Personal Observations

Feb 13, 2015

It’s one thing to argue the economics of inequality. The reality is that there are different and conflicting interpretations of the data and the theories. There is ambiguity. Personal biases play in. Some feel the most important thing is to allow motivation to be undisturbed by taxation, that opportunity abounds, and others feel the wealthy should help the underprivileged in one way or another.

It’s entirely another thing to experience the realities of the world around us on a daily basis. Sometimes, what we see with our own eyes, in the halls and on the streets of our city, on the back roads of the world, tells us more, with no ambiguity. There is a reality.

Yesterday, I had the privilege to attend a San Francisco Symphony performance. Herbert Blomstedt, now about 87, was conducting Sibelius and Mozart.

I found a hall filled to about 2/3 capacity at 10am on a weekday, tickets very cheap ($40) at this “open rehearsal,” in which we could see and hear this elderly icon graciously instruct his large orchestra, and then conduct them through the complex and beautiful compositions.

I felt deeply moved by the music and by the whole scene. Blomstedt, without a glance at his music, so clearly calling out with his hands to the oboes, then the bassoons, and to each section of instruments, calling up their volumes in one and down in another. The musicians, each with an accomplished specialty, some in their twenties, some in their seventies, each in complete command of their unique instruments and roles.  All of it coming together in a way that transcends the imagination of just how–how the composer dreamed it up and wrote it down, a different score for each of the dozens of instruments and individual parts; how the conductor memorized it and knows each part, adding his own interpretation; how the musicians have been able to devote their entire careers to playing a viola or a french horn, with excellence. All for our pleasure, and for a short period of almost touching the essential beauty of life.

As I listened and watched, I considered the cost of all this–the hundreds of musicians and support staff coming from all over the Bay Area, maintenance of the great hall, and all of it. The hundreds of years of devotion to these exquisite compositions.

I reflected on how fortunate I am, having the privilege to be touched by such accomplishment and beauty. I thought of those in The Ukraine, in Nigeria, in Syria and Iraq, in rural India, and in the homeless shelters of our own cities, some only a few blocks from this great hall. We have 45 million in poverty in our country. I imagine none of them would regard even the $90 for two tickets to this performance to be inconsequential in their daily survival needs.

How can we avoid being reminded vividly of the privilege of our lives here, realizing that much of the world will not have this opportunity in their lifetimes? Here in San Francisco, one of the wealthiest cities in the US, the wealthiest country in the world. Maybe it’s easy to be remain oblivious, surrounded as we are by such privilege and wealth.

Branko Milanovic, noted scholar of inequality at the World Bank, has analyzed available global data to conclude the following: some 50-60% of your economic destiny today is pre-determined by the country in which you happen to have been born; another 20% is pre-determined by the wealth of your parents. Thus, almost 80% of your economic destiny is pre-determined. And, he speculates that when the data permits analysis of gender, race, religion and other factors which are givens at birth, the percentages will be far higher.

For those who haven’t seen this conclusion before, it doesn’t mean there is no chance for pulling oneself up by the bootstraps, even if one was born of color, female, in Uganda, of poor parents, or an equivalent set of pre-determined obstacles. Some do. However, the data clearly shows that the “chance” of your “making it” with such birth handicaps is far lower than for the rest of us. It is “almost” impossible. My parents were relatively poor, but I was born in the USA. I’m male, Caucasian, Protestant. And, that was a very different time, a very different political scene, and a very different economy than today. There was more opportunity.

Some in this area who live in poverty, some who are working with very tight budgets, some who have been forced to move to the distant suburbs of our San Francisco by our increasingly unaffordable housing, many, many, will not be able to experience the Symphony. Ever. And, as Milanovic says, the vast majority of those born in the wrong country of poor parents, never will. Ever.

I have a wonderful young couple who clean my home biweekly. They are immigrants. They work very hard, do an excellent job for me, always willing to do anything extra that I need. As I was recording these thoughts today, the husband arrived , and with great trepidation took me aside to ask whether I could consider an advance on future cleaning of my home, so that he could buy the little things they need for the new baby they are soon expecting.

There can be no dispute that we are seeing a staggering rise in inequality in the US. This has rightfully become a political issue worth debating (and resolving).

When a right wing academic chides his own side of the political spectrum for disingenuously promoting a political solution to inequality, his analysis deserves reading, and he deserves recognition for intellectual honesty. This is the message from Ramesh Ponnuru of the American Enterprise Institute, a conservative think tank, in today’s NY Times.

He’s pointing out that Republicans have started blaming the Obama administration and the Democrats for the significant rise in inequality, and have even been so bold as to suggest that Republicans will provide a solution, less inequality, if only we elect a Republican President in 2016, giving them control of all three chambers of our federal government. If ever there was, this is truly the pot calling the kettle black!

