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Posts Tagged ‘Income Inequality’

Last week, George W. Bush’s presidential library was dedicated. The Media were there in droves. So too were presidents Obama and Bill Clinton. They were all buddy-buddy, smiling, shaking hands and mutually jovial in the realization, no doubt, of the successful implementation of their very similar policies of the past 20 years–policies which, of course, have their ultimate origins in their common policy ancestor, Ronald Reagan.

The policy differences between the three (and Reagan) are far less than the similarities. It’s all just a matter of degree and emphasis. GW Bush, however, represents an extreme in that common spectrum. The damages to the US and global economy by the Bush regime have been almost immeasurable, and continue to this day, as they will for years to come.

Liberal economist, Paul Krugman, briefly recounted some of the more momentous damages in his recent column. But a brief column cannot do justice to the full scope and severity of George W. Bush’s toxic legacies.

This writer wrote a lengthier assessment back in December 2008 of the Bush Ten Toxic Legacies (a short list). Given all the hoopla about Bush and his library dedication (and the accompanying attempt to resurrect his reputation surrounding the event), I thought it was appropriate for readers to review in more depth and detail just what George W. Bush had done to destroy the US economy and US society, written by yours truly in December 2008. That assessment is as follows:

“GEORGE W. BUSH’s TEN TOXIC LEGACIES:

“Bush’s First Economic Legacy: The Mountain of Debt

During Bush’s two terms in office more than $3 trillion have been poured down the black hole of wars in Iraq and the Middle East. More than $5 trillion has been served up in tax cuts for corporations and the wealthiest 10% households in the U.S.

According to U.S. Federal Reserve Bank data, since Bush assumed office in January 2001 Government debt levels have risen by more than $3 trillion. But that’s only the total as of the end of March 2008. It does not yet include the cost of bank bailouts this past September: $300 billion for Fannie Mae/Freddie Mac, $85 billion for the insurance company giant, AIG, and the infamous $700 billion ‘TARP’ (Troubled Asset Relief Program) bailout at the close of the month. The September bailouts thus amount to another minimum $1.085 trillion.

The above $1.085 also doesn’t include pending bailouts by the U.S. government’s FDIC (Federal Deposit Insurance Corp.), the agency that is tasked with closing down failed banks and reimbursing depositors. Banks like IndyMac and others. As of the end of September, The FDIC has only $35 billion in available funds remaining for additional bailouts. It is potentially liable for 8,600 banks in the U.S. with deposits and assets totaling $13.3 trillion. It expects 800-1000 regional and smaller banks to fail in coming months. Its bailout this past summer of Indymac Bank cost $8 billion alone. After the November elections, it will have to ask Congress for hundreds of billions, and perhaps even a trillion or more, in additional funding to cover bank failures yet to come. And that’s only banks! What happens when large hedge funds or a large pension fund goes under? Will the Government bail them out as well? It seems anyone with a corporate balance sheet is now eligible for a Government-Taxpayer income transfer.

For example, non-financial corporations have already begun to queue up at the bailout trough. The three big US auto companies have just been handed $25 billion by Congress, in a separate bill that quietly slipped by the public and press in September, amidst the cacophonous wailings for bailout assistance by banks and financial institutions. Even foreign auto makers doing business in the U.S. are now demanding a piece of that pork as well. Like hogs in a pen, Corporate America’s lobbyists, financial and non-financial alike, noisily rush to the fence as the farmer approaches with his slop-pail of goodies. And it’s only the beginning. Corporate defaults are expected to rise tenfold in the next eighteen months, according to Standard & Poor’s, the corporate rating agency.

But there’s still more trillions in this Bush mountain of debt legacy picture. Between 2002 and 2007 the ‘subprime’ mortgage loan crisis was created by the Bush administration. Total mortgage debt in the U.S. more than doubled, rising from $5 trillion in 2001 to more than $11 trillion in 2007. The poor quality subprime and other risky mortgage loans amounted to approximately $2 trillion of that $6 trillion.

The Bush administration was forewarned time and again from 2003 on, by regulators and elected officials alike, at both federal and state levels, that the subprime situation was a time-bomb. Bush not only did nothing but actively discouraged federal intervention. The Bush administration officials at the Securities & Exchange Commission, SEC, in particular were instructed to look the other way as Banks set up ‘shadow banks’ operated off their regulated books. The shadow banks, called Structured Investment Vehicles, or SIVs, served as the trash receptacles in which various securitized bad subprime mortgage bonds were stuffed. Cooking separate books like this, off ‘balance-sheet’ as it is called, was precisely what CEOs and CFOs at Enron went to jail for a few years earlier. But similar behavior at banks and financial institutions in the case of subprimes was apparently not a problem for the Bush administration. When certain investigators and prosecutors got too close or appeared to have too much success, such as ex-New York attorney-general and governor, Eliot Spitzer…well… the FBI found a way to remove him from the scene.

Bush directly contributed to the subprime bust and financial crisis in yet another way. This required the active assistance of Federal Reserve (FED) Chairman, Alan Greenspan. In 2003 Greenspan was awaiting reconfirmation of his position at the FED by the Bush administration. The economic recovery from the 2001 recession had stalled by 2003. After a weak recovery in 2002, job growth was declining once again, even though jobs had still not recovered to pre-2001 levels. Bush was intent on going to War in Iraq. And 2004 elections were but a year away. The economy needed a special boost.

Bush-Greenspan struck a partnership that led directly to the subprime bust. Here’s how it happened: Greenspan and the FED accommodated Bush by lowering interest rates to 1% and then keeping them there far longer than was economically justified in any sense. The Bush-Greenspan strategy paid off for both partners. Super low interest rates produced a housing and commercial property driven economic boom from 2003 to 2006. Greenspan was awarded with reappointment as FED chairman by Bush in spring 2004 and Bush got his economic over-stimulus in time for the November 2004 elections. Financial speculators, banks and the mortgage industry raked in superprofits. They were able, as a result of Greenspan policies, to borrow virtually free money from the FED, which they then ‘leveraged’ to purchase ten times more volume of subprime mortgage bonds. Some of the more aggressive Investment banks, like Bear Stearns and Lehman Brothers, leveraged themselves 30 times or more. Greenspan’s 1% interest rate policy helped fuel the speculative excesses in the mortgage industry that created the subprime boom of 2003-06. When the FED finally began to raise rates again in 2005-06 it provoked the subprime bust of 2006-07. The end result of it all was a record housing price spike from 2004 to 2006, followed in turn by the consequent subprime mortgage price collapse.

In the process of borrowing for leveraging and housing speculation, banks and financial institutions added roughly $8 trillion in new debt during the first seven years of Bush’s term–$6 trillion of that during the subprime speculative boom period of 2003-07.

But there’s still another $ trillion to account for. That’s the amount of new credit card debt that American middle and working class consumers also took on since 2001. It is a lie and misrepresentation that consumers have been increasing their credit card debt in order to engage in spending on luxury and unnecessary items. Most of credit card debt has been taken up in order to pay for big ticket necessities, like college education for children, payment for medical bills their employer insurance plans no longer cover, for medical services by those no longer able to afford insurance at all, for basic transportation needs, for general cost of living by retirees no longer able to survive on social security, and so on. The credit card has replaced the annual wage increase that many employers used to but no longer give. It has substituted for wage increases that unions, now but a shell of their former selves, used to negotiate but no longer can. Credit cards are now relied upon by the more than 40 million workers who used to have full time permanent jobs but now have to make due with lower paid part time or temporary work; and by the more than 8 million workers whose once decent paying manufacturing jobs have gone offshore and have had to accept lower paid service jobs.

