Social Security" is a component of reducing the deficit is either lying or uninformed, period. The Social Security system never has and never will add one dime to the deficit. The Social Security system, through taxes levied entirely on middle to low wages, has been one of the biggest financiers of the national debt for 30 years. The root cause of all of the fiscal problems with Social Security is income inequality and a system of taxation and benefit adjustment that doesn't take changing levels of income inequality into account. The system was designed under the assumption of static levels of income inequality and a static level of gross national income going to payrolls. As both the portion of national income going to capital income has increased and income inequality has increased both the revenue and expenditure have failed to account for these conditions and thus revenues are falling behind and expenditures are increasing too much.

The way to fix the system then, is not to do something like raise the retirement age, which is just a completely unrelated action that just works around the underlying problem, but rather it is to fix the formulas or take income inequality completely out of the equation by eliminating the taxation caps and applying the tax to all forms of income. The first solution, fixing the formula, would result in a balanced Social Security budget and the ability to keep the benefits essentially unchanged while raising the FICA taxation cap and keeping the tax rate the same, while the second solution would allow us to cut the FICA tax roughly in half while still maintaining benefits. In addition, taking either one of these actions, by bringing in more revenue immediately, would allow for a slower draw down of the Trust Fund, thus reducing the rate at which that debt would have to be paid back, while neither decreasing benefits nor raising taxes on the poor or middle class, who have already been overpaying for the past 30 years.

See also:

The Truth About Social Security

The real deal with Social Security


Posted by at 10:44 AM EST | Post Comment | View Comments (33) | Permalink
Updated: Wednesday, March 16, 2011 7:41 AM EDT
Monday, March 7, 2011
 Clarifying Wisconsin Pensions

I had been trying to write a post about the Wisconsin pension system for about a week, but was unable to confidently do so due to lack of clear and reliable information. I have finally been able to get enough solid information to make some reasonable statements about the system, in large part thanks to a March 3rd posting on the Wisconsin Employee Trust Fund website.

The main reasons to even focus on this issue are the way in which it has been reported in the corporate media, and even by outlets such as NPR, as well as the many misconceptions that people have about public retirement benefits in general.

See the following for some examples: Really Bad Reporting in Wisconsin: Who Contributed to Public Worker's Pensions? (Note that even this article I believe gets a few things wrong, or at least not clear)

First let's just get all of the basic facts on the table:

  • This entire discussion about governor Scott Walker's actions in relation to public workers' benefits and collective bargaining rights in Wisconsin is in relation to Wisconsin State Senate Bill 11.
  • The Wisconsin public employees pension system is 99.8% fully funded, and stands as among the most financially secure state pension systems in the nation.
  • Virtually all of those participating in the state pension system are exempt from Social Security, they pay no Social Security taxes and accrue no Social Security benefits while participating in the pension system.
  • The total percent of payroll contributed to the pension system varies each year and by classification of the employee, but is generally around 11.2%, less than the percentage of payroll taxed by Social Security.
  • The bill proposed by governor Scott Walker would not reduce the retirement benefits for anyone currently participating in the pension system, either as current recipients or future recipients.

Those are the basics, from there it gets a little more complicated.

First, the state pension system in Wisconsin does not have financial problems. It is not under-funded, and the immediate effects of Senate Bill 11 would not do anything to change the total amount of money going into the state pension system, nor would it do anything to reduce the retirement benefits of those in the state pension system. As such, the effects of this bill have nothing (directly) to do with long-term fiscal issues relating to the retirement system. (There are some provisions I'll get to later that could have a big long-term impact though)

Thus, any claim that this legislation is needed to address long-term pension obligations or anything like that are completely unfounded, because the legislation does not directly have any impact on the long-term benefit obligations of the pension system.

Secondly, and this is important because it is one of the major areas of confusion, what this bill states (which I have not been able to independently verify) is that under current law it is possible for the employer to pay the "employee's" pension contribution portion, and what this bill would do is eliminate that provision.

This is the meat of the issue. Currently the pension agreement for general state employees (this 90% of state employees and is the main focus of the legislation), states that 6.2% of the pension contribution (for 2009 for example) is to come from the employee, while 5% is to come from the employer. See: Wisconsin Retirement System Fact sheet

To think of this in the way that Social Security works, for anyone who is a full-time or part-time  employee, they have 6.2% of their income (up to a limit, currently around $106,00) taxed from their paycheck by FICA, the Social Security tax. Their employer contributes another 6.2%, for a total of 12.4%. If you are self-employed, etc. then you pay the entire 12.4% yourself.

