US Inequality Quiz
Can You Pass The US Inequality Quiz?
By Jeffrey Rudolph (June 2011; last update August 2014)
The American mainstream media regularly laments the incontrovertible reality of rising inequality yet rarely provides historical perspective or detailed analysis. Rather, the typical article provides statistical facts of inequality coupled with theoretical claims linking capitalism, incentives, economic growth and inequality.
While few doubt that capitalism is the preferred economic system for a country—despite its inevitable resulting inequality—the fundamental issue is whether the American model of capitalism should be preferred to versions of capitalism in, say, Europe or Japan. A misleading assumption of the US mainstream media is to equate capitalism with America’s “free-market” version. The alternative thus becomes the authoritarian, centrally planned system of the defunct Soviet Union.
The following quiz is intended to bring more depth to the issue of capitalism and inequality by providing historical context and international comparison. The conclusion is heartening: the US can be made both more just and more productive—indeed, it once was.
The US Inequality Quiz
1. True or False: Rising income inequality is simply the result of impersonal economic forces that have affected the US and the rest of the advanced world.
-False. “The sharp rightward shift in U.S. politics is unique among advanced countries; Thatcherite Britain, the closest comparison, was at most a pale reflection. The [impersonal] forces of technological change and globalization, by contrast, affect everyone. If the rise in inequality has political roots, the United States should stand out; if it’s mainly due to impersonal market forces, trends in equality should have been similar across the advanced world. And the fact is that the increase in U.S. inequality has no counterpoint anywhere else in the advanced world. During the Thatcher years Britain experienced a sharp rise in income disparities, but not nearly as large as the rise [in the U.S.]…, and inequality has risen modestly if at all in continental Europe and Japan.”
“[T]he forces of technological change and globalization have affected every advanced country: Europe has applied information technology almost as rapidly as we have, cheap clothing in Europe is just as likely to be made in China as is cheap clothing in America….In terms of institutions and norms, however, things are very different among advanced nations: In Europe, for example, unions remain strong, and old norms condemning very high pay and emphasizing the entitlements of workers haven’t faded away….There is…a…case for believing that institutions and norms, rather than technology or globalization, are the big sources of rising inequality in the United States.” (Paul Krugman, The Conscience Of A Liberal, W. W. Norton, New York: 2007, 9, 137, 140-1. Hereinafter referred to as, Krugman.)
For an example of the significance of norms and institutions to inequality, consider that Denmark’s Gini Index was 24.7 in 1992 and 24.8 in 2011(est.) while the US’s respective numbers were 43 and 47. (And, it is important to note, Denmark ranks highly on the Index of Economic Freedom (http://www.heritage.org/index/).)
-“[W]hen economists, startled by rising inequality [in the early 2000s], began looking back at the origins of middle-class America, they discovered…that the transition from the inequality of the Gilded Age [1870s to the beginning of the 20th century] to the relative equality of the…[post WWII] era wasn’t a gradual evolution. Instead, America’s postwar middle-class society was created, in just the space of a few years, by the policies of the Roosevelt administration…” (Krugman, 7-8)
2. What percentage of total income (excluding capital gains) was held by the top 10% of Americans in 2005? 1920s?
-2005: 44.3 percent; Average for 1920s: 43.6 percent. (The top 1% held 17.4% and 17.3% in 2005 and the 1920s, respectively.) The US is back to levels of inequality not seen since the days before the New Deal. (Krugman, 16)
-In 2011 “the top 10 percent of earners hauled in 46.5 percent of all income…the highest proportion since 1917 – and that doesn’t even include money earned from investments. The wealthy have benefited from favorable tax status and the rise in stock prices, while the rest have been hit with a continuing unemployment crisis that has kept wages down.” “American capitalism as currently practiced clearly redistributes income upward. According to Nobel laureate Joseph Stiglitz, the richest 1 percent of Americans now hold 25 percent of the country’s wealth. The total income share for the 1 percent has jumped more in the U.S. than in any other major Western country since 1960…The top 1 percent’s share of income dipped in some European countries and increased by up to 4 percentages elsewhere, but in the…U.S., land of opportunity, it soared over 9 percentage points.” http://www.alternet.org/print/economy/9-economic-facts-will-make-your-head-spin
-In 2012 “the top 1 percent of American households collected 22.5 percent of the nation’s income, the highest total since 1928. The richest 10 percent of Americans now take a larger slice of the pie than in 1913, at the close of the Gilded Age, owning more than 70 percent of the nation’s wealth. And half of that is owned by the top 1 percent.” http://www.nytimes.com/2014/04/20/business/international/taking-on-adam-smith-and-karl-marx.html?_r=0
-In 2005, US “households in the bottom 20 percent had an average income of $10,655, while the top 20% made $159,583—a disparity of 1,500 percent, the highest gap ever recorded.” (Arianna Huffington, Third World America, Crown Publishers, New York: 2010, 18. Hereinafter referred to as, Huffington.)
-In 1979 the top 0.1% of Americans (approximately 300,000 people) received 2.2% of all income. In 2005 the top 0.1% received more than 7% of all income. (Krugman, 259.)
-In 2010, the Walton family (of Walmart fame) owned more wealth ($89.5 billion) than the bottom 40 percent of America (49 million families). http://www.politifact.com/truth-o-meter/statements/2012/jul/31/bernie-s/sanders-says-walmart-heirs-own-more-wealth-bottom-/
-“The 90 percent of Japanese at the bottom of their nation’s wealth distribution own 60.7 percent of their nation’s wealth. In the United States…[t]he bottom 90 percent of Americans own…30.2 percent of U.S. household wealth…Japan’s wealth spreads throughout Japanese society.” http://www.fpif.org/articles/deeply_unequal_world
-“Even when upward income redistribution creates more wealth…there is no guarantee that the poor will benefit…[T]he trouble is that trickle down usually does not happen very much if left to the market. For example…the top 10 per cent of the US population appropriated 91 per cent of income growth between 1989 and 2006, while the top 1 per cent took 59 per cent. In contrast, in countries with a strong welfare state it is a lot easier to spread the benefits of extra growth that follows upward income redistribution…through taxes and transfers. Indeed, before taxes and transfers, income distribution is actually more unequal in…Germany than in the US, while in Sweden and the Netherlands it is more or less the same as in the US.” (Ha-Joon Chang, 23 Things They Don’t Tell You about Capitalism, Bloomsbury Press, New York: 2010, 145-6. Hereinafter referred to as, Chang.)
