More New Books Highlight Plight of Middle Class

The situation of the middle class is a hot topic these days, and rightly so. In addition to James Carville and Stan Greenberg's recent book, It's the Middle Class, Stupid, new books are out by Donald Barlett & James Steele, Jeff Faux, and Mike Lofgren.Together, they advance our understanding of middle class issues significantly.

Barlett and Steele have been sounding the alarm about middle class decline since they wrote the first newspaper articles forming the core of 1992's America: What Went Wrong? In The Betrayal of the American Dream, they tell the stories of everyday Americans, many of whom they kept up with after interviewing them for previous books. They date the beginning of the decline of the middle class to the 1970s, which I think is correct since that is when real wages for production and non-supervisory workers began their forty year decline. They emphasize the central role of Congressional and Presidential decision-making that has given us tax rules favoring the 1%, laws allowing private equity and other corporate raiders to raid pension funds and break contracts with unions and retirees, trade agreements, industry deregulation (which they see as highly destabilizing for the middle class), the destruction of retirement via the assault on pensions and their replacement with 401(k)'s, and the devastation of offshoring.

Their proposed solutions include raising taxes on the rich, and to consider instituting a financial transactions tax (also known as a Tobin tax, after its first proponent) or a gross receipts tax, which would be harder to dodge than the corporate income tax. Barlett and Steele argue further that we need to rebuild manufacturing and reduce the trade deficit, with high tariffs if necessary. They propose massive investments in infrastructure and education, including job training. Finally, they argue that the financial fraudsters who caused the 2008 financial crisis need to be prosecuted. Surprisingly, they say little about getting money out of politics, though they do mention it in their prologue as well as the well-funded corporate propaganda machine.

Jeff Faux, founder of the Economic Policy Institute, was fighting trade agreements long before mainstream economists were willing to admit that maybe free trade isn't always good for everybody, especially workers in the United States. His book, The Servant Economy, is a dystopian vision of the future of the middle class if present trends are not reversed. His basic argument is what he calls an "end-of-empire story," that the U.S. can no longer sustain subsidized capitalism, global military dominance, and middle class prosperity. He argues that the country's former economic and military dominance gave it a "cushion" that was able to sustain the middle class, but that the pressures of international trade and global competition have eroded that cushion along with the nation's ability to achieve all three of the goals mentioned above.

For Faux, much of the problem stems from the increasing U.S. trade deficit, which figures in prominently throughout the book. The rise of finance relative to manufacturing is a key problem as well, one which has made the Democratic Party more dependent on Wall Street Money, which led to Clinton ending Glass-Steagall and Obama treating bankers with kid gloves after he came into office. Worse, as we saw in the 2011 debt negotiations and other instances, the President has made it clear that he thinks there needs to be cuts to Social Security.

"Hope is not a strategy," according to Faux, and he devotes an entire chapter to what he calls "the shaky case for optimism." He foresees a "politics of austerity" that will mean cuts to middle class programs, the continuing loss of good jobs to the trade deficit, and slowly declining living standards and economic security for the vast majority of Americans for decades to come.. He calls cuts to Social Security and Medicare "a done deal." To me, perhaps the single most depressing statistic in the book relates to the much hyped "onshoring" phenomenon: GE has moved some production from China to Louisville, but the workers there make $13/hour compared to the $22/hour they formerly made.

What, then, is to be done? In a talk Faux gave at the Economic Policy Institute August 15th, he explained that he didn't see the need to give a laundry list of policy proposals because, first, he had done so in previous books, and second, there was no point in it unless we change government decision-making. Thus, it is essentially a one-point program, a constitutional amendment that ends corporate "personhood" permanently. This would also have the effect of overturning Citizens United. Without that, he argues, there is no hope.

