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

Not Easy Being Green

February 24, 2019

by Steve Stofka

Newly elected Democratic Rep Alexandria Ocasia-Cortez has introduced a House resolution that details a broad basket of long-term infrastructure and humanitarian goals titled a Green New Deal. Connecticut Senator Ed Markey has introduced the resolution in the Senate. Whether it makes it to the floor of either chamber for a vote is uncertain. Some of the attacks on the resolution have been on points that were rejected from the resolution but were raised in a Q&A passed around to some House members in the building of a political consensus (Note #1).

The aspirations behind these improvements echo the infrastructure dreams of a post-World War 2 America. Politifact recently summarized the various points (Note #2). The key characteristics of the infrastructure goals are “safe,” “efficient” and “clean.” Those characteristics are embedded already in thousands of laws and regulations – but with practical limitations. A flexible approach is key to achieving these goals.

This week, I’ll focus on the infrastructure goals, starting locally at the granular level. “Upgrading all existing buildings in the United States and building new buildings to achieve maximum energy efficiency, water efficiency, safety, affordability, comfort, and durability, including through electrification.”
Someone clumsily attached those last three words, but they are critical. The words may be read to include an electrical upgrade of all buildings. They may be understood to include all buildings which could be improved with new electrical service. The language may be interpreted as a call for building retrofits for solar power.

These are expensive retrofits, so it is important that this clumsy language be sold as an aspirational guide, not the model language of a law or an agency rule. Local building regulations often “grandfather” older buildings so that they do not have to meet more recent building guidelines if they passed existing codes when they were built or remodeled. Anything other than a gradual approach in this area will be doomed.

“Universal access to clean water.”
Shortly after WW2, the Federal government took an increasing role in regulating local water supplies and sanitation, while helping to fund improvements (Note #3). This Green resolution is a reaffirmation of those goals. After seventy years, many existing water systems need massive and costly improvements. A contaminated water supply forced the residents of Flint, Michigan to use bottled water for more than three years.

The key word in this goal is “universal” and how that word is read. An exodus of residents and industry from poorer rural communities have crippled their budgets and resources. Who will pay to rebuild the aging plumbing systems of these hollowed out communities? Within many thriving metro areas are rural communities who do not have a central water system or sanitation. Homeowners and commercial buildings rely on private wells and are responsible for the maintenance of their wells and septic systems. Poorer residents may not have the means to service their systems properly. Will proposed legislation subsidize those residents? Since the Clean Water Act was passed fifty years ago, state and local governments have been fighting a legal battle with the Federal government over improvements to the water supply. Without a deft approach, legislation would continue to keep the lawyers busy.

Smart grids, a more efficient electrical delivery system, is a regional goal that is a restatement of the EISA law created in 2007 (Note #4). Our existing grids are more than fifty years old and need upgrading to a system that senses and adjusts to the changes in the system load. It would enable more clean power alternatives. Federal legislation which mandates upgrades to existing buildings to implement this vision will be met with impassioned resistance. Shall all power lines and power stations throughout the country be upgraded to meet new standards?

In conjunction with a transition to smart grids, this Green resolution restates an earlier vision: “eliminating pollution and greenhouse gas emissions as much as technologically feasible.” In the years after WW2, there was talk that the country would transition to nuclear power plants, a source of clean, cheap energy. The accident at the Three Mile Island nuclear plant in 1979 disrupted that vision (Note #5).

“Clean, affordable, and accessible public transit, and high-speed rail.”
This was a 20th century goal whose implementation stumbled. In 1960, my family traveled by train from Chicago to Dallas. We enjoyed the passing countryside from the upper deck of an observation car on the train. When Amtrak was created in 1971 (Note #6), there was going to be a highly efficient and affordable rail network built throughout the country. We are still waiting. After 9-11, let’s face it – plane travel sucks. The U.S. has the finest rail transport for goods in the world. Why are we so bad at moving people by rail?

There are many reasons. Following WW2, America invested more in highways than railroads. Families fell in love with the individual freedom of their automobile. The public is more resistant to the Federal government’s exercise of eminent domain. When the Civil War Republican Congress passed the Railway Act in 1862, the Federal government took what land it needed, and gave vast tracts to railroad companies who became rich selling off the land after laying the rails (Note #7). The Federal government played a key role in creating the corporate America that now wields an extraordinary amount of political and economic control of our daily lives. The public is weary and wary of large Federal projects.

Sweeping Federal legislation to achieve these goals must overcome the constitutional design of the country which gives those in rural areas a greater say in policy than their numbers warrant. This design was a 19th century compromise between agricultural and industrial states. Until a Supreme Court decision in 1964, many rural states did not redraw their state electoral maps after each census. In some states, one rural vote counted the same as forty urban votes (Note #8). Fifty years later, the structure of many state houses is designed to weaken the power of urban voters within the state.

The infrastructure goals contained in this resolution are essentially Infrastructure 2.0, an update of 20th century dreams. As in the past, economic and political realities will present formidable obstacles. Next week, I’ll look at the humanitarian goals contained in the resolution.

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Notes:
1. Green New Deal article at the Hill
2. Green New Deal article at Politifact
3. Water and sanitation regulation after WW2
4. Smart grid
5. Three Mile Island 
6. Amtrak history
7. Pacific Railroad Acts 
8. Reynolds v. Sims reinforced the idea of one person, one vote