What this legislation states is that while there is a similar agreement in place for public employees, what is happening is that some public employers are "paying the employee's share on their behalf".

What this means is that if an employee has an annual salary of $50,000, under the agreement they should be paying $3,100 into the pension system each year from that $50,000, and the state should be contributing an additional $2,500 on top of the $50,000. Apparently, however that isn't happening, apparently some departments are paying the "employee share", so that with $50,000 in annual salary, little or nothing is coming out of the $50,000, while almost the entire $5,600 is being paid by the state on top of the $50,000. This is, in effect, a backdoor raise.

Now I don't pretend to know how this situation came about or why it exists, but I would agree that this sounds like bad practice, for multiple reasons from the purely bookkeeping to the political reasons on display now.

However, for anyone who came into the system with such an agreement in place what simply changing this practice means is that forcing the employee portion to come out of the employee's paycheck will act as a pay cut. If someone agreed to a job based on the provision that their retirement contributions wouldn't come out of their paycheck, then of course this will result in a loss of agreed upon benefits, their pay will go down.

So the real effect of the legislation is to reduce current state payrolls, not to do anything about long-term benefit obligations. Under the proposed change the long-term obligations will stay exactly the same. Personally, I'm opposed to the whole notion of hidden "employer paid" fees for anything, be it Social Security, pensions, health care befits, whatever, and think that all of these things should visibly come out of the employee's paycheck, BUT, I think that the portion of all of those things currently being paid by employers should be paid to the employee, not that they should be paid by the employee without any changes to employee pay. But of course, doing that would never be in the cards in this case because the whole point of the legislation is to reduce spending, whereas what I'm talking about would be completely spending neutral.

To claim, however, that the state employees were somehow getting a "free ride" is nonsense as well, because ultimately all compensation agreements are in respect to the entire compensation package. If private employees participating in Social Security were told, "Employers will no longer have to contribute to Social Security, but you still have to pay 12.4% so the full 12.4% will now come out of employee paychecks," this would essentially be no different than what is taking place in Wisconsin. It's just a matter of accounting in the first place. If a teacher takes a job at $40,000, with $5,000 in benefits paid by the employer, then that's no different than $45,000 with $5,000 taken out each year for benefit contributions. What this legislation does is take people who agreed to the first scenario and then shove them into the second, but without adding $5,000 to their paychecks. It is a permanent, long-term, salary reduction.

So that much is clear, but what about the claim that the public pension systems are costing tax payers more, due to their "generous benefits"? Actually, at least in Wisconsin, this is not true, and in fact under the legislation I believe the total benefit contribution will go up, from 11.2% to 11.8%, so the benefit  itself will actually cost tax payers a little more, though this will be more than paid for by the effective salary reductions on public employees.

But the point is that if these employees weren't exempt from Social Security (something I'll cover in a later post) they would be costing tax payers more, because then they would have to pay 12.4% of payroll to Social Security as opposed to the 11.2%-11.8% of payroll that the pension currently cost.

But, the benefits are better right, so it must cost more somehow? Not so. Yes, the benefits have historically been a little better, namely that you can retire earlier (as early as 57 for general employees), but this doesn't cost tax payers anything, this is a product of the fact that the pension system generally is able to generate more benefits from less contributions, because pensions are investment systems (similar to what a "privatized" Social Security system might look like). The state pension requires that workers contribute for a minimum of 30 years, and after 30 years of contribution there is a minimum retirement of 57, so after age 57, once you have contributed for 30 years you can draw benefits, with a maximum retirement age of 65, meaning that anyone can draw benefits by age 65, no matter how long they have contributed.

So, at least in regard to the pensions, while the benefits are a little better, they aren't "costing taxpayers more". I'll save the discussion of pensions vs Social Security for a later post as well.