Ponnuru explains–there is no real interest among the consensus of Republicans in addressing inequality.  There are no visible Republican proposals which would improve inequality. It’s worse. He goes on to explain a critical variable: That the Republican economic centerpiece is just economic growth. That’s all. He clearly explains that when growth is strong, everything else constant, guess what?  Inequality increases! So, in essence, the Republican agenda is indisputably inconsistent with improving inequality. It’s really that simple.

I’m impressed with this accurate and honest explanation, and most especially coming from a sound voice on the Right. He advises Republicans to give it up–it’s dishonest.

On the other hand, Republicans can honestly argue that they might be able to make the economy grow faster than Democrats can. Comparisons between Democratic and Republican administrations’ growth records across the Twentieth Century would not lend credence to that argument, at least not based on history. Nevertheless, I would trust Republicans might honestly believe they can do that.

However, they may not be able to pull it off.  As Ponnuru suggests, removal of some of the restrictive, burdensome and ineffective regulations would be helpful (although many have been added under Republican administrations, as well as Democratic).  So, they will find me with an open mind, interested, if they think they can grow the economy faster. I would listen to their proposals. Growth is good, beneficial. But, growth alone will not reduce inequality.

Ponnuru accurately observes that the American population still seems more interested in jobs and opportunity than in measures to reduce inequality. Faster growth might improve opportunity. Wages might increase. But wealth and income disparity will not diminish–it will worsen, unless there is some form of redistribution.  I believe it indisputable that at some extreme of inequality, depending (of course) on other variables, any country will eventually face revolution. I suppose the Republicans who really understand economics and history are banking on the hope that inequality will (somehow) level out on its own. This is known as the “Kuznets curve,” no longer believed by most economists. And in the meantime, they are betting that improving jobs and wages (a little) will suffice. The real questions are (a) is it getting worse? (b) at what rate? and (c) and how far are we from the precipice?

Redistribution is the only answer to reducing inequality. There is no other answer. Redistribution can come in many forms, however. Some are particularly painful to conservatives–like taxing the rich to provide welfare to the unemployed. But, there are more palatable forms of redistribution. Schools and infrastructure would be good places to start. We shouldn’t even be debating these priorities. They contribute to opportunity for all, which Republicans claim they support. These are properly called redistribution when the wealthy pay for more than their share of the benefit. But isn’t that better than wondering whether your children or grandchildren will have the wherewithal to hire enough vigilantes to protect their gated homes?

The rationale for the continuing tolerance among Americans (and for Chinese and other unequal developed nations) for rising inequality is perhaps best explained by a parable from the noted economist Albert Hirschman in 1973. Paraphrased by Debraj Ray, this is it:

“You’re in a multi-lane tunnel, all lanes in the same direction, and you’re caught in a serious traffic jam.

After a while, the cars in the other lane begin to move.  Do you feel better or worse? At first, movement in the other lane may seem like a good sign: you hope that your turn to move will come soon, and indeed that might happen. You might contemplate an orderly move into the moving lane, looking for suitable gaps in the traffic. However, if the other lane keeps whizzing by, with no gaps to enter and with no change on your lane, your reactions may well become quite negative. Unevenness without corresponding redistribution can be tolerated or even welcomed if it raises expectations everywhere, but it will be tolerated for only so long. Thus, uneven growth will set forces in motion to restore a greater degree of balance, even (in some cases) actions that may thwart the growth process itself.”

Americans and Chinese are still believers in the Horatio Alger story, but reality for the great majority is that bootstrapping it is harder than ever.

It’s not so easy to get into that fast lane. The traffic there is moving faster and faster these days. Those Bentleys and Rolls Royces only seem to brake to admit those of their own kind. Expensive private high schools in my neighborhood, feeders to Ivy League Universities, cost $35-40,000 per year, while the San Francisco public schools must get by on a budget amounting to about $9,000 per student.

The Republican stance on key economics defies rationality. For example, to promote growth, few would disagree that appropriate spending on our infrastructure is needed and would greatly benefit growth. Here we are talking about worn out roads and highways, bridges, tunnels, inadequate fast rapid transit, tired airports, our power grids, and even our internet (slower than many other nations). Note the powerful correlation between public investment and economic growth:

Paul Krugman has argued the key point repeatedly and does so again in today’s NY Times. Essentially, it comes down to the Republican attitude of severe austerity–that reducing debt and meanwhile reducing government (continuously) is the answer. Europe is demonstrating now that this cannot be the entire answer. I argue that the Obama administration (and the Federal Reserve) deserve great praise for rather miraculously dragging our economy to this stage of growth while continuously restrained in proper tools to do so, by Republican excessive adherence to austerity. Maybe austerity can be understood for Japan, with astronomical debt, but certainly not for the largest economy in the world, the reserve currency of the world.

If we are to continue across the next few years with Republican control of the purse strings, just how are they going to grow the economy? Removing regulations alone will simply not do it.

A better statement from Republicans can be suggested: “We don’t think inequality is important to fix. It is simply a factor of motivation, which is a good thing for everyone. As to those with motivation who have obstacles to their achievement, we’re sorry, but we simply can’t distinguish between those who really want to work and those who don’t, so we don’t favor any form of redistribution. We will only be able to contribute to improved opportunity for those who can take advantage of it. We hope you all continue to agree with us.”

