OBSERVATIONS, MUSINGS, AND RANTS

Tea Party Foolishness
Since August the Tea Party Movement seems to have dominated much of the national political discussion, despite the fact that their main premise is incorrect and their positions are often illogical and sometimes even inconsistent. Additionally, we have started to see such nonsense as people claiming that extending unemployment benefits creates dependency and that these "lazy" people are bankrupting our country. This is all part of the old Reagan trick of blaming the poor for societal problems and saying that government policies to help the poor do not help, but hurt our economy.

I have discussed the whole issue of income inequality previously, but it is probably useful to return again to some main points, especially since more information is available since I wrote last year. Regarding the charge that we are taxed too much already, I urge anyone who is interested to google income tax rates and check out the taxfoundation.org website. It gives all the tax tables since the inception of the income tax in 1917. Income taxes right now are at their lowest in about 75 years. From 1964 to 1981, the top (or marginal) rate was 70%. It was lowered to 50% in 1986, and then to 38.5% in 1987. It is now 35%. So, all during Reagan's presidency, the tax rate was higher than it is now. When the Bush tax cuts expire, the top rate will go up to 39.5%, or one percentage point higher than the last two years of Reagan. Likewise, capital gains are only 15%, down from 20% and, earlier, 25%. Also, the capital gains rate was extended to cover dividends under Bush, a new feature. This is one reason why in 2009 the top 400 income earners paid an average of only 17% on their income. Thus, as it should be clear, our income tax rates right now are at almost historic lows and the tea party movement's main complaint is, to put a simply, a giant load of crap. Recent reports are that either 47% or 49% (I have seen both figures) will not have to pay any taxes this year. As an added point, you should be aware that Reagan sponsored what was called then the largest tax increase in history (in dollar terms, not percentage) by increasing payroll taxes to keep Social Security afloat. Payroll taxes are not as progressive as income taxes, so that this tax increase hit the poor and middle classes more than the rich, just as Bush's tax cuts give much greater benefit to the rich than the middle class or poor.

A major result of these tax policies has been an incredible increase in inequality. When adjusted for inflation, average wages are actually down by about 12% when compared to 1973 (this is the date usually used) while the top 10%, 1% and one tenth of one percent has increased tremendously. The smaller the group, the larger their increase. While CEO's used to get about 35 times the income of the average wage earners in their companies, they now get about 350 times as much (again, there are differing figures here, but this is representative). Income inequality in the US is now the worst it has been since about 1920 (pardon the bold, but this word processor on this site has started defaulting to it even though I keep trying to change it back). Depending on whether you consider Russia a developed country, we have the worst income inequality of any developed country in the world, about on par with Mexico. According to a recent study (The Spirit Level by Wilkinson and Pickett), greater inequality means higher rates of teen pregnancy, infant mortality, obesity, mental illness, drug use, imprisonment, and homicide. It also means less economic growth and more economic instability. Here are the reasons why.

It is a well known economic fact that the middle class and the poor spend a greater portion of their income than does the rich; after all there is only so much you can spend. Let's look at one of my favorite examples--hedge fund managers. First, they make fabulous amounts of money and yet pay at the capital gains rate of only 15%. A recent NY Times article found that the top 25 hedge fund managers made $25 + billion in 2009, or an average of a little more than one billion each. FYI, the low was $350 million and the high was $4 billion. These 25 individuals made as much as 500,000 people who made $50,000 each. 25=500,000. Imagine if you made $1 billion in one year. Could you spend it all? The fact is that they can't and they don't. So what do they do? They speculate. It is the super rich who drive the speculative markets, whether it be real estate, futures trading, stocks, or derivatives. Remember that in 1987 Reagan lowered the top tax rate to 38.5%? What happened two years later? The S&L debacle due to a bubble in real estate collapsing. If those hedge fund managers had to pay the old tax rate of 70%, those poor dears would have to get by on an averate of $300 million a year. Oh, the horror! Government revenue just from this one small group of 25 would increase by $14 billion per year.

