handout 11/13 Economy now, shame poverty ...

Economic Policy Institute : Profits are up, but the wages and the incomes of average Americans are down. --Inflation-adjusted hourly and weekly wages are still below where they were at the start of the recovery in November 2001. Yet, productivity--the growth of the economic pie--is up by 13.5%.... --Consequently, median household income (inflation-adjusted) has fallen five years in a row and was 4% lower in 2004 than in 1999, falling from $46,129 to $44,389.
More and more people are deeper and deeper in debt. --The indebtedness of U.S. households, after adjusting for inflation, has risen 35.7% over the last four years. --The level of debt as a percent of after-tax income is the highest ever measured in our history. Mortgage and consumer debt is now 115% of after-tax income, twice the level of 30 years ago.... --The personal savings rate is negative for the first time since WWII.... Rising health care costs are eroding families' already declining income. --Households are spending more on health care. Family health costs rose 43-45% for married couples with children, single mothers, and young singles from 2000 to 2003. --Employers are cutting back on health insurance. Last year, percent of people with employer-provided health insurance fell for the fourth year in a row. Nearly 3.7 million fewer people had employer-provided insurance in 2004 than in 2000. Taking population growth into account, 11 million more people would have had employer-provided health insurance in 2004 if the coverage rate had remained at the 2000 level.

December 8, Federal Reserve report, Flow of Funds Accounts of US, tells the tale of two economies: one drowning in debt, the other overflowing with so much cash that it doesn't know what to do with it.
For families: Record debt. Household debt is at a record high (121.2 percent) as a percentage of disposable income. This means that families are more burdened by their debt than ever before. Record reductions in home equity. Families have cashed out more home equity than ever before, $113 billion in the third quarter alone. This means families are financing more of their consumption by reducing their home equity-a trend that is not sustainable without further wage growth.
For companies: Highest cash holdings in nearly 40 years. Corporate cash holdings totaled 6.2 percent of their assets in the third quarter of 2005. Cash holdings for the last four quarters are at their highest level since 1966. Less investment. Instead of using the additional resources generated by high profits for productive investments, corporations are using their money to spread the wealth to their shareholders. Typical mechanisms are dividend pay-outs & share repurchases that help to boost share prices. Fewer dividend pay-outs relative to corporate profits have been largely compensated for by higher share repurchases.
Employment to population ratio is still 1.7 percentage points below its 2000 average, the equivalent of 4 million fewer people holding jobs.
Over similar period in Clinton recovery, payrolls grew by near 300,000 per month.
Bush43 job creation pace remains well below. For example, payrolls grew by 2 million jobs in 2005. In a similar period in Clinton recovery, payrolls grew by 3.5 million jobs. In percentage terms, payrolls grew 1.5% over the past year. The average over prior recoveries is twice that rate at 3.1%. Job growth in Bush43 recovery is the slowest on record September 6, 2005

The Larger Shame : Poverty In America
By NICHOLAS D. KRISTOF

The wretchedness coming across our television screens from Louisiana has illuminated the way children sometimes pay with their lives, even in America, for being born to poor families.

It has also underscored the Bush administration's ongoing reluctance or ineptitude in helping the poorest Americans. The scenes in New Orleans reminded me of the suffering I saw after a similar storm killed 130,000 people in Bangladesh in 1991 - except that Bangladesh's government showed more urgency in trying to save its most vulnerable citizens.

But Hurricane Katrina also underscores a much larger problem: the growing number of Americans trapped in a never-ending cyclone of poverty. And while it may be too early to apportion blame definitively for the mishandling of the hurricane, even President Bush's own administration acknowledges that America's poverty is worsening on his watch.

The U.S. Census Bureau reported a few days ago that the poverty rate rose again last year, with 1.1 million more Americans living in poverty in 2004 than a year earlier. After declining sharply under Bill Clinton, the number of poor people has now risen 17 percent under Mr. Bush.

