American Dream: The Rewards of Labor vs Good Life From Inheritance [248]

Capital in the 21st Century

Vautrin's Lesson

i HAVE BEEN WORKING MY WAY THROUGH THOMAS PIKETTY'S, a French economist, latest book titled Capital in the 21st Century; I am at page 238 of 577, plus notes and appendices; there it is to the right. His work is unique in that it takes a 310-year look at economic activity worldwide, a long enough time span, encompassing enough major events, to determine very long-term movements in economic data.

Specifically, the section which contains page 238 begins to look at capital and labor income inequality. Vautrin's Lesson concerns income derived from inheritance relative to income derived from labor. Vautrin is a criminal in Balzac's 1835 novel Père Goriot. He is counseling Eugene de Rastignac, a "penniless" (after his family's estate pays essential expenses) young French noble staying at the same boarding house. Also residing there is Mademoiselle Victorine, a shy young woman, who is the illegitimate daughter of a wealthy man, who has taken a liking to Eugene; she also has access to a million francs, but only if her brother dies. For a commission and a share of the booty, Vautrin offers to off the brother for Eugene; who originally only wanted to get a law degree and become a lawyer or judge. (For perspective, a million francs might return about 50,000 francs/year in capital income which is about 100 - 170 times average wage income of the time, or around 250 - 450 francs/yr.)

While Piketty takes a few pages of small type to develope this part of Balzac's story, I will shorten it still further. In essence Vautrin tries to reason with Eugene by pointing out, truthfully for 19th Century France (or any other society including ours) that the realistic expectation of making it BIG from the fruits of ones own labor are slim to none.. If Eugene ever hopes to live the life of a real noble, being a lawyer or a judge will never get him there. His ONLY hope is to marry into it, in this case by marrying Mademoiselle Victorine and letting Vautrin kill her pesky brother.

Fortunately for the brother, morality wins out over greed and Eugene chooses not to have the brother killed; I don't know if he marries Victorine anyway.

A Short Aside

AS MOST OF MY FOLLOWER KNOW, MOST OF THE HUBS I write are ones where I derive my conclusions from the logic use of available data. I lay bare my methodologies and sources and get into the why's, wherefor's, and steps leading to my final results which, unfortunately can lead to gory detail that bores many readers to death, especially if you are inclined to fall asleep when numbers appear; many people are simply hard-wired that way.

But, I have found that many people nevertheless appreciate the effort because they see that I don't simply "proclaim" things to be true and factual, or refer the royal "them" as proof the truth of my assertion. Further, while some of my Hubs are to vent and give opinion, most are to try to convince someone. Now I am aware that there are those who may read me, but rarely agree with what is said and can't ever be persuaded to do so, regardless of how compelling a case I can bring. I am happy, however, to have these readers to take the time to do so because this is the only way my work can get critiqued. They are motivated to find and point out flaws in my logic or errors in my data, And when assertions I make are based on one or the other or both and is found to be untenable, I am not wed to it; when this has been the case, I have been known to modify, drop, or even reverse my assertions.

Then there is another group to whom I am "preaching to the choir" and who don't need any convincing; for this group I am appreciative of that and look for advice on how to improve my presentation. It is the remaining group who I am hoping will find all of these charts, tables, logic, and words I have put together, which I pray are organized and presented in such a way as to make an understandable case, useful in persuading them as to the efficacy of the points I am trying to make, Once all of the data and logic is laid out and shown how it points to the conclusion I have come to, it is up to the reader to ultimately decide if they agree or not, or if I have simply bored them to tears.

Income from Capital vs Income from Labor

PRIOR TO WW I, THE WORLD WAS PRETTY MUCH LIKE BALZAC described in Père Goriot. This includes the United States, just to a lesser degree; and hardly at all in frontier areas where America was still expanding. The clear implication of Vautrin's Message is that there was no hope of upward mobility based on talent and hard word alone; it just couldn't be done. In order to live high (or even middle)-on-the-hog you either had to be born into wealth or marry into it; you couldn't work your way into it; it was almost mathematically impossible. Why was this true?

First, I need to make clear, that unlike the period after WW I, there was virtually no stigma attached to living off of one's inheritance. In fact, in Europe, and to a much less degree in America, it was expected. It was OK not to earn your living, a concept that seems very foreign to us today. This was true of both women and men. Sexist or not, this view still holds, to a large degree for women (by men) but it seems almost wimpish for men to do the same. In any case, that sets the stage for a discussion about wages and "rents", a term Piketty insists on using, from capital; I will use the term "income".

National income comes from two sources, 1) income from labor and 2) income from capital. There is also a ratio β (capital/income) that divides something called National Capital by National income. Now, before I go further, let me define a few things that you will need to know to understand all of this:

  • Income from Labor: Wages of any sort plus non-wage remuneration for work performed
  • Income from Capital: Any income derived from the possession of Capital Assets, e.g. profits, dividend, interest, rents, capital gains, etc
  • Capital: Essentially anything one can possess and utilize, and for which a price can be developed; e.g., equipment, stocks, cash, factories, etc.; this excludes humans who are not slaves or indentured servants and raw, unworked land
  • Capital-Income Ratio (β): The ratio of the market value of National Capital divided by National Income
  • Growth Rate (g): Annual, long-term growth in productivity plus population
  • Savings (s): Annual net national savings rate of both individuals and businesses
  • Capital Portion of Income (a): That part of income derived from Capital
  • Labor Portion of Income: This is 1 - a.
  • Capital Rate of Return (r): e.g., a bond that returns r% per annum.
  • Labor Inequality - Table 1
  • Capital Inequality - Table 2

There are also two fundamental relationships one must understand as well to make any sense of this:

  • β = s/g (which says that over the long-run, the Capital-Income ratio is the savings rate divided by growth rate)
  • a = r * β (which says that the share of income from Capital is simply the Capital-Income ratio times the rate of return from Capital)

So, with the above as a foundation, we can then proceed to see why Vautrin's message can was very true in the time his character was created; why, in those days, labor only got you a sense of moral superiority and not much else.

Let's Add Some Numbers

I WILL TRY TO KEEP THIS AS SIMPLE AS POSSIBLE, given numbers and hubs don't mix well. Nevertheless, the results of this section will be used in the next to show in what situations it is pointless to expect great wealth from hard work, i.e., when the American Dream is essentially unachievable. Having said that, you can skip this section for now and move directly on to the next, and then refer back to this one if you feel the need.

First, let me explain Tables 1 and 2 below a little bit. Each table has four stratifications, 1) the top 1% of earners, 2) then next 9%, 3) the "middle 40%, and 4) the remaining 50% of wage earners (meaning a full 1/2 the population). The fifth row is something called the Gini Index, a measure of inequality that I like as a general statistic but Piketty doesn't for technical reasons when you take a more detailed analysis of the data. Basically, the larger the Gini Index, which goes from 0 and 1, the more inequality in whatever it is measuring, in this case wages or capital ownership. The columns in each table reflect different time periods throughout history.

Table 1 looks at the distribution of income from wages plus the value of non-wage substitutes, e.g., paid health insurance, stock options. So, it says that an example of low inequality is represented by Scandinavia in the 1970s where the top 1% received only 5% of the national wage income (or 500% of the the mean wage) while the bottom 50% received 35% of the national income (or 70% of the mean wage). On the other hand, if you look at France in 1750s, an example of very high wage inequality, the top 1% receive 17% of the national income (1700% of the mean income), while the bottom 50% get only 20% of national wages, or 40% of the mean wage!! You can see where America falls in 2010.

Likewise, for Table 2 which measures capital ownership, the inequality is even greater, as one would expect. But, when the disparity gets too high, and as we will see later in this Hub (and in much more detail in a future Hub) while the rate of return on capital (r) is normal and growth (g) is low, this can have a disastrous effect on society going forward. Table 2 is read just like Table 1. I just want to point out three things, 1) there is no example of "low capital ownership inequality" in real life, 2) look how in all cases, the bottom 50% of the population possesses virtually no wealth (another term for capital) at all, and 3) it is only with the advent of a true "middle class" after WW II did wealth migrate down from the top to the middle; but not to the bottom. (Note, prior to WW I, you had a merchant class, but not a real middle class as we understand it today.)

For the moment, while we are talking about Vautrin's Message, let's focus on the Very High columns in Tables 1 and 2 as well as β, r, a, (1 - a), and a somewhat arbitrary mean wage of $42,000 and median wage of $27,000. I choose the Very High columns from the tables because they are indicative of the distributions in Vautrin's time frame where we are analyzing income from inheritance (capital) vs income from labor. The mean and median wages are 2012 U.S. wages and keep in the back of your mind the large separation between the mean and median; I will come back to that later.

In the period leading up to WW I, the income and capital inequality picture is that of the right-most column of each table - Very High. Likewise, β was at 700%, meaning the value of national capital was 7 times that of the national income. The return on capital (r) has historically been constant at around 4 - 7%. Using 6% for (r), which was seen during the period of Vautrin's Message, as an average that gives us an (a), or share of income from capital of around 42% (hold this thought). OK, take a breath, and let your eyes come back into focus; all of this actually means something once it is put together.

The next piece took me a little time to work through my head, but once there, it was extremely revealing. For this, we will need Table 3, below.

Labor Income Distribution

INCOME GROUP
LOW LI INEQUALITY
MEDIUM LI INEQUALITY
HIGH LI INEQUALITY
VERY HIGH LI INEQUALITY
Example
Scandinavia - 1970
Europe - 2010
U.S. - 2010
France 1750 (est
TOP 1%
5%
7%
12%
17%
NEXT 9%
15%
18%
23%
28%
MIDDLE 40%
45%
45%
40%
35%
BOTTOM 50%
35%
30%
25%
20%
GINI INDEX
.19
.26
.36
.46
TABLE 1

Capital Ownership Inequality

INCOME GROUP
LOW CO INEQUALITY
MEDIUM CO INEQUALITY
MEDIUM-HIGH CO INEQUALITY
HIGH CO INEQUALITY
VERY HIGH CO INEQUALITY
Example
None
Scandinavia - 1970
Europe - 2010
U.S. - 2010
Europe - 1910
TOP 1%
10%
20%
25%
35%
50%
NEXT 9%
20%
30%
35%
35%
40%
MIDDLE 40%
45%
40%
35%
25%
5%
BOTTOM 50%
25%
10%
5%
5%
5%
GINI INDEX
.33
.58
.67
.73
.85
TABLE 2

DISTRIBUTION OF INCOME AND CAPITAL OWNERSHIP 1700 - 1913

 
INCOME %
INCOME $
CAPITAL OWNERSHIP %
CAPITAL OWNERSHIP $
MEAN
 
$42,000
 
$288,000
Top 1%
17%
$714,000
50%
$11,400,000
Next 9%
28%
$130,667
40%
$1,013,333
Middle 40%
35%
$36,750
5%
$28,500
Lowest 50%
20%
$16,800
5%
$22,800
TABLE 3

NEW YORK STOCK EXCHANGE - WALL STREET

Source

OK, Isn't it clear now? NO? I understand. The distribution and the share of capital income (a=42%) is the key to Vautrin's Message. It is key for these reasons:

  1. Income from capital accounts for almost half of ALL income (actually around 42%, as we saw in the previous section, you can release that thought now.)
  2. From the right-most column of Table 2, we see that virtually all (90%!) of the capital (non-wage) income is earned by the top 10% of the population
  3. Because, in that time period, the return on capital (r) is much greater at 6% than economic growth (g) at less than 1%, capital will continue to accumulate at the top because those that earn it only have to spend a small part (say 2 or 3%) of their capital income to sustain their lifestyle; the rest gets reinvested thereby increasing the value of the capital still further. (It is not limitless, however, but it might as well be).

