Bush Exploited the Common People to Make the Rich Richer

As the Global Sociology blog notes, "stratification happens when the tax regime favors the transfer of wealth to the top". After years of growing income disparity between the rich and the rest of America, surely the federal government wouldn't exacerbate the problem would it? Well if it was the Bush administration, the answer is "yes".

The tax cuts sponsored by President George W. Bush lapse at the end of next year. Those cuts will have saved individuals, and cost the government, $2.34 trillion, according to The New York Times. Unfortunately, not every individual benefitted equally.

As the table above shows, a full 61.6% of the Bush tax cuts went to the top 20% of wage earners! Only 1.3% went to the bottom 20% of wage earners, and only 7.6% went to the next 20%. If you were in the middle quintile of US wage earners, you received about 11.8%, or about half of your "fair share".

This was income redistribution at its worst. The rich were in power, and their greed knew no limits. No wonder so many Americans have felt for years that their country is in danger of becoming another banana republic, because under Bush it sure looked like this country was dominated by an oligarchy of inherited wealth.

No, the right wing cannot justify the cuts as economic stimulus. Economic progress was stalled for years under Bush, and the majority of Americans are worse off than they were at the start of the decade. As the facts show, the tax cuts were nothing more than a scheme to transfer wealth to the rich, pure and simple.

Not only were benefits distributed unfairly through society, but reduced taxes mean reduced Federal tax revenues. You and I and everyone else in American with an income (if they are lucky enough to have one) is still paying off that deficit with our taxes now.

Fortunately, Bush's unfair tax cuts are lapsing now, but more will be needed to reverse the trend toward greater social stratification in America. Let's hope that America can get back on the path to social justice and economic growth for everybody.

Investing in America's Future

The Problem is Waste

A frequent theme on this site is that today's financial crisis lie is the direct result of a longstanding misallocation of resources into unproductive ends. Current consumption, larger houses, etc. were preferred to savings and investment in the future, even if families and governments buried themselves in debt.

What the President Said

In "American Blew It, Will Obama?", we quoted the President's realistic State of the Union Speech about the incredibly short-sighted policies that led us into this mess:

In other words, we have lived through an era where too often, short-term gains were prized over long-term prosperity; where we failed to look beyond the next payment, the next quarter, or the next election.

Despite years of waste, maybe we could have muddled through if it hadn't been for the kleptocratic policies promoted by the preceding administration. As the President said:

A surplus became an excuse to transfer wealth to the wealthy instead of an opportunity to invest in our future. Regulations were gutted for the sake of a quick profit at the expense of a healthy market. People bought homes they knew they couldn’t afford from banks and lenders who pushed those bad loans anyway.

What We Said

Not only did these policies weaken the American middle class, but the diversion of precious resources away from more fundamental investments left the nation less competitive economically. As we pointed out in "Mis-Allocated Resources":

One of the issues brought to the fore by the present financial crisis is the extent to which America's productive capacity has been hollowed out. . . . Houses, shopping malls, internet concept stocks -- all were bubbles that wasted billions of dollars that could have funded productive, forward-looking activities.

In other words, we borrowed against our futures through leveraged speculation rather than investing in basics like R&D, training the workforce, etc.

New Support from the Financial Mainline

It seems that the mainline financial community is coming to agree with this point of view. In his latest monthly commentary, "Midnight Candles", PIMCO's Bill Gross cited some statistics compiled by his organization:

The U.S. and most other G-7 economies have been significantly and artificially influenced by asset price appreciation for decades.

Growth, in other words, was influenced on the upside by leverage, securitization, and the belief that wealth creation was a function of asset appreciation as opposed to the production of goods and services.

A long history marred only by negative givebacks during recessions in the early 1990s, 2001–2002, and 2008–2009, produced a persistent increase in asset prices vs. nominal GDP that led to an average overall 50-year appreciation advantage of 1.3% annually.

We, in effect, were hollowing out our productive future at the expense of worthless paper such as subprimes, dotcoms, or in part, blue chip stocks and investment grade/government bonds.

Putting a compounding computer to this 1.3% annual outperformance for 50 years, produces a double, and leads to the conclusion that the return from all assets was 100% (or 15 trillion – one year’s GDP) higher than what it theoretically should have been.

In other words, by leveraging up in stocks and other paper assets, we deleveraged our GDP, and by a huge amount.

The Only Solution

To repair America's decline, we must get at the root cause -- misdirection of resources. We can't continue to emphasize the financial sector of the economy. We must invest in the things that will make us productive, which are human potential, intellectual property, and productive capacity. This is the only path to a future that will benefit all the American people.

