Category Archives: The Economy

The Man Who Saved a Billion Lives.

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In the 19th Century, a lot of Norwegians migrated to places like Minnesota, Iowa, and the Dakotas to make a living as farmers. Tough, hard-working, close-mouthed, decent people. Norman Borlaug (1914-2009) fit the stereotype. He grew up during the Depression, worked his way through the University of Minnesota to get a BA in forestry (1937). Along the way he got interested in plant diseases, so he went on and got a Ph.D. in plant pathology and genetics (1942).

Borlaug spent most of the Second World War on research work for DuPont down in Wilmington. In 1944 his old Ph.D. adviser recruited him to work on improving wheat harvests in Mexico. Borlaug spent sixteen years in Mexico developing disease-resistant strains of wheat. Along the way he had to overcome resistance from incompetent, lazy, or anti-foreign bureaucrats. He also had to persuade farmers to try something new when they were both wedded to tradition and fearful that a failed experiment would leave them to starve. He persevered. The seeds developed by Borlaug both yielded high returns of grain and resisted disease. A bunch of his developments were impossible in theory, but possible in practice. (So much for Rene Descartes.) Largely as a result of Borlaug’s work, the yield of Mexican wheat rose five-fold between 1950 and 2000. Mexico went from being a wheat-importer in the 1940s to being a wheat-exporter by the 1960s while feeding a much larger population.

In the early 1960s developing countries all over the world were struggling with rapid population growth. (See: The Population Bomb.) How were they to feed their people? Agricultural scientists in India and Pakistan got their governments to call in Borlaug. Borlaug had to overcome all the same difficulties that he had encountered in Mexico, with the added problem that India and Pakistan were at war with each other for part of the time. He persevered. As a result of Borlaug’s work, the yield of Indian and Pakistani wheat quadrupled between 1960 and 2000. Other countries in Latin America, the Middle East, and Africa then copied the Borlaug seeds. Then Asian governments applied his basic approach to producing high-yield, disease resistant rice instead of wheat. The huge increase in food production in countries that once faced the certainty of mass-death from famine has come to be called the “Green Revolution.”

In 1970 Norman Borlaug won the Nobel Peace Prize. When the committee called Borlaug at home to inform him, his wife said that he had already gone to work. It was 4:00 AM.

Later on, from 1984 on, Borlaug taught at Texas A&M University.[1]

Critics have found much to dislike in the effects of Borlaug’s work. They denounce the shift from subsistence farming to single-crop agriculture because it makes people dependent on the capitalist market. They denounce the reliance on scientifically-bred seeds and fertilizers and tractors and irrigation systems because it creates profits for American corporations. They dislike genetically-modified foods because it seems unnatural.

Borlaug replied that “They’ve never experienced the physical sensation of hunger. They do their lobbying from comfortable office suites in Washington or Brussels. If they lived just one month amid the misery of the developing world, as I have for fifty years, they’d be crying out for tractors and fertilizer and irrigation canals and be outraged that fashionable elitists back home were trying to deny them these things”

Borlaug was a tough, hard-working, close-mouthed, decent man. It has been estimated that about a billion people didn’t starve to death because of his work.

[1] The “A&M” stands for “Agricultural and Mechanical.”   Once upon a time, we had a different vision of education.

American Union, stay away from me uh.

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The percentage of American workers belonging to a union peaked in 1954 at almost 35%, almost all of them in the private-sector.[1] Today, only about 7% of private-sector workers belong to a union. How this came to be is a complex story.

On the one hand, private-sector union membership soon began a steady decline that continues into the 2010s. The 1970s marked an important watershed. First, beginning in the 1970s foreign competitors exerted steady pressure on American producers. Japanese and German cars, steel, and electronics, and Asian textiles all penetrated the American market to an unprecedented degree. Second, companies were racked by strikes that disrupted production and forced up wages: there were 381 major strikes in 1970 and 187 major strikes in 1980. These hard-pressed companies responded by cutting costs, including the high labor costs of unions.

Beginning in the 1980s, companies moved production from pro-union Northeastern and Mid-Western states to anti-union Southern states; or they began the process of off-shoring their production in low-wage Asian countries. High-wage unionized labor got left behind as the non-union jobs created elsewhere paid lower wages. In a sense, unions priced themselves out of jobs.

