Nations Agenda™ - Constructive Political Thought
Informative articles and commentaries on government, economics, climate change, our times
Millennials, Seize the Future or Lose It All
 
Part 10 - Income Redistribution, Good or Bad?

Income redistribution is a hot topic, with the realization that the wealthy are getting wealthier, and the poor are getting poorer. CEO salaries are insane, and a major driver of this economic situation. Notably, worldwide, the upper 1% have over 90% of the wealth in the world, which makes people very uneasy.

More specifically to conditions in the US, “…the mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%… From 2009 to 2011, the mean wealth of the 8 million households in the more affluent group rose to an estimated $3,173,895 from an estimated $2,476,244, while the mean wealth of the 111 million households in the less affluent group fell to an estimated $133,817 from an estimated $139,896.

“These wide variances were driven by the fact that the stock and bond market rallied during the 2009 to 2011 period while the housing market remained flat.

“Affluent households typically have their assets concentrated in stocks and other financial holdings, while less affluent households typically have their wealth more heavily concentrated in the value of their home.” – Pew Research Center, A Rise in Wealth for the Wealthy; Declines for the Lower 93%

Refining those results to the top 3 percent, the top 3 percent of the income distribution received roughly a third of all income (not wealth) in 2013, while the top 3 percent of the wealth distribution held 54 percent of all wealth. – A Guide to Statistics on Historical Trends in Income Inequality. The Center on Budget and Policy Priorities.

Note: The Center on Budget and Policy Priorities has been accused of being “left-wing.” Despite that, their handling of statistics, while some have knocked them in the press, is very thorough and explained very well in the linked article. Judge for yourself.

The statistics are dizzying, and very confusing for most people. It’s difficult to know what they really mean, and what their impact on the economy and the poor is. More later in this article.

Business and economy drivers, historical and now

Expanding markets are a major business driver. When companies see their potential market is expanding, or when they see more demand for products, they increase production. Increased production increases the need for workers.

How expanding markets drive the economy was very evident after WWII. The Great Depression was ended by the war. And while war goods production wound down, returning GIs and growing families created a huge demand for homes, products, etc.

"The years from the end of World War II into the 1970s were ones of substantial economic growth and broadly shared prosperity.

  • Incomes grew rapidly and at roughly the same rate up and down the income ladder, roughly doubling in inflation-adjusted terms between the late 1940s and early 1970s.
  • The income gap between those high up the income ladder and those on the middle and lower rungs -- while substantial -- did not change much during this period." - A Guide to Statistics on Historical Trends in Income Inequality
  • "The cycle that began in 1940 was quite different in both duration and in driving force. The growth rate increased steadily for twenty-five years, then declined as steadily, and the movement was propelled almost entirely by fertility-the baby boom and its subsequent reversal, rather than immigration. The consequences of this population bulge have often been recounted: economic and social "crowding" as the baby boom members matured, competitive pressures within and among birth cohorts. Accompanying this population change after 1950 was an important change in household structure that figures strongly in the studies to be examined: a dramatic increase in female headed families. " - Social and economic change since the Great Depression: Studies of census data, 1940-1980
  • 1940 US population: 132.12 million
  • 1950 US population: 152.27 million (15% increase)
  • 1960 US population: 180.67 million (19% increase)
  • 1970 US population: 205.05 million (13% increase)
  • 1980 US population: 227.22 million (11% increase)
  • The golden era of increasing wealth for the average person didn't last. "Beginning in the 1970s, economic growth slowed and the income gap widened.
  • Income growth for households in the middle and lower parts of the distribution slowed sharply, while incomes at the top continued to grow strongly.
  • The concentration of income at the very top of the distribution rose to levels last seen more than 80 years ago (during the "Roaring Twenties")." - A Guide to Statistics...

What happened?

