How the Top One Percent Ripped Off the Bottom 99 Percent

Oct 11, 2011Jon Rynn

wall-street-150As the financial sector sucks up more and more money, the rest of us are left making less and less.

wall-street-150As the financial sector sucks up more and more money, the rest of us are left making less and less.

Occupy Wall Street has put a spotlight on the vast and growing economic inequality in the United States. It now takes its place as a top progressive priority -- perhaps the highest priority it has experienced since the Great Depression.

Underlying this greater and greater inequality is a shift of wealth from manufacturing to the top 1 percent and the financial sector. Over the past 40 years, the sectors of the economy that grew in output share grew very little in employment share -- making more money but paying it to a small group of people. The sectors of the economy that grew in employment share did not grow in output share, meaning that a growing number of workers had to share in a smaller pot of profits. From 1969 to 2007, the richest 1 percent has grabbed 15 percent more of the income of the United States, to a total of about 24 percent. Meanwhile, the manufacturing sector has lost a similar 15 percent of gross domestic product (GDP). This has led to a downward shift in income for the bottom 99 percent.

Let’s look at the shift among sectors of the economy in a bit more detail, because as finance has risen, so have other lower pay sectors. A good way of looking at the health of an economy is to see if there is a difference in how much income a particular sector, such as manufacturing or finance, pulls in -- that is, how much of the economy (GDP) it constitutes versus how much employment it accounts for. You might think of this as what percentage of the economy each working person receives, viewing each sector as a whole. I will call this the “the ratio”: that is, the ratio of the GDP (value-added) share of the economy to the percentage of the employment share of the economy for a particular sector; I will always compare 1968 to 2009 (all data sourced from the Bureau of Economic Analysis).

Manufacturing has historically been the quintessential middle class sector because its share of GDP declined slightly, from 28 percent to 25 percent, between 1948 and 1968 in tandem with its share of employment (its ratio was 104 percent in 1968). Thus someone working in the manufacturing sector made an average income for the economy as a whole -- that is, he or she was right smack in the middle of the middle class. Since 1968, the employment share of manufacturing has been heading down by .38 percent per year, so that it is now 8.7 percent, while its share of the economy is 11.2 percent. The average employee is making about 30 percent more than the average for the economy, most likely because so many of the low-skill jobs were outsourced (along with most high-skilled ones).

At the same time, the finance, insurance, and real estate, or FIRE, sector increased its share of the economy from 14.2 percent to 21.5 percent, while the employment share only rose from 4.4 percent in 1968 to 5.7 percent in 2009. So this sector went from a ratio of 322 percent to 376 percent; for finance alone, the ratio almost doubled from a fairly middle class 116 percent in 1968 to 197 percent in 2009. Real estate always had a ratio of about 1000 percent, which is one more reason, perhaps, that society should not encourage real estate bubbles. Overall, the pot of money has exploded without an increase in payrolls.

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So FIRE took about half of the share of GDP that manufacturing lost while barely increasing employment. The rich got richer.

On the other hand, in what is called “accommodation and food services,” or basically hotels and restaurants, the share of the economy moved from 2.2 percent to 2.7 percent in the 41 years between 1968 and 2009, but its share of employment rose from 4.5 percent to 7.2 percent; the ratio fell from 49 percent to 33 percent. The “health care and social assistance” sector, dominated by the health care industry, saw its ratio decline from 73 percent to 63 percent; its share of GDP rose from 2.8 percent to 7.5 percent, but its employment soared from 3.8 percent to 11.9 percent. The other sector that saw a major decline was retail, which actually saw a decline in economic share from 7.9 percent to 5.8 percent at the same time that its employment share increased slightly from 9.9 percent to 10.8 percent. Call this the “Walmart” effect: driving out mom-and-pop stores, leading to a greater efficiency, but lowering the average wage from 79 percent to 54 percent of the economy-wide average.

If we combine these employment “growth” sectors, GDP share moves from 12.9 percent to 16 percent between 1968 and 2009 but the employment share grows from 18.2 percent to 29.9 percent. The ratio fell from about two-thirds of the average to less than half. More and more Americans are employed by sectors that aren’t bringing in a large share of the economy.

So where did the employment and economic output of the manufacturing sector go? When it declined, most of the income went into FIRE and the top 1 percent, and most of the employment -- such as it is -- went into lower paying service jobs or has ceased to exist.

Counter to conservative ideology, the economic role of the government has actually gone down -- at least when measured, as I have been doing here, by value-added data, which eliminates the effect of transfer payments. From 1968 to 2009, the share of employment for the federal government decreased from 9.7 percent to 3.8 percent, and its GDP share went from 6.9 percent to 4.3 percent, while for the state and local governments the employment share rose from 11.7 percent to 14.4 percent and GDP share went from 7.6 percent to 9.3 percent. So much for “big government." FIRE’s share of GDP is at 21.5 percent, while government at all levels is at 13.6 percent. Sounds like “big finance” to me!

All of these statistics point to the need to understand the “natural history” of the economy. The health of a particular sector of the economy is a relevant political issue, as is how we might change the relative importance of each. I have argued previously that manufacturing is at the center of the economy. If we were to move from a manufacturing sector with 9 percent of employment to 20 percent, the economy would add over 14 million jobs. To achieve a change like that, we need to redirect our resources from the “economic royalists” and top 1 percent to the bottom 99.

Jon Rynn is the author of the book Manufacturing Green Prosperity: The power to rebuild the American middle class, available from Praeger Press. He holds a Ph.D. in political science and is a Visiting Scholar at the CUNY Institute for Urban Systems.

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Was the Past Year a Throwaway for Job Growth?

