Good and Bad Inequality

August 14, 2017

Inequality can be either good or bad, depending.

Assuming behavior is ethical and legal, it is good for extra reward to go to those who work harder, are more creative, or take greater risks than the rest of us. The opportunity to earn extraordinary rewards is healthy and something we do not want to quash with taxes so high as to destroy the motivation to take risks.

It’s perfectly acceptable that there are people at every economic level. Every citizen can strive to achieve the high rewards if prepared to “pay the price,” which often involves very hard work and significant risks to sleep, health, relationships, and more.

It’s important for Liberals like me to endorse this kind of “good inequality,” because Conservatives often seem to think we only want socialism–everyone exactly at same income and wealth, with no motivation to try for more.

Please understand–we don’t want that.

In my view, bad inequality occurs in four major ways. First, if the behavior leading to greater income and wealth includes any of the following, it results in bad inequality: Corruption, immoral, unethical, or illegal behavior; using power to take advantage of laborers, purposefully capturing “rents” which are rightly deserved for labor, not for capital. How this is to be judged is not the purpose of this post, but it is often obvious.

Second, if the amount of high remuneration is not correctly correlated to performance and contribution, it results in bad inequality. Just because a compensation committee of the board of directors decides the CEO’s salary, bonus, and stock options doesn’t mean it is correlated with the CEO’s actual contribution. It’s usually not right, in this writer’s opinion, if the CEO earns 331 times that of the average employee. Surveys show the public thinks CEO’s are vastly overpaid.. This writer thinks 100 times would be a good target for policy intervention, and that’s way above the level of the 1960s.

Third, it is bad for significant wealth to be obtained through inheritance. The kids didn’t earn it, didn’t take the risk. Inherited wealth promulgates bad inequality. There should be a modest limit to what can be transferred, and a high tax on the remainder. This means a wide variety of transfer mechanisms need to be removed.

And fourth, if the share of income and wealth attributed to the top percentiles of the populations is very high and the share for those in the bottom percentiles very low, inadequate to live a decent life, inequality has risen to a level which is dangerous to the society as a whole. This is bad, regardless of whether the wealth is earned fairly.

The US has all these characteristics at this time–much good inequality, but all the forms of bad inequality. The combined effect results in creating the fourth condition, with the highest inequality among highly developed countries. The negative effects of high inequality have been elaborated in previous posts.

This high level of inequality is not the result of the natural and inevitable progress of healthy capitalism. The march of technology and globalization has contributed to the growth of inequality. But of equal or greater impact has been the steady advance of conservative economic policies designed to benefit business and capital at the expense of workers. We have tools to moderate the impact of all these influences.

The Federal Reserve has an objective to manage inflation (which also affects inequality) within upper and lower limits. Similarly, there is a lower and an upper limit to healthy inequality. Inequality is an issue which requires management and needs moderation.

We should have a government objective to keep inequality within a moderate range.

 

 

Then and Now–So Different!

August 12, 2017, Da Lat, Vietnam

My childhood family in High Point, North Carolina was poor. My parents were high school grads who found their way from farms 20 miles south, to this small textile and furniture town, and both got jobs at the most prominent textile factory, Adams Millis. All four kids worked on our small truck farm at the North end of town, and for neighbors–mowing lawns, harvesting tobacco, washing cars, stacking produce at the local grocery store, whatever we could find. Starting wage for me was $.15 per hour at age 12. When I entered college on a scholarship, my wages were $.75 per hour in the reference library.

My parents were never able to save. Even with the harvest of crops on our small farm, their combined wages were barely enough to keep us in a used pickup and a beat up car, plus clothing and essentials.

This may seem really rough, but that wasn’t how it felt in those days. We were poor, but clearly far from the poorest in town. There were many like us. We always had transportation, decent clothes, school supplies, and plenty of good food. Dad raised pigs and chickens for meat and mother canned a lot of the summer crops to last us through the winter. We felt happy and secure. We had “enough.”

To supplement his wages, my father sold produce off the back of his pickup truck, sometimes in the African American neighborhood of High Point–and there, we could see real poverty.

There are three important differences between then and now:

  1.  We had advantages
  2.  Times have changed
  3.  Inequality has risen sharply

First, as children of the 50s and 60s in the US, my family was white and we were WASPS. Our hard working parents went to church, didn’t drink, and didn’t use drugs. We had support from friends and relatives in a crime free environment. We had decent public schools. But the makeup of our nation today doesn’t look like High Point in the 60s and 70s. What about the millions today who are not white, not WASPS, may not have solid parents, live in real poverty far worse than we experienced, and may be surrounded by criminals, drugs, and little in the way of support?