However, after having gone through all of that, the most interesting part of the whole bill in relation to pensions is the following provision on page 124:

(a)  The secretary of administration, the director of the office of state
employment relations, and the secretary of employee trust funds shall study the
structure of the Wisconsin Retirement System and benefits provided under the
Wisconsin Retirement System.  The study shall specifically address the following
1.  Establishing a defined contribution plan as an option for participating
employees, as defined in section 40.02 (46) of the statutes.
2.  Establishing a vesting period of 1, 5, or 10 years for employer contributions
under section 40.05 (2) of the statutes and for eligibility for retirement benefits.
3.  Modifying the supplemental health insurance premium credit program
under subchapter IX of chapter 40 of the statutes.
4.  Permitting employees to not make employee required contributions under
section 40.05 (1) (a) of the statutes and limiting retirement benefits for employees
who do not make employee required contributions to a money purchase annuity
calculated under section 40.23 (3) of the statutes.
(b)  No later than June 30, 2012, the secretary of administration, the director
of the office of state employment relations, and the secretary of employee trust funds
shall report their findings and recommendations to the governor

Basically, this says that the governor is interested in replacing the entire pension system with a 401K style system, which means defined contributions but no defined benefits. This talks about making it optional, but it appears that the intention is to start trying to transition public employees out of the pension system altogether. Permitting employees to not make contributions and also not receive benefits would be an obvious tactic for trying to just drive employees out of retirement benefits altogether, if they aren't paid enough to make ends meat now, they'll elect to opt out, then once they get old, they are just screwed.

At any rate, after about a week of looking into this subject, this is what I've come up with. My conclusion is that overall the reporting on this subject has been both hugely lazy and irresponsible. Most articles, even from major outlets  like the New York Times, NPR, and USA Today, etc. haven't relied on solid sources, they have mostly just used the press releases and talking points from the governor as their source, and they have allowed the governor's spin to color their own descriptions of the situation. Even those "on the other side" haven't really gotten it right either.

The ultimate point is that the pension system in Wisconsin is financially sound and the legislation supported by the governor doesn't reduce future pension obligations. Some public employees currently do apparently (and I haven't even been able to fully verify this myself) have a portion of their pension contribution which is designated as the "employee portion" paid by their employer (the state) which means that they are able to take home a larger portion of their gross income. The legislation in question seeks to eliminate this practice, without providing additional compensation to the employees from which to pay that portion. This would result in an effective pay cut for the employee, while do nothing to change the total amount going to the pension system (although there is an additional provision to increase the amount a small bit as well). The overall cost of the pension contributions of public employees has been and will remain lower than Social Security, thus the pension system is actually a less expensive benefit for public employees than Social Security would be. And furthermore, the public employees have already agreed to the proposed changes regarding the employee portion of the pension contribution anyway.

This post isn't actually what I was planning on writing about initially, but I figured just getting the facts straight was important in the first place.  I'll write another post about pensions vs Social Security (my initial intention) at a later date.

Posted by at 11:22 AM EST | Post Comment | View Comments (6) | Permalink
Updated: Tuesday, March 8, 2011 7:22 AM EST
Tuesday, February 22, 2011
 Redistribution vs. Redistribution

Topic: Commentary

One of the major claims/beliefs of conservatives, including genuine middle-class "Tea Party" type conservatives who are genuinely concerned about the state of the American economy, is that "redistribution of income" from income earners to welfare recipients is one of the major causes of stress on the American middle-class.

According to the Heritage Foundation (a major conservative think tank), welfare spending has increased from 0.5% of GDP in 1962 to 4.4% of GDP in 2010. The welfare programs cited by the Heritage Foundation are all clearly redistributive programs. These are food stamp, housing assistance, Medicaid, and income assistance programs.

The Heritage Foundation puts total welfare spending in 2010 at $648 billion.

It is absolutely true that there has been an increase in spending on anti-poverty programs over the past 50 years, and that spending on welfare programs is higher today than it has ever been, and it is absolutely true that these programs constitute "redistribution of income" from income earners to those with less or no incomes, however, this isn't the whole picture of redistribution in America.

If we grant that this $648 billion roughly represents the "forced" redistribution from the haves to the have-nots in America today (surely there is some charity in addition to this spending, plus there are other less direct programs that benefit the poor such as public schools, etc), the next question is, what about redistribution from the have-somes to the have-mores?

The middle-class is definitely getting squeezed in America, but who is doing the most squeezing?