If it's shameful that we have bloated corpses on New Orleans streets, it's even more disgraceful that the infant mortality rate in America's capital is twice as high as in China's capital. That's right - the number of babies who died before their first birthdays amounted to 11.5 per thousand live births in 2002 in Washington, compared with 4.6 in Beijing.

Indeed, according to the United Nations Development Program, an African-American baby in Washington has less chance of surviving its first year than a baby born in urban parts of the state of Kerala in India.

Under Mr. Bush, the national infant mortality rate has risen for the first time since 1958. The U.S. ranks 43rd in the world in infant mortality, according to the C.I.A.'s World Factbook; if we could reach the level of Singapore, ranked No. 1, we would save 18,900 children's lives each year.

So in some ways the poor children evacuated from New Orleans are the lucky ones because they may now get checkups and vaccinations. Nationally, 29 percent of children had no health insurance at some point in the last 12 months, and many get neither checkups nor vaccinations. On immunizations, the U.S. ranks 84th for measles and 89th for polio.

One of the most dispiriting elements of the catastrophe in New Orleans was the looting. I covered the 1995 earthquake that leveled much of Kobe, Japan, killing 5,500, and for days I searched there for any sign of criminal behavior. Finally I found a resident who had seen three men steal food. I asked him whether he was embarrassed that Japanese would engage in such thuggery.
"No, you misunderstand," he said firmly. "These looters weren't Japanese. They were foreigners."

The reasons for this are complex and partly cultural, but one reason is that Japan has tried hard to stitch all Japanese together into the nation's social fabric. In contrast, the U.S. - particularly under the Bush administration - has systematically cut people out of the social fabric by redistributing wealth from the most vulnerable Americans to the most affluent.

It's not just that funds may have gone to Iraq rather than to the levees in New Orleans; it's also that money went to tax cuts for the wealthiest rather than vaccinations for children.

None of this is to suggest that there are easy solutions for American poverty. As Ronald Reagan once said, "We fought a war on poverty, and poverty won." But we don't need to be that pessimistic - in the late 1990's, we made real headway. A ray of hope is beautifully presented in one of the best books ever written on American poverty, "American Dream," by my Times colleague Jason DeParle.

So the best monument to the catastrophe in New Orleans would be a serious national effort to address the poverty that afflicts the entire country. And in our shock and guilt, that may be politically feasible. Rich Lowry of The National Review, in defending Mr. Bush, offered an excellent suggestion: "a grand right-left bargain that includes greater attention to out-of-wedlock births from the Left in exchange for the Right's support for more urban spending." That would be the best legacy possible for Katrina.

Otherwise, long after the horrors have left TV screens, about 50 of the 77 babies who die each day, on average, will die needlessly, because of poverty. That's the larger hurricane of poverty that shames our land.

U.S. versus U.K. Health care Systems

Last week, in his New York Times column , Paul Krugman wrote about a study from the Journal of the American Medical Association , and the study is fascinating enough that it’s worth a second look. It was conducted by a group of epidemiologists at University College London (my parent’s alma mater!). The point was to compare the health of the United States and the United Kingdom. It’s an interesting question for a number of reasons, but principally because the United States spends $5274 per person, per year, on health care and the United Kingdom spends $2164, or substantially less than half as much. The question is—what do we get, in terms of health, that for extra $3100 a year?

Comparisons between countries are pretty tricky. So the study takes a number of precautions. Obviously the United States has a much larger percentage of immigrants, particularly Latino, and a large and (relatively poor) black population. So the comparison is limited to non-Hispanic whites in both countries. Health also differs, dramatically, by socio-economic status, so that everyone in the study was broken up into one of three groups by income and education. It was also limited to men and women between the ages of 55-64, and the age distribution of the two countries was identical.

