Lies, Damned Lies, and Statistics?

Professor Jeffrey Sachs, Director of the Earth Institute at Columbia University, wrote an excellent article for the Huffington Post, The Super Committee's Big Lie (h/t Fred):

The big political lie of the Super Committee is that the deficit must be closed mainly by cutting government spending rather than by raising taxes on corporations and the super-rich. Both parties are complicit. The Republicans want to close the deficit entirely by cutting spending; Obama has brandished the formula of $3 of cuts for every $1 of tax revenues. On either approach, the poor and middle class would suffer grievously while the rich and powerful would win yet again (at least until the social pressures boil over).

The key to understanding the U.S. economy is to understand that we have two economies, not one. The economy of rich Americans is booming. Salaries are high. Profits are soaring. Luxury brands and upscale restaurants are packed. There is no recession.

The economy of the middle class and poor is in crisis. Poverty and near-poverty are spreading. Unemployment is rampant. Household incomes have been falling sharply. Millions of discouraged workers have dropped out of the labor force entirely. The poor work at minimum wages to provide services for the rich.

There are two forces that account for this deep divide. The first is globalization. Manufacturing employment peaked in 1979, with jobs and factories increasingly shifting overseas. For a while, the housing bubble provided construction jobs that partly offset the loss of manufacturing jobs. Now the housing bubble has burst. Good jobs for young people with a high-school diploma or less have disappeared.

Unless you have a four-year college degree, you're struggling. Yet only one third of young men ages 25 to 29 have a bachelor's degree. Most of the rest are holding on for dear life. Among young Hispanic men, only 11 percent have a bachelor's degree; among young African-American men, the figure is 16 percent. Poor kids can't meet tuition, and they drop out of college in droves. Yet with more cuts in state support for tuition and in federal Pell Grants, the situation is rapidly getting worse.

The second force is politics. When Obama has one of his many $35,800-a-plate fundraising dinners, he doesn't meet young people struggling to cover tuition payments. Obama has been separated from reality by the White House's campaign to collect between $750 million and $1 billion for Obama's reelection bid. The big money on the Republican side is even worse. Big Oil controls the party.

The upshot is that both parties champion the 1 percent, the Republicans gleefully and the Democrats sheepishly. Both parties have worked together to gut the tax code. Companies use accounting tricks approved by the IRS to shift their profits to foreign tax havens. Hedge-fund managers and recipients of long-term capital gains pay only 15 percent top tax rates. As a result of these irresponsible tax policies and rampant tax evasion, tax collections as a share of national income have sunk to 15 percent, the lowest in modern American history.

Americans are told daily that these low tax rates on the rich are the natural order of things, that the American economy would collapse if the top 1 percent were to pay more to help fund education, job training, infrastructure, and new technologies. This claim is absurd. We should be collecting at least 3 to 4 percentage points of GNP more from the rich and the corporate sector. We could collect these added amounts by raising top tax rates on regular income and capital gains, closing down offshore tax havens, taxing net worth of high-wealth households, taxing financial transactions, and cracking down on evasion.

The big lie against raising taxes on the rich comes in two variants. The most preposterous is that the U.S. simply could not collect more revenues as a share of GDP. According to some foolish assertions, an iron law of revenues puts the maximum federal tax collection at around 18 percent of GDP! Yet European high-income countries, and Canada, collect somewhere between 5 and 15 percent of GDP more in taxes than the U.S. There is no iron law against raising more revenues.

The second variant of the big lie is that the U.S. economy would be ruined if the U.S. fiscal system were more like those in Europe. Each day, Republicans warn us that if we raise taxes we will end up like Europe, that is, in collapse. Democrats, for their part, go silent, not sure what to make of the argument.

Here's what to make of it: it's plain wrong. Europe per se is not in crisis. Southern Europe is in crisis. Northern Europe, by contrast, where the taxes are higher than in Southern Europe, is vastly outperforming the United States.

Consider three key dimensions of the economic crisis: high unemployment, large budget deficits, and high current account deficits (broadly meaning more imports than exports). To compare how countries are doing, I'll create a simple Misery Index equal to the sum of these three indicators. In 2010, for example, the U.S. had a Misery Index equal to 23.4, the sum of a 9.6 percent unemployment rate, a budget deficit equal to 10.6 percent of GDP, and a foreign (current account) deficit of 3.2 percent of GDP.

When we calculate the Misery Index for the U.S., Canada, and Western Europe, we find that, lo and behold, the U.S. ranks among the most miserable performers, 5th out of 20 countries. The country with the highest Misery Index is Ireland, followed by Spain, Greece, Portugal, and the United States. All five countries deregulated their financial markets and thereby experienced a housing bubble and bust.