Lofgren's book, The Party Is Over, is a Republican-eye view of what went wrong, beginning with Newt Gingrich's takeover of the Republican Party. While highly critical of the rightward, anti-science turn of his party, he argues that the Democrats are not much better, and have suffered from extremely bad messaging (he says the stimulus act should have been called the "jobs bill," for example). Interestingly, his major recommendation is to cut trillions from defense spending and redirect it to infrastructure. Of course, he wants to get the money out of politics, too, but cutting defense is his most distinctive policy proposal.

Taken together, these books are largely complementary, though each has its own distinct emphasis. Faux's book, in my opinion, is the best of the three, though also the most depressing. His vision of a likely future is far too plausible to take lightly.

UBS Whistleblower's Award Reminds Us Romneys Banked at UBS

Yesterday, the lawyers for Bradley Birkenfeld, the whistleblower in the Union Bank of Switzerland (UBS) tax evasion case, announced that he had received a reward of $104 million from the IRS, its largest-ever whistleblower award. Birkenfeld's ripping away the curtain of Swiss bank secrecy led to $5 billion in extra revenue for the U.S. government, including $780 million from UBS itself, which admitted helping thousands of Americans illegally evade taxes. Not only that, UBS turned over the names of 4500 American clients, and a subsequent amnesty program for Americans with foreign bank accounts in 2009 pulled in another 3000 names (via Matt Yglesias) as of shortly before its deadline. Many more have come in under 2011 and 2012 versions of the amnesty.

The big question behind all this is whether Mitt Romney took advantage of the 2009 amnesty, as Yglesias (link above) suggests. While John McCain saw 23 years of Romney's returns and said there was "nothing disqualifying" in them, he would not have seen Romney's 2009 return. This strengthens the circumstantial case that Romney wants to hide something from that year. So does the fact that Governor Romney declared a Swiss bank account in the one tax return he has released, 2010. Most important of all, the Swiss bank account ($3 million of Ann Romney's blind trust) was at UBS.

Given that the Obama campaign has said that five years of tax returns would be enough, one has to wonder just what could be so awful in his 2005-2009 returns that he still refuses to release them despite all the flak he has gotten over it. I can only think of a short list: tax rate under 13% one or more years, especially 0 federal taxes owed; penalties for under-reporting in prior years; the 2009 amnesty.

Oh, and one more: if his UBS account was one of the 4500 turned over to the IRS by UBS.

Have I missed any?

UPDATE: I see Linda Beale is thinking along the same lines I am.

Labor Day: U.S. Wages Trail 10 OECD Countries, but with Higher Unemployment than 9 of Them

Contra Eric Cantor, Labor Day celebrates the importance of labor and the labor movement in American history. But the bluster of Cantor, where he celebrates the so-called job creators, does illustrate that organized labor has been in decline in this country for quite some time.

One result of having a weak labor movement is that average wages in the United States have fallen behind those of 10 other industrialized democracies that are members of the Organization for Economic Cooperation and Development (OECD). What is most confounding, for Republicans at least, is that nine of these countries also have lower unemployment, which contradicts their view that high wages (and high minimum wages) harm employment.

The table below below is constructed from data at OECD StatExtracts, showing the average earnings of all wage and salary workers in each country, as well as its most recent unemployment rate (usually July 2012).

Country		2011 Annual Wages		Unemployment Rate Percent
Switzerland		$93,235		4.3
Norway		$81,475		3.1
Australia		$74,512		5.2
Luxembourg		$73,203		5.5
Denmark		$73,032		7.9
Ireland		$66,882		14.9
Netherlands		$57,001		5.3
Belgium		$56,252		7.2
Canada		$56,008		7.3
Sweden		$54,459		7.5
United States		$54,450		8.3
Finland		$53,069		7.6
Austria		$52,404		4.5
Japan		$51,613		4.3
United Kingdom		$50,366		8.0
France		$47,704		10.3
Germany		$46,984		5.5
Italy		$39,112		10.7
Spain		$37,583		25.1
Israel		$35,872		6.5
Slovenia		$30,676		8.1
Korea		$29,053		3.1
Greece		$28,434		23.1
Portugal		$22,559		15.7
Czech Republic		$16,922		6.6
Slovak Republic		$15,513		14.0
Estonia		$14,955		10.1
Hungary		$14,177		10.8
Poland		$13,811		10.0

Source: OECD StatExtracts. For average wages, select data by theme, then labour, then earnings, then average annual wages, and use "2011 USD exchange rates and 2011 constant prices" for each country. For unemployment, select data by theme, then labour, then labour force statistics, then short-term statistics, then short-term labour market statistics, then harmonized unemployment rates.

