Tom Coburn, a Republican US Senator from from Ohio, says Sweden is the new right wing icon for slashing spending and taxes and is doing great.  Sweden.  Oh well, enter stage left Noble prize winning economist Paul Krugman, who writes a blog for the New York Times.

But Ezra didn’t challenge Coburn on the claim about spending cuts; why don’t we look at what Sweden has actually done, as opposed to the official right-wing line? Look, in particular, at actual government consumption — purchases of stuff. Here’s Sweden versus the United States, from Eurostat:

Somebody has been practicing harsh spending-side austerity — and it’s not Sweden.

And to make everything sweeter, a commentator writes the following:

Someone needs to tell nitwit Coborn:
Sweden’s ratio of government spending to GDP is over 50%, much higher than that of the US.
Sweden recently raised taxes on capital gains and dividends.
Sweden’s top marginal income tax rate is 57%.
Sweden’s ratio of government spending on their military is about 1.2%, about one quarter of that of the US.
Sweden’s government provides its citiizens free health care, free education and a generous safety net.
Sweden’s gini index, which measures income inequality, is in the low 20′s, about half that of the US.

In addition to free health care and generous unemployment and retirement benefits, here is what Sweden provides children:
480 paid days of parental leave.
A monthly, tax-free allowance paid to all children until age 16.
A study allowance to all children over 16 in full-time education.
Special large family supplement to families with two or more children.
Additional benefits for children with disabilities or illness.

What do we get in the US?
Endless wars and a military more expensive than the rest of the world combined.

Beezer here.  Hey he’s a US Senator so it must be correct, right?  Are you kidding me.  The guy hasn’t got a clue what he’s talking about.  We just have to pay better attention and stop voting for the GOP, which has gone stark raving mad.

The last budget deal between the administration and Congress included $55 billion in automatic defense spending reductions.  These reductions are part of the Obama administration’s proposed 2013 budget.

But it appears the Tea Party House of Representatives, those ideologues who constantly hector us over deficits, debt and the size of government, are suffering from reduction remorse.   Apparently Tea Partiers instead prefer to cut spending on programs that provide help to American individuals and families.   It’s a classic Guns over Butter choice.  An opinion piece in the New York Times details the hypocrisy.

For more than a year, House Republicans have energetically worked to demolish vital social programs that have made this country both stronger and fairer over the last half-century. At the same time, they have insisted on preserving bloated military spending and unjustifiably low tax rates for the rich. That effort reached a nadir on Thursday when the House voted to prevent $55 billion in automatic cuts imposed on the Pentagon as part of last year’s debt-ceiling deal, choosing instead to make all those cuts, and much more, from domestic programs.

If this bill were enacted, estimates suggest that nearly two million Americans would lose food stamps and 44 million others would find them reduced. The bill would eliminate a program that allows disabled older people to live at home and out of institutions. It cuts money that helps low-income families buy health insurance. At the same time, the House bill actually adds more than $8 billion to the Pentagon budget.

In all, the bill would cut $310 billion from domestic programs; a third of that comes out of programs that serve low- and moderate-income people. Other provisions would slash by half the budget of the Consumer Financial Protection Bureau, which was set up after the financial meltdown to protect consumers from predatory lending and other abuses, and reduce the pay of federal workers.

Beezer here.  The brazen hypocrisy and arrogance of these folks is astonishing.  Equally astonishing is the silence of our professional media on what choices the Tea Party is making in our name.  We believe bills like this will eventually become known to the public at large, and the reaction will be swift and certain in 2012.

The global warmingsignal is now louder than the noise of random weather, as I predicted would happen by now in the journal Science in 1981. Extremely hot summers have increased noticeably. We can say with high confidence that the recent heat waves in Texas and Russia, and the one in Europe in 2003, which killed tens of thousands, were not natural events — they were caused by human-induced climate change.

We have known since the 1800s that carbon dioxide traps heat in the atmosphere. The right amount keeps the climate conducive to human life. But add too much, as we are doing now, and temperatures will inevitably rise too high. This is not the result of natural variability, as some argue. The earth is currently in the part of its long-term orbit cycle where temperatures would normally be cooling. But they are rising — and it’s because we are forcing them higher with fossil fuel emissions.