Inherent in what is happening is statistical distortion

"Abruptly, 1973 marked a watershed: the beginning of stagnation, inflation, and recurrent recessions until 1983, ten years of "a quiet depression." - Social and economic change

Partly, demographic changes happened. The surge in market demand in the 1940s - 50s, met a relatively stable but growing population in the 1970s, with only an 11% increase, and most of them teens.

Baby boom teens purchased transistor radios, music, clothes, and some cars, but not houses, appliances, boats... they didn't have the earning power to move the economy. It wasn't until the late-1970s that the baby boom generation began to make an impact on jobs, wages, and spending.

The following animated chart shows the population demographic changes. U.S. Population Distribution by Age, 1950 through 2050

A lesson from this is the dependence of companies on expanding markets. It is a difficulty faced by Europe for over a decade as population growth has stabilized, and we are now facing this in the US. The US has already crossed the threshold of not increasing the population by births, and during the Great Recession, birth rates plummeted. Population growth in both Europe and the US is from immigration and immigrant births.

To create ever increasing profits, companies have to expand their market, or raise prices, or come up with new products, or reduce production costs. They reduce costs through less expensive materials or new technology, or increase productivity, or cut labor through downsizing, increasing responsibilities, or mergers. Companies are currently not increasing productivity, even with technology, so cutting jobs through downsizing or mergers is what is happening.

Another major reason for the economic decline came about because of single family households. "Demographic changes have contributed to poverty, because the groups more likely to be poor-notably those living in households headed by women-have proportionately increased, while those less likely to be poor-those headed by white men of working age-have proportionately decreased." - Social and economic change

In 2009, the number of unmarried households crossed 50%. That badly skews the figures of household income. - Myths and Causes of Income Inequality

Individual income is a much more representative statistic. From 1947 to 2012 the middle person (median), real incomes rose just $11,000.00, landing at $26,989.00, while average (mean) individual real income rose $21,000.00, landing at $40,653.00. Russell Sage Foundation Chartbook of Social Inequality.

The big difference between the mean and average individual incomes raises the question, what is the real story. The story is probably reflected well in a graph on household income that shows that 40% of households have income from $5000 to 40,000.00, with the mode (most households) on that node of the graph at $15,000.00, while average income is around $50,000.00. - Income Inequality

Note on statistical sources. The Census Bureau's data on real median household income displays an increase of 8% between 1984 and 2011, while the Congressional Budget Office's (CBO) data on real median household income displays an increase of 29% over this period.

Note that the Census Bureau's data on real median household income displays an increase of 8% between 1984 and 2011, while the Congressional Budget Office's data on real median household income displays an increase of 29% over this period. Neither of these figures look at the mode, which tells the story better.

Importantly, IRS data doesn't include income from many low income individuals, nor does it include some non-cash (benefit) income. Census Bureau data doesn't include income above a certain level, nor any non-cash (benefit) income.

CBO data includes an adjustment to represent non-cash income, which includes food stamps, etc. CBO data, while accurate, distorts the picture of what is really going on in the economy.

The popular Piketty-Saez income measure doesn't include personal income coming from the public and private non-cash benefits.

No statistics are perfect. None of these figures look at the mathematical mode, which tells the story better. Many of the tables do use "percentiles," which are as useful a tool as mode.

So most households, in the 40% of households making in the $5000 to 40,000.00 range, are mostly making around $15,000.00 annually. Many of these households tend to be single female parents as head of household, who make lower wages.

Many things distort or confuse understanding of the statistics.

EITC distortion

Another factor, that distorts the statistics, is EITC. This is the annual payment that the IRS gives to low income households through their tax filings. It enables them to purchase a much needed appliance, buy a used car, get a medical procedure, pay off bills, etc. In 2013, 28 million received over $66 billion in EITC. This averages to $2,407.00 to each individual or household receiving EITC (Max is $6,143.00).

EITC also has the effect of lifting many people out of poverty, or who are close to poverty. So this distorts the poverty statistics, which have remained flat since around 1970. This is a mechanism of income redistribution. The top 1% (the very wealthy), pay 47.5% of the taxes in the US. While the safety net is wonderful and necessary, this disguises what is really going on in the economy.