This table does not make use of purchasing power parity (PPP) conversions to wages (and the U.S. in fact has the highest wages when adjusted for PPP), for a very important reason. Essentially, the PPP calculation adjusts actual exchange rates for differences in the cost of living between countries. In practice, this means downward adjustments for expensive countries like Norway (where I had a personal pan pizza for $25 on my honeymoon six years ago; the New York Times recently published more examples) and upward adjustments for developing countries and even Eastern European countries. As I note in Investment Incentives and the Global Competition for Capital, gross national income per capita for the Czech Republic in 2006 was $12,680 at actual exchange rates, but $21,470 at PPP (page 99).

The reason we should ignore PPP when dealing with wages and jobs is that a company deciding to invest in one place rather than another has to pay the wages using the actual exchange rate and is not affected by PPP. Thus, if there is an effect of wages on employment, that will be a response to what an employer actually has to pay to hire someone, not a hypothetical measure of how well off the worker is in terms of PPP-adjusted dollars. The data here does not show any negative effect of wages on unemployment.

Moreover, I would argue that living in a high-wage, high-cost location has distinct advantages over living in a low-wage, low cost location, even if after adjusting for cost of living (via PPP or within a single country) the lower wage location has "higher" pay. One important reason is that having extra cash gives you extra options. You will have a higher retirement benefit and will keep it if you move to a lower-cost area, whereas the reverse is not possible. You will have better quality services on average, particularly health care. It is far easier for you to vacation in a low-cost location than it will be for someone in a low-cost location to vacation to a high-cost location ($25 personal pan pizzas!). Your high salary will be the benchmark if you take a job in a lower-cost location. If you economize from the standard basket of goods used to measure cost of living, your benefit will be higher in the high-cost area. Of course, a full treatment of this issue requires another post, but the big point is that high wages do not necessarily create unemployment and reducing wages is not the route to middle class prosperity.

Cross-posted with Angry Bear.

Hilarious twist on "You didn't build that!" UPDATED

The Atlantic Wire (via @NoBigGovDuh) has a great story on the dishonesty of Mitt Romney's "You didn't build that" ads. It turns out that at the Republican convention on Tuesday night, they plan to ramp it up again with a speech by a small business owner from Delaware, Sher Valenzuela, telling everyone how she did build it, not government.

Only one small problem. Actually, two.

First, Valenzuela's business, First State Manufacturing, "received more than $2 million in federal loans and more than $15 million in federal contracts over the years," according to the article. This included Small Business Administration money very early on, as well as federal disaster relief loans after 9/11 and loans from the American Recovery and Reinvestment Act. So, beyond the fact that she obviously didn't build the roads and bridges and other infrastructure--which the President was actually referring to in his speech Romney has so grossly twisted in his ads--she benefited mightily from more direct government aid. Even a month ago, we knew that lots of companies Romney promoted with this tagline actually had gotten direct government support, too.

Second, a fast-thinking Redditor figured out that Valenzuela had not claimed www.firststatemanufacturing.com for her website, and constructed his own parody of her there (h/t @NoBigGovDuh and Atlantic Wire). On the landing page we see Valenzuela displayed next to the words:



This refers to the company's designation by Delaware in 2000 as a Disadvantaged Business Enterprise. As the "About" page concludes,

First State Manufacturing is proud of our heritage, and thankful for the help that government has given us along the way. Not to mention the current help government provides! We believe that to say otherwise would be ungrateful, hypocritical, and unpatriotic.

