Saturday, August 25, 2007

Wealth and Democracy

Wealth and Democracy, by Kevin Phillips, (NY: Broadway Books, 2002), 422 pages, 2 appendix, notes, bibliog., $29.95 U.S.

The book Wealth and Democracy opens with two long segments primarily about wealth and wealth creation and ends with a third segment primarily about democracy, or really politics. The first two segments have three chapters, the last segment has four and there is a closing chapter.

The beginning segment has a narrative history of wealth and the sources of wealth in America written in chronological order from 1776 to 2002. Information is documented and comes from a variety of sources. We learn, for example, that many of the wealthy from 1776 to 1790 acquired, or if you like, earned their wealth selling goods and munitions for the revolutionary war, or booty from privateering.

Moving along through 100 pages we hear about the Carnegies, the Rockefellers and others until we come to the year 2000. The year 2000 gets a separate chapter of about 70 pages, which describes the millennial plutocracy and many of its excesses. Details of the new wealth describe the whos, whys and wherefores and include Census and other government data showing the rapid rise of income inequality and unequal distribution of wealth.

Phillips narrative introduces causes for the millennial realignment. He mentions technology, especially biotechnology and computing, as sources of speculation that help generate rapid changes in income distribution as does speculation in financial assets. He uses the term financialization, which may or may not show up in your dictionary. It is a term to characterize the millennial obsession with buying and selling stocks, bonds, and exotic securities for money making rather than creating productive assets. Actually producing something takes time, whereas financialization caters to the urge to get rich quick.

Chapter 3 also has nine pages describing the changing and growing role of corporations in wealth inequality, noting their declining share of United States taxes and growing overseas investments.

The second segment begins with a chapter of historical precedents from three former great power eras: the Spanish Hapsburgs in the 1500’s, the Dutch Netherlands in the 1600’s, and Great Britain in the mid and late 1800’s. Phillips looks for meaningful repetitions of events and political attitudes in the rise and fall of great powers. Several common threads get attention in great power descents. Decline goes with a nation’s growing inequality of income and wealth. Decline goes with a country’s reliance on finance and services rather than domestic manufacturing. Decline goes with an increasing movement of capital abroad.

The middle chapter of this third segment develops the role of government in creating wealth, the wealthy and inequality. He continues to use historical precedents from Spain, Netherlands, Great Britain, but predominately from the United States.

After introducing technology as a means of rapid wealth creation in Chapter 3, the last chapter in this second segment picks up the technology thread again with a lengthy narrative and its historical association with wealth creation. Many lines characterize the 1990’s wave of high tech wealth built around the microprocessor and the Internet.

On this blog we can sympathize with Mr. Phillips in the trials and tribulations of writing narrative using supporting data. Writing economic and political narrative without data reads like preachy opinion or an editorial. Facts and figures and their documentation are an essential element to persuade readers, but it is hard to decide how much detail to include. If there are many numbers cited, with many ups and downs, and rising percents, or falling trends the reader may get bogged down and forget more than they remember.

In this way the reader should be warned that Mr. Phillips uses lots and lots of data from lots and lots of sources. When I think of data in this book I think of water pouring over Niagara Falls. It is good to try to have some numbers stand out so the reader can get some specific detail from their reading, but with this book the reader will need to have paper and pencil handy to make note of any particular number, figure or source that has special interest to them. Searching for it later may take more time than you think.

The third and last segment covers the Democracy part of the book’s title. The opening chapter describes the politics of wealth creation for the United States. The ebb and tide of United States wealth creation is tied to cycles of presidential politics, but with contrasting eras especially Andrew Jackson, Theodore Roosevelt and Franklin Roosevelt when there was moderation and a return to policies promoting equality.

The next two chapters zigzag among varied and interrelated media, academic and political attitudes towards wealth. These chapters have a more journalistic character to them than other parts of the book. Corruption in wealth distribution gets nearly eight pages, but greed, vice, and avarice pop up frequently and in other contexts. Discussions come from different eras and different countries. Many names are mentioned: Bill Clinton, Ronald Reagan, Adam Smith, Charles Darwin, Milton Friedman, even Leona Helmsley, “Only the little people pay taxes.” Readers are encouraged to question a broad range of social and political actions as they apply to wealth creation in the United States.