Second, times have changed. Although we were poor, the reality is that we had little doubt about opportunity at that time in the US. When I graduated, I knew there would be many jobs available to me, and only worried about how to choose the best one. IBM offered me a job and Citibank another. I took banking. My brother took Southern Bell. My sister took Sears Roebuck, and the youngest took the Trammel Crow real estate firm in Texas. We all had the possibility of long term employment. We all had benefits including health insurance.

Our careers spanned a rapidly changing jobs era in America. These days, even if you have a college degree, it’s not that easy to find a good job, or to keep it. With the cost of education outpacing wages by a wide margin since the 70s, many more cannot afford college. Good luck if you can’t get through college today! The triple forces of Conservative economic policies since Reagan, globalization, and technology have eviserated manufacturing jobs, which Trump tries in vain to restore. There was opportunity and mobility then.

Third, as I argue in previous posts, inequality matters. Inequality has skyrocketed while mobility has simultaneously declined. Even in those days. we were painfully aware that there were social classes to which we were not privileged in our small town. You might ask, so what, everyone has someone above them in income and class, right? Yes, right, and we Liberals have no interest in completely eliminating inequality–only in significantly moderating it.  While inequality/status was a mild depressant then, it is now colored in bold terms all around us. In previous posts, I cite studies which show the damaging effects of high levels of inequality. Those include physical and mental health, life expectancy, crime, drugs, and slowed economic growth, plus the obvious misery of those at the bottom.

If only the US of today was committed to everyone “having enough” as a social contract. That’s not adequate, as I have argued above, but we don’t even have that. We have something like a philosophy of responsibility for yourself. Translation: If you are out of work, it is probably your own fault and we only help (a little) those who demonstrate that they try hard. They can only demonstrate trying hard by actually finding work. Thus the earned income tax credit–you can’t get support if you don’t have income.

Isn’t it obvious that we need a re-vitalized and active government (you can choose Federal, State or Local, it’s all government) to address the future of work, community, shared prosperity, and inequality? Is there an alternative?

How Americans Lose Faith in Government–an Example

July 31, 2017, Da Lat, Vietnam

This post illustrates why so many have lost confidence in government, using the example of a happenstance disclosure of  what I found to be disturbing information, with no justification available from the government.

Only as a result of the escalating feud between Congress and Russia, caused by Russian hacking and interference in our election, have we learned the size of the US Embassy and Consulate staff in Russia. Apparently the number is 1,119. Putin now retaliates against additional sanctions by requiring a 744 reduction to a new level of 455.

I’m shocked to see how many people we keep in just one country, just for the Embassy and Consulate. I can’t imagine how/why it is necessary for us to have this huge contingent of employees there. I’m sure there are also other government agencies represented there. And, that doesn’t count the many employees of  the State Department in the US who are devoted entirely to Russian relations.

A search on the internet provides little in the way of justification, nothing in the way of expense. I only find we have four offices there, and there are departments involved with business, education and culture, visas and US citizen services. I am pondering the annual cost of maintaining our properties there, plus the employment costs of 1,210 staff, the cost of expatriate salaries, health care,  housing and support, after recognizing that a number of employees are local hires. I would venture a guess that the cost of the  US Embassy and Consulates in Russia exceeds $100 million annually. I wouldn’t be surprised it it is more, and I wouldn’t be satisfied if it is half that, still a huge annual expense.

To me, this revelation is the kind of thing that causes so many Americans to lose total faith in government to use our tax money effectively and efficiently. It causes me to wonder how many other Embassies and Consulates in how many other countries may be overstaffed and/or inefficiently spending our tax dollars.

Maybe we really need all these services in Russia and all these employees and this huge expense. But I’d like to see the justification.  How many Americans would be comfortable that we really need more than 1,000 people and attendant expense to provide these services in just one nation? What if the NY Times or CNN brought this to the attention of the voters? President Trump could have provided such justification for his proposed cuts in the State Department, which were far less than that required now by Putin, as it relates to Russia only. If that was available, maybe I wouldn’t have such heartburn over seeing these numbers, almost by accident.

I recommend an annual analysis of every government program which can be isolated to a given purpose or country (e.g., State Department, Russia), if the annual expenditure exceeds a certain level. This should include costs along with performance and efficiency analysis.  Since so many programs are large, we could start with a hurdle of $100 million, and then lower it gradually in future years. I would recommend the information be provided to the public by the CBO, and renewal of such expenditures be required of Congress annually. I can’t imagine a business which wouldn’t conduct such an examination and justification annually.