Stock market distortion

The stock market, and the new business model, has a decidedly negative impact on the middle class. This is clearly deciphered in William Lazonik's book, "Sustainable Prosperity in the New Economy?"

Having worked as a field engineer and then manager in the high tech industry from 1965 to beyond 2005, and being familiar with the old economic business model (OEBM), and the new (NEBM), and with marketing, which I did toward the last of those years, I concur with Lazonik's conclusions.

In the 1960s and before, the business model for most businesses was to create products and services that benefited society, and rewarded all of the stakeholders, from employees to stockholders, and for stockholders that was primarily through dividends. CEOs and managers tried to use innovation to create new products, or improve old ones. Often employees retired with the same company.

Innovation takes a lot of resources, including market analysts, employees dedicated to design, and a development cycle that includes sometimes multiple years, and then marketing and advertising. It isn't a simple or inexpensive process, and you often have to develop several products to find one that is a market winner. But the reward is improvements in manufacturing costs for existing products, or new markets for new products.

Technology oriented companies came into fruition in the 1960s. They ushered in an era of a steady quest for low price labor, downsizing, mergers and acquisitions, and ever-rising stock prices, rather than dividends. This came to full potential in the 1990s.

In the NEBM, CEOs were rewarded with stock options, and the expectation of the stock market and board of directors was that the CEO would make the stock price rise. They would be rewarded with stock, so it was to their benefit, for both their job and their income, to make the price go up... every quarter.

This new business model, when widespread to most companies, was a disincentive to CEOs to innovate. Innovation takes a year or more and takes financial resources. Those resources could instead be directed to stockholders, and the year of development avoided. Financial resources resulting from downsizing could be directed to stockholders. A variety of dishonest mechanisms and gimmicks (such as stock repurchase) could be used to cook the books, and the result directed to stockholders or raise stock prices.

The people who suffered as a result of all of this stock manipulation, stock speculation, downsizing, importing cheap labor, replacing older expensive workers with new ones and eliminating pensions, exporting work to cheap labor in other countries, was the middle class, who were squeezed out.

The result that we are seeing today is that innovation is at a minimum, and stockholders are complaining that stock prices are not going up. While a lot of jobs are available, applicants don't match the desirable category of well trained and cheap.

Companies have relied heavily on Federal Government programs that fund university and other research and development in medicine and many other sciences. Not only are companies lagging behind in research and development, government funding has dropped off sharply. As a percentage of GDP, many other countries are investing much more. - U.S. R&D: A troubled enterprise

US Competitive Strategy distortion

For years, the cry has been for more graduates in math and sciences to meet the demand for high tech jobs. Even manufacturing, which is only 12% of the economy, uses a lot of high tech employees in manufacturing processes. The supposed strategy is that the US is a knowledge economy that the rest of the world can't catch up to.

The reality is that the average IQ is 100, I don't mean this in a demeaning way at all. People seek and get matched with appropriate jobs. About half the population doesn't begin to match the qualifications for many high tech jobs. The most common job in almost ever state is truck driver, and some of these have PhDs. In business, most jobs can be done by anyone with a 7th. grade education. But are we prepared for high tech?

On the other hand, we educate the world: Our competitors. Many countries do amazing things in high tech, in medicine, computers, etc. We exported manufacturing for all computers to other countries. IBM sold its entire computer line to China.

There is a huge mismatch between reality and what business leaders and legislators promote. And the business emphasis they support continuously drives jobs and wages downward. The Redistributive Consequences of Monetary Policy

While the outcry in business is that they have to cut costs because of competition, what appears to be happening instead is that CEO incentive to cut costs is simply driven by the stock market, to drive up the price of stock.