To the $3 trillion in government debt was thus added $6 trillion in household mortgage debt, $8 trillion in banking debt, another $1 trillion in new consumer credit card debt, and $3.5 trillion in additional non-financial business debt. A total of more than $21 trillion in accumulated debt of various kinds over the course of Bush’s term in office. That’s a stack of $500 bills 3,297 miles high; or, roughly the distance from New York City to London.

Second Economic Legacy: Financial System Collapse

The ‘unwinding’ of the $21 trillion in net debt accumulated during the Bush administration is the direct, root cause of the current financial crisis.

The write-downs and write-offs by banks and other financial institutions, the bankruptcies by companies and consumers, the losses of home values, the foreclosures, etc.—all represent the ‘unwinding’ of that record level of $21 trillion new debt accumulated since Bush took office. The September bank bailouts, from Fannie Mae to TARP, represent an effort by the US government on behalf of banks and financial institutions to transfer the cost of the banks’ $8 trillion debt unwinding from their banking friends to the general taxpayer. More specifically, the September bailouts represent a strategy by Finance Capital and America’s corporate elite to shift a major portion of this debt from their corporate balance sheets to the ‘public balance sheet’ and taxpayer.

But the bank bailouts will not stop the debt unwinding. They do not address the fundamental causes of housing and commercial property price collapse underway since the beginning of the year and now accelerating. Housing prices have yet to fall another 20-30%, and new phases or stages of the financial crisis will continue to emerge. Furthermore, housing deflation will continue to spill over to the commercial property market, to the stock markets that have yet to fall another 20% as well, and eventually to producer and consumer prices and wages should the recession prove deep and long. The bailouts only relieve the banks of their share of the pain of that collapse. Bailouts like those enacted in September are designed primarily to transfer the costs of the crisis—from big banks, financial institutions, and other corporations and their investors to the general taxpayer, worker, and consumer. But shifting the ‘bad’ debt from private to public balance sheets does not eliminate it. The only thing settled by the bailouts—TARP, Fannie Mae, AIG, and others—is who will pay for the crisis, not how to end the crisis.

Once a fundamental debt-driven financial crisis gains momentum it is not easy to stop. The US Federal Reserve’s strategy has been to throw ‘liquidity’ at it. Since December 2007 the FED has committed nearly a trillion dollars in special and emergency loans—to no avail. Time and again the FED has upped the ante—and the crisis has deteriorated further. It is amazing that the current chairman of the FED, Ben Bernanke, has not learned that throwing liquidity at the problem, i.e. a money supply solution, is not working after a year of such repeated attempts. The problem is not the balance sheets of banks and financial institutions; the problem is the ‘balance sheets’ and insufficient incomes of workers, consumers and homeowners—i.e. a demand side problem. The financial crisis is not a liquidity crisis. It is a solvency crisis. It is a general systemic crisis and a deepening crisis of confidence in the financial system itself.

The debt-driven financial implosion is thus the second major economic legacy of the Bush administration. What Bush has left the nation is a classic Debt-Deflation crisis that has resulted in a near freeze up of the entire financial system. The last time this occurred was 1929-34, and before that in the 1870s and the 1890s. Moreover, the Bush legacy of financial collapse is not finished. It will continue to reverberate and make itself felt for years to come.

Third Economic Legacy: Epic Recession

The direct consequence of financial crisis and implosion is a general ‘credit crunch’. A ‘credit crunch’ is a system-wide severe and sharp contraction of credit. A credit contraction has been progressively growing in the economy since last January. A credit contraction occurs when banks and financial institutions have, or expect to have, significant losses due to bad loans and investments, and therefore are increasingly reluctant to loan out reserves they may have on hand. They are uncertain they may need the cash on hand and reserves to cover anticipated losses and prevent becoming technically bankrupt if their losses exceed their reserves. Over the past year financial institutions have step by step tightened their lending terms. But even the slow down in lending hit a wall and entered a new, more intense and serious stage with the financial events of September—i.e. a credit crunch. In the wake of the collapsing of Fannie Mae, Lehman Brothers, Merrill, AIG and others, in September credit market after market began to freeze up and virtually shut down

From housing and commercial property markets, to industrial loans, to municipal and corporate bonds, to commercial paper, and even markets in which banks loan to each other, such as Libor—all began to shut down in September. There is no inter-bank lending market at present in the U.S. or even globally for that matter. They have shut down. The FED and other central banks have become, in effect, the only banks willing to lend to other banks. Even money markets are contracting. Money market funds, mutual funds, pension funds, and hedge funds are all in the process of contracting and reducing lending.

The credit crunch is the transmission mechanism by which the current financial crisis translates into a recession. It is the linking event. Financial crisis and recession are therefore but two sides of the same coin, driven by the same set of fundamental causes. The debt-deflation drives the bank, consumer and corporate losses, which results in the credit crunch. Without available funds to borrow, or even borrowing at extremely high rates, businesses in turn begin to cut back, announce mass layoffs, and then shut down or go bankrupt.

The extreme levels of accumulated debt since 2000 has produced a financial crisis correspondingly severe and unlike anything since 1929-34.. The severe and protracted financial collapse has created a credit crunch of equal historic dimensions as well. So there is no reason to assume the recession now emerging will be anything less historic or severe. The current financial crisis and credit contraction is producing a recession of equally deep scope and magnitude—i.e. ‘Epic Recession’—as I have called it last June in an earlier article in this publication. An Epic Recession of particularly long and/or deep duration that shares characteristics of a typical postwar recession but also characteristics of a classic Depression similar to 1929-34, 1873-78, or 1892-97. A recession that is fluid and unstable, and can easily accelerate in the direction of a bona fide Depression.

What Bush has therefore bequeathed the country is an economic crisis of historic proportions—in terms of debt, systemic financial collapse, and Epic recession. In so doing, Bush has turned the clock back on the American economy more than a century.

Fourth Economic Legacy: Record Budget Deficits and Fiscal Crisis of the State

With bailouts, with expected losses in tax revenues in 2009 due to the now deepening recession, and with the certain need for further fiscal stimulus by the federal Government to save State and Local governments from bankruptcy and provide unemployment insurance for the millions more jobless to come—the next U.S. budget deficit will easily double from its current projected level of around $500 billion. (Yes, that’s another $1 trillion!) A mind-boggling $trillion dollar budget deficit that will all but ensure that, whoever wins the November 2008 election, few if any of their campaign promises or programs will see implementation. Instead, a national economic ‘austerity program’ will likely be the agenda come January 2009 regardless who wins. Come January 2009, critical programs like national health care reform, student loans, sustainable environment, jobs creation and protection, foreclosure mortgage relief, retirement systems reform, etc. will all be sidelined more or less permanently, or at best proposed by the new President in only token form with insufficient funding.

The fiscal-budget crisis of the US government that now looms large on the horizon also has potentially enormous consequences for the non-financial economy. The massive budget deficit is the consequence thus far of three primary causes: the $3 trillion Mideast Wars, the $5 trillion tax cuts for corporations and the rich, and now more recently the multi-trillion, still rising bailouts of finance capital at taxpayer expense. A fourth and fifth cause will balloon the budget deficit further. The fourth is the deepening recession itself, which will result in a major shortfall of tax revenues to the federal government. The fifth is need for the federal government to spend significantly more in order to stimulate recovery from the downturn.