So, what is the implication of that? Well, for every dollar of national income, $0.38 goes to the top 10% in the form of some sort of return on investment (ROI) (and another $.04 to the remaining 90%) while the other $0.58 is spread among, not the rest of the population, but 100% of the population who earn an income through wages or salaries. It gets much worse for our poor hero however. In looking at the rightmost column of Table 1, you see that a full 55% or $0.32 of remaining $0.58 left over for wages go to the to just the top 10% of wage earners as weil. Doesn't this leave just $0.28 of national income to be split among the other 90% of the population, which includes Eugene?

So, what do you think our noble can do with his share of the $0.28? Not much, I suspect which was Vautrin's Message. To earn income from capital, you have to have what ... wealth, of course, and Eugene has none. How do you acquire wealth other than marrying into it or through gift or inheritance? You work your butt off and save like crazy for your retirement. So, the question is, is it reasonable to expect Eugene to be able to save enough wealth from his share of the $0.28, while keeping in mind his profession will be at the top end of that low income bracket supplement his wage income enough to live a good life?

Mean vs Median Wages

NOW, TO FIGURE THAT QUESTION OUT, I AM going to use the current results from another hub I wrote which contains a survey asking what hubbers thought the minimum income that is needed to barely make ends meet in middle America for a family of three. At the moment, it stands between $33,000 and $39,000, depending on whether you take a guess at the overall number or at each major expenditure a family makes (which leads to the higher number.) For comparison, the official federal poverty level is for a family of three is a little over $19,000, around 1/2 of what hubbers think the minimum is that one needs to just survive in today's world; I find that astounding.

Using that data and the information from the previous tables, I construction the wage distribution charts below.

UTOPIA vs REAL WORLD WAGE DISTRIBUTIONS

Click thumbnail to view full-size
CHART 1 - WHAT A WAGE DISTRIBUTION MIGHT LOOK LIKE IF DISTRIBUTED IN A MANNER THAT SOME PEOPLE THINK IS FAIR.CHART 2 - WHAT IT LOOKS LIKE IN THE REAL WORLD (1960)  WHERE THE MECHANICS OF BUSINESS GUARANTEE SOME DEGREE OF WAGE INEQUALITY.CHART 3 - WHAT IT LOOKS LIKE IN THE REAL WORLD (2010) WHERE DIFFERENT MECHANICS OF BUSINESS GUARANTEE A LARGER DEGREE OF WAGE INEQUALITY.CHART 4 - WORLD HAS IT MIGHT HAVE LOOKED IN 1910 AND EARLIER.CHART 5 - WORLD HAS IT MIGHT HAVE LOOKED IN 1910 AND EARLIER ANNOTATED TO REFLECT POVERTY LEVELS
CHART 1 - WHAT A WAGE DISTRIBUTION MIGHT LOOK LIKE IF DISTRIBUTED IN A MANNER THAT SOME PEOPLE THINK IS FAIR.
CHART 1 - WHAT A WAGE DISTRIBUTION MIGHT LOOK LIKE IF DISTRIBUTED IN A MANNER THAT SOME PEOPLE THINK IS FAIR. | Source
CHART 2 - WHAT IT LOOKS LIKE IN THE REAL WORLD (1960)  WHERE THE MECHANICS OF BUSINESS GUARANTEE SOME DEGREE OF WAGE INEQUALITY.
CHART 2 - WHAT IT LOOKS LIKE IN THE REAL WORLD (1960) WHERE THE MECHANICS OF BUSINESS GUARANTEE SOME DEGREE OF WAGE INEQUALITY. | Source
CHART 3 - WHAT IT LOOKS LIKE IN THE REAL WORLD (2010) WHERE DIFFERENT MECHANICS OF BUSINESS GUARANTEE A LARGER DEGREE OF WAGE INEQUALITY.
CHART 3 - WHAT IT LOOKS LIKE IN THE REAL WORLD (2010) WHERE DIFFERENT MECHANICS OF BUSINESS GUARANTEE A LARGER DEGREE OF WAGE INEQUALITY. | Source
CHART 4 - WORLD HAS IT MIGHT HAVE LOOKED IN 1910 AND EARLIER.
CHART 4 - WORLD HAS IT MIGHT HAVE LOOKED IN 1910 AND EARLIER. | Source
CHART 5 - WORLD HAS IT MIGHT HAVE LOOKED IN 1910 AND EARLIER ANNOTATED TO REFLECT POVERTY LEVELS
CHART 5 - WORLD HAS IT MIGHT HAVE LOOKED IN 1910 AND EARLIER ANNOTATED TO REFLECT POVERTY LEVELS | Source

Wage Inequality

LET ME DIVERT A MOMENT AND EXPLAIN THE FOUR CHARTS above. Their purpose is to give a picture (you know, the 1000-word kind) of what wage inequality looks like and then associate that with poverty levels. This way we can fit Eugene into the picture to see what his chances are to reach the good life from wages alone.

As I said earlier, this isn't the hub to discuss wage inequality in detail, other hubs have presented several sides of it and a future hub will dig deeply into the subject. Nevertheless, let me start by asking what do you think of when you think of wage equality? Is it everybody earning the same wage? Or, everybody earning a wage that reflects their skill and utility to the company? I don't know for sure, but my guess is it is the latter scenario. But what would that look like if you graphed all those wages out? My initial guess would be people would think the wages would follow a distribution like a persons height does ... a few very short people, a few very tall people, but most people distributed equally around some average height, or in our case wage. That is what Chart 1 depicts.

I set it up to look like a "normal" distribution where half the wages fall on one side of the average wage and the rest on the other side. The numbers on the left axis is how many people have the wage contained in the intervals going along the bottom axis. For example, In my made-up world there are only 1000 people and around 350 of them earn between $38,000 and $46,000 per year . If you add the heights of each bar, they will equal 1000.

So if a "fair" wage distribution is one where the most people earn near the average of all wages and it declines more or less equally on either side of the average, then Chart 1 is what it would look like. Notice that the "median" wage, the wage where 50% of the people each less and the other 50% earn more, is the same as the average. That will become important shortly. Also note the Top 1% bar is in this kind of distribution; it is, as one would expect, very small.

Chart 2, shows the distribution as it really is was in 1960 using 1960 distribution percentages from Piketty and data from the 1960 Census. Notice that while I kept our population at 1000 people, I changed the income brackets to reflect even buckets of income up to the top 1%, then one bucket to capture anything above that the latter bracket is for people earning more than $180,000 per year.

Chart 3, shows the distribution as it really is in 2010, using 2010 distribution percentages and data from the 2010 Census. I also kept the axis the same as in Chart 2.

There is quite a change from Chart 2 to Chart 3, isn't there? It is a tremendous indictment on the deterioration of wage inequality in America over the last 50 years. The actual distribution is skewed heavily to the left and the median wage is quite different than the average wage for 2010, yet in 1960, the curve looks more "normal" like and the median wage is actually to the right of the mean, indicating a relatively egalitarian distribution (the more to the median is to the left of the mean, the more inegalitarian the wage distribution is.).

Also, the top end of the salary range extends very far to the right. But, it is this way because in any economy which lets business set its own wages and organize itself as it sees fit, e.g., not a socialist or communist economy, a normally distributed set of wages is impossible to achieve, in fact some degree of wage inequality is guaranteed, it is just a matter of how much. The reason is as follows. Almost all businesses are organized such that those who actually produce a product or provide a service are the most numerous and the lowest paid. Above them are a lesser number of higher paid supervisors, above them are fewer still higher paid managers, and so on.

The mathematics of a hierarchical pay structure is what forces some degree of inequality. The inescapable truth is higher pay will go to fewer people which is, by definition, wage inequality; you can't get away from it, nor should you ... for all sorts of good reasons. It is when this inequality goes too far, i.e, the rich have gotten too rich and the poor too poor as it has in our moneyless nobleman's case, does it rise to the level of social concern. When it gets to the point where the vast majority of a nations citizens barely survive on the wages they are paid, while, at the same time, a very small minority live a very good life, does social instability arise. This was the case in 1700s and 1800s. This is the case in Chart 4.

The purpose of Chart 4 is to portray the world as it was in the time of Vautrin and Eugene, using dollars that you will recognize. I also added, just for fun, a working population that approximates France's at the time. Consider how far this graph is skewed to the left. It is so skewed that 90% of wage earners earn less than the mean wage of $42,000.

Now look at Chart 5 where I overlayed current poverty levels. As you can tell, much of the population lives below the federally designated poverty level of around $19,000. Almost all of the population falls below what Hubbers think the poverty level ought to be between $32K and $38K. Then, if you look to the right, you will find a bump at the end representing the unbelievably wealthy earning more than 17 times the mean wage (actually, as I will describe a bit later, this translates into 170 times in Vautrin's day)..

Back To Eugene Rastignac

FOR REASONS I WON'T GET INTO, CHART 5 actually presents a rosier picture for Eugene than the one he truly faced in the mid-1800s. That is because I chose to use modern wage rates, rather than those prevailing at the time, in order to make things more relevant for you. I hope, however, not too much is lost in the translation.

In Chart 6, I laid in two more items, 1) what an average lawyer can make in today's dollars and 2) using Piketty's estimate of how much above the average wage one needs to lead a fairly stress-free life from an economic standpoint. Today that is around six times the average wage and in Eugene's time, that would be about 60 times for the lower end of the range; the difference is the estimated change in purchasing power between now and then.

I am hoping Chart 6 is a stunning to you as it is to me. If you can remember how books like Tale of Two Cities or the recent movie/play Les Miserables described what life was like in England and France in the 17 and 1800s, then that is what that economic life looks like in chart form. Notice how virtually all of the population is scrunched up at the poverty end of the income spectrum which quickly decreases as income increases until you get to the very wealthy where there is a noticeable uptick of beneficiaries. For the period of time we are investigating, the long slope down the chart portrays represents your wage earners. That bump at the end are those who live off of inheritance; they do not have to work. This chart is the essence of Vautrin's message and the choice Eugene must make.

What should jump out at you is that Eugene, given he is in one of the highest paid professions of that, and this time, is well below what it takes to live at a minimally stress-free life. In fact, he is around $110K short, at least in our example. This means, to have any shot at the "good life", not only does he have to be in a very highly paid profession, he must be one of the best in that field as well. In truth, however, he can never attain his wealth goal, for in Rastignac's time, things were even worse than the picture I paint here. And, by the way, I can also lay out a mathematical argument why Eugene can never attain the wealth he desires by labor alone, but I won't. (Under the constraints of Chart 3, in 2010, however, you still can attain your wealth goal, but it is getting harder.)

For Eugene Rastignac, Labor is the Fools (but Moral) Choice

CHART 6 - DO YOU SEE WHY, ECONOMICALLY, WORKING IS THE WRONG CHOICE FOR EUGENE? (although it probably keeps him out of jail)
CHART 6 - DO YOU SEE WHY, ECONOMICALLY, WORKING IS THE WRONG CHOICE FOR EUGENE? (although it probably keeps him out of jail) | Source

So What About Wealth From Capital?

THAT ISN'T GOING TO HAPPEN EITHER, UNLESS YOU INHERITED IT! (To be clear, throughout history, roughly 10 - 20% of your super rich become that way through entrepreneurship, as opposed to labor or inheritance, but this isn't one of Eugene's choices.)

A look at Table 3 should convince you Eugene is out of luck on this front as well. As you can see, 90% of all capital is owned by just 10% of the population, and our penniless nobleman isn't really one of them. Do know, however, that in the story, his family does have an estate, they are nobles after all; but the "rent" they receive from this capital is barely enough to keep Eugene and others in the Rastignac family with room, board, and with some left over for an education (therefore, it is problematic that his family is either given they can't pass on a sustainable inheritance to their offspring); which nevertheless is far in excess of what is available to the vast majority of the French population. What you see missing is any ability for Eugene to save or invest. Further, after Eugene finishes his job and becomes a lawyer or joins the government legal system, he must be able to maintain himself and any family he may acquire; meaning there is little chance to save here either given he is still near the poverty level. It is only after he is well along in his career might he be able to acquire wealth from which to earn capital income to supplement his wages.

