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Reich and Income inequality - Those rich are at it again
Posted by: McQ on Wednesday, February 13, 2008

Former Clinton Labor Secretary Robert Reich has a piece out in the NY Times in which he analyzes the economic situation, and, as expected, finds doom on the horizon unless we take his advice.

That's not to say he doesn't make some fair points within the piece. For instance, the median hourly wage is barely higher than it was 35 years ago, adjusted for inflation. Or the fact that the income of a man in his 30s is now 12 percent below that of a man his age three decades ago. Obviously stagnant or declining wages are not good economic indicators, and he is right to say they point to a much deeper problem than just the housing downturn.

He also points to why this has been a building crisis which has now come to a head. Since the median hourly wage hasn't shown much movement in many years, Americans have taken other steps to compensate for the lack of a growing household income. For instance, women entered the workforce in droves in the '70s making a 2 income family the rule, not the exception.

A second way they compensated was to work more hours. But obviously there are only so many hours in the day. And finally, he claims, Americans turned to credit with a vengence. The whole point, of course, was we've found ways over the decades to compensate for stagnant wages and to spend beyond our means. As an aside, the same is true for our government, as we all know.

So, accepting his explanation, where does he think the problem lies?

Wait for it - yes, you're right, he thinks it lies with the rich. You see, per Reich, most of the money has been going to the very rich and they, apparently, have been putting it in coffee cans and burying it in the backyard:
Most of what’s been earned in America since then has gone to the richest 5 percent.

Yet the rich devote a smaller percentage of their earnings to buying things than the rest of us because, after all, they’re rich. They already have most of what they want. Instead of buying, and thus stimulating the American economy, the rich are more likely to invest their earnings wherever around the world they can get the highest return.
What an awful thing to do. And I suppose the "highest return" they can find comes from thin air, huh? Or is it money trees which only the rich are privy too? What in the world does Robert Reich think "investments" are and what does he think invested money does? Sit there and magically grow without risk?

"Rich devote a smaller percentage of their earnings to buying things than the rest of us...?" What sort of cock-eyed nonsense is that, other than the typical class-warfare nonsense of the left? How does one turn plain old vanilla over-consumption and consumerism into the fault of the rich?

And, of course, the solution? Well, as you might have guessed, it can only come from, wait for it again - government - oh, and more unions:
A larger earned-income tax credit, financed by a higher marginal income tax on top earners, is required. The tax credit functions like a reverse income tax. Enlarging it would mean giving workers at the bottom a bigger wage supplement, as well as phasing it out at a higher wage. The current supplement for a worker with two children who earns up to $16,000 a year is about $5,000. That amount declines as earnings increase and is eliminated at about $38,000. It should be increased to, say, $8,000 at the low end and phased out at an income of $46,000.

We also need stronger unions, especially in the local service sector that’s sheltered from global competition. Employees should be able to form a union without the current protracted certification process that gives employers too much opportunity to intimidate or coerce them. Workers should be able to decide whether to form a union with a simple majority vote.

And employers who fire workers for trying to organize should have to pay substantial fines. Right now, the typical penalty is back pay for the worker, plus interest — a slap on the wrist.
Short version - the answer to decades of rampant over-consumption and overspending is to raise taxes on the rich, further empower unions and to punish employers who try to resist their interference and eventual cost. No talk about cutting spending and living within one's means, is there? Not when you can blame it all on the rich.

It comes as no surprise to me to find that Reich's piece was written in an academic setting within the warm liberal confines of UC Berekely.
 
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Yet the rich devote a smaller percentage of their earnings to buying things than the rest of us
How about this...

Instead of the government mandating higher taxes for the rich — the government could mandate that everyone (or just the rich) pay at least a certain percentage of their earnings to buy things!

Then no one could complain about the rich "devot[ing] a smaller pecentage of their earnings to buying things."

Problem solved (except for the government interference thing — but that part doesn’t bother Reich anyway)!

[\sarcasm]

How much is "fair" when it comes to spending your own money to buy stuff, anyway?
 
Written By: JWG
URL: http://
Instead of buying, and thus stimulating the American economy, the rich are more likely to invest their earnings wherever around the world they can get the highest return.
Right, because investing in company stock or freeing up capital for lending doesn’t help companies start up or expand. And companies starting up and expanding don’t tend to hire new employees or buy more resources and services from other companies, and the economy isn’t stimulated at all.

I guess since he was a Secretary of Labor he doesn’t understand how labor is dependent on capital formation.

Reich ought to be horsewhipped for that statement.
 
Written By: Steverino
URL: http://
Reich’s piece was steeped more in partisan politics than economic reality. Well, I guess you can’t blame a guy like that for trying to combine the two.