Very little to date has been expended by government to help consumers and homeowners and thus stimulate demand to generate any recovery from recession. The depth of the fiscal-budget crisis may thus neutralize to a large extent the ability of the government to engineer a recovery from the recession. Monetary policies of low interest rates have clearly failed to have any effect on recovery, and the FED has little further leeway to lower interest rates in any event. Traditional monetary policy has clearly failed. The full burden of recovery is thus now shifted to Congress, the President, and fiscal policy. But can the government—having wasted so much on Wars, tax cuts for the rich, and bailouts—still afford to stimulate the economy given the pending trillion dollar deficits? That kind of fiscal spending constraint did not exist in 1929-33, whereas it now clearly does.

As the fiscal crisis deepens, it may have no recourse but to pull out of the wars it can no longer afford, find some way to raise taxes on corporations and wealthy investors, and slow the free flow of bailout money to the banks. However, it is highly problematic that Congress and the new President will have the political will to do any of the above.

Trillion dollar budget deficits may also have serious consequences for the U.S. economy in a global sense. It means the US government will have to borrow much of that trillion deficit from foreign sources—central banks, banks, wealth funds, and foreign investors. If it cannot borrow, it will have to print the money. But will foreign sources want to loan that amount to the US? Perhaps not, if they believe the value of their loans might decline overnight. But if they do not, it may mean a collapse of the U.S. dollar as a world currency. And that will in turn hasten the decline of the U.S. dollar still further, in a vicious downward cycle. If the U.S. government cannot borrow enough to cover the trillion deficit, it will have no recourse but to turn to printing money. That will lead to an explosion of inflation, a further decline of the dollar, and even less willingness by foreign sources to loan to the U.S., and so on. In short, the fiscal crisis legacy of Bush carries the very real risk of spawning a consequent U.S. currency crisis of epic dimensions as well.

Fifth Economic Legacy: Chronic Job Loss and Jobless Recessions

More than 3 million US workers have lost jobs to China alone during the two Bush terms, and another million have been lost due to free trade with Mexico, Central America and Canada. Bush’s first recession in 2001 resulted in loss of millions more jobs. It took 48 months, four years, just to return to employment levels that existed in January 2001 on the eve of Bush’s first recession. It was the longest ‘jobless recession’ on record in the post world war II period. We are now in the third Bush jobs recession. The first occurred between 2001-2002. A brief and weak recovery of jobs followed in 2003, followed in turn by another jobs decline in 2003-04. It was not until just before the 2004 elections that job levels fully recovered. By late 2007, after just a brief few years of jobs growth the economy once again began to gush jobs at an alarming rate. After three jobs recessions under Bush, it now appears jobs recessions are becoming endemic to the US economy.

The most recent jobs recession began in 2007 and now has begun to accelerate once again. Officially, more than 750,000 jobs were lost through September in 2008. The actual number is much higher, however, given the conservative way the US government calculates unemployment. For example, in September the government estimated 159,000 jobs were lost. But 337,000 part time workers were hired that month. That means many tends of thousands of US workers were cut back from full time and rehired as part time. Part time work should represent a ‘half’ of job loss, but the government counts part time and fully employed. Since January 2008 at least another 750,000 part time workers were hired. The true job loss since the start of 2008 is thus closer to 1.5 million than the estimated official 800,000 or so.

The Bush jobs legacy has thus been one of shifting more jobs offshore as a result of free trade policies, weak and brief job creation during recoveries from recessions, at least three ‘jobs recessions’ during his watch, and the replacement of millions of higher quality full time jobs with lower paid, lower benefits (or no benefits) part time and temporary jobs. It is an abysmal legacy that explains a good deal why 91 million middle-working class households’ pay and incomes have stagnated or declined.

Sixth Economic Legacy: Middle-Working Class Earnings and Income Stagnation

The real weekly earnings of the 91 million households in the U.S. earning—i.e. 80% of all households earning roughly $80,000 a year or less—are less today than when Bush took office. To maintain standards of living these households—those that constitute the middle and working class—have out of necessity turned to credit cards, refinancing their mortgages when it was possible, and working second and third part time jobs. The chronic loss of jobs due to free trade and repeated jobless recessions, the shift to lower paying service jobs, and companies transferring workers from full time permanent employment to more part time-temporary jobs explains a good deal of the stagnant or declining incomes. But not all. The decline of unions and effectiveness of collective bargaining during Bush’s term has also contributed to the income stagnation, as has the shifting of the cost of rising health insurance, deductibles, and copayments from employers to workers during Bush’s term.

In stark contrast to the Bush legacy of stagnating and declining earnings for the 91 million as a group, the Bush legacy has meant turning a blind eye to multi-million dollar, and even billion dollar, CEO pay packages—including those granted bank executives who received multi-million dollar payoffs even when their companies crash and burn. No wonder the general public were incensed this past September with Treasury Secretary, Paulson’s, proposal for $700 billion TARP bailout! That bailout failed—and continues to fail—to provide any effective constraints on Executive Pay or CEO ‘golden parachutes’. The obscene, uninterrupted, and historically unprecedented explosion of executive pay is thus one of the more visible hallmarks of the Bush economic legacy.

Seventh Economic Legacy: Regulatory Chaos and Endemic Corporate Corruption

Some argue the current financial crisis is the product of financial industry deregulation. But that is only partly correct. Deregulation is only an ‘enabler’ of the crisis, not a fundamental cause of it. Deregulation has allowed the banks to set up ‘shadow’ institutions, as noted above, in which to hide and bury their ‘junk’ securities. It has spurred the process called ‘securitization’, in which bad loans were bundled with other bad or good securities, cut up into 5 to 15 pieces, marked up in price to make a superprofit, and sold and resold around the world to other central banks, banks, funds and private investors. Deregulation allowed banks to work with mortgage lenders to generate record quantities of bad mortgages; allowed banks to spread contagion in the name of spreading risk; permitted excess leveraging by financial and non-financial corporation alike. But deregulation means nothing if debt is not readily available to borrow at excessively low costs. That’s where the FED’s quarter century long loose monetary policy and below normal market interest rates played a complimentary role. Speculation results in excessive leveraging of ‘bad debt’. But leveraging requires easy, low cost borrowing. Deregulation allows leveraging to happen. But super low interest rates by the FED makes it possible in the first place. The two go hand in hand.

The repeal of the Depression-era Glass-Steagall Act in 1999 and its replacement with the Gramm-Bliley Act removed a major impediment, while providing a major impetus, to financial speculation and excess. But Bush took the opportunity several steps further. Bush’s contribution was to encourage and promote excessive financial speculation; turn over what remained of policing of the banking industry, in particular the investment banks, to the banks themselves; and send the remaining regulatory agency, the Security and Exchange Commission (SEC), to the sidelines. This policy thrust went on from the very beginning of his term in 2001 up to the outbreak of the financial crisis in late 2007. It is possible to cite numerous and repeated attempts by state and even federal mid-level officials who warned of the dangers of growing financial speculation, in general and with regard to subprimes in particular, from 2002 on. Regulators at both the state and federal levels repeatedly warned from late 2003 on what was going on in the mortgage markets in particular. So it is simply not true that Bush Administration regulators “did not see what was coming”.

In April 2004 the floodgates were further opened. At that time the SEC decided to allow the ‘big 5’ investment banks—i.e. the Lehman Brothers, Bear Stearns, Merrill, Morgan Stanley, Goldman Sachs—to take on unlimited debt and ‘leverage’ as they began their manipulation of the emerging boom in the subprime market. They were no longer required to keep virtually any reserves on hand for emergency situations. They could borrow without limit from the FED, hedge funds, and other private funds and leverage to the hilt, which they did. Bear Stearns, Lehman and the rest typically took on any and all bad debt and leveraged themselves to more than 30 times their available reserves. Moreover, they would be allowed to self-regulate themselves with no further SEC policing or oversight. Without this strong encouragement by the Administration, the excessive bad debt accumulation associated with the subprime market would not have been possible.

