Relevant and even prescient commentary on news, politics and the economy.

Explaining Class Warfare

 
Last month one hundred and fourteen thousand unemployed moochers…suddenly yank the government teat out of their mouths, get off the couch for forty hours a week? Why?
 
 
I say follow the money; cause I found out, that right around the time those people got those jobs…they started getting paid!
 
And just where does that money come from? Right out of the pockets of the job creators. How’s that for your socialist redistribution of wealth? Folks, it’s called class warfare.
 
 
Mr Colbert has created a new party that will issue a certificate to sooth the hurt of the job creators. The Certificate of Richness issued by:
Protecting Industry Titans and Yachtsman party. The P.I.T.Y. party.
 
And right on cue:
 
 
If President Obama is re-elected and raises taxes, Westgate Resort’s David Siegel says he will have to lay off workers and downsize his company — or even shut it down.
 
 

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Income Mobility

Lifted from comments from Daniel Becker’s post here, reader PJR provides links to two good sources:

Another data-driven study indicates income mobility is down at the same time that inequality is up, saying “Overall, the evidence indicates that over the 1969-to-2006 time span, family income mobility across the distribution decreased, families’ later-year incomes increasingly depended on their starting place, and the distribution of families’ lifetime incomes became less equal.” Check out the charts/data in the back (I wish data went further back in time, but this is pretty good). Some of the charts, and good commentary, is [also available] at Jared Bernstein’s place [edited for functionality, readability]

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Define Rich, Part III. What the tax tables of yore say.

 By Daniel Becker

Randolph Duke: Money isn’t everything, Mortimer.
Mortimer Duke: Oh, grow up.
Randolph Duke: Mother always said you were greedy.
Mortimer Duke: She meant it as a compliment.
A while ago (an understatement) I posted on the question of what is rich. The first dealt with what issues to consider in defining rich. The second was looking at the issue of getting rich if that is even what one wants to do. The “rat race”. I don’t believe most people really want to be rich. I believe most people when thinking about being rich are thinking about what it would take to remove the fears of events that would make one’s life either very difficult in a world that requires money to remove risk or drastically different from what one’s life was. I’m thinking things like losing a job, debilitating injury or illness possibly resulting in physical disability or Louis Winthorpe III.
This all ties into “The American Dream”. The “Dream” is not just an ideology of governance and social philosophy. It is also a life style and thus requires a specific level of income. I have posted on this issue also and noted just how high in income we have driven this “Dream” such that two people with bachelor’s degrees just starting life together may not be able to have it.
Now that we have entered a period where taxes are on everyone’s minds such that there is serious consensus to raising taxes, maybe we need to see what we had in the past to know what we need now. I am sure most readers are aware of Mike’s work defining what rates appear to effect economic growth the best. If I recall correctly the number for the top 1% was around 65%. I have also suggested that there is a range as to how large a share of the income the top 1% should have. That number for the top 1% is not to be above 15% and not to much below 10%.
I should also mention my postings on taxation’s purpose. Specifically I looked at taxing from the perspective of the legal profession as oppose to the economic profession. The conclusion was that there was one main reason for taxing. It is to fulfill the directive of our constitution: equality of power. It is to assure the concept of one voice one vote. If there was ever a time in our history to raise taxes in order to assure this directive it is now in the age of the Citizens United ruling. President FDR referred to the issue and those with the one voice multiple votes do to their monied power as “economic royalty”. I like that phrase and I wonder why it is not used as are retort to those who use “class warfare” as a guilt trip.
Let’s get started.


I have constructed 4 sets of data using the tax rates of 1936/37, 1945/46, 1965/67 and 2010. I chose 1936 because it is a tax rate increase after the economy had turned north based on Mikes posting. I chose 1945/46 because it is another adjustment that happens right after after WWII. I chose 1965/67 because it is the decrease often spoken of fondly. Of course 2010 is because that is where we are at.