There has been substantial literature on purchasing power as opposed to inflation-adjusted wage rates. Does a teacher, for example, or a warehouse worker (both chugging along wage-wise) live worse, as well, or better than his counterpart of thirty years ago? Productivity has made huge gains over that time period, and most goods and services are substantially cheaper than they were.

Reich also skates past the idea of the top 5% earners. Who are they? Have the same SOB’s been sucking the cream off my paycheck for the last thirty years? A recent study of tax returns indicates that the top and bottom quintiles of taxpayers are an extremely fluid bunch. Most at the bottom are above that ten years later. Most at the top slip back within ten years (inheritances will do that).

This is stuff that he knows. So he must be writing what he writes for some other reason, maybe Secretary of Something.
 
Written By: Rich
URL: http://
That’s not to say he doesn’t make some fair points within the piece.
I agree that 2/3 of Reich’s proposed solutions are asinine, but the negative income tax was (I believe) first proposed by Milton Friedman, which in and of itself doesn’t make it a good idea, but it’s a lot better than food stamps, subsidized housing, subsidized student loans, etc. etc.

Given your acceptance that he makes some fair points do you have any proposals to address those points (legitimately curious, no snark intended)?
 
Written By: m.jed
URL: http://
How about the fact that 30 years ago, the man was a greater source of income compared with today. So, there was more pressure on them to earn more money as a means of getting ahead. If most needs are now met with two incomes, then there is less selective pressure. I believe that goes both ways, as the employer realizes this as well. It could also explain in part other things like how men with children to support make more money than those without (selective pressure, that is).
 
Written By: anomdebus
URL: http://
For instance, the median hourly wage is barely higher than it was 35 years ago, adjusted for inflation. Or the fact that the income of a man in his 30s is now 12 percent below that of a man his age three decades ago.
how much median wage increase can be expected? would it not also factor into inflation? Aside from that, does using the 70s as a baseline really give sufficient context?
 
Written By: meh
URL: http://
Given your acceptance that he makes some fair points do you have any proposals to address those points (legitimately curious, no snark intended)?
While I accept some of his points as valid, I don’t necessarily feel they address the real problem (although he hints at it) nor is there a "fix" that can be made by others. Instead I ended my critique by saying:

No talk about cutting spending and living within one’s means, is there?

That comes off as somewhat simplistic, but it more directly addresses the problem than anything Reich puts forward.

The problem isn’t ’the rich’, or taxes or lack of unions. The problem, as I see it, is a cultural propensity for living beyond our means for decades and finally being caught in the inevitable credit crunch such living eventually brings. Or said another way, the bill has come due.

There aren’t many pretty or painless ways around the problem, and frankly, I’m not so sure there should be. Bailouts have a tendency to see behavior repeated, and to dissuade a repeat of the behavior, lessons need to be learned across the board. Over-spending, both personally and nationally, aren’t habits to be rewarded. My guess is many of us are about to learn that lesson at a personal level (as are many businesses which incentivized such behavior). Whether we’ll ever learn it at a national level remains to be seen.
 
Written By: McQ
URL: http://www.qando.net
Thanks. I wasn’t sure which points you thought were fair, and which weren’t, and I think mis-inferred. Personally, I think the debt-burdened consumer is a myth. Family credit card debt for the median is $0.00, and for the 45-ish% of families with credit card debt the balance is something like $5,000. While the average Financial Obligations Ratio (an expanded version of Debt Service Ratio) has steadily increased since the 80’s, so have real average (not necessarily median) incomes. Accounting for the increase in incomes, real income after debt service has increased for every family income quintile.

I’m also less concerned about the redundant cry of "the median" household by the left, because it’s not comparing what’s happening to individual households as the head of household ages (strongly correlated with real income growth through age 55-60 or so). That the 30-year old male is worse off today than before is the most "concerning" thing you clipped from him - but again, I’m not clear on the demographics of today’s 30 year old male versus the historical one.

I haven’t seen any good proposals to grow "the median" wage, other than education, and given the unintended consequences of increased student aid (universities just increase their "rack rate" pricing) there remains no magic bullet.
 
Written By: m.jed
URL: http://
This chipmunk wasn’t really a Cabinet official, was he? Robert Reich, Britney Spears - you must have mixed them up.

Sorry - I checked. He really was a Cabinet official. Hard to tell.

He has to know that this "tax the rich" stuff is horse-hockey. The bottom 50% of taxpayers already only pay 3% of the total taxes as it is.

Earlier this week, in the very same op-ed space, was a piece by W. Michael Cox and Richard Alm, showing that when you looked at per person consumption,the bottom 20% consumed $10,678, while the top 20% consumed $22,538.

The biggest differences were in housing, transportation, and - wait for it - taxes! The lowest 20% paid an average of $900, while the highest paid $23,000.

Tell you what, Mr. Reich. Drop my taxes, and I promise to spend whatever you don’t take on stuff. What would you like me to buy?
 