Thus the Securities and Exchange Commission did not simply ‘look the other way’. The agency responsible for regulation actively participated in and enabled the deregulation. It helped dismantle the last vestiges of regulation under Bush. Its chief Commissioner, Christopher Cox, was handpicked by Bush because he, Cox, had a long track record as a representative in the House raising and promoting legislation to protect the investment banking industry from lawsuits, loosening accounting rules for executive stock options, and cutting staffing and inspections at the SEC. Bush awarded him with the position.

It is also often forgotten that Secretary of Treasury, Paulson, the administration’s point man for financial system re-regulation, assumed his current role as Treasury Secretary in mid-2006, barely two years ago, and immediately launched as his first act in office a major effort to deregulate the banking industry still further. As the subprime crisis began to emerge in late 2006, Paulson was proposing and championing legislation for looser oversight by the SEC of banks and mortgage companies responsible for the subprime bust. His ‘mantra’ was to replace defined rules governing banks’ practices and behavior with vague, undefined ‘principles’. He originated a special commission to report proposals to do just that, which it did. As part of the report, while controls were further lifted on banks, more controls and restrictions were implemented, in contrast, on regulators. The target of the report were attorney generals and governors, like Eliot Spitzer, who were beginning to act and intervene because the SEC was content to do nothing and ignore the growing crescendo of warnings about the pending subprime crisis.

The same Paulson, ex-CEO of the investment bank, Goldman Sachs, and champion of deregulation under Bush from 2006 on, is now entrusted with financial re-regulation. It should therefore have been no surprise that his original ‘TARP’ proposal called for no new regulatory controls on the banks or limits on executive pay, as he simultaneously proposed to give Banks a handout of $700 billion.

Deregulation is directly related to corporate fraud. In Bush’s first term, scores of CEOs and senior managers were indicted and convicted for various forms of fraud. These companies were mostly associated with the technology sector, in the wake of the dot.com boom and bust. The current financial crisis has yet to produce its own crop of corrupt captains of industry. But it will. Investigations are already well underway by the FBI, SEC, and Congress. The new corruption cases will make the post-dot.com bust fraud revelations pale in comparison in terms of the dollar value rip-offs. Bush will therefore leave office with one of the worst legacies of corporate corruption on his watch.

It is important to note that Bush’s legacy on deregulation and its huge costs to the economy and US taxpayer was not limited to the finance industry. Space does not permit a chronicling of the devastating consequences of other industries’ deregulation under Bush: transport, communications, cross-industry occupational safety and health, environmental, federal labor and wage standards, food and drug safety, and countless other areas. In all cases, however, the result has been greater profits for corporations at the expense of consumers, workers and taxpayers.

Eighth Economic Legacy: The Destruction of Retirement

Another Bush legacy has been the destruction of the retirement system established in the immediate post-World War II period. That system was based upon the idea of a ‘three legged stool’ structure that included Social Security, employer-provided pensions, and personal savings. All three were actively undermined by Bush and have resulted in a crisis of historic proportions, for the more than 44 million retirees today and the 77 million baby boomers who will start joining their ranks starting next year.

The crisis in Social Security is not as described by the Bush administration a few years ago, as Bush desperately attempted to privatize the system. The crisis is the more than $2.3 trillion dollars that has been siphoned out of the Social Security Trust Fund the last two decades, transferred to the U.S. general budget, and spent in order to pay for wealthy and corporate tax cuts, chronic wars under Bush, and ballooning defense budgets. Social Security payroll tax collections for two decades have actually subsidized the U.S. budget, not undermined it. Every year the Social Security program produces a surplus, at the rate of sometimes hundreds of billions of dollars a year. And that surplus is diverted in full and spent. Defenders of the historic theft say ‘we owe it to ourselves’ and can put it all back in the trust fund whenever we need’. True. But to replace it requires the US Government borrowing back the $2.3 trillion from banks and other private sources, paying interest on that debt, and thus adding at least $200 billion more a year for ten years to the coming $1 trillion a year budget deficit. In accounting terms it is possible; in economic and political terms it is not. Bush has borrowed over his eight years in office more than $1.3 trillion of the $2.3 trillion Social Security Trust Fund surplus.

The second ‘leg of the stool’, private pensions, have fared even worse under Bush. When Bush took office there were more than 35,000 defined benefit pension plans, single and multi-employer, in the U.S. Today there are barely 30,000. More than 5,000 have disappeared. That decline has been with the active encouragement of the Bush administration. Throughout his first term and well into his second, Bush allowed underfunded pension plans to defer payments, required by law, into their pension funds to ensure they were solvent. He called these ‘contribution holidays’. In 2004-05 the practice was particularly abusive, in the run-up to the passage of what he called the ‘Pension Protection Guarantee Act of 2006’. That 2006 Act, however, was not designed to rescue defined benefit plans but to hasten their further demise—as witnessed by the collapse of 5000 more plans during his term. His legacy in this area is yet to worsen, moreover. Key elements of that Act permitted pension funds to invest in risky Hedge Funds. The latter are about to go bust in large numbers, resulting in a further crisis of traditional defined benefit pensions and their funds.

Bush consistently pushed the dismantling of defined pensions and their replacement with 401K plans. In fact, the 2006 Act has allowed companies to force-enroll employees in 401Ks. But 401Ks are virtually unregulated and studies show they yield far less in returns available for retirement than do traditional pensions. In fact, the average balance in 401ks today is barely $18,000. That means tens of millions face the future of retirement in the 21st century with only $18K of retirement sources, apart from social security benefits.

The final ‘leg’ of the retirement system stool has been broken as well under Bush. That was supposed to be the accumulation of one third of necessary retirement resources from personal savings. However, under Bush the personal savings rate has collapsed. Americans now have a negative savings rate, as they’ve struggled to barely keep up with the cost of living. Falling annual earnings do not produce savings. In an ominous recent trend, moreover, it appears many are having to borrow from their already insufficient 401ks just to cover medical cost and other expenses.

Bush’s legacy in the area of retirement is a crisis of historic dimensions in insufficient resources for tens of millions.

Ninth Economic Legacy: Dismantling the Postwar Health Care System

Bush has been even more successful in privatizing, and thus dismantling, the post-war health care financing system. By allowing health care insurance premiums and other costs to double during his term, rising more than 10% every year in his first seven years, he has forced employers and workers alike to give up health care coverage altogether or to reduce that coverage in order to afford rising premiums and other costs. There are now more than 47 million Americans without any kind of health coverage whatsoever, an increase of 9 millions since 2000. Eight out of ten of those uninsured are working Americans. More than 1.3 working Americans lost their health insurance coverage in 2006 alone. Approximately 12% of all kids in the U.S. have no health coverage. Despite this collapsing coverage, the U.S. spends nearly twice as much, about 17%, of its total GDP on health care. That compares with 9%-10% for those countries with single payer health delivery systems in Europe, Canada and elsewhere. It means the U.S. spends more than $1 trillion a year on middle men, i.e. mostly insurance companies, to push paper and forms around while delivering not a single health service.