This posting would be hugely long if I post on all 4 periods at once, so I have broken it up. Let me first and I think most importantly note that we people today have no idea just how much we were willing to tax ourselves to have the society that we now refer to as “the good old days”. Not only did we have the tax tables of 1936, that table eventually had a 10% surcharge added to pay for the war. Yes, another reason to consider the generation that fought the 1st and 2nd world wars the greatest generation. There was a 7% surcharge for the Vietnam war, though that number became less as time passed. Still, we knew that if we wanted to do exceptional things, we had to tax ourselves exceptionally. Also, the early taxation made no distinction for single or married, never mind filing joint or separate. Everyone paid the same rate. Most interestingly, with the current table, the people who comparatively get screwed are those who are married and file separately. All the rates kick in at a lower income than even those who are single. The other thing we don’t seem to understand is that all the tax rhetoric we have been hearing since Reagan we’ve heard before virtually to the word.
Andrew Mellon, Treasury Secretary 1921 to 1932 :
Generally speaking, Mellon argued that tax burdens were too high. Steep rates, he insisted, served only to stifle incentive and foster tax evasion. “Any man of energy and initiative in this country can get what he wants out of life,” he wrote. “But when initiative is crippled by legislation or by a tax system which denies him the right to receive a reasonable share of his earnings, then he will no longer exert himself and the country will be deprived of the energy on which its continued greatness depends.”
Worse yet, Mellon argued, high rates didn’t even raise money. By encouraging both legal tax avoidance and illegal tax evasion, they eroded the tax base and reduced overall revenue. Lower rates, he said, would actually raise money by spurring economic growth and reducing the incentive for tax avoidance. “It seems difficult for some to understand,” he complained, “that high rates of taxation do not necessarily mean large revenue to the government, and that more revenue may actually be obtained by lower rates.” In particular, Mellon insisted that high rates distorted investment decisions, boosting the popularity of tax-free state and local government bonds. Indeed, Mellon made these tax-free bonds a regular target of his reform attempts, but Congress resisted his plans to eliminate them.
Atlas Shrugged wasn’t even written then!  What we don’t hear much of are the original concerns and reasoning for progressive taxation. Teddy Roosevelt:
1906…We should discriminate in the sharpest way between fortunes well-won and fortunes ill-won; between those gained as an incident to performing great services to the community as a whole, and those gained in evil fashion by keeping just within the limits of mere law-honesty.
1907 regarding an income tax:…while in addition it is a difficult tax to administer in its practical working, and great care would have to be exercised to see that it was not evaded by the very men whom it was most desirable to have taxed, for if so evaded it would, of course, be worse than no tax at all; as the least desirable of all taxes is the tax which bears heavily upon the honest as compared with the dishonest man.
No advantage comes either to the country as a whole or to the individuals inheriting the money by permitting the transmission in their entirety of the enormous fortunes which would be affected by such a tax; and as an incident to its function of revenue raising, such a tax would help to preserve a measurable equality of opportunity for the people of the generations growing to manhood. We have not the slightest sympathy with that socialistic idea which would try to put laziness, thriftlessness and inefficiency on a par with industry, thrift and efficiency; which would strive to break up not merely private property, but what is far more important, the home, the chief prop upon which our whole civilization stands. Such a theory, if ever adopted, would mean the ruin of the entire country–a ruin  which would bear heaviest upon the weakest, upon those least able to shift for themselves.
At this moment, I want to mention corporate taxes. There are lessons to be learned from it’s history. I think it is a factor in understand more completely the issue Mike is focusing on: taxation and GDP growth. Wrap your minds around the fact that from 1936 to 1943 there were 6 years that corporate tax collections were greater than personal income tax collections. 1943 was the best year for this as personal income tax collections were 68.1% of the corporate tax collections. Just one year later it flips to corporate tax collections being 75.3% of personal income tax collections. In 1944 $34,543 million in total for the two taxes was collected vs 1943 $16,062 million in total.  In fact, personal income taxes remain in the mid to high 40 percent of total revenue collections from 1944 to present. The corporate share of total revenue peaks in 1943 at 39.8% and declines to hover around the 10% level with a few ventures into the single digits. Most notably 1983 the corporate share was 6.2% and 2009 it was 6.6%.
First up is our current tax table. I used the “married filling jointly” as that would be consistent with the other tables. One big rule of this series of postings: DO NOT concern yourself or me about the deductions that exist. They do not matter for this presentation and for all intent and purposes we can consider the income to have already gone through the deduction calculator and is now ready to have the tax table applied. This is because, these tables only apply to adjusted gross income.
You will notice that the table is calculated out to $,1,000,000 of income. I did this in order to keep all the tables going to the same income level. The 1936 table actually has rates for incomes up to $8 million. That is $8 million in 1936. (Using my favorite money converter that would be $301,000,000 in unskilled labor or $573,000,000 in GDP/capita.) Going to $1,000,000 in income also allows one to see what happens at the top when the rate no longer rises.
A very important concept to understand is that not every dollar is taxed at the single percentage rate as you go up the income ladder. Thus, there are two columns in my charts. The “Marginal Tax” is the additional money paid at the top of the bracket for the corresponding rate. The “Total tax” is the actual money paid up to that level. It is the “effective rate”. In simple terms, if you are at the 35% level, you 
are not paying 35% on all that you earn. Instead you are paying the amount based on your income being divided up into the number of brackets that exist. For 2010, there are 6 brackets, thus you have six different incomes so to speak.
This is what it looks like as a graph.
When the rate maxed out, I divided the range to $1 million into even parts so that the tax paid for each additional income level is the same. For the 1945/46 and 1965/67 data sets I converted the net income to 2010 dollars. I used the “unskilled labor” and GDP/cap as those are the 2 factors suggested as being the best for knowing what income equivalents are over time. The 1936 data set is converted to 1967 dollar because the numbers just get crazy. For example, a net income of $3840 is $145,000 in unskilled labor and $275,000 in GDP/cap. Though it is only $60,400 via the CPI. Which doesn’t say much for today’s median family income. It also gives us a clue as to just how much money is considered “rich”.
Next posting, I will start presenting the historical data sets. I’m still thinking about the best way to do it as what is important is the comparison among the data sets.  Maybe post just the data charts and later the graphs or maybe one data set and it’s graphs at a time. 