Then foreign competition combined with new technology to just eliminate many other jobs in previously unionized industries. Between 1974 and 1999 employment in the American steel industry fell from 521,000 people to 153,000 people.[2] The experience of the United Auto Workers has been even more disastrous than that of the United Steel Workers. Many jobs were lost to foreign competition. When foreign companies did build auto plants in the United States, they located them in Southern states. Union membership fell from a peak of 1.5 million in 1979 to 540,000 in 2006 to 390,000 in 2010. Overall, private-sector employers got what they wanted: a lower-cost, more flexible, less disruptive work force.[3] Employers in other industries have worked hard to keep out unions to avoid the fate of cars and steel.

Another key factor is the corporate mismanagement shown by the massive bureaucracies of the car companies and their incompetent response to the “oil shocks” of the 1970s.

However, American businesses have created a lot of good jobs in the high-tech industries at the same time that jobs were disappearing from the low-tech sector. Unions have failed to unionize these sectors. The reasons for this failure are complex. In essence, most of the workers have non-traditional concerns or are educated people who don’t want yet another boss.

In contrast, public sector union membership grew steadily. Today, 31% of federal workers, 35% of state workers and 46% of local workers belong to unions. Moreover, the numbers of people employed by state and local government rose from 4 million workers in 1950 to 16.6 million in 2009. In 2009 there were more people in public sector unions (7.9 million) than in private sector unions (7.4 million). Even the good news is bad news. To prevent the disruption of basic services, governments granted good pay and promised generous pensions. They didn’t ask if future generations would be able to support their promises. It isn’t clear that those pension promises can actually be made good.[4] Another disaster looms for unions.

[1] The absolute number belonging to a union peaked in 1979 at an estimated 21.0 million.

[2] However, what is true in America is true in every other steel-producing nation. Over the last quarter of the 20th century, the world steel industry cut its work force by more than 1.5 million people. Some countries were hit harder even than the United States: Japan was down from 459,000 to 208,000; Germany was down from 232,000 to 78,000; Britain was down from 197,000 to 31,000; Brazil was down from 118,000 to 59,000.

[3] There were only 11 major strikes in 2010. That is a 97% drop from the 1970 peak.

[4] See the many articles by Mary Williams Walsh in the NYT over the past decade.

Does Paul Krugman eat lunch alone?

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Paul Krugman[1] (1953- ) is one of the smartest guys alive. He got a BA in Economics from Yale (1974) and a Ph.D. from M.I.T. (1977). He taught at M.I.T. from 1979 to 2000, then moved to Princeton. He has won both the American Economic Association’s John Bates Clark Medal (1991) and the Nobel Prize in Economics (2008). He is a prolific author and a columnist for the New York Times.

Krugman presents himself as a scald to “politicians and pundits who solemnly repeat the conventional wisdom that sounds tough-minded and realistic.” He argues that “some of those seemingly tough-minded positions are actually ways to dodge the truly hard issues.” He cites “Bowles-Simpsonism”[2] as an example of this problem. Elite discourse is diverted from the immediate problem of high unemployment by obsessing over how to pay for Social Security and Medicare/Medicaid in the distant future.

His latest target is efforts to “divert our national discourse about inequality into a discussion of alleged problems with education.”[3] Krugman argues that “soaring inequality isn’t about education; it’s about power.” The conventional wisdom holds that rapid technological change has divided the labor force into those who have adapted (and reaped the rewards) and those who have not (and have suffered the losses). (See: Inequality )

The evidence doesn’t support the contention that “educational failings are at the root of still-weak job creation, stagnating wages, and rising inequality.” First, there’s no sign of high demand for skilled-workers, so the “skills gap” argument doesn’t hold water. Second, the inflation-adjusted incomes of highly-educated people have stayed flat for almost twenty years, so the differentiated income argument doesn’t hold water either.

Krugman sees something different happening. Corporate profits are up without the rate of return on investment having risen. He sees this as a sign of monopoly power. Companies are just squeezing consumers, rather than letting competition drive down prices. Furthermore, incomes are rising sharply for people with “strategic positions” in corporations and Wall Street.

He recommends redistribution through higher taxes on corporations and the rich, spending on programs to help working families, raising the minimum wage, and support for organizing labor to bargain effectively with employers.