For those still with health insurance, the rising cost burden has also shifted significantly from employers to their workers—by as much as 30% according to some studies—to cover rising costs of not only monthly premiums but out of pocket deductibles and copayments. Thousands of companies have been allowed to abandon their health plans altogether, most notably in recent years the big auto companies which are in the process of dumping their health care funds, underfunded by $50 billion, onto the auto workers’ unions. Employers that once provided medical benefits for their retirees under their plans, benefits often negotiated with their unions, have simply arbitrarily and unilaterally discontinued those benefits. The administration and the courts have encouraged and endorsed such employer and court decisions.

Bush’s long run plan has always been to fully privatize health care, just as it has been to complete the privatization of defined benefit pensions and has attempted to privatize social security. Bush’s creation of so-called Health Savings Accounts, or HSAs, has been the center of the administration’s health care insurance strategy. HSAs are simply the analog of 401ks. Like the latter, they are designed to eliminate and replace group plans provided by employers or negotiated by unions. Bush and employers have as their goal the elimination of any central role by employers providing either retirement or health care coverage. That is what Bush has called his ‘Consumer Driven Society’. That too is his legacy—a health care delivery and financing system that is now as broken as the retirement system.

Tenth Economic Legacy: Massive Tax and Income Shift to the Wealthy

Every year for the first five years of his terms in office Bush pushed historic tax cuts totaling more than $5 trillion. Estimations from sources like Brookings, Urban Institute, and others are that about 73% of the cuts benefited the wealthiest 20% households. 30%, or $1.5 trillion, of that 73% benefited the wealthiest 1% households, or roughly 1.1 million out of the total 114 million taxpaying households in the U.S. But these figures don’t even include tax cuts for corporations, which have amounted to trillions more under Bush. Nor do they include similar massive tax shifting at the State and Local government levels. Where has all that tax cut money gone, one might ask? A good deal of it into Hedge Funds, Private Equity Funds, and other forms of private, unregulated banking—and thus stoking the fires of speculative investment in recent years in subprimes, derivatives and other unregulated financial securities. Other amounts have no doubt contributed to the explosion of offshore tax shelters. According to the investment bank, Morgan Stanley, in 2005 offshore tax shelters had increased their funds from only $250 billion in 1983 to more than $5 trillion by 2004. More recent estimations by the Tax Justice Network indicate tax shelters now hold more than $11 trillion. A reasonable estimate is that wealthy Americans likely account for at least 40% of that total, or around $4-$4.5 trillion. Exactly how much is not currently knowable, since there are around 27 offshore tax shelters, according to the IRS, in mostly sovereign nations like the Cayman Islands, the Seyschells, Isle of Man, Vanuatu and the like which have closed their tax doors and do not cooperate with IRS attempts to investigate how much wealthy US taxpayers have stuffed away in their electronic vaults.

The massive tax shift has been a prime cause of the Bush legacy of shifting relative income and wealth in the U.S. during his term—from roughly 91 million middle and working class taxpaying households to the wealthiest 1% (1.1 million) of U.S. households. There are of course numerous additional means by which income has been shifted from the bottom 80% to the wealthiest 1% (e.g. executive pay), but the tax system restructuring under Bush has likely been the most contributive sources.

An idea of how much this has all resulted in the explosion of income and wealth gains at the top at the expense of those at the bottom 80% has been estimated in recent academic studies by professors Emmanual Saez and Thomas Picketty. Based on their deep analysis of IRS taxes paid over the history of the Federal Income Tax since 1917, the wealthiest 1% of households in the U.S. received about 8.3% of total income in the U.S. in 1978. By 2006, however, that wealthiest 1% were receiving 20.3% of total income generated in the U.S. And that still does not include tax sheltered income. Nor does it include corporations’ retained income or profits diverted offshore to avoid taxes. But the 20.3% does represent a return to almost exactly what the top 1% received in 1928—i.e. 21.09%–on the eve of the last Great Depression!

For the Bush years, that 20.3% translates into incomes of the top 1% growing in real terms at a rate of 11% per year between 2002-2006. In contrast, the remaining 99% of taxpaying households in the U.S. grew in real terms at an annual rate of only 0.9%. It also means that top1% captured about 75% of all the incremental net income gains during the years 2002-06 under Bush. (1)

Two Final Comments

Bush’s ‘Toxic Economic Legacies’ have their roots in policies that are not uniquely his own. The above ten points represent policies that commenced in earnest in the 1980s under Reagan, and in some instances even before that during the last two years of the Jimmy Carter administration. The policies were continued in various form through the administrations of George Bush senior and Bill Clinton with different emphases. What characterizes the administration of George W. Bush is that the toxic legacies were carried to the extreme, accelerated in terms of their effects, as well as their inevitable negative consequences. Whether income shift, financial deregulation and crisis, tax shift, budget deficits and fiscal crisis, the destruction of the retirement and health care systems, etc., Bush represents the continuation of the policies and legacies on an accelerated rate, on a magnified scale—i.e. ‘a toxicity writ large’.

A second, final comment is that these toxic economic legacies are interdependent, one feeding upon and exacerbating the other. It is not possible, for one example, to understand the current financial crisis and emerging global epic recession apart from the massive shift and concentration of income in the hands of the wealthiest household-speculators and corporate-speculators. That is not the sole explanation of the present systemic financial collapse or growing threat of global depression increasing now almost daily. But the financial and economic crisis underway at present cannot be fully comprehended apart from the former either. Reversing the legacies, removing the toxic effects on the future of American economy and society cannot take place without correcting the fundamental causes. And that includes reversing once again, as in the 1930s and 1940s, the perverse and distorted income and wealth distribution afflicting society itself.

Dr. Jack Rasmus

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(The following is an excerpt from this writer’s forthcoming, March 2013 ‘Z’ Magazine article, ‘Income Inequality and Double Dip Recession’. For a complete version, see ‘Z’ Magazine).

The dominant characteristic of the US economy today—and a fundamental cause of the faltering, stop-go economic recovery in the U.S. since 2009—is the long term and continuing growth of income inequality in America.
Income inequality in the US is not only growing, but growing at an accelerating rate. What follows is a detailed accounting of the dimensions of the growing income inequality in the US, and some of the more important reasons for that continuing, and now accelerating, income shift. Growing income inequality—approaching now obscene levels—is not simply a ‘moral outrage’. It not only represents a gross violation of historically held American values or reasonable equality for all. It is a condition that has served, and continues to serve, as a major cause of the lack of sustained economic recovery in the US now for five years—as well as a major factor in explaining why the US continues today to drift toward another ‘double dip’ recession.

Median Real disposable household income has been declining steadily over the long term since 2000 and that decline has accelerated since 2008, at a rate between 1-2% per year. With consumption constituting 70% of the US economy, spending by 100 million wage earning households in the US (bottom 80%) has limped along based increasingly on debt spending, more credit card usage, more withdrawals from 401k and savings accounts, and more part time second job employment. Recent data show more than 50% of all 401k withdrawals, which are rising rapidly, are withdrawn just to pay monthly bills. Auto, student and installation debt continues to accelerate. Part time jobs have increased nearly five-fold since 2008. Meanwhile, corporations sit on more than $2 trillion in cash and justify their hoarding, instead of investing and creating jobs, referring to the lack of household consumption for their goods and services as main reason for their reluctance to invest and create jobs. The US economy limps along in a ‘stop-go’ trajectory, and most recently ‘stop’ instead of ‘go’ as government and business continue to cut spending.

The Wealthiest 1% Households Historic Income Gains

That inequality is most dramatically represented by the growth in the share of national income by the wealthiest 1% of households, on the one hand, and the decline in the share of national income for the bottom 80% and remaining 110 million plus US households, on the other—i.e. between those earning an average of $593,000 a year (top 1%) and those earning less than $118,000 a year (bottom 80%) with a median annual income of around $50,000.