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Monetary Policy. I’m not only not feeling it, I’m dehydrating because of it.

by Daniel Becker

Continuing my prior post suggesting that what ever monetary policy has done, it has not reached that vast majority nor has it addressed what is the main issue, I viewed this chart by Mike Kimel and thought: Perfect!
Then comes Ken Houghton linking to this article with it’s chart.
What do they have in common? Income inequality. So let me repost this graph from my 12/2007 post.
I’m only posting the second half of the graph, as that is the one that matters.

Take a look at 1996. That is the year that personal consumption crossed over the income level of the bottom 99%. It’s been borrowed money ever since. For an economy that runs on making money from money, that’s not a problem for those who earn their income by such a manor, is it?

Back to Mike’s chart. He noted that the change in what type of spending was associated with recessions happened around the early 70’s. That time is when another major event happened. The rise in productivity disconnected from the rise in wages. That is, any rise in productivity did not produce a corresponding rise in wages as was the historical norm. My position is that this was the start of the “new” service economy of making money from money that went into full mode with Reagan. Ok, we went from government spending to private sector spending as the fuel for the economic engine which I agree with Mike is what is the real mechanisms that is behind the results Mike notes Tyler Cowen labeled The Great Stagnation. Mr. Cowen is correct, it’s a great stagnation, but stagnation has it’s cause. Regarding both Mike and Mr. Cowen, the shift from government spending to private sector spending being considered the fuel that resulted in stagnation is not the complete answer. The change in the means of spending coincides with the ideology change. We went all Milton and Rand ideologocially. However, the act of spending dollars and the means by which dollars are spent is not the fuel of the engine, it only referrers to the distribution of the fuel. Mike is taking about the distribution system and Mr. Cowen is talking about the results of using that system.

So, what is the real culprit? What is it about the fuel that made us get to where we are today?