The lowest macroeconomic misery is in Northern Europe. Norway has the lowest score, followed by Switzerland, Luxembourg, Netherlands, Sweden, Germany, and Demark. All seven countries have lower unemployment rates, smaller budget deficits as a share of GDP, and lower foreign deficits as a share of GDP, than the U.S. We look pretty miserable indeed by comparison.

Yet, miracle of miracles, these seven countries collect higher taxes as a share of GDP than does the U.S. Total government revenues in the U.S. (adding federal, state, and local taxes) totaled 31.6 percent of GDP in 2010. This compares with 56.5, 34.2, 39.5, 45.9, 52.7, 43.4, and 55.3 percent of GDP in Norway, Switzerland, Luxembourg, Netherlands, Sweden, Germany, and Denmark, respectively. These much higher levels of taxation are raised through a combination of personal, corporate, payroll, and value-added taxes.

The Northern European countries earn their prosperity not through low taxation but through high taxation sufficient to pay for government. In five of the seven countries, Denmark, Germany, Norway, Netherlands, and Sweden, government spending as a share of GDP is much higher than in the U.S. These countries enjoy much better public services, better educational outcomes, more gainful employment, higher trade balances, lower poverty, and smaller budget deficits. High-quality government services reach all parts of the society. The U.S., stuck with its politically induced "low-tax trap," ends up with crummy public services, poor educational outcomes, high and rising poverty, and a huge budget deficit to boot.

I'm posting the data here for everybody to have a look. As the Super Committee threatens this week to gut the government on the basis of a big lie, it's more important than ever that we fight back with systematic data. With truth on our side, the new progressive movement will prevail.

Jeffrey Sachs spells it out for you, both parties are full of it, pandering to Big Oil, Big Banks, Big Hedge Funds and Private Equity Funds. That's why when I read Bloomberg articles warning that the implosion of the congressional Super Committee may pose an immediate threat to the struggling U.S. economy, I take it with a shaker of salt. It's all nonsense, this "Super Committee" was a farce, it was set up to fail from the get-go.

Last night, I watched an hour-long interview with BlackRock CEO Larry Fink and Pimco co-founder Bill Gross on Bloomberg TV, in which the two financial titans discussed the global economy, job creation and even the Occupy Wall Street protests ( Bloomberg has online video here and here.)

What struck me is that both men support Occupy Wall Street movement. Fink and Gross agree that Washington and Wall Street both need to sack up and take responsibility for what happened to fix problems and restore confidence in the economy. Here are the highlights of the video embedded below:

  • 0:28 — Fink: "I'm actually very happy with Occupy Wall Street because I think that actually for the first time in 3 years we may have fringe element symmetry...The Tea Party shaped the 2010 elections in a very big way and frankly I was personally surprised that we didn't have a left wing element...I'm not saying I agree with one side or the other, I agree with a lot of fringe elements and what they're trying to say."

  • 1:29 — Fink: "We have to admit, as members of the financial press and the financial community...Washington...we really did let down a lot of people... To resolve this we have to admit it."

  • 2:23 — Gross: "(I have) Sympathy for labor as opposed to capital...Wall Street as opposed to Main Street...that's the 1% versus the 99 can basically be differentiated in that way. For a long time, for 20 or 30 years, capital has benefitted at the expense of labor...How can one not sympathize with their predicament?...To not have sympathy with Main Street as opposed to Wall Street is to have blinders."

  • 3:43 — Gross: "The fact is that Washington is dominated by K Street and it's dominated by finance and contributions from large corporations which don't have the interests of Main Street.
Nothing like two financial titans to lend their support to a social movement. Gross is an extremely intelligent man who understands that capital has "benefited at the expense of labour" in the last few decades. Both men didn't tackle the hairy issue of income inequality directly, but they alluded to it plenty of times. And Gross, a registered Republican, flat out admitted that he voted for Obama but asked "was there I can believe? I hoped there was but there isn't." He said that if the elections were held today, he wouldn't vote for anyone.

I don't blame him. President Obama squandered a historic opportunity to implement substantial change that would rectify what in my mind remains the single biggest threat to the US and other industrialized economies, income inequality. I wrote a long weekend comment on this subject and called it "The Global Disconnect."

Even Larry Summers, the former Treasury Secretary, and one of the men responsible for massive financial deregulation that exacerbated income inequality, is now coming out openly writing about the fierce urgency of fixing economic inequality:
The principal problem facing the United States and Europe for the next few years is an output shortfall caused by lack of demand. Nothing would do more to increase the incomes of all citizens—poor, middle class and rich—than an increase in demand, which would bring with it increases in incomes, living standards, and confidence. A more rapid recovery than now appears likely would reverse, at least partially, a growing disillusionment with almost all institutions and doubts about the future.