The next and last chapter in this third segment, Chapter 10, keeps a tight focus on voting and cycles of political resentment that affect voting patterns. It has historical examples mostly from the United States but other countries as well. The chapter is an admission that the worst abuses and egocentrism of the well placed wealthy gets a boost when a sour and cynical populace withdraws from politics and stops voting.

Phillips frustrations with America’s electorate come out most specifically beginning on page 391 and for several more pages. The many Americans who are overworked, underpaid and overtaxed have withdrawn from politics and do not vote. Even though the data presented by Phillips throughout the book and all of the data I look at from the Bureau of Labor Statistics and Bureau of Census shows a sharply polarizing distribution of income and wealth most of the inequality could be corrected in a decade or so with a more progressive rate schedule for personal income taxes, changing or eliminating the steeply regressive payroll tax and appropriate adjustments to the federal estate tax. But there in lies the problem since none of these changes will occur unless there is an up turn in the cycle of voter resentment. They have come in the past and we can tell Mr. Phillips is hoping for a new one in the future. Maybe there is room for optimism.

Books can be like houses. They can be neat and tidy; they might be cluttered. Mr. Phillips book is cluttered. There is just too much he wants to tell us and report to us to have arguments flow smoothly. Still, in spite of the clutter, I would say the common thread of historical precedents and their comparison to United States current events emerges as the most visible and most important thread in the book. In the times of the Spanish Hapsburgs, the Dutch Netherlands, and Great Britain it was not just that the wealthy were greedy, unethical and corrupt, their actions brought general economic and political decline. In the United States the parallels with inequality of income and wealth, unmanaged investment abroad and the decline of America’s domestic manufacturing base look similar. It is sobering that so many in economics, business and government think the United States can remain as an economic power even if our manufacturing industries move abroad or decline in the United States. Mr. Phillips does not believe that. In that view we can be sure he is correct.

Friday, August 24, 2007

Blinder's Torment

Updated July 2009

Economist Alan Blinder worries about American jobs lost to outsourcing abroad. He wrote “Pain From Free Trade Spurs Second Thoughts” in the Wall Street Journal (3/28/07) and “Free Trade’s Great, but Off-shoring Rattles Me” in the Washington Post. (5/6/07) He tells us he has always been as doctrinaire about free trade as economists everywhere. We feel his pain when he tells us some fellow economists now call him a heretic even though economics is supposed to be an empirical science and not normally a religion for the faithful.

Dr. Blinder’s heresy is to question the benefits of free trade in all cases. He thinks the digital revolution in the new global economy might cause employers to move their computer jobs abroad. In the Wall Street Journal Article Dr. Blinder listed 12 jobs with employment counts from the May 2005 Occupational Employment Survey published by the Bureau of Labor Statistics. All but two of the jobs are professional jobs requiring college degree skills and all were described as vulnerable to loss from cheaper foreign labor.

13-2051 Financial Analyst
15-1021 Computer Programmers
15-2011 Actuaries
15-2021 Mathematicians
19-1022 Microbiology
19-3011 Economists
27-1024 Graphic Designers
27-3091 Interpreters and Translators
27-4032 Film & Video editors
31-9094 Medical Transcriptionists
43-3031 Bookkeeping, auditing and accounting clerks
43-9021 Data Entry Keyers

The total of these jobs in the Occupational Employment Survey for May 2008 is 3,158,930 compared to 3,101,130 in November of 1999, but the jobs could be exported since the work is not like manufacturing where autoworkers have to be at the auto plant to do their work.

However, the global economy is not new. If Dr. Blinder wants to worry about free trade and jobs why limit the worry to 12 jobs that might be moved offshore. Dr. Blinder should look more closely at the new Current Employment Survey benchmark data published by the Bureau of Labor Statistics where manufacturing employment continues its mordant mournful decline, but service employment continues to grow, adding 27.8 million new service jobs since 1990, covering the lost manufacturing jobs and as well as job growth. Off-shoring jobs is just one part of the global economy, does he mean to ignore imported goods and the changes in the service economy?

Among America’s service jobs count 414 thousand employed in the gambling industry and casino hotels, but fat and exercise is growing faster with employment at fitness centers now at 510 thousand, up this year and every year since 1990. Collections agencies are up again with 160 thousand jobs for 2008. Employment at temporary help agencies is down for 2008 still has 2.3 million jobs. Security and security guard services keep going up too, another 23 thousand jobs for 2008 and now at 807 thousand jobs. Security guards have an advantage; their jobs won’t be exported.

