The Green Divide

March 24, 2019

by Steve Stofka

Half of the country’s voters live on 80% of the land, which the political analysts color red. Half of voters live on the remaining 20% of land, which is colored blue. The needs, values and outlooks of those in the red are not the same as those in the blue. As the country’s population continues to migrate from rural to metropolitan areas, the country becomes ever more divided. As economist Paul Krugman wrote this week, no one knows how to fix the continuing economic decline in rural areas (Note #1).

A person’s views on an issue may depend on the state they live in. In the past several decades, immigration has had much more impact on California and the southern states. In 1980, 15% of California’s population was foreign born, almost four times the national average of 4.3%. In 2015, that share had doubled for both California and the nation as a whole. However, the national average is only a third of California’s numbers (Note #2). How does the nation adopt a single policy toward immigration when there are such differences in circumstances?

Regardless of our different experiences and outlooks, we are dependent on each other. 20% of Americans are on the Social Security and Medicare programs (Note #3). 24% are on CHIP and Medicaid (Note #4). 40% of the two million farms in America receive subsidies (Note #5). The transfers of money between Americans has reached 14% of GDP.

TransfersPctGDP

In 1962, Ronald Reagan took a stridently conservative tone when he warned that the Medicare program being developed in the Democratic Congress would lead to socialism and the destruction of American democracy (Note #6). Having married into wealth, he could afford a dramatic interpretation of social policy. Few Americans hold such extreme views today (Note #7).

The reasonable arguments of today might look oppressive to future generations, and progressive ideas seem natural to our descendants. Our ancestors had different views toward slavery, racism, voting rights and social programs than we have today. What has not changed is our distrust of those we regard as “other,” and our desire to make our principles universal for our fellow Americans. We want everyone to play by our rules, or our interpretation of the rules.

In the debates on the ratification of the US Constitution, some asked what the terms “provide for the …general welfare” meant (Note #8). Was the new government to become a national charity? The Federalists argued for the inclusion of the term to give the government a degree of latitude in changing circumstances. The anti-Federalists argued that this new government would eventually become the home of beggars and lobbyists wanting to promote their own welfare as the “general welfare.” In the past century, the phrase has become a constitutional bedrock of Supreme Court precedent underlying social programs. A person could argue that the size of social welfare spending and the extraordinary power of lobbyists in Washington has proven the anti-Federalist’s case.

America is the land of debate because the Constitution was structured to promote debate. While Americans had a platform to argue with each other, it was hoped that there would be less bloodshed, rebellion, and dictatorship (Note #9). Some days we might be less sure of that premise. As the circumstances of urban and rural America diverge further, we will struggle ever more to reach consensus. Each side will feel the need to impose its will on the other.  As we debate these issues, we should be just as careful of our own instincts as we are about the instincts of those on the other side of the debate.

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Notes:

1. Krugman op-ed on lack of solutions for the economic decline in rural America
2. Four decades of immigration numbers – pdf page 6
3. 62 million Americans on Social Security and Medicare – numbers here
4. 74 million Americans on CHIP and Medicaid – numbers here
5. 39% of 2.1 million farms receive agricultural subsidies
6. Reagan warns against Medicare
7. During the debate before the passage of Obamacare, some Tea Party members advocated a return to the days when we just let old people die.
8. U.S. Constitution, Section 8.1 “provide for the common Defence [sic] and general Welfare of the United States” http://constitutionus.com/
9. Former colonies of Great Britain have struggled with free speech issues. South Africans has only had freedom of expression for twenty years . Canada still does not have complete freedom of speech

 

Green Debt

March 17, 2019

by Steve Stofka

Imagine a world where, each year, the U.S. government (USG) gave $1000 to each of it’s approximately 300 million citizens (Note #1). The annual cost of the program would be $300 billion, about $120 billion more than the 2017 tax cuts (Note #2). As it does every year, the USG would borrow the money and issue Treasury bills, which are traded around the world. Although there is more than $23 trillion of Treasury debt – a plentiful supply – there is not enough to meet world demand.

Let’s say that the American people spent 80% of that $300 billion each year and saved the rest (Note #3). Let’s also calculate a multiplier of 1.5 so that the extra $240 billion of spending generates $360 billion of GDP (Note #4), about 1.7% of last year’s GDP. The increase in GDP would return about $60 billion to the USG in tax revenues (Note #5). The net cost to the USG is $300 billion less $60 billion in additional tax revenue = $240 billion.

Will the slight increase in GDP each year generate higher inflation? Inflation occurs when too much money chases too few goods and resources. Efficiencies in world production of goods and services has caused a continuing deflation in developed economies. Against those headwinds, inflationary pressures will be modest.