Now, let's look at some obscene pay in other areas. First, you should know that the financial sector of our economy has gone from about 12% of our economy to 21% and, even more telling, the financial sector accounts for 45% of the profits in the economy. Wall St., just from 2003 to 2006, paid $121 billion to its executives (Dylan Ratigan Show, 4/7/10) Just since January of this year, Goldman Sachs has awarded $21 billion in bonuses to its top executives (Manchester Guardian, 4/19/10). I think it is safe to say that in the last decade, Wall St. executives have made over $200 billion. What do they get that money for? Making loans to businesses, investing in new technologies, helping our economy? No, they get that money mostly for gambling and conning other people out of their money. A Goldman Sachs executive testified recently that while they were selling derivatives to investors and assuring them they were safe, they knew they were risky and purchased credit default swaps, betting that they would go down in value. And this isn't even what they were indicted for. Of the $181 billion that went to AIG in TARP funds, at least $40 billion was pass through money to pay off Goldman Sachs for the credit default swaps they bought. If you think this is an isolated case, you haven't been paying attention to the news. Did you know, for example, that two different people were indicted recently for Ponzi schemes that took $1 and $3 billion respectively from investors? It was minor news because while that would have been a mjaor event in the past, now it has been dwarfed by Bernie Madoff, and Wall St. scams.

Here's another example. A former head of United Health Care made $1.2 billion, mostly in stock options, in about 7 years. Because it was discovered that many of these options were illegally backdated, he had to pay a fine of $400 million, leaving him with only $800 million. Since these were stock options, they would be covered by the capital gains rate and taxed at only 15%. That fine, by the way, went to the government, not to stock holders or, heaven forbid, those buying premiums from United Health care. The $1.2 billion he collected would have paid for the premiums of almost 30,000 people a year for 7 years, assuming a premium of $500 per month.

Now, let's take a look at those awful, lazy people getting unemployment benefits. The average unemployment check is $335 per week, or $17,420 per year. A recent story said that 44% of those getting unemployment had been on unemployment for 6 months, and 30% for at least a year. Since there are about 11 million unemployed, that means about 3.3 million were on unemployment for at least one year during 2009. Going back to the hedge fund managers, those 25 people made as much as between 1.4 and 1.5 million people on unemployment, or almost half of those who had been unemployed for at least a year. If those hedge fund managers paid at the old 70% rate, their income tax alone would have paid for about 1 million of the long term unemployed. I hope this gives you some idea of the extent of the income inequality in this country and how our system is set up to reward the super rich, many of whom contribute very little to our ec0onomy.

Now, let's looks at the charge that all these people on unemployment would become addicted to the "free money." This is such nonsense that one hardly knows where to begin. Let's look at the Depression. President Hoover reportedly said something to the effect that all the men selling apples on the street was a sign that more people were going into business for themselves. He also was adamantly opposed to any governmental relief such as unemployment payments. This, as much as almost anything, was responsible for plunging the nation deeper into depression. With no income, they couldn't buy anything, so more businesses went out of business, leading to more unemployment and so on. It also led to more foreclosures which led to a tremendous drop in property values which led to more bank failures, which led to more unemployment whilch led to , you get the idea. Unemployment payments help stop a deflationary spiral. They keep the recession from getting much worse. During the 90's, when Clinton was president, the unemployment rate at one point dropped to below 4%, which as economists tell us, is full employment since there are always people moving, changing jobs, businesses going out of business, etc. so that there will always be some unemployment. Why would the population gladly embrace employment then, but spurn it now for $335 per week? Secondly, psychologists will tell you that for many people, their job defines their worth and losing their job greatly reduces their self-esteem. It is considered a major stressor in life comparable to death of a loved one or a messy divorce. Thirdly, it completely ignores today's present economic situation. There are over 5 applicants for every job opening, on average. It's not a lack of people trying, but a lack of jobs available.

Another tea party mantra is smaller government and reduce the deficit. It's obvious that most of these people have never bothered to learn anything about the government. It's astounding to me that any information you want is just a few clicks away on the internet, but these people and many others never bother to find out the facts. Defense and homeland security cost about $715 billion, or about 20% of the budget, and half of the so-called discretionary budget. Other major expenditures (by percentage) social security 20%, Medicare/Medicaid 21%, interest on the debt, 6%, safety net programs (food stamps, unemployment, e.g.) 14%, and federal pensions and veterans benefits 7%. These programs take up 92% of the total budget. If you really want to reduce government you need to cut defense spending, medicare/medicaid, and social security. Yet these same people don't want to cut these things. Revenues plunged to 15% of GDP, the lowest it has been in decades. The solution is simple, get people back to work, increase taxes on the rich ($1 million per year) and super rich ($10 million per year) and we will probably have to make some adjustments to Medicare and Social Security. Remember this, Herbert Hoover passionately believed in small government and balanced budgets and those policies produced the worst depression in US history. Had we followed the same policies this time, we probably would have had an even worse depression now than in the 30's.