We started starving the engine of fuel. And we did it by using a supposedly better fuel distribution system. Instead of moving the money into the engine via the broadest distribution system, we followed an idea that suggested a more focused distribution system would work. It has not worked. It has quite literally starved the engine of fuel. I noted this here.
To quote that post using the time span of 1933 to 2005:

For the first 43 years, GDP doubling was always ahead of the income. For the next 32 years, GDP growth was always behind the income which was do to the top 1%’s share. Their’s is the only income that increased faster than the economy. In chart form it looks like this:
First 43 years doubling: GDP 8.6 yrs, 99%’ers 10.75 yrs, 1%’ers 14.3 yrs.
Next 32 years doubling: GDP 10.6 yrs, 99%’ers 11 yrs, 1%’ers 8 yrs.

The first 43 years the share of income to the top 1% was declining to a low in 1976. After that in was increasing.

Ok, now to Mike’s chart. He stated:

Basically, if you corner enough economists, you might get them to tell you recessions begin if there’s a big drop in private consumption, private investment, or gov’t spending.

Reading that statement while looking at his chart should be causing fire alarms and sirens to sound. This is because, if “private consumption” is an accepted cause of a recession, and the only time such appears to be associated is this current recession in 72 or so years of having recessions, then something has radically changed. If that chart showing that an accepted cause of recession only happened once in recent history, then honey, it’s the big one.

I think there is no way to deny it. Income inequality is the dinosaur in the room. It is the meteor that hit the earth. It is why all the past solutions theorized and used since the New Deal recovery are not working.  

They can’t work because they do not address the predicted but never before (recent history) experienced.

So, look at my chart again. It’s borrowed money that keep the consumption going since 1996 (yeah the supposedly great Clinton year). You do know that the share of income rose faster to the top 1% during his 2 terms than during Reagan, Bush 1 and Bush 2? It was debt combined with “new products” designed to pretend people could pay the debt which kept it going.

In terms of numbers: $1,400,000,000,000. That’s 1.4 trillion dollars every year, year in and year out that the original system had moving through it that is now somewhere in the new system doing nothing as it relates to building a larger, stronger, healthier economic engine. You can’t cut taxes enough to make up for this. You can’t distribute enough money via QE to make up for this mostly because QE does not address this at all as noted.
 
Still not convinced with my graph, Mike’s chart and the chart Ken referred too? Then try this on for size: Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze—an Update to 2007, by Edward N. Wolff, Levy Economics Institute of Bard College

March 2010 Page 20 to 22

As noted above, the ratio of debt-to-net-worth of the middle three wealth quintiles rose from 37 percent in 1983 to 46 percent in 2001 and then jumped to 61 percent in 2007. Correspondingly, their debt-to-income rose from 67 percent in 1983 to 100 percent in 2001 and then zoomed up to 157 percent in 2007! This new debt took two major forms. First, because housing prices went up over these years, families were able to borrow against the now-enhanced value of their homes by refinancing their mortgages and by taking out home equity loans (lines of credit secured by their home)…Where did the borrowing go? Some have asserted that it went to invest in stocks. However, if this were the case, then stocks as a share of total assets would have increased over this period, which it did not (it fell from 13 to 7 percent between 2001 and 2007). Moreover, it did not go into other assets…The question remains whether the consumption financed by the new debt was simply normal consumption or was there a consumption binge (acceleration) during the 2000s emanating from the expanded debt? That is, did the enhanced debt simply sustain usual consumption or did it lead to an expansion of consumption?

The average expenditure of the median income class was virtually unchanged from 1989 to 2001 and also from 2001 to 2007. Thus, the CEX data, like the NIPA data, show no acceleration in consumer spending during the debt splurge of the 2000s. As a result, it can be concluded that the debt build-up of the 2000s went for normal consumption, not enhanced consumption.

Got that? Let’s summarize: The share of income to the 99% of people declined from 1976 onward. At the same time the means of making money changed from labor production to money manipulation (producer economy to finanicialized economy) adding to the reduction in share of income. We also changed the ideology to one from relying on the vast population (as represented by the individual and We the People) to relying on a small portion of the population to distribute what money was created. We did this for 33 years. By 1996, people were borrowing as a means to sustain their standard of living (not increase it). If the people are not spending to increase their standard of living, then is the economy really growing? By 2006 people were no longer able to make the payments and consumption was declining.  Then gas hit $4/gal and winter heating was looking like another $4000 to $6000 would be needed.