At the end of ten years, this program would create an additional $3.5 trillion in U.S. debt, the same amount of debt that the Federal Reserve accumulated in 2008 to protect the jobs and bonuses of Wall St. bankers. The Fed still owns most of that debt (Note #6). Which is fairer? A program to distribute money equally to everyone or a program to distribute the same amount to a select few?

Implementation of such a program is unlikely but illustrates the lack of a moral rudder in our Congress. Self-branded fiscal conservatives in both parties promote the fiction that the Social Security and Medicare funds will “run out of money” at a certain date in the future. These funds are part of the Federal government and are nothing more than bookkeeping entries on the Federal government’s books. The Social Security Administration explains this: “[the funds] provide 1) an accounting mechanism for tracking all income to and disbursements from the trust funds, and (2) they hold the accumulated assets. These accumulated assets provide automatic spending authority to pay benefits” [my emphasis] (Note #7). The accumulated assets are paper IOUs from the government to itself so that Social Security benefits are beyond the reach of Congressional infighting and debate each year. When it was created, President Roosevelt called Social Security an insurance program because it was insured against Congressional tampering.

Republicans propose to privatize Social Security while Democrats propose additional taxes to “fully fund” Social Security. These schemes are built on accounting fictions and sold to the general public as prudent solutions. Will the trust funds run out of money? Congress can change this with a stroke of a pen. Just as they “borrowed” from the funds, they can “loan” to the funds (Note #8). Both parties are trying to convince voters that big changes must be made because Congress is too incompetent to make a small legislative change. Will voters buy this nonsense and let them keep their jobs?

Around the world, the value of US Treasury debt is more trusted than gold. It is more than a bond because it trades among commercial banks like currency. The U.S. enjoys a unique position. Its debt is a trusted part of the world’s savings. This country has worked hard and prudently to make the U.S. dollar the world’s money. Over the past century, the U.S. has managed its economy and debt better than other large developed countries. Let us take advantage of that position. Let’s stop the political ploys around Social Security and other federal entitlement programs. Let’s have a serious discussion about investing in building new schools and transportation solutions, as well as needed infrastructure repairs. Let’s stop posturing like buffoons and start behaving like the leader we are.

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Notes:

1. Census Quick Facts
2. Annual loss of tax revenue about $180 billion times 10 years = $1.8 trillion per CBO estimate 
3. Americans usually save about 5% of income.
4. More on fiscal multipliers. 1.5 is an average of various multipliers.
5. USG revenues average 17% of GDP.
6. Fed’s balance sheet over time. The Fed buys Treasury debt in the secondary market from large banks that buy the debt at Treasury auctions. The Fed continues to hold $1.6 trillion of mortgage-backed securities, the same kind of debt that led to the Financial Crisis. Current balance sheet.
7. Social Security Administration FAQ #1 on the nature of the funds . Also, see their page debunking SS myths promoted on the Internet
8. The Federal government pays below market interest rates for the money that it “borrowed” from the SSA funds. Decades ago, the interest rate was set at approx. the five-year average for funds “borrowed” for several decades. If 20 or 30 year rates had been used, the SS funds would be much larger. There would be no “crisis” to argue about.

Green Incomes

 

March 10, 2019

by Steve Stofka

Many Americans cross the street if they think a socialist program is walking toward them. We believe that the U.S.A. is the heart of capitalism, but recent history reveals that our financial and legal systems are based on socialism for the very, very rich.

In the past two weeks, I reviewed the infrastructure goals as well as the justice and education goals of the Green New Deal (Note #1). In Part Three this week, I’ll look at the income supports included in the resolution’s economic agenda.

“Guaranteeing a job with a family-sustaining wage.” This is yet another example of clumsy language used to state a goal that some might read as utopian. Some can group the first phrase as ” Guaranteeing a job with a family sustaining wage” meaning that all wages should have a certain minimum. That sounds like the language of Minimum Wage 2.0, but does that mean that each job should be able to support a family of four, or six, or eight?

Others might group the first phrase as “Guaranteeing a job blah, blah, blah” and read the intent as a platform point of a Socialist Manifesto. Is the government going to hand out jobs to everyone that wants one? Only if the government takes over some of the means of production and becomes the nation’s chief employer can it hand out jobs to anyone who wants one. That is the textbook definition of socialism. It is not enough to have good intentions. Clarity of language matters.

Why the clamor for more income redistribution? The real (after inflation) income of poor and working families has lost more than half since 1980. That might not surprise some readers. The trend is even broader and more insidious. Income data from the Congressional Budget Office (CBO) shows that even the top 5% of real incomes have dropped 30%. The real income of a ¼ million families – the very, very rich – have grown in that time. Here are some highlights from the data.

In 2015 and 1980, the number of poor households, or bottom 20%, equaled the number of rich households, or top 20%. In 2015, the government took money from each rich household and gave it to 5-1/4 poor households to raise their income by 65% (Note #2). In 1980, the government took money from each rich household and gave it to 10-1/4 households to raise their income by only 25% (Note #3).