Oct 7, 2011Mike Konczal

While month-to-month jobs numbers may have different takeaways, the larger picture is looking pretty bleak.

Given the way they bounce around, following the job numbers month-to-month might not always be the best way to get a handle on the health of the economy. Some numbers come in high, some come in low, and it is difficult to step back and see the bigger picture. So let's compare the September 2011 labor market against the September 2010 one and figure out if yet another year can be thrown on the "Lost Decade" pile.

While month-to-month jobs numbers may have different takeaways, the larger picture is looking pretty bleak.

Given the way they bounce around, following the job numbers month-to-month might not always be the best way to get a handle on the health of the economy. Some numbers come in high, some come in low, and it is difficult to step back and see the bigger picture. So let's compare the September 2011 labor market against the September 2010 one and figure out if yet another year can be thrown on the "Lost Decade" pile.

To start at the beginning, when the economy first tanked it threw a lot of people into unemployment very quickly. The unemployment rate skyrocketed during 2008-2009:

So the economy has had a lot of work to do in stabilizing and then adding to the number of jobs. The recession technically ended in June 2009, and since then everyone has been waiting for the number of jobs to take off. Let's look at the total number of people employed since then, with an emphasis on the number a year ago:

Employment has gone up just a little bit since it bottomed out in wake of the recession. But it isn't anywhere near where it was before the recession started. And it really isn't even that much higher than it was a year ago.

And the population is still growing. How has the employment-population ratio fared?

The percentage of the population working has actually declined over the past year. There's a technical debate about how many jobs the economy needs to create in order to keep up with population growth, but the short answer is that we aren't getting anywhere near what we need over the longer run.

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Unemployment is down from ~9.6 percent to 9.1 percent. But that good news comes alongside an increase in people who fall into the "out of the labor force" category. The new trend for unemployed workers -- that they are more likely to quit the labor force than find a job -- has continued during this time.

And with weak job growth, the large cluster of people thrown into unemployment over the past year is slowly, if ever, absorbed back into the workforce. As such, the duration of unemployment continues to grow.

Meanwhile, as many are commenting, another major trend is the decline in the number of government jobs. Beyond the short-term spike in hiring for the 2010 Census, there have been huge numbers of government layoffs during a weak recovery, which puts massive pressure on aggregate demand at the worst time:

Meanwhile, many continue to argue whether this month was good or that month was off. But stepping back, it looks to have been a lost year since last September. In general, we are below the number of jobs our economy can produce, leaving millions unemployed and unproductive. We are treading water with no hopes of serious moves in fiscal, monetary, and housing policies that could kick the economy and get it moving again. When we wonder how a lost decade can pass, remember that a decade is just a series of months one after the other, a series of months where it's never quite bad enough to jolt action, compiled into years that are tossed down the drain.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Why the 99 Percent is Crying Out

Oct 5, 2011Bryce Covert

Occupy Wall Street is right to be angry. Americans are falling farther and farther behind.

The biggest controversy over Occupy Wall Street is about what they stand for. Are they a bunch of dirty hippies with no agenda? Do they really think they can change the entire system? Why won't they just put out a concrete list of demands and policy prescriptions?

Occupy Wall Street is right to be angry. Americans are falling farther and farther behind.

The biggest controversy over Occupy Wall Street is about what they stand for. Are they a bunch of dirty hippies with no agenda? Do they really think they can change the entire system? Why won't they just put out a concrete list of demands and policy prescriptions?

While signs at the protests have many, many messages -- from BP to Iran to capital punishment -- the affiliated Tumblr, We Are the 99 Percent, exposes what's motivating people to get on the streets. With over 700 submissions at this point, Americans from all over have been writing down personal stories to explain their frustrations. While those protesting on Wall Street have grievances that are far ranging, those on the Tumblr are almost all sparked by a combination of a few common things: joblessness, debt, and low wages. They are the stories of those who can't make ends meet. These days, that covers a lot of us.

Here's a sampling just from the most recent page (my bold):

My mother (leader in her field of pathology, MA) is upside-down on her house. My father (multiple PhD's) lives in his car so that he can do what he loves for a living rather than be a slave to the system.

I am 45 years old. I was laid off twice in 18 months... I am "unemployable" because of layoffs. I have not worked since November 2008.

I am 27 years old with $100,000 in debt. I was laid off in 2009 and have been struggling ever since then. I have not made more than $10,000 a year since then.

My husband and I have $80k in student loan debt. I am in the process of being diagnosed with Multiple Sclerosis, a hard enough thing in and of itself. I also have over $30,000 in medical debt because of that... We own cheap cars, live frugally, have a roommate to help, and try hard to keep up... I work when I'm not too sick, and he works full time.We have a combined annual income of less than $40k annually.

I have an MS from a top state university- & $135k in student loans (& growing). I've lost 2 jobs in 3 months.

Lost my job in 2006. Sold my home and moved in with my 87-year-old mother.... Cancer survivor. Need medical care. Can't afford health insurance... TOO YOUNG TO RETIRE. Watching my retirement funds and savings shrink.

As a newer, less established member of the faculty I was out of work when my college cut classes. Over a year later and I still can't find work... Because of deferments my $41,000 loan has become $62,000.

Adjusted for inflation, a smaller American reality than that of my dad -- a civil servant who dropped out of college... My son is learning to speak Mandarin.

I am 29 years old. I have a Master's degree. I am $120,000+ in student loan/medical debt. In the past 18 months I: was diagnosed with cancer, lost 2 jobs, worked 70 hours/wk and unable to keep up. I get more calls from creditors than I do friends... I have $4 in my bank account and no job.