The kicker is, according to Lazonick, "...evidence suggests that, in the U.S. case at least, the stock market has been a relatively unimportant source of cash for corporate investment, except possibly in periods of rampant stock market speculation."

High stock prices encourage "merger mania," which is companies buying up younger companies that have been more innovative, and then grabbing their product and letting duplicate, or all, employees go.

I contend that companies would be better off using loans to expand. They pay those off instead of paying "rent" forever on ever increasing stock value.

Regulatory laws relaxed under Reagan, Clinton, and Bush, enabled much of this wild stock market activity. Everyone started investing in the 1990s, and received great rewards. With the dot.com crash in 2001, investors high on huge returns turned to housing, and speculators and poor business decisions created a destructive bubble whose collapse created the Great Recession of 2007. New regulations were put in place to prevent this from happening, but investment companies fought these, and many have been relaxed. They are talking about getting into bad paper again. It doesn't change.

The stock market has a destructive influence on the economy, and especially the middle class, by discouraging innovation and long term market strategy, while encouraging wage and job reduction, and creating a very unstable economy subject to speculation and bubbles.

Because the economic climate has not moved on, philosophically from Supply Side Economics - nothing has replaced it - the political climate isn't conducive to recognizing the problems created by how the stock market is currently operating. Too many people are invested in "get extremely wealthy" from high returns and wealth building, and too many politicians are paid by very wealthy donors to ignore it.

We are back to the "Roaring Twenties" in the number of extremely wealthy people, and the extreme disparity between wealthy and poor.

Citizens will have to either turn over the government through elections, or find ways to counter the stock market influence.

Does inflation hurt us?

According to Federal Reserve research, another factor in income redistribution is inflation. Inflation hurts the wealthy more than others, may help the middle class in some respects, and definitely hurts the poor. In total, inflation may redistribute money from the wealthy to the middle class. (I still think the Fed should target .5% inflation, not 2 - 4%, because of its impact on the poor.)" - The Redistributive Consequences of Monetary Policy

One example of a benefit of inflation is in housing. Historically housing has increased in price at a 2 to 4% annual rate (stopped during the Great Recession and following).

If you are a homeowner, with a $100,000.00 home and 4% inflation, your property increases in value in 5 years to $121,665.29. That's an enormous gain. The mortgage is the largest part of people's budgets, so other expenses, if they do appreciate at 4%, don't have as much impact.

The wealthy, on the other hand, disregarding property, if they have $1,000,000.00, they see it depreciate at 4% to $831,190.00 over the same period. They are more likely to have it invested in stock, so in the Janus Fund, which has no connection to me, just as an example, they can get 4 - 42% annual return, depending on how much risk they are willing to take and how well a sector does. </span><br />

The wealthy also take the risk that "tomorrow" their stock could crumble to 1/2 of what it is today. While the overall stock market "always goes up," if they invested in the wrong stock, they lose. Most investment funds move their investments regularly - it's very fluid, taking advantage of opportunities and avoiding low returns.

For IRAs (retirement funds), mutual funds return on average, 8 to 10 percent per year, well above inflation, although inflation takes up to 4% of that.

The wealthy also take the risk that "tomorrow" their stock could crumble to 1/2 of what it is today. While the overall stock market "always goes up," if they invested in the wrong stock, they lose.

Education Distortion

Advanced education, college or some college, is a prerequisite for some jobs. It is debatable whether a college education will lead to employment or higher salary, but for many jobs advanced education is required, and they generally pay more, with higher lifetime earnings and more interesting careers, that offsets the price.

While middle class incomes are declining, the cost of a college education has been going up at a similar double-digit rates to medical care, placing an education out of reach except for the wealthy.

Why is this happening? College professors, like doctors, are complaining that their salaries are barely keeping up, or going backward. The professor to student ratio has remained about the same. Assistant professors are commonly getting less than minimum wage.