To date, nothing has been done to address this. Nothing at all. And, by “this” I mean, the income inequality that has resulted in an an economy where a very small group of people (top 1%) are taking money out of the system (that is money that would fuel the engine) faster than the engine can make it which results in an ever faster declining share to the rest of the people. Instead, we have refined new fuel and dumped it right into the top 1%’s hands and wonder why the engine is still sputtering?

One other issue I have with framing and the words used today: Under water.

People are not under water. They are not drowning in debt. On the contrary, people are dehydrating. They are starving for water. Do you know what the symptoms are of dehydration? You get thirsty and then urinate less to conserve water. (debt spending) Then you stop making tears and stop sweating. (can’t borrow) Eventually your muscles cramp, the heart palpitates and you get dizzy. (close to bankruptcy, voting against your interest) Let it go long enough and you get confused, weak and your coping mechanisms fail. (Tea Party, etc) In the end, your systems fail and you die. (recession)

People are dehydrating and Washington is doing nothing about it because they believe it is drowning.  They are throwing out life boats to people in a desert.  That is the chart Ken linked to.

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Random Notes 3 June 2011

  1. Buce has been on fire recently, so I’ll probably have to do a post about why this post is so off-target, though his conclusion is correct (short version: he’s been misled).
  2. If I’m reading this morning’s SIFMA Brief correctly, Moody’s—whose rating skills Robert has discussed at length—(1) may downgrade US debt if we spend too much and (2) will downgrade US banks unless we spend too much on them. Oh, and the banks object to regulation because it would “artificially” reduce asset values (presumably, many of the same ones Moody’s wants protected).
  3. Relatedly, James Salt (probably h/t Felix) notes that “generous” UK banks are playing reporting games. (The US version is to deny the rework and leave the asset marked at unsustainable levels.)
  4. That this is spot-on would make me sadder if I thought we still lived in anything resembling a meritocracy, or even a developing economy.
  5. If we needed further evidence of that, the state with the best secondary eduction system in the country is pushing forward with privatize-the-gains.
  6. I’m more and more convinced that China “is different,” but very much not certain the differences will make an ultimate difference. Daniel Gross is inclined to think not. More on this as I finally finish my review of BoomBustOlogy, which you should expect to see some time before the apocalypse.
  7. I assume everyone has already seen this. Just in case, check out the facts, stylised or not.
  8. Oh, and Felix is wrong here. But that’s a post that will probably never be written by me. Someone else want to send it in?

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Monetary policy. I’m sorry, it’s just not doing it for me.

By Daniel Becker
Stock market is up, Profits are up and banks are safe. So what? Unemployment is somewhere between going down and I can’t get no satisfaction. Housing values are still falling

A new nationwide survey from real estate Web site Zillow.com says the value of U.S. homes fell 3% from January 1 to March 30 — the steepest quarterly decline since 2008.

 
I know, I’m suppose to care. Bigger picture and all. But frankly, when I read comments such as that by Mark Sadowski’s:
 

Since Bernanke’s Jackson Hole speech the steep rise in stock prices has increased household wealth by some $5 trillion. The rise in inflation expectations has helped to ease the household debt deflation problem. Consumption has been the bright story in the BEA numbers last two quarters,…

I just get all “A vineyard? Really?” Now I know Rebecca’s post is about looking for some indication that things are better though tipsy and Mark is responding that with: No, things are rather solid in the “we’re moving forward” category.
I’m going to be bold here and state right out that I’m speaking for the middle-class. (Those of this class can correct me if I’m wrong.) Five trillion dollar in new stock market wealth is not reaching us. I’m happy for you all that are now more wealthy, but really, you’re only a small percentage of the population and thus your success is not representative of how well We the People in total are doing.