The concentration of carbon dioxide in the atmosphere has risen from 280 parts per million to 393 p.p.m. over the last 150 years. The tar sands contain enough carbon — 240 gigatons — to add 120 p.p.m. Tar shale, a close cousin of tar sands found mainly in the United States, contains at least an additional 300 gigatons of carbon. If we turn to these dirtiest of fuels, instead of finding ways to phase out our addiction to fossil fuels, there is no hope of keeping carbon concentrations below 500 p.p.m. — a level that would, as earth’s history shows, leave our children a climate system that is out of their control.

Beezer here.  Just another pointy head scientist warning the sky is falling in like Chicken Little.    And it’s published by that commie rag, the New York Times, so that says it all.  What, me worry.

RS: One thing that stood out and sort of surprised me was that inequality seems to follow the stock market.

JG: In the United States it certainly does, and there’s a very straightforward reason for that, which is that we measure inequality from tax records. Tax records are records of taxable income. Taxable income at the top of the scale is very closely correlated, it’s essentially determined by capital gains and stock options realizations and salary payments that come out of venture capital initial public offerings, things of that nature, and are very closely correlated to the level of asset prices in the stock market…

RS: How does this type of inequality really affect the well-being of people in general, given that pay inequality hasn’t changed much?

JG: Well, generally, it improves their well-being in the short run, because a stock boom is associated with higher rates of investment,  job     creation and more overtime pay throughout the workforce, and so if you separate out incomes of working people from the capital incomes, that sort of inequality actually goes down in the stock boom. A prime example of this is in the late 1990′s when overall income inequality goes up enormously as the result of a NASDAQ information technology boom, but inequality in the working population declines, the poverty levels decline because of the effect of that on economic activity. So this is not mysterious. It is why I think the emphasis should not be on the welfare effects of inequality, but on the instability.

RS: Do you suspect a causal relationship?

JG: Again, what I find in the data is that very rapidly rising inequality, which is something that one can measure, is associated with credit booms, and credit booms are followed by credit busts. This is part of a dialog that, well I’ll leave it at that and come back to how it fits into the discussion in economics. There’s a reason for stressing this particular point….

Beezer here.  So in the late 1990s with the dot.com boom, although income inequality grew, the economic activity created causes poverty rates to decline.  OK.  So the ensuing dot.com bust was relatively minor compared to the Great Recession bust of 2008.  Galbraith stresses credit growth as the culprit of causing economic instability.

JG: The money associated with a credit boom is largely created in the process of credit extension, it’s not something that comes out of the pockets of poorer people, there’s not a fixed sum of money, this is the mechanism of an unstable credit economy.

RS: The fact that the money is essentially, well it’s not really virtual, either, or is it?

JG: Money is a spreadsheet operation, all of it is virtual in that sense. Your bank does not maintain a large stack of notes with your name on it.

RS: What’s the link between inequality and poverty? Is there a link between inequality and poverty, or are these just two very different things? We think about poverty when we think about inequality. But is that really the same thing? Do they go together?

JG: I think one has to be careful about cases. In the U.S. case, where, as I say, we have been for thirty years, our moments of prosperity were of this highly unstable credit-driven type. The poverty rates went down in the booms and go up in the slumps, so they’re really quite different from the inequality numbers as measured in the tax records. On the other hand, they do reflect the strength of demand for labor in the bottom half of the wage structure because the numbers which one can measure separately for wage inequality are very closely correlated to the hours worked by people in low-paid jobs. The number of jobs they hold, the number of hours they work in each of them, all of that translates very directly into their weekly earnings, and in the booms, of course, that goes up.

Beezer again.  Although the dot.com boom and bust were derived from equity prices, not debt, Galbraith still puts it in the too much credit category.

JG: We have many ways of measuring poverty, but there’s no question that in the booms, poverty rates fell. No question about that. By the end of the 1990′s, poverty rates for minorities in the United States were at all-time lows. That’s a direct consequence of the fact that you had three years of unemployment rates that were below four percent. The problem with that time – one can argue about the allocation of resources, could you have done better than spending all those hundreds of billions of dollars on internet start-ups that were going to go bust – but the problem of that time was not a poverty question, the problem of that time was that prosperity was built on a very unstable foundation.

RS: So essentially it’s the credit that makes the whole thing unstable, that credit is excessive…

JG: Yes, yes, yes, that’s exactly the point.

