Income Inequality

Updated below
An article in The Guardian on Sunday illustrated the division between rich and not-rich in the United States,

In a speech last month Buffett - the third richest man in the world - pointed out that his tax rate was 17.7 per cent of his income while his secretary was taxed at 30 per cent. 'Many of the new super-rich are looking long term at the world and they see a collapsing US education system and health-care system and the disappearance of the middle class and they realize: this is bad for everybody,' said Frank. (Wall Street Journal reporter Robert Frank)

Defenders of low tax for the very rich point to the theory of trickledown economics - the spending power of the rich benefiting the poor. But while the super-rich have boomed, the earning power of the average and poor citizen has not nearly matched the performance of the elite. In 2005 the top one per cent of earners in the US gained 14 per cent in income in real terms, while the rest of the country gained less than one per cent. The situation is especially bad for the severely poor - those living at half the poverty level - whose numbers are at a 32-year high. (Emphasis added.)

We certainly need to be sure the inheritance tax goes away, don’t we? And make sure that the tax cuts for the wealthy don’t get eliminated in 2010?

But there are deeper forces at work here than taxes.

Circuit City, not long ago, laid off all of its senior workers merely because they were senior and because their wages were higher than the wages of workers who had been there less time. They even brazenly offered to hire those same people back as “new hires” at a beginner’s wage. All of this to improve their profit. They were not losing money at the time, they just wanted to make a higher profit. I don’t know the amounts of their management staff salaries at the time, but no mention was made of those salaries being reduced or positions cut.

The corporate role of making a decent return for the stockholder investment while being a responsible citizen of the community is no longer viable for today’s financial market. The “dot com” craze was, I suspect, the culprit, but something turned Corporate America on to obscene profits and outrageous value gains and now nothing less will do.

So instead of increased productivity being shared between financier and worker in the form of greater profit and higher wages, the worker’s wages are actually reduced and the financier is rewarded with the doubled profitability of higher productivity and workers' reduced income.

The corporation needs government’s help today to be sure that it is not overtaxed, that it does not have to overpay its workers, that it is able to maximize the selling prices of its products, that it is able to obtain raw materials from public lands without paying royalties, and that it does not have to waste money in protecting the environment in which it functions. And it gets that help in abundance.

And things get worse.

The biggest incomes today are made by people who spend their time selling financial instruments. That’s right. The way to become immensely wealthy is to make your living selling money to people who have lots of money. And people who have lots of money don’t make more money by manufacturing anything, building anything, or selling any tangible product; they increase their wealth by manipulating money.

All of the manufacturing, building and tangible product work is done by the semi-rich who hope to become rich enough that they can divorce themselves from the mundane manufacturing, building and tangible product work and engage full time in “finance.” The manufacturing, building and tangible product work is increasingly being done by people overseas who do not have the “ambition” that wealthy Americans have.

Bear in mind that if your income derives from manufacturing, building or providing a tangible product or service it is taxed as income at 30% or more. If it is derived from manipulating money for people with filthy amounts of money it is “capital gains” and is taxed at 15% to help you become one of those people with filthy amounts of money.

Although this is really more of a societal problem than a political one, are any of the presidential candidates talking about ways to address this?

Update: 7/25/07

See JRB at The Democratic Strategist of July 21st. Yes, Obama and Edwards both are, but of course the media isn't covering it. Note also that both of them seem to be addressing the issue of core poverty, but not the growth of the extreme upper class at the expense of the middle class.

My post, Grocery Workers, reflects a step in the right direction though.

Mortgage Disaster

I usually agree to one degree or another with posts on the Left Coaster blog (you’ll see that blog on my blogroll), but this one by Mary echoes a rather common motif that rather goes against the grain for me.

It has to do with the rising tide of failures in the "subprime" home mortgage market, involving home loans that fall into several categories. One is simply the ARM, where payments initially are based on a low, “teaser” interest rate which rises after a few years. Others involve initial payment of interest only, and some involved making the loan based on applicant data, such as income, which the applicant knew that lender would not verify.

Bush administration regulators began allowing the lender to claim as income the highest payment that could be made under these loans, rather than the payments that actually were made, which is what Mary bases the following accusation on,

We will probably see many, many Americans find themselves believing their lives and their dreams for a better future have been destroyed. All because the Bush economy was purposely based on a Ponzi scheme where the rich hold all the cards and the people who should be able to depend on government standing on their side were sold down the river.

I’m no fan of the Bush administration, and I’m sick of regulatory changes which further enrich moneyed interests. But I think it's a stretch to argue that the Bush administration is the primary driver in people losing their homes, here.

Mortgage loans were attractive for reasons beyond that regulatory change. The change made some people richer, but the country was awash in mortgage money and the subprime market developed because there were not enough prime borrowers to lend it to. Builders were building homes at a frenetic pace, and the subprime mortgage market helped them sustain it.

More importantly, while some of the borrowers are innocent victims, a large majority are not. The terms of the loan were spelled out in documents which the borrowers signed and the increasing payments were not buried in the fine print, they were stipulated in the body of the document. Further, in many cases the borrowers lied about their incomes to obtain the loans. Most all of the buyers knew they were buying homes that they ultimately could not afford, hoping that soaring prices would magically "bail them out." They knew that they were taking a gamble and now they want big brother, that's you and me the taxpayers, to pick up the cost of losing that gamble.

I live in Southern California, land of (among other things) soaring home values. I have been bombarded for years with offers of “fantastic low payments” on my home, mailers telling me of the dream vacations I could go on, the cars and boats I could buy, the easy money that I had in my home. Easy money. I still have my years-old, low-rate, thirty-year fixed.

When a con man takes down his mark there is no truly innocent party, because the con works by appealing to the mark’s greed.

I do not favor the Bush unregulated business model. Unregulated business becomes predatory, but it cannot truly do so until it becomes monopolistic. There is not much good in the sad story of this subprime lending market, but the saddest part of the story is that the fingers of blame are pointing both ways.