Monday, 24 February 2014

America's polity threatened by incomes gap?

History shows that when society advances it does so best when the majority of people enjoy the fruits of economic progress. But can it be said today that the world's leading economy, America, is dangerously ignoring that lesson? Cogent evidence, alas, suggests that it is, but what are the symptoms, dangers, causes and cures? The world has a strong, vested interest, for now, in keeping and hoping that the American economy will remain strong but there is little it can do if weakness within festers like a growing canker threatening to undermine the polity.

The symptoms have been plain for decades and can be summated in the dangerously widening gap between the rich on the one hand and the middle class and poor on the other, a gap that has been accelerating particularly over the last decade. A few stark statistics may concentrate minds. The Forbes List of the 400 wealthiest Americans shows that they have more wealth than half of all Americans combined, while it has been reported that just six of the Walmart heirs have more wealth than one third of all Americans combined. Between 1978 and 2012 the top-earning 1% of Americans' share of the nation's income rose from 7.7% to 19.3%. Put another way, a family in the richest 1% has more than 288 times the wealth of the median family. About 35% of working Americans were earning $25,000 or less and 36% were in the $25,000 - $50,000 bracket.

It is not, however, just a case of the rich pulling away faster but that the poor are worse off in real terms and the middle class have gone nowhere since 1997 and seen inflation-adjusted earnings rise only about 13% since the 1980s. If the Federal minimum wage of $7.25c, set in 2009, (and much lower than many European countries' rates) were raised to $10.70 an hour it would only have compensated for inflation since 1968, so in real terms the low paid have taken a big hit. And it is not as though poor productivity is to blame, for the fact is that productivity has risen about 125% between 1968 and 2010. That means the Federal minimum wage would be $16.93c if it had kept pace with productivity growth. To add salt to the wound, adjusted for inflation Americans' real income has fallen 8% since 2000.

Immense wealth wields immensely disproportionate power, even in democracies, and stretches back to classical times. Left to grow unchecked, it can be socially divisive because like monopolies the plutocrats pulling strings behind the scenes, can and often do act against the public interest. It would be naive to believe that American politicians cannot be disproportionately influenced by the richest 1% of the population, who spend billions of dollars every year lobbying Government to steer new bills through that would be harmful to the public, or prevent other bills so as to maintain the status quo in the Rich's favour. It is, perhaps, a sad reflection on American society that only 40% of the wealthiest Americans support raising the minimum wage and that the Rich's disparate voice in public policy affairs skews the US tax code in favour of the better off.

Why the American model is failing

It must be crest-falling for Americans to look across the Atlantic to Europe to compare their economy with Europe's and what it means for social fairness. At the end of World War 2 America emerged triumphant, militarily and economically. It was the richest nation on Earth with more food and household appliances than it could possibly consume itself, while much of Europe lay in ruins and bankruptcy. Even Britain, although a victorious ally, faced a busted Treasury, significantly degraded infrastructure and interest-bearing debt to America that took about 50 years to pay off. Its only consolation for its costly sacrifice was a moral claim on the world for standing alone for over a year against sinister, vicious Nazi tyranny that threatened to plunge much of the world into unbearable oppression, but morality does not pay the bills. Yet, what do we see today?

Not only do we see the legal minimum wage in most western European countries much higher than in America but much better social security payments and free national health services that would be the envy of Americans. Gross Domestic Product (GDP) per capita is often taken as a guide to national wealth but it says nothing about how the wealth is apportioned. The fact is, many countries, including Britain, have higher earnings per capita for their middle classes than America. So is the American model failing relatively, and if so why and what are the risks?

America's hammered lower and middle classes' relative decline against their European counterparts is evidence for the failure. Inequality of incomes seems to be at least one of the biggest causes, with excessive military spending and staggering tax avoidance, helped by a badly-designed tax code, as runners up. Gross inequality of earnings is disturbing owing to its social implications, which could turn very ugly. Much of America's recent wealth creation has been the illusory kind based on casino-style economics involving much paper shuffling of newly-created financial instruments, like CDOs, to absorb credit-created wealth, rather than creation of tangible goods. The result of the lack of Federal oversight and action in the casino led to the inevitable credit implosion, which this writer warned against in January 2007, for which the innocent poor and middle classes are still paying. The vast profits so created would not be so bad if the money made was invested in job-creating enterprises. Instead, we see much of the profits invested in equities, land and existing real estate, leading to asset bubbles. Worse and more sinister still, the profits made are often secreted in offshore tax havens, where as far as the American economy is concerned it is dead money because the velocity of money circulation is reduced below what it would be.