With average annual incomes of $593,000 a year today, the wealthiest 1% of households in the U.S.—approximately 750,000 out of a total of more than 150 million families in the U.S.—receive about 24% of all income generated in the US every year, according to Nobel Prize winning economist, Joseph Stiglitz. That’s up from only 8% of total income in 1979. That’s a tripling of the wealthiest 1%’s annual share of total income over the last three decades since Ronald Reagan took office. Not since 1928, when the wealthiest 1% share of income reached 22%, has income inequality been as extreme as today. And income inequality continues to grow worse at an accelerating rate.

According to studies of IRS data by University of California economist, Emmanuel Saez, and others, during the Clinton years, 1993-2000, the wealthiest 1% households captured 45% of all the increase in US income growth. During the George W. Bush years, 2000-2008, they captured 65%. And in the latest year of available data, 2010, they captured 93%. So the top 1% recovered quickly from the recession. So did their corporations, from which the same 1% households obtain more than 90% of all their income in the form of capital gains, dividends, interest, rents, and other forms of ‘capital incomes’.

Corporate Profits and the 1%

Profits are the major conduit through which the wealthiest 1% incomes grow, redistributed to stockowners, bondholders, and senior executive managers in the form of capital incomes like capital gains, dividends, interest, rents, etc. And Corporate Profits have done extremely well the past three decades, since 2001 in particular, and especially since the Great Recession of 2007-09.

After three years of recession, by 2011 corporate profits in the US were higher than even in 2007 just before the Great Recession began, rising at the fastest rate in 31 years during the recession and immediately after in 2010-11.
Averaging an annual rate of increase of about 10% from 1948-2007, Pre-Tax Corporate profits virtually doubled from their recession 2008 low-point of $971 billion to $1.876 trillion by March 2011 less than a year and a half later—i.e. a level 28% higher than even their 2007 pre-recession record high of $1.460 trillion.

A subset of the $1.876 trillion, i.e. profits of the 500 largest US corporations, rose 243% in 2009-10 according to the Wall St. Journal. That’s 243% after averaging 10% a year during 1998-2007. Moreover, that 243% does not include profits of multinational US corporations hidden and sheltered in their offshore subsidiaries, which in 2012 were estimated at more than $1.4 trillion.

This record gain in pre-tax corporate profits since the onset of the economic crisis in 2007-08 was achieved not from the increased sale of goods and services, but from record profit margins from cost-cutting operations—i.e. by cutting jobs, by reducing wages, benefits, and hours of work, and by productivity gains pocketed by management and not shared with their workers. Profit margins since 2008, i.e. profits as a percent of operating costs, by 2011 thus attained the highest levels in more than 80 years.

Just as cost-cutting at the direct expense of workers has been the main factor in generating record pre-tax corporate profits, so too have Corporate After-Tax profits surged as a consequence of massive corporate tax cutting by governments at all levels, Federal as well as State and Local.

Major corporate tax cut legislation in 2004-05, new rules allowing faster depreciation write-offs (a form of tax cut), and disregard of enforcing the foreign profits tax under George W. Bush all resulted in a further surge in corporate after-tax profits in Bush’s second term, 2004-08. That was followed by hundreds of billions more in business tax cuts at the Federal level under Bush and Obama from 2008 through 2012.

State and local government taxes on business since 2008 have been falling especially fast, as a December 1, 2012 feature article by Louis Story in the New York Times abundantly pointed out. That article estimated the cost of business tax cuts to by State and Local governments at no less than an additional $70 billion a year not represented in the above profits figures.

As a result of the continuing corporate tax cuts since 2008 at all levels of government, Corporate After-Tax profits recovered even faster during the recent recession than did pre-tax corporate profits. From a 2008 low-point of $746 billion, in less than 18 months from the recession low, after tax profits rose to $1.454 trillion—i.e. a level of 47% higher than even their 2007 pre-recession record of $989 billion. In other words, after tax profits recovered twice as fast as pre-tax profits as a direct consequence of government business tax cutting during the recent recession.

Corporate cost cutting at the direct expense of labor resulted in record corporate pre-tax profits during the last decade and especially since 2008. Three decades of corporate tax cutting—intensifying since 2001 and continuing through the recent recession—resulted in even greater after-tax profit gains. But as corporate tax cutting has intensified so too has the cutting of taxes on recipients of capital incomes—i.e. capital gains, dividends, interest, rents, etc.

The Personal Income Tax has concurrently been reduced for the wealthiest 1% households, enabling the ‘pass through’ of ever larger magnitudes of corporate after-tax profits to the wealthiest 1% and permitting that 1% to retain ever greater amounts of those distributed corporate profits as a result of accompanying reductions in the personal income tax.

The reductions in the Personal Income Tax have occurred in various forms: the lowering of the top marginal tax rates, the raising of the income threshold at which the top marginal rates would apply, the reducing of capital gains and dividends tax rates even faster than for other forms of income of the wealthiest 1%, introduction of new forms of interest income taxed at lowest rates (e.g. carried interest), the IRS benign neglect of offshore tax sheltering by the wealthy, the proliferation of countless income tax loopholes benefiting the wealthy too numerous to recount.
The outcome has been the shift in income to the top 1%, from 8% in 1979 to the estimated 24% share of national income in 2012.

Income Decline for the Bottom 80%

But income inequality is a consequence not only of income shifting to the wealthiest households and their corporations. Income inequality is a ‘double edged’ sword. It is also the consequence of conditions and policies which have simultaneously reduced the real incomes of the bottom 80% households—i.e. those 110 million earning less than $118,000 annual income and most of whom earn less than $50,000—while simultaneously raising the incomes of the wealthiest and their corporations. Once again the nexus is Corporate America.

Policies and measures that have raised corporate profits in the US to record levels over the past three decades, and especially since 2001, are in many instances the same policies that have reduced income for the middle and working classes in America. A short list of the major causes would include:

1. De-unionization of much of the labor force and a consequent collapse in the union-nonunion wage differential
2. Free trade policies that have lowered wages for new export companies by 20% compared to higher paid jobs lost to imports.
3. Millions of jobs permanently lost to free trade from NAFTA, CAFTA, and others
4. Offshoring of high paying jobs by multinational corporations to Asia and beyond
5. Creation of a 40 million two-tier workforce of part time and temp workers, with 60% wages and virtually no benefits
6. Elimination of health care benefits for tens of millions, and reduction in benefit coverage and higher cost sharing for those remaining with benefits
7. Longer duration between adjustments of minimum wage legislation, and smaller progressive adjustments when they occur
8. Rising base level of unemployed as recessions occur more frequently, are deeper and longer in duration, resulting in job recovery longer and at lower pay
9. Management hoarding of all productivity gains without sharing in part with wages
10. Elimination of defined benefit pensions and replacement with minimal 401k plans
11. Exemption by government rule changes of millions of workers from eligibility for overtime pay
12. Rise in property tax, sales taxes, and other local government fees and charges as local government grants more and more tax cuts to corporations and businesses.
13. Indexation and rise in payroll tax contributions by workers
14. Reduction in paid leave time for vacations, holidays, sick leave, etc.

These and scores of other measures have resulted in a concurrent decline in working and middle class income, as profits of Corporations and income from capital simultaneously have risen. The heaviest impact has been on working class households earning annual income from $39,000 to $118,000 a year—virtually all of which is wage income—sometimes called the middle class.