I will close by acknowledging there are poor legislators on both sides of the aisle, as there are wise voices on both sides. However, it is now the Republican Party which has allowed itself to be hijacked by extremists on the far Right, such that it is unlikely Republicans can even stimulate growth. And, as Ponnuru so rightly states, Republicans have no interest in reducing inequality.

In just previous posts, I argue that Republican policies (neoliberalism) are largely responsible for the rise in inequality across the last 30 years.

References:

Paul Krugman: http://www.nytimes.com/2015/02/09/opinion/paul-krugman-nobody-understands-debt.html?hp&action=click&pgtype=Homepage&module=c-column-top-span-region&region=c-column-top-span-region&WT.nav=c-column-top-span-region

Ramesh Ponnuru:http://www.nytimes.com/2015/02/09/opinion/lets-not-mention-inequality.html?hp&action=click&pgtype=Homepage&module=c-column-top-span-region&region=c-column-top-span-region&WT.nav=c-column-top-span-region&_r=0

Debraj Ray on Hirschman: http://www.econ.nyu.edu/user/debraj/Papers/Uneven.pdf

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.

Anyone who cares about the future of this country has probably been watching the news, or in some cases, participating in the aftermath of the police shooting of a young black man, and now following the announcement that the Grand Jury has not found cause to indict the policeman.

Rotating back and forth between MSNBC and Fox news, one can get a sense of the two extremes in points of view:

• Michael Brown was murdered by the white policeman in yet another example of law enforcement racial profiling and prejudice against young men of color. He was unarmed and was trying to comply when he was shot repeatedly. This would not have happened if the young man had been white.

Or

I fear we will not.

Both parties are trying to make their case beginning with “The American people have shown….” Lately, it’s more from the Right than the Left, perhaps because Republicans are basking in the aftermath of their election victories, and still objecting to anything. Yes, anything–not just anything coming from the President or the Left, but anything.

In my previous post, I suggest several characterizations of such rhetoric: First, it’s insulting to suggest that any of the specifics objected to (e.g., immigration reform of a certain type) were on the ballot–thus, cannot be argued to be the position of the people; Second, it’s insulting to suggest “the American people” are of one mind on anything. In fact, 2/3 of registered voters did not even vote in these elections. But it’s clear that like our elected officials, we are highly polarized on many key issues. We are also the most diverse nation in the world. Thus, it is undoubtedly true that we have a diverse array of opinions.  We may agree on a problem (jobs), but we have different opinions on how to solve the problem.

What seems likely is that the absence of specific proposals from the Right will continue until the new Congress is installed. Then, the Republicans still have a major task of reconciling the Ultra-right (people like Cruz and Paul from a Libertarian bent, McCain and Graham from a hawkish bent) with mainstream Republicans.  And, Republicans will have to deal with a President who seems ready to use his vero.

While the American people want to “get things done,” it’s ridiculous to assume an extensive list of miscellaneous legislation will satisfy anyone.The American frustration is not likely to be assuaged by passage of legislation around campus sexual assaults, veterans benefits, or the like. It does not appear that Americans will be satisfied with only a few of the controversial partisan issues getting resolved by negotiated legislation–things like immigration and climate control (not that such resolution is likely). And, it’s doubtful that much satisfaction would be provided by a negotiated resolution of the Keystone pipeline.

That’s because the key issue appears to be around jobs, and the pipeline won’t create many jobs. In contrast to Republican claims of 600,000 to 3.5 million jobs, estimates from Trans-Canada itself have the construction jobs down to 9,000 only, and estimates of permanent jobs after construction are as low as 35, Forbes reports from sources. These lower numbers are further confirmed by comparison to the actuals from the Trans Alaska pipeline, which was much more complex and expensive than Keystone is expected to be.

In my just previous post here, I acknowledged no-one knows what the American people really want. Specific actions preferred are diverse, where they exist at all. But there is clarity about one overarching issue that needs fixing, even if the way to fix it is disputed. My guess coming from numerous polls and addressed repeatedly (superficially) by politicians, is that there is much commonality in jobs dissatisfaction. Jobs problems are the big beef of the American people!

While the economy has improved dramatically since 2009, unemployment down to 5.8%, frustration remains about the nature, wages, and security of the available jobs. C Class compensation has skyrocketed. Just look at today’s SF Business Times list of top paid Bay Area CFO’s, one step below CEO’s. Annual comp for those 50 ranges from  a low of $3 million annually to a high of $38 million. Per capita income in my city of San Francisco is $47,000. Lots of people have been forced to take lower paying or temporary jobs, in desperation.

So, whether the blame is placed by some Americans on Democrats for this complex set of unresolved and seemingly deteriorating jobs issues, or by others on the Republicans, this does seem to be the central issue.  Of course, there are those of us who are retired, in school, or solidly situated in well paying management jobs, for whom this is not a personal issue. However, even these worry about graduation or about the opportunity for children and grandchildren.

