One of the reactions to my post of yesterday was to argue the point of who/what is responsible for the rise in inequality experienced in most countries. Here in the US, I argued that the Republicans and their policies are the prime culprit. My friend argued that globalization is the cause.

My friend is right. Globalization has resulted in inequality–inequality between countries (failure to converge in incomes) and inequality within countries. The latter has happened because cheaper foreign labor accompanied by faster transportation and advancing technology has moved jobs overseas. In my home town in North Carolina, almost the entire local employer base in textiles and furniture was moved to China and elsewhere around the globe. Improved technology provided for communication and remote management with China. Improved transportation enabled China to ship heavy sofas to the US at substantially lower prices than for US manufacturers. Enhanced financialisation and open borders enabled US producers to move labor, factories, capital and funds flows rapidly around the world. Enhanced “flexibility” for US employers pursued by Reagan and Republicans since has enabled them to abandon North Carolina workers on a moment’s notice and leave them without support or new skills training. These policies are central to the Republican agenda.

Globalization also means facing how pollution from China affects the US and vice versa. We two are the top producers, and we may endanger the planet if we don’t cut back. Just now, legislators are struggling to restrain our use of fossil fuels. This necessity costs jobs for coal miners in Kentucky and elsewhere. I believe this action is necessary, but what’s lacking is government and industry working together to re-train and support workers who lose jobs. China is far ahead of the US now in fully accepting the role of government to pave the way for its industry, with infrastructure, research, and significant investment where private capital cannot do the job. In the US, Republicans even resist government investment to develop solar. Of course there will be some failures when government invests in pioneering business where private industry will not, but that’s a justified role of government. That’s how the internet was first developed–by the US government, not by private industry.

He reminded me that Wall Street supports both parties. Yes, but according to the research behind Paul Krugman’s article of today, starting with support for Romney in 2012, Wall Street money swung much more heavily to Republican candidates and policies. 

I’ll try to tackle globalization more in another post–can it be restrained? How? What would be some wise global policies to enable a more fair and sustainable outcome to the continuance of globalization? One thing for sure–the optimal development of globalization is not just uncontrolled free borders, free markets, free capital, and “flexibility” for employers. If capitalists feel everything about their corporations needs to be carefully controlled, why do they think that world markets need no controls? Why is that different? Isn’t good management all about controlling outcomes?

For now, just consider this: The graph below displays countries which have experienced the greatest globalization, as defined in the chart:

Note that Singapore, Ireland, and Switzerland are now more “globalized” than even the US. But, the movement of inequality (measured the the Gini index) has been dramatically different for these 4 countries. What have Singapore, Ireland, and Switzerland done to manage the impact of globalization on their populations, their pursuit of equality, that we have not?

Here is a comparison of the Gini indices (measurement of inequality–higher is worse) for the four:

Ireland             35.9 (1987)                           33.9 (2010)
Singapore          NA                                      46.3 (2013)
Switzerland     33.1 (1992)                           28.7 (2012)
United States   34.0 (1985)                           47.6 (2013)

While Singapore appears to have been consistently high, not increasing much (based on other data), Ireland and Switzerland reduced inequality over roughly comparable periods, while the US significantly increased inequality.

And, what about Finland and Norway? They have also been actively engaged in globalization and yet have kept inequality remarkably low–both below 26.0 in 2011, about equal to where they were in 1999. Between 1985 and 2008, income inequality rose in most OECD countries, but not all. It fell or held constant in Turkey, Greece, Hungary, France, and Belgium.

The mentioned constitute a good list of outliers to the trend of increasing inequality. It’s not just one country with unique characteristics that managed it well. It’s not just non-participants in globalization which performed well in inequality. How did they do it? Part of the answer is in how much the government did to reduce market-generated inequality. As shown in the chart below, the US diid less than most in the way of redistribution.