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And I find this one perhaps the most emblematic of the average American's experience:

We live within our means, we own our cars, yet cannot accumulate much savings. We live responsibly, and consider ourselves "citizens" and not "consumers." We find it troubling that living simply can still accrue so much debt... We are one emergency away from financial ruin.

"Living simply can still accrue so much debt." That's been the American experience for years now. As Ezra Klein put it, the Tumblr is full of "small stories of people who played by the rules, did what they were told, and now have nothing to show for it."

For those who are lucky enough to work, the money we take home has been either stagnating or decreasing, and it's getting worse in the aftermath of the recession. As reported by Bloomberg:

Take-home pay, adjusted for prices, fell 0.3 percent in August, the third decrease in five months, and personal income dropped for the first time in two years, the Commerce Department reported last week. The declines followed news from the Census Bureau that median household income in 2010 fell to $49,445, the lowest in more than a decade, and the poverty rate jumped to 15.1 percent, a 17-year high.

That figure, $49,445, isn't going to cut it. A recent report showed that a household with two working parents and two young children needs to earn $67,920 to meet basic needs without relying on public support. It only drops to $57,756 for a single parent with two young kids. Not to mention that rent, food, and health costs are rising. On top of this, 14 million Americans don't even have jobs. When we don't bring in enough money to pay for the basics, the next place we have to turn is debt. Our total revolving debt comes to $796.1 billion, with the average household carrying $14,743 in credit card debt. Household debt is currently 90 percent of GDP, up from 70 ten years ago. It's no wonder, then, that despite making some headway in paying down our debt loads, consumers are still struggling to do so.

And student debt is a whole other story. The total is on track to reach $1 trillion this year, more than our combined credit card debt. Alongside this surge is a rise in delinquencies post-recession. This is partly fueled by the government, schools, and hard-pressed parents pulling back on support. It is also certainly fueled by the dismal job market and graduates' unemployment rate -- which will have ramifications for their earning capacity for years to come.

I'm not surprised that people are at their wit's end over personal finances. I'm not surprised that they're blaming the banks that make money from keeping us in debt. I'm just surprised it took this long for the anger to find its voice.

Bryce Covert is Assistant Editor of New Deal 2.0.

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Occupy Wall Street: Not Anarchy, But Beautiful Sincerity

Oct 4, 2011Jeff Madrick

The media may mock the Wall Street protesters, but their commitment and their cause are no joke.

The media may mock the Wall Street protesters, but their commitment and their cause are no joke.

The contrast between the press accounts of Occupy Wall Street and the reality is stark. That is what I noticed first when I was invited there to speak on Sunday and joined Joe Stiglitz in a teach-in. At first it indeed looks like anarchy. People are sleeping there overnight. You think you may never find an organizer, but my wife and I were guided by the young man who invited me. Soon you find that amid the seeming confusion there is organization. It is, I must say, organization of a most beautiful kind.

There are “facilitators,” who somehow round up the people, pick a spot and, oops, spontaneously, the teach-in begins. These facilitators organize who will speak at the general assembly, which addresses the entire crowd. And they create the now-famous echo, which overcomes the seemingly major obstacle that the police have not allowed the protesters and their guests any microphones or other amplification.

The echo chamber is extraordinary. You must speak in half sentences, which the group then repeats. In the general assembly, each phrase is repeated twice, once by those nearest the speaker, then again for those behind the front group. This has produced surprising benefits: People are engaged, they pay attention, and they force the speakers to talk briefly and get to the points. Ah, the benefits of no technology.

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The other characteristic of the crowd is how friendly and courteous it is. The young people (though they were not all young) that Joe Stiglitz and I spoke to, perhaps a hundred or more, were very attentive, very much wanting to absorb what information and opinions we had to offer. We talked about income distribution, predatory lending, and ways to get out of the mess. They were eager and they were grateful. Finally, they asked good questions. They were also, after all, talking to a Nobel laureate standing on the wet grounds of Zuccotti Park.

Later, as dark descended, I spoke to the general assembly. It seemed like perhaps 500 people. I spoke briefly, telling them about how much money the top 1 percent make, about how steep the Great Recession is, about the lack of prosecutions, about the inadequacy of reregulation, and about how we need a serious conversation about what Wall Street is for.

As I left, I heard one sincere "thank you" after another.

Many criticize the protesters for not having formal objectives or an agenda. That is just fine for now. But many of the protesters are concerned about specific issues. They may well develop agendas over time, and people like Joe and myself may help them get better informed and focus their views.

What is most aggravating is how the press has mischaracterized this group and treated it as an event with no meaning and the participants as clowns. Even the progressive press often has a tone of condescension. Many of these people are educated, but all of them are frustrated and angry. Is there some reason they should not be? Try to get a good job if you are in your twenties today. Try to make sense of why Washington has not been harder on Wall Street. Try to understand why the unemployment rate is still 9 percent and may rise in 2012, not fall. Dressing up as zombies to mock Wall Streeters -- is that so wrong for capturing attention, letting off steam, and fighting wealth not with violence, but with humor?

Roosevelt Institute Senior Fellow Jeff Madrick is the author of Age of Greed.

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The Young Are on the Streets Because They Have the Most to Lose

Oct 3, 2011Mike Konczal

mike-konczal-newWhy are so many of the protesters on Wall Street college-age kids? Because their futures are at stake.

This Occupy Wall Street sign is my favorite:

The sign has a clever double meaning. The young have the most to lose by standing idle and not having their voices heard in the political process, and they have the most to lose by actually being idle -- or unemployed.

Why are so many of the protesters on Wall Street college-age kids? Because their futures are at stake.