-The 2008 recession seems to have cemented income and wealth inequality in the US. The “top 10 percent earn a larger share of overall income than they have since the 1930s. The earnings of the top 1 percent took a knock during the recession, but have bounced back. In contrast, the average working family’s income has continued to decline through the anemic recovery. The distribution of wealth has become more concentrated as well” as the “top 1 percent of households now hold a larger share of overall wealth than the bottom 90 percent does.” http://www.nytimes.com/2012/10/17/business/economy/income-inequality-may-take-toll-on-growth.html?_r=2&src=me&ref=general&pagewanted=all&
-For graphs displaying inequality and its relation to other variables go to: http://www.washingtonpost.com/blogs/wonkblog/wp/2012/12/27/2012-the-year-in-graphs/
3. Why have advocates of a smaller welfare state and regressive tax policies been able to win elections in the US even as growing income inequality should have made the welfare state more popular?
-“[S]omething has allowed movement conservatism to win elections despite policies that should have been unpopular with a majority of the voters.…[That something] can be summed up in just five words: Southern whites started voting Republican.”
After the passage of the Civil Rights Act of 1964, President “Johnson told…a presidential aide, ‘I think we’ve just delivered the South to the Republican Party for the rest of my life, and yours.’ He was right…The changing politics of race made it possible for a revived conservative movement, whose ultimate goal was to reverse the achievements of the New Deal, to win national elections—even though it supported policies that favored the interests of a narrow elite over those of middle- and lower-income Americans.”
Running for governor of California in 1966, Ronald Reagan said: “If an individual wants to discriminate against Negroes or others in selling or renting his house he has a right to do so.” (Movement conservatives have since learned to be more circumspect in their public statements.) “Ronald Reagan began his 1980 [presidential] campaign with a states’ rights speech outside Philadelphia, Mississippi, the town where three civil rights workers were murdered; Newt Gingrich was able to take over Congress entirely because of…the switch of Southern whites from overwhelming support for Democrats to overwhelming support for Republicans.”
Movement conservatism’s “pandering to a subset of white voters by catering to their fear of blacks (and other non-whites such as Hispanics)…has less electoral impact as the US becomes less white and as many whites become less racist.” (In 1980, Hispanics constituted 6.4% of the US population; in 2000, 12.5%.) “The importance of the shifting politics of race is almost impossible to overstate. Movement conservatism as a powerful political force is unique to the United States. The principal reason movement conservatives have been able to flourish here, while people with comparable ideas are relegated to the political fringe in Canada and Europe, is the racial tension that is the legacy of slavery. Ease some of that tension, or more accurately increase the political price Republicans pay for trying to exploit it, and America becomes less distinctive, more like other Western democracies where support for the welfare state and policies to limit inequality is much stronger.” (Krugman, 12, 86, 99-100, 178-9, 211)
-At the 2012 Republican National Convention, Senator Lindsey Graham of South Carolina, commenting on the rising proportion of non-white voters, had this to say: “The demographics race we’re losing badly. We’re not generating enough angry white guys to stay in business for the long term.” Sen. Graham’s concern for Republicans is valid as “Exit polls from 2008 showed that 90 percent of GOP voters were white, a homogeneity that has been consistent for more than 30 years, even as the percentage of the electorate that is white has fallen.” http://www.washingtonpost.com/politics/as-republican-convention-emphasizes-diversity-racial-incidents-intrude/2012/08/29/b9023a52-f1ec-11e1-892d-bc92fee603a7_story.html
In the 2012 presidential election, Romney did gain a strong majority of the white male vote. However, to be precise, he “won poorly-educated, older white males….Obama actually won, albeit narrowly, among highly educated white males, and won handily among younger highly educated white males.” http://bernardavishai.blogspot.ca/2012/11/my-demographic-and-ours.html
4. Which Republican leader wrote the following? “Should any political party attempt to abolish social security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear of that party again in our political history. There is a tiny splinter group, of course, that believes you can do these things. Among them are H. L. Hunt…, a few other Texas oil millionaires…Their number is negligible and they are stupid.”
-By the time US President Eisenhower wrote those words in 1954, Republican leaders had, as a matter of political necessity, accepted the institutions created by the New Deal. (In fact, taxes on corporations and the rich were even higher during the Eisenhower presidency than they had been under FDR.) As the great majority of Americans are assisted by programs such as social security, it should not be surprising, that when facts are understood, progressive government is popular. The moderate Republican trend of domestic governance continued under President Richard Nixon. While Nixon exploited the race issue to get elected in 1968, he “governed as a liberal in many ways: He indexed Social Security for inflation, created Supplemental Security Income…, [raised taxes,] expanded government regulation of workplace safety and the environment, and even tried to introduce universal health insurance.”
By the mid-1970s movement conservatism had the organization in place to achieve power. What facilitated the acquisition of power was “a double crisis, both foreign and domestic. In foreign affairs the fall of Vietnam was followed by what looked at the time like a wave of Communist victories in Southeast Asia and in Africa, then by the Soviet invasion of Afghanistan and—unrelated, but feeding the sense of anxiety—the Islamic revolution in Iran and the humiliation of the hostage crisis. On the domestic front a combination of bad policy and the energy crisis created the nightmare of stagflation, of high unemployment combined with double-digit inflation.…[T]he dire mood of the 1970s made it possible for movement conservatives to claim that liberal policies had been discredited. And the newly empowered movement soon achieved a remarkable reversal of the New Deal’s achievements.” (Krugman, 58-9, 62, 81, 122-3)
-“The story of rising political polarization isn’t a matter of both parties moving to the extremes. It’s hard to make the case that Democrats have moved significantly to the left: On economic issues from welfare to taxes, Bill Clinton arguably governed not just to the right of Jimmy Carter, but to the right of Richard Nixon. On the other side it’s obvious that Republicans have moved to the right: Just compare the hard-line conservatism of George W. Bush with the moderation of Gerald Ford.” (Krugman, 5)
5. Which country’s law mandates that the employees of large corporations elect one-half of the board of directors? (I.e. Shareholders do not elect all of the board.)