But what would Rastignac need to, say, double his income to the minimum he would need? Well, the going return on investment of someone of his means is around 5%, so to make $174,000/yr, he would need a corpus of around $3.5 million. Unless you are extremely lucky, that is virtually an impossible goal, wouldn't you think?

So, the bottom line for Eugene is to tell Vautrin he accepts his offer to kill the Victorine's brother in return for part of the inheritance after he marries her ... IF he wants wealth. Fortunately, Eugene's conscience got the better of him and he chose to live a mediocre life.

Rehearsal

OK, NOW THAT YOUR MIND IS NUMB WITH ALL of those numbers thrown around every which way, we see that Eugene de Rastignac is faced with a dilemma, 1) work a job you have been longing to do and hope it will provide you a very nice life or 2) take the easy way out and have Victorine's brother killed in order to marry into great wealth. So, what does Eugene need to consider, beyond the obvious moral choice?

If our hero is of normal talent, we know that on average he might earn, in our example, a wage of $174,000 by the middle or end of his career.. With that income, Eugene will probably have risen to probably top 5% of those drawing a wage, which in those days would be mediocre, but today would be considered nice. Nevertheless, this is not bad at all, in and of itself.. But because, as we saw, during his lifetime he will earn little or no income from capital assets, his total income from capital will be in the bottom 10% and, in fact, lower his overall income standing slightly. So, Eugene will end up better off then most, but not necessarily in a position where he isn't struggling to keep his head above water in times of trouble in his day. But in today's American society, more than likely he qualifies for upper-middle class, no big whoop, but comfortable; the difference is the level of income inequality?

But what if Eugene is a really, really good lawyer and earns three times the average, or $519,000/yr; then, he has a chance of making the big bucks ... barely. Without going through all of the number crunching, even that amount of wages does not qualify for the top 1% of wage earners, but maybe the top 2 - 3%. Further, because even with $519,000 a year income, it is nearly impossible for Eugene to rise to the top 10% of capital owners. Maybe at the end of his career, Eugene will have accumulated enough wealth to draw a nice retirement, but will he be able to quit work and still maintain the lifestyle to which he has become accustomed, probably not. Nevertheless, at say $ 600,000, assuming some capital income, while he is working, Eugene will be nicely ensconced in the overall 10% percentile.range. But, look what he has to be to obtain that level ... exceptional, well above the norm.

And, by definition, only a few people are exceptional. The conclusion from all of this then is, with the kind of inegalitarian distribution of wage income and capital ownership which existed prior to 1913 (and really between the end of WW I and 1929), the only real expectation an average citizen had of improving themselves was to the middle class, and then only if they were lucky and possessed skills that were in high demand. Otherwise you were relegated to subsistence living.

UP TO THIS POINT, we have been using assumptions from Chart 5. If, however, we use inequality percentages from say 1960 (Chart 2), how might it look for Eugene? Much, much brighter, as a matter of fact. His $174,000 salary now puts him in the top 2 - 3% of wage earners (in our example). Also, the likelihood that he has acquired capital (such as stocks and bonds) from which to earn income has risen substantially. Is it enough to where he might be knocking at the very well-to-do's door? Probably not. BUT, if he is only somewhat more talented and can earn maybe $348,000/year, then he has made the top 1% over all, including income from capital; and in 1960, that is starting to push the 0.5% threshold of the extremely wealthy.. Again, what is making the difference is the degree of wage and wealth inequality.

The Tree of Wealth

Source

That Was Then, What About Now?

WELL, ACCORDING TO THOMAS PIKETTY (and I believe him) ALL SIGNS ARE POINTING TOWARD THE US, and maybe the rest of the rich nations heading back to a facsimile of pre-1913 economic conditions again. Just flip through Charts 6, 2, and 3, in that order to see what I mean. Why Chart 6 became Chart 2, is that the two world wars and the Great Depression knocked the stuffings out of capital ownership inequality while at the same it also reduced the inequality in wage income to reasonable levels. But since the end of WW II, and especially since 1980, with the end of high marginal tax rates and the race to the bottom in taxes on capital gains, dividends, and inheritance in the US and abroad, the disparities, the divergance in both capital (which is already back to 1913 levels, but with a twist) and wages came roaring back; primarily in America and to a lesser degree in England, but not so much in Europe, but hardly at all in Scandinavia..And the march hasn't stopped!

Will we ever see a repeat of Vautrin and Eugene's time? Piketty doesn't think so, but he doesn't rule it out either. The reason he thinks it is unlikely is that with the shocks between 1913 and 1945, there was a fundamental change in the capital structural and in the 1980s, there was the creation of the "super manager"; top executives who get paid astronomical salaries. This means some wage earners can reach the super wealthy status through labor alone and not have to rely on income from inheritance or other capital resources. Further, the social engineering efforts coming out of WW II created an honest-to-goodness middle class in America made up of blue collar and lower paid white collar labor. Later, after the benefits from that effort had been diminished over time by a return to conservatism, a class of highly paid managers developed to replace them as their median income declined. Now, as one can see in Table 6, even this newly minted middle class are having their position eroded as we slowly approach Table 2 again.

In addition, Thomas Piketty has found that beginning in 1990, the role of inheritance, who many had thought had all but disappeared, has made a major comeback. So much so that inheritance plays the same or even more of a role than it did 200 years ago, see Table 4.

You don't yet have to make the choice that Eugene did so many years ago, even though inheritance has regained its former status in most ways save inequality. Because, at least so far, a relatively large, but shrinking number of people can still, through labor alone, work their way into the life of an aristocrat of old. But, Piketty maintains that the course the world is on, if nothing is done, will lead once again to where it is the few that have and the hordes that have not with an unbridgeable gap in between.

Now let's look at inheritance directly and see why it is such a bogeyman, starting with Table 4.

The Different Faces of Inheritance

 
1810
1920
2010
INHERITANCE vs LIFETIME INCOME of BOTTOM 50%
10%
2.2%
13%
INHERITANCE vs TOTAL RESOURCES AT AGE 50
25%
9%
23%
INHERITANCE vs HOUSEHOLD INCOME
21%
9% (5% in 1950)
20%
TABLE 4

The first row reflects, for persons born in that year, what percent of lifetime income of the bottom 50% of wage earners is total inheritance received by those born in that same year. For example, for those born in 1810 and were receiving an inheritance, the total inheritance received by those individuals would be greater than 10% of the lifetime income that earned by the bottom 50% of wage earners born in 1810. For 2010, that rate is 13% and growing.

For the second row, the same procedure is used except the denominator is total wealth (resources) of those receiving inheritance. For example, in 1810, inheritance accounted for 25% to total wealth, Keep in mind, only the top 10% had inheritances or wealth.

Finally, the third row is what percent did inheritance income represent of total household income. That should be self-explanatory.

As you can see, given this is now 2014, the importance of inheritance has exceeded what it was 200 years ago, even though it doesn't appear that way when viewed from a day-to-day perspective. That is because 1) we are in the era of super managers and 2) we have not yet reached the state of inegalitarianism which existed 200 years ago.

So, What To Do?

THE ANSWER IS WHAT NOBODY WANTS TO HEAR, RAISE/CHANGE TAXES. How taxes are structured have a major impact on the distribution of wealth. Other ways are to change fiscal and labor policies. One of the outcomes of the Great Depression was a world-wide realization that governments not only had "regalian" responsibilities to the nation, e.g., police, courts, foreign affairs, common defense, etc (those which the adherents of "small government" find sufficient), but social responsibilities as well. Social responsibilities would be those associated with general welfare, tranquility, pursuit of happiness, and similar values.

By 1933, most major nations had instituted some sort income and capital tax system, but in both cases rates were extremely low, accounting for about only 8% of National Income. Then, shortly after 1910, they were raised to about 12% of National Income to pay for WW I. But, to pay for things like Social Security and other nascent welfare programs as well as WW II, taxes had to be raised again; this time to around 25% of National Income (except for the UK which reached 30%). For obvious reasons, it was the wealthy who picked up the burden for they were the only ones with money, everybody else, due to the depression, were destitute.

After WW II, Europe and Asia had to rebuild. Further, people and their governments still remembered the world-wide great Depression and the income disparity prior to WW I, so they also supported increased spending on social programs. As a consequence, taxes on both labor, capital, and consumption kept increasing until they reached about 29% in 1950 (38% in the UK). After that, different nations took different paths. Further, the taxes were made progressive, meaning those who earned more were taxed more on the portion that exceeded what most earned. One of the main purposes of progressive taxation was to reduce the inequality induced by simply having more money.

In the 1950s, conservatism slowly began its rise in America and between 1950 and 1970, taxes only rose a few more percentage points before leveling off at 30% on national income, where it remains today. In the UK, the same pattern took place where taxes leveled out at 40%. On the other hand, France and Sweden kept increasing their spending on social programs until about 1980, where their spending leveled out at 50% and 55% of National Income, respectively.

If you look at levels of inequality in each of these countries for both wage and capital, guess what you find? America is the most inegalitarian and Sweden the least. And what is more, all four have economies that are, for the most part, capitalistic ... not socialistic.

But, what is also happening in both America and Europe, which is driving even more inequality, is the tax burden has been shifting to the shrinking middle class (which is one reason it is shrinking); at the higher income levels taxes are actually becoming regressive! This means the very wealthy are paying a far less share of their wealth in taxes than they use to, but since the revenue stream is constant, then those below them are picking up the tab. The reason for this is the taxes on inheritance and other wealth resources (corporate income, dividends and capital gains) have been cut significantly, or eliminated altogether, thereby putting a much higher burden on labor and consumption. Since the majority of the very wealthy's income comes from these sources, their effective tax rate falls on-par with or below that of Joe Sixpack.

A major part of the solution, then, would appear to be to return to a tax structure similar to that which was in place during the 1960s when inequality was tolerable. I don't think it needs to be that draconian however for there was a theory popularized by a guy named Laffer during the Reagan revolution that said there is a tax rate that optimizes tax revenues. If the rate is higher or lower than this, tax revenues fall off. The latest simulations of this theory put the rate somewhere between 40 and 70%. Consequently, I would structure the 1960s tax system to reflect a 50% tax rate and not the higher rate that was actually contained in its structure. Anything less, especially at the low level it is now, will drive massive and growing inequality which will ultimately lead to social unrest; the leading edges of which I think we are seeing today.

© 2014 My Esoteric

More by this Author


24 comments

HSchneider 2 years ago from Parsippany, New Jersey

I jus recently bought Piketty's book but have not started it yet. From what I have heard, it lays out in detail what I am arguing in a Hub I am writing. The current tax rates have caused extreme wealth and income gaps This not only caused social unrest but is hampering our economic growth. The middle and lower classes need to spend their wealth while the wealthy and corporations are hoarding it. Laffer would continue cutting rates as far as the eye can see. We need more fairness and some more fuel into our economic engine. Excellent Hub, My Esoteric. I look forward to reading this book when I finish the one I am reading now.


My Esoteric profile image

My Esoteric 2 years ago from Keystone Heights, FL Author

Thank you, HR, I am at about page 500 right now. It opens up a whole new world about how to think about things; in a fairly understandable way. But, in any case, you nailed it. Basically, the wealthy earn about 5 to 10% on average depending on how wealthy they are, but only spend 2 to 3% of it to maintain their lifestyle. The rest gets reinvested thereby making the disparity grow.

I would think Laffer would have to agree with me, given it his theory and people doing simulations based on his theory come up with the range I described.


bradmasster from Orange County CA 2 years ago

My Esoteric

With all the work you put into your hubs, such as this one, you should have more comments. Views are nice, but comments are why you write hubs. My opinion anyway.

I have a comment

"shortly after 1910, they were raised to about 12% of National Income to pay for WW I. But, to pay for things like Social Security and other nascent welfare programs as well as WW II, taxes had to be raised again; this time to around 25% of National Income ("

bm:

I was wrong to consider that SS had to be paid for especially before 1950. It is a TAX, and it could have been made self sustaining with the proper kind of management, and away from the greedy hands of congress. So there is a little economic insanity, when a tax like SS, needs another tax to pay for it!