So what do they find? The first conclusion is that Americans are really, really sick compared to the British. In every socio-economic group, for instance, the prevalence of diabetes is roughly double in the United States than it is in the United Kingdom. Rates of hypertension, heart disease, heart attacks, stroke, lung disease and cancer are also all higher in the United States. And not just a little big higher. Much higher. So, for example, 2.3 percent of the English have had a stroke, versus 3.8 percent of the Americans.

Is that because Americans have unhealthier lifestyles? Not really. Levels of smoking, in the two countries, are pretty similar. Americans are much more likely to be obese (31.3 versus 23 percent). But then 30 percent of the British were heavy drinkers, versus 14.4 percent of Americans. (One of the curious facts in the study: in both the United States and the United Kingdom, the more money you make and the more education you have, the more you drink. There are roughly twice as many heavy drinkers in the best educated English cohort as there are in the least educated English cohort. So much for class assumptions about alcohol.) The study’s author did a statistical exercise, where they assumed that the British group had exactly the same lifestyle risk factors as their American counterparts. The result? Nothing much changes. Americans were still far sicker than the British.

Krugman argues that this is evidence of how much more stressful living in America is than living in England. I think that's absolutely right. I would simply add that it is one more nail in the coffin of the notion that good health is something that can be purchased through fancy, high-tech drugs and doctors and hospitals,.I know the idea that health care is just another consumer good is pretty popular at the moment. But its very hard to read the JAMA study, see what our $5274 actually buys us--and still believe in that notion. Our health is in reality a function of the broader society in which we live--the pressures and conditions and environments in which we find ourselves. The next time we have a debate about, say, how much to tax the rich, or how to structure old age pensions, it would be nice if someone in Washington had the courage to make this point.

The Wealth Divide
The Growing Gap in the United States Between the Rich and the Rest
An Interview with Edward Wolff, professor of economics at New York University. He is the author of Top Heavy: The Increasing Inequality of Wealth in America and What Can Be Done About It, as well as many other books and articles on economic and tax policy
Multinational Monitor: What is wealth?
Edward Wolff: Wealth is the stuff that people own. The main items are your home, other real estate, any small business you own, liquid assets like savings accounts, CDs and money market funds, bonds, other securities, stocks, and the cash surrender value of any life insurance you have. Those are the total assets someone owns. From that, you subtract debts. The main debt is mortgage debt on your home. Other kinds of debt include consumer loans, auto debt and the like. That difference is referred to as net worth, or just wealth.

MM: Why is it important to think about wealth, as opposed just to income?
Wolff: Wealth provides another dimension of well-being. Two people who have the same income may not be as well off if one person has more wealth. If one person owns his home, for example, and the other person doesn't, then he is better off.

Wealth — strictly financial savings — provides security to individuals in the event of sickness, job loss or marital separation. Assets provide a kind of safety blanket that people can rely on in case their income gets interrupted.

Wealth is also more directly related to political power. People who have large amounts of wealth can make political contributions. In some cases, they can use that money to run for office themselves, like New York City Mayor Michael Bloomberg.

MM: What are the best sources for information on wealth?
Wolff: The best way of measuring wealth is to use household surveys, …. — probably the best source is the Federal Reserve Board's Survey of Consumer Finances. ….

MM: How do economists measure levels of equality and inequality?
Wolff: The most common measure used, and the most understandable is: what share of total wealth is owned by the richest households, typically the top 1 percent. In the United States, in the last survey year, 1998, the richest 1 percent of households owned 38 percent of all wealth.

There is also another measure called the Gini coefficient. It measures the concentration of wealth at different percentile levels, and does an overall computation. It is an index that goes from zero to one, one being the most unequal. Wealth inequality in the United States has a Gini coefficient of .82, ….close to the maximum level of inequality you can have.

MM: What have been the trends of wealth inequality over the last 25 years?
W: We have had a fairly sharp increase in wealth inequality dating back to 1975 or 1976.

Prior to that, there was a protracted period when wealth inequality fell in this country, going back almost to 1929. So you have this fairly continuous downward trend from 1929, which of course was the peak of the stock market before it crashed, until just about the mid-1970s. Since then, things have really turned around, and the level of wealth inequality today is almost double what it was in the mid-1970s.