  We'll see on Tuesday night.

(For the humor-challenged out there, remember, this is not her site and not her words. It's a parody.)

UPDATE: Here is something from Valenzuela's own website: "Get federal dollars by being a minority-owned business." Hypocrisy, anyone?

Lid Blowing Off Romney Tax Secrecy

Gawker (via Eman at Daily Kos) dropped a bombshell yesterday when it released over 950 pages of confidential documents from 21 Bain Capital-related investment vehicles, all of which Mitt or Ann Romney invested in. It made all 48 documents into a single searchable one here so that others could take a look and see what nuggets it might contain.

Romney previously claimed that his Cayman Island funds had to be located there in order to attract foreign investors, who invested via the Caymans so they would not be subject to U.S. taxes on their earnings, and that he did not reduce his tax bill as a result of his Cayman holdings. The newly released documents confirm that among these 21 funds, two set up a total of five so-called "blocker corporations" which allow U.S. non-profit entities to legally pretend to be foreign (i.e., Cayman) corporations in order to avoid the 35% "unrelated business income tax, which was created to prevent nonprofit groups from undertaking profit-making ventures that compete with taxpaying companies," as the New York Times reports. The still-unanswered question is whether Romney's huge 401-k, valued between $20 million and $102 million on financial disclosure forms, is one of the entities that invested in a blocker corporation, which would then refute Romney's assertion that his Cayman investments had not reduced his tax.

The two Bain funds with blocker corporations are Bain Capital Asia Fund LP (mentioned in the Times article; 3blockers) and Bain Capital IX Coinvestment Fund (2 blockers).

A second issue that has been raised is that various Bain entities converted management fees to carried interest (via Ryan Grim). While people know that the carried interest loophole (which makes management compensation into capital gains) exists and is legal, the issue raised by Professor Victor Fleischer of University of Colorado Law School is that private equity firms have come up with a way to make fees that are unarguably management fees subject to ordinary income (35% tax) into capital gains (15% tax) by "waiving" the fees in exchange for virtually certain future profit, so that the extremely slight economic risk is disproportionately small compared to the tax gain. Fleischer argues that this is flat out illegal and concludes: "Mitt Romney has not paid all the taxes required under law." Not all experts agree. We can look forward to more argument on this issue in coming days. Even if it is legal, it is morally even less defensible than the carried interest loophole.

In the end, we are still left with the fact that the tax system for the 1% is different from that for the rest of us.  Whether Romney releases more tax returns or not, that issue is not going away. And the drip, drip, drip of new information makes me think he will eventually cave in.

Cross-posted with Angry Bear.

Is the Growth of Manufacturing Production a Mirage?

A lot of people lament the decline in manufacturing employment, which has fallen by about 1/3 since 2000. As Upjohn Institute economist Susan Houseman points out in the linked article, we're talking about 5.5 million lost manufacturing jobs in that time frame. Here's what it looks like in long perspective

Instead of recovering as it did in previous recessions, after the 2001 recession manufacturing employment continued to fall, as Houseman points out.

But a number of commentators, including Matthew Yglesias and some more conservative ones cited by Houseman, have argued that what we really ought to be looking at is manufacturing output, which has risen steadily except for small blips during recessions.

What's wrong with needing fewer people in manufacturing due to greatly increased productivity?

Houseman argues that the increased productivity is a mirage, due to a single industry, computers. She writes:

Real value added in the computer industry grew at a staggering rate of 22 percent per year from 1997 to 2007 and 16 percent per year from 2000 to 2010. In contrast, average growth of real value added in the rest of manufacturing was just 1.2 percent per year from 1997 to 2007; real value added in the rest of manufacturing was actually about 6 percent lower in 2010 than at the start of the decade.