Administrative costs, similar to hospitals, have been going up at a very rapid rate. That's the answer. Colleges have been investing their money in administrative positions: 235% increase. And it makes them un-competitive, but it continues anyway.  -Administrators Ate My Tuition

Economic Model Distortion

Economic modeling has never been an exact science. The economy often acts in ways that are not predicted.

The Fed currently uses GDP as its measure of economic success. GDP is The monetary value of all the finished goods and services produced within a country's borders in a specific time period. It includes consumer spending. It has major problems with accuracy during the winter months, and often has to be revised during the first quarter.

Is the GDP the right measurement tool? Are innovation and productivity the be all and end all of economic progress? Is consumer attitude a very important indicator?

The forecast for 2015 was for 2.5% GDP growth. That was the expectation. GDP fell .7% in the first quarter.

In this article, Shrinking Economy? No, but It’s Not Surging Either, a different picture of winter 2014/2015 is given that focuses on consumer income and spending. The picture is brighter than GDP indicates.

Tools continue to improve, especially after the Great Recession took economists by surprise. Economic modeling is done with various other tools. The New York Fed DSGE models use the New Keynesian Phillips curve—a, which shows the relationship between current inflation, future expected inflation, and real marginal cost.

Economist Mordecai Kurz, of Stanford University, developed an economic model that illustrates how wage increases would have shortened the Great Recession to 2.25 years, and resulted in full employment. - Stabilizing Wage Policy

We don't really understand some of the complex issues affecting the economy, and we have to restudy them as we learn more. The influence of inequality in income distribution appears now to have more effect on more prosperous economies than thought in the past. Complicated ties between inequality and growth.

In an unusual move, CEOs are actually asking for regulation concerning potential asset bubbles fueled by current low interest rates. A unifying approach to prevent asset price bubbles

Incomes and the slipping middle class

Since around 1973, real family incomes have remained stable on average, with no increase in purchasing power. But this statistic doesn't look at individual incomes, which would account for ~50% of households.

Note that the IRS tax structure encourages people living together to report taxes together - they pay less taxes - which would nullify a lot of statistical problems. However, those living together may also chose to ignore their living situation and if their income is low enough they don't have to file taxes, except to get a refund. No statistic is perfect.

The statistic that is revealing about the economy is what has taken place prior to and after 2007. Wages showed no growth for decades, and then in 2007 with the Great Recession, and subsequent "recovery," middle class incomes declined. During this same period incomes at the top continued an upward march.

The middle 60% of earners’ share of the national pie has fallen from 53% in 1970 to 45% in 2012. And The Decline Of The US Middle Class Is Getting Even Worse.

"The median income of the demographically defined middle class hasn't been as stable since the 1980s as the numbers suggest. It's 16% lower now than it was in 1989; relative to the overall U.S. median, it's down by 21%. To put it another way, the sociologically defined middle-class family ranked at the 55th percentile of U.S. income earners in 1989; by 2013 it had fallen to the 45th percentile. If you're riding in that car, it's a steep drop." - Why the middle class is doing even worse than you think.

The economy is repressing and damaging the middle class.

The bottom line, though, is the middle class hanging on the edge of poverty? The percentage of people at or near poverty has remained the same since 1995. The number of EITC recipients in 1995 was 19 million, with a population of 223 million, or 9%. Just prior to the Great Recession, in 2006, it was 23 million. In 2013, 27 million, in a population of 316 million, or 9%.

Note that to qualify for EITC, people are required to have income and file a tax return, and mostly required to have children. A growing number of people don't.

EITC qualification changes may have distorted the statistics.

Census figures may give a better picture of poverty than EITC.

Tax Distortion

Who pays taxes? - Tax Policy Center

Americans who don't pay any taxes: 14%. They are mostly elderly or young. The rest pay payroll. Payroll taxes are Social Security, etc. a total of 43% don't pay an income tax because their incomes are too low, they are too young to have income, or they are retirees.

The top earning 1% will pay 47.5% of the nation's income taxes. They don't pay a higher tax rate. Actually many find ways to pay lower rates than the middle class. They just earn so much income that this is what they owe.