How to deal with government is the key to resolving the jobs frustration. The Right has done a good job of marketing, placing the blame for all this on Obama, Democrats, and big government. Their solution is less and less government–move the jobs problem to the private sector.

The question is whether or to what extent pushing the jobs problem to the private sector will work.  Will private industry choose, with perhaps some tax reduction and other incentives, to pay more, provide more benefits, grant more security, conduct skills trainings to enable displaced workers to upgrade, etc? My guess is this won’t work very well. Of course, some companies are volunteering contributions to employment, social justice, or environmental justice. There is a slowly growing cadre of such. However, it’s too small, too limited, and too slow.

Such gratuity is limited by its inherent conflict with shareholder bottom line motivation at the heart of capitalism. It costs money to do these things, and if all my competitors don’t do it with me, I will lose access to capital for the future of my business. This may be exacerbated by Conservative views that the best way to create jobs is simply to grow the economy, and the best way to grow the economy is to further relax any restraints on employers in regard to their obligations and costs of employment. Trust “the invisible hand” of capitalism. If capitalism limits the extent to which employers can justify additional protection to employees, and Conservatives are driving to further reduce any government imposed obligations to do so, it is unlikely we’ll see significant improvement. In fact, maybe even the opposite.

The jobs problem is further complicated by structural issues such as automation, outsourcing, and globalization.

It is clear we need government to motivate and restrain the excesses of capitalism when these result in social or environmental injustice. The problem is that government is terribly inefficient, and the American people are rightfully frustrated with the cost and inefficiency, with which frustration the Right has taken advantage with messages boiling down to “let’s just starve the beast,” because (unstated) we don’t have the ability to manage government effectively.

It is true that there is a great deal in government that could be made more efficient, and there is also a great deal we could do without. Consider one example with which I am quite familiar, having spent a career in it: Banking.  Federal Financial Analytics has estimated that the new financial regulation (Dodd-Frank) stemming from the great recession has cost the 6 largest banks an additional $70 billion, and that doesn’t include the costs of oversight by government regulatory agencies (OCC, FDIC, Federal Reserve, etc.). It also does not include the cost to business delayed and denied, and to the economy. And this is just for the big 6 banks and just for the most recent wave of regulation.

Bank regulation can be done a lot less expensively, making the wheels of financial commerce move much more swiftly, with a boost to economic growth. Many agree that a few simple requirements could replace thousands of pages of regulation, and hundreds of thousands if not millions now employed on both sides of financial regulation: Increased capital requirements; a requirement to retain at least say 25% of loans on the originator’s books; separation of investment banking and speculative activities into separate entities without FDIC or other government support and without use of average citizen’s deposits; requirement that borrowers (whether individual or corporate) be liable for at least 20% of the debt (fully exculpated loans prohibited); and a downpayment of at least 20% on home purchases. These rules could be the basis for elimination of much of current regulation.

If so, why hasn’t the bank regulation been done this simpler way? Is it the fault of the Democrats wanting more detailed regulation-micromanaging? No. There is no marked difference between Democratic and Republican administrations in imposing such regulations. There is a rush from both sides to regulate when crises occur. Many economists blame the increased frequency of dramatic cyclical crises of finance on neoliberal economic policies gaining ground since 1980, supporting the freedom of “financialization.” When crises occur, regulations are designed by legislators who are not experienced in banking. Lobbyists representing banks have fought against simpler rules like the ones above, preferring all this paperwork, oversight and compliance over simpler rules which might reduce profits slightly and reduce freedoms for banks to speculate for their own accounts, with the implicit backing of the government.

So, government is terribly inefficient in some areas.  Granted. Does this mean we can just starve government and do without it? Trust the private sector for most everything? No–that would be at least equally foolish.

If the Conservatives would work with Democrats in a combination of incentives to industry to seriously address jobs needs, much could be done. The “60 Minutes” TV weekly last night focused on one of the easiest opportunities –fixing our aging US infrastructure. Democrats cannot do anything about that, since Republicans will not spend the money. As Economist Paul Krugman has argued throughout the recovery, we are missing a great opportunity to both grow the economy and create lots of jobs. Jobs needed to fix roads, bridges, tunnels, ports, airports and even our internet access, will not be few, as with the pipeline–there will be millions, and the work will continue for years, just to catch us up with other developed economies. This will stimulate jobs, generate new sales for business, and make US industry more competitive. Without government controls, this won’t fully solve the need for wage growth and job protection, but the Right is missing a great opportunity in resisting addressing infrastructure improvement. There are other such opportunities.

Conclusion: Americans mostly want jobs conditions to improve. Democrats who turned out for Obama in previous elections didn’t vote, likely disappointed with jobs performance, and not sure who is responsible. Voting Americans endorsed candidates with a political viewpoint that government cannot be used to fix the problem.  Maybe they were lured by Republican rhetoric. Maybe they just wanted a change–any change.