I have been a consistent advocate for fixing government, not starving it. I believe our country needs strong institutions to assure our survival and advancement. I will continue to argue for that. But contrary to the depiction many Conservatives want to paint of us Liberals, I do not condone inefficiency and waste.

We need a better managed government, well managed and transparent to citizens–better than under Barack Obama, and definitely better than so far under Donald Trump.

Postscript Aug 12: Now President Trump praises Putin for reducing Embassy staff in Russia! If this kind of reduction properly right sizes the staff, why didn’t Trump do it?

Fundamental Beliefs Explain a Lot

July 31, 2017, from Da Lat, Vietnam

Here are a few key questions which illustrate critical determinants of how we individually see the world, what we vote for, and what we support or fight for. If you know a person’s stance on such as these, you can predict his/her attitude toward border walls, health care, foreign trade, tax legislation, and more.

  • Is success and wealth in life determined solely by one’s drive, hard work, and creativity; or, are the successful of us mostly beneficiaries of privilege of birth, help along the way, and/or good luck?
  • Do most of the underemployed want to work and provide for themselves; or, do most want to live off the government?
  • Should government limit its role to rule of law, protecting property rights, and security; or, are health care, education, infrastructure, and regulating the excesses of capitalism (and more) also part of the proper role of government.? For this question, assume government can be local, state, or federal. Also, assume that all of us are displeased with most government as it has operated in recent times. This is a question of what should be, not what is.

I believe in people, regardless of nationality, ethnicity, sexual preference, religious belief or other differences. I am naturally inclined to trust people. There are criminals, and there are lazy-good-for-nothings. There are corrupt leaders of nations made up of good people like the people around us at home. But I strongly believe the great majority of people in the US and around the world are honest, and trustworthy. That includes Chinese, Russians, and Iranians, even North Koreans.

I believe most people are not lazy, want to work and care for their families, and do not prefer to rely on others or on government. God knows, what you can get from the government is hardly enough to motivate anyone to prefer it, unless you are caught in a web of despair and need a helping hand to get trained and get a good job.

I think those of us born male WASPs (white, Anglo-Saxon, Protestants) or the like, of good and stable parents, good communities, good mentors, various helpers along the way, need to remember that we didn’t do it all by ourselves. How much harder is it for a woman, a person of color, Jewish or Muslim, or an immigrant, a person with poor or absent parentage, born into poverty? It is abundantly clear that “making it” is much harder for non college graduates now than in the 60s, for even a white male. Some of the reasons are structural (e.g., technology and globalization), but much is due to advancing neoliberal policies favoring business and wealth over workers.

I have been deeply disappointed by the performance of government–in Venezuela, in Russia, and in the US, particularly under the current administration. I won’t bother to even make a partial list of my disappointments with government. But starving government until you can drown it in the bathtub (Grover Norquist) is not the answer. We must fix government. We can’t live without it. Competition is what capitalism is all about. We can no more allow capitalistic competition without the government as active referee, than we can tolerate a football game without a referee. The game would quickly degenerate into a dangerous and deadly disaster, like the gladiators in ancient Rome. So, the logical (and only) answer is to work to fix government, not to destroy it.

My beliefs are deep seated. I can’t tell you where they come from. You have such beliefs too, perhaps different from mine.

I’m left to wonder…if I believe people want to work and  be responsible, just need an occasional helping hand, and you believe they prefer to live off handouts, then how can we resolve our differences and move ahead?

 

 

 

Musk vs. Zuckerberg

July 25, 2017

Today’s news is that Elon Musk and Mark Zuckerberg have opposing views of the future of Artificial Intelligence.

Musk says, “AI is a fundamental risk to the existence of human civilization in a way that car accidents, airplane crashes, faulty drugs or bad food were not — they were harmful to a set of individuals within society, of course, but they were not harmful to society as a whole.” Musk’s concerns start with driverless vehicles and a wide variety of blue collar and white collar jobs he expects to be lost. Then, he extends to the potential for criminal use, even use to start wars.

Zuckerberg responds, “I think people who are naysayers and try to drum up these doomsday scenarios — I don’t understand it. It’s really negative and in some ways I actually think it is pretty irresponsible.”

In a previous post entitled Better World or Worse World, I examine a variety of elements of the present and future global condition, noting that computers, artificial intelligence, robotics, and machine learning have the potential for significant disruption. In Good News and Bad News, I note that we face the potential that 5 million drivers of vehicles are likely to lose their jobs to driverless technology as it advances across the next 10-20 years, very soon. There are estimates that as much as 47% of US jobs are vulnerable to technological replacement. Musk thinks even more.