America now has millions of prisoners and they are on the rise with 7.1 million reported under correctional supervision by the Bureau of Justice Statistics. They are great for jobs and BLS reports 428 thousand jobs as correctional officers and jailors, 41 thousand jobs as first line managers of correctional officers and jailors and 97 thousand jobs as Probation Officers and Correctional Treatment Specialists. Those are the jobs keeping and managing the prisoners. There are more jobs getting them there. Police patrol officers, police detectives, criminal investigators, lawyers, judges, magistrates, hearing officers, bailiffs, counselors, social workers.

Jobs in child day care services averaged 388 thousand in 1990, but 859 thousand in 2008. And pets, do not forget pets. The Bureau of Labor Statistics reports jobs at America’s pet supply stores, kennels, pet care services and for veterinary services, all of which have 453 thousand jobs. Veterinary services added 168 thousand jobs with gains every single year since 1990. The employment growth implies a growing concern among Americans for the health and welfare of their pets, but with millions of actual Americans without health care insurance we might worry that some household pets get better health care than our fellow citizens.

Despite all the nasty and derogatory things said about government, government creates lots of non-exportable service jobs. Actually 22.5 million work in federal, state and local government including education. The published data mentioned above shows 282 thousand new jobs in government for 2008. Local government employment now stands at 14.6 million with higher employment every single year since 1990, no exceptions. I am sure Mr. Blinder will join me in hopes that tax administration will not be outsourced abroad, even though it could, but there seems to be plenty of streets, sidewalks, schools and other projects to keep the government job mill rolling. Public school jobs are up 99 thousand and do not forget about social services where individual and family services jumped 59 thousand in one year and stands at 1.1 million jobs. These are social work and counselor jobs and they solid middle class and non-exportable jobs.

Last I want to mention my favorite source of new jobs: restaurants. Cooking used to be one of America’s biggest do it yourself occupations. Everyone can stay home and cook, but more and more we go out. From 2007 to 2008 restaurant employment were up 42 thousand. Restaurant jobs now stand at 9.6 million with growth every year since 1991. The total does not include food service workers at school cafeterias, hospitals, retail stores or ball parks, museums and other recreation facilities. Add them to the total brings us to 11.4 million food service jobs. Worse, jobs from the farm to the supermarket continue to decline due to productivity growth and imports in the global economy. Restaurants are the only part of the food chain Americans can count on for new jobs.

As long as Americans and their governments keep spending all their money as fast as they can there will be jobs as the jobs at gambling casinos, fitness centers, collection agencies, temp services, prisons, day care centers, pet care salons, veterinary services, government and restaurants can testify. Mr. Blinder makes a mistake when he looks at the jobs we might lose. If he would look at the jobs Americans are already taking he might revise his economic theory of free trade and realize free trade creates restaurants. Now you know.

Tuesday, August 14, 2007

Pitching to Work

"The Toronto Blue Jays, flush with an infusion of cash from owner Ted Rogers, just locked up Florida Marlins starter A.J. Burnett for five years and $55 million, barely a week after making B.J. Ryan the best-paid reliever in baseball history with a five-year, $47 million deal of his own. Burnett is 28, but he's only 49-50 for his career. Ryan is 29, and his resume is even shorter: one year as a closer and 42 career saves.”
-Associated Press 12/7/2005

Friday, August 10, 2007

The Great Engine of Employment

On April 1, 2005 the Washington Post published an article about a Congressional investigation: “Cost of Cisneros Probe Nears $21 million Over 10 years.” Cisneros was President Clinton’s Secretary of Housing and Urban Development way back in 1995. Congress authorized an independent counsel investigation after allegations that Cisneros lied about payments to his mistress. After 4 years and $10.3 million dollars of investigation, Cisneros pleaded guilty. That was in 1999, but the investigation continued in order to investigate if anyone attempted to obstruct justice, the Washington Post reported. The continued probe added another $10.7 million to the expense, hence the caption “$21 million over 10 years”.

We could say America would be better off if the money used on the Cisneros investigation went into medical research, but that is different from saying government should reduce its total expenditures, or even that it wasted money. Either expenditure pumps $21 million into the economy and any cut in government spending whether it is for medical research or Cisneros probes will limit employment. Government is a major employer and even though the government has money to pursue what appears like a political vendetta, as in the Cisneros case, America needs government that is actively creating or inventing jobs.