It would be, however, a serious mistake to suppose that our only problems are cyclical or amenable to macroeconomic solutions. Just as evolution from an agricultural to an industrial economy had far reaching implications for society, so too will the evolution from an industrial to a knowledge economy. Witness structural trends that predate the Great Recession and will be with us long after recovery is achieved: The most important of these is the strong shift in the market reward for a small minority of persons, relative to the rewards available to everyone else.

In the United States, according to a recent CBO study, the incomes of the top 1 percent of the population have, after adjusting for inflation, risen by 275 percent from 1979 to 2007. At the same time, incomes for the middle class (in the study, the middle 60 percent of the income scale) grew by only 40 percent. Even this dismal figure overstates the fortunes of typical Americans; the number unable to find work or who have abandoned the job search has risen. In 1965, only 1 in 20 men between ages 25 and 54 was not working. By the end of this decade it will likely be 1 in 6—even if a full cyclical recovery is achieved.

To highlight the disturbing trends in a different way, one calculation suggests that if income distribution had remained constant in the U.S. over the 1979-2007 period, incomes of the top 1 percent would be 59 percent or $780,000 lower and the incomes of the average member of the bottom 80 percent of the population would be 21 percent or over $10,000 dollars higher.

Those looking to remain serene in the face of these trends, or who favor policies that would disproportionately cut taxes at the high end and so exacerbate inequality, assert, for example, that what could be called “snapshot inequality” is not a problem, as long as there is mobility within people’s lifetimes and across generations. The reality is that there is too little of both. Inequality in lifetime incomes is already only marginally smaller than inequality in a single year. And tragically, according to the best available information, intergenerational mobility in the United States is now poor by international standards, and, probably for the first time in U.S. history, is no longer improving. To take just one statistic, the share of students in college coming from families in the lowest quarter of the income distribution has fallen over the last generation, while the share from the richest has actually increased. Given the pressures associated with recession, it appears that more elite American colleges and universities have dropped need-blind admissions than have adopted it in recent years.

Why has the top 1 percent of the population done so well relative to the rest of the population? Probably the answer lies substantially in changes in technology and in globalization. When George Eastman revolutionized photography he did very well, and because he needed a large number of Americans to carry out his vision, the city of Rochester had a thriving middle class for two generations. When Steve Jobs revolutionized personal computing, he and the shareholders in Apple (who are spread all over the world) did very well, but a much smaller benefit flowed to middle class American workers, both because production was outsourced and because the production of computers and software was not terribly labor intensive. In the same way, the moves from small independent bookstores to megastores like Barnes and Noble, and now to Amazon and e-books, have meant that more books at less cost are available to consumers, but also mean fewer jobs for middle class workers in retail, publishing and distribution, and greater rewards for superstar authors and entrepreneurs who are transforming the way content is delivered. One other manifestation of progress is that increasingly sophisticated financial markets have provided ever-greater opportunities for those like Warren Buffett, with the ability to detect errors in prevailing valuations, to profit handsomely.

There is no issue that will be more important to the politics of the industrialized world over the next generation than its response to a market system that distributes rewards increasingly inequitably and generates growing disaffection in the middle class. To date, the dialogue has been distressingly polarized. On one side, the debate is framed in zero-sum terms and the disappointing lack of income growth for middle class workers is blamed on the success of the wealthy. Those with this view should ask themselves whether it would be better if the U.S. had more entrepreneurs like those who founded Apple, Google, Microsoft and Facebook, or fewer. Each did contribute significantly to rising inequality. It is easy to resent the level and the extent of the increase in CEO salaries in the United States, but it bears emphasis that firms that have a single owner, such as private equity firms, often pay successful CEOs more than public companies do. And for all their problems, American global companies over the last two decades have done very well compared to those headquartered in more egalitarian societies. When great fortunes are earned by providing great products or services that benefit large numbers of people, they should not be denigrated.

At the same time, those who are quick to label any expression of concern about rising inequality as either misplaced or a product of class warfare are even further off base. The extent of the change in the income distribution is such that it is no longer true that the overall growth rate of the economy is the principal determinant of middle class income growth—how the growth pie is sliced is at least equally important. The observation that most of the increase in inequality reflects gains for those at the very top—at the expense of everyone else—further belies the idea that simply strengthening the economy will reduce inequality. Indeed, focusing on American competitiveness, as many urge, could easily exacerbate inequality while doing little for most Americans, if that focus is placed on measures like corporate tax cuts or the protection of intellectual property for companies who are not primarily producing in the United States.