-Germany has had a very successful economy and a strong welfare state. The unemployment rate is 7.5 percent (well below the US’s). During most of the last decade, Germany, a nation of 82 million people, was either the world’s top exporter or essentially tied for the top spot with China. Germans work less than Americans with six weeks of vacation time. Poverty rates for children and the elderly are less than half that of the US. Unlike most Americans, the average German isn’t perpetually indebted because basic public goods (such as healthcare, education and childcare) are paid for by the state. This last point is crucial for understanding how Germans can pay much higher taxes and still be able to save.
The three building blocks of German social democracy are the worker council, the co-determined board and regional wage bargaining. With respect to the last block, “unions bargain for wages and pensions just like in America, except instead of negotiating with one employer at a time, they do so with as many employers in the same industry as possible….[T]his system [for example] would allow clerks at…all bookstores to be paid the same wage. Same work, same pay, so that companies aren’t competing based on wages and the ‘race to the bottom’ is stopped in its tracks. The system is powerful: Unions negotiate the wages of 60 percent of Germany’s private sector workforce, more than eight times the percentage of U.S. workers covered by bargaining agreements. But things get much more interesting with the other big blocks. Works councils, comprised of elected workers, actually help to manage companies. That means the councils help determine core issues, like when to open and close the store or office, who gets what shift, and who gets laid-off or fired….[W]orkers and bosses make decisions together. More interesting are the co-determined boards….In any German company with more than 2,000 employees, workers get to elect half the firm’s board of directors — the same amount that shareholders get to elect. Although the board chairman, chosen by shareholders, gets to break ties, this arrangement gives [regular non-supervisory] workers…a modicum of control over the firm. They can try to block factory shutdowns and protect good manufacturing jobs and block capital flight and outsourcing….After World War II, US Army leaders, overseeing Germany’s reconstruction and steeped in the New Deal, advocated for works councils and co-determined boards in order to bring real democracy (not just better wages) to post-Nazi Germany.” http://tomgeoghegan.com/2010/07/in-these-times/
6. In 1969, how much did a typical auto industry production worker earn (in 2005 dollars)? In 2005, how much did a typical Wal-Mart nonsupervisory employee earn?
-In 1969, the typical GM production worker salary (in 2005 dollars): $40,000 (with excellent benefits). In 2005, the typical Wal-Mart nonsupervisory employee salary: $18,000 (with limited benefits). (Krugman, 139)
-“From 1947 through about 1978, wages and benefits for rank-and-file workers grew roughly in tandem with the overall productivity of the U.S. economy: both more than doubled over that period.…Between 1979 and 2007, productivity shot up by another 70 percent. But compensation for the American rank and file hardly moved, inching up only 5 percent, after factoring in inflation. In recent decades, only the elite—those in the top tenth of income distribution—saw their real earnings keep pace with gains in productivity.”
“By the end of the previous economic expansion, in 2000, the median American family earned about $61,000 annually, after accounting for inflation. In 2007, before the economy turned down again, the median family had seen its earnings contract to $60,500. For the first time since the government began keeping records more than a half century earlier, an expansion had ended, with most Americans effectively sliding backward.…[During the same general period,] corporate profits as a percentage of national income swelled close to the highest level in sixty years.” (Peter S. Goodman, Past Due: The End of Easy Money and the Renewal of the American Economy, Times Books, New York: 2009, 10-11, 161. Hereinafter referred to as, Goodman.)
-The reason why US “manufacturing workers, construction workers, and restaurant workers lose their jobs to low-paid workers from the developing world, and doctors and lawyers don’t, is that doctors and lawyers use their political power to limit the extent to which they are exposed to competition from their low-paid counterparts in the developing world. Our trade policy has been explicitly designed to remove barriers that prevent General Electric and other companies from moving their manufacturing operations to Mexico, China or other developing countries. By contrast, many of the barriers that make it difficult for foreign professionals to work in the United States have actually been strengthened in the last two decades.” http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/inequality-the-silly-tales-economists-like-to-tell
-According to a “recently released report from the Federal Reserve…two-thirds of American households are unable to raise $400 cash without selling possessions or borrowing from family and friends.” http://www.informationclearinghouse.info/article39381.htm (Aug. 12, 2014)
7. True or False: The US has higher social mobility than the Scandinavian countries.
-False. “[I]nternational comparison of social mobility [shows that]…the Scandinavian countries have higher social mobility than the UK, which in turn has higher mobility than the US. It is no coincidence that the stronger the welfare state, the higher the mobility. Particularly in the case of the US, the fact that low overall mobility is largely accounted for by low mobility at the bottom suggests that it is the lack of a basic income guarantee that is preventing poor kids from making use of the equality of opportunity. [The percentage of Americans born to parents in the bottom fifth of income who will climb to the top fifth as adults is only 7 percent.]…Unless we create an environment where everyone is guaranteed some minimum capabilities through some guarantee of minimum income, education and healthcare, we cannot say that we have fair competition….Equality of opportunity is absolutely necessary but not sufficient in building a genuinely fair and efficient society.” (Chang, 219-20)
-The US’s lack of “universal health care, all by itself, puts Americans who are unlucky in their parents at a disadvantage: Because American children from low-income families are often uninsured, they’re more likely to have health problems that derail their life chances. Poor nutrition, thanks to low income and a lack of social support, can have the same effect….Then there’s the highly uneven quality of U.S. basic education…” (Krugman, 249)
-One important reason why many poorer Americans accept policies underlying income inequality, and thus respond negatively to policies that would benefit them, is their (false) belief in high rates of social mobility. “Why would the poor oppose taxes on the wealthy? Because many believe that they, or at least their children, will eventually be wealthy, voting for taxes on the rich may feel like voting for taxes on themselves….[The issue is] whether educating Americans about the current level of wealth inequality…might increase their support for policies that reduce this inequality.” http://www.nytimes.com/roomfordebate/2011/03/21/rising-wealth-inequality-should-we-care/living-beyond-your-means-when-youre-not-rich
-The “World Bank’s top analysts acknowledged…that redistribution—as well as economic growth—is needed to end world poverty. Nations can’t offer equity of opportunity…without first achieving a healthy measure of equity in distribution. That’s because…societies with extreme inequality in wealth generate also extreme inequality in power….[G]overnments that reflect these extreme inequalities in power…tend to govern not in the public interest, but in the interest of wealthy elites.” http://www.fpif.org/articles/deeply_unequal_world
8. Who wrote the following? “By necessaries I understand not only the commodities which are indispensably necessary for the support of life, but what ever the customs of the country renders it indecent for creditable people, even the lowest order, to be without. A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably, though they had no linen. But in the present times, through the greater part of Europe, a creditable day-laborer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into, without extreme bad conduct.”