Thanks to all the congresses, and presidents from FDR to Obama for not doing anything to prevent or rescue SS from the tax black hole that it is today.

-----

bm:

Income inequity is more complex than making table based on percentage of income. First, the AGI is only part of the data, to understand the real impact you have to know how much income was protected from taxes.

Also, a people don't work at the same level, and shouldn't get paid at the same level. They don't even get paid the same within a level. The latter statement is why many companies used merit raises to reward the better performing workers.

There are many trades, and technical expertise jobs that didn't exist in your historical data. These jobs require more training and education than they did in the old days.

Now the class that has always been overpaid are lawyers, but that is because they have a closed system much like a monopoly. Out of the professions of Law, and Medical, the most worthwhile of them are the dentists. Their stuff has to work, the others, well you know.

Lawyers versus rocket scientists, I would imagine that lawyers average more in income.

My point is that outside of unions, and professional associations, the rest of the workers are paid by their performance, their unique skill sets, certifications, education, and other attributes. They don't all perform at the same level, so they shouldn't be paid at the same level.

However, this is not the case for example with teachers. They don't get tenure for performance.

It is also like are discussion on minimum wage. People working now below the magic number of ten dollars an hour, are not performing at the same level, and they are not getting the same pay. But, here comes the ten dollar minimum wage, and everyone below ten dollars an hour is making the same, but they are still not performing the same.

Year ago, I worked on a project at Rockwell, now Boeing. There was this guy that was working on a software program. He spent all day with his head down, and he looked busy. The looks were deceiving as he spent little time working on his task. He was very punctual, for lunch and quitting time.

Over the course of time, I got the drift of what he was doing at work. So, I asked him how he got through his work day.

He told me, he thought about three things.

1. I wonder what my wife is making for dinner tonight.

2. I wonder what is on TV tonight.

3. I wonder is tonight is the night.

Should he have been making the same money as those that performed their task?

Thanks

bradmaster


My Esoteric profile image

My Esoteric 2 years ago from Keystone Heights, FL Author

@Bradmaster -

"Income inequity is more complex than making table based on percentage of income." - Actually not really, when used properly. This answers your third point as well. You are correct in that one chart for one time period doesn't say a lot, unless the disparity is egregious, like it was in 1900; common sense it is not reasonable for 1% to live in luxury and 95% live in near poverty. But where tables like that have their power is showing change over time, which they do. If they show increasing inequality, then it is happening, assuming all of the arithmetic is correct.

"First, the AGI is only part of the data, to understand the real impact you have to know how much income was protected from taxes." - As I suggested to @Landmark in a different hub when he raised the same issue; the fact that the data may be missing hidden protected income, which is only an issue with the more well off, doesn't make what the tables portrey less true, not at all. In fact, if that income could be obtained and used, it would only make the inequality worse.

"Also, a people don't work at the same level, and shouldn't get paid at the same level. They don't even get paid the same within a level. " - this is also quite true, but not at all relevant. It is not relevant because we aren't looking at a static period in time; instead what is being considered is change over time. It's a given the division of labor as well as capitalism leads to a certain level of inequality, most people know and accept this truth. It is when this disparity becomes oppressive does it need scrutiny; having the ratio of CEO pay to average pay go from 20:1 to 350:1 in the space of 30 years when there was no market-based reason for such a growth in inequality.


My Esoteric profile image

My Esoteric 2 years ago from Keystone Heights, FL Author

@Bradmaster -

"Thanks to all the congresses, and presidents from FDR to Obama for not doing anything to prevent or rescue SS from the tax black hole that it is today." - I would buy this if you put the emphasis on Congress, they are the only ones which can create and pass legislation. Presidents can ask for it, but Congress can and have told Presidents to piss off. When you have national emergencies like the Great Depression, generally Congress and both Parties get behind the President. That has happened in every national emergency before and after ... until the Great Recession of 2008. In that case, one Party fought tooth and nail to stop Obama from succeeding and told the Nation to go to Hell.

It was WW I, the Great Depression, and WW II which reversed the income inequality. It decimated capital income inequality almost reducing it to nothing. It also greatly reduced wage income inequality such that by the end of WW II, while there was still wage inequality, for the very reasons you suggest, it was reasonable. What has happened since WW II, actually since 1980, is that both capital and wage income inequality has surged and is approaching 1910 levels once more.


bradmaster fromOrange County CA 2 years ago

My Esoteric

SS

The bottom line is no one did anything about SS, to correct, to repeal it, or to protect. FDR started SS, so why couldn't another president do something about it. Today, we have a real problem generated by the government, but it punishes the people that were forced to participate in it.

----

It is the government that creates inequity, what is your proposal that can change it. Levels are important, and my point is for the current levels, and historical data doesn't really come into play. So many variables have changed that it is apples to oranges.

====

What you propose is the 2008 tooth and nail to stop Obama is not true because in the first place, Obama spent his first two years with a democrat controlled congress setting up Obamacare, and he put the economy in behind that focus.

If the controlling party has a bad idea, it is the duty of the minority party to oppose it. What you say about the republicans is the same thing that the democrats did to George W Bush. It is the reason why the country never moves forward. The country should be purple, not Red or Blue.

The government has always been reactive instead of proactive. Obamacare was an ax, and it would have been better served to use a scalpel. The big issue on healthcare was the pre-existing condition, and that could have been nullified by a singe law. Adding layers of bureaucracy to a problem, only creates another problem.

Proactive?

During 911, not one offensive US military weapon engaged the threat. There was not one armed fighter jet to protect Washington DC. No one in command apparently conceived of this scenario. We didn't seem to learn from our history.

--------

The congress because of the two party system that is diametrically opposed to each others goals, have only been able to move the country to the left or the right and back and forth. They hardly ever move the country forward because that would require an agreement between them. Many times, they move the country backwards.

It has to be self evident that after the last one hundred years that the government has failed the country, and the people. Although, I also blame the voters for their poor choices, and not holding the politicians to their promises.

Once again, if we didn't get into WWII, there would have been no economic recovery.

----

As far as income inequity, do we pay everyone the same for their different performance, experience, expertise, and education. Conversely, do we reward people that can manipulate the stock market, money markets, and commodity markets?

Oddly, at the same time, I think that taxes should be paid uniformly and not progressively, and not using the thousands of tricks found in the Internal Revenue Code.

====

Thanks

bradmaster


My Esoteric profile image

My Esoteric 2 years ago from Keystone Heights, FL Author

@Bradmaster, "Today, we have a real problem generated by the government, but it punishes the people that were forced to participate in it." - Sorry, I just don't see the real problem, even given the way it is currently structured, which we both agree could be better. It only will take some minor tweaks to keep SS solvent for a long time. (One thing I wish they would do is a split the eligibility age to take into account hard labor jobs and white collar jobs. People in the former categories simply wear out sooner.)

Medicare is the one that needed a lot of help, and it seems that is happening now. The solvency date has been pushed back twice now and is expected to be pushed back another decade in the not too distant future.

You say "It is the government that creates inequity, ..." - and that is partly true, mostly through its flat tax structure. Most of its actions are attempting to reduce the inequity caused by unregulated capitalism (which, I guess you could say is also government's fault because they aren't regulating it.)

You said "Obama spent his first two years with a democrat controlled congress setting up Obamacare, and he put the economy in behind that focus." - Many on the Right hang their hat on the fact that Obama had total control for the first two years in office ... you say it more properly by using 'Democrat controlled', and they think he should have crammed 8 years worth of legislative achievements into the first two years. Exactly how realistic is that?

The fact is, the FIRST thing Obama did WAS to address the economy by 1) implementing the stimulus, 2) further implementing Bush's TARP, and 3) finalizing Bush's auto bailout. Those were the "first" items on his agenda. Because those things take time to bear fruit, time which the Right was not willing to give him a day of (they wouldn't even acknowledge the bottoming out of the stock market slide as soon as the stimulus program was started). So saying "... and he put the economy in behind that [Obamacare] focus. ..." is quite wrong.

His second task was Obamacare, as it should be because it would take a supermajority in Congress to get it passed. Every president from Harry Truman on has wanted to get some sort of universal health care passed with the sole exception of Bush 43. Clinton came the closest to succeeding but blew it. Obama's approach of letting Congress do its job almost failed as well and only his last minute intervention and butt kicking, something he is not good at, saved the day. As a result, he squandered much time focusing on Obamacare and ended up ignoring job programs and immigration reform that Conservatives later killed once the Ds lost their supermajority in the Senate and the House altogether.

The Right used their propaganda expertise, from March 2009 on, to whip up anti-Obama rhetoric to such a high pitch that even though polls show that approve of most everything Obama has done, when considered one at a time and without his name attached, when you let them know he is responsible for it, they immediately hate it. That is how effective the Right has been in getting the public to hate the man himself; they like what he has done, but dislike him.

You said, "If the controlling party has a bad idea, it is the duty of the minority party to oppose it. " - and that is quite true. But the controlling Party generally doesn't have 98% of its ideas on the "bad" side, yet that is about the percentage of Obama programs the Conservatives have opposed and beaten. Also, until this specific Party configuration, no Party has every convened a meeting to make plans on how to destroy the sitting President's presidency like this one did. No senior member has ever publicly announce that it is the political goal of the Republican Congress to complete thwart President Obama's agenda as Minority Leader McConnell did.

You also said "What you say about the republicans is the same thing that the democrats did to George W Bush. It is the reason why the country never moves forward. " - both of those are also false. Yes, once Democrats gained an edge in the House and Senate during Bush's last two years, they absolutely gave him grief. But on important issues, they also worked with him to find compromise solutions; they didn't effectively shut Congress down like the Conservatives have today. Further, even after Gingrich butted heads with Clinton by shutting the government down when Clinton would back down to his bullying, they finished the last four years compromising on the big issues. (Unfortunately, one of those compromises set the stage for the 2008 recession.) Until this Congress, Congress has almost always found a way to work things out and pass what needed to get passed such that each side got some of what it wanted. That is the way the system is supposed to work and has been for most of the last 220 years.

A scalpel wouldn't have worked. If the only think you did was not allow pre-existing conditions to be a bar to insurance, you would have either 1) bankrupted the insurance companies or 2) driven premiums so high, only the rich could afford them. In any case, I am one of those who believe basic health care is a natural right (so did John Locke) just like Life, Liberty, and Pursuit of Happiness.

But you are right, gov't is reactive and not proactive. I think there are two reasons for that. One is the idea of limited gov't; you don't want to create more gov't unless it is actually needed. The other is Congress is made of factions, nobody sees the same problems the same way, so trying to get this group of cats to agree on a proactive solution is nigh impossible.

Your 9/11 solution costs lots of money. When have you ever seen Conservatives want to spend money on anything as remote as protecting America from an outside terrorist attack that has never happened in our history? Should there have been more alert, I think so given some of the fractured warning signs. but the only plane they might have gotten to is the one that hit next to me at the Pentagon. It wasn't three minutes after I mumbled to a group of us watching the twin towers fall (we were in a satellite office about 1/4 mile away) about how long befor a plane hits the Pentagon. Then we felt it hit.

On income inequality - as I have said, nobody with any sense is suggesting people get paid the same wage; a degree of inequality is expected and accepted for exactly the reasons you mentioned.

Its when the inequality goes beyond what one would expect for those same reasons where problems arise, and in America, we have already passed that point. The inequality that existed from 1950 - 1980 was in a reasonable range; it simply isn't today and it is getting worse.

I agree with getting rid of all of the tax loopholes for individuals and businesses, but I disagree strongly that taxes should be uniform. I uniform tax guaranteed a "ever growing" inequality; it is a mathematical certainty. A progressive tax scheme, Piketty has convinced me, with just as much mathematical certainty, reduces inequality; which is why I am now back to favoring progressive taxes.


bradmaster from orange county ca 2 years ago

My Esoteric

@Bradmaster, "Today, we have a real problem generated by the government, but it punishes the people that were forced to participate in it." - Sorry, I just don't see the real problem, even given the way it is currently structured, which we both agree could be better. It only will take some minor tweaks to keep SS solvent for a long time. (One thing I wish they would do is a split the eligibility age to take into account hard labor jobs and white collar jobs. People in the former categories simply wear out sooner.)

bm:

What I don't like is that the SS was not universal in the country. It should have been the plan for all the wage earners, including the government from the start.