Beezer here again.  OK so what about the effect of lower, or higher, marginal tax rates?  Interestingly, before he gets to marginal tax rates, Galbraith asserts getting pre-tax distribution of income right is more effective than after-tax methods ie tax rates.  Why?  Because once you allow people to grab a huge share of income, there’s Hell to pay trying to raise top marginal rates in an effort to get some of it back. 

JG: This has always been an interesting debate amongst economists for whom the professional credo has been that you should allow whatever distribution emerges before tax, and then redistribute through the tax system, and I’ve never thought that was very persuasive. I think what actually happens is that the distribution before tax is substantially a regulatory outcome, it’s an artifact of ex ante social decisions. It has to do with, among other things, minimum wages and the structure of trade unions and a great many other things in society, and that having an accepted pretax distribution that is fair is much more stable than trying to change things through the tax code, because you get an enormously powerful political resistance to doing that once you’ve allowed people to have the attribution of income to them pretax.

Beezer again.  OK, having strong trade unions does have this kind of pre-tax distribution effect.  But as we’ve seen in recent times, strengthening trade unions has not been the trend, weakening them has.  And this weakening has, according to Galbraith, been a dynamic widening the income gap on the front end of income distribution.  That said, Galbraith does go into the back end stuff, the tax rates issue.

the point of the ’86 act was to reduce the rates at the top, but to expand the base such as to be revenue-neutral, which it largely was. I think the long-term implications of the ’86 act are only now being recognized in the economics profession. A major thing that it did was to – and that’s true also of the earlier Reagan cuts – was to create a strong incentive for corporations to shift income directly to their chief executives. I think the CEO boom was partly an artifact of the reduction of marginal tax rates, and that had very pernicious effects on corporate governance in the United States. I wrote about this in a previous book, in The Predator State, and I’m now beginning to see some commentary. I know that Thomas Piketty has come to the same conclusion.

RS: How did that happen? I don’t quite understand.

JG: Well, if you have a high marginal rate, then you have an incentive to retain earnings in the corporation and pay the corporate tax rate and then to use the retained earnings in ways that add indirectly to the consumption of your top executives. You build a skyscraper with lovely penthouses in it, you have corporate aircraft, you have the whole aspect of this that characterized the way the big corporations presented themselves in the 50′s and 60′s in the United States. And they stopped building skyscrapers – when was the last time one was built? Probably the World Trade Center in 1970. There was very, very little after that, and corporations started building basically campuses, which are much cheaper, and instead funneling the money directly into the pockets of their chief executives.

RS: Okay, that makes sense.

JG: That’s what happened. I don’t know that that was entirely anticipated by the authors of the tax cuts in the 80′s.

Beezer again.  So the back end effect of lowering top marginal rates on personal income, even if by closing loopholes it’s revenue neutral, has had some unanticipated consequences, including one of reducing retained earnings and company investment.

What do you think the effect is of the CEO boom on the economy? Does it set the wrong incentives?

JG: The main thing is that it creates a kind of very small class of, let’s say, of “personally empowered corporate executives” who are detached from the technical operations of their own enterprises by and large – that is to say, they are primarily financial people – and I think that has had a very significant effect on the way in which large American corporations operate. It has made them much more vulnerable to being downsized, having their physical operations manipulated for the sake of financial results.

RS: To put a value on that, that’s a pretty negative result.

Beezer here.  Oh well, I suppose I’ll have to read the book in order to get all this digested.  It should be stressed Galbraith is doing empirical research here.  He’s not arguing causality, only highlighting correlations that seem to re-occur in recent history.  We wrote in an earlier post about the mistake of omitted variable bias, where something ignored ends up skewing your conclusions away from the truth.  Galbraith is going to great pains avoiding conclusions.  He’s just hinting.  I don’t have that problem of course.  I want strong unions and I want higher top marginal tax rates on all income.

JG: Yes, I think that’s a pernicious result, for sure.

Beezer finally.  For sure they are pernicious.  We need to do both front end and back end reform in order to get the economic ship of state back on a sustainable even keel.  As per usual thanks to Mark Thoma’s economist’s view blogsite for highlighting this German interview.

Fast forward to today.  A fundamental characteristic of the Great Depression of the 1930s and our current ongoing recession is that there’s too much debt.  For any number of reasons, the private sector went on a debt buying spree of massive proportions.  It was in truth a debt bubble.  When that bubble burst the economy went south in a major way, throwing millions of heretofore productive people out of work, and making the debt even more sketchy because the likelihood of it being paid down was in doubt.