There’s a lot to like in Krugman’s arguments. His assault on the inadequate Obama stimulus bill certainly proved correct. However, for someone with such extraordinary intellectual fire-power at his disposal, it’s odd that he doesn’t have more effect. Writing for the NYT is preaching to the converted. It is, perhaps, revealing that he called the British Labour Party leader Gordon Brown “more impressive than any US politician.” Brown is a brilliant man with sadly deficient political skills. The far less capable Tony Blair maneuvered Brown into delaying his claims to the prime ministership for years; then Brown put his foot in his mouth once he had the job. Krugman has explained his own absence from government by saying that he’s “temperamentally unsuited for that kind of role. You have to be very good at people skills, biting your tongue when people say silly things.”

It’s hard to persuade people if they turn down the volume when you start to talk.

[1] Curiously, Krugman’s middle name is Robin. His first wife’s name was Robin Bergman. His second wife’s name is Robin Weiss. This starts to sound a little like Lyndon Johnson.

[2] Krugman does not exactly attack the Commission’s Report itself, so much as a movement that makes use of the report. Erskine Bowles punched back effectively in a letter to the WSJ, 11 February 2015.

[3] Paul Krugman, “Knowledge Isn’t Power,” NYT, 23 February 2015.

Inequality 3.

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In November 2014 the voters completed their long swing from creating a Democratic majority in Congress and the White House in the 2008 elections to creating a Republican majority in Congress. President Obama has little chance of getting any legislation through Congress between now and the end of his term in 2016. Instead, in recent months the president has sought to shape the terms of debate in future elections.[1]

The latest component in this effort came out on 19 February 2015, with the release of the annual “Economic Report of the President.”[2] The document restates President Obama’s “middle-class economics” prescriptions.

The report adopts a “historical” approach.[3] The years from 1948 to 1973 were the “Age of Shared Growth.” Operating in an almost competition-free global environment and making good use of technological innovations, productivity rose sharply and inequality remained at the comparatively low levels achieved during the Depression and New Deal. Incomes doubled over the course of this quarter century. The report assigns an important role to the power of unions and to a sense of community on the part of corporate leaders. This golden age gave way to a second period, from 1973 to 1995, which the report labels the “Age of Expanded Participation.” During these years, productivity growth slowed down and a rising share of income went to those with more education. Families made up for the short-fall in their desired incomes by having both mothers and fathers work. This silver age gave way to a third period, from 1995 to the present, which the report calls the “Age of Productivity Recovery.” In this period, computer and internet technology boosted productivity out of its doldrums, but the benefits flowed to those with more education even more than before. The Great Recession came at the end of this age of lead. During the recession, women entered the labor force in smaller numbers and men just dropped out of it in larger numbers than at any time in human memory. Baby Boomers aging-out of the labor force will only compound the strains.

The President wants to take this moment to urge his “middle class economics.” In practice, this means more spending on education and on infrastructure; rapid completion of trade deals with Europe and the countries of the Pacific region; carrying out immigration reform; reforming the tax on business; and cutting taxes on “modest” incomes while raising taxes on high incomes. He thinks that these measures will increase productivity.

The president faces push-back. Democrats hate free trade because it ships low-skill/low-educations jobs overseas[4], harming the interests of the sort of people who used to make up much of the Democratic base. Republicans oppose higher taxes on high incomes because they shift money from investment toward consumption, harming the interests of the sort of people who still make up much of the Republican base.

There’s a lot to like in the report. Education and infrastructure need improvement; more trade deals are better than fewer; and immigration reform needs to go through. There’s also a lot to argue with. Tax “cuts” on low income groups just pay them to stay the same, when they need to change; higher taxes reduce investment when we need a lot.

Will Hillary Clinton feel bound by this report? Will Republicans take it seriously?

[1] One can’t help but suspect that experience has taught him that the Democratic Party in general is not deeply committed to his own vision of a just society.

[2] John Harwood, “Economic Report From Obama Focuses on Income Inequality,” NYT, 20 February 2015.

[3] There is a lot to quibble with in the report’s historical sophistication.

[4] In fact, a lot of American jobs were lost to China, rather than to NAFTA, which created American jobs.

Annals of the Great Recession V.

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From the late 19th Century “Gilded Age” to the early 20th Century “New Era,” America lived with a lot of income inequality.[1] The Great Depression of the 1930s and the policies of the New Deal closed that range of incomes. This new order continued from the 1930s through the 1970s. From the 1980s to the financial crisis income inequality rose sharply once again.   The financial crisis and the subsequent Great Recession dented this inequality, but did not reverse it. Nor does it seem likely that it will be substantially reduced under foreseeable conditions.

