Merry Christmas

More Profits, Less Welfare

Lucienne Bloch, Land of Plenty, woodcut, ca 1935.  Lucienne Bloch was in the WPA and worked with muralist Diego Rivera in the 1930s.

While Congress is working on half-measures to reform the US system of health insurance, I ran across these news stories about how our health care and welfare systems are working.  We always hear myths about America's systems of health and welfare:  You can depend on health insurers to protect your health.  Anyone can get the medications that they need.  America wouldn't let children go hungry.  The reality is anything but.

Aetna Is Forcing 600,000-Plus to Lose Coverage in Effort to Raise Profits

In a third-quarter earnings conference call, officials at Aetna announced that the health insururer is planning to force up to 650,000 clients to drop their coverage next year in order to raise to meet profit expectations.  They predicted that the company would lose between 300,000 and 350,000 members next year from its national account as well as another 300,000 from smaller group accounts.  Aetna's third quarter earnings were up 26 percent year over year, but if they price more families out of insurance, they can do better.

Unburied Bodies Tell the Tale of Detroit -- A City in Despair

Things are bad in Detroit.  The murder rate is soaring. The school system is in receivership. The city treasury is $300 million short.  The city cannot reliably provide rubbish collection and other basic services. Thousands of houses are abandoned.  Entire shopping districts lie boarded up.  Auto manufacturing plants have been abandoned for years.

Can it get worse?  It just did.  People are dying from their poverty, and not even receiving burials.

In June, the $21,000 annual county budget to bury Detroit’s unclaimed bodies ran out. Many there cannot affort to bury their family members, and the city managed to provide burial in the past. Now that the city is in financial straits, the bodies are piling up in the morgue now.

What has alarmed medical examiners at the mortuary is that most of the dead died of natural causes. It is evidence, they believe, of people who could not afford medical insurance and medicines and whose families can now not afford to bury them.

Many people cannot afford health insurance ... and they are dying because of it.  Does anyone doubt that the US needs national health insurance for all the people?

The Safety Net Is Failing Needy Americans

Four organizations -- The Institute for Policy Studies, the Center for Community Change, Jobs With Justice, and Legal Momentum -- have released a study showing how the nation's social welfare system is failing millions of Americans during the Great Recession, just as the need is greatest.  Here are highlights from Battered by the Storm: How the Safety Net is Failing Americans and How to Fix It.

Temporary Assistance to Needy Families (TANF) is supposed to be our nation’s last line of defense against falling into the depths of poverty.

Yet this program is so deeply inadequate that by 2008, the number of needy children receiving TANF fell to only 22 percent. Under the pre-“welfare reform” system of Aid to Families with Dependent Children (AFDC) in 1995, 62 percent of poor children were benefiting. Eligibility criteria are set at sub-poverty levels in some states, making poor children ineligible, and barriers such as lack of childcare and lack of access to employment have further kept poor children from receiving desperately needed economic assistance that a system such as TANF should provide.

The food stamp program is doing better, because it has responded to growing need by reaching more households.  Sadly, the average monthly benefit per person is only about $100.  The report asks: "How can our children be happy, healthy, and adequately nourished on that?"

The reason for this human misery lies in the political trend of the past 30 years that has benefitted the wealthiest Americans while reducing wages and increasing poverty for the rest.  With the onset of the Great Recession, we are seeing more poverty and likelihood of reprecussions for years to come.

Henri Matisse, Icarus

Eight Centuries of Financial Crises

Thomas Hart Benton, The Departure of the Joads, 1940.  Oil painting commissioned by 20th Century Fox to advertise their film production of John Steinbeck's novel, The Grapes of Wrath.

As behavioral economists know well, humans suffer from biases that cause them to overweight the present and the recent past in their reasoning.  If one's biases have been based on a period of good economic times, it is not surprising that many will be unprepared and suffer greatly during a general crisis.  Those wanting to place the present financial crisis in a long-term historical context may wish to read a fascinating, recently-released study from the National Bureau of Economic Research -- This Time is Different: A Panoramic View of Eight Centuries of Financial Crises, by Carmen M. Reinhart of the University of Maryland and Kenneth S. Rogoff of Harvard University.  Quotes of some of the key findings, with my comments:

We find that serial default is a nearly universal phenomenon as countries struggle to transform themselves from emerging markets to advanced economies.

The current crisis is nothing unique, because disruptive financial crises have occurred from time to time over the centuries.  Maybe it is prudent to live one's life as if financial and economic disaster is a real possibility (like avoiding massive debts, saving money, etc.).

Major default episodes are typically spaced some years (or decades) apart, creating an illusion that “this time is different” among policymakers and investors.

People have limited memories and tend to treat the recent past as "normal".  Those living in good times will hardly be prepared for extreme adverse events, unless they consciously review the historical record.