What is often overlooked is that the upper 10% pay 70% of the national income taxes. That means they pay 70% of EITC, government employees, road maintenance, military costs, entitlement costs - all of the things that the government does except Social Security. The rest of us pay for 30% of government finances.

It's something to think about before deciding the wealthy should pay a lot more, or their income should be more constrained. Redistribution of wealth is already alive and well. More checks and balances, and restraints, on the stock market will reel some of this in.

Conclusion

The wide disparity between those at the top, and those economically suffering, is a major cause of concern. For some it is a call for class warfare. For some it's an appeal for more socialistic mechanisms in our economy.

Having reviewed a number of statistical analyses of what is going on in our economy, with a very wide scope, the picture it presents is not one of economic collapse, but troubling and significant trends that aren't destroying us, but are badly hurting us. Where the tipping point would be that would send the economy into a tailspin, isn't evident. The downward trend is troubling, and we may have reached the point where consumer spending can't support business, and the day may be now, pointed to by weak performance in the first quarter of 2015. Who knows?

Most people no longer believe in the American Dream and all that it promised. Two in three people born into the middle class will not achieve middle class incomes. Millennials are avoiding college and its high costs, and settling for a mediocre financial life, and not chasing higher paying jobs around the country. People have major problems financing a home, even though they actually pay more in rent, but in part because of insecure job positions and part time work for both spouses.

Statistics aside, this is reality: People are struggling. Financial institutions have nearly free reign to gamble and wreck the economy, and they want no controls over them. The idea that they can self-regulate is outlandish. They live for the rush of huge financial gain, and they are determined to get it at any cost. Most recently a group of huge banks were caught collaborating on foreign exchange rate fixing. In a private chat room they schemed and called themselves a cartel. The government fined them $5 billion, a pittance for them, for illegal financial manipulation, but it's just a cost of doing business - a gamble. Everyone knows they will do similar things again. It's a game. Ethically bankrupt. Scoff laws.

The stock market has a corrupting and corrosive effect on our society by wildly rewarding CEOs for short term gain, and ignoring long term sustainability. It discourages innovation. It encourages the downward push on wages and jobs, which are the lifeblood of our economy. It doesn't really have much purpose in our society except as an instrument of wealth creation and mergers. It badly needs controlled. I would prefer to see companies buy back all stock.

Wage stagnation for decades, and recent decline, is not the American Dream. Nine percent of people living at or near poverty is not the American Dream. The lions share of Fifty percent of households earning in the lower percentiles, earning around $15,000.00 - is not the American Dream.

The economy should be improving for the average person, and people should be able to afford medical costs, transportation costs, college costs, mortgage costs... but it is becoming increasingly difficult for people to afford these things. That's reality.

The solutions

Warren Buffet recently recommended expansion of EITC to include higher income people. But this is essentially socialism and makes more people dependent on government. The safety net needs to be improved in other areas, and making more people dependent on government for wage support should be a last resort.

If capitalism can't perform as well as socialism.... Capitalism has to be made to work, or abandon it for more socialistic practices common in other Western countries. If it can't perform to our benefit, it's pointless. It has not done well.

More has to be done to create new industries and reach full employment with good wages. More has to be done to dampen rampant speculation in the stock and commodities markets that destroyed the economy in 1929 (Great Depression), 2001 (Dot.com bust), and 2007 (Great Recession), and continuously pushes to eliminate jobs and lower wages. More regulation and monitoring are essential.

Specifically: There should be a moratorium on mergers and acquisitions. Stock benefits should be eliminated from CEO compensation as a conflict of interest in long term growth. High gains in the stock market should be taxed, whether gains are taken out or not. Transactions in the stock market should be taxed. The tax rate on stock market capitol gains should go back up. These things would turn the stock market from being a continuous drain (permanent rent on business) to actually being an economic benefit.