Income inequality has also risen. Most people date this rise to the early 1970s, but it hasn't gone up nearly as dramatically as wealth inequality.

MM: What portion of the wealth is owned by the upper groups?
Wolff: The top 5 percent own more than half of all wealth.

In 1998, they owned 59 percent of all wealth. Or to put it another way, the top 5 percent had more wealth than the remaining 95 percent of the population, collectively.
The top 20 percent owns over 80 percent of all wealth. …..This is a very concentrated distribution.

MM: Where does that leave the bottom tiers?
Wolff: The bottom 20 percent basically have zero wealth. They either have no assets, or their debt equals or exceeds their assets. The bottom 20 percent has typically accumulated no savings.

A household in the middle — the median household — has wealth of about $62,000. $62,000 is not insignificant, but if you consider that the top 1 percent of households' average wealth is $12.5 million, you can see what a difference there is in the distribution.

MM: What kind of distribution of wealth is there for the different asset components?
Wolff: Things are even more concentrated if you exclude owner-occupied housing. … The top 1 percent of families hold half of all non-home wealth. …..

The richest 10 percent of families own about 85 percent of all outstanding stocks. They own about 85 percent of all financial securities, 90 percent of all business assets. These financial assets and business equity are even more concentrated than total wealth.

MM: What happens when you disaggregate the data by race?
Wolff: There you find something very striking. Most people are aware that African-American families don't earn as much as white families. The average African-American family has about 60 percent of the income as the average white family. But the disparity of wealth is a lot greater. The average African-American family has only 18 percent of the wealth of the average white family.

MM: Are you able to do a comparable analysis by gender?
Wolff: ….. What we do know is that single women, or single women with children, have much lower levels of wealth than married couples.

MM: How does the U.S. wealth profile compare to other countries?
Wolff: We are much more unequal than any other advanced industrial country.

Perhaps our closest rival in terms of inequality is Great Britain. But where the top percent in this country own 38 percent of all wealth, in Great Britain it is more like 22 or 23 percent.

What is remarkable is that this was not always the case. Up until the early 1970s, the U.S. actually had lower wealth inequality than Great Britain, and even than a country like Sweden. But things have really turned around over the last 25 or 30 years. In fact, a lot of countries have experienced lessening wealth inequality over time. The U.S. is atypical in that inequality has risen so sharply over the last 25 or 30 years.

MM: To what extent is the wealth inequality trend simply reflective of the rising level of income inequality?
Wolff: Part of it reflects underlying increases in income inequality, but the other significant factor is what has happened to the ratio between stock prices and housing prices. The major asset of the middle class is their home. The major assets of the rich are stocks and small business equity. If stock prices increase more quickly than housing prices, then the share of wealth owned by the richest households goes up. This turns out to be almost as important as underlying changes in income inequality. For the last 25 or 30 years, despite the bear market we've had over the last two years, stock prices have gone up quite a bit faster than housing prices.

MM: A couple years ago there was a great deal of talk of the democratization of the stock market. Is that reflected in these figures, or was it an illusion?
Wolff: I would say it was more of an illusion. What did happen is that the percentage of households with some ownership of stocks, including mutual funds and pension accounts like 401(k)s, did go up very dramatically over the last 20 years. In 1983, only 32 percent of households had some ownership of stock.

By 2001, the share was 51 percent. So there has been much more widespread stock ownership, in terms of number of families. …. But a lot of these families have very small stakes in the stock market. …….. The richest 10 percent own 85 percent of all stock.

As a result, the stock market boom of the 1990s disproportionately benefited rich families. There were some gains by middle class families, but their average stock holdings were too small to make much difference in their overall wealth.

MM: Apart from the absolute level of wealth of people at the bottom of the spectrum, why should inequality itself be a matter of concern?
Wolff: I think there are two rationales. The first is basically a moral or ethical position. A lot of people think it is morally bad for there to be wide gaps, wide disparities in well being in a society.