The Barbarous Relic -- "I Just Buy It"

John Maynard Keynes, whose ideas have such an important place in modern macroeconomics, referred to gold as a "barbarous relic" in his 1924 work Monetary Reform and in a 1944 speech to the House of Lords. With the decline of the gold standard for currencies, one might think that gold is little more than a "barbarous relic", having little interest to any but jewelers, electronics fabricators, and commodity futures traders.

Yet with the decline of the gold standard for currencies, the modern world faces a situation in which central banks can create their fiat currencies at will. In the wake of the financial crisis, they have been doing a lot of that lately. If new dollars, euros, etc. are not consumed in acts of deleveraging, as they have been to some extent so far, currency holders (like you and I) may start to become concerned that their dollars, euros, etc. will become worth less relative to real things that are less easy to create. In other words, they may worry that the necessary inputs to their lives and their industries -- energy, food, metals -- will become more expensive in monetary terms.



Perhaps this is why gold the "barbarous relic" attracts interest today and often seems to trade on the basis of perceived risk rather than on the basic supply and demand, or interest rates that determine carring costs for future delivery. But given such a tenous perception as risk, would anyone want to hold gold as a significant portion of his portfolio for very long? When perceived risk is such a personal matter, what complicated strategy would one need for deciding when to buy and when to sell? For most of us, gold seems too risky itself to hold with confidence.

If we look at Commodity Online, we see that famed investor Jim Rogers said of gold "If it goes down I'll buy some more, and if it goes up I'll buy some more. I periodically buy some gold. I don't have a method to it. I just buy it."

If one thinks that recent price ranges for gold are far below future prices, then he does not need a complicated strategy for buying and selling: "If it goes down I'll buy some more, and if it goes up I'll buy some more."

So, there you have a strategy for accumulating and holding gold as a hedge for the loss of value of the currencies and other financial assets created by mere humans. The strategy is insensitive to fluctuations in price: "I periodically buy some gold. I don't have a method to it."

The deflationary forces of a deep recession give little indication of future inflation, especially as so many people are saving their dollars and buying US Treasury securities for safety now. Indeed, Treasury prices seem insensitive to the impending flood of issuance. That is the present, however. If you think that the world's reserve currency, the US dollar, will be worth much less in the future, you might want to consider other assets, such as gold, and a trading strategy. Gold -- "I just buy it".

Health Care in the US -- Inefficient and Discriminatory

No Public Option. President Obama has apparently taken the "public option" for US health care off the table -- in other words, whatever health care reform the Obama administration is able to engineer, it won't be a public program providing universal care with the Federal government as single payer.

Who Wins, Who Loses. The big health care business special corporate interests must be greatly relieved. With the help of their right-wing ideologues, they have finally paid off enough members of Congress to get their way. The American people are the real losers, because the system will not get the fundamental reform that it requires.

Why We Need Health Reform. If you need more evidence that the US health system is in need of fundamental reform, just consider the above chart from the World Health Organization, comparing the health of citizens of the US, UK, France, and Singapore. It shows how poorly the US health system performs relatively to other advanced nations.

The systems compared by WHO. The health systems in the UK and France are publicly funded, universal, and government run. The US system is half public and half private, where no one is guaranteed health coverage. The Singapore system is another part-public, part-private hybrid system, where the government provides most care for those who are least economically advantaged, and costs are variously shared between the government and the rest of the population.

Effectiveness. The US has the lowest life expectancy of the countries compared. This is no surprise, because there is little promotion of disease prevention, little outreach to those who are in chronic need, and little attention to promoting healthy life styles and good health practices. It is easy to conclude that, given the rich resources available, the US system is not effective at promoting and delivering good health.

Efficiency. Of the countries compared, the US expends the highest percentage of its GDP on health care. It is easy to see that the US system is highly inefficient at delivering health.

Equity. In the US, only 10% of non-Hispanic whites are without health insurance. 16.8% of Asians, 19.5% of blacks, and 32.1% of Hispanics are without health insurance. If the statistics divide so strongly along ethnic lines, it is clear that the US system is highly unequal.

Why the Right Opposes Health Reform. Health reform isn't welfare for the rich, that's why. Billions for Wall Street? No problem. Never mind that government programs are paid for by the people's taxes and are supposed to be for the public good. Billions for the public good? If it really helps the people, it's "socialism". Socialism for the rich is ok here.

Why Public Options Are Vilified. Ever notice how Americans say that they encourage entrepreneurial risk taking, but they only consider the upside of the risk? Rich entrepreneurs are wonderful, but if you take a risk and fail, obviously you didn't try hard enough. In fact, you are so lazy and stupid that you no longer deserve the right to life and liberty. No health care for you. Not that it's their fault, but neither do your kids. It is convenient to have people to blame.