Also, the plan should have not been based on a TAX, it should have been privately managed, and with a time period for vesting, as well as owned by the contributor.

SS is a bad system to continue in its current form. It is a TAX, with a suggestion of a benefit. The mean benefit amount is poverty level.

-----

Medicare is the one that needed a lot of help, and it seems that is happening now. The solvency date has been pushed back twice now and is expected to be pushed back another decade in the not too distant future.

bm:

Medicare like SS should have also been the universal healthcare plan.

The Medicare savings that you say are the benefits of Obamacare should not be used for Obamacare, but left in the Medicare Trust Fund.

Medicare has lost countless billions, I don't know the exact number, from fraud and mismanagement since its creation in 1965. Any savings to the Medicare system should be retained by that system.

=-====

You say "It is the government that creates inequity, ..." - and that is partly true, mostly through its flat tax structure. Most of its actions are attempting to reduce the inequity caused by unregulated capitalism (which, I guess you could say is also government's fault because they aren't regulating it.)

bm:

First, there isn't a Flat Tax Structure" it is a progressive tax structure. And having higher marginal rates applied to the higher income taxpayers doesn't work when it can easily be offset by the Internal Revenue Code.

Unregulated capitalism was the root cause of the dot com, and sub prime bubbles. The government reward the financial industry because they couldn't let the giants that they ignored by not taking control, die without killing the country with it.

I don't really care to specify the guilty party in more detail than the congress and the presidents. George H Bush, Bill Clinton, and George W Bush.

==

Thanks

bradmaster


bradmaster from orange county ca 2 years ago

MyEsoteric

comment continued.

You said "Obama spent his first two years with a democrat controlled congress setting up Obamacare, and he put the economy in behind that focus." - Many on the Right hang their hat on the fact that Obama had total control for the first two years in office ... you say it more properly by using 'Democrat controlled', and they think he should have crammed 8 years worth of legislative achievements into the first two years. Exactly how realistic is that?

bm:

My point is that Obamacare was not needed and now six years later it is barely helping anyone. The economy needed the continued focus of congress and president Obama, but they were too busy adding a third party to the social trilogy, SS, Medicare, and Obamacare.

The congress and the president should have figured out how to control the financial industry that was too big to fail. They also needed to look at the Federal Reserve Board and how they contributed to the sub prime bubble, along with Freddie and Fannie. All three were major contributors to the sub prime bust.

We don't have any improvement on the financial industry, nor other super global conglomerates today.

------

The fact is, the FIRST thing Obama did WAS to address the economy by 1) implementing the stimulus,

bm:

How did the stimulus help the victims of the financial industry that gave them the bogus home and equity loans?

------

2) further implementing Bush's TARP,

bm:

President Elect Obama asked President Bush to take over TARP before he was inaugurated. As I said before that since January 2007, the entire congress was focused on the 2008 election. They were interested in seats, and not the economy. Even the presidential candidates debates were not overly concerned about the economy.

TARP was a plan that was postured to look like a solution to the economic meltdown, but as they say about cars, it was all show and no go. Otherwise, they wouldn't have had to followup with the Stimulus program.

----------

and 3) finalizing Bush's auto bailout. Those were the "first" items on his agenda.

bm:

President Bush was a one trick pony, and he only had time to focus on the war. As far as GM was concerned, the congress should have let it go bankrupt, and then reconstituted it. Bailing out GM was like trying to keep a ship that is covered with holes afloat. Ford did the responsible thing and it took control over its own problems.

In addition, had the congress of the late 1970s taken action against the threat on the oil supply, things in the auto industry would have been more secure. It was the five dollar and continuing to rise gallon of gasoline that caused the problem for the US Auto Industry.

--------

Because those things take time to bear fruit, time which the Right was not willing to give him a day of (they wouldn't even acknowledge the bottoming out of the stock market slide as soon as the stimulus program was started). So saying "... and he put the economy in behind that [Obamacare] focus. ..." is quite wrong.

bm:

It is not wrong, it is quite correct because the country needed congress and Obama to focus on the economy. Neither TARP nor the Stimulus had any real impact on the economy. The healthcare issues could have been handled by a few well crafted laws. Like specifically addressing the problem of pre-existing conditions for starters.

Once again, neither TARP nor the Stimulus helped the victims of the bad loans, but they did enrich the incompetent executive management of the failed companies.

Also, as further proof that neither programs helped reverse the decline of the economy was the hundreds of billions of dollars that the FRB kept investing in the bundled derivatives. Their justification was based on their assessment that the economy was not coming around. These were the same bundled derivative that were the responsible for the failure in the economy in the first place.

-----

His second task was Obamacare,

bm:

He didn't finish with his first task, the Economy.

-----

as it should be because it would take a supermajority in Congress to get it passed. Every president from Harry Truman on has wanted to get some sort of universal health care passed with the sole exception of Bush 43.

bm:

Universal health care is not the same as Obamacare, and it wasn't part of the failed economy. Getting people off the food stamp program, and off of unemployment would have allowed people to get health insurance. People that are unemployed can't pay COBRA rates. Maybe lowering the COBRA rates would have help the people that were out of work.

Universal Health Care should have been the same in both the public and private sector. It is not reasonable for the taxpayers to pay expensive healthcare for public employees, while the private sector plays games with limited hours to workers to bypass providing healthcare insurance.

Obamacare is a Red Herring that distracted the needed focus on the economy. The high rate of unemployment also put a strain on SS, and Medicare contributions.

These were the important issues, not redefining a private sector function of healthcare. Government is the worst manager of programs, and they should regulate private industry, and not try to usurp private industry.

----

Clinton came the closest to succeeding but blew it. Obama's approach of letting Congress do its job almost failed as well and only his last minute intervention and butt kicking, something he is not good at, saved the day. As a result, he squandered much time focusing on Obamacare and ended up ignoring job programs and immigration reform that Conservatives later killed once the Ds lost their supermajority in the Senate and the House altogether.

bm:

A bad idea such as Obamacare should be scrutinized and not given the green light. The real solution, as I have already stated, should have been to craft some special legislation to right the wrongs of the health industry. This should have also included analyzing the usefulness, and effectiveness of the FDA. National care doesn't work,

-------

The Right used their propaganda expertise, from March 2009 on, to whip up anti-Obama rhetoric to such a high pitch that even though polls show that approve of most everything Obama has done, when considered one at a time and without his name attached, when you let them know he is responsible for it, they immediately hate it. That is how effective the Right has been in getting the public to hate the man himself; they like what he has done, but dislike him.

bm:

I am not left or right, except I am for right versus wrong. Obamacare was ill time, ill constructed and only perpetuates the incompetence of government running businesses that should be run by private industry, but controlled by regulations from the government.

Once again, as long as people keep choosing political party sides, the country can only be more to the left or the right, and at best to the center, but hardly ever forward.

The rate of inequity of income has moved up rapidly during the last six years, while the people are still on food stamps, still losing their homes, and still unemployed. The rates on the latter two are lowering, but only because the homes inventory of underwater homes are less, and many people are still out of work, but no longer getting unemployment. Once off the list, they are no longer a factor of unemployment statistics, even though they are not working.--

-------


My Esoteric profile image

My Esoteric 2 years ago from Keystone Heights, FL Author

You said "What I don't like is that the SS was not universal ... ." - I agree.

BTW, have you taken the Meyers-Briggs Type survey yet? I bet you are an ESTJ or ISTJ.

You said "Also, the plan should have not been based on a TAX, it should have been privately managed, and with a time period for vesting, as well as owned by the contributor." - I disagree, disagree, disagree, and agree, sort of.

I think both SS and Medicare, just like the penalty for the ACA was not intended by Congress to be a Tax because in all cases, it can be more logically considered an insurance premium; in the latter case that was the Congressional intent. However, the mechanism for collection in all three cases was via the tax code; ipso facto the Supreme Court declared it a Tax. Regardless of their technical title, they are effectively insurance premiums. (I am an INTP which allows me to make that leap).

Privately managed implies someone is making a profit off of my contributions which means an automatic decline of 10 - 20% in the value of my investment. And if they are allowed to invest it in risky items above my risk tolerance level, I will be a very unhappy camper because they won't share in my loss should there be one. No, privatizing SS or Medicare is definitely a bad idea.

There already is a vesting period but I think a person who doesn't vest should get their money back with interest?

I agree with the idea of "ownership" so long as the idea of "insurance" is maintained as well where certain benefits are available for the premiums paid.

You said "Medicare like SS should have also been the universal healthcare plan." - I believe that is true now, although there might be a few esoteric exceptions I am not aware of.

You said "The Medicare savings that you say are the benefits of Obamacare ... " - that is really mute, I think. All it does is take out a step. Medicare savings reduce the deficit, it doesn't increase the Trust Fund. The cost of ACA increases the deficit. One simply off-set the other.

You say "First, there isn't a Flat Tax Structure" it ..." which is technically true; I should have inserted the words "effectively a" in front of flat tax. Why? Because what came before Reagan's tax structure, which is more or less what we have today, was progressive. While what we have today is somewhat more progressive than Reagan's, it is still quite flat compared to Kennedy's, the one we need to go back to.

You said "Unregulated capitalism was the root cause ..." - and I absolutely agree. But I don't totally agree with your closing statement. While the government certainly played a starring role, so did the financial industry for misusing the power given to them by the Conservatives. The progressives in government put governors on that power from 1937 - 1980, but it was the conservative mentality which removed them and told business "we trust you to do the right thing for that is our philosophy".


bradmaster from orange county ca 2 years ago

Esoteric

The Right used their propaganda expertise, from March 2009 on, to whip up anti-Obama rhetoric to such a high pitch that even though polls show that approve of most everything Obama has done, when considered one at a time and without his name attached, when you let them know he is responsible for it, they immediately hate it. That is how effective the Right has been in getting the public to hate the man himself; they like what he has done, but dislike him.

You said, "If the controlling party has a bad idea, it is the duty of the minority party to oppose it. " - and that is quite true. But the controlling Party generally doesn't have 98% of its ideas on the "bad" side, yet that is about the percentage of Obama programs the Conservatives have opposed and beaten. Also, until this specific Party configuration, no Party has every convened a meeting to make plans on how to destroy the sitting President's presidency like this one did. No senior member has ever publicly announce that it is the political goal of the Republican Congress to complete thwart President Obama's agenda as Minority Leader McConnell did.

bm:

This just shows you how bad the Republicans think about Obamacare.

I don't see two percent of the democrat goals are worthwhile. Perhaps you can educate me.

Thanks

bradmaster


bradmaster from orange county ca 2 years ago

My Esoteric

You also said "What you say about the republicans is the same thing that the democrats did to George W Bush. It is the reason why the country never moves forward. " - both of those are also false. Yes, once Democrats gained an edge in the House and Senate during Bush's last two years, they absolutely gave him grief. But on important issues, they also worked with him to find compromise solutions; they didn't effectively shut Congress down like the Conservatives have today.

bm:

The democrats put the troops that were in the war, that congress first agreed to, then stepped away from it, at risk by not providing them with the funds to provide the weapons that they needed on the ground.

Congress did the same thing in Vietnam.

-------

Further, even after Gingrich butted heads with Clinton by shutting the government down when Clinton would back down to his bullying, they finished the last four years compromising on the big issues. (Unfortunately, one of those compromises set the stage for the 2008 recession.) Until this Congress, Congress has almost always found a way to work things out and pass what needed to get passed such that each side got some of what it wanted. That is the way the system is supposed to work and has been for most of the last 220 years.

bm:

The two political party system is a failure, and these are the results. You cannot have congress effectively partisan because the goals of each party are diametrically opposed. So progress for the country cannot be achieved because of the fundamental differences.