If that is not convincing to a person, the second reason is that inequality is actually harmful to the well-being of a society. There is now a lot of evidence, based on cross-national comparisons of inequality and economic growth, that more unequal societies actually have lower rates of economic growth. The divisiveness that comes out of large disparities in income and wealth, is actually reflected in poorer economic performance of a country.

Typically when countries are more equal, educational achievement and benefits are more equally distributed in the country. In a country like the United States, there are still huge disparities in resources going to education, so quality of schooling and schooling performance are unequal. If you have a society with large concentrations of poor families, average school achievement is usually a lot lower than where you have a much more homogenous middle class population, as you find in most Western European countries. So schooling suffers in this country, and, as a result, you get a labor force that is less well educated on average than in a country like the Netherlands, Germany or even France. So the high level of inequality results in less human capital being developed in this country, which ultimately affects economic performance.

MM: To what extent is inequality addressed through tax policy?
Wolff: One reason we have such high levels of inequality, compared to other advanced industrial countries, is because of our tax and, I would add, our social expenditure system. We have much lower taxes than almost every Western European country. And we have a less progressive tax system than almost every Western European country. As a result, the rich in this country manage to retain a much higher share of their income than they do in other countries, and this enables them to accumulate a much higher amount of wealth than the rich in other countries.

Certainly our tax system has helped to stimulate the rise of inequality in this country.

We have a much lower level of income support for poor families than do Western European countries or Canada. Social policy in Europe, Canada and Japan does a lot more to reduce economic disparities created by the marketplace than we do in this country. We have much higher poverty rates than do other advanced industrialized countries.

MM: Do you favor a wealth tax?
Wolff: I've proposed a separate tax on wealth, which actually exists in a dozen European countries. This has helped to lessen inequality in European countries. It is also, I think, a fairer tax. If you think about taxes that reflect a family's ability to pay, a family's ability to pay is a reflection of their income, but also of their wealth holdings. A broader kind of tax of this nature, would not only produce more tax revenue, which we desperately need, but it would be a fairer tax, and also help to reduce the level of inequality in this country.

MM: In broad outlines, how would you structure such a tax?
Wolff: I would model it after the Swiss system, which I think is a pretty fair system. It would be a progressive tax. In the United States, the first $250,000 of wealth would be exempt from the tax. That would exclude 80 percent of all families. The tax would increase at increments, starting out at .2 percent from about $250,000 to $500,000. The marginal rate would go up to .4 percent from $500,000 to $1 million, and then to .6 percent from a $1 million to $5 million, and then to .8 thereafter. …..

It would not be an onerous tax, but it could raise about $60 billion annually. Eighty percent of families would pay nothing, and 95 percent of families would pay less than $1,000. It would really only affect very rich families.

MM: Do you recommend non-tax approaches to deal with inequality as well?
Wolff: I think we have to provide a much broader safety net in this country.

There are lots of things that we should do to strengthen our income support system. We can expand the Earned Income Tax Credit, which is now a fairly substantial aid to poor families, but which can be improved.

The minimum wage has fallen by about 35 percent in real terms since its peak in 1968. We should think about restoring the minimum wage to where it used to be. That would help a lot of low-income families.

The unemployment insurance system is in a real mess; only about one third of unemployed persons actually get unemployment benefits, either because they don't qualify or because they exhaust their benefits after six months. Typically the replacement rate is about 35 or 40 percent. In the Netherlands, the replacement rate is 80 percent. Our unemployment insurance system is much less generous than in other industrialized …

Of course, the welfare system is in a total state of disrepair …… real welfare payments had declined by about 50 percent between 1975 and 1996. So we had already experienced an enormous erosion in welfare benefits, even before we adopted this new system.