-The concept of relative deprivation (not merely absolute poverty) was described by Adam Smith in The Wealth of Nations. As Smith recognized, income inequality has significant negative consequences.
-“It appears that, while money matters to people, their relative ranking matters more….Poor health may be the most dramatic consequence of relative deprivation, but there are more subtle effects as well…[For example,] children from poor families may lack skills…that could enhance their prospects in the job market….Being relatively poor in a rich country can be a great capability handicap, even when one’s absolute income is high in terms of world standards.” Conservatives generally reject relative-poverty measures “since some people will always earn less than others the relative-poverty rate will never go down. Fortunately, this isn’t necessarily true. If incomes were distributed more equally, fewer families would earn less than half the median income. Therefore, the way to reduce relative poverty is to reduce income inequality—perhaps by increasing the minimum wage and raising taxes on the rich.” http://www.newyorker.com/archive/2006/04/03/060403fa_fact?printable=true¤tPage=all
-“[T]here is overwhelming evidence that as inequality grows a country becomes nastier. [R]ates of violent crime and racism tend to be higher where the gap between rich and poor is greater. So firmly established is the link between homicide rates and inequality…that many criminologists regard it as more important than any other environmental factor….[I]n some countries inequality reduces the life expectancy of the poorest by as much as 25%. We are talking about the effects not of absolute poverty but of inequality – which apparently leads to acute anxieties and insecurities, and a chronic lack of social trust.”
9. Which political leader said the following? “We had to struggle with the old enemies of [domestic] peace—business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering. They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob. Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hatred for me—and I welcome their hatred.”
-The above was spoken by President Franklin Delano Roosevelt on the eve of the 1936 presidential election. Rich Americans had good reasons to hate FDR. His New Deal imposed a heavy tax burden on corporations and the wealthy, fostered the growth of unions, and oversaw a narrowing in income inequality (that included a substantial fall in after-tax incomes at the top). (Krugman, 59-60)
-“Thousands of lobbyists plus billions of dollars equal access and influence out of the reach of ordinary Americans….In 2009, more than 13,700 registered lobbyists spent a record $3.5 billion swaying government policy…double the amount lobbyists spent as recently as 2002….And that is just the money corporate America is spending on lobbying. Millions more are given directly to politicians and the political parties….Over the past two decades, it [the financial sector] was the top contributor to political campaigns….[T]he bankers’ money rained down [to both Democrats and Republicans]…The investments paid off…with the rollback of…financial regulations that had kept the worst excesses of corporate greed in check since the Great Depression…The results for corporate America: record profits, record pay packages, and record bonuses. The results for the rest of us: the savings and loan crisis, the corporate scandals of the Enron era, and the [current] economic collapse…” The US “spent $182 billion to bail out AIG ($12.9 billion of which went straight to Goldman Sachs)…this amount alone would be more than enough to close the 2010 budget gap in every state in the Union.” “[One] effective means of restoring the integrity of our government is through the full public financing of political campaigns….[This is] the one reform that makes all other reforms possible….If someone’s going to own the politicians, it might as well be the American people.” (Huffington, 10, 128-130, 172)
-Legislation such as the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act cannot alone confer the necessary fortitude upon regulators to diligently do their job with respect to powerful industries such as Wall Street. The political will to effectively regulate is often overwhelmed by “massive campaign contributions, relentless lobbying, and multimillion-dollar payouts awaiting government officials who join Wall Street firms…” For example, “one of the best protections against future bailouts short of breaking up the largest banks is to make sure that banks have thick capital cushions that can absorb potential losses. More capital means that the banks’ shareholders–and not the taxpayer through bailouts–pay if the banks suffer large losses. Although Dodd-Frank called for higher capital levels to be set by the regulators for the largest banks…they have still not formally done so.” (Neil Barofsky, Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street, Free Press, New York: 2012, 219, 231. Hereinafter referred to as, Barofsky.)
-“Money is the glue of movement conservatism, which is largely financed by a handful of extremely wealthy individuals and a number of major corporations, all of whom stand to gain from increased inequality, an end to progressive taxation, and a rollback of the welfare state—in short, from a reversal of the New Deal.” (Krugman, 10)
-US polls consistently show majorities in favor of Canadian-style Medicare, less spending on defense, increased taxes for the rich, and government spending to increase employment. Yet lobbying power has moved elected officials (not the majority of the population) to the right.
10. What was the top personal income tax rate on earned income in the US in the 1920s? Late-1930s? Mid-1950s? 1979? 2006?
-1920s: 24%; Late-1930s: 79%; Mid-1950s: 91%; 1979: 70%; 2006: 35%.