I’m privileged to be a Fellow in Harvard’s Advanced Leadership Initiative this year. My favorite professor, an expert on inequality, and I had a discussion about the future of technology at the end of the Spring semester. I took the view that Musk expresses. He took the Zuckerberg view. I don’t want to be a pessimist. Really I don’t.  But as much as I respect my professor, I have two problems with the optimistic view about all this. One problem is lack of any specifics as to how those 5 million will recover good jobs, jobs paying the $62,931 average pay for truck drivers. Second, in the absence of any logical explanation for replacement jobs, I find it hard to understand failing to plan for the possible downside.

The common “explanation” for the positive scenario is based on nothing other than history. Reference is made to the agricultural/industrial transformation in the 20th century. In the late 19th Century, more than 50% of Americans worked on farms. Today, with mechanization, we only require 2% of Americans as workers on farms, to provide far more quantity and much higher quality food than was produced in 1900. The argument is that the citizens of 1900 could not have predicted how the large agricultural cohort of labor would be absorbed into the advancing industrial economy. But, it happened.  Of course, the transition was disruptive and painful, but across a few decades, new opportunities of work for most did evolve. One only wonders whether government planning and action might have alleviated some of the pain. Think Grapes of Wrath, by John Steinbeck. And this says nothing about the criminal and dark side possibilities of technology advancement–e.g., robot and drone warriors.

So, maybe, just maybe, there will be some kind of yet unimaginable transition from the industrial economy to the digital economy, the knowledgeable economy. I certainly acknowledge it is theoretically possible for a wide variety of new opportunities for creative work being unleashed by advancing artificial intelligence and related technology. I certainly hope so.

But I don’t want to see a big segments of the next generation suffer through a transition that has no attempt at planning or support for those to be displaced during the change. I watched such an unassisted transition take place in my hometown of High Point, North Carolina, when virtually the entire textile and furniture industries abruptly moved to China in the 1990s, and government did nothing to help workers move, find other employment, or gain new skills. The US was all about globalization and open borders then. I suppose government was taking the optimistic view–things will work out in time.

I don’t see how we can justify taking the optimistic view about the future of technology, unless we  actively plan to do our best to anticipate the problems and prepare proper protections and assistance for the displaced. Isn’t this what government should be doing–trying to prepare the nation for the future?

 

 

What the American People Want

July 27, Da Lat, Vietnam

I hate it when politicians tell me what “the people” think or want, what Americans care about or don’t, unless the politicians provide evidence from polls or research that supports their statements–and, they never do. The American people want…” starts the common phrase from candidates and politicians. The American people want to repeal Obamacare. The American people want a big border wall. The American people do not want immigrants from Muslim countries. And on and on.

One that I particularly hate goes like this: “People [implying all people] don’t care about inequality.” The argument follows that [all] people don’t care if the CEO of Wells Fargo makes 300 times the income of the average Wells Fargo employee. After all, the Board of Directors makes that determination based on what other comparable companies pay their CEO’s, and based on the performance the Board assesses for the corporation.

People only care, goes the argument, that they have a decent job and some steady (albeit modest) annual increase in wages. According to US Census Bureau, since 1980, GDP rose by 154%, corporate profits rose by 182%, average income for the top 1% rose by  190%, and median household income rose by only 16%. I can’t help wondering how anyone could not care. I wonder whether those who say people don’t care would be happy to see it even more unequal. No limits?

Nicholas Kristof summarizes this era of increasing inequality in his NY Times column of July 23: “Since the 1970s we’ve seen a long-term trend toward cutting taxes and social services, and there have been a series of grim consequences: rising inequality, stagnant high school graduation rates, rising incarceration rates, rising narcotics use, stagnant earnings for the bottom half of Americans, and so on.” And still people don’t care?

There are many ways to measure economic inequality. Most common are the Gini index, comparisons by tiers, or by measuring consumption instead of income. And, we now know a great deal about wealth inequality, which is greater (worse) than income inequality. Pew Research provides a quick summary. The bottom line is that no matter how you measure it, inequality is very high, and in almost all serious studies, it has increased dramatically since around 1970. My posts offer references and evidence supporting my view that most Americans, most global citizens, do in fact care about inequality.

In a previous post entitled Inequality Matters, I address the reasons inequality matters just as much as all other factors that are offered as sufficient substitutes: shared prosperity, opportunity, mobility,  having “enough,” and other such positive outcomes. In Relative Status Matters, I address some of the feelings about inequality that appear to be universal and result in the kinds of negative outcomes Kristof mentions. I also refer to the research which documents these correlations.

