American Stagnation

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America has never been richer. Private assets amount to over $80 trillion, more than four times the national debt and the GDP. Yet the United States is regressing. That is not the opinion of a populist editor. That is the opinion of some of our best and brightest economists, as relayed to you by a populist editor.

Dr. Larry Summers, Dean Emeritus of Harvard University, former Secretary of the Treasury under Bill Clinton, is worried. He is worried that our country is in decline. He doesn’t put it that way. He only mentions politics infrequently and somewhat noncommittally but the comments have clear implications. We are allowing Right Wing political forces to diminish the growth of the United States economy for reasons that can only be seen as personal greed. There are constant reminders of the fact that, underlying all government obstructions of jobs, of infrastructure improvements, of social services, is the reference to “no new taxes.” Since Ronald Reagan took office and reduced government revenues by cutting taxes from 70% to 28%, the United States has grown by about 90 million people, more than a third. But government revenues have gone from 20% of GDP to 18% of GDP. How much is that? The difference is equal to about $340 billion, roughly the same as our annual deficits.

Larry Summers is a man whose life since age 28 has been spent teaching and working in the field of economics. He has held top posts at major institutions of learning and top posts in government involving economic matters. And he thinks we are becoming stagnant. In its simplest interpretation, this means that government is doing nothing to instill a desire or a need for growth among private investors and is, in fact, restraining the natural emphasis on growth by entrepreneurs. And why? Again, it is politics. Billionaires do not need to invest and they do not want to pay more taxes. In its basic form, that is why we are stagnant.

Why would a man be worried about an economy that has seemingly returned relatively well from the depths of the huge George W. Bush Honorary Second Great Depression? Why would a man so brilliant worry after a recovery from the mistakes of a man so stupid? With unemployment at 5.5% and the stock market at 18,000, why should he worry?

Well, of course, the answer is in the specifics of the way decisions are being made about the growth of the country itself. Statistics show that over 80% of all new income is going to those in the top 1%. Now, the top one percent of households are those above $380,000 or so in household income. That means that almost all income in a country of 310 million people is going to the top 1.3 million while roughly 150 million others in the workforce earned no new income. (It’s actually worse than that, according to Bloomberg News which says that the top 1% got 93% of all income growth.)

Here’s what it means. People on an average wage, let’s say $15 an hour working in a retail establishment, got no wage increases. In fact, some wages have gone down. But let’s say that they earned $15 an hour last year and the year before that. This year they are making the same $15 an hour. That is what has happened in the vast majority of workers’ cases. In the meantime, over the last several years, the stock market has been shooting up. So, the head of a giant corporation may have had the same salary of, say, $1 million but has stock options. Those stock options may have grown over the last 3 years by, let’s say, $50 million (a lot, but not an unusual amount.) If he sold $10 million of those shares this year, his income went from $1 million to $11 million.

Perhaps more important than the difference between the really, really rich and the rest of us is the difference between the upper-income families and the middle-income families. So an upper income family (man, wife and a child) would have an income of something like $114,000. A middle-income family (same size) would have an income of about $38,100 or a little higher. Each income is an average representation of that income class. It becomes clear immediately that the upper-income group has an income 3 times higher than the middle income group. Even more significant is the fact that the net worth, or wealth of an upper income family grew faster than that of a middle income family so that while income was 3 times higher, actual wealth grew to 6 times higher, creating greater separation between the two groups. The gap between middle-income families has increased substantially since the Bush Depression. While high-income families experienced growth in net worth, to over $630,000, the net worth of middle and lower income families remained the same, at $96,500 and $9,300 respectively.

So, in the beginning of 2015, research indicates that middle and lower income families have not recovered appreciably from their post-Bush Depression 2009 levels of income and wealth. On the other hand, not only have upper income families felt a positive change, they have both recovered and increased their net worth. This only reinforces both the income inequality that has been shown to have occurred in the last 30 years but even widens the gap between upper and lower classes.