-“Between 1979 and 2006 the top tax rate on earned income was cut in half [from 70% to 35%]; the tax rate on capital gains was cut almost as much [from 28% to 15%]; the tax rate on corporate profits fell by more than a quarter [from 48% to 35%]….[R]aising taxes on the rich back toward historical levels can pay for part…of a stronger safety net that limits inequality.” (Krugman, 47, 257)
-In 2007, Warren Buffet commented “that his receptionist paid 30 percent of her income in taxes, while he paid only 17.7 percent on his taxable income of $46 million.” (Huffington, 59)
11. What is the tax rate that US hedge fund managers pay on fund earnings?
-Hedge fund managers’ earnings are taxed at the capital gains rate of 15%. “[I]n Britain capital gains are taxed as ordinary income…” (Krugman, 258-9)
-In 2009, the top hedge-fund manager earned $4 billion. (Huffington, 59)
-It is no wonder that “profit and pay levels in the finance sector have soared over the past three decades. From 1973-1985, the finance sector accounted for under 16% of corporate profits, in the 1990s this ranged from to 21-30% and in the 2000s they peaked at 41% in the lead up to 2007. From 1948-1983, pay in the finance sector ranged from 99% to 108% of pay in other industries. Between 1983 and 2008 it grew to 181%.”
In other words, Wall Street got huge, its bankers got very rich, and its political power expanded. Wall Street and Washington merged as a flow of investment bankers went into government. The result was a string of legislation designed to further enhance the freedom and power of finance. Regulations separating commercial and investment banking were repealed. There were major increases in the leverage–amount of debt financing in relation to equity–allowed to investment banks. http://teslaconference.com/documents/CUK%20-%20Co-operative%20Money%20and%20Economic%20Democracy.June12.pdf
12. How much in corporate income taxes did General Electric pay to the United States on its 2010 billions in profit?
-In 2010, “General Electric…reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States. Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion.” “Although the top corporate tax rate in the United States is 35 percent, one of the highest in the world, companies have been increasingly using a maze of shelters, tax credits and subsidies to pay far less….Such strategies, as well as changes in tax laws that encouraged some businesses and professionals to file as individuals, have pushed down the corporate share of the nation’s tax receipts—from 30 percent of all federal revenue in the mid-1950s to 6.6 percent in 2009….G.E. spends heavily on lobbying: more than $200 million over the last decade…While G.E.’s declining tax rates have bolstered profits and helped the company continue paying dividends to shareholders during the economic downturn, some tax experts question what taxpayers are getting in return. Since 2002, the company has eliminated a fifth of its work force in the United States while increasing overseas employment. In that time, G.E.’s accumulated offshore profits have risen to $92 billion from $15 billion…”
-“Goldman Sachs…got $10 billion and debt guarantees from the U.S. government in October …[Its 2008] effective income tax rate dropped to 1 percent from 34.1 percent [in 2007]…The firm reported a $2.3 billion profit for the  year after paying $10.9 billion in employee compensation and benefits….[Goldman] lowered its  rate with more tax credits as a percentage of earnings and because of ‘changes in geographic earnings mix,’ [i.e., it routed more earnings through lower-tax foreign jurisdictions]…”http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a6bQVsZS2_18
-Citigroup “has been involved in virtually every major financial screw-up, from Enron and WorldCom, to the analyst scandals of the tech bubble, to the mortgage fiasco. That long string of setbacks…cost Citi shareholders…about $100 billion in pretax losses from fines, settlements, reserves, or write-downs from 2001 to 2010….In fact, if you look at the entire history of the company, the past decade doesn’t seem like an aberration. The scandals have occurred more frequently…but they’re not new. [Citi] has come close to failing six times throughout [its] history, in the years 1921, 1932, 1970, 1982, 1991, and 2008. On multiple occasions, it received federal bailouts to remain solvent, and each of those instances follows a similar arc: The company takes on excessive risks, gets into trouble, and requires the government to step in simply so it can survive. That incident leads to new outside regulations against such risky behavior in the future, which the bank grumbles about and then doesn’t follow anyway.” We should not take bankers seriously when they argue that since they know a lot more “about the riskiness of their” business the government should not closely regulate them. (Mike Mayo, Exile on Wall Street: One Analyst’s Fight to Save the Big Banks from Themselves, John Wiley & Sons, New Jersey: 2012, 114-5, 120)
-After the massive government bailouts of the too-big-to-fail banks in 2008 and 2009, “the largest banks had become significantly bigger, led by JPMorgan Chase, which grew by 36 percent, from $1.56 trillion in assets at the end of 2007 to $2.12 trillion at the end of 2010…” It is only to be expected that such growth translates into even greater political influence for the banks than they wielded before the crisis. (Barofsky, 217)
13. What was the main cause for the sudden decline in incomes, between the mid-1930s and mid-1950s, for the richest Americans? (Hint: Your answer can be one word long.)
-Taxes. “Partly as a result [of rising taxes] the ownership of wealth became significantly less concentrated: The richest 0.1 percent of Americans owned more than 20 percent of the nation’s wealth in 1929, but only around 10 percent in the mid-1950s. So what happened to the rich? Basically the New Deal taxed away much…of their income. No wonder FDR was viewed as a traitor to his class.”
“By the mid-fifties the real after-tax incomes of the richest 1% of Americans were probably 20 or 30 percent lower than they had been a generation earlier.…Meanwhile the real income of the median family had more or less doubled since 1929.” (Krugman, 41-42, 48)
14. What was the main reason for the relatively good incomes for American blue-collar workers in the 1960s as compared to the 1920s? (Hint: Your answer can be one word long.)
-Unions. “At the end of the twenties, the American union movement was in retreat.…By 1930 only a bit more than 10 percent of nonagricultural workers were unionized, a number roughly comparable to the unionized share of private-sector workers today .…But under the New Deal unions surged…At the end of World War II more than a third of nonfarm workers were members of unions—and many others were paid wages that…were set either to match union wages or to keep workers happy enough to forestall union organizers.”