                                Source: The Economist Nov 26 2013

As a result of our form of capitalism and our reduced form of social welfare and related investments to benefit lower classes, the income of the top 20% and especially the top 1% significantly outpaced the rest of our population between 1979 and 2011, both before and after taxes:

And the US poverty rate today of about 14% of our population has not declined from its level in 1967. In a word, things have not been getting better in the US since Republican agenda (sometimes called “neoliberalism”) began to dominate our economics:

Yes, we have had Democratic administrations during this time, and they too have paid too much homage to the neoliberal economics, whether by pressure of Republican political force, the pressure of big conservative money, or by simply failing to see how far the pendulum was swinging. Maybe it just wasn’t clear until some of us began to marvel at the atrocious behavior of the GOP during the 6 years of the Obama administration.

The point was also made in response to my previous post, that it’s not just the Republicans opposed to expanding immigration–in fact, many of the poor and middle class Americans oppose immigration, because immigrants are taking some of the jobs in the lower income category, driving down wages–restaurant workers as an example.  Yes, with apology for the necessity to speak here in broad terms when indeed there are so many variations of philosophy within both parties, I nevertheless think that almost all of the anti-immigration rhetoric preceding the recent election came from the Republican side of the aisle. I believe this is just one of the “tools” conservatives realize they can use to lure Americans to vote their way (along with freedom to own and carry guns, opposition to abortion, continuing tax reductions, etc.). In my view, these points are not the major wins Republican leaders seek (except for the tax reductions). This is a carefully developed marketing program, designed to appeal to the poorer segments of our population.

I’m in favor of some form of amnesty for those illegals within our borders who have worked and paid taxes for a period of time. I’m in favor of increased quotas. I believe it’s time for us to recognize in our globalized world that our responsibilities do not stop at our borders. We must start to think as citizens of the world.

Unfortunately, it is not possible for any country to just accept all immigrants who want to come. If we could, it would solve a great deal of global inequality, but the disruption to any receiving nation has to be managed. In-migration has to be paced. Along with increased immigration, we need increased equal education for all, to enable us to keep advancing the US economy in service and information sectors. As shown in this chart, we do not need many immigrants to support our agricultural segment. We need them to support the advanced sectors of our economy. We have to recruit well educated immigrants and train and educate others to do that work.

Perhaps the most significant of these was the weakening of one particularly key part of bank regulation. Having spent most of my career in banking, I feel qualified to comment on it. My career involved lending of most all types–commercial, real estate, and consumer. I’m not a huge fan of bank regulation, because we have done it so poorly–far more complicated and costly than it needs to be.

A great deal of today’s banking regulation is a massive waste of time and money. For example, the increased regulation of mortgage loans under HMDA (the Home Mortgage Disclosure Act) is a huge and expensive burden to regulators, banks, and to borrowers. If you have bought or re-financed a home in recent times, you know. There are dozens of documents to sign. No-one reads them. There are many forms to fill out. Regulators comb through banks files in examinations to see if every rule and document requirement is met. Much of this could be eliminated if we had just a few rules for banks, whose deposits are protected by the FDIC. We could require banks only make home mortgage loans with 20% minimum cash down payment. We could require banks not sell more than 80% of the loan, or that banks retain the first 10% of the risk of all loans that are sold.  Just these regulations could replace endless paperwork, save millions if not billions, and strengthen bank regulation. 

Bundling these loans up and securitizing them into tranches with suggested levels of risk and return (sometimes called “financial weapons of mass destruction–WMD’s”) is what led to the start of the economic depression beginning in 2008. The rights of big banks to trade for their own account in these kinds of instruments was just what Dodd-Frank was created to eliminate. The rider to the omnibus bill, added by Republicans, weakened that protection to American bank investors and taxpayers substantially. These protections are not wasted regulation like those cited above. They are important. Republicans have scuttled them with their amendments to the omnibus bill. In the meantime, it is hard to find a segment of capitalism in which executives are paid more than in the financial sector. Jamie Dimon of Chase was paid $20 million for 2013, notwithstanding trading losses of $6 billion a year earlier and fines for $1 billion in 2013. 