What then, is the right response to rising inequality? There are today too few good ideas in the political discourse, and the development of better ones is crucial to our democracy. But here are several:

First, government must be careful to insure that it does not facilitate increases in inequality by rewarding the wealthy with special concessions. Where governments dispose of assets or allocate licenses, there is a compelling case for more use of auctions to which all have access. Where government provides insurance—implicit or explicit—it is important that premiums be set as much as possible on a market basis rather than in consultation with the affected industry. A general posture for government of standing up for capitalism rather than particular well-connected capitalists would also help.

Second, there is scope for pro-fairness, pro-growth tax reform. A time when more and more great fortunes being created and government has larger and larger deficits is hardly a time for the estate tax to be eviscerated. With smaller families and ever more bifurcation in the investment opportunities open to the wealthy, there is a real risk that the old idea of “shirt sleeves to shirt sleeves in three generations” will be obsolete, and those with wealth will be able to endow dynasties. There is no reason why tax changes in a period of sharply rising inequality should reinforce the trends in pretax incomes produced by the marketplace.

Third, the public sector must insure that there is greater equity in areas of the most fundamental importance. It will always be the case in a market economy that some will have mansions, art, and the ability to travel in lavish fashion. What is far more troubling is that the ability of children of middle class families to attend college has been seriously compromised by increasing tuitions and sharp cutbacks at public universities and colleges. At the same time, in many parts of the country, a gap has opened between the quality of the private school education offered to the children of the rich and the public school educations enjoyed by everyone else. Most alarming is the near doubling, over the last generation, in the gap between the life expectancy of the affluent and the ordinary.

Neither the politics of polarization nor those of noblesse oblige on the part of the fortunate will serve to protect the interests of the middle class in the post-industrial economy. We will have to find ways to do better.

I'm skeptical that we will find ways to tackle income inequality. It's a problem that pervades the US and other economies. Even in Europe, the middle class is being squeezed and now they're being prescribed a large dose of austerity to help bail out the incompetent bankers who made all these stupid loans.

Felix Salmon wrote an excellent comment in Reuters asking whether austerity can cure contagion:

I love this video from Mark Fiore (see below):

Sovereign Transmitted Debts don’t have to be embarrassing or keep you from other financial relationships…

Contagion-Ex works by releasing a powerful dose of austerity on troublesome workers, reducing your risk of financial infection so your wealth can be preserved.

It’s easy to believe that this is what Europe’s leaders are up to — after all, Mario Draghi, Mario Monti, and Lucas Papademos are all proud alumni of Goldman Sachs. Aren’t these exactly the kind of unelected technocrats who would shaft their putative constituents so that the 1% can continue to rake it in?

As Paul Krugman points out, though, the prescriptions coming from Europe’s unelected leaders tend to feel “more like a religious proclamation than a technocratic assessment.” For here’s the real irony: austerity will cause untold harm for hundreds of millions of European citizens — and it will harm the fat-cat bankers, too.

Look at the prices of the sovereign bonds that they’re holding, or at the share prices of their banks: austerity doesn’t seem to be helping the bankers at all. We’re in a liquidity crisis, here, and austerity doesn’t provide liquidity to anybody. Quite the opposite.

But here’s the cunning bit: the bankers don’t really have their banks’ best interests at heart. They just want to keep on getting their coupon payments until this year’s bonuses are paid. And then, once those bonus checks are cashed, they’ll start trying to get next year’s bonus payment, too.

The bankers and technocrats know full well that the longer they manage to kick the can down the road, the worse it’ll be for everybody in the long run. But in the short run, they get very wealthy. Even as crucial government services are cut to the bone, and the risk of major social unrest increases greatly.

Joseph Stalin once remarked: "The death of one man is a tragedy, the death of millions is a statistic." In a world where absolute power corrupts absolutely, the poor, working poor and disappearing middle class have to increasingly spit blood so that the rich and ultra-wealthy continue enriching themselves. And now, amazingly, collection agencies want debt deadbeats arrested! Prison for the poor and working poor if they cannot pay their debts while the banksters and corporate cronies get rewarded for their failures by bailouts from US taxpayers.

Don't worry, however, because one way or another these excesses will be addressed, and in the end, the "prosperous few" will succumb to needs of the "restless many." Social media will revolutionize the way people view the world and expose lies, damned lies and statistics.

Below, leave you with Bloomberg clips on the Super Committee's failure, Bill Gross and Larry Fink discussing Occupy Wall Street, and watch Mark Fiore's wonderful clip on ContagionEx here.