-----

A scalpel wouldn't have worked. If the only think you did was not allow pre-existing conditions to be a bar to insurance, you would have either 1) bankrupted the insurance companies or 2) driven premiums so high, only the rich could afford them. In any case, I am one of those who believe basic health care is a natural right (so did John Locke) just like Life, Liberty, and Pursuit of Happiness.

bm:

Well being in the elite public sector healthcare, you are not expressing the actual plight of the people in the private sector.

If the scalpel of pre-existing conditions would bankrupt the healthcare industry, how does pre-existing conditions removal in Obamacare not do the same thing.

I believe that pre-existing conditions are covered in FEHB.

-------

But you are right, gov't is reactive and not proactive. I think there are two reasons for that. One is the idea of limited gov't; you don't want to create more gov't unless it is actually needed.

bm:

What expansion of government was actually needed in the last several decades?

--------

The other is Congress is made of factions, nobody sees the same problems the same way, so trying to get this group of cats to agree on a proactive solution is nigh impossible.

Your 9/11 solution costs lots of money. When have you ever seen Conservatives want to spend money on anything as remote as protecting America from an outside terrorist attack that has never happened in our history?

bm:

It is a failure of congress, and the president, once again all of them. They all had the opportunity to make needed changes to protect ever changing threats to us domestically, as well as abroad.

They didn't even attempt to do it.

--------

Should there have been more alert, I think so given some of the fractured warning signs. but the only plane they might have gotten to is the one that hit next to me at the Pentagon. It wasn't three minutes after I mumbled to a group of us watching the twin towers fall (we were in a satellite office about 1/4 mile away) about how long before a plane hits the Pentagon. Then we felt it hit.

bm:

The military like it was in the cold war, should be a 24/7 armed and ready defense. Sadly, that was not the case for Pearl Harbor, a situation that also never happened before. Nor during 911, when not one single defense to the threat was available. Is this why the government keeps growing because of its incompetence.

Who could possibly believe years ago, when President Reagan, and VP Bush said, Ollie did what? VP Bush had been the head of the CIA before the Contra incident, and he surprisingly says he doesn't know anything about it.

At that point, there should have been changes made to the CIA, and investigations on the other agencies to see if there were problems that were also not known at the time.

--------

President George W Bush could have handled 911 better by taking control out of the standstill caused by existing protocol between the FAA and NORAD. Instead he sat at the public school, which seems to put question on what he actually knew about the threat. Clearly, the protocol would have been to suspect that maybe the terrorists were going to run a plane into the school where he was still lingering after being notified about the threat

Maybe we should have had Tom Clancy as the head of the CIA, as he at least can write scenarios that are better than what we see from the CIA.

The intensive airport intrusion on passengers has less of an effect on the terrorists than it does on the average flyer. There are so many so targets in America, like the Boston Marathon, and train stations, as well as large shopping malls that should be part of the military think tank as strongly possible threats to the country.

The reasoning of this never happened before is exactly why the government failed us during 911. The fact that Andrews Air Force Base couldn't protect Washington DC is pathetic. Perhaps, it only exists to ferry politicians to their fund raisers.

-----

Thanks

bradmaster


bradmaster from orange county ca 2 years ago

My Esoteric

On income inequality - as I have said, nobody with any sense is suggesting people get paid the same wage; a degree of inequality is expected and accepted for exactly the reasons you mentioned.

Its when the inequality goes beyond what one would expect for those same reasons where problems arise, and in America, we have already passed that point. The inequality that existed from 1950 - 1980 was in a reasonable range; it simply isn't today and it is getting worse.

bm:

Then what is the cause of the inequity, and what is the solution. It is certainly not the minimum wage? Bringing every below the current minimum wage to the new level is an example of ignoring performance, expertise, and education simply to fulfill socialistic redistribution.

----

I agree with getting rid of all of the tax loopholes for individuals and businesses, but I disagree strongly that taxes should be uniform. I uniform tax guaranteed a "ever growing" inequality; it is a mathematical certainty. A progressive tax scheme, Piketty has convinced me, with just as much mathematical certainty, reduces inequality; which is why I am now back to favoring progressive taxes.

bm:

What about equal protection under the 14th Amendment?

Even when using a flat single percentage for income tax, the higher wage earners will pay more money. But, this is hampered by the IRC allowing only the wealthy non wage earners to take full advantage of the bulk of the code.

We have had progressive income taxes forever, and it hasn't stopped or even retarded the increase in income inequity.

As long as congress allows third party, mostly corporations to influence them, the income inequity will continue and it will get worse.

-----

end of responses from the original My Esoteric comment of 12 hours ago.

Thanks

bradmaster


bradmaster from orange county ca 2 years ago

My Esoteric

Your comment came when I was making a series of response on your big comment from yesterday. I broke my responses up into several comments.

This response is from your comment today.

0000

You said "What I don't like is that the SS was not universal ... ." - I agree.

BTW, have you taken the Meyers-Briggs Type survey yet? I bet you are an ESTJ or ISTJ.

bm: I haven't taken the test recently, but I like your assessments. These two could both work for me.

-------

You said "Also, the plan should have not been based on a TAX, it should have been privately managed, and with a time period for vesting, as well as owned by the contributor." - I disagree, disagree, disagree, and agree, sort of.

I think both SS and Medicare, just like the penalty for the ACA was not intended by Congress to be a Tax because in all cases, it can be more logically considered an insurance premium; in the latter case that was the Congressional intent. However, the mechanism for collection in all three cases was via the tax code; ipso facto the Supreme Court declared it a Tax. Regardless of their technical title, they are effectively insurance premiums. (I am an INTP which allows me to make that leap).

bm:

Even as an insurance, you don't keep changing the contributions, and you don't have to vest, and your benefits are known before hand. In addition, the Insurance Company and not the government manages it.

Also, once you start collecting on an insurance policy, you don't have to keep contributing to it. SS is applied to wages even when the person retires on it, if they continue to work.

SS is not a very fair system, and if the same contributions, including the employer were put in a private plan like the 401k, or even in IRAs, it would be a better system. The government doesn't manage FERS?, they don't put the contributions into the general fund,

000000000000000

Privately managed implies someone is making a profit off of my contributions which means an automatic decline of 10 - 20% in the value of my investment. And if they are allowed to invest it in risky items above my risk tolerance level, I will be a very unhappy camper because they won't share in my loss should there be one. No, privatizing SS or Medicare is definitely a bad idea.

bm:

That is what they do with IRAs and 401ks.

---------

There already is a vesting period but I think a person who doesn't vest should get their money back with interest?

bm:

At any time the government can kill SS, and Medicare. They wouldn't but there is nothing to prevent them from doing it.

---------

I agree with the idea of "ownership" so long as the idea of "insurance" is maintained as well where certain benefits are available for the premiums paid.

bm:

I am talking about ownership like FERS, IRAs and 401Ks,

-------------

You said "Medicare like SS should have also been the universal healthcare plan." - I believe that is true now, although there might be a few esoteric exceptions I am not aware of.

bm:

If it was universal, you wouldn't have to wait until you retire on SS.

-------

You said "The Medicare savings that you say are the benefits of Obamacare ... " - that is really mute, I think. All it does is take out a step. Medicare savings reduce the deficit, it doesn't increase the Trust Fund. The cost of ACA increases the deficit. One simply off-set the other.

bm:

My point is that there should be no connection between the two plans.

I wrote a longer comment elsewhere.

00000000

You say "First, there isn't a Flat Tax Structure" it ..." which is technically true; I should have inserted the words "effectively a" in front of flat tax. Why? Because what came before Reagan's tax structure, which is more or less what we have today, was progressive. While what we have today is somewhat more progressive than Reagan's, it is still quite flat compared to Kennedy's, the one we need to go back to.

bm:

The only path that has a solution is to not use the income as a tax base.

The NST taxes the money when purchases are made. And as you have previously agreed, the IRC favors the wealthy. If you want to stick with tax on income than flatten it, by really stripping the IRC. Most of that code is unusable by the average wage earner.

--------------

You said "Unregulated capitalism was the root cause ..." - and I absolutely agree. But I don't totally agree with your closing statement. While the government certainly played a starring role, so did the financial industry for misusing the power given to them by the Conservatives. The progressives in government put governors on that power from 1937 - 1980, but it was the conservative mentality which removed them and told business "we trust you to do the right thing for that is our philosophy".

bm:

It was actually Clinton and the liberals that started the everyone should be able to own a home. The conservatives didn't do anything to stop it. The FRB kept the interest rates down, so these pathetic and unsound, low, to negative equity sub prime loans wouldn't explode.

President Bush and his congress didn't do anything helpful to stop the liberal plan of everyone owns a home, but president Obama and his democrat controlled congress could have done something, but they were working on Obamacare.

Also, we still don't have control over the financial industry even today. And a major player in the economic meltdown was Freddie and Fannie, but the government neither acknowledged their part, nor did they make any changes to insure that it wouldn't happen again.

In my opinion, the stock markets, commodities market, and the money market need to be protected from the latest technology. These technologies were non existent until trades on these markets were done online by anyone with a computer.

As evidenced by the dot com bubble burst, and the sub prime bubble burst, the average online investor that is not a professional is really naïve. There are also groups or investors that use the latest technology, based on your favorite, statistics, that have different and varied inference engines that can be used to their advantage. It is more sophisticated than the day traders of the past.

Probably the reason that these programs are so good is that they are based on the way people act and react. This is the equivalent of card counting to win at BJ.

Speculators can also adversely affect the market, especially the commodities markets. They have a real effect on the oil market. All the odds are favored for the oil producers. A down in the oil market can take weeks to get lower prices at the gas pumps, while, in a matter of hours, gas pumps will reflect the higher price. This is true even though the gas that is being pumped was bought before the prices went high.

It is a manipulation of the supply/demand curve as played by a super monopoly, the oil cartel.

-----

Thanks

bradmaster


My Esoteric profile image

My Esoteric 2 years ago from Keystone Heights, FL Author

You said "Even as an insurance, you don't keep changing the contributions ... " - When's the last time the contribution rate has been changed? When changes are made to the program itself, like pushing back the age to draw a retirement it applies people a long way from drawing. While it doesn't begin with new wage earners, it goes far enough back to be reasonable. Unlike normal insurance policies, SS is a public program with a specific purpose of providing a safety net for society, therefore the rules have to be different. (There is a move afoot to stop taxing wage earners once they start drawing SS.)

Actually, the gov't does manage FERS; they set the rules and regulations the private contractor they hire to manage the program must follow; the contractors don't make independent decisions about the program.

You said, " That is what they do with IRAs and 401ks." - but I and the company have a choice. For example, we just started paying the fee for the SIMPLE IRA program we have for our employees. I suspect, employers do that for the executives of there firms as well.

If you don't use income as a base, then the gov't has no vehicle of taking the money the wealthy took from the poor and giving it back to them. In terms of fairness, a Flat Tax only works if around the first $50K of income for each person is exempted. Also, the tax needs to apply to all income, regardless of source. Even so, a flat tax will only enhance income inequality.

A NST only works under the following conditions:

- all basic medicines and over the counter drugs are tax free.

- all vegetables, certain dairy products, breads and related products, certain meats, and other essential foods are tax free.

- the first $600 - $1,200 of rent, depending on location, is tax free.

- the first $??? of an auto lease is tax free or the first $15K of a car purchase is tax free.

- All utility bills below $400 are tax free.

- Medical insurance is tax free.

- and so on, you get the idea.

But once again, a NST only increases income inequality.

You said "It was actually Clinton and the liberals that started the everyone should be able to own a home." - No, you have to go back further than that. The affordable housing project started right after WW II with President Truman and carried forward by each President and Congress after that. What Clinton attempted to do was end discrimination in who got loans. The program never required banks to give loans to people who couldn't afford them, but it did make them stop discriminating in who they would give them to out of the group that could afford them.