Capital income is also a form of redistribution, which is why it is classified by the IRS as "unearned income". Income from capital constitutes income from dividends, interest, rents, and gains from the sale of capital, i.e. selling a stock for more than what you paid for it.

Ultimately all capital income is a tax on wages. Capital income comes from owning property, not from doing work. The value used to pay capital income has to be produced by work. Without work being done there can be no capital income.

Using a similar time-frame as that of the Heritage Foundation, what we find is that from 1960 to 2010 the portion of national income going to capital has increased from roughly 14% to 24%. The portion of national income going to wages has dropped from 67% in 1960 to 55% in 2010. If we look at the portion of wages going to the bottom 95% of the population what we find is that this has dropped from roughly 62% in 1960 to 44% in 2010. Sounds unbelievable I know, but that's the case. Only about 44% of gross national income in 2010 went to the wages of the bottom 95% of income earners. Even when we add in proprietor's income (income of small business owners) for the bottom 95% that still only adds up to around 52% of gross national income.


Now even if we ignore the wage issue and just focus on capital income alone, what we find is that in 1960 roughly 1.5% of gross national income went to the capital income of the top 5%, however as of 2010 roughly 12% of gross national income went to the capital income of the top 5% of income recipients.

So let's consider this. In 1960 roughly 0.5% of gross national income went to welfare programs for the poor and roughly 1.5% went to the capital income of the rich. Both of these are forms of redistribution from workers.

As of 2010 roughly 4.5% of gross national income went to welfare programs for the poor and roughly 12% went to the capital gains of the rich, and again, both of these are forms of redistribution.

This doesn't even take into consideration disproportionate income gains in the areas of wages and benefits, which I would argue have also been redistributive in relation to executives and other ultra-high income individuals, however there is a problem here of double counting, because a portion of that 4.5% going to welfare programs is actually paid by the rich, and so it isn't actually a direct drag on the middle-class. It is, in effect, a tax on the income that is redistributed from the working-poor and middle-class to the rich, and then redistributed back to the poor. But since welfare programs at the federal level are funded primarily from more progressive income tax, and the top 5% currently pay roughly 60% of federal income taxes, let's attribute 60% of that 4.5% of GNI to the rich, which leaves only 1.8% of middle-class income going to support the poor through federal taxation.

Let's also consider that some portion of the increased capital income of the top 5% in America is a product of redistribution from foreign workers, and thus not directly redistribution from American workers. Let's assume that one third of the capital income of the top 5% of Americans comes from foreign workers, that still puts the redistribution from American workers to rich capital owners at around 8% of gross national income.

So we conclude that somewhere around 1.8% of all income below the 95th percentile is being redistributed toward federal anti-poverty programs, and somewhere between 8% and 12% of income below the 95th percentile is being redistributed in the form of capital income to the top 5% of income receivers. (Note that this likely grossly underestimates the full level of redistribution from the middle-class to the rich since it doesn't take into account inflated fringe benefits and wages that are also partly paid for by underpaying middle-class workers.)

Whether or not you support the concept of capital income or believe in the merits of capital income as a driver of investment in productivity, etc. the fact is that the pie has to be split between wages and capital income, and the fact is that over the past 40 years that pie has been increasingly split in favor of capital, not wages.

We can clearly see the effects of this on compensation in relation to productivity. As productivity has soared, wages for the middle-class have stagnated. This is because the increases in productivity have gone increasingly to capital, executive bonuses, and ultra-high wage receivers, again like executives.


The fact that the income pie is going increasingly to capital isn't a problem in and of itself, in fact this is in many ways a good thing, the problem, however is that virtually all of the capital is owned by the wealthiest 5% of the population, and this is why the net effect is hugely redistributive. If capital ownership were broadly shared, then this effect wouldn't be considered redistributive, but under the current condition of high capital ownership concentration it is.

So if we consider the middle-class worker, the redistributive burden on them to support the poor is a small fraction of the redistributive burden on them to support the rich. In other words, the tax on labor to support the rich is at least 5 or 6 times higher than the tax on labor to support the poor, and this doesn't even take into consideration the burden of side-effects of wealth concentration, like the ways in which the wealthy are able to use their power to undermine the voting interests of the middle-class, etc.

Posted by at 9:29 AM EST | Post Comment | View Comments (85) | Permalink
Updated: Tuesday, February 22, 2011 9:50 AM EST

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