“[T]he existence of powerful unions acted as a restraint on the incomes of both management and stockholders. Top executives knew that if they paid themselves huge salaries, they would be inviting trouble with their workers; similarly corporations that made high profits while failing to raise wages were putting labor relations at risk.” The FDR administration’s shift from agent of bosses to protector of workers’ right to organize enabled the rise of unions. And, union power was an important factor in the creation of a middle-class society in the US. (Krugman, 49, 111, 114-5)
-“A modest retirement was once guaranteed for many American workers, particularly those in unions, whose contracts offered traditional pensions that paid out a monthly lump sum until the end of life.…But in the 1980s, as union power eroded, many employers quit offering pensions and shifted to the then new 401(k) retirement savings plans, to which they made only limited contributions. Employees themselves contributed the bulk of the money, choosing from a basket of mutual funds and stocks in which to invest, much to the delight of Wall Street banks that earned profits by managing the money.” (Goodman, 12-13)
-The percentage of American workers in unions in 1924: 11%; 1935: 12%; 1945: 35%; 1970: 27%; 2006, 11%.
15. Why aren’t Wal-Mart employees unionized?
-“[T]he sources of union decline in America lie not in market forces but in the political climate created by movement conservatism, which allowed employers to engage in union-busting activities and punish workers for supporting union organizers. Without that changed political climate, much of the service economy—especially giant retailers like Wal-Mart—would probably be unionized today.…Much if not most of the antiunion activity that led to the sharp decline in American unionization was illegal even under existing law. But employers judged, correctly, that they could get away with it”
“The sharpest increases in wage inequality in the Western world have taken place in the United States and in Britain, both of which experienced sharp declines in union membership.” Imagine how different worker pay would be in the US if “Wal-Mart employees were part of a union that could demand higher wages and better benefits…[While] retail prices might be slightly higher…the retail giant wouldn’t go out of business—and the American middle class would have several hundred thousand additional members.” (Krugman, 150, 263-4)
-“Business interests, which seemed to have reached an accommodation with the labor movement in the 1960s, went on the offensive against unions beginning in the 1970s. And we’re…talking about hardball tactics, often including the illegal firing of workers who tried to organize or supported union activity. During the late seventies and early eighties at least one in every twenty workers who voted for a union was illegally fired; some estimates put the number as high as one in eight. The collapse of the U.S. union movement…has no comparison in any other Western nation.” In 1960, Canada and the US had approximately the same percentage of unionized wage and salary workers (at 31%). By 1999, The US’s percentage was down to 13.5% while Canada’s was stable at 32.6%. (Krugman, 150-1)
-In 1958, senator Barry Goldwater, the 1964 Republican presidential candidate, declared Walter Reuther, the president of the United Automobile Workers from 1946 to 1970, “a ‘more dangerous menace than…anything Soviet Russia might do to America.’ In the 1950s America was a nation in which organized labor played a powerful, visible role….America’s unionization rate was higher than that of Canada, Italy, or France…Strident antiunionism was what initially gave Goldwater national prominence.…Antiunionism gave movement conservatism its first solid base in the business community. From the 1960s on, business owners who hated unions were a solid source of financial support.…[I]n the seventies and eighties America’s political shift to the right empowered businesses to confront and, to a large extent, crush the union movement, with huge consequences for both wage inequality and the political balance of power.” (Krugman, 138)
-“Undermining and destroying collective bargaining rights is one of the most important structural reforms that any right-wing government in a developed country can win. And it is not just because…unions contribute money to the campaigns of Democratic candidates. It is much deeper than that. Organized labor is relatively weak now, but for more than a century it has been the most important force for positive economic reforms in the United States, from the eight-hour work day, to health insurance and Medicare, social security, pensions and minimum wages….[President Reagan, in the early 1980s, began] a new era of labor suppression in which private sector workers all but lost their rights to organize unions….Unions were 20 percent of the private sector labor force when Reagan was elected; they are 6.9 percent today ….[P]resident Obama…did have a mandate for change as the majority of the electorate finally rebelled against nearly four decades of right-wing reforms and the pain and anxiety caused by the Great Recession. One structural reform that Obama had promised in his campaign to support was the Employee Free Choice Act, which would have gone a long way toward restoring the collective bargaining rights that Reagan had destroyed. President Obama quickly backed off from this promise.”
16. What was the federal US minimum wage (in 2006 dollars) in 1966? 2006?
-The US minimum wage in 1966 (in 2006 dollars): $8.00; 2006: $5.15. Thanks to the 2009 Democratic majority in Congress, the minimum is now $7.25. It’s important to note that a classic study, by highly respected labor economists, “found no evidence that minimum wage increases in the range the United States has experienced led to job losses.…[This study] has stood up very well to repeated challenges, and new cases confirming its results keep coming in.” (Krugman, 79, 261)
-Raising “the minimum wage doesn’t only cut into profits, it also increases demand in the economy by moving income to workers who spend more than those who receive profit. The Economic Policy Institute estimated that the proposed increase in the minimum wage would actually increase employment.” As of August 2012, there is legislation before the US Congress to raise the federal minimum wage from its current $7.25 an hour to $9.80, over three years. After that it would be indexed to inflation. “In Brazil, the minimum wage was raised by 60 percent in real terms by the country’s most popular president, Lula da Silva…as Brazil’s economy moved toward record-low levels of unemployment. Across South America, other left governments including Argentina, Ecuador, Bolivia, Venezuela and more have significantly reduced inequality while increasing economic growth.” http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/minimum-wage-raise-is-the-least-we-can-do-to-civilize-america
-Working full-time at the minimum wage in 1970 kept a worker out of poverty. Such is no longer the case.
-“The median inflation-adjusted earnings of men working full-time in 2005 were slightly lower than they had been in 1973.” (Krugman, 127)
17. True or False: American top managers of large companies are actually underpaid when compared to their counterparts in other rich countries.