We don’t do Jubilees anymore, but the Jubilee concept is worth keeping in mind.  The Jubilee, as a practical matter, put an end date on all debt.  That meant that all debt was either written to be retired sensibly by that date, or some type of debt to equity conversion needed to be written into all debt agreements (termed an ‘indenture’ today).

In the Great Depression FDR essentially executed a Jubilee.  He closed all banks temporarily and called it a ‘bank holiday.’  After the ‘holiday’ there were a lot of banks missing.  A lot of debt was gone along with a lot of banks.

Problem with today’s world, no President could do such a thing.  So the forceful side of a Jubilee isn’t possible today and thus the debt overhang is more difficult to eliminate.  But that does leave the debt to equity transformation part of a Jubilee.

Much of the debt bubble rested on the idea that property values would not decline.    And if there was any decline it would be modest and temporary.  What few realized was the amount of leverage embedded in the bubble.  Because of this leverage any decline in property values instantly made the banks  insolvent.

The only way left to eliminate the debt overhang, other than massive default on all debt, is to transform a lot of debt into equity.  Something like this was accomplished when the federal government bought preferred equity in major banks.  This cash infusion, some of which still exists today, represented a temporary debt to equity swap.  This allowed the banks to be declared solvent, from a bookkeeping perspective anyway, and therefore gave the banks time to write down debt against profitable revenues.    And that’s precisely what happened.  Most banks have retired the preferred equity shares, in effect paying the taxpayer back.

But down at the Main Street level, no such relief was offered to homeowners who found themselves ‘underwater’ on their mortgages.  Many found themselves suddenly unemployed at the same time.   There needs to be a debt to equity conversion at this level.  Banks need to convert a good portion of the debt they are owed into equity, just as was done for the banks themselves by the taxpayer.

In the meantime, Congress needs to directly create millions of jobs building  infrastructure, or hiring back teachers and other public employees cash strapped states continue to fire, thus coming at the same debt problem from the other end, the income end.

One way or the other, history shows housing prices will decline at minimum back to trend before the bubble.  They often decline even further, and that’s still a possibility.  So raise incomes and swap property mortgage debt into equity.  That’s a sensible way to more quickly work off the bubble debt.

Now along comes a new book written by scholars Thomas E. Mann and Norman J. Ornstein, entitled It’s Even Worse Than It Looks, detailing how bad it really is.

In a New York Times review of the book, columnist Timothy Egan writes:

The House run by John Boehner is stuffed with zealots and intellectual dead-enders who think compromise is a synonym for treason. Americans agree on very little, but there seems to be shore-to-shore consensus on a view of this Congress: We hate you….

Quoting Mann and Ornstein from the book, Egan writes:

“Today, however, we have no choice but to acknowledge that the core of the problem lies with the Republican Party.”

They describe the G.O.P. as “an insurgent outlier,” and cite studies that Republicans are now more conservative they have been since, well, the era when women could not vote, blacks could not share the same public space as whites and the income tax was a distant dream of a forward-thinking Republican reformer, Theodore Roosevelt.

It’s not just the “appalling spectacle of hostage taking,” as Mann and Ornstein described last year’s budget crises, when Republicans threatened government shutdown and public default in the name of fiscal responsibility. If the House majority were really fiscally responsible they would at least close tax loopholes. But they won’t, because 238 of the 242 House Republicans have taken a pledge to Grover Norquist to never raise revenues, shirking their duty to put country first.

Nor is it the pathos of Republicans who let the most dangerous demagogues among them — highlighted by freshman Representative Allen West, whose latest absurd claim is that up to 81 Democrats in Congress are members of the Communist Party — lie without censure….

But these people with an R on their jerseys are harming the country, acting like “an apocalyptic cult” as a veteran Republican staffer, Mike Lofgren, cited by Mann and Ornstein, described his party last year.

What we got with the 2010 election was a group that creates its own facts. They deny the elemental fiscal math that the United States will never balance its books without raising somebody’s taxes. And they deny elemental science, going so far as to vote as a group that global warming caused by man essentially does not exist….