This Occupy Wall Street sign is my favorite:

The sign has a clever double meaning. The young have the most to lose by standing idle and not having their voices heard in the political process, and they have the most to lose by actually being idle -- or unemployed.

The media hasn't learned the lessons from the 1960s, as there is still a tendency to dismiss young people protesting because they are young. You can see this phenomenon in the original New York Times coverage, and it appears in much of the rest. But at the heart of dismissals of young college kids in the 1960s was the idea that they had a very bright future ahead of them that they were taking for granted. For instance, here's President Nixon in the New York Times, May 1970:

You know, you see these bums, you know, blowin' up the campuses. Listen, the boys that are on the college campuses today are the luckiest people in the world, going to the greatest universities, and here they are, burnin' up the books, I mean, stormin' around about this issue, I mean you name it -- get rid of the war, there'll be another one.

Can it be argued that young people, college educated or not, are particularly lucky in this recession? Every category of worker is doing terribly in the Lesser Depression. My former editor Derek Thompson has a must-read article, "Who's Had the Worst Recession: Boomers, Millennials, or Gen-Xers?," which compares the three age categories across employment, income and wealth, and finds that everyone is suffering across the board.

But let's focus on the young. The issue of debt, especially student debt, hovers over the protests. How is the employment ratio looking for young people with a college degree? Here's data from last year:

And that doesn't factor in the fact that many college educated workers are working jobs that don't require college degrees. They are essentially using their degrees to crowd out those with a high school diploma or some college education from the jobs they would normally take. And no matter what jobs they are able to get, student debt hangs around their necks like an albatross.

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This impacts everyone who is young. Here's a summary of the recent 2010 Census' American Community Survey by PBS:

  • Employment among young adults between the ages of 16 to 29 was at its lowest level since the end of World War II. Just 55 percent were employed, compared with 67 percent in 2000.
  • Nearly 6 million Americans between the ages of 25 to 34 lived in their parents' homes last year.
  • Young men are nearly twice as likely as women to live with their parents.
  • Marriages among young adults hit a new low. Just 44 percent of Americans in that age group were married last year.
  • Other trends were also headed in the wrong direction. In 43 of the 50 largest metro areas -- often a magnet for 20-and-30-somethings -- employment declined.

In our desperate bid to replicate Japan, we are also replicating the poverty and joblessness among Japanese youths. This 2010 AOL article, "Japan's Economic Stagnation Is Creating a Nation of Lost Youths," can give you a sense of our trajectory.

Will we get our own version of the hikikomori? Young people are doubling up and not moving out of their parents' houses in this recession. If we looked at solely their own income, their poverty rates would be astounding. From the Census Bureau:

These “doubled-up” households are defined as those that include at least one “additional” adult -- in other words, a person 18 or older who is not enrolled in school and is not the householder, spouse or cohabiting partner of the householder...

In spring 2007, there were 19.7 million doubled-up households, amounting to 17.0 percent of all households. Four years later, in spring 2011, the number of such households had climbed to 21.8 million, or 18.3 percent...

Young adults were especially hard-hit, with 5.9 million people ages 25 to 34 living in their parents’ household in 2011, up from 4.7 million before the recession. That left 14.2 percent of young adults living in their parents’ households in March 2011, up more than two percentage points over the period.

These young adults who lived with their parents had an official poverty rate of only 8.4 percent, since the income of their entire family is compared with the poverty threshold. If their poverty status were determined by their own income, 45.3 percent would have had income falling below the poverty threshold for a single person under age 65.

Even if we can ever move out of the short-term recession, it will impact young people for years to come. Looking at a research summary compiled previously by Roosevelt Institute super-intern Charlie Eisenhood, Beaudry and DiNardo (1991) found “that every percentage increase in the [national] unemployment rate is associated with a 3-7 percent drop in entry-level contract wages.” Kahn (2009) found an estimate on the high end of that spectrum, discovering an “initial wage loss of 6 to 7% for a 1 percentage point increase in the unemployment rate measure.”

Unfortunately, the recession’s effect is not limited just to the initial job search and wages. The negative impact persists far beyond that. Kahn found that the effect “falls in magnitude by approximately a quarter of a percentage point each year after college graduation. However, even 15 years after college graduation, the wage loss is 2.5% and is still statistically significant.”

Job mobility is also affected. Kahn found a “negative correlation between the national unemployment rate and occupational attainment (measured by a prestige score) and a slight positive correlation between the national rate and tenure.” She concludes that “workers who graduate in bad economies are unable to fully shift into better jobs after the economy picks up.” Worse, Oreopoulos found permanent wage effects on workers with low expected earnings (based on occupational prestige).

So yes, young people have an important stake in what happens going forward. Do we continue policies that benefit Wall Street and the top 1 percent? Do we tax the rich to rebuild America? Do we reform a financial sector that dominates the economy? The list of choices in front of us goes on and on. Their whole future, indeed all of ours, depends on it. It's no wonder that they've taken to the streets.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Make Way (Again) for the "Job Creators"

Sep 28, 2011John Paul Rollert

the-situationWhat do Bill Gates and the Situation have in common? Republicans think they're equally vital to our economy.

the-situationWhat do Bill Gates and the Situation have in common? Republicans think they're equally vital to our economy.

With the announcement last Monday of President Obama's plan to pay for his jobs bill with, among other things, the so-called "Buffett Rule," we're going to be hearing a lot more about the "job creators." Over the last year, Congressional Republicans have consistently invoked them as a hex of sorts against any proposal to raise new tax revenue. "I am not for raising taxes in a recession," Eric Cantor declared last November, when the Bush tax cuts were a bargaining chip in the protracted budget debate, "especially when it comes to the job creators that we need so desperately to start creating jobs again."