Written By: orthodoc
URL: http://
Are median wages supposed to increase in money value? If what you can buy for the money increases over time, does the absolute numerical value of wages really matter in the end?

Most people today own color T.V.s, automobiles, home computers, cell-phones, own homes, have access to internet ect... A lot of these things weren’t even invented 35 years ago.

There should be more in depth criteria on what constitutes prosperity than just a numerical value of wages. How many people own homes now compared to back then? Or own automobiles, or have college educations, ect...
 
Written By: Jimmy the Dhimmi
URL: www.warning1938alert.ytmnd.com
"Workers should be able to decide whether to form a union with a simple majority vote."
And workers should have the ability to opt out of the union completely with no union benefits and pay no union costs at all - no fair share, nothing. Forgot about that side of the coin, eh Robert?
 
Written By: Grimshaw
URL: http://
’For instance, the median hourly wage is barely higher than it was 35 years ago, adjusted for inflation. Or the fact that the income of a man in his 30s is now 12 percent below that of a man his age three decades ago.’

This kind of statement is great for playing on emotions and completely ignores what has been happening within the entire economy/society.

1 - The actual cost to live has gone down. Compare, after accounting for inflation, the cost of food, housing and cars.
2 - Compare the actual % of income which is spent on food, housing and cars.
3 - Account for the actual changes in food, housing and cars. (More prepared food, eating out, larger houses, more and bigger/better stuff in the houses, the options which are available on cars, the former car options that are now considered standard).

We are living a good deal better than the conditions we were raised in. Being born in 1949, I still remember the first Caddie which had power windows. My Grandfather did not allow us to play with them. The first TV was clunky, expensive but still a marvel.
 
Written By: Ed on West Slope
URL: http://
Most people today own color T.V.s, automobiles, home computers, cell-phones, own homes, have access to internet ect... A lot of these things weren’t even invented 35 years ago.

There should be more in depth criteria on what constitutes prosperity than just a numerical value of wages. How many people own homes now compared to back then? Or own automobiles, or have college educations, ect...
Most of the items you listed are cheap. Things like boats, snowmobiles, and vacations are high dollar items that were used back then and today. It would take a heck of a lot of internet access to buy a boat, even a small canoe, let alone pleasurecraft level. They even owned homes 30 years ago if you can believe it.

And it brings up a point I’ve raised. We have different toys today thanks to technology, but ultimately they are relatively cheap. But buying big ticket items is as hard today as was 30 years ago.

What’s wrong with this picture? Electronics technology should have had an impact like the agricultural and industrial revolutions did. Make things more efficient, cheaper. Short term there’s some unemployment, longterm there’s prosperity. I know where I worked over the last 15 years we got rid of all the secretaries. Not that I had one, but only the biggest of the big bosses have one now. People generate their own polished report, teleconference which saves time and need to travel, etc.

Where’s the prosperity from the Electronics revolution? Reich’s slide may be worse than he depicts because prosperity from a technology boon may have offset it, obscuring both.
 
Written By: jpm100
URL: http://
Everyone’s missing one big item in the median income stat: real total compensation is higher now than it was 30 years ago. Health insurance is part of total compensation. And we can add in 401k contributions while subtracting pension benefits (I’m inclined to think this is still a net positive).
 
Written By: Steverino
URL: http://
Steverino has hit it. Fringe benefits are tax free while wages are taxed. So workers actually prefer benefits to wages in this respect. If benefits were taxed or not provided by employers, many workers would take more money and less health coverage.

 
Written By: Harun
URL: http://
Please excuse this long comment, but I think it all adds together to make the final point. First, equalization of wealth at a global level is inevitable given the level of global communication and transportation that is now the norm. We can never go back.


Second, the U.S. does not produce enough economic value from its manufacturing or service sectors to earn its citizens the buying power they have grown accustomed to weilding. A contraction in American spending power is just, and inevitable.


America has to not only compete globally with nations 1) without worker and environmental protections and 2) with lower costs of living, but also 3) with far lower military expenditures, an activity that moves money out of the paychecks of the citizens and into the pockets of the Halliburtons. Talk about wealth redistribution!


Third, America could take the lead globally in offering alternatives to the carbon power industry that is one of the main areas in which Americans send dollars out of the country each day (buying oil from abroad), and this would allow us to start offering the world economy greater value, but this would require an educated populace. It is already the case that we have a shortage of doctors, nurses and dentists in the U.S. We have far more young people who aspire to be rich entertainers than to be people who use their minds to produce real value at a decent wage. This is actually the "game plan" of many young people who are ready to gamble on their futures like this, having no belief they could possibly perform academically at a level that would allow them to ever be professionals. And a lot of them are RIGHT. They are so poorly prepared for their futures, due to a whole host of reasons not the least of which being the malnutrition of the factory-farmed/processed/fast food age, that many can’t even learn to read by the time they finish high school.