My forecast is that little meaningful will be accomplished in the next two years. We’ve been dtawn by tax reduction promises to starve government. But government is needed, along with private industry, to make the desired improvements in the jobs market. In addition to rule of law, national defense, and internal security, government is needed for infrastructure, education, and health care. Most advanced nations recognize that private industry alone will not meet these needs, is not by its very nature able to do so so. And, government is our only protection from the excesses of unrestrained capitalism.

We’re left to hope that the Republicans get reasonable across the next two years. There are quite a few competent and wise Republicans in the center of the party. However, it does not yet seem likely they will be able to control the extreme factions. So, if they only manage to do little, but yet succeed in persuading Americans that continued jobs failure is the fault of government and Democrats, we’re likely to see a totally Republican administration in 2016–legislative and executive. Then, we’ll have to wait another 4 years for Americans to realize the totally private industry strategy is never going to work.

It is not likely Americans will get much satisfaction for the foreseeable future, regrettably.

References:

Pipe Dreams: How Many Jobs Will Be Created By Keystone XL?
http://www.forbes.com/sites/energysource/2013/05/10/pipe-dreams-how-many-jobs-will-be-created-by-keystone-xl/

 The Cost of Bank Regulation:
A Review of the Evidencehttp://www.federalreserve.gov/pubs/staffstudies/1990-99/ss171.pdf

The Cost of New Banking Regulation: $70.2 Billion: http://blogs.wsj.com/moneybeat/2014/07/30/the-cost-of-new-banking-regulation-70-2-billion/

Huffington Post Headline. This pretty much sums it up for us Democrats. We suffered a big defeat. Congratulations to the Republicans.  Congratulations for their effective campaign. I wish all of us the best under their next two years controlling Congress, but honestly, I’m not expecting much. And I can’t sincerely congratulate Republicans for their ideology or the substance of their campaigns.

In the press conferences by McConnell, Boehner, and others, there was a frustrating litany of statements claiming “the American people have shown that:”

• They want the Affordable Care Act (Obamacare) repealed
• They want the Keystone pipeline
• They do not want immigration reform
• And, a number of other things claimed to be what the American people have shown by this election

None of these were on the ballots. The American people have in no way sent these messages to Congress and the President. I am an American. I do not favor repeal of the ACA, unless we replace it with a single payer system operated by the government, something far from the Republican wish list. If the election was a mandate against Obamacare, was the 2012 re-election of Obama a mandate for Obamacare?

And the constant theme that the American people are calling for change! “Change I intend to deliver,” says McConnell. Never mind the 30 years I have already served in Congress and didn’t manage to effect change. Exactly what change is it that you’re referring to, Mitch?

Even the President’s interpretation of the message, “get stuff done,” is not helpful. This is what both parties have been parroting, both claiming the other party is the obstacle. Reference is made to the fact that only 185 laws have been enacted by this Congress, the lowest number in decades.

But Obama has vetoed only 2 bills in 6 years. Bush vetoed 12. And, it is not true that the problem is an unusual number of bills passed by the Republican House but blocked from vote by the Democratic Senate. The Washington Post uses GovTrac data showing there have been a number of prior Congress’s with more unaddressed bills backed up. And does anyone really believe that if a few hundred bills do get approved by this new Republican Congress and the President, definite proof of “getting stuff done,” Americans will be happy?  Not necessarily.  Doubtful. It would be an insult to American intelligence and diversity to believe this would make a dent in Americans desire for “change.”  True change is going to require approval of hotly contested proposals, which is not likely. Compromise on the pipeline, foreign trade, and campus sexual assaults will not solve the problems weighing on Americans.  On the important stuff which might effect change, the parties are more divided than ever before.

So much rhetoric (“Change and Reform”), so little specificity as to exactly what is meant by those catch-all words. For example, I want serious attention to equal opportunity and inequality. Others wants the Keystone pipeline. Other voters want legalized marijuana. I favor increased taxes on the wealthy and those with high incomes, provided we use the proceeds for the improvements I favor. Many others favor reduced taxes on the wealthy. So what “change” or “reform” is the politician referring to? I resent any politician claiming to know what I want, worse yet that we all want the same thing. I want leaders with the judgment to propose specifics, with the courage to come out from behind meaningless phrases.

If so much progress has been made in the economy and in jobs, why so much concern about jobs? Why did the Democrats get thrown out? A good guess is that while corporate profits are at record levels, available jobs pay less than before, new skills are needed to achieve decent pay, there has been no wage growth for the middle class and lower, and there is substantially more risk in employment in recent decades than before. Unemployment rates do not capture those who have simply given up, nor does it count those who took lower paying jobs while still hoping for better–there are lots of these nowadays. We have 50% more people in part time jobs on an “involuntary” basis–they want full time work, but can’t find it.  That’s 7 million people. There is also more risk of getting laid off or fired without protection. Plus, our ideology of equal opportunity is fading.  The wealthy are sending their kids to private schools, gateways to the most prestigious colleges, and the funding of public schools is declining. 2/3 of Americans in 2014 feel their children will be worse off than their parents. These aspects of work life and opportunity for the middle class and below did not originate under Obama. This has been growing since around 1980.