On the rare days when Congress is in session, somebody in the People’s House will rise to say they are following the will of the people. But on the big issues, this is preposterous. A big majority of Americans want taxes raised on millionaires who pay a lower rate than their secretaries. A CNN poll in April found that nearly three-quarters of the public favored the so-called Buffett rule.
If Congress were representative of the public, you’d see some of that will of the people in the vote. Yet all but five of 234 Republicans present voted against this basic act of fairness. And in the Senate, it couldn’t even get past the filibuster threshold to allow for some debate, let alone a vote.

Just now, Republicans say they want to prevent student loan rates from doubling, which will happen soon if the Do Nothings do nothing. They passed a bill in the House, but it raids health care to pay for it, ensuring a veto. This balancing would be fine if Republicans were consistent. They aren’t. The Bush tax cuts will end up costing $2 trillion over a decade, but this huge debt is treated as a trifle by the reality-denying majority in Congress.

I would add one other big consideration to all of the above: these people in Congress, and this mess, are the voters’ fault. We put Democrats in control in 2008, and they’d no sooner started to govern when we put Republicans in charge. We get the Congress we deserve, and when Republicans gained 63 seats in the House in the 2010 elections, voters took a chance with a sustained temper tantrum.

At least in 2010, the insurgents were an unknown commodity, produced by the faux populism of talk radio and the Tea Party. If this majority is voted back in, we’ll have nobody to blame but ourselves for a democracy that, at this moment, no longer has the will to self-govern.

New York Times economics columnist and Princeton economics professor, Paul Krugman, contends that the rise in income inequality has a lot to do with this Congressional dystopia.

So how did that happen? For the past century, political polarization has closely tracked income inequality, and there’s every reason to believe that the relationship is causal. Specifically, money buys power, and the increasing wealth of a tiny minority has effectively bought the allegiance of one of our two major political parties, in the process destroying any prospect for cooperation.

And the takeover of half our political spectrum by the 0.01 percent is, I’d argue, also responsible for the degradation of our economic discourse, which has made any sensible discussion of what we should be doing impossible….

Now, however, the Republican Party is dominated by doctrines formerly on the political fringe. Friedman called for monetary flexibility; today, much of the G.O.P. is fanatically devoted to the gold standard. N. Gregory Mankiw of Harvard University, a Romney economic adviser, once dismissed those claiming that tax cuts pay for themselves as “charlatans and cranks”; today, that notion is very close to being official Republican doctrine….

And why is the G.O.P. so devoted to these doctrines regardless of facts and evidence? It surely has a lot to do with the fact that billionaires have always loved the doctrines in question, which offer a rationale for policies that serve their interests. Indeed, support from billionaires has always been the main thing keeping those charlatans and cranks in business. And now the same people effectively own a whole political party.

Which brings us to the question of what it will take to end this depression we’re in.

Many pundits assert that the U.S. economy has big structural problems that will prevent any quick recovery. All the evidence, however, points to a simple lack of demand, which could and should be cured very quickly through a combination of fiscal and monetary stimulus.

No, the real structural problem is in our political system, which has been warped and paralyzed by the power of a small, wealthy minority. And the key to economic recovery lies in finding a way to get past that minority’s malign influence.

Beezer here.  We have the greatest level of income inequality since 1929 and that year ushered in the events that three years later introduced the Great Depression.  If you believe the Great Recession is just an unfortunate coincidence this time around, you need to have your head examined.  The faux Tea Party fooled the public by promising quick action on job creation but has done everything but since taking over Congress in 2010.   This Congress spends more time on recess than any Congress in recent memory.  It has passed little to no real legislation.  It’s stock in trade is hectoring the public and Democrats, espousing economic theories last in vogue when women couldn’t vote and blacks couldn’t drink from the same water fountain used by whites.  It’s a national disgrace and embarrassment, and it’s hurting America horribly.  Small wonder this is the Congress everyone hates.

In 2009 and 2010, total nationwide health care spending grew less than 4 percent per year, the slowest annual pace in more than five decades, according to the latest numbers from the Centers for Medicaid and Medicare Services…..

A recession has caused part of the slowdown, but health care experts and economist’s say the slowdown is greater than the recession impact.

Still, the slowdown was sharper than health economists expected, and a broad, bipartisan range of academics, hospital administrators and policy experts has started to wonder if what had seemed impossible might be happening — if doctors and patients have begun to change their behavior in ways that bend the so-called cost curve….