Actually 22 million work as employees on government payrolls. There are 2.7 million in the federal government, 5.1 million in state government, nearly 14.2 million in local government including education and hospitals. Add another 1.4 million for the armed forces. Still it undercounts employment that is the result of government action because governments buy so much from businesses where employees are on private payrolls even though their jobs are really the result of government spending.

The decision to build roads and highways is the decision of a government. Builders and developers build a few roads in their new developments, but the roads that get people from here to there are planned and funded by a government. The actual building is typically contracted to private firms in the highway, street and bridge construction industry. The people who work in this industry are counted as part of employment in private business and not counted as government employees.

The terms government contractor, outsourcing and privatization all connote private businesses, but they are private businesses doing government funded and government sponsored work. Government employment added to government sponsored employment is more than a mere 22 million: much more.

The federal government will always be vitally important in job creation because it controls the money supply and can increase the country’s total spending as much as necessary to increase job growth. Local governments do the same thing on a smaller scale. At the school board meeting school crowding is a problem and everyone agrees Westside elementary school needs three new classrooms. Then someone stands up and says Westside is old and the roof is bad and the heating plant needs updating and it would be better to tear down the old school and have a whole new school, and the parking lot needs expansion too. Now we have a jobs policy. A new school packs a real punch of spending. Borrow the money, hire local contractors and nearly everyone will be happy.

In Arlington, VA the School Board and the County Board agreed to construct a new high school, which has a pre-construction price tag of $95 million. Arlington already has three high schools and a school population of 18,800 with 5,400 high school students split among three high schools. However, the new high school is not to be the 4th high school, nor is it due to growing enrollment in the public schools. Actually enrollment is declining slightly, down from over 19,000. Instead the plan is to tear down one of the existing high schools, Washington and Lee High School, and replace it with a better school.

The old school has modest fame as the high school of Warren Beatty and Sandra Bullock. Drawings and plans of the new school show an aesthetic design, which is pleasing to the eye. It will have a theatre, swimming pool, luxurious gym with ample seating. It will have a media center, computer labs, cafeteria and of course it will be fully wired with state of the art communications. The thing is though the old school has all of that already. The existing gym is so big it has balconies and seats several thousand in a full sized gymnasium. The old school is not run down, nor dilapidated, nor is the county building inspector worried about code violations. Going into the school or driving by it is easy to notice it is big and really amounts to a bunch of boxy brick additions; more or less one box built onto another. Without a doubt it is a very homely school and with a bad track pattern.

In Virginia the state legislature correctly and wisely requires all local governments to pass a bond referendum to finance their local projects. You might suppose there would be a tough sell to get majority approval for this new high school. If you had to organize a public relations campaign here what would you say? "Don't let our children attend a homely school." However, no campaign was necessary at all. True, a small band of brave and courageous souls stood up in the full light of day and objected to the excess. They could have accomplished more bailing out the Potomac River with a teacup. The School Board for its part remained calm and dignified in their silence. They all know the history. Arlington does not turn down bond referendums. Ever. Referendums for curbs, sidewalks, streets, parks, libraries and schools pass with 80 and 90 percent majorities. They knew perfectly well they could propose the Palace of Versailles and it would pass. In Arlington, people work hard, but they love their work. That is why they work like demons and spend like maniacs. Arlington sits right next to Washington, DC where thousands of professionals make their living at federal bureaucracies. People here know how to stay employed; they keep those dollars rolling.

The current expenditures of government add up to $4.098 trillion reported as seasonally adjusted at annual rates for 2006, or close to a third as large as Gross Domestic Product. It is a big enough share to think that government spending by all levels of government provides a mighty engine of employment. All this spending is supported by taxes and borrowing. Taxes reduce private spending and job creation, but governments are experts at spending all their revenue as fast as they can. They run deficits and make debt finance a way to pep up employment and put off higher taxes. The federal government can borrow but as mentioned above it controls the money supply so it can create money to cover its spending and put off collecting taxes. Local governments can use bond-funded projects to speed up and enlarge spending in the near term and let the growth in property values and higher property taxes pay for capital projects in the future.