Reward for the Hereditary Elite . . .By Sebastian Mallaby June 5, 2006;
It doesn't matter if you are liberal or conservative, Democrat or Republican. There is no possible excuse for doing what Congress is poised to do this week: Abolish the estate tax.
The federal government faces a future of expanding deficits. Thanks to the baby bust and medical inflation, spending is projected to rise by nearly 3 percent of gross domestic product by 2030, a growth equivalent to the doubling of today's Medicare program. What is the dumbest possible response to this? Take a source of revenue and abolish it outright.
The nation faces rising inequality. Since 1980 the gap between the earnings of the top fifth and the bottom fifth has jumped by almost 50 percent. The United States is by some measures the most unequal society in the rich world and the most unequal that it's been since the 1920s. What is the dumbest possible response to this? Identify the most progressive federal tax and repeal it.
The nation faces the prospect that inequality will damage meritocracy. When the distance between top and bottom widens, it becomes harder to traverse the gap; people of low birth are stuck at the bottom, and human talent is wasted. What is the dumbest possible response to this? Take the tax that limits what the super-rich pass on to their children and get rid of it. Send a message to hereditary elites: Go ahead, entrench yourselves!
For most of the past century, the case for the estate tax was regarded as self-evident. People understood that government has to be paid for, and that it makes sense to raise part of the money from a tax on "fortunes swollen beyond all healthy limits," as Theodore Roosevelt put it. The United States is supposed to be a country that values individuals for their inherent worth, not for their inherited worth. The estate tax, like a cigarette tax or a carbon tax, is a tool for reducing a socially damaging phenomenon -- the emergence of a hereditary upper class -- as well as a way of raising money.
But now the House has voted to repeal the estate tax, and the Senate may do the same this week. Republicans are picking up support from renegade Democrats, such as Blanche Lincoln of Arkansas, Bill Nelson of Florida, Ben Nelson of Nebraska and Max Baucus of Montana. Several more may go over to the dark side if a "compromise" bill, which would achieve nearly everything that abolitionists dream of, is introduced in the Senate. President Bush, who has already muscled a temporary repeal of the estate tax into law, would be delighted to sign a bill making abolition permanent.
If the abolitionists succeed, some other tax will eventually be raised to make up for the lost revenue. So which tax does Congress favor? The income tax, which discourages work? A consumption tax, which hits the poor hardest? The payroll tax, which is both anti-work and anti-poor? Really, which other tax out there is better?
The abolitionists don't respond to this question because there is no convincing answer. Paul Volcker, the former Federal Reserve chairman, has written that "we would be hard-pressed to find evidence that, compared with the alternatives, a reasonable estate tax significantly discourages work or innovation or savings." In other words, killing the estate tax and raising some other tax instead would damage the economy. And that's before you take into account the positive distortions introduced by the estate tax, such as more social mobility and higher charitable giving. Charitable bequests will fall by at least a fifth if the estate tax is repealed permanently.
People often remark on the perversity of popular support for estate-tax repeal. A majority wants to abolish the tax, even though only the richest 2 percent of households have ever had to pay it. Yet this shoot-your-own-foot weirdness is easily explained: Most people just don't know that, under the law's current provisions, a couple can bequeath $4 million without paying a penny to the government.
But I'm fascinated by the spectacle of elite support for this policy. How can the president and the abolitionists in Congress, who understand the tax and its details, possibly want to kill it? They all say they accept the principle that the tax system should be fair -- Bush officials are constantly claiming that their tax cuts are progressive. They all accept the principle that free trade and competition get the best out of American firms, so what about subjecting rich heirs to competition from ordinary Americans?
Repealing the estate tax is like erecting protectionist barriers around the hereditary elite. It is anti-meritocratic and unfair -- and antithetical to this nation's best traditions.
smallaby@washpost.com
- rise in the estate tax exemption level from $1.5 million per person to $2 million ($4 million per couple) means that less than one third of one percent of all U.S. estates—or 0.27%—will be affected by the federal estate tax in 2006. All other estates, or 99.73% …