“The tectonic plates might be beginning to shift,” said Karen Davis, the president of the Commonwealth Fund, a nonprofit research group in New York. “It’s hard to believe everything that’s been tried over the last decade to slow spending wouldn’t be making a difference.”

Experts were surprised, for instance, at a drop in spending on some hospitalized seniors — people enrolled in Medicare, whose coverage the recession should not affect. They also noted that some of the states where health care spending slowed most rapidly were states that were not hit particularly badly by the recession, suggesting that other factors were at play.

“The recession just doesn’t account for the numbers we’re seeing,” said David Cutler, a Harvard health economist and former adviser to President Obama. “I think there’s much more going on.”

The implications of a bend in the cost curve would be enormous. Policy makers on both sides of the aisle see rising health care costs as the central threat to household budgets and the country’s fiscal health. If the growth in Medicare were to come down to a rate of only 1 percentage point a year faster than the economy’s growth, the projected long-term deficit would fall by more than one-third.

The loss of private insurance has been going on for almost two decades.  It’s not a phenomenon unique to any particular administration.  As insurance rates rose quickly, employers reduced benefits and increased employee co-pays, which has an effect on health care use.  But still health care costs rose smartly.  Maybe it’s hitting some type of wall, some sort of limit as to what health care can charge for services.  Maybe employers, hospitals and employees are beginning to push back on the fee for service type of care.

“In Massachusetts, we had a lot of political pressure to understand the growth in costs as unsustainable,” said Sandra Fenwick, the chief operating officer of Children’s Hospital Boston, which has put more than 100 reforms into effect, saving millions of dollars, in the past four years. “We had to figure out how we were going to be part of the solution, not part of the problem.”

Ms. Davis of the Commonwealth Fund said that “a lot of the big gains have come from keeping people out of the hospital and the emergency rooms.”

“Five or seven years ago, the private sector started rewarding providers that got their patients’ chronic conditions like diabetes and asthma under control,” Ms. Davis said. “That was couched as a quality-control measure, or putting an emphasis on chronic-disease care. But the direct result is going to be a reduction of hospitalization.”

Moreover, experts said not to discount the accountable-care revolution just because it remained small or because the changes implemented by the Obama health care law had not come into full effect yet.

“In the past, these slowdowns have occurred not just because of the direct effect of reforms, but because of greater attention to reforms changing provider and patient behavior,” said Mark B. McClellan, the economist and doctor who ran Medicare and Medicaid under President George W. Bush.

Beezer here.  Oh well, it would be nice if this moderation, or flattening out, of health care cost increases continues.  Nobody knows if it will.  That’s the problem with projecting trends out into decades, they’re almost always significantly off.  If they do continue, then a lot of pressure on longterm debt is lifted because all those debt projections assume the past rates of growth in health care costs.

All the paths utilize the same propaganda tools.  No matter what class of the population that’s taking control, the techniques are pretty much unchanged:  It’s much easier to maintain rule if the population can be convinced without force to obey.

America’s version of Orwell’s society is boiled down to ‘Money talks.  Everyone else walks.’  Whether it’s a Tea Party controlled Congress that rejects social programs for the populace in favor of tax breaks and tax shelters for the wealthy or a Supreme Court that unleashes great wealth to manipulate political discourse, the takeover always circulates around fooling the public.

The enemy of all these efforts is a skeptical, informed public.  That’s why propaganda, the control of information, is so critical to theocracies, dictators, technocrats, and the like.

As the headline to this post indicates, we are now well into in a pre-1984 type of world.  The corporatist propaganda machine is well disciplined and more than adequately funded.  The most outrageous statements of propaganda, defying all common sense, are being constantly broadcast into the public domain.  Cut pay and people will spend more.  Contraction is expansion.  Fire people and more people will be put to work.  Cut taxes for the already wealthy always and the country will prosper.   Ignorance is strength therefore cut education spending.  Continuous war secures our peace.  Eliminate health programs, particularly for the elderly and women and children, and the nation’s health will improve.

That you can find this echo chamber literally 24/7 on television in a capitalist system means the system has run amok.  The public constraints on greed and manipulation have been broken.  When it is warned that danger lies this way, the response is that even less regulation, just like even less taxation on the wealthy, will result in overall economic improvement shared fairly by all.