To understand the importance of government in employment for America’s system of government remember the national government sits at the top of the federal system and has taxing authority over the entire country. Our elected Congress in Washington, DC has taxes collected for personal and corporate income, payroll, estates, gifts and excise taxes, and customs duties. The 50 states divide up the country and each of the state legislatures has sovereign authority to govern every square inch of their respective states.

If the state legislature of Virginia wanted to be in charge of trash pick up in Sharpsburg or Norfolk or anywhere else they have the full authority to do that. For practical reasons it is too much trouble for state legislatures to be managing local services. Instead the states are physically divided into counties, and then counties further subdivided into smaller jurisdictions. Some states divide their counties into townships, but all the states allow villages and towns to incorporate or establish a charter and set up separate city governments within their counties, or townships. The power to govern these sub state jurisdictions comes directly from the state legislature. In effect, the state legislatures of the 50 states delegate their sovereign authority to these sub units of government by having their legislative staff write carefully detailed laws that define the taxing and spending authority of counties, municipalities, townships, school districts and special districts. The state laws spell out the taxing and spending authority of all the local governments.

Ask almost anyone and they know there are fifty states. It would be hard to reside in the United States without knowing there are fifty states. Ask the same people how many counties there are in the United States and they are less likely to know there are 3,034 counties. Even fewer know there are 16,506 townships, especially since not all states have township government. I have to confess I did not know the count of townships until I looked it up.

I do know township government is completely and totally obsolete. Take Michigan where there are 83 counties and 1,242 townships. Back in the 1830’s when Michigan became a state there were no motorcars or telephones and people got around on dirt roads and horseback. It made sense to divide the counties into smaller spaces so that meetings could be held and services could be delivered to the people who could get to them. In today’s world the roads are paved and almost everyone has a car and a telephone so township government is a surplus layer of government in between counties and municipalities. An extra layer of bureaucracy creates more work and administrative costs and it would be more efficient to eliminate the extra layer of government and have the county or cities take care of these services.

Do not expect township government to be eliminated anytime soon, or ever. There are lots of people who will fight to their last breath of life in defense of township government. Inefficiency creates jobs and not just the 5 paid jobs as elected members of Michigan’s township boards. In Michigan, for example, many know that townships have borrowing, taxing and spending authority. The Michigan Public Improvements Act (MCLA 41.721-41.738) of 1954 gives fiscal authority to township boards, which includes constructing, improving or maintaining sewers, water systems, roads, elevated structures, bicycle paths, erosion control, lighting systems, and sidewalks plus acquiring, improving or maintaining public parks, planting and maintenance of trees, and eradication or control of aquatic weeds. I think they forgot flagpoles.

To fund these fine improvements township boards have the state’s blessing to provide for payment with the issuance of bonds or to defray all or part of the costs with special assessments along with a “pledge of full faith and credit of the township for the prompt payment of the principal of and interest on the bonds authorized herein, as the same shall become due,” in which event, “the township may levy a tax on all taxable property in the township for the payment of principal and interest on the bonds without limitation as to rate or amount and in addition to all other taxes which the township may be authorized to levy.” It is my thought that attorneys familiar with America’s township government drafted many condominium declarations and by-laws.

Townships only scratch the surface of America’s government units. In addition, there are 19,431 municipal governments, which are generally incorporated places with taxing and spending powers defined similarly, although not identically, among the states. What municipal governments have in common is incorporation, which defines separate governmental powers.

Next there are 13,522 independent school districts. The independence of independent school districts means separate from a department or agency of another level of government. Finally, we have 35,356 special district governmental units. Special district governments exist as separate government units but most state legislatures limit their authority to a small list of projects, but with independent fiscal authority. Often their geographical jurisdiction overlaps county, township, and city governments in various combinations.

In Michigan the County Department and Board of Public Works Act(MCLA 123.731-123.786) provides independent fiscal authority for a separate county board of public works to acquire and administer water systems, sewage disposal, refuse collection, lake improvements and erosion control. As a special use district the county board of public works has officials appointed by the county board and with fiscal authority almost identical with township government including a pledge of full faith and credit to pay any and all expenditures incurred under the act.

To be counted by the Bureau of Census in its Census of Government, government units must be organized subject to public accountability with elected members, or with officials appointed by elected members to administer a separate administrative structure. Total all the government units from the Census of Governments and the sum reaches 87,900. These are 87,900 independent modules of taxation and spending; independent modules so important to assure government as America’s great engine of employment.