1. No matter what one believes to be the cause (s) of our high inequality, Republicans have done virtually nothing to try to restrain it across the last 30 years, unless one gives credit to attempts to strengthen the private sector vs. workers, in order to raise growth–the “trickle down” approach. But as we know from the last 30 years with steadily rising inequality, there hasn’t been any trickle down. We still have 45 million Americans categorized as in poverty in the US and wages of the middle class have hardly moved. Jobs have become insecure.
2. As to the future–can anyone point to current Republican policies, legislation proposed, that is intended to reduce inequality, restore more equal opportunity, other than trying to raise growth by more power and freedom to the private sector?

Across my lifetime, I never thought the Republicans were the best party for social justice, although I’m told they once were. I spent a career in the private sector, during which I generally thought the Republicans were best for economic wisdom. As a lifelong registered Democrat, I voted Republican a number of times. But, I have felt growing concern with how the world and our country have changed in recent years.  And after a year (2013) studying economics in London, and observing for a year since,  I have concluded that the “Grand Old Party” has lost its wisdom on economics (and a few other important attributes) along the way.  I am now planning to look to the Pope for more economic guidance than to the Republicans.

Quoting Pope Francis: “To our dismay we see technical and economic questions dominating the political debate, to the detriment of genuine concern for human beings. Men and women are reduced to cogs in a machine, items of consumption to be exploited.The result is that when human life is no longer useful to the machine, it is discarded without qualms, as in the case of the terminally ill, the elderly who are abandoned and the children who are killed in the womb. It is a great mistake when technology is allowed to take over, and there is a confusion between ends and means. It’s an inevitable consequence of throwaway culture and uncontrolled consumerism.” These characterizations apply to the US as much as to Europe, if not more so, considering that our inequality and social mobility is worse than that of most European countries.

I don’t agree with all of the Pope’s views, abortion rights as an example. However, I do agree with much of what this Pope stands for. He’s a great transforming voice in the Catholic church and in religion today. Of course, some will say, what does the Pope know about economics? And what kind of economic message is conveyed in his views? He is calling for countries and companies to restore recognition of people as human beings, as opposed to units of production, who can be discarded as soon as capitalism finds better alternatives for production, without obligation to help re-train and re-deploy, without obligation to provide gainful and equal opportunity for all. He is insisting that citizens are not just automatons whose fulfillment is met only by constantly increasing consumption. I relate to his objection to selfish lifestyles and opulence, when there remain hundreds of millions in poverty, significant segments in most all countries in the world. The US Census Report says we have 45.3 million US citizens living in poverty, as of 2013.

These are most definitely economic factors. They are reflections of the harmful excesses of an unrestrained capitalism, the American version of which may be the most harsh on the middle class and poor. These behaviors cost our country and our economy. These are reflections of the Tea Party, the Libertarians, the Conservatives, mostly represented by the contentious and fractionalized Republican Party of today–the party now distinguished for its inability to propose any meaningful legislation, focusing all its attention on criticizing President Obama and the Democrats, and reducing government, at the expense of schools and infrastructure, as well as worker protections and social welfare.

What the Pope is decrying can be considered under the broad umbrella of “inequality,” a term Republican refuse to use and consider. They prefer “poverty” because that term suggests I can choose to help if I want to, whereas “inequality” suggests I am responsible to help–I failed to provide for others as I should have. Republicans don’t want any obligation assumed, since that would invite another pejorative word–“redistribution.”  Some find that the essence of this position by the Right is based on deep seated ideology, such as value of the individual (as opposed to the group), the belief that anyone can make it here (and if you haven’t, it’s your own fault), and favoring opposition to government doing much more than protecting private property rights, rule of law, and national defense. Unfettered capitalism should be left to do the rest. 