Expanding markets are a major driver of economic growth, and population growth is slowing, and there are too many downward pressures on wages and jobs. We need a different economic model.

More should be done to encourage new product innovation and basic research. Small to medium businesses should be given incentives to hire and to create new products, and to raise wages.

We also have to come to grips with the idea that it only takes so many people to support market demand, and with innovations, and Creative Commons that create and distribute products for nearly free, we may need a revolutionary new economic model.

People have to realize what is going on, in this very complex economy, and get involved. The problem won't solve itself, and the trend is downward. The current politicians in Washington, and in most state houses, aren't likely to address these problems at all - they are aligned with the wealthy and often funded by them. These politicians have to be replaced. People are going to have to start fighting for what they want.

Economic models by some economists, mentioned previously in this article, show that things like increasing wages would not only have shortened the Great Recession, it would have resulted in full employment and a much healthier economy. The policy of squeezing and eliminating, while it may be wildly popular in some circles for eliminating social programs, is just bad economics and we need to look at newer models and solutions.

The Economic Policy Institute called raising wages our central economic challenge, and created an initiative: Raising America’s Pay - Why It’s Our Central Economic Policy Challenge

Former Chairman of the Fed, Ben Bernanke, in his blog, addressed the role of the Fed in Monetary policy and inequality, and indicates that the effect of Fed policies on inflation have more negative impact on the wealthy, and the potential role of the government is more likely the right avenue for having more impact on this issue.

Redistribution is a viable solution that won't hurt anyone. See the Economics of Financial Redistribution on this site.

I put other solutions at Solutions – Part 6

Robert Reich got it right in this:

Comment 1: T commented in another forum:

Wealth and Income do confuse a lot of people. One of the biggest problem I have with a lot of articles is that they start with income (and only income taxes) and infer wealth.

One of the things I would say (looking at the article so far) is it says, "The Great Depression was ended by the war".... kind of true. I think it was delayed by the war. When you took 3M people out of the workforce and sent them overseas, and you shoot up spending by that much, you can get full employment. But those things only work during a common survival struggle. Coming off the war, we were prepared to go back to a NEW new deal, and bring the depression back. But thank goodness we said, "NO!".

Keynesians predicted that cutting spending that much, without government management would cause an even bigger return of the Great Depression. But it turned out Reaganomics won -- as he said, "In this present crisis, government is not the solution to our problem; government is the problem."... well that turned out to be the case. We never cut government intrusions as far and as fast as after WWII, and we had the massive success that came with that.

Of course it's more complex. I think a lot of it was just the psychology had changed. People that came back from the war had seen death, and destruction and horrible things -- so they had a thirst for life. They were willing to take risks, start their businesses, and compared the poverty they'd endured in the depression or war, they could put up a little deferred gratification to make businesses or succeed in a business. And the result was the end of FDR and the beginning of a successful era.

The income ladder didnt' change because the tax rates were still too damn high. So everyone cheated on taxes. We had offshore accounts and everyone rich had holding corporations that held their wealth. So the way we account is by personal income tax returns -- but no one rich paid those -- they had corporations doing everything for them and they paid the lower corporate taxes. So the numbers looked stable, because they were fake.

When Reagan flattened the tax code so that income taxes and corporate taxes were about the same, people stopped using shell corps and offshore accounts to do things and it LOOKED like income (and thus inequality) shot up. But it's complete bullshit. And known to be bullshit. CBPP either doesn't know this, and is clueless, or they're preying on the clueness of their readership to not call out this major modifier/caveat to their data.

The other big modifier is they're not looking at spending and debt.

One of the biggest scams of the post war era is Social Security. Since there were more people paying in than taking out, they used this surplus to pay off the war debt, and then they kept spending it on other things. But it was trillions (nay HUNDREDS of TRILLIONS) of liability that they were borrowing from the future and spending today. So sure, that gave the economy a kick, but the cost was going to be stagnation and a huge burden when the population bubble peaked. Guess where we are now?