As to the subprime loans, it wasn't until the non-banks got into the market in 2004-5 did bad subprime started to go bad because the non-banks didn't care if the people they gave mortgages to could afford them or not. It wasn't conventional banks and it wasn't Freddie Mac and Fannie May, they ended up being a minor player in the end, that made the large percentage of bad loans, it was the non-regulated non-banks.

Au contraire, the gov't did quite a few things to prevent a repeat, like bring the non-banks under government control. But, they didn't do the critical thing, reestablish the Glass-Steagall Act.

You said "Speculators can also adversely affect the market, especially the commodities markets" - this is a truism that Conservatives refuse to believe.


bradmaster from orange county ca 2 years ago

My Esoteric

You wrote

You said "Even as an insurance, you don't keep changing the contributions ... " - When's the last time the contribution rate has been changed? When changes are made to the program itself, like pushing back the age to draw a retirement it applies people a long way from drawing. While it doesn't begin with new wage earners, it goes far enough back to be reasonable. Unlike normal insurance policies, SS is a public program with a specific purpose of providing a safety net for society, therefore the rules have to be different. (There is a move afoot to stop taxing wage earners once they start drawing SS.)

bm:

Today, the safety net is needed way before the retirement age.

An insurance policy is way different than SS, as it is owned by the person, and its terms are set, and the death benefit is more than $255.

--------------

You wrote

Actually, the gov't does manage FERS; they set the rules and regulations the private contractor they hire to manage the program must follow; the contractors don't make independent decisions about the program.

bm:

Why should FERS have a private manager, while SS is managed by the government.

-------------------

You wrote

You said, " That is what they do with IRAs and 401ks." - but I and the company have a choice. For example, we just started paying the fee for the SIMPLE IRA program we have for our employees. I suspect, employers do that for the executives of there firms as well.

bm:

If the SS from the employer's FICA contribution was given to the employee under the 401k, they would do better than what they get from SS.

---------

You wrote

If you don't use income as a base, then the gov't has no vehicle of taking the money the wealthy took from the poor and giving it back to them. In terms of fairness, a Flat Tax only works if around the first $50K of income for each person is exempted. Also, the tax needs to apply to all income, regardless of source. Even so, a flat tax will only enhance income inequality.

bm:

A consumption tax get back the money from everyone that consumes. And it is done equally as a percentage. I don't favor a Flat Tax because it only changes the rate variable, not the bureaucracy.

-----------------------

You wrote

A NST only works under the following conditions:

- all basic medicines and over the counter drugs are tax free.

- all vegetables, certain dairy products, breads and related products, certain meats, and other essential foods are tax free.

- the first $600 - $1,200 of rent, depending on location, is tax free.

- the first $??? of an auto lease is tax free or the first $15K of a car purchase is tax free.

- All utility bills below $400 are tax free.

- Medical insurance is tax free.

- and so on, you get the idea.

But once again, a NST only increases income inequality.

bm

Actually, it is fair just to use the existing rules currently applied to state sales tax. No one is complaining they are unfair.

How could you possibly increase the current inequity?

--------------------

You wrote

You said "It was actually Clinton and the liberals that started the everyone should be able to own a home." - No, you have to go back further than that. The affordable housing project started right after WW II with President Truman and carried forward by each President and Congress after that. What Clinton attempted to do was end discrimination in who got loans. The program never required banks to give loans to people who couldn't afford them, but it did make them stop discriminating in who they would give them to out of the group that could afford them.

bm:

If what you say was true then the housing bubble would have happened decades before. The loans that were allowed, and supported by Freddie and Fannie were mostly ones to people that couldn't afford them. They were creative insults to the concept of loans. The help of the FRB allowed these loans to not collapse immediately by artificially and for the reason of not collapsing the loans by raising interest rates.

This is not a partisan argument, the entire congress, and president Clinton and especially president Bush were part of the problem.

There would have been no economic meltdown with the start that happened during the Clinton administration, and it couldn't have continued with the support of the Bush administration and congress.

You would have to call not being able to afford home ownership as the discrimination that was eliminated. Yes, poor people can't own a home, and middle class people can't own a Yacht, or a mansion.

-----------------

You wrote

As to the subprime loans, it wasn't until the non-banks got into the market in 2004-5 did bad subprime started to go bad because the non-banks didn't care if the people they gave mortgages to could afford them or not. It wasn't conventional banks and it wasn't Freddie Mac and Fannie May, they ended up being a minor player in the end, that made the large percentage of bad loans, it was the non-regulated non-banks.

Au contraire, the gov't did quite a few things to prevent a repeat, like bring the non-banks under government control. But, they didn't do the critical thing, reestablish the Glass-Steagall Act.

bm:

Too little too late.

And why wasn't the GS act the first thing that they brought back?

Also Freddie and Fannie were up to their necks in causing the problem.

-----------------------

You wrote

You said "Speculators can also adversely affect the market, especially the commodities markets" - this is a truism that Conservatives refuse to believe.

bm:

Well, I am not partisan, I just opine on the situation, and who or whatever is responsible.

BTW,

There is no way to bring the Red and the Blue partisans to any shade of Purple. So, by doing the search for which party is guilty doesn't change the result, nor does it change the course of the future.


My Esoteric profile image

My Esoteric 2 years ago from Keystone Heights, FL Author

SS is a behemoth compared to FERS. SS is an example of a gon't function that can't be outsourced at a cost savings while FERS is.

An annuity is also an insurance policy. SS is not a life insurance policy. Also, I didn't say SS IS an annuity (insurance), I said it acts like one.

Personally, I seriously doubt that, except for a small percentage, people would do better using their FICA in a 401K plan. The biggest reason is they don't get all of the non-annuity related benefits that come with FICA payments and the second reason is that what ever nest egg they manage to build up is finite, SS is not. 401ks are not a safety net, SS is.

People, by and large, are terrible money managers; that is why 85% of my employees do not participate in our SIMPLE IRA program. Why do you think these same people would manage their 401k's properly? Hell, even my CEO left her contributions in a money market account because math, accounting, and finance beyond the simple stuff are beyond her capability, she, and the majority of Americans are just like her, aren't hard-wired to understand finance.

Let's say you live in a state that has a sales tax for virtually everything, and there are several states like that. (Then again, there are some states that have no sales tax at all; which one are you going to choose as a model?)

Anyway, let's further say you are a family of 3 (single mom, dad died) living in Omaha, NE earning $10.10/hr (they raised the min wage). That means you earn $21,008/yr. Take out FICA and Medicare but add in EITC ($5,400) and you are up to $24,800.

Obviously, there will be no income tax. In fact the $5,400 in EITC will disappear under your plan. So you just lowered her income to $19,400. Now, input to my hub on the subject says a family of three (it presumes a man, wife, and kid), currently stands at $31,600 minimum to just survive in Omaha. OK, our lady doesn't earn that much so it is reasonable to assume she spends the entire $19,400 on supporting herself and three kids.

Now, the CBO has calculated an NST of 20% would be needed, while other studies have suggest anything above a 10% rate will run into serious compliance issues. But let's use 20%. What does that do to our poor lady?

Why it reduces her real income to after subtracting out the $3025 for NST on $15,123 (of which $989 was NE sales tax) in purchases of 1) rent, 2) transportation, 3) utilities, 4) school, and 5) laundry. The remainder goes to non-taxable food at $1.50 per person per day (the hub currently has about $10 per person per day) . What wasn't accounted for is medical, minor entertainment for her or her kids, personal care, clothes, and other.

Therefore, in this common situation, you effectively "taxed" this lady and her kids $8,405 and driven her onto the welfare rolls if she wasn't already there at min wage. Was this your intention?

Now let's briefly look at someone who earns the average wage in America, a little more than $21/hr. or $40, 463 after payroll taxes. Take the same mother and 2 kids. After spending the low end minimum of what it takes to survive in Omaha, $31,600 + $2,067 taxes = $33,812, the NST slice would be, after subtracting out $10,585 for food, our lady gets to pay $4,645. In all likelihood, with two kids, her income tax bill would be around $1,500 or less.

So again, you have increased her tax burden by at least $3,145 (and look who got taken to the cleaners even worse, the lower paid workers). Further, instead of having $5,396 left over for savings or to do things above and beyond the basic necessities of life, they now only have $2,251.

Again, is this what you intended? As to moving up the chain, there aren't very many jobs available to move into that doesn't require specialized training or promotion to management in larger companies. Even at $16/hr, still a barely surviving wage for a family of 3, many of the jobs require specialized training beyond a high school diploma.

The NST is anything but fair the way you propose it.

You said " The loans that were allowed, and supported by Freddie and Fannie were mostly ones to people that couldn't afford them." - That is simple not true. Even during the worst of the 2004 - 2007 period, Freddie and Fannie had limits, granted very loose ones, but still it was nevertheless noticeably harder to get loans from them than it was through the non-regulated financial institutions. Freddie and Fannie "never" had "NINJA" loans (no income, no job, or assets), but the non-regulated investment banks did. F&F always required proof of income and proof of jobs before accepting loans. What changed with them is that instead of having a 38% debt to income they loosened it to something much higher; things like that, but never programs like NINJA. That is why from 2007 on, their subprimes performed MUCH better than did the non-bank subprimes which "swamped" Freddie and Fannies loan portfolio by 2005, I think it was. (I wish they allowed underlines.)

But to your point about bubbles, prior to bank regulations which began in 1937 and ended in 2000; America experienced bubbles of one sort or another (normally real estate, but not just housing, often land) about every five to six years, non-stop for over 100 years. The least of the subsequent recessions was of the order of the one we had in 2008; the worst was in 1929 with three others which came very close in severity.

I have no idea why GS wasn't brought back, other than the Right would have filibustered it; but, it didn't even look like the Left even tried. I am shaking my head.

Freddie and Fannie definitely were a player, but in my opinion, unwilling. Much of what they did was to keep up with the non-banking sector or go under. I guaran-damn-tee you that had there been no non-banking sector, there would have been no Great Recession; instead, it would have been just a run-of-the-mill recession we have been use to since 1950.


My Esoteric profile image

My Esoteric 2 years ago from Keystone Heights, FL Author

As to you last statement, today it is true. In times past, including when Thomas Jefferson took office, it was true. But, in time, it always seems that the public gets fed up and changes the mix of government.

The one thing that has to go, however, is the ability to gerrymander.


bradmaster from orange county ca 2 years ago

My Esoteric

We differ on the core of the government problem, and that is the two party system that is divergent, ineffective for the public, while very accommodating to their financial backers and third party interests.

By being loyal party members they have given their party the power of the people. The two party system has worked against the people and the country for over sixty years.

The decline of the US can be tied to the watering down of the US Constitution, a failure of the three branch government system in controlling the runaway power of one branch.

The list goes on, and every decade the government increases its size and scope, making the states redundant, and impotent.

It should be clear that the divergent goals of the democrats and the republicans cannot be resolved in congress, or in the country. It is political segregation in congress, and there is no common American interest on which they can agree.

The United states has been mutated to the Controlling and ever spiraling Central Government.

If we were to look for the trail that led us to where we dismally sit today as a country, one only have to look at the lack of accomplishments of the federal government, and specifically the congress.

The safeguards of the country have been rendered inoperative, and the country is headed towards critical mass.

The country has lost its intelligent voters, and it has been replaced by the Vote column A or column B.

The party system also reduces the chance of presenting better qualified candidates instead of party picked favorites. So, in the last several decades most elections have been voting for the lesser of two evils.

Voters have become sheep, and vote for congressional candidates as if congress was two sports teams. They profess team loyalty to their party, and blame the other pseudo team for the failure to win games.

Instead the voters should be picking a single team for congress that is more like picking the players for an All Star game


bradmaster from orange county ca 2 years ago

My Esoteric

You wrote

SS is a behemoth compared to FERS. SS is an example of a gon't function that can't be outsourced at a cost savings while FERS is.

bm:

SS is a tax disguised as a benefit. It can and should have been implemented similar to FERS.

FERS is an expensive benefit paid for with taxpayer dollars. SS should have been the plan for the entire country not just the private sector. It should have been more like a 401k plan than under the control of government.