Before I go further, let us do a little simple math (for you stat manipulators, the key word: simple. Add more complication as you wish in comments.) I am allowed to do this, keep it simple because I’m not an economist. Or am I?
Let’s say that 81.2% of all stock is owned by the top 10% of wealth gatherers. (table 9). Let’s say there was 100 shares at $1 each for a total value in stock on 8/31/10 of $100. That $100 became $129.80 by 5/2/11.(S&P closing numbers)  But, I’m going to round off all of this to keep it really simple. 100 shares. 80 shares owned by 10 people. 20 shares owned by 90 people. Fast forward 9 months and now the $100 is $120. Still 100 shares. (We’re excluding splits, initial offerings and anything else that would increase the number of shares, simple.)
So, 10 people now have a total worth of $96. The 90 people are splitting up $24. Both saw a 20% rise. Hooray! But here’s the issue, an additional $1.60 will do a lot more than an additional $0.04. The issue is coin in the pocket. For the middle-class, it’s just not happening.
Let’s add a some more fun facts to this Yahoo party.   I used:  Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze—an Update to 2007 by Edward N. Wolff, Levy Economics Institute of Bard College, March 2010
 

As of 2007, 38% of all households have stock via pensions and of that group it represents 31.4 % of all stock. (Table 14b, 14c) Unfortunately, the middle 3 quintiles 65.1% of their assets are their house, 12.9% is pension, 3.6% is stock held in some form. Darn few of the middle-class have any stock at all and what they have is tied up.
So again, that 29.8% rise… ain’t feeling it. I ain’t feeling it in customers in my shop. I ain’t feeling it in volume of sales in my shop. I ain’t feeling it in dollar’s per sale in my shop. Guess what I ain’t gonna do? I ain’t gonna hire anyone.
Let me leave you with this. Let’s say we manage to move 5 more people into the group that has 80% of the stock for a total of 15 people. They each have $5.333.  (Finance likes to measure as if they are using micrometers.) The remaining 85 have $0.235. The 85 have 5.9% more wealth to start. 9 months later, the 15 people have $6.40 each. They have $1.067 more. The 85 have $0.282.
Certainly $0.047 more to those in the 85 group is not going to make them go out and buy flowers. However, 5 more people have more than a buck to spend and in my shop that buys one carnation that will last 2 to 3 weeks.  As I noted before, buying that flower for one’s self has major positive benefits for one’s personality. I have a better shot at selling that 1 carnation when there are 15 people that could purchase it than when there are 10. That mean’s there is a better chance that there will be one more happy person and thus push the consumer confidence index up.
That my middle-class friends, is the power of policy designed to promote income and wealth equality vs just wealth increases.  I want me some of that there policy. 
A vineyard. Really?

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More KISSing the income inequality

by Divorced one like Bush

So, I’m listening to Saturday Night Fish Fry as I’m composing. It’s the blues, though the station is a jazz and folk station. Public broadcasting at it’s best! Maybe if the economy sinks enough, we’ll return to the big bands and swing. No more solo acts of Rockband. And, maybe I’ll be supplementing my income playing rent parties.

You have all heard about the IRS release of the top 400 income earners (pdf) stats? Yup, $105.2 billion combined taxable income.

In the first posting, I showed that, all things being equal, as income share goes down for 99% of the population, there is overall less greenbacks (great tune)in the hands of the Many. The astute AB readers said: What about the fact that there is more water in the pool over time? Yes there is. But is it not six to one, half dozen to the other? Did not every numerical factor that acted to raise the pool of greenbacks in the income pool also act on everything else? Well, of course it would be foolish to think the force of economic nature rains equally on all species of greenbacks.

Just a little aside with the band (stepping aside, laying down the Les Paul, black with a maple finger board for those interested), we (Angry Bear) recently discussed velocity as a factor in giving the thumbs up or down to the stimulus package. I forgot about this money concept. It is part of what I’m trying to relay in my model to the average voter. Being that velocity has to do with how many hands a greenback moves through in a given unit of time or over time, I thought with showing that less greenbacks in the hands of the Many over time, the effect would become evident. I mean, how is it we can be talking about the effectiveness of a stimulus package in terms of it’s multiplier effect which jams with velocity and miss that the chance of increasing how fast money moves and/or how much money will move and/or how many times it moves increases when you have more people moving more money than when you have more people moving less money? Why are we talking about giving tax cuts to the greatest number of people instead of the fewest this time as part of the stimulus? Why did we give everyone $600 last year?