Ten months, no new taxes, and one debt ceiling crisis later, Cantor said the same thing last week in response to the president's jobs bill: "I sure hope that the president is not suggesting that we pay for his proposals with a massive tax increase at the end of 2012 on job creators that we're actually counting on to reduce unemployment." Given that 44 percent of the nation's unemployed have been without work for at least six months and more Americans are living below the poverty line than at any time in the last 50 years, one marvels at Cantor's faith in the truant "job creators" as well as his forbearance in the face of human misery. To the jobless, he is counseling the patience of Job.

But who exactly are these "job creators?" The phrase is not new. Republicans have been using it for years to underscore a particular vision of capitalism in which those who have benefitted most by the system are also most essential to its continued success. As long ago as 1991, Newt Gingrich characterized Democratic opposition to a cut in the capital gains tax as evidence that liberals reject this vision. "They hate job creators," he told a gathering of Senate Republicans, "they're envious of job creators.  They want to punish job creators." With no apparent sense of irony, Gingrich added this was proof liberals "believe in class warfare."

A more telling example for our current political impasse is the debate over the 1993 Clinton budget plan, which aimed to cut the deficit by, among other things, raising the top income tax rate. Congressional Republicans fought the bill tooth and nail, no one more so than former Texas Senator Phil Gramm. On the eve of its passage, he expressed the hope that the bill would "defy history" and prove that "raising taxes on job creators can promote investment and promote job creation." Gramm, of course, did not think this was very likely to happen. "Only in Cuba and in North Korea and in Washington, D.C., does anybody believe that today," he said, "but perhaps the whole world is wrong."

Hindsight suggests that the world wasn't wrong so much as Phil Gramm, along with every other Republican member of Congress. Not one of them voted for the bill, which cleared the House by only two votes and required Al Gore's tie-breaking vote in the Senate. While higher taxes on the "job creators" proved no obvious hurdle to economic growth -- the economy grew for 116 consecutive months, the most in U.S. history -- it did cut the deficit from $290 billion when Clinton took office to $22 billion by 1997 and helped put the country on a projected path to paying off the national debt by 2012.

So much for ancient history. If the term "job creators" is no new addition to the lexicon of American politics, it has enjoyed quite a renaissance since President Obama took office. A Lexis-Nexis search of U.S. newspapers and wire services turns up 1,082 individual mentions of "job creators" in the month before the debt ceiling deal was reached, or just 175 fewer mentions than for George W. Bush's entire second term.

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Jon Stewart, for one, did not fail to notice the uptick. "Republicans are no longer allowed to say that people are rich," he noted during the deficit ceiling debate, "You have to refer to them as 'job creators.'" Stewart's observation is funny only to the extent to which you believe that saying you're a member of the top tax bracket and saying that you create jobs is not an obvious redundancy. If you believe, however, that the cast of Jersey Shore has just as much claim to being called "job creators" as Bill Gates or Steve Jobs, then Stewart's joke not only falls flat, but misses the point. The wealthy are the "job creators," whether or not they spend their time actually trying to create jobs.

The problem, of course, with upholding a definition of "job creators" that does not turn on the dedicated effort to create jobs is that it becomes hard to figure out what distinguishes the "job creators," as a group, from everyone else -- at least beyond their relative wealth. All Americans spend, save, and invest in varying degrees; most just do so with a lot less money.

In this light, the "jobs creators" rhetoric highlights a theory of capitalism in which those at the very top of the economic pyramid end up supporting the base. We might call this theory the Visible Hand of Capitalism in order to distinguish it from Adam Smith's Invisible Hand. In The Wealth of Nations, he famously located the enduring success of capitalism in an increasingly complex system of work and exchange that sees "the assistance and co-operation of many thousands." In such a society, no single group can be meaningfully called the "job creators." They are as much the managers of capital as the men on the factory line.

As an intellectual matter, the Visible Hand of Capitalism has enjoyed support from figures as disparate as Destutt de Tracy, the French philosopher and economist whom Thomas Jefferson championed, to the steel baron and indefatigable philanthropist, Andrew Carnegie. As a rhetorical matter, however, the phrase "job creators" appears to come directly from the work of Ayn Rand. She favored the term "creators" to describe an elite caste in society and her highest human ideal.

John Boehner made reference to Atlas Shrugged, Rand's most famous novel, in a speech he gave recently to the Economic Club of Washington, D.C. "Job creators in America are essentially on strike," he said, in an obvious nod to the decision by the "creators" in the novel to go on strike in defiance of an intrusive federal government. The nation immediately begins to falter, and the books concludes with its hero, John Galt, giving a marathon address in which he explains to the rest of the country why America is crumbling. The nation, in brief, has scared away the very people who keep the economy working, leaving behind those who are ill-equipped to fend for themselves. Describing the economic and social theory underpinning this vision, Galt says:

In proportion to the mental energy he spent, the man who creates a new invention receives but a small percentage of his value in terms of material payment, no matter what fortune he makes, no matter what millions he earns. But the man who works as a janitor in the factory producing that invention, receives an enormous payment in proportion to the mental effort that his job requires of him. And the same is true of all men between, on all levels of ambition and ability. The man at the top of the intellectual pyramid contributes the most to all those below him, but gets nothing except his material payment, receiving no intellectual bonus from others to add to the value of his time. The man at the bottom who, left to himself, would starve in his hopeless ineptitude, contributes nothing to those above him, but receives the bonus of all of their brains.