The Republicans won largely on the basis of criticizing everything about President Obama and the government, always underscored by the popular messages of reducing taxes and getting “over-reaching” government out of local and personal affairs in which they have no business. There were no specific positive proposals for what they would do differently. Republicans have done an amazingly good job of convincing many who are hurt by their policies, that their little defined policies will solve the problems–will improve the jobs situation. How? By restraining immigration? By removing regulations on businesses? By building the Keystone pipeline? If that’s it, the results will fall far short of American expectations.

It does seem that what “the American people” most want is for government to fix the jobs problem. Fixing this problem will mean increasing economic growth. That’s the one thing the right and the left can agree on. Economic growth is critical for increased jobs prospects. But that might be where it stops for the Conservatives–i.e., reducing regulation and giving companies more “flexibility” as it is called, regarding employment. Translation: Less protection for workers. That plus more foreign trade, more “open borders” for underdeveloped foreign countries–a prescription that has generally not inured to the benefit of those countries, but has benefitted big global industry.

If we can’t even agree on fiscal stimulus dedicated to our vast aging infrastructure, we won’t be able to do much to stimulate growth. With no fiscal help, the Federal Reserve has done about as much as it can. Growth is already pretty strong, and that hasn’t solved the wage and safety problems of workers. Growth alone is not enough. This period of stagnant wage growth for our workers has been the case for a long time, during cyclical periods of both stronger and weaker growth. Fixing jobs is going to involve significant and effective investment in public education and new methods of assisting with job training. And it is going to require some rebalancing of the power of industry vs. the protections and power of labor, because capitalism left uncontrolled has insufficient motivation to protect the workers–except for the “C Class” workers, of course. The median pay of S&P CEO’s is up 43% since 2009, while median household income has declined by 3%.

I think we can help reduce this “jobs” frustration with some gradual redistribution. To some extent, the protest is about inequality, which has risen to historic highs. I am personally in favor of higher taxes on the wealthy and using the revenues to pay for some of these critical needs. I have said before that I will give up my social security and my mortgage deduction if we do that in a fair and progressive way, across the board.

What should we expect of our lawmakers? I don’t expect them to read my mind or to provide only for my needs. They need to listen to all the voters who care enough to express themselves. They will certainly get a lot of conflicting requests. We’re trying to elect wise and intelligent leaders who can take all of that and use their own judgment to pursue things which are in the long term best interest of citizens–all citizens. And, we expect them to do their best to assure the effective management of government. I don’t expect to agree with all they do, but I will certainly push and vote for what I believe is the right general direction.

But I imagine at any town hall meeting these days, the major complaint has to do with jobs–good jobs, good wages, job security. Republicans claim the obstacle is government–get government out of it–the private sector will then flourish and good jobs will be plentiful.  I agree some regulations on government should be eliminated or streamlined, but I strongly disagree that the private sector left alone will solve the problem. Government has to play a strong role.

There are two problems with our government being able to provide the major fix regarding jobs. The first problem is that government is incredibly difficult to manage. The second problem is that the Conservative view of a very small government does not provide for the actions and services needed to fix the problem.

Schuck finds these six categories of problems in democratic management of government: Elected officials goals are not consistent with those electing them–they are pushed to offer short term benefits and hide long term costs; information is hard to obtain and interpret and changes in Congress are frequent, changing the direction of government entities; officials routinely underestimate the impact of markets and the actions necessary to control them; social engineering schemes are cumbersome and officials and interest groups push them in different directions; law has been extended way too far into minutiae, making it impossible to effectively manage; then the size issue–layers of bureaucracy, poorly paid and politically appointed managers, restrictions on ability to fire and discipline, vast amounts of work contracted out with loss of control, etc. Our government reflects the world’s largest economy, our diverse population, our undertaking to protect our citizens, and to some extent to protect the world.

On the other hand, Kleinbard argues for more government. But he asks for only 2% more GDP, dedicated to such things as improved equal education opportunity. He points out that our health care system costs us 18% of GDP, while the next most expensive developed country system costs less than 10% of GDP, all being one form or another of single payer systems–operated by governments–something the conservatives do not want to see here. Obamacare is not a new health care system. It’s just a structure that has been placed on top of a private insurance system that we have had for decades. It’s just an enhancement providing for a certain amount of redistribution or protection for the elderly and unhealthy of us–folks private insurance would not otherwise insure at rates they could afford. 

Kleinbard reports that discretionary government spending (as he defines it) under Reagan amounted to 10% of GDP, whereas under Obama it has been under 4.5%, so in that sense, government spending has not increased, provided we agree that it is appropriate to measure spending as a percentage of GDP, not in absolute dollars. 