In addition, the evidence is that the recovery from the details of the Bush Depression has not been as great as it should have been. Negative factors press down on the economy, suppressing growth while the natural cycle of economic activity pushes up. Consequently, the country needs to take a hard look at new methods of dealing with long-term employment. The stagnation in the economy is not only because of exogenous factors, but problems with structural unemployment.

Republicans have their theory. It isn’t really a theory at all. It is an attempt to placate their rich supporters and ingratiate themselves into the sectors where money flows and very few people ask questions except: “what have you done for me lately?” The Koch Brothers, Donald Trump, the corporations like Coca-Cola, BP Oil, EXXON, Kraft Foods who either are or were members of ALEC. (Many are dropping out because people have begun to realize that buying a coke or a piece of cheese was simply donating money to people who want to pollute, to cut Social Security and who want health care to stay private and expensive…if you can get it at all.) Republicans just want to do two things. One…cut taxes for the rich. Two…cut services (except the purchase of war materials and weapons) for the People.

The Democrats have a theory and it is not too bad. Their idea is maintain taxes where they are or raise them slightly on those who can pay and on corporations. Then, take the money and use it to close the budget gap and to restore a crumbling infrastructure that the American Society of Civil Engineers says is collapsing in front of our eyes. An alternative would be to place a small uniform surcharge on every product brought into this country by U.S. manufacturers who make it somewhere outside the United States. Not on products from foreign corporations, just on U.S. manufacturers who do not want to pay U.S. workers or U.S. taxes.

And finally, what incentive is there for U.S. industry to expand? If you are the CEO of a major U.S. corporation, you earn 300 times what the average worker earns—while trying all the time, every day, to lower those wages—and you do so with a corporation that has approximately one-fifth share of a stable market. You don’t want to rock the boat. You are being paid to overcharge the citizens of the United. States for cable television, for gasoline, for food, for appliances, for electricity, and now, in some areas, even for the water that comes out of the ground in a country in which you pay taxes…but that corporation selling you water—often doesn’t!

What incentive is there for a billionaire to risk his hard earned money? He has a billion dollars. If he has ten relatives, he can make each of them a millionaire ten times over and still have $900 million dollars left over. He doesn’t need to invest outside of the Stock Market. He or she can put his money into the market and be assured that it will never earn less than a given amount and that it will appreciate by a substantial amount. That is how it is done. The average man thinks of selling a product, something tangible, like radio or a watch. The billionaire makes money by allowing stockbrokers to use his or her money to buy and sell different kinds of products, pieces of paper that convey ownership of pieces of corporations or other securities. By trading back and forth, always moving up, they make large sums of money quickly, often without ever paying a dime of tax.

Between 1980 and 2006, the rich not only earned more in annual income, but also in their personal investments. In hedge funds you could (if you have the money to get in) have averaged 12% per year. With a good investment broker, (also costing lots of money) could have made 13.5% investing in the S & P 500. But investing is risky isn’t it? Well, that’s the idea of hedge funds. They are a hedge, supposedly, against failure and that is why something like $2 trillion dollars, from pension funds and university endowments and others seeking both high returns and security turn to hedge funds….if they have the large sums necessary to get in…to provide both. So the rich get richer while doing it in relative security.

So why invest in a solar panel company or a long-term battery company, or why even buy bonds to help a community resurface roads or strengthen bridges when you can invest in hedge funds here, or even invest abroad with perhaps even more tax advantages? Milton Friedman was right. People will always follow the course that they see as furthering their own self interest. Less risk, in this case, is that self-interest. And why is that? Because taxes are so low that billionaires keep over 80% of what they make. Since you, Mr. Billionaire, keep 80% or 8 dollars out of ten, and since you must pay some taxes anyway and need someone to help you do so, why not simply try to get out of paying another dollar out of ten or fifty cents or a quarter. After all, it all goes in your pocket. Or…if your people can find a Congressman who, for a relatively small amount, will help you cut your tax bill….why invest?

The problem with the country right now, and this is what Larry Summers is saying, is that there is no incentive to invest. There is no powerful group in Congress seeking ways to create more investment. There are no pieces of legislation that can pass Congress that would provide incentives for investment. We are not in a growth mode. Our government is promoting stagnation. And that is where we are today.