For all that it lacks in human decency, Rand's vision of who makes capitalism work at least has the advantage of isolating a group of people who actually create something. By contrast, the current "job creators" rhetoric seems to elevate a group of people whose shared tax bracket is their only outstanding trait.

As the debate over the president's jobs bill takes shape, the "job creators" rhetoric is certainly deserving of a little more scrutiny, especially by those who don't qualify for the distinction. Otherwise, they might as well accept the judgment of a far greater authority than even John Galt:

The fault, dear Brutus, is not in our stars,
But in ourselves, that we are underlings.

John Paul Rollert is a doctoral student at the Committee on Social Thought at the University of Chicago.  His essay, "Does the Top Really Support the Bottom? - Adam Smith and the Problem of the Commercial Pyramid," was recently published by The Business and Society Review.

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It's Time to Stop Tinkering with the Economy

Sep 28, 2011Bo Cutter

The solutions being offered by both sides are too small and small-minded to meet the challenges we face.

The solutions being offered by both sides are too small and small-minded to meet the challenges we face.

I liked the president's jobs speech, but I was deeply disappointed with his budget speech on September 19. The president is missing an immense opportunity, and what may have been the last chance of his first term, to build a workable economic strategy. The undeniable truth is that nothing currently on the political agenda comes close to being sufficient to meet our problems.

When President Obama gave his jobs speech, I thought he would follow it with a budget speech that would change both the budget and the tax game, and then with an infrastructure speech that would provide a genuine bridge to long-term economic growth. There's a lot more to do than jobs, budgets, and infrastructure, but those three are not a bad start, and I thought there was an opening to build a real strategy -- one a president could both run on and govern by.

I may or may not have been right about the opening for a strategy; we will never know. But President Obama doesn't seem to be looking for that opening, and I was wrong about the path he was on. I think we are about to waste a year debating trivialities.

There is a fundamental mismatch today between the issues we are debating and the problems we are facing; between the issues the two parties are willing even to consider and what is developing as a grinding, long term economic crisis. We are still in the relatively early stages of what Carmen Reinhart and Kenneth Rogoff have called the "Great Contraction," an excruciatingly long period of slow growth and high unemployment that -- unless we act -- could easily become America's very own lost decade. We may be facing a European-led double dip recession. But wait, there's more: When this period -- this "Great Contraction" -- is over, we will not simply return to the world of the past. We are losing competitiveness, the middle class is hollowing out, we are not creating the right kinds of jobs, we are not preparing the next generation, and inequality continues to grow.

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In the face of these impending waves of real crises, both parties are displaying an instinct for the capillary, not the jugular. They are retreating to their core ideologies and refusing to budge from their different received wisdoms. Meanwhile a huge potential force is gathering in the center and looking around for a real set of solutions.

What is a "real set of solutions?" To characterize them in general, I agreed completely with what David Brooks wrote yesterday in the New York Times: "Try to reform whole institutions... there are 6 or 7 big institutions that are fundamentally diseased... The Simpson-Bowles report on the deficit was an opportunity to begin a wave of institutional reform." To say this another way, we should stop tinkering.

Here are more specific thoughts that take us beyond tinkering:

  1. Move now toward a combination of Simpson-Bowles/Rivlin-Domenici;
  2. Establish an infrastructure bank with a capitalization of $500 billion;
  3. Reform the income tax code; bring personal and corporate rates way down; create a super rate for super high personal earnings -- say above $5 million;
  4. Introduce a consumption tax and/or tax "bads" (fuel, green house gases);
  5. End the current employer tax exclusion for employee health care costs; put a ceiling on costs by converting it to a credit; move employees to the health exchanges which should be the central feature of President Obama's health insurance program;
  6. Require much higher capitalization -- say 15 percent -- of major banks;
  7. Create a jobs tax credit focused on small new businesses, which create the vast percentage of America's new jobs.

That's enough for starters. These are the kinds of big changes we need. They derive from ideas of both the left and the right. All of them land squarely on some "third rail" of American politics. None of them will actually be proposed by either of the current major parties. Together they show the need for a force or party of the radical center. But despite that word "radical," none of these are truly radical; we could do all of them. Together, they would together be a project for American renewal.

Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles in the White Houses of two Democratic presidents.

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No More False Choices: Christina Romer on Fiscal vs. Housing Policy

Sep 27, 2011Mike Konczal

mike-konczal-newRomer refuted four of the most popular objections to President Obama's jobs plan. Any other takers?

Christina Romer wrote an excellent New York Times article on Sunday, "A Plan on Jobs Deserves a Hearing." In it, Romer discusses four objections to the new Obama jobs plan. In keeping with developing a map of demand and supply explanations for the weak economy, I want to specifically address how Romer discusses the different demand-side approaches. First, let's take another look at that demand-side map:

Romer refuted four of the most popular objections to President Obama's jobs plan. Any other takers?

Christina Romer wrote an excellent New York Times article on Sunday, "A Plan on Jobs Deserves a Hearing." In it, Romer discusses four objections to the new Obama jobs plan. In keeping with developing a map of demand and supply explanations for the weak economy, I want to specifically address how Romer discusses the different demand-side approaches. First, let's take another look at that demand-side map:

Romer argues for the job plan, which is centered around solutions in the fiscal circle (infrastructure, tax cuts) and doesn't primarily include solutions in the housing circle (except for housing refinancing, which is unlikely to go anywhere). Romer addresses this head-on:

WE NEED A HOUSING PLAN, NOT MORE FISCAL STIMULUS The bubble and bust in house prices has left households burdened with too much debt. Until we deal with this problem — perhaps by providing principal relief to the 11 million households whose mortgages are larger than the current value of their homes — we’ll never get the economy going.