Why did poor households need so much more support in 2015 than they did in 1980? Because their real incomes before transfers and taxes (BTT) lost more than 50% (Note #4). The real BTT incomes of the top 5%, the very rich, have lost more than 30% . It is only the very, very rich, the top 1%, that have fared well in this fight against inflation. Their BTT income has grown 15% in the past 35 years. The bulk of those gains have probably come from the top .1%, or less than ¼ million families.

Why? Where has the money gone? The high interest rates of the 1980s made the dollar so strong that manufacturers began to move their operations to lower cost markets in Asia. Japan kept the value of the yen low relative to the dollar and attracted much of this investment. The Japanese economy and real estate boomed. American exports of manufactured goods declined, and commodity prices crashed, destroying a lot of income producing wealth, particularly in rural areas (Note #5). Bankruptcies during this decade far exceeded those filed during the Financial Crisis ten years ago (Note #6). Older readers may remember the charity concerts to raise money for farmers (Note #7). Today, many commercial buildings in small towns throughout the country stand empty. As rural clinics and nursing homes close, people must move to urban areas where medical services are available (Note #8).

As real incomes declined in the late 1980s, households and governments borrowed to make up for the loss of income. Who did they borrow from? Financial institutions who managed the assets of the very, very rich. As the financial sector grew in proportion to the size of the entire economy, the top managers of financial firms became very, very rich themselves (Note #9).

In the past twenty years, lobbying by the financial sector has quadrupled (Note #10). It paid big dividends during the latest crisis. After the initial bailout by the Bush administration in the fall of 2008, the Obama administration brought in a team led by Robert Rubin, Larry Summers, and Timothy Geithner. The first two helped dismantle the safeguards between deposit banks and investment institutions during the Clinton administration. Geithner was a protégé of Rubin. All were deeply embedded in the interests of the banks, not the creditors and governments who had trusted the judgment of financial managers.

The lack of separation between deposit banks and investment banks helped spread a cancer from the investment banks to banking institutions throughout the world. As Obama’s Treasury Secretary, Geithner continued to protect the bonuses of top managers despite massive losses. To preserve the wealth of the very, very rich, the Federal Reserve loaded up their own balance sheet with toxic bonds bought at full value.

After a 35-year period of rising real incomes and wealth because of favorable fiscal and monetary policy in Washington –
after Washington protected their wealth and income during the financial crisis at the expense of middle-class families who lost their savings and houses –
it is time for the very, very rich to pay taxpayers back.
You have eaten well. Here is the check.

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Notes:

1. Politifact article
2. In 2015, the bottom 20% of households (24.3 million) averaged $20,000 in income before taxes and transfer payments. The top 20% (25 million) earned almost $300,000. After taxes and transfer payments, the incomes of the bottom 20% rose 65% to $33,000. CBO report on household income in 2015, updated Nov. 2018
3. Number of households underlying CBO report is in Sheet “1. Demographics” of Supplemental Data spreadsheet linked on last page of report. Dollar amounts are in Sheet “3. Avg HH Income”, of same spreadsheet.
4. The impact of high interest rates on investment and commodities during the 1980s Secrets of the Temple pp.590-604
5. Using BLS calculator to compare CPI January 1980 to January 2016 prices, $1 in 1980 = $3.05 at the end of 2015. Average income amounts from Sheet 3. See Note #3 above.
6. Four decades of bankruptcies chart at Trading Economics
7. Farm aid timeline
8. Nursing centers in rural areas are closing NYT
9. The financial industry’s increasing share of GDP
10. Increase in financial lobbying since 1998

Green Goals

March 3, 2019

by Steve Stofka

Last week I reviewed the infrastructure goals of the Green New Deal (Note #1). In Part Two this week, let’s look at the resolution’s re-commitment to justice and education, time honored themes of American life. Next week, I’ll review the income and health care proposals of the Green New Deal.

“Promote justice for all people.”
What Lincoln and the Reconstruction Republicans began in the 19th Century, President Lyndon Johnson (LBJ) hoped to fulfill in the 20th Century. President and Mrs. Johnson started the LBJ foundation in 1971, three years after he left office. In an ongoing commitment to the goal of justice for all, the foundation honors individuals who have demonstrated a dedicated pursuit of those values. Last year’s recipient of the foundation’s Liberty and Justice For All award was former Arizona Senator John McCain. (Note #2).