Both of these authors/scholars of government agree that Americans are misguided if they fall prey to arguments that taxes simply should be reduced. The first question Americans should ask is what services we want from our government, and then figure out whether the answer dictates more or less taxes. Some people see social security and medicare as examples of bloated government. They are really insurance programs designed to deal with the fundamentally risky nature of our lives here–and both the above authors think these are examples of good government. Some Americans have been quoted as demanding, “don’t let the government dare touch my social security or my medicare,” as if to suggest these are not government programs, but certainly suggesting they are valuable. Indeed, neither party has shown the courage to attack these. Even the Conservatives recognize that would be political suicide.

There is certainly much that should be done to improve government–programs which should be discontinued, laws and regulations that are out of date and ineffective, and entire activities government should not be involved in. Scholars of government have argued for sunsetting every government program after say 15 years–put it up for examination and a new vote. But re-engineering government is a herculean task that no President or Congress in the last 50 years has been up to.

The second problem is that Conservatives do not want government to do much more than its original role–defense and rule of law. Even health care and education are at risk to Conservative agenda. Republicans have not been courageous enough to say what they would offer to replace the ACA, but Paul Ryan has suggested a move toward private industry to handle education, through vouchers. Private industry has not been effective in dealing with issues like affordable housing. Who believes leaving civil rights to private industry will suffice? 

Conservatives have succeeded at the ballot box by continuously proposing reduced taxes, without explaining what services will be cut. Kleinbard likens this to a doctor asking an elective surgery patient, “how much pain would you like?” before asking “what benefits are you seeking to obtain from the surgery?” Without the benefit, the answer will always be, “not very much, please.”

At the root of all this are deep seated ideological differences. Are we a bunch of individuals, or are we a collective society with the willingness to look out for each other? Both views have value, both have a place. I’m just hoping for a little more of the collective recognition, given our 30 years of drift in the other direction. I don’t believe our individual fates are entirely determined by our own merits. 

For these reasons, I’m not very optimistic for the near term.  Government has to fix the problems and Republicans don’t like government. I’ll vote for any Republican who is able to find ways to effectively streamline government, remove activities we don’t need, simplify burdensome regulation, streamline the tax code, etc. But, fixing the “jobs problem” is not something private industry alone can fix–it’s going to require government intervention and investment. Government is often inefficient, but the alternative is worse. And government does not appear to be something the Republicans are prepared to engage in. 



Postscript See Brookings Inst. Article Nov 10, 2014: “Yes, the Jobless Rate Fell. Here’s Why Americans Are Still Gloomy.”
 http://www.brookings.edu/research/opinions/2014/11/07-jobless-rate-fell-wessel?utm_campaign=Brookings+Brief&utm_source=hs_email&utm_medium=email&utm_content=14835239&_hsenc=p2ANqtz-8w5GfF88Hs_OTQlcYvkZl1-mIMNpngZVzpMnEGwFbWADjBS5miJSE_8HFduYFKbS9CRFUwIKfcBwV9JTlHoYuroFhFWw&_hsmi=14835239

References:

http://www.brookings.edu/events/2014/10/31-can-we-make-government-work
history of bills unaddressed by Congress: http://www.washingtonpost.com/blogs/the-fix/wp/2014/08/08/yes-the-senate-is-ignoring-hundreds-of-bills-passed-by-the-gop-house-but-its-always-that-way/
History of bills passed by Congress: https://www.govtrack.us/congress/bills/statistics
Orzag and Bridgeland: http://lockerroom.johnlocke.org/2013/06/19/more-evidence-of-problems-linked-to-government-spending/
Berkowitz review of Schuck’s explanation of the weaknesses of government: http://www.realclearpolitics.com/articles/2014/03/25/peter_schucks_rx_for_big_governments_ills_122035.html
The economy under Obama: http://www.economist.com/news/united-states/21627659-big-business-angry-small-firms-are-even-angrier-fury-makers
Part time worker count: http://online.wsj.com/articles/post-recession-legacy-elevated-level-of-part-time-employment-1415808672

Bill Gates has written an article about Thomas Piketty’s now-famous 2013 best seller Capital in the Twenty-First Century in which Piketty argues that the rich will get richer, and that’s a problem we should solve with a wealth tax.

I can’t think of a billionaire I admire more than Bill Gates. Self made man, built a world class company, has integrity, retired early to devote his remaining life to philanthropy.  Unlike many of his billionaire cohorts, his wealth is not going primarily to Stanford or to pet issues of little rank in the world order of major problems. He’s giving primarily to address global needs in poverty, healthcare, and education. And what he’s giving is carefully monitored and professionally managed.

But I regret that I have to disagree with much of what Bill had to say about Piketty’s work. Bill says he read the 700 page book. I did also.

Here are the main critical points from the article Gates wrote (referenced below):

• Piketty fails to differentiate between different types of wealthy people, whose behavior in the use of their wealth reflect different degrees of social utility.
• The Forbes 400 list shows that inherited wealth is not predominant.
• Piketty should have given equal treatment to inequality measured by consumption.
• Instead of a tax on wealth, a progressive tax on consumption would be better.
• Piketty should have given more credit to philanthropy.