While there may be no accurate figures on how much has been lost to tax havens, the figures are undeniably staggering, with one estimate suggesting $20 trillion. A large part of that would be accounted for by individual rich persons avoiding tax.* This is not to say that the middle and lower earnings groups are the victims solely of rich people's economic decisions, but it is a significant factor. Much of the lower and middle earnings groups have been hit by changing technology and off-shoring of manufacturing jobs to exploit much cheaper labour costs abroad. That has been a boon for developing economies while keeping down American inflation rates. It has also favourably impacted the American Government's ability to keep interest rates low owing to foreign buying, particularly from China, of US government promissory notes. The pursuit of global trade is the hand maiden of prosperity and prosperity is the surest guarantor of peace, so to that end globalisation of trade has been desirable.

Minimum wage hike will help

 To redress the potentially serious imbalance of incomes, America must act to make the economy fairer and that means tackling wages and the tax system. President Obama's latest call for a $10.10c minimum Federal wage compares with the existing $7.25c set in 2009. While that is topped up by social security payments, such help is also available in most European countries where minimum wage rates are much higher. In fact, the US minimum wage as a percentage of national average pay was only 27% in 2012, lower than any other member of the OECD, except Mexico. The case from the American right is that any rise would be a jobs killer but does experience, particularly elsewhere, support that view?

Evidence undoubtedly shows that minimum wage rises at the State level have caused little, if any, harm to employment. Denmark, for example, has a minimum pay of $20 an hour and yet has been rated as the easiest place to do business for the last three years running. One report  found that by stimulating the economic growth, a minimum wage rise could create jobs, because a worker for one company is the customer of another. Minimum wage workers struggling to make ends meet are more likely to spend in productive ways, thus accelerating the velocity of money in a more beneficial way than the rich would by salting their incomes away in overseas tax havens or simply investing in asset bubbles at home like land and real-estate, an outcome supported my various studies. Even the right-leaning British business journal, The Economist, argues that the minimum wage hike in Britain "has done little or no harm" and "not only has it pushed up pay for the bottom 5% of workers but it also seems to have boosted incomes further up the scale and thus reduced wage inequality." A substantial rise in the Federal minimum wage, therefore, would go far to minimise the risk to social cohesion that gross inequality of incomes poses.

America's economy is deeply mired in Federal Government debt which hangs like a Damoclean sword
over the economy. Arguably, a leading cause in recent years, in particular, is defence spending, which in 2012 soaked up 4.4% of its GDP, or $682 billion (rising to $750 billion in 2013) but as a percentage of total world defence spending it is 39%. This compares with a UK ratio of 2.5%, a country where the minimum wage is much higher than America's. While some US defence spending is useful in creating jobs, especially when export oriented, it seems the case for reducing this burdensome cost is a strong one. Are not these words of the Chinese sage, Sun Tzu, from 2,400 years ago prophetic? "Where the army is prices are high; when prices rise the wealth of the people is exhausted."

The third cause and cure for America's threatening incomes gap must be the issue of tax avoidance. The US tax regime cries out for major reform. A tax code that favours the wealthy over the poor cannot be justified on any grounds, except, perhaps, marginally to encourage entrepreneurial drive. But it is not just the internal tax regime in need of overhaul. International agreement on global tax avoidance is desperately needed to recoup the billions of dollars lost not only to the US Treasury but the whole world. Loopholes in the system not only allow multi-national corporations to use contrived structures legally to avoid corporation tax and sales taxes; it also allows them an unfair advantage over competitors who pay their taxes responsibly. If the vast sums of these multi-nationals were not kept offshore indefinitely then the taxes they would have to pay in the countries where the sales arise would be a welcome boost to growth and social justice. But the solution must be an international one and the time for pussyfooting is over.

*Google my blog: "Corporate tax avoidance threatens your children's future". 

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