But I don’t argue that all Americans care. Pew reports that significantly more Democrats care than do Republicans. I’ll venture to suggest motivations for some of those saying “People don’t care.” First, the speaker may not care about inequality, because he is enjoying the fruits of inequality in the upper crust. Second, he (or she) believes everyone is capable of being rich if they only try hard enough. Some believe they made it all the way to the top echelon based on nothing other than their own drive–forgetting advantages of birth, excellent schools, help along the way, luck, and certainly anything at all that the vast governments of their cities, states, and country did to lay the foundation for individual success.

Granted this is a complex subject. It seems abundantly clear that CEO compensation is not guided by performance, but rather by cronyism among Boards of Directors and compensation consultants, and could be modified by regulation or tax incentives. It is not so easy to imagine how to adjust for star athletes and entertainers. But higher tax rates do offer one part of the solution.  Emanuel Saez and others have calculated that raising the top marginal tax rate from 42.5% (average of US and all states and local governments) to 73% would maximize revenue–i.e., there would be no diminution of investment up to this rate.

What is clear is that the current high level of inequality is not the inevitable and natural consequence of democracy and capitalism. Rather, it is the result of decades of legislation that have increasingly favored corporations and the wealthy at the expense of the working man and woman. The vast extent of such changes across the period since 1970 are well chronicled in books by Robert Reich and Joseph Stiglitz, among others.

I suggest all would-be-influencers stick to documented evidence when speaking of what people want. Or, better still, stick to what we want, and why.

We all have many wants. Top of my list is for a reversal in the pendulum swinging toward higher inequality. I want a concerted effort by all three branches of government to restore and strengthen the rights and protections of the working man. I want a top level commitment to shared prosperity. I want to see inequality return to where it was in the 1960’s. We had billionaires then, but they contributed much more in taxes than now, and still felt highly motivated to start businesses and invest.

That’s what I want.

 

Basic Psychology

July 16, 2017, Da Lat, Vietnam

Basic psychology has long provided fundamental sound advice for relationship differences. Don’t start out criticizing the other person. Don’t tell them they are wrong. Don’t try to prove you’re right. Don’t give instructions for what they should do better.

Instead, start by listening very carefully to the other person. Repeat back what they said in your own words, giving comfort that you heard correctly and understand. Ask questions only to clarify any points you may not fully understand. You might want to say you understand and respect the other person’s point of view.

Only after all this, you may ask if you could now respectfully present your different view. You may ask the other person to kindly listen as you did, without interrupting or challenging, until you have finished explaining your view.

This is basic psychology, understood by anyone who has been in therapy or has read a book on relationships. Why? Because without this kind of approach, a heated argument will almost certainly escalate in name calling and worse. Criticism will result in hardened positions, eliminating any possibilities for agreement or compromise.

Of course, no matter how courteously and respectfully one approaches the solving of a difference, there is always a chance the other party will infer criticism and react to that inference. But, if this kind of preface is observed, and if the process is repeated during the course of discussions, there is a far better chance of working together to solve the problem or finding a compromise.

Why wouldn’t this basic psychology be the right way for Congressmen and the Presidential administration to deal with their important relationships, relationships with  influential politicians of opposing parties?

Note this Trump statement in his address at Liberty University: “Nothing is easier or more pathetic than being a critic, because they’re people that can’t get the job done.”

Many of us are to blame for allowing the acrimonious situation to develop, but no one is more responsible than the person we elected as our President. Along the way to the White House, Donald Trump was demeaning, vicious, and humiliating to all his major opponents. Regrettably, he has either forgotten his promise to “become Presidential,” after the election, or he really just can’t do it.

His continuing targets include all liberal media, but also James Comey, Barack Obama, Chuck Schumer, Nancy Pelosi, the Mayor of London, Angela Merkel, China, Mexico, and pretty much anyone else who disagrees with him. Hasn’t it occurred to him that he needs votes from the other side of the aisle in order to pass critical legislation, and he needs foreign cooperation in foreign policy objectives? Bullying and demeaning those forces will not open their hearts and minds to compromise and solution.

If our President cannot conduct disagreements with courtesy, if he can’t set an example as the current leader of the free world, I suppose we shouldn’t be confused as to why we continue to degenerate into the deeper and deeper abyss of partisanship and acrimony.

Wouldn’t you agree this is near the top of the list of his failures in leadership at the six month mark? As he said at Liberty University, this may be one of the reasons he can’t seem to get the job done.