We also confirm that crises frequently emanate from the financial centers with transmission through interest rate shocks and commodity price collapses.

In other words, the current crisis is highly typical.  Problems started in US and spread to the rest of the world.  Within the US, the crisis started in the financial centers, including the large mortgage brokers and investment banks, spread into markets for securitized mortgages and credit default swaps, and snowballed into problems for Main Street and the entire nation.  A lack of proper regulatory oversight permitted critical financial institutions to operate without consideration to risk management and precipitate a massive crisis.

Our data also documents other crises that often accompany default: including inflation, exchange rate crashes, banking crises, and currency debasements.

Just because US hasn't experienced inflation, exchange rate crashes, or currency debasements yet, we can't ignore these possibilities.  Conditions are still in place for the crisis to morph into new phenomena.  Debt is being transferred from the financial system to the balance sheet of the Fed.  Most private debt (home mortgages, commercial real estate, credit cards, etc.) has hardly been touched yet.  There is a distinct risk that more crises could come soon.

The authors looked in particular detail at the years 1800 to 2006, where the data are the most complete:

Aside from the current lull, one fact that jumps out from the figure are the long periods where a high percentage of all countries are in a state of default or restructuring.

Countries are connected financially, now as in the past.  We should be on the lookout for further breakdowns as the crisis spreads and strains build on weak points throughout the world.   East European countries have built huge debts with West European banks.  Will this be the next place to crack?

Serial default on external debt—that is, repeated sovereign default—is the norm throughout every region in the world, even including Asia and Europe.

Soverign default isn't just possible, it is common.  Countries like France and Spain have defaulted multiple times in the past.  In view of the problems faced by a number of governments around the world (not just the US), we should be prepared for more shocks to come to the financial system.

Our extensive new dataset also confirms the prevailing view among economists that global economic factors, including commodity prices and center country interest rates, play a major role in precipitating sovereign debt crises.

If you have been worrying about these kinds of risks, you weren't off the mark.  Despite worries about the long-term sustainability of the US debt, there are many other countries around the world where sovereign risks are greater and more immediate.  Whenever central banks raise short-term interest rates in anticipation of economic recovery, there will be countries and corporations that will be unable to withstand the shock.

Periods of high international capital mobility have repeatedly produced international banking crises, not only famously as they did in the 1990s, but historically.

Capital mobility is one of the hallmarks of the present era of globalization.  However, our world has undergone earlier eras of globalization, accompanied both by capital flows and episodes of financial crises.  In fact, the present era's flows of instantaneous information seem pale in their impact, compared to the flow of material goods loosed on the world by industrialization and the age of steam in the nineteenth century.   We are not unique, and we would do well to consider the lessons of past crises.

Yet, the government’s gain to unexpected inflation often derives at least as much from capital losses that are inflicted on holders of long-term government bonds.

The US response to the financial crisis seems to have done little but increase the risks of new bubbles.   Is anyone worried that the US might try to inflate its way out of its debt problems?  Is anyone worried about a bubble in US Treasuries?  Of course they are.

Watteau, The Embarcation for Cythera, 1717.  Cythera is one of the Ionian islands and in antiquity was site of a shrine to Aphrodite.  Watteau is playing on a popular notion viewing Cythera as a fictional place where the power of love eliminated petty conflicts and people could live harmoniously and engage in amorous pursuits.  This idea followed the humanist views of the age of reason, whereby human beings were seen as perfectable and capable of achieving greater happiness.  In the midst of this dreamy optimism, the lower classes lived desperate lives under the thumb of the aristocracy.  In the painting, the elegantly attired rich await their departure for Cythera.  After their departure from the dust bowl, the Joads faced desperation, disillusion, and rejection.

Caryatids

Porch of the Caryatids, the Erectheon, Athens (author's photo)

Architecturally, a caryatid is a female figure acting as a column to hold up a structure. In a more figurative sense, I can't help thinking how much these caryatids on the Acropolis remind me of the American people. Our special burden isn't architectural, of course. It is debt, public and personal.

For some of us the burden is immediate and acute. The fallout of the financial crisis has left many unemployed, buried in debt, and foreclosed or at risk of foreclosure. States and cities are going broke as their tax base has withered. The elderly who lived prudently and saved their money are being punished by a financial system that keeps savings interest rates low, but quickly loans funds to speculators.

As for the rest of America, those not being crushed by debt, most of us are probably not overly worried about debt. But that may be a mistake. Since the start of the 21st century, Federal government debt has been rising due to lax fiscal policy, tax breaks for the rich, subpar economic growth, funding endless wars, and many other reasons, political and economic. Most recently, bailouts of our reckless financial sector ballooned the Federal debt to previously unimaginable levels that should give us all pause for our futures. Meanwhile, a recession has reduced the tax base from which to pay for the ballooning national debt. Even as economic growth shifts overseas, policies to renew economic growth seem lacking.