With that kind of growth, many multiples of GDP growth, we must be an export powerhouse in computers and electronics, right? (Insert joke here.)*

Of course we aren't, so where does that gigantic growth rate come from? If you remember the debates over inflation that gave us the Boskin Commission, you will recall that one of its criticisms of Bureau of Labor Statistics Consumer Price Index (CPI) data was it did not adequately account for improvements in quality over time. Houseman argues that the huge increases in computer power and semiconductor processing speed are what are beneath the apparently massive growth in productivity in the industry. In other words, the price deflators used to calculate real growth are the real reason productivity is apparently growing so rapidly in computers.

If Houseman is right, it means that falling manufacturing employment really is a problem; we have not become so productive that we simply need fewer manufacturing workers. And the fact that productivity is growing by leaps and bounds, yet our trade deficit in electronics keeps getting worse, seems to me to be strong evidence that she is on to something.


* From the Austin Lounge Lizards song, "The Drugs I Need."

Cross-posted with Angry Bear.

Most U.S. Trade Agreement Improve Trade Balance, but Effect Overwhelmed by NAFTA and China Trade

The U.S. trade deficit figures heavily in the analysis of Jeff Faux's new book, The Servant Economy. Faux, the founder of the Economic Policy Institute (EPI), was one of the most important voices speaking out against NAFTA when it was debated and ultimately passed by Congress in 1993.

According to EPI's 2011 Annual Report,"Presently, the United States' non-oil deficit alone costs more than five million U.S. jobs." This underscores the importance of the deficit and what is at stake. In the book, Faux points out that the theoretical benefits of free trade assume full employment, but that is hardly ever the case. Thus, he argues, the trade deficit is indeed a job killer.

Yet, as David Cay Johnston notes, the United States continues to negotiate new trade agreements while government agencies and government officials from the President down, tout them as engines of job creation. Johnston points out that the government predicted that our small pre-NAFTA trade surplus would continue, when instead we quickly went into a deficit that in 2011 reached $64.5 billion. Similarly, he says, the U.S. International Trade Commission predicted that normalizing trade relations with China would lead to a trade deficit of just $1 billion, when in fact it grew by 2011 to $295 billion!

How have these trade agreements performed? At present, according to the U.S. Trade Representative, the U.S. has free trade agreements with 19 other countries, with a 20th (with Panama) approved but not yet implemented. The 19 countries are: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, South Korea, Mexico, Morocco, Nicaragua, Oman, Peru, and Singapore.

The U.S. Census Bureau (then click on individual countries) has the answer to this. In 11 cases, the goods trade balance has improved from the year prior to the agreements' coming into effect through 2011, in one case it's too soon to tell (Colombia, effective May 15, 2012), and only in seven cases did the trade balance worsen.

Unfortunately, that's the end of the good news, because our trade with most of these countries is relatively small: in six cases the improvement was under $2 billion dollars, which pales against the country's overall goods deficit of $727.4 billion in 2011. The biggest gains have been with Singapore ($10.7 billion) and Australia ($9.1 billion).

The losses, on the other hand, have been huge, with the culprits being NAFTA and liberalizing trade with China (not even a full free trade agreement, just making it easier for U.S. firms to offshore their production to China). In the wake of NAFTA, the U.S. goods trade balance with Mexico has worsened by $66.2 billion, while our Canadian goods trade balance has worsened by $23.7 billion. Just since 2001, when China joined the WTO, and 2011, the goods trade deficit has increased from $83 billion to $295 billion. Robert E. Scott of the EPI estimates that this massive deficit has "eliminated or displaced nearly 2.8 million U.S. jobs since 2001." In addition, our Israel free trade agreement has added about $10 billion more to the deficit.

As Faux argues, the trade deficit reduces demand for U.S. labor, and pushes wages down in the aggregate. Indeed, this is the tendency of trade in general for a labor-scarce country like the United States. Faux's vision of where this is leading us in the long term is a depressing one, which I will discuss in more detail in a future column.

Cross-posted at Angry Bear.