The premise of this argument is probably true: recent evidence suggests that high debt is holding back consumer demand. But it doesn’t follow that the government needs to directly lower debt burdens to stimulate job growth.

Recent research shows that government spending on infrastructure or other investments raises demand even in an economy beset by over-indebted consumers. Another effective approach is to aim tax cuts and government payments at households that would like to spend, but can’t borrow because of their debt loads (such as the poor and the unemployed).

History actually suggests that the “tackle housing first” crowd may have the direction of causation backwards. In the recovery from the Great Depression, economic growth, which raised incomes and asset prices, played a big role in lowering debt burdens. I strongly suspect that fiscal stimulus will be more cost effective at speeding deleveraging and recovery than government-paid policies aimed directly at reducing debt.

We should, however, be thinking hard about whether the president’s stimulus plan is the best one for a debt-heavy economy. It may be too tilted toward broad tax cuts, when bigger increases in government investment spending and more targeted tax cuts would promote faster growth.

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I tend to think there's enough space for advancement on all three fronts, especially as they are three distinct battlefields -- Congress and budgets for fiscal, the FOMC and expectations for monetary policy, and regulators and the foreclosure industry for housing. If all three approaches had to go through one place I could understand the need to pick our battles, but they exist in different spaces with different arguments. As such, I've always thought liberals need to take them all on at once.

But in general, those who think that we have a housing debt hangover think that running a larger fiscal deficit is a good thing. This is a representative argument: "If the private sector is incapable of absorbing all desired savings the government has to jump in – at least temporarily, while the private sector is paying down its excess debts. The government offers savers a safe asset (government bonds) and uses the funds to directly boost aggregate demand."

Or as Richard Koo puts it:

Indeed the key lesson from the Japanese experience is that fiscal support must be maintained for the entire duration of the private-sector deleveraging process. This is an extremely difficult task for a democracy in a peacetime, because when the economy begins to recover, well-meaning citizens who dislike reliance on government will argue that since fiscal pump-priming is clearly working, it is time to reduce (what they see as wasteful) government spending. But if the recovery is actually due to government spending and the private sector is still in balance-sheet-repair mode, premature fiscal

reform will invariably result in another meltdown, as the Japanese found out in 1997 and the Americans in 1937...

Although government deficit spending should be avoided when the private sector is healthy and forward looking, once in several decades when the private sector gets carried away in a bubble and damages its financial health, a prompt and sustained fiscal medicine from the government is essential in minimizing both the length of recession and the eventual bill to the taxpayers.

Romer adds an interesting argument to this overlap -- that the best way to deal with the housing hangover is to boost wages and employment, which can be done through fiscal policy. Unemployment is well-correlated with deleveraging, foreclosures and underwater mortgages, so relief through this channel will go toward the areas most in need. I'd add that even places where there wasn't a housing bubble -- say, Texas -- have very high unemployment rates in excess of 8 percent, indicating something larger at work than simple deleveraging.

I agree with what Romer hints at, that the job plans is too tilted towards tax cuts. Building in infrastructure will have a payout years down the road that will make this an even better investment, but with real interest rates negative we should be getting as much of it out the door as we can until output returns to trend.

With the Romer editorial in hand, what are the arguments against this job bill again?

Mike Konczal is a Fellow at the Roosevelt Institute.

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The Twisted Logic Behind the Federal Reserve Dissenters' Arguments

Sep 22, 2011Mike Konczal

Three members are living in a world very different from what the unemployed are experiencing.

Three members are living in a world very different from what the unemployed are experiencing.

I made the case that liberals should engage monetary policy more directly in The New Republic today. I want people to pay special attention to the Evans Rule, which derives from Chicago Fed President Charles Evans's fantastic speech "The Fed's Dual Mandate: Responsibilities and Challenges Facing U.S. Monetary Policy." The rule proposes that the Federal Reserve could simply state that it will keep interest rates at zero and tolerate three percent average inflation until unemployment gets down to seven percent. I'd consider going further and announcing a targeted transition to a permanent four percent inflation target, while keeping rates near zero until unemployment is at least 6.5 percent. But these are the areas where liberals need to focus their energy when it comes to monetary policy.

Because Operation Twist won't cut it, especially with the housing market a complete mess. But even this mediocre action had three dissenting votes: Fed Presidents Richard Fisher, Narayana Kocherlakota, and Charles Plosser.

Having a map of the demand-and-supply sides of the policy debates is crucial to analyzing their arguments, and I'll allude to it throughout this post. The dissenting arguments aren't in the demand side, but instead in the supply side. Instead of thinking we have a demand problem but that monetary policy is ineffectual in this environment -- an opinion held by many people -- their explanations for why they are against future monetary policy use the language of the supply-side.

We don't know yet exactly why they dissented this time, but there are clues from their previous statements. To understand Fisher's perspective, there is this clue from the August 20th FOMC meeting (my bold for the following three quotes):

Voting against this action: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser... Mr. Fisher discussed the fragility of the U.S. economy but felt that it was chiefly nonmonetary factors, such as uncertainty about fiscal and regulatory initiatives, that were restraining domestic capital expenditures, job creation, and economic growth. He was concerned both that the Committee did not have enough information to be specific on the time interval over which it expected low rates to be maintained, and that, were it to do so, the Committee risked appearing overly responsive to the recent financial market volatility...

He said something similar in an August 17th speech applauding Texas' job growth. "Those with the capacity to hire American workers -- small businesses as well as large, publicly traded or private -- are immobilized. Not because they lack entrepreneurial zeal or do not wish to grow; not because they can’t access cheap and available credit. Rather, they simply cannot budget or manage for the uncertainty of fiscal and regulatory policy." That logic falls under the "government-induced uncertainty" circle in my map.