Now that the national debt is ballooning, and the economic capacity to service the debt is declining, our creditors seem to be growing increasingly worried. If they come to believe that they won't be paid back anything close to 100 cents on the dollar, they may look elsewhere to invest. That dollar could tank, interest rates rise, and the resultant defaults send the economy into a deep depression.

Rodin transformed the architectural convention of the female form supporting weight in the Fallen Caryatid Carrying Her Stone. In her fatigue, the caryatid can no longer support her weight. As she is crushed under the stone, what is going through her head?

Those who have lost jobs, homes, or lifetime savings know what it is like to support a weight too heavy to endure. The rest of us should care, because we are all caryatids now.

Fallen Caryatid Carrying Her Stone, Auguste Rodin, Musee Rodin, Paris

No American Dream without Social Mobility

The American Dream

Income disparities in America have been growing for years as the very rich got richer and the rest of society stagnated economically. But the American Dream is till alive, isn't it? You can still advance based on your abilities and not your family background, can't you?

It's All Based on Social Mobility

We like to think of America as a land of opportunity, where anyone can succeed no matter how rich or poor he or she starts out in life. Unfortunately, America does not compare well to other advanced countries when it comes to the basic precondition for the American Dream, social mobility. There are many advanced countries where the social rank of a child's family means a lot less than it does in America for that child's educational achievement and chances of future economic advancement.

New Data from the OECD

Now comes a report from the Organization for Economic Cooperation and Development examining social mobility in the advanced economies. Orsetta Causa and Asa Johansson, the authors of Intergenerational Social Mobility, find that there are many advanced countries where the economic conditions of a child's family mean a lot less than they do in America for that child's future educational achievement and economic advancement in life.

What They Found

The influence of parental background on individual earnings varies widely across OECD countries, but low mobility across generations, as measured by a close link between parent’s and children’s earnings, is particularly pronounced in the United Kingdom, Italy, the United States and France. Mobility is higher in the Nordic countries, Australia and Canada.

The influence of parental socio-economic status on students’ achievement in secondary education is particularly strong in the United States, France and Belgium, while it is weaker in some Nordic countries, as well as Korea and Canada.

Inequalities in secondary cognitive skills are likely to translate into inequalities in post-secondary educational achievement and subsequent wage inequality in the labour market.

The Role of Social Policy

According to the report, any measure that reduces inequality will make it easier for individuals to break free of the constraints of their backgrounds. More progressive income taxation and higher short-term unemployment benefits were found to be helpful. Both were associated with a looser link between parental background and outcomes for children's cognitive skills and wages. If children are to succeed based on their own merits, they need equal access to the means of self-help.

Good for Economic Growth

Not only is social mobility fair, but it can be good for all of society. The report points out "the ability of an economy to continuously allocate human resources to their best use can have important effects on economic performance". The better the opportunity to succeed on your own merits, the better your skills will be employed in the economy. By understanding how economic growth and equal opportunity are mutually supporting, we can design policies to encourage both.

Worrying Trends in Income Inequality

With the gap between rich and poor growing so rapidly, it is no surprise ifthe American Dream is fading. A 2008 OECD report found that this trend is persistent and getting worse rapidly. (See Growing Unequal? Income Distribution and Poverty in OECD Countries, Country Note: United States.) The trend goes back to the 1970s, but since 2000, income inequality has increased rapidly.

Rich households in America have been leaving both middle and poorer income groups behind. This has happened in many countries, but nowhere has this trend been so stark as in the United States.

The distribution of earnings widened by 20% since the mid-1980s which is more than in most other OECD countries. This is the main reason for widening inequality in America.

As a result, the United States is the country with the highest inequality level and poverty rate in the OECD, with the exception of Mexico and Turkey. Just consider the data: "The average income of the richest 10% is US$93,000 US$ in purchasing power parities, the highest level in the OECD. However, the poorest 10% of the US citizens have an income of US$5,800 US$ per year – about 20% lower than the average for OECD countries."

We Need to Overhaul Social and Economic Policy

No one wants his or her children at a disadvantage in life merely because they lack the advantages available to the rich. However, as the 2008 OECD report notes: "Redistribution of income by government plays a relatively minor role in the United States." Unless we design policies to increase social mobility, we will continue to underuse our society's human resources and suffer sub-par growth. Meanwhile, other nations are growing quickly, and their people are reaping the benefits.

We aren't a third world country -- not yet -- but we can do better. After all, we still see outselves as a world leader, and maybe we can act like a leader. Social stratification is growing in America, and we must act to reverse the trend if we are to preserve the American Dream.

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.