Why Vested Interests Call It "Socialism". Powerful vested interests are trying to use twisted rhetoric to set the terms of the health care debate, and right-wing ideologues are happy to play along. It is very convenient for the powerful to taint public health systems as doctrinally "socialist", because they think that they can divert the American people from discussing the real issues at stake. If no one compares the economic and health benefits of alternative systems of organization, they won't notice how inefficient and unequal our current US system is. There really are alternatives to our inefficient, unequal system.

Why We Need a Public System. The only way to reduce health-care costs is to to provide health care consumers with the power to negotiate costs with their doctors, hospitals, drug companies, and others who provide the goods and services. This means a system of sufficient scale and create an authority that will enable private insurers to negotiate effectively ... or else let the Federal government do the negotiating itself. And the only way to promote freedom, equality, and opportunity in the US with an affordable system is to have a public health care system that provides care for all of us.

No Exit

Not the financial Terminators, we hope

Mr Bernanke's Testimony. In Congressional testimony last week, Federal Reserve Chairman Ben Bernanke tried to put to rest the widespread concerns that the Fed has no "exit strategy" from the unprecedented degree of monetary easing and fiscal stimulus currently underway. Many commentators seem greatly relieved by the Chairman's testimony, which identified many of the monetary tightening mechanisms in the Fed's arsenal. Others were not impressed.

The Fed's Tightening Mechanisms. The Fed's inventory of assets includes short-term Treasury bills, which it can sell in order to soak up excess any excess liquidity in the hands of the public and thereby reduce inflationary pressures. The Fed can also encourage banks to hold excess funds (and not loan them to the public) by raising the interest rate that it offers member banks on overnight deposits. These kinds of tightening mechanisms are well known, and it is remarkable that so many observers seemed to be reassured by the Chairman's testimony.

Near-Term Deflationary Pressures. It is true that there is little apparent risk of inflation in the US in the near term. Deflationary forces are likely to persist for some months, or longer, for many reasons. Levels of debt are very high and money entering the financial system is being used for deleveraging and not for real economic activity. Overseas holders of US Treasuries are interested in supporting their own economies by keeping their currencies low relative to the dollar, so as to encourage exports. Debtors are defaulting in increasing numbers, and levels of economic activity are still declining.

Disciples of Bush asleep at the switch again!

Long-Term Debt Problems. Despite the near-term comfort, there are very real long-term risks. The off-balance sheet obligations of Medicare, Medicaid, Social Security, and other programs are huge and growing. The US shows little political will to prevent the train wreck that will occur when runaway promises threaten to turn into a runaway debt load.

Debt Reduction Problems. To make things worse, the economy may stay weak for years, making it even harder to pay for the financial bailouts, let alone pay for expensive social programs. What if the economy is still weak when the interest load starts to become unbearable for the US? Would the Fed defend the dollar by soaking up excess liquidity and risk sending the US into another depression? A depression is hardly the time to raise interest rates.

The Financial Terminator? California's current budget problems may be a forwarning of things to come for the US as a whole. There are clear imbalances in the state's long-term obligations and its ability to fund them. However, the state's supposed budget "solution" fails to cut costs or raise taxes enough to solve the long-term imbalances already built into the system.

The similarities to the growing budget burdens of the US are worrying for the US dollar. Like an army of financial Terminators, creditors do not treat spendthrift debtors kindly.

Closer to the Breaking Point?

Darius III encounters Alexander at the Battle of Gaugamela, detail from mosaic in the House of the Faun, Pompeii

The AP reported today that the administration's annual midsummer budget update — usually scheduled for mid-July — has been put off until the middle of next month, "giving rise to speculation the White House is delaying the bad news at least until Congress leaves town on its August 7 summer recess".

The delay is raising worries that the budget update will reveal what we already know -- "higher deficits and unemployment and slower growth than projected in President Barack Obama's budget in February and update in May". The AP story suggests that the release is being delayed because it could complicate his efforts to get his signature health care and global-warming proposals through Congress.

Investors need to worry about market implications.

More economic weakness would depress stock markets and drive hot money into dollars and Treasuries as safe harbors. That has been the usual play on news of economic weakness. But everyone already knows that the economy is weaker than the Obama administration forecasted.

Besides, the current meme is the continuing growth of China, accompanied by hot money flowing into speculative markets like commodities. Maybe the risks of a surprising budget update lie in a different direction.

Real news would be to reveal an even worse position than anticipated with the Federal budget. If worries arose about the ability to fund the deficit, investors would flee Treasuries, sell the dollar, and seek safety in the traditional safe haven -- gold.