During his life growing up in Texas, LBJ witnessed the class/race warfare that many white Southerners took for granted. The un-Christian racism apparent for all to see in the southern states was almost as prevalent in northern states but cleverly disguised by implicit understandings among white Northerners. Urban housing maps were “redlined” to confine blacks to small sections of a city where they could purchase or rent housing. During his presidency, LBJ signed the Fair Housing Act to outlaw, if not stop, the practice (Note #3). Many Northerners who had adopted the moral high ground in their criticism of white Southerners continued to flee toward the suburbs (Note #4).

LBJ had to overcome opposition in his own Democratic Party to pass the Civil Rights Act of 1964 (Note #5). The Act struck down employment, credit and some housing discrimination prevalent throughout the country at the time. This point in the resolution is a reaffirmation of last century’s aspirations and legislation.

“Providing resources training and high-quality education to all people of the United States.”
This goal, first stated in the middle of the 19th century, led to the adoption of public education by all states shortly after the Civil War. By the end of World War 1 in 1918, all states had adopted compulsory education laws. During the first half of the 20th century, the country began Ed 2.0 as many states built secondary schools. When America declared war on Japan after Pearl Harbor in 1941, half of all young people had high school diplomas (Note #6).

After the war, the Federal government’s G.I. bill expanded access to college for veterans. This marked a new phase Ed 3.0 in American education, in which the Federal government took a greater role. During the post-war thirty-year period, the federal government and states expanded funding to traditional four-year colleges and universities.

In the last forty years, Ed 4.0 has been marked by the growth of community colleges within the states. This allowed more students affordable entry to a college education and promoted two-year degrees in applied training.

In Germany, where the government provides low cost or free higher learning, one third of high school students attend college. In Britain, the rate is one-half (Note #7). In the U.S., 2/3rds of high school students attend college (Note #8).

This goal in the Green New Deal marks a new phase in American Education: Ed 5.0. In the first two stages, the states were responsible for the development and funding of K-12 schools. The growing role of the Federal government in phases Ed 3.0 and 4. 0 worry those who have a well-grounded suspicion of the Federal government. In most areas, it is inefficient, slow to respond to a changing environment and dismissive of local concerns and standards.

These concerns should inform, not impede, this new phase of American education. Most states do not have the resources to build and maintain educational institutions that are global leaders. The Federal government must take the lead because the need is urgent. Mechanical Automation has replaced many blue-collar jobs but many of these jobs are still not cost effective to automate. Artificial Intelligence, or Intellectual Automation, is the greater threat and it affects low to medium skilled white-collar jobs.

Trends in Financial Sector employment illustrate the growing threat. A steady increase in employment from the end of World War 2 through the middle of the 1980s hit a ceiling as affordable computing became more available. Since that time, the percent of jobs in the financial sector has declined.

FinEmpPctTotEmp

A sharp mind, attention to detail and a knack for customer service are no longer a path into this sector. Programming jobs that paid the equivalent of $70,000 twenty years ago have been replaced by jobs paying $50,000. Common programming tasks have been automated. White collar employees will compete against AI systems that can be situated in any country. To compete against other industrialized nations, the white-collar workers of tomorrow will need to develop the magical talents of the human brain that are difficult to automate. That will require a large national re-commitment to education.

The high unemployment that characterized the Great Recession and Financial Crisis of 2007-2009 made it apparent to many job seekers that they needed some post-secondary education. Millions signed up for classes in community colleges, private colleges and public universities. Many took advantage of federally insured loans. Since 2006, student loan debt has almost quadrupled to its current level of approximately $1.6 trillion (Note #9). More than 11% of loans are delinquent (Note #10). Current law prevents the discharge of student debt in bankruptcy. Payments in default can be withheld from federal benefits like Social Security.

As the nation enters Ed 5.0, there will be much discussion and dissension over student loan forgiveness. Is it right that one person should receive an advantage over another person in the job market at taxpayer expense? These involve questions of moral hazard and fairness that provoke instinctual reactions in all of us. Compromises may include a debtor paying an additional percentage in taxes on wages above a certain threshold. We must not sacrifice the pragmatic concerns of a nation competing in the global workforce on the altar of our righteousness toward the actions of others.

By re-committing to traditional American values and ideals, this resolution can engage the public in a lively debate. What are our values? How do we attain our ideals in a practical and equitable manner? Do Americans need the passage of a resolution to spark argument? Heck no. This country was founded on argument and a consensus over how we should argue. The Civil War was our one horrible failure to argue with words. Thousands died in an argument using guns and cannons, not debate. Let’s hope that was our last failure to debate.

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Notes:

1. Politifact article on Green New Deal
2. Liberty and Justice For All award
3. Fair Housing Act 
4. White Flight to the suburbs
5. Civil Rights Act of 1964 
6. Education in the U.S.
7. 49% of British high school students attend college – Guardian article
8. 2/3rds of American high school students attend college – BLS data
9. Student loan debt series at FRED database
10. Student debt delinquency – Minneapolis Fed Reserve article