-False. US top managers “are paid, depending on the measure we use and the country we compare with…between twice (compared to…Swiss CEOs, excluding stock options) and twenty times (compared to…Japanese CEOs, including stock options) their counterparts abroad…running similarly large successful companies. American managers are not only over-priced but also overly protected in the sense that they do not get punished for poor performance.” (Indeed, the American CEOs are running companies that perform no better, and frequently worse, than their Japanese and European competitors.) “And all this is not…purely dictated by market forces. The managerial class in the US has gained such economic, political and ideological power that it has been able to manipulate the forces that determine its pay. The  average CEO compensation (salaries, bonuses, pensions and stock options) in the US is 300-400 times the average worker compensation (wages and benefits).…[This compares to] 30 to 40 to 1 in the 1960s and 70s.” (Chang, 149-153)
-“Markets weed out inefficient practices [such as excessive executive compensation], but only when no one has sufficient power to manipulate them. Moreover, even if they are eventually weeded out, one-sided managerial compensation packages impose huge costs on the rest of the economy while they last. The workers have to be constantly squeezed through downward pressure on wages, casualization of employment and permanent downsizing, so that the managers can generate enough extra profits to distribute to the shareholders and keep them from raising issues with high executive pay…Having to maximize dividends to keep the shareholders quiet, investment is minimized, weakening the company’s long-term productive capabilities. When combined with excessive managerial pay, this puts the American and British firms at a disadvantage in international competition, eventually costing the workers their jobs. Finally, when things go wrong on a large scale, as in the 2008 financial crisis, taxpayers are forced to bail out the failed companies, while the managers who created the failure get off almost scot-free.” (Chang, 156)
-It should be noted that CEO pay is largely determined by CEOs. Corporate boards, largely selected by the CEOs, hire compensation experts, almost always chosen by the CEO, to determine how much the CEO is worth.
18. True or False: Increased income taxes and social welfare spending necessarily come at the expense of economic growth.
-False. “Following the Second World War, there was a rapid growth in progressive taxation and social welfare spending in most of the rich capitalist countries. Despite this (or rather partly because of this…), the period between 1950 and 1973 saw the highest-ever growth rates in these countries…Before [this period]…per capita income in the rich capitalist economies used to grow at 1-1.5 per cent per year.…[From 1950 to 1973, per capita income in these economies] grew at 2-3 per cent in the US and Britain, 4-5 per cent in Western Europe…Since then, these countries have never managed to grow faster than that.” (Chang, 142)
-Americans should dismiss modern conservative claims that “no policies can appreciably raise the share of national income going to working families, or at least that none can do so without wreaking the economy….[F]ranklin Delano Roosevelt and Harry Truman managed to preside over a dramatic downward redistribution of income and wealth that made America far more equal than before—and not only wasn’t the economy wrecked by the redistribution…[but the stage was set] for a great generation-long economic boom.” (Krugman, 38-39)
-“A well-designed welfare state can actually encourage people to take chances with their jobs and be more, not less, open to changes. This is one reason why there is less demand for trade protectionism in Europe than in the US. Europeans know that, even if their industries shut down due to foreign competition, they will be able to protect their living standards (through unemployment benefits [and health insurance and housing subsidies]) and get re-trained for another job (with government subsidies), whereas Americans know that losing their current jobs may mean a huge fall in their living standards [as unemployment insurance coverage is of shorter duration than in Europe, public help with retraining and job search is limited, and losing one’s job means losing health insurance]…This is why the European countries with the biggest welfare states, such as Sweden, Norway and Finland, were able to grow faster than, or at least as fast as, the US, even during the post-1990 ‘American Renaissance’…Obviously, the size of the welfare state is only one factor in determining a country’s economic performance, but…a large welfare state is not incompatible with high growth….Were the free-market economists right about the detrimental effects of the welfare state on work ethic and the incentives for wealth creation, this kind of thing should not happen.” (Chang, 221-2, 229)
-A growing “body of economic research suggests that [income inequality] might mean lower levels of economic growth and slower job creation” for a country. According to IMF research, economic growth is more fragile “in countries with high levels of inequality like the United States”; and, “the widening disparity since the 1980s might shorten the [US's] economic expansions by as much as a third.” In fact, “Reducing inequality and bolstering growth, in the long run, might be ‘two sides of the same coin,’…” http://www.nytimes.com/2012/10/17/business/economy/income-inequality-may-take-toll-on-growth.html?_r=1&src=me&ref=general&pagewanted=all
-In 2012, “The [European] countries with the well-developed welfare states, Germany, Denmark, Sweden, the Netherlands are doing fine. The countries that are in crisis, Spain, Greece, Portugal, Ireland, have the least developed welfare states among the older EU countries.” http://www.cepr.net/index.php/blogs/beat-the-press/steven-pearlstein-doesnt-like-the-european-welfare-states
19. At the end of 2009, what was the unemployment rate among American men aged twenty-five to fifty-four?
-19.7 percent. This is the highest figure since the Bureau of Labor Statistics began tracking this data in 1948. America has always had unemployment rates far lower than other developed nations. But this historic advantage is coming to an end. (Huffington, 63)
-“By early 2009, only 55 percent of working-age African American men were employed, the lowest level since 1983.” (Goodman, 163)
-“In April 2010…the number of Americans on food stamps grew to forty million…” “The National Center on Family Homelessness estimates that 1.5 million children in the United States are homeless—that is one in fifty children.” (Huffington, 55, 73)
-The 2010 “Census Bureau data shows that one in two Americans currently falls into either the ‘low income’ category or is living in poverty. Low-income is defined as those earning between 100 and 199 percent of the poverty level. Adjusted for inflation, the earnings for the bottom 20 percent of families have dropped from $16,788 in 1979 to just under $15,000. Earnings for the next 20 percent have been stuck at $37,000….46.7 million Americans must now use food stamps in order to get a meal…Almost half of all U.S. children will be on food stamps during some part of their childhood. For black children, that number is 90 percent.” http://www.alternet.org/print/economy/9-economic-facts-will-make-your-head-spin
-“Two and a half million Americans are currently under lock and key….The U.S. has 5 percent of the world’s population, but we have 25 percent of the world’s prisoners.” http://www.alternet.org/print/economy/9-economic-facts-will-make-your-head-spin
20. True or False: The US has the highest per capita income in the world.
-False. According to World Bank data, the “per capita income of the US in 2007 was $46,040. There were seven countries with higher per capita income…starting with Norway ($76,450) at the top, through Luxemburg, Switzerland, Denmark, Iceland, Ireland and ending with Sweden ($46,060).…[And] the US is much more unequal than the European countries…” “[A]mericans work considerably longer than Europeans. Per hour worked, their command over goods and services is smaller than that of several European countries.” (Chang, 103-5)
-“French GDP per worker is only 10 percent lower than in the United States. And that difference in GDP per worker, in turn, is entirely because French workers get much more time off: On average French workers put in only 86 percent as many hours each year as U.S. workers.” (Krugman, 254)
21. Who said the following? The government “should cultivate the view also among the propertyless classes of the population, those who are the most numerous and the least educated, that the state is not only an institution of necessity but also of welfare. By recognizable and direct advantages they must be led to look upon the state not as an agency devised solely for the protection of the better-situated classes of society but also as one serving their needs and interests.”