Ok, the LP is slung and the Ampeg is cranked.

All things being equal is not so much. From 1976 (the low point of the top 1% share of income) to 2005 the disposable income increased by a factor of 6.94. The $1000 in the model is $6940 in 2005. Unfortunately the per capita income (how much for each person) only increased by a factor of 5.13. So people, we just plain have less to begin with. Thus, the $1000 to be true to my model of a never increasing population of 100 is now $5130 in 2005. What do you think this does for velocity? I bet it explains the “historically” low inflation thus “historically low” interest rates.

Let me keep playing. In 2005 using a constant income, the One gets $230, (23%) the 99 get $7.77 each. It is a ratio of 29.6 to 1. But income increased. I’m going to use the increase that mattered, per capita. Per capita income in 2005 is $5130. The One has $1179.90. The Many get to share $3950.10 for a per capita of $39.90. 99people get to have $39.90 each. 5.13 times more than my constant income model. A ratio of 29.6 to 1. How about that! The only thing not equal in my constant income model is the population.

The drums are pounding a driving blues now. If the income share percentages had remained constant to what they were in 1976 the One would have $446.31 (2.6 X less) and the Many would share $4683.69 for an amount of $47.31 each (1.2 X more).

What do you think works better as a jam for velocity and multiplier effects, 99 people sharing $3950.10 or $4683.69?

Solo time.
From the Center for Housing Policy 2006 report (pdf) I learned that 62.9% of income for all families based on 28 metropolitan areas is spent on housing, transportation, food and medical. Now what would help velocity more, 62.9% of $3950.10 leaving $1465.55 for everything else or $2199.14 for everything else because the 99 had more income? (The $2199.14 is assuming people did not just spend more on housing, transportation, food and medical because they had more.) Or hold the expenditure percentage constant to the income increase, you still have more extra greenbacks to riff with. $272.14 to be exact. In the same report, those earning $20,000 to $50,000 are spending 80.1% of their income on housing, transportation, food and medical. Your turn to solo with the numbers.

Ending riff of tax cut squeals.
Using actual, nominal numbers, the dollar amount that would need to be made up to play a tune as in 1976 by a tax cut to the 99 in 2005 is: $1,493,418,800,000. (1.2 of the nominal 2005 99% income – 2005 99% nominal) One trillion, four hundred ninety three billion, four hundred eighteen million, eight hundred thousand dollars. All in one year (not many are into the long 1/2 hour jams any more). Still thinking the stimulus is just right or too big or not enough tax cuts?
Who played that sour tax cut note? Get them out of the band!

Next time, we’ll play some jazz and see what various inflation factors do to the Many.

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Let’s KISS the income inequality.

by Divorced one like Bush
(Updated to correct my decimal point. I’m bad.)

When I talk to others about why we’re in the mess we’re in from a position of income inequality using numbers like $1,025,000,000,000 per year from the 99% to the 1% does impress them, but as I posted a while ago it is hard to really comprehend such a large scale. I had to come up with a KISS model. This model had to also correct a problem many had when I would tell them that the share of income to the top 1% has increased to around 23%. Often they would equate the increase to the over all increase in the economy. That is, the 1% got 23% more because the economy was 23% bigger.

The solution: Scale it down. I used pennies! (Let’s not worry about the cost of a penny to mint being more than a penny is worth.)

100 pennies of income generated. 100 people.

In 1976, the share of income to the top 1% was 8.7% rounding up. You can see where I’m going with this? 1 person got 8.7 pennies and 99 received 0.92 pennies. Well, nobody gets a 0.X penny returned to them when they buy something at the store. Consequently, this just confused the issue some more.

1000 dollars of income generated. 100 people.