The low and middle-income groups suffered limited losses from the recession in comparison to upper income groups. The financial crisis and subsequent recession hit upper income group harder than other groups; federal government responses helped lower income groups more than upper income groups, the wealthy still haven’t made up their losses, and inequality has decreased.

The one-percent suffered the largest fall in pre-tax income during the Great Recession. Between 2007 and 2012-2013, the income of the top one ten-thousandth of earners fell 26 percent; the income of the “one-percent” fell 21 percent; the income of the top five percent fell 15 percent; and the bottom 90 percent fell 13 percent. For most poor and middle-class groups, the average income decline was about 10 percent.

In 2007, the pre-tax income of the highest one ten-thousandth of earners peaked at $39.4 million. In 2009 it fell to $21 million. That’s a 46.6 percent drop in income. Most of these losses came on falling stock-prices, so the run-up of the stock market in recent years has done much to restore the income of this group. In 2012 and 2013, it reached $29.2 million. This group is back at about 74 percent of its pre-recession income. Overall, the income of the “one percent” is still about 20 percent below its pre-recession peak.

Long-standing federal government counter-cyclical policies—unemployment payments, food stamps—helped off-set the effects of the Great Recession for low-income groups. The stimulus bill helped as well. After-tax and after-transfer incomes for the middle quintile of income earners fell by 2 percent in comparison to pre-recession levels. After tax and after transfer incomes for the lowest quintile income group actually rose 2.6 percent.

These facts run against the common perception. “Maybe [people haven’t perceived this truth] because many liberals are tempted to believe inequality is always getting worse,…”

Leonhardt sees middle-class incomes as having been “damaged” by income inequality. This, in turn, “has caused wide-spread frustration.” The implications for American politics should be obvious.

It’s hard to sympathize with people whose incomes dropped from almost $40 million a year to barely $20 million a year. They’ll get by, somehow.

Nevertheless, there are issues that are worth some thought.

First, is inequality as such a durable political issue or would most people be satisfied if they experienced a moderate rise in income each year?

Second, why have upper-incomes grown so much since the 1980s while most incomes have stagnated? The answers here are likely to be more complex and the problems less tractable than the political ideologies of left and right would lead us to believe. Increasing inequality has coincided with globalization, two recessions, the aging of the “Baby Boom” generation, problems in adapting the American labor force, and political near-paralysis. What to do?

[1] David Leonhardt, “Since the Financial Crisis, A Little Less Inequality,” NYT, 17 February 2015.

Climate of Fear XIII.

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A decade ago, back when climate change began to emerge as a serious concern, scientists and environmentalists composed a menu of possible future alternatives to burning carbon. Both solar power and wind power seemed likely to be massively expensive. In contrast, biofuels—the conversion of plants into fuel—seemed like it might be a low-cost winner. Both the government of the United States and European governments have invested billions of dollars in developing biofuels. In Britain, for example, subsidies and mandates were used to stimulate a shift to burning wood pellets made from sawdust and tree waste.[1] In the United States, the government mandated and subsidized the mixing of ethanol—a biofuel made from corn—with gasoline. Anywhere from 30 to 40 percent of America’s corn crop now goes to ethanol.

In fact, costs for wind and solar power dropped sharply over the same period that biofuels were being developed. However, until we transform battery technology it will not be possible to use solar or wind power for transportation. Many people continue to count on biofuels as a substitute for carbon-burning.[2] A 2014 report from the Intergovernmental Panel on Climate Change (IPCC) urged replacing carbon with biofuels as an affordable means to hold back climate change. The International Energy Agency speculates that it may be possible to provide over a quarter of world transportation fuel needs by 2050. More immediately, the United States projects that 12 percent of its transportation fuel will come from biofuels within a decade. Similarly, the European Union projects a sharp increase in the role of biofuels to power transportation between today (2.5 percent) and 2020 (10 percent).

Now people are re-thinking this strategy.[3] For one thing, biofuel production has turned out to be massively inefficient: a huge amount of land is required to produce a meager amount of energy. (The 30-40 percent of the American corn crop devoted to ethanol reduces gas consumption by only about 6 percent.) The energy content of all current biomass (food crops, fodder for animals, lumber, biofuels) is about 220 exajoules. The IPCC estimates that the biofuels component alone will have to reach 250 to 300 exajoules by the end of the 21st Century to hold back climate change. This implies a massive expansion of biofuel acreage.