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For Kocherlakota, a clue lies in his big paper "Labor Markets and Monetary Policy," which states:

There are good reasons to believe that expected after-tax productivity p fell. Over the past three years, the U.S. economy has experienced large increases in the federal budget deficits, contributing substantially to the overall federal debt. In addition, many states and municipalities are facing budgetary challenges. It is natural for firms to expect that these budget challenges at all levels of government may be met at least partially by future increases in tax rates. Both in the model and in reality, firms know that hiring a worker is a multiyear commitment, and so what matters for that decision is productivity, net of taxes, over the medium term of the next several years. If firms expect to face higher taxes in this time frame, then their measure of p has fallen.

What about the utility that a person derives from not working? In response to the recession, the federal government extended the duration of unemployment insurance benefits. Thus, it is plausible that z has risen in the past three years. This increase -- in and of itself -- means that firms must offer higher wages... In this scenario, nominal rigidities are playing a much less important role in suppressing the creation of job openings. Correspondingly, monetary policy should be considerably less accommodative... However, if (p−z) has fallen by 0.15, then the implied u* is 8.7 percent. This is indeed a wide range of possibilities.

The biggest factors for him are government-induced uncertainty created by budgetary challenges, future tax increases, and unemployment insurance. In Kocherlakota's models, the natural rate of unemployment might be 8.7 percent or higher, so in his mind he's gotten us to Full Employment. Congrats!

Mind you, the models he uses don't even really leave room for insufficient demand to be part of the story, which is kind of a problem. But either way, he falls into the overlap between "government-induced uncertainty" and "productivity."

What about Plosser? Here's a February 2011 interview with the Wall Street Journal:

Mr. Plosser’s answer is unequivocal: This mess was caused by over-investment in housing, and bringing down unemployment will be a gradual process. “You can’t change the carpenter into a nurse easily, and you can’t change the mortgage broker into a computer expert in a manufacturing plant very easily. Eventually that stuff will sort itself out. People will be retrained and they’ll find jobs in other industries. But monetary policy can’t retrain people. Monetary policy can’t fix those problems.”

Scott Sumner has devastated the argument that this is about unemployed carpenters with a passing glance at the data, and as far as I can see Plosser has offered little additional data on this matter. And again, even if the "natural" rate of unemployment has jumped up to 6 percent or 7 percent, there are still millions of people who are unemployed and who can be affected by policy. But either way, he's operating from the "labor productivity" circle in the map.

So the three dissenters don't have a demand story in which monetary policy can't work. They have a story in which things would be fine if the government just got out of the way and stopped trying to regulate the financial sector, focused on balancing the budget immediately, and also stopped preventing people from moving to new careers by giving them unemployment insurance.

How did these people ever end up being some of the most crucial players with control over whether or not our country will leave the Great Recession and get back to full employment?

It would have been great if Charles Evans had dissented on behalf of the unemployed. It is important for the public to understand that the dissenters aren't balancing out a Fed that is too active, but instead holding a Fed that could be setting more aggressive expectations in check. They have their biases and are seeking out whatever stories and data will fit into it, and their biases end up being against trying to close the unemployment gap. And thus our unemployment crisis continues on.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Mapping Out the Economic War of Ideas

Sep 21, 2011Mike Konczal

A literal take on the ideological bubbles that have formed in our economic debate.

For the next few posts, I will allude to an ongoing battle of ideas about what is troubling our economy and what solutions are available to fix it. So it might be a good idea to create a sort of topological map of the clusters of ideas and policies that constitute these arguments, as well as the overlap among them. This is a preliminary version of this map; I’d really appreciate your input about what is missing and how to make it better.

A literal take on the ideological bubbles that have formed in our economic debate.

For the next few posts, I will allude to an ongoing battle of ideas about what is troubling our economy and what solutions are available to fix it. So it might be a good idea to create a sort of topological map of the clusters of ideas and policies that constitute these arguments, as well as the overlap among them. This is a preliminary version of this map; I’d really appreciate your input about what is missing and how to make it better.

From those who think that the problem is related to demand and Keynesian theories, there tends to be three areas of focus: fiscal policy, monetary policy, and the debt hangover in the broken housing market. One can think all three are important -- I certainly do -- but most think one has priority over the others. Many will think one of the three isn’t in play or particularly useful as a focus of policy and energy. Here’s a rough map of all three. Quotations are ideas, non-quotes are policies, and parentheses are people associated with each:

konczaltopo1

(Click for larger image.)

Join the conversation from the comfort of your own computer on September 25 as noted experts discuss FDR's inner circle.

The flip-side to a demand crisis is a supply crisis, and there’s been a large effort to explain our high unemployment and below-trend growth as the result of supply-side factors. Having surveyed the arguments, I’ve split them into two categories. There are those who think that the government has created an increase in uncertainty. This results from a combination of deficits that scare bond vigilantes/job creators, new regulations that have killed all the potential new jobs, government-created disincentives to work. The second area of focus is on the productivity of the labor force, with special emphasis on a skills mismatch, the characteristics of the long-term unemployed, and the idea that something has fundamentally changed in our economy that will keep so many unemployed for the foreseeable future.

konczaltopo2

(Click for larger image.)

I’m making the productivity circle conceptually expansive enough to include “recalculation” stories, though I tend not to find these arguments convincing. I suppose I could add a third circle in the next version.

So what did I miss?  What should go in the next version of this chart?

Mike Konczal is a Research Fellow at the Roosevelt Institute.

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