America needs to prepare itself for the huge segment of these kids who are going to grow up to be unable to support their living needs, let alone their overblown sense of entitlement, without turning to crime. There is no amount of money you can invest in education that is going to make every kid succeed. Too many have already had their minds twisted by a culture of consumerism and a self-identity that is based on nothing other than having money and promiscuous sex with the best looking people. They have no system of life meaning to strengthen them when economic prosperity stops being a realistic hope and economic necessity becomes a reality (after their parents finally kick them out or they can’t bear living at home anymore at age 25).


There is going to be increased inter-group conflict, with Americans scapegoating other Americans the same way they now do with illegal immigrants and the same as happened with freed black slaves who moved North and took lower paying jobs previously held by European immigrants at the end of the Civil War.


Basically we can look forward to a real social mess. I guess you can call that progress, though not the progression of prosperity. More like a massive market correction. We haven’t earned the communal sense of connection and national identity that warrants social harmony. We are still a nation of individualists and small factions. The illusion of riches and the hope for riches is what has kept the lid on this pressure cooker and created an illusion of greater social advancement than America has really attained. We are a nation of greedy, individualistic, lazy takers, just like the Russians, and we can look forward to a lifestyle much like current day Russia, albeit not quite as cold.


What can we do about it? Personally get out of debt, build savings, AND invest some significant time and effort in making a difference in the lives of young people, ones outside your own family or even your immediate community.

The only wealth redistribution that needs to happen is the sharing of "wisdom wealth." Expose a poor kid to healthy choices and lifestyles (like yours). Explain things to them straight; even if they can’t fully understand or agree with you now, you will be planting the right seeds for them to maybe turn around sooner when what you predict starts coming to pass in their lives. And as a citizen, support opportunities for adults to go back for the education they missed while they were being mis-educated by the American media system in their childhood and teen years. We will all either rise together or fall into chaos and despair together. So let’s pull up the kids of our neighbors, and call every America our neighbor.
 
Written By: Dutton
URL: http://
Dutton,

"America has to not only compete globally with nations 1) without worker and environmental protections and 2) with lower costs of living, but also 3) with far lower military expenditures,"

You forgot:

4) countries with flat taxes that offer more incentive to work.
5) countries with low corporate tax rates and zero capital gains taxes that encourage investment and entrepreneurship.
6) countries where unions have not artificially raised labor costs to be uncompetitive.

The good news is other countries often screw up just as badly as the USA.

I’ve lived in Taiwan for the past 16 years, and have seen the youth of this nation transform from hard-working studious geeks into cool kids who have the slacker mentality we have in the USA. Oh, and hip hop music, pot, and ecstasy arrived as well. They all want to have the most expensive cell phone, iPod, clothing, Nikes, etc. I think the more affluent the society the more people take wealth for granted. This has occurred in Japan as well.
 
Written By: Harun
URL: http://
I too thought this point (both Reich and MCQ made it) was incorrectly put as a negative:

’...For instance, the median hourly wage is barely higher than it was 35 years ago, adjusted for inflation...’

In other words, the media hourly wage has not only kept pace with inflation, but it has gone up a bit more than that. So that seems positive to me.

I can think of a couple of economic principles that would lead to the median hourly wage going up faster than inflation — higher productivity or a labor shortage.

In general, we have had higher productivity, but we have only had labor shortages in selected industries, typically in highly-skilled occupations. With a growing workforce (through natural growth and immigration), there tends to be downward pressure on the hourly rate for lower-skilled occupations.

All in all, I think the result mentioned above makes sense given the economic conditions.
 
Written By: Kurt Brouwer
URL: http://www.fundmasteryblog.com
There seems to be some confusion between wealth and income. Let’s just throw everything into the pot. Mrs Heinz-Kerry’s billions, Bill Gates’ billions, Kennedy’s compound, Barbara Streisand’s mansion, John Travolta’s planes, my paltry thousands, my mortgaged house, my car, the 26 inch tube type TV and divvy it all up.

It should last for the rest of my lifetime. Kind of tough on my kids, but hey, I’m just a conservative misanthrope anyway.

/sarcasm

Seriously, this all boils down to attempting to force outcome of results. While I’d like my share of being a pro basketball star, I’m lacking in height, agility, speed, stamina and ability. How unfair.

I have a serious question: What do you all feel about poor Mr Latrell Sprewell? After choking his coach, he never played pro basketball again. He’s behind in his payments and they are going to seize his yacht. His income has to be close to zero. How much do we dig in to help him out? Do I sacrifice my daughter’s education? At the macro level, this is what we are talking about. The kid who studied and got a good education can dig in and support the kid who goofed off.

We owe everyone the opportunity for an education, and an equal opportunity to compete.





 
Written By: MarkD
URL: http://

 
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