Nothing could be further from the truth.  Firing people and cutting their pay doesn’t result in a better economy, it only forces recession or depression, oftentime resulting in fire sale prices for the few assets the public owns, like their homes.   Tell the public education is a waste of time for most people.  Most people should stick to working with their hands and forego any other type of education, we are all told.  We are told efforts to protect domestic employment, particularly in manufacturing, are counter-productive.

All of this is patent nonsense.  That it is allowed to remain dominant in public discourse is a clear sign of danger, a clear sign of the dominance of one class over the others, forcing policies that protect this classes’ interest over all others.

It’s been a bad assumption.

Lawrence Mishel provides the facts over at the Economic Policy Institute.

Income inequality has grown over the last 30 years or more driven by three dynamics: rising inequality of labor income (wages and compensation), rising inequality of capital income, and an increasing share of income going to capital income rather than labor income. As a consequence, examining market-based incomes one finds that “the top 1 percent of households have secured a very large share of all of the gains in income—59.9 percent of the gains from 1979–2007, while the top 0.1 percent seized an even more disproportionate share: 36 percent. In comparison, only 8.6 percent of income gains have gone to the bottom 90 percent” (Mishel and Bivens 2011).

A key to understanding this growth of income inequality—and the disappointing increases in workers’ wages and compensation and middle-class incomes—is understanding the divergence of pay and productivity. Productivity growth has risen substantially over the last few decades but the hourly compensation of the typical worker has seen much more modest growth, especially in the last 10 years or so. The gap between productivity and the compensation growth for the typical worker has been larger in the “lost decade” since the early 2000s than at any point in the post-World War II period. In contrast, productivity and the compensation of the typical worker grew in tandem over the early postwar period until the 1970s.

Productivity growth, which is the growth of the output of goods and services per hour worked, provides the basis for the growth of living standards. However, the experience of the vast majority of workers in recent decades has been that productivity growth actually provides only the potential for rising living standards: Recent history, especially since 2000, has shown that wages and compensation for the typical worker and income growth for the typical family have lagged tremendously behind the nation’s fast productivity growth. This paper uses data from EPI’s upcoming The State of Working America, 12^th Edition (Mishel, Bivens, Gould, and Shierholz 2012) to document and explain these trends, particularly those of recent years.

Beezer here.  Yet more data that shows the system is somehow broken.  Income is flowing up towards the top of the income pyramid, especially to the very tip top .01%!  Based on the chart above, the divergence began sometime around 1970.  There is no consensus about what’s causing the divergence, but there is no question there’s a divergence.  My view is there’s more than one reason.  One is the loss of bargaining power by labor.  Another is the gaming of the tax system so that not only are the wealthy grabbing most of the gains, they are being allowed lower tax rates and specific tax avoidance tools too.  Another is probably the loss of manufacturing jobs which would have provided employment that paid living wages.  That I blame on a government indifferent to employment and labor issues.

Here’s an exercise I did for my own edification — and to prepare for questions on book tour — but others may be interested in the results. I wanted a simple answer to the people who always insist that we must be having massive fiscal stimulus because we have a big budget deficit; my answer is that the deficit is a result of the depressed economy, but how do we show that without getting too much into the weeds?

Well, here’s a quick and dirty approach. Suppose that spending and revenues would, in the absence of the slump, have risen at 5 percent per year — roughly GDP growth plus inflation, and actually a bit slower than actual spending growth (6 percent per year) from 2000 to 2007. With this assumption, I can draw three charts for the federal government (using CBO data) and one for state and local (using FRED) that, I think, tell the story.

 

First, most of the surge in the federal deficit is about plunging revenue. In the figure below, the “No recession” line shows what would have happened if federal revenue had grown 5 percent per year after 2007:

That’s about an $800 billion per year shortfall.

What about spending? Well, it is higher than you would have expected in the absence of the slump, by around $300 billion:

What’s that $300 billion about? Well, they’re mainly about the category CBO calls “income security”, mainly food stamps and unemployment insurance:

Income security spending is, of course, strongly related to the state of the economy. So are some other forms of spending — Medicaid, of course, but also things like disability insurance, where people on the cusp are more likely to seek the benefits if they can’t find work.

So basically, the federal deficit is all, yes all, about the recession and aftermath.

And meanwhile, there has been austerity at the state and local level (calendar years here instead of fiscal, but that’s not crucial):

So the reality is that we have deficits because the economy is depressed, but relative to previous policy we’ve been imposing fiscal austerity, not stimulus.