Skeptics believe it unlikely that farm productivity can actually be increased much on the ground, as opposed to on a chalk-board. The world faces an increasing demand for food as both population and incomes in developing countries rise. These will more than eat up any increase in productivity, leading to continued expansion of lands devoted to crops. The American bet on ethanol has driven up world food prices. Harvesting trees for biofuel seems like even more of a losing proposition. It reduces the amount of carbon dioxide captured by trees while increasing the amount of carbon dioxide emitted.

Clearly, there are no simple solutions to the climate problem. It is going to take time to discover the best approaches, even though we seem to be short of time. Government hasn’t entirely succeeded at picking “winners” from among contending solutions. Decisions can have unanticipated consequences that turn out to be hard to un-do. Rather like the origins of the climate problem in the first place.

[1] The chief beneficiary of this effort may have been the members of the U.S. Industrial Pellet Association, which supplies much of the European demand.

[2] Eduardo Porter, “A Biofuel Debate: Will Cutting Trees Cut Carbon,” NYT, 11 February 2015.

[3] Justin Gillis, “New Report Urges Western Governments to Reconsider Reliance on Biofuels,” NYT, 29 January 2015. The story reports on a World Resources Institute study released on Friday.

 

A couple of economic ideas from the past.

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As we lament economic inequality and get ready to keel-haul the Greeks, it is worth recalling  some commanding ideas of the past.

International payments and the domestic economy.

First, in the olden days, money had consisted of silver (good) and gold (better). Then, people had agreed to use paper money (which was worthless) on the understanding that it could be exchanged for gold whenever anyone wanted. To prevent scummy governments from printing all the paper money they wanted (“How can I be over-drawn when I still have some checks?”), fixed ratios of paper money to gold held by the government were established. The more gold that a government held, the more paper money that it could issue; the less gold that a government held, the less paper money it could issue. (See: accordion.)

Second, the money from one country can’t be used in another country. Countries settled their debts by transferring gold. Buy more stuff from a foreign country than you sell to that country and you had to settle the debt by shipping gold. Sell more stuff to a foreign country than you buy from it and they sent you some gold.

Third, if you put gold-backed paper currency together with the use of gold to settle international debts, you got a system in which the domestic economy of each country was linked to the international economy of all countries. If a country exported more than it imported, then gold flowed into the country. The increased gold supply inside the country compelled that country to increase the amount of paper currency in circulation. Prices and incomes would rise, making it less competitive. If a country imported more than it exported, then gold flowed out of the country. The decreased gold supply inside the country compelled that country to decrease the amount of paper currency in circulation. Prices and incomes would fall, making it more competitive.

Ideally, each country would strive for a rough equilibrium. However, the system was thought to be kinda-sorta automatically self-correcting. Countries with in-flows of gold and rising national incomes then could afford more stuff from abroad and ended up having to export gold. Countries with outflows of gold and falling incomes then could afford less stuff from abroad and ended up importing gold. This cut down on the role of any national government in managing the economy. Mostly, the heads of the various national banks (the Bank of England, the Bank of France, the US Federal Reserve Bank, etc.) were supposed to co-operate in smoothing out any bumpy patches.

 

Business cycle theory.

Commonly-accepted economic theory held that during a period of growth demand exceeded supply, so prices rose too high; any fool could make a profit and many did; wages tended to float up above a sensible level and many dead-beats got hired; and banks made unsound loans. In short, “plaque” built up in the “arteries” of the economy. This couldn’t go on. Eventually a “slump” would clean out all the plaque and re-establish the basis for sound growth. (See: angioplasty.) Demand would fall. Falling demand would force down prices to a reasonable level; unemployment would get rid of dead-beats and take wages down to a sensible level; silly businesses (see: nail salons) would go bankrupt; stupid loans would not be made; and the particular mix of products would return to what people actually needed. Then the economy could start growing again.

There is a seductive elegance to these all-encompassing theoretical systems. Same as there is with Marxism. The parallels don’t end there. Ideas have consequences.

What is globalization?

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“Globalization” has been going on for a very long time, but in the last quarter of a century the degree of globalization has increased dramatically.

The ancient “Silk Road” trade route connected East Asia, South Asia, the Middle East and Europe. Sailors, caravan drivers, missionaries, and the odd tourist carried word of one civilization to another. (Bits of Roman armor have been discovered in Vietnam.)