So it's great that things looked good. But they only looked good to people who were accounting for all the hidden spending and borrowing. Since we're smarter and have hind sight, we need to include that in anything we say/write about the time.

So the economy slowed, but why? Because you can't borrow at that rate forever. Now we get to not only borrow at that rate, but we also have the added burden of having to payoff the debts (the promises they made), and that's suffocating our growth.

Chris V. replies, in another forum

If the top 10% earn 90% of the income, how come they only pay 70% of the tax? Yes, income distribution is alive and well, as it has been since the 70s. It's going to the top, out of the rest of our pockets, and out of the active economy, creating a greed-fueled stagnation.

And what's missing from this, as most conservative economic analysis, is corporate welfare. Loopholes, or deduction should have the intent of stimulating positive economic activity, such as the deduction used by the middle class for home purchase, health care, college, etc. But we're subsidizing Big Oil to the tune of hundreds of billions of dollars per year. We're creating incentives for corporations to increase the division of income. This while the conservatives complain about government spending that stimulates the economy.

What's the ratio of incentives for creation of green energy vs oil subsidies? Why does GE pay no taxes while people buying houses and cars can no longer deduct interest on those purchases?

Since corporations aren't investing in the economy, and consumers are, deductions should be directed downward to stimulate activity. This is why income redistribution works, and is a policy worth pursuing.

Wiser to follow models that worked, like before the 70s when the super rich, the ones most able to pay without crippling the economy, carried a much higher tax rate. This provides the government with the ability to invest in the economy, instead of concentrating power and treasure in those that are bringing this country, and the world, to the edge of financial ruin.

Dorian replied to Chris in another forum

Here is what I propose. Because the stock market has very little value to society, except creating wealth and retirement income, and it is a constant drag on the economy because companies pay "rent" forever on stock market values, we should turn the stock market into something that actually helps the economy. To do that, for transactions other than IRAs, which have caps, transactions should get taxed, and stock value gets taxed (currently it only gets taxed as capitol gain when withdrawn, and only 15%, unless there is a tax dodge). Most money in the stock market remains there. But I would rather see the tax money go to other parts of the economy, rather than directly to taxes.

Money that goes into the economy ends up creating jobs and raising wages. This also improves the stock market. It's a win win.

Chris V: Taxing transactions creates a disincentive for investment. Taxes on profits, dividends, and capital gains are a great idea.

Dorian: I want to discourage investment. I want the money going into the economy, not reinvested in the stock market. In the stock market, it does nothing.

Chris V: Because the money is idle? What investment opportunities does that create for the middle class?

Dorian: Exactly. Idle. Subject to market downturns where it evaporates. Companies mostly aren't using it for expansion. Speculators drive it up, and CEOs are rewarded for driving it up, even through just accounting and stock buybacks. It's a perverted system.

For the middle class, don't tax IRA transactions or gains (until funds are withdrawn, as it is now).

Chris V: Federal R&D funding is at a fifty year low, in a country that thrives on innovation. The gov't should immediately increase their funding of R&D through grants. Especially for green energy.

Dorian: Federal R&D funding is a problem. It is one of the main methods of innovation for companies, and companies are investing minimally in innovation also. In the last few years, innovation has ceased to be a market driver.

Are we maxed out on innovation? CEOs are not rewarded for that. Currently they are rewarded with stock options, and responsible for quarterly stock market price increases. This gives them the incentive to work toward short-term goals, use available funds to reward investors, and not invest money in innovation that may take a year or more to see happen. This raises the CEO's stock price - he is rewarded. It is easier to go buy some new innovative company and gut it.

Chris V: Corporate welfare and low gov't and private sector in R&D is helping us march backwards in relation to the rest of the world. We're falling behind and wasting our potential.

Dorian: Corporate welfare has to stop. Giving money to oil companies is not only ludicrous, it's harmful to the economy, especially individuals.