In 1976 1 person pocketed $87.00 and 99 people each pocketed $9.22. Cumulatively, the nation sees 1 group (the One) having $87.00 worth of purchasing power and the other (the Many) group having $913.00 of purchasing power. At this point some might say, so what, there is still a total of 1000 dollars of purchasing power. Yes, BUT… The One group may or may not spend it all, the Many will spend something in any given year. No matter what the percentage is of income spent, the Many still move more money into the demand side of the economic engine. For my gear head friends, more air flow. More dollars moving through the throttle body.

Ok Sherman, set the WABAC machine for 2005.

1000 dollars. 100 people

In 2005 the share of income to the One is 23%. (For those wanting a push against Obama I have noted that the fastest rise in income inequality was during the Clinton years. Obama has Clinton years people on staff.)

One pockets 230 dollars. Many pocket 7.77 dollars each. Are you feeling the kiss? The One has 230 dollars of purchasing power. The Many has 770 dollars of purchasing power. Being that we know Many will move more of it’s dollars into the demand side of the economy, with this change we have choked the air flow and flooded the fuel. The engine will not rev as high, will not produce as much power, and just like high altitudes where the air is thinner, it will not have the reserve to get you over the mountain. At the same time, the engine is pushing raw fuel out the exhaust. I’m confident the gear heads can explain the analogy.

I’ll use this web site to play with the numbers next.

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Inflation and interest groups in the Carter Years

Robert Waldmann

Matthew Yglesias is very smart, but he is not omniscient. In particular he doesn’t remember things that happened before he was born and it appears that he has fallen for some Republican propaganda.

He writes

In the late 1970s, it just so happened to be the case that the structure of Great Society programs and of then-widespread union contracts meant that the objective interests of union members with automatic Cost of Living Adjustment (COLA) provisions, African-Americans, and public assistance recipients were quite a bit different from the objective interests of other Americans. By contrast, it was relatively easy for Ronald Reagan to assemble a coalition built around lower taxes and inflation that started with the well-off but expanded deep into the middle class. It was actually Carter who began the effort to fight inflation and deregulate certain key sectors of the economy, but that wasn’t a politically sustainable agenda for a Democrat (as witnessed by Ted Kennedy’s very strong primary challenge).

He’s wrong. as I explain after the jump.

The point of his post is that it is hard for Republicans to win elections given widening income inequality that disconnects the experience of their base (the rich) and the majority. True. I’d add that it is hard given high inequality and especially high inequality in (easily taxable hard to hide) W-2 income, since there is so much to be gained for most people from a policy of soaking the rich and spreading it out thin.

But the facts about the 70s are the facts. I was there.

Yglesias seems to be under the impression that AFDC benefits were indexed to inflation. They weren’t. The real value of AFDC benefits declined sharply under Carter. The idea that “public assistance recipients” had less of an interest in fighting inflation than your average non-union worker is simply false. AFDC benefit levels were set by state legislatures and not indexed to inflation. National average real AFDC benefit levels declined sharply during the Carter and early Reagan years, then the decline ended (for a while) around 1984. AFDC plus food stamps declined less sharply (but declined a lot) plus there was a sharp drop 81 to 82 (food stamps are federal). Overall, the recipients of AFDC+food stamps appear to have suffered much more during the Carter years than your average non-union worker.
See here (PDF), page 12.

From 1977 to 1981 the union non union wage differential in the USA decreased from 19% to 16% (17% in 1980) (all very roughly) It is true that inflation crept up during the Carter years. It is not true that this helped Unionized workers relative to non-unionized workers. See here (PDF), page 40.

The Kennedy challenge to Carter had a lot to do with the fact that Carter was generally immensely unpopular (Iran and a recession). Carter’s deregulatory efforts were generally not controversial, mildly popular and barely noticed (I remember I was there). I don’t recall any criticism from Kennedy.

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The Race is on?

Will post-autistic economics review (who have, sadly imnvho, renamed themselves “real-world economic review) or The Economists’ [sic] Voice be the first to publish Robert Waldmann’s paper (a readable version of this blog post, which now also links to the paper)?

Only Brad DeLong may know for certain. But you should read it now.

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