The “Voyages of Discovery” created European empires of Trade in Asia and of Settlement in the Americas. Europeans (willing) and Africans (unwilling) moved to the Americas; cotton, coffee, corn, tomatoes, tobacco, potatoes, and Aedes aegypti all crossed the oceans for the first time.

Industrialization in the 19th Century spread Western power, ideas, and patterns of economic development all over the globe in new ways and to a greater degree than before. European investment poured into American, Indian, and Chinese railroads, and into the Suez and Panama canals; the telegraph eliminated time in sending messages; millions of people migrated.

The rise of Communism between 1919 and 1989 sealed off much of the world from Western Capitalism. These places needed scientists, doctors, and engineers, so they built up an educated elite. Then the collapse of the Communist model led to the opening of Russia, Eastern Europe, and China to the world market. Countries like India, much of Africa, and Latin America had all copied parts of the Communist model. After 1989 they also opened up. Low-skill jobs flowed toward low-cost producers who had to employ and feed poor people as best they could. Making steel, sneakers, T-shirts; assembling computers; and processing chicken all migrated.

The collapse of Communism roughly coincided with the development of the Internet for commercial uses. This, too, wiped away barriers. Call centers in India sprang up, making my afternoons a living hell. At the same time, angry Russian techies who had lost their cushy jobs with NepoCom went in for cyber-crime against Western businesses.

The whole world suddenly became more like One World than ever before.

 

It always has been driven by economic forces, but it always has had huge effects in every other aspect of human life. Here are a few examples.

On the one hand, the world is organized into nation-states, but there aren’t any borders in the atmosphere. Green-house gases emitted by one country affect every country. On the other hand, hundreds of millions of people live in environmentally-fragile places, but they are driving for industry as the path to a better life. What happens when 1.3 billion Chinese decide that they all want a car, just like 300 million Americans? I suppose we could tell them to stick to bicycles, but that seems kind of racist. Maybe we should go back to bicycles to set a good example?

Millions of people in poverty-stricken “failed states” want to get to some place that is successful. Even if they don’t speak the language, can’t read or write beyond an elementary school level, belong to a traditional culture that devalues women, and have spent their working lives behind a water buffalo. It will get worse if their country is about to go under water.

You can get a kidney transplant done for $5,000 in India (plus airfare and hotel); you can get SRS done for $16,000 in Thailand (plus airfare and hotel).

Rihanna is from Barbados; Frankie Joe Rukundo is from Rwanda; “Narcocorrida” is popular on both sides of the Mexican-American border; some of the most interesting American students consider themselves “otaku”; three French brothers produced “Assassin’s Creed.”

Inequality 2.

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Americans history since 1967 has been complex and troubled. However, the economic fortunes of virtually all Americans have steadily improved.[1] In 1967, 40 percent of households earned less than $35,000; 53 percent earned between $35,000 and $100,000; and 7 percent earned more than $100,000 a year. In 2013, 34 percent of households earned less than $35,000 a year; 43 percent earned between $35,000 and $100,000; and 22 percent earned more than $100,000.

The share of households earning more than $100,000 increased from 7 percent to 22 percent. This 15 percent moved up from the middle class. If nothing changed for the lowest share of households, then the middle class would have fallen to 38 percent. Instead, the share earning less than $35,000 decreased from 40 percent to 34 percent. This 6 percent moved up into the middle class. This pretty much matches up with the 43 percent still earning between $35,000 and $100,000 a year. For all three classes, then, the years from 1967 to 2014 have seen a total of 21 percent of Americans moving from the lower class into the middle class or from the middle class into the upper class. This means that 79 percent of Americans remained in their original class. That doesn’t mean that many of them felt frustrated or deceived.

However, the over-all rise of American household fortunes masks other important trends. First of all, the general process of advance went into reverse after 2000. In 2000, 31 percent of households earned less than $35,000 a year; 45 percent earned between $35,000 and $100,000; and 25 percent earned more than $100,000. Then, between 2000 and 2013, 3 percent of households fell out of the middle class into the lower class, and 3 percent fell out of the upper class into the middle class. So, the American story up to 2000 was even more emphatically one of success. It was followed by a period of retreat. How much of the retreat—and the resulting sense of crisis–arises from the pain of the Great Recession and how much from long term trends like globalization? People were clearly falling backward between 2000 and the onset of the financial crisis in 2008. This decline resulted from foreign competition and new technology.