But such a casual observation about the list of wealthy really proves nothing. This is not how good analysis is done–by leafing through the annual Forbes 400. For example, the 2013 cutoff for Fortune 400’s latest list of wealth is $1.55 billion. If someone on the list in 2004 with wealth of $2 billion, died and left his wealth to his 4 children, none of that family name would likely be on the 2014 list, but shouldn’t $500 million each, adjusted for taxes and wealth growth since 2004 still be considered monumental inheritance? See “Inside Wealth” by Robert Frank which breaks down the Forbes list to reflect who got a running start with family wealth. It seems to range between 30 and 50% of that list, depending on the type of business cycle we’re in. And, why limit the analysis to only those who have $1.55 billion? A good study of inherited wealth must go far deeper than that–it must be of the Piketty type, which took years to assemble.

Furthermore, Piketty devotes significant attention in his book to the big recent salaries and bonuses of corporate chieftans, entertainers, and athletes. He does not in any way argue that most wealth is inherited. But even if you only have time to look at that list, there are a lot of repeat names, like Gates, Walton, and Buffet. And the high salaries of some in 2013 turn into wealth if not fully consumed.

Gates, reportedly worth $64 billion in January 2013 (Bloomberg), assures us in his article that he does not intend leaving his own children a fortune, and his close friend Warren Buffet has said the same, as have some other billionaires. But, what about the Waltons and others who do not agree? And, I have not seen specificity from such minded billionaires as to exactly what they mean by “leaving little” to their children. The median net worth of the US, $87,000 in 2003, is now only $56,000. Regarding billionaires who proclaim they will leave “little” to their children, I would like to see their definition of “little.” I imagine a billionaire might feel $25 million is “little.” To the median American, $1 million is a fortune. What’s wrong with a high progressive tax on inheritance? Then we would be consistent about generational transfer, and not simply dependent on billionaire philanthropy to eliminate inheritance inequality. If Gates, Buffet, and others mean what they say about inheritance, let them advocate for high progressive inheritance taxes and/or disclose exactly what they are leaving to their children.

Finally, for more on the inequality of inheritance, please see my previous post, “Inherited Wealth, Is It a Problem?”

Consumption as a Measure of Inequality:

Experts in inequality write books on this subject. Inequality can be measured by surveys of household consumption, and the result shows how we differ in consumption. Because most wealthy do not consume as much as the poor, as a % of their income, the standard consumption measure will usually show lower inequality, and slower growth in inequality.

However, a recent study by Mark Aguiar and Mark Bils of Princeton and the University of Rochester, respectively, shows that when adjustment is made to estimate luxury purchases effectively, the rate of increase in inequality measured by consumption is approximately the same as when measured by income. There are other such studies. Even the conservative Economist acknowledges that the two measures really move in tandem.

What type of tax would result in the most effective redistribution? 

 

Philanthropy: 

Source: National Philanthropic Trust: http://www.nptrust.org/philanthropic-resources/charitable-giving-statistics/

Gates says Piketty pays too little attention to philanthropy. Unfortunately, the inference many will draw from this criticism is to think that the nature and degree of philanthropy from the ultra-wealthy makes up for the dramatic reductions in support for the poor by the government, beginning around 1980.

 Aggregate US household net worth, $12 trillion in 1983, $62 trillion in 2010, is now in the range of $81 trillion.  38% of the increase in wealth between 1983 and 2010 has gone to the top 1%. 

From the first chart in this section, it appears US philanthropy was about $60 billion in 1983, and was about $300 billion in 2010 (using current dollars). So, philanthropy increased by 5 fold during that time. Household wealth also increased 5 fold. But the top 1% increased its wealth by 19 trillion across that period, and in 2010 owned about 33% of all household net worth.  The top 1% of our approximately 117 million households earned an average of $717,000  last year, meaning their aggregate earnings were about $838 billion. 

Are the wealthy giving enough? It is not the case that philanthropy in general even remotely comes close to filling the gap created by government withdrawal. A recent Google/University of Indiana study found US philanthropy totals about 2% of US GDP.  No, it is not enough.

Are they giving to the most important needs? Much of philanthropy goes to universities or churches, and much more likely to go to Stanford than to Hayward State. In my neighborhood of San Francisco, private schools charge $35,000 annually for high school students, and wealthy young parents contribute generously beyond that for capital campaigns and annual operating expense campaigns. None of this philanthropy helps inequality, and little goes in scholarships to poor students. Only about 1/3 of US philanthropy is directed to the needs of the poor, so less than 1% of GDP. It is reasonable to assume that far less than that goes to the needs of foreign poor, with a few exceptions like Gates. No, it is not going to the right priority of needs.

Stated simply, the individual choices of the wealthy for charity are nice to see, help some, but they are just too personal, too disparate, too fragmented. What is needed for the major issues can only be met by more effective government programs, by society joining together to decide what is most important to the society, not by individuals doing their own thing. 

For more on this, see my previous post, “Is Philanthropy from the Wealthy Sufficient, or Would a Little More Government Help?”