--------

You wrote

An annuity is also an insurance policy. SS is not a life insurance policy. Also, I didn't say SS IS an annuity (insurance), I said it acts like one.

Personally, I seriously doubt that, except for a small percentage, people would do better using their FICA in a 401K plan. The biggest reason is they don't get all of the non-annuity related benefits that come with FICA payments and the second reason is that what ever nest egg they manage to build up is finite, SS is not. 401ks are not a safety net, SS is.

bm:

SS is not owned by the people as is FERS. The age for SS was set so that most people would die before getting much of the benefits. And now that people are living longer, it is corrupted that scheme. This resulted in SS having its minimum age being pushed up. With FERS, contributions are set to a time limit, and the benefits are set, and they are privately managed, and unlike 401ks they cannot be corrupted by the economy, as they are backed by the government giving the defined benefits.

----------

You wrote

People, by and large, are terrible money managers; that is why 85% of my employees do not participate in our SIMPLE IRA program. Why do you think these same people would manage their 401k's properly? Hell, even my CEO left her contributions in a money market account because math, accounting, and finance beyond the simple stuff are beyond her capability, she, and the majority of Americans are just like her, aren't hard-wired to understand finance.

bm:

So you are saying the private managers cannot protect the simpletons.

------------

You wrote

Let's say you live in a state that has a sales tax for virtually everything, and there are several states like that. (Then again, there are some states that have no sales tax at all; which one are you going to choose as a model?)

BM:

The best model.

---------------

You wrote

Anyway, let's further say you are a family of 3 (single mom, dad died) living in Omaha, NE earning $10.10/hr (they raised the min wage). That means you earn $21,008/yr. Take out FICA and Medicare but add in EITC ($5,400) and you are up to $24,800.

Obviously, there will be no income tax. In fact the $5,400 in EITC will disappear under your plan. So you just lowered her income to $19,400. Now, input to my hub on the subject says a family of three (it presumes a man, wife, and kid), currently stands at $31,600 minimum to just survive in Omaha. OK, our lady doesn't earn that much so it is reasonable to assume she spends the entire $19,400 on supporting herself and three kids.

bm:

You also advocate increasing the minimum wage. And the state sales tax already do that to this family.

----------

You wrote

Now, the CBO has calculated an NST of 20% would be needed, while other studies have suggest anything above a 10% rate will run into serious compliance issues. But let's use 20%. What does that do to our poor lady?

Why it reduces her real income to after subtracting out the $3025 for NST on $15,123 (of which $989 was NE sales tax) in purchases of 1) rent, 2) transportation, 3) utilities, 4) school, and 5) laundry. The remainder goes to non-taxable food at $1.50 per person per day (the hub currently has about $10 per person per day) . What wasn't accounted for is medical, minor entertainment for her or her kids, personal care, clothes, and other.

bm:

It is not an issue for state sales tax, so it shouldn't be anymore of an issue for NST. The exclusions for necessities for the poor would counteract the taxes that they pay for booze and tobacco

----------


My Esoteric profile image

My Esoteric 2 years ago from Keystone Heights, FL Author

So you see the multiparty system of say France, England, Italy, etc as a better system?

Where you see the Constitution being "watered-down", I see it as "changing with the times".

No, I think the intelligent voters are still there, but intelligent people tend to be more reflective and silent than dogmatic and ideological ones. So long as gerrymandering is kept legal, the intelligent voter will be gerrymandered to the sidelines leaving us with what you describe.

If you are suggesting a "No Party" system, our founders tried that when they created the Constitution and George Washington insisted on it for his first two terms. You see how well that turned out. Human beings simply aren't built that way, we are engineered to compete and fight one another.

Male humans are little different from male chimps in that regard. What has let us become as civilized as we are is the ability for some to see further into the future than others and have the capability to both understand and devise a social system that mitigates male aggression ... sometimes.

I really wish we had descended from Bonobo's rather than their cousin the Chimpanzee. The Bonobo society was a much more egalitarian society than the aggressive, hierarchical one of chimps.

"Voters have become sheep, " - I think you read my Right-wing Authoritarian follower hub already. It applies the Left, as well as the Right, just to a lesser degree. Gerrymandering takes full advantage of that characteristic in some humans.

Ah, your last statement says you like the English system where they do just that, pick a team. The team picks the candidates; the voters have no say in the matter. To me, that is turning the Constitution on its head.


bradmaster from orange county ca 2 years ago

My Esoteric

You wrote, continued

Therefore, in this common situation, you effectively "taxed" this lady and her kids $8,405 and driven her onto the welfare rolls if she wasn't already there at min wage. Was this your intention?

bm:

I am more interested in the middle class that is disappearing into the class below it due to the Income Tax and their failure to take advantage of the IRC as do the wealthy.

This woman you mention had to be on the welfare and food stamps rolls already. The poor are protected by the numerous social government programs, but the middle class is not.

The income tax system is Draconian and it favors the wealthy because they have the IRC, the middle class doesn't, and the poor don't pay taxes.

----------

You wrote

Now let's briefly look at someone who earns the average wage in America, a little more than $21/hr. or $40, 463 after payroll taxes. Take the same mother and 2 kids. After spending the low end minimum of what it takes to survive in Omaha, $31,600 + $2,067 taxes = $33,812, the NST slice would be, after subtracting out $10,585 for food, our lady gets to pay $4,645. In all likelihood, with two kids, her income tax bill would be around $1,500 or less.

So again, you have increased her tax burden by at least $3,145 (and look who got taken to the cleaners even worse, the lower paid workers). Further, instead of having $5,396 left over for savings or to do things above and beyond the basic necessities of life, they now only have $2,251.

Again, is this what you intended? As to moving up the chain, there aren't very many jobs available to move into that doesn't require specialized training or promotion to management in larger companies. Even at $16/hr, still a barely surviving wage for a family of 3, many of the jobs require specialized training beyond a high school diploma.

bm:

The poor are protected, the middle class is not, and the wealthy get richer. That is due to the effects of the Income Tax system.

The low paying jobs due to people not having an education is the result of the failure of the government not doing their job.

This is the age of technology, not the fifties in the South. The only reason that we need an income tax is to feed the ever growing and ever consuming government. Reducing the scope and size of the federal government and restoring those functions that should be in the states back to them. This would reduce the duplication of state and federal taxes for functions that belong in one but not both.

-----------------

You wrote

The NST is anything but fair the way you propose it.

bm:

Yes, it is not fair to the wealthy because they wouldn't be able to hide their consumption through the IRC.

What is not fair is being taxed to grow an already Obese and an impotent federal government.

-----------------------

You wrote

You said " The loans that were allowed, and supported by Freddie and Fannie were mostly ones to people that couldn't afford them." - That is simple not true. Even during the worst of the 2004 - 2007 period, Freddie and Fannie had limits, granted very loose ones, but still it was nevertheless noticeably harder to get loans from them than it was through the non-regulated financial institutions. Freddie and Fannie "never" had "NINJA" loans (no income, no job, or assets), but the non-regulated investment banks did. F&F always required proof of income and proof of jobs before accepting loans. What changed with them is that instead of having a 38% debt to income they loosened it to something much higher; things like that, but never programs like NINJA. That is why from 2007 on, their subprimes performed MUCH better than did the non-bank subprimes which "swamped" Freddie and Fannies loan portfolio by 2005, I think it was. (I wish they allowed underlines.)

bm:

Then explain how these loans failed along with the other loans?

And why did the FRB feel that it was necessary to keep the interest rates artificially low for years?

The FRB in my opinion was working with the government to produce these shoddy loans. and had the interest rate been allowed to increase, all these loans would be in jeopardy.

These loans removed the foundation of conservative financial investing concepts, merely to satisfy a purely political agenda.

The federal government fostered the bubble and it killed the economy. Where were your economists that could have prevented this bubble in the first place?

--------

You wrote

But to your point about bubbles, prior to bank regulations which began in 1937 and ended in 2000; America experienced bubbles of one sort or another (normally real estate, but not just housing, often land) about every five to six years, non-stop for over 100 years. The least of the subsequent recessions was of the order of the one we had in 2008; the worst was in 1929 with three others which came very close in severity.

I have no idea why GS wasn't brought back, other than the Right would have filibustered it; but, it didn't even look like the Left even tried. I am shaking my head.

bm:

The dot com and sub prime bubbles were different than all the others because the government made the changes necessary for them to exist. These were major changes that were developed and didn't exist before.

The 1929 depression was cause by margin calls. While it was a flaw in the system we didn't learn from it.

Changing the separation of financial institutions to compete with each other was less than brilliant. It should have been shot down in its inception, but once again, the government isn't that smart.

That doesn't mean that government workers are not smart, but that politicians are not that smart, or they are too smart.

That is one my reasons why I oppose the growth of the size and scope of the federal government.

Theoretically, the government is supposed to protect the people, but in this case they became the people from which we need protection.

------

Freddie and Fannie definitely were a player, but in my opinion, unwilling. Much of what they did was to keep up with the non-banking sector or go under. I guaran-damn-tee you that had there been no non-banking sector, there would have been no Great Recession; instead, it would have been just a run-of-the-mill recession we have been use to since 1950.

bm:

I agree


My Esoteric profile image

My Esoteric 2 years ago from Keystone Heights, FL Author

You said "The rate of 'inequity of income' has moved up rapidly during the 'last six years', while the people are still on food stamps, still losing their homes, and still unemployed. The rates on the latter two are lowering, but only because the homes inventory of underwater homes are less, and many people are still out of work, but no longer getting unemployment. Once off the list, they are no longer a factor of unemployment statistics, even though they are not working.-- -

-- A couple things on that. I highlighted to points, one about how long income inequality has been rapidly rising and the other is that we are talking about income and not capital.

Inequality of both types, labor income and capital income, have been rapidly rising since about 1980 - 1985. The 2008 - 2013 period is just a blip on the long term trend.

While unemployment does count toward labor income inequality measurements, housing, being a capital asset, does not; even rents received from rental property do not; instead, they count as capital income (where even worse disparity exists, but that is more acceptable ... to a point).

Both labor and capitol income inequality levels were at tolerable levels from the end of WW II to around 1980. That was a period where nobody really complained about income, of either sort, inequality. The only complaint was about the rampant discrimination which led to the Acts of 1964 and 1965, and the intolerable condition of the poor in this wealthy nation for which there was virtually no support structure and independent support groups were at the same time discriminatory in who they helped and ineffective in any case.


bradmaster from orange country ca 2 years ago

My Esoteric

My point on the last six years is that the rate of inequity is increasing, not just continuing.

The adverse effects from this inequity has been predominantly to the middle class. The wealthy are getting wealthier, and the poor are seeing the middle class sliding into them.

It is the white collar worker that has been damaged, and they have no protection from discrimination.

Out of the protected class of discrimination only blacks have any real protection. The old, the fat and women have only tacit paper tiger protection. Then come the newbies on the block with alleged sexual orientation discrimination that is trumping all other discrimination.

But, once again the average white educated male has little to no protection against discrimination.

We saw that ineffectiveness of the Civil Rights Acts in bringing the level of the blacks up to the average. Integration didn't help them in education and they are not much improved today.

When we extoll the black prowess in sports and music no one balks at that generalization. But, when it is pointed out that blacks also excel in crimes, and being poorly educated, then flags are thrown on the play.

None of the above is an example of discrimination, they are merely examples of results from empirical evidence.

Even the white race is falling behind to the Asians in education. Today we are hiring a huge number of H1b workers from Asia because we are no longer developing hi tech workers.

Education has shown to be resistant to the accepted American government concepts of how to educate the people. So, like congress and politics the only salvation would be to develop a new paradigm to solve the problem.

    Sign in or sign up and post using a HubPages Network account.

    0 of 8192 characters used
    Post Comment

    No HTML is allowed in comments, but URLs will be hyperlinked. Comments are not for promoting your articles or other sites.


    Click to Rate This Article
    working