Some of the people who “fell” from the ranks of the middle and upper classes probably were marginal new arrivals. Any economic down-turn would shove them off the ledge. They were the victims of President Obama’s rejection of an adequate stimulus bill back in 2008-2009 and of Republican-enforced austerity policies after 2010.

Average median household income has fallen by 9 percent. Among households headed by people 65 or older, median income has risen by 14 percent since 2000. Partly, the rise in income for older households results from people who continue to work after age 65. Partly, it results from increasingly generous benefits (Social Security, Medicare) provided to older people.

One of the key factors here appears to be education. Even as late as 1992, almost half of middle class families were headed by someone with a high school education or less; slightly more than half by someone with at least some college. Today, 37 percent of middle class families are headed by someone with a high school education or less; 63 percent with at least some college. The middle class has declined most markedly in places that have shifted from industry toward technology and services. New England and New Jersey offer good examples.

How should we deal with globalization, the increased value of education, and the weighting of social policy toward older Americans at the expense of younger Americans?

[1] Dionne Searcey and Robert Gebeloff, “More Fall Out As the Middle Class Shrinks Further,” NYT, 26 January 2015.

 

The ticking clock.

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President Obama and the Democratic majority began his first term by launching a stimulus bill and creating a national health insurance system.[1] Both had failings, real and purely imaginary. Many voters responded to the ravings of the Tea Party and mainstream Republicans had little choice but to fall into line. The 2012 elections began to movement toward a Republican majority in Congress that culminated in the elections of 2014. Along the way, the Republican majority in the House not only blocked any further stimulus spending, but actually forced spending cuts through the sequester. Americans are still paying for that foolishness. By November 2014 President Obama and the Democrats were facing a two year-long march through the desert. Republican majorities can block any policy initiatives from the White House just as effectively as the White House and the Senate blocked the policies of the Republican House for the last four years. Aides are beginning to leave the White House to prepare for future campaigns on behalf of others or to cash in their chips by becoming consultants.

By early January 2015 the unemployment rate was down to 5.6 percent and falling, and the deficit had shrunk to 3 percent of GDP. This seemed to some observers to open a new “post-recession, post-panic era.” What will be the political themes of this new period? The mainstream of the Democratic Party is intellectually exhausted, while the left-wing (Elizabeth Warren, Bernie Sanders) is filled with enthusiasm.[2]

Betes noire of the Democratic Party (to judge by my cousins’ posts on FB) include big banks and inherited wealth and money earned from assets. The bêtes blanche are the middle class working Americans.[3]

In part, the President appears to have said “OK, I’ll do what I wanted to do from the start—govern the country like I’m the king.” He used his “prosecutorial discretion” to temporarily amnesty millions of illegal immigrants”; he dumped the policy of pretending Communist Cuba is just going to go away. In part, the President appears to have decided to lay down markers for the course his Democratic successors should follow.[4] In his state of the union address President Obama pitched a new tax plan. The plan proposed to raise the tax on capital gains, force people to pay when they inherited assets, and put a stop to 529 education savings plans because well-off people use them more than do lower-income people. The additional revenue would be used to fund a $500 tax credit to families where both parents work, and to cut taxes on families with children.

Right now this plan is going nowhere. It’s just more hot air from a guy who has always believed too much in the efficacy of speech. Republicans are philosophically opposed to high taxes on assets because the economy needs investment to grow. Still, going forward, it sets up a straight fight between Capital and Labor as the basic issue in the 2016 election. Whether that’s the best solution to the current American problems is open for debate. (See: Inequality 1.) Whether Democratic candidates will feel bound by Obama’s speeches also is open for debate.

[1] Neil Irwin, “Obama’s Tax Proposal May Help in Setting a Framework for 2016,” NYT, 18 January 2015.

[2] This same pattern led to disaster in the 1970s and 1980s. One can’t help but wonder if the Democratic Party is headed down the same road as the British Liberal Party in the early 20th Century. See: George Dangerfield, The Strange Death of Liberal England (1935).

[3] This loose terminology sets academics to grinding their teeth for its lack of “rigor,” but the meaning is clear enough: pissed-off people who actually vote.

[4] Given the way Hillary Clinton and Leon Panetta have rushed into print with memoirs of their service under a still-serving president, you can understand his indifference to the effect on subsequent candidates. I’m leaving Robert Gates out of this because he’s in a different category of public “servant.”