According to the PEW Institute’s 2012 study, the share of total income for those households in that annual income range declined from 58% in 1983 to 45% in 2011. So what the top 1% households gained (16% share increase, from 8% to 24%), the middle class largely lost (13% share decline from 58% to 45%). In terms of wealth estimates, the middle class has lost 28% of its wealth in just the last two decades, whereas the top1% share of wealth has risen from 27% to 40%. The size of the middle class itself has declined, shrinking from 61% of adults in the US population at its peak to only 51% today.

The decline in income and wealth has been long term, increasing noticeably since 1980, accelerating since 2001, and continuing through the recent recession to the present day. Since 2008, households without a 4 year college education have been especially hard hit, with a significant -9.3% income decline at the median in less than four years. Older workers, age 55-64, and younger workers, age 25-34, have been similarly hard hit in terms of income decline; the former a -9.7% drop and latter a -8.9% drop. Even college degreed workers’ income has fallen by -5.9% since the so-called end of the recent recession in June 2009.

While some of the income decline is due to wage and benefit reductions by those who did not lose their jobs during the recent recession, much more of the relative income decline has been due to massive loss of jobs since 2007, which reached a level of 27 million at one point and still remain at 22 million after four years of so-called recovery. While more than 15 million jobs were lost, no more than 5 million have been ‘recovered’ since the recession began. Moreover, the jobs added during the recession have paid significantly less than the jobs lost, thus lowering income accordingly. According to a National Employment Law Project survey published in August 2012, 60% of the jobs lost during the recession were higher paying construction, manufacturing, and tech jobs, ranging between $13.84-$21.13 per hour. But only 22% of the jobs added since 2008 were in this range. In contrast, 21% of the jobs lost after 2008 were low paying, $7.69-$13.84, but the latter have been 58% of the jobs added during the recession. And the problem is not only short term and recession related. Since 2001, low wage jobs have grown 8.7% while higher wage jobs have decline -7.3%.

In summary, while corporate profits have continued to grow so too has the income of the top 1 wealthiest households. This has been made possible in large part at the expense of the middle and working classes, as rising corporate profits gained at workers’ expense are passed through to forms of capital incomes—the latter process accelerated by the reduction in both corporate taxation and personal income taxation for the wealthiest 1% households. The process began in earnest more than three decades ago under Reagan, continued under Clinton, accelerated under George W. Bush, and has remained under Obama during his first term. The consequence has been the growing—and accelerating—income inequality in America which is a major characteristic of the US economy in the 21st century.
It also explains in large part why the current US economic recovery has repeatedly relapsed on three different occasions since the formal end of the recession in June 2009, and will continue to do so in the future. While corporations, bankers, speculators, stock and bond traders, and the wealthiest households continue to experience significant long term income gains and have recovered years ago from the 2007-09 economic contraction, the rest of the populace remains plagued by an economy that has been simply ‘bouncing along the bottom’ now for four years.

Jack Rasmus

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On Tuesday, February 12, 2013, President Obama will give his State of the Union address. Previews from the media in recent days indicate he will talk about job creation and the problem of income stagnation for the middle class. Neither of these issues—jobs and income—have been seriously addressed for more than five years since the start of the recent recession in December 2007. More than 20 million workers remain jobless and real income for middle class families has fallen, and continues to fall, for the past five years according various measures.

It is rumored Obama will call for a massive increase in Free Trade, specifically for a pacific-wide free trade agreement, the ‘Trans Pacific Partnership’ agreement that his representatives have been working on already for more than a year. Also in the works is a parallel Free Trade agreement with the entire European Union. If passed, these agreements will result in millions more lost jobs—not new jobs—and will make the more than 5 million jobs already lost to NAFTA free trade and China preferred trade pale in comparison. But it will be passed off as a ‘job creator’.

With regard to domestic job creation, it is rumored he will call for business to invest more in the US in order to create jobs here. It is not likely, however, the President will bother to mention the more than $2 trillion in cash US corporations are sitting on—or distributing to their stockholders to the tune of $500 billion last year—instead of creating jobs. Nor is it likely the President will mention that, according to latest Wall St. Journal surveys, big businesses plan to increase investment in 2013 by a mere 2%, down from 8% in 2012 and 20% in 2011. He will exhort them to do something more about investing and job creation, without saying what he himself will do if Business continues to sit on its massive cash hoard and lower investment still further.

The reason most frequently given by CEOs for not investing more in the US is that US consumers aren’t buying enough. True enough. Except for the wealthiest 10% households, median family consumer spending is lagging badly. Most of median household spending that is occurring is spending on credit—credit cards, installment loans, student loans—or spending from depletion of savings to cover escalating healthcare costs. Consumer spending based on real income gains is just not happening for the middle class. And that picture is about to get seriously worse very quickly in coming weeks, given the recent run-up in gas prices that will almost certainly exceed $5 a gallon this spring.
But Obama will talk about the need for income gains for the middle class, while remaining short on the specifics how that will occur; he’ll talk about the need for more jobs without offering specific programs except for more job-destroying free trade agreements. And while he’ll reference the key problem of falling real middle class incomes, specific solutions he plans will be conspicuously absent.

How important is the fact of stagnating and/or declining middle class incomes? The following are some of the more salient facts about income inequality trends in the US in recent decades and years; why those trends are growing worse; and why that inequality is a major factor in the now stagnating once again US economy and recovery.

The Wealthiest 1% Households Historic Income Gains

The dominant characteristic of the US economy today—and a fundamental cause of the faltering, stop-go economic recovery in the U.S. since 2009—is the long term and continuing growth of income inequality in America.
That inequality is most dramatically represented by the growth in the share of national income by the wealthiest 1% of households, on the one hand, and the decline in the share of national income for the bottom 80% and remaining 110 million plus US households, on the other—i.e. between those earning an average of $593,000 a year (top 1%) and those earning less than $118,000 a year (bottom 80%) with a median annual income of around $50,000.

With average annual incomes of $593,000 a year today, the wealthiest 1% of households in the U.S.—approximately 750,000 out of a total of more than 150 million families in the U.S.—receive about 24% of all income generated in the US every year, according to Nobel Prize winning economist, Joseph Stiglitz. That’s up from only 8% of total income in 1979. That’s a tripling of the wealthiest 1%’s annual share of total income over the last three decades since Ronald Reagan took office. Not since 1928, when the wealthiest 1% share of income reached 22%, has income inequality been as extreme as today. And income inequality continues to grow worse at an accelerating rate.

According to studies of IRS data by University of California economist, Emmanuel Saez, and others, during the Clinton years, 1993-2000, the wealthiest 1% households captured 45% of all the increase in US income growth. During the George W. Bush years, 2000-2008, they captured 65%. And in the latest year of available data, 2010, they captured 93%. So the top 1% recovered quickly from the recession. So did their corporations, from which the same 1% households obtain more than 90% of all their income in the form of capital gains, dividends, interest, rents, and other forms of ‘capital incomes’.

Corporate Profits and the 1%

Profits are the major conduit through which the wealthiest 1% incomes grow, redistributed to stockowners, bondholders, and senior executive managers in the form of capital incomes like capital gains, dividends, interest, rents, etc. And Corporate Profits have done extremely well the past three decades, since 2001 in particular, and especially since the Great Recession of 2007-09.

After three years of recession, by 2011 corporate profits in the US were higher than even in 2007 just before the Great Recession began, rising at the fastest rate in 31 years during the recession and immediately after in 2010-11.
Averaging an annual rate of increase of about 10% from 1948-2007, Pre-Tax Corporate profits virtually doubled from their recession 2008 low-point of $971 billion to $1.876 trillion by March 2011 less than a year and a half later—i.e. a level 28% higher than even their 2007 pre-recession record high of $1.460 trillion.