-In this 1881 statement, Otto von Bismarck, Germany’s powerful chancellor, was providing a rationale for a welfare state: a means to pacify the lower classes and secure the Kaiser’s rule. With Bismarck’s Germany leading the way, Europeans had begun to develop New Deal-like policies well before the US. In particular, Britain introduced a limited old-age insurance system in 1908 and a health insurance system in 1911. In the US “the gospel of free enterprise remained dominant.” What changed everything in the US was the Great Depression, which made FDR’s New Deal possible. (Krugman, 33, 35)
-The strong welfare benefits of, say, France will lead to an upper-middle-class or higher Frenchman having significantly less disposable income than an American receiving the same market income. However, French citizens know that they will never lose their health insurance and if they ever hit a rough patch during their lives their standard of living will remain quite decent due to government programs. (Krugman, 252)
-In 1996, “the Clinton administration joined with Republicans in Congress to end the days of guaranteed cash assistance for poor people.…The [Personal Responsibility and Work Opportunity Reconciliation] act imposed a five-year federal time limit on cash benefits for recipients. It allowed states to set much stricter deadlines, as many did. For poor single mothers, government aid was no longer guaranteed.…By 2007, the number of children in poverty reached 13.3 million, up from 11.6 million in 2000.” (Goodman, 75, 78-79)
22. Which country was the most protectionist in the world throughout the 19th century and right up to the 1920s?
-The United States. By 1820, the Congress increased the average tariff to 40%; such high tariffs were supported by American industrialists who wanted room for their industries to grow by impeding manufactured imports from Europe. Tariffs on manufactured imports remained at 40-50% until WWI, and were the highest of any country in the world. However, despite being the most protectionist country, the US was also the fastest growing economy.
“It was only after the Second World War that the US—with its industrial supremacy now unchallenged—liberalized its trade and started championing the cause of free trade.…[However] even when it shifted to freer…trade, the US government promoted key industries by another means, namely, public funding of R&D. Between the 1950s and the mid-1990s, US federal government funding accounted for 50-70% of the country’s total R&D funding, which is far above the figure of around 20%, found in such ‘government-led’ countries as Japan and Korea. Without federal government funding for R&D, the US would not have been able to maintain its technological lead over the rest of the world in key industries like computers, semiconductors, life sciences, the internet and aerospace.”
“[P]ractically all of today’s developed countries…have become rich on the basis of policy recipes that go against the orthodoxy of neo-liberal economics. Today’s rich countries used protection and subsidies, while discriminating against foreign investors—all anathema to today’s economic orthodoxy and now severely restricted by multilateral treaties, like the WTO Agreements, and proscribed by aid donors and international financial organizations (notably the IMF and the World Bank).”
“Like the US in the mid-19th century, or Japan and [South] Korea in the mid-20th century, China used high tariffs to build up its industrial base. Right up to the 1990s, China’s average tariff was over 30%. Admittedly, it has been more welcoming to foreign investment than Japan or Korea were. But it still imposed foreign ownership ceilings and local contents requirements (the requirements that the foreign firms buy at least a certain proportion of their inputs from local suppliers).”
“During the 1960s and the 1970s, when [the developing countries] were pursuing…policies of protectionism and state intervention, per capita income in the developing countries grew by 3.0% annually.…This growth rate… remains the best that they have ever recorded. Since the 1980s, after they implemented neo-liberal policies, they grew at only about half the speed seen in the 1960s and 1970s (1.7%).”
“Accelerating growth—if necessary at the cost of increasing inequality and possibly some increase in poverty—was the proclaimed goal of neo-liberal reform. We have been repeatedly told that we first have to ‘create more wealth’ before we can distribute it more widely and that neo-liberalism was the way to do that. As a result of neo-liberal policies, income inequality has increased in most countries as predicted, but growth has actually slowed down significantly.” (Ha-Joon Chang, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, Bloomsbury Press, New York: 2008, 15, 27-30, 51, 54-55)
-“American subsidies to its domestic industry have seriously depressed the price of cotton. In 1990, it was about US$2 a kilo. [In June 2014] it is US$2.07. According to an Oxfam report, American subsidies in 2002 to its own cotton farmers amounted to US$3.9 billion, more than the total value of the US$3 billion harvest that year and more than the entire GDP of Burkina Faso, a country in which more than 2 million people depended on cotton cultivation. Not surprisingly, the price of cotton hit near rock bottom in 2002, just under US$0.88 a kilo. Appeals to the World Trade Organization from other cotton producers led the U.S. to reduce its subsidies by about 10 per cent in 2007, but the collapse of the WTO’s Doha round trade negotiations on farm subsidies the following year has left developing-nation producers at a continuing disadvantage.” http://www.montrealgazette.com/business/Sock+Journey+fair+trade+sock/9978273/story.html
Jeffrey Rudolph, a Montreal college professor, was the Quebec representative of the East Timor Alert Network, and presented a paper on its behalf at the United Nations. He was awarded the prestigious Cheryl Rosa Teresa Doran Award upon graduation from McGill University’s faculty of law; has worked as a chartered accountant at one of the world’s largest public accounting firms; and has taught at McGill University.
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