In contrast, the Democratic view can be summarized as valuing the collective, recognizing that equal rights means equal opportunity that requires work and protections to sustain. Democrats understand that some citizens simply need support from the state, which should be active in its partnership with capitalism, and should restrain some of the excesses of uncontrolled capitalism. Consider the agreements reached for the Millenium Development Goals. The much debated process ended up agreeing that while markets drive economic growth, they need the public sector to support them. The MDG goals also ended up agreeing that poor countries must have active support from rich countries. We were a major party to these global MDGs. Have we forgotten–government has a significant role, and we should concern ourselves with the needs of developing countries and their citizens? Consider what might happen if we really applied these principles in our trade and immigration policies.

As to the Republicans, I’m forced to agree with the views of Thomas Mann and Norman Ornstein. They wrote a best selling book in 2012. Mann is a Senior Fellow at Brookings, a centrist Think Tank, and Ornstein is a scholar at The American Institute, a conservative think tank. Indicating they have come to stark conclusions of today’s Republican Party with regret, they write, “We have been studying Washington politics and Congress for more than 40 years, and never have we seen them this dysfunctional. In our past writings, we have criticized both parties when we believed it was warranted. Today, however, we have no choice but to acknowledge that the core of the problem lies with the Republican Party.The GOP has become an insurgent outlier in American politics. It is ideologically extreme; scornful of compromise; unmoved by conventional understanding of facts, evidence and science; and dismissive of the legitimacy of its political opposition. When one party moves this far from the mainstream, it makes it nearly impossible for the political system to deal constructively with the country’s challenges.”

I hold Republicans largely responsible our high inequality, driven by their economic policies since around 1980, sometimes called “neoliberalism.” There are other contributing factors, such as technology, globalization, and financialization, but Republican policies have significantly influenced these as well. 

So, just how severe is our inequality in the US? Just how successful have the Republicans been in advancing this set of views?

The answer is very successful. We are now back to the 1925 peak of inequality, the “robber baron” peak. We enjoyed a period of improvement between 1925 and 1975.  Recognizing that some “re-balancing” of the power of labor and capital may have been necessary in the 70’s and 80’s, the pendulum has now swung way too far to the Right. Republicans have done an excellent job of persuading Americans that Democrats and big government are responsible for their lackluster wages and poor jobs prospects, by arguing that the Democrats have hobbled capitalism with too much government and regulation–just get rid of all that, and everything will soon be hunky-dory. The Republican argument is that all we need is more growth! More growth comes only from unfettered capitalism. That’s the argument.  

There are two main problems with this argument:

First, it is certainly not evident that growth alone will reduce inequality, without any form of redistribution (either via increased taxes on the wealthy, or by simply re-allocating the existing government budget–federal, state, or local–to such as education and infrastructure from such as military or excessive government support for the relatively wealthy elderly, as examples).

Yet, the conclusion that inequality reduces growth will certainly remain disputed disputed. Even the findings of such entities as S&P, the OECD, and the IMF will undoubtedly be disputed by conservative economists. 

• However, I certainly haven’t found any studies arguing the contrary–that high and rising inequality enhances growth.

• Second, there is no dispute about the social and moral negatives to high and rising inequality, at least none other than the Libertarian response that we are all on our own, and that somehow this is what God intended. 

• Furthermore, Republicans should take note–regardless of their arguments, there is a growing chorus of concern expressed across the spectrum from liberal to conservative. Politically, it is time for Republicans to pay attention.

• Finally, even if growth should be slightly restrained by actions taken to improve equality of opportunity, or even to gradually redistribute by modestly increased taxation on the wealth and those of higher incomes, the trade offs would certainly be more acceptable to Americans than continuance of present trends.  

It does seem abundantly clear that Americans are not happy with the trends of the last 30, 20, or 10 years. It’s getting worse (for middle class and below). The recent mid-term election results suggest Americans have been persuaded to blame their frustrations over poor jobs, low wages, and reduced opportunity on the Democrats and big government. The reality is that these ills are largely the result of Republican policies over the last 30 years.