A subset of the $1.876 trillion, i.e. profits of the 500 largest US corporations, rose 243% in 2009-10 according to the Wall St. Journal. That’s 243% after averaging 10% a year during 1998-2007. Moreover, that 243% does not include profits of multinational US corporations hidden and sheltered in their offshore subsidiaries, which in 2012 were estimated at more than $1.4 trillion.

This record gain in pre-tax corporate profits since the onset of the economic crisis in 2007-08 was achieved not from the increased sale of goods and services, but from record profit margins from cost-cutting operations—i.e. by cutting jobs, by reducing wages, benefits, and hours of work, and by productivity gains pocketed by management and not shared with their workers. Profit margins since 2008, i.e. profits as a percent of operating costs, by 2011 thus attained the highest levels in more than 80 years.

Just as cost-cutting at the direct expense of workers has been the main factor in generating record pre-tax corporate profits, so too have Corporate After-Tax profits surged as a consequence of massive corporate tax cutting by governments at all levels, Federal as well as State and Local.

Major corporate tax cut legislation in 2004-05, new rules allowing faster depreciation write-offs (a form of tax cut), and disregard of enforcing the foreign profits tax under George W. Bush all resulted in a further surge in corporate after-tax profits in Bush’s second term, 2004-08. That was followed by hundreds of billions more in business tax cuts at the Federal level under Bush and Obama from 2008 through 2012.

State and local government taxes on business since 2008 have been falling especially fast, as a December 1, 2012 feature article by Louis Story in the New York Times abundantly pointed out. That article estimated the cost of business tax cuts to by State and Local governments at no less than an additional $70 billion a year not represented in the above profits figures.

As a result of the continuing corporate tax cuts since 2008 at all levels of government, Corporate After-Tax profits recovered even faster during the recent recession than did pre-tax corporate profits. From a 2008 low-point of $746 billion, in less than 18 months from the recession low, after tax profits rose to $1.454 trillion—i.e. a level of 47% higher than even their 2007 pre-recession record of $989 billion. In other words, after tax profits recovered twice as fast as pre-tax profits as a direct consequence of government business tax cutting during the recent recession.

Corporate cost cutting at the direct expense of labor resulted in record corporate pre-tax profits during the last decade and especially since 2008. Three decades of corporate tax cutting—intensifying since 2001 and continuing through the recent recession—resulted in even greater after-tax profit gains. But as corporate tax cutting has intensified so too has the cutting of taxes on recipients of capital incomes—i.e. capital gains, dividends, interest, rents, etc.

The Personal Income Tax has concurrently been reduced for the wealthiest 1% households, enabling the ‘pass through’ of ever larger magnitudes of corporate after-tax profits to the wealthiest 1% and permitting that 1% to retain ever greater amounts of those distributed corporate profits as a result of accompanying reductions in the personal income tax.

The reductions in the Personal Income Tax have occurred in various forms: the lowering of the top marginal tax rates, the raising of the income threshold at which the top marginal rates would apply, the reducing of capital gains and dividends tax rates even faster than for other forms of income of the wealthiest 1%, introduction of new forms of interest income taxed at lowest rates (e.g. carried interest), the IRS benign neglect of offshore tax sheltering by the wealthy, the proliferation of countless income tax loopholes benefiting the wealthy too numerous to recount.

The outcome has been the shift in income to the top 1%, from 8% in 1979 to the estimated 24% share of national income in 2012, and the accelerating accrual of all income gains by the top 1% noted previously in the opening paragraphs of this essay.

Income Decline for the Bottom 80%

But income inequality is a consequence not only of income shifting to the wealthiest households and their corporations. Income inequality is a ‘double edged’ sword. It is also the consequence of conditions and policies which have simultaneously reduced the real incomes of the bottom 80% households—i.e. those 110 million earning less than $118,000 annual income and most of whom earn less than $50,000—while simultaneously raising the incomes of the wealthiest and their corporations. Once again the nexus is Corporate America.

The heaviest impact has been on working class households earning annual income from $39,000 to $118,000 a year—virtually all of which is wage income—sometimes called the middle class.

According to the PEW Institute’s 2012 study, the share of total income for those households in that annual income range declined from 58% in 1983 to 45% in 2011. So what the top 1% households gained (16% share increase, from 8% to 24%), the middle class largely lost (13% share decline from 58% to 45%). In terms of wealth estimates, the middle class has lost 28% of its wealth in just the last two decades, whereas the top1% share of wealth has risen from 27% to 40%. The size of the middle class itself has declined, shrinking from 61% of adults in the US population at its peak to only 51% today.

The decline in income and wealth has been long term, increasing noticeably since 1980, accelerating since 2001, and continuing through the recent recession to the present day. Since 2008, households without a 4 year college education have been especially hard hit, with a significant -9.3% income decline at the median in less than four years. Older workers, age 55-64, and younger workers, age 25-34, have been similarly hard hit in terms of income decline; the former a -9.7% drop and latter a -8.9% drop. Even college degree workers’ income has fallen by -5.9% since the so-called end of the recent recession in June 2009.

While some of the income decline is due to wage and benefit reductions by those who did not lose their jobs during the recent recession, much more of the relative income decline has been due to massive loss of jobs since 2007, which reached a level of 27 million at one point and still remain at 22 million after four years of so-called recovery. While more than 15 million jobs were lost, no more than 5 million have been ‘recovered’ since the recession began. Moreover, the jobs added during the recession have paid significantly less than the jobs lost, thus lowering income accordingly. According to a National Employment Law Project survey published in August 2012, 60% of the jobs lost during the recession were higher paying construction, manufacturing, and tech jobs, ranging between $13.84-$21.13 per hour. But only 22% of the jobs added since 2008 were in this range. In contrast, 21% of the jobs lost after 2008 were low paying, $7.69-$13.84, but the latter have been 58% of the jobs added during the recession. And the problem is not only short term and recession related. Since 2001, low wage jobs have grown 8.7% while higher wage jobs have decline -7.3%.

In summary, while corporate profits have continued to grow so too has the income of the top 1 wealthiest households. This has been made possible in large part at the expense of the middle and working classes, as rising corporate profits gained at workers’ expense are passed through to forms of capital incomes—the latter process accelerated by the reduction in both corporate taxation and personal income taxation for the wealthiest 1% households. The process began in earnest more than three decades ago under Reagan, continued under Clinton, accelerated under George W. Bush, and has remained under Obama during his first term. The consequence has been the growing—and accelerating—income inequality in America which is a major characteristic of the US economy in the 21st century.

But don’t expect to hear anything specific or concrete from the President how he proposes to reverse the continuing deterioration in middle class income. What he’ll likely say is you don’t have enough income because you don’t have enough education, so go out and get more and take on even more student debt. And he’ll say the way to stimulate investment and jobs is to pass more Free Trade treaties that will destroy millions more jobs. Or pass the Immigration bill, much of which is being drafted right now by big tech companies to ensure they can hire hundreds of thousands more H-1B visa workers from their offshore subsidiaries. Or propose to create ‘green’ jobs by giving the ‘greenlight’ to natural gas fracking and pipeline construction throughout the US. But none of that will solve the problem of more than 20 million still jobless, or the fact that jobs that have been created are low pay, part time, temp, non-union service jobs with little or no benefits—that is, jobs that do little to resolve the even deeper problem of stagnating middle class incomes.

Jack Rasmus
February 11, 2013

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