Why is the economy stuck in a rut?

It’s them damn socialists…

The American Dream can be summed up as: “if you work hard and play by the rules, this country is truly open to you. You can achieve anything.” The Governator, Arnold Schwarzenegger said it. And Presidents Clinton and Obama have said something similar. That’s certainly the credo for every rich guy, isn’t it? But while worker productivity has doubled since 1973, wages have basically remained stagnant.

In the simplest terms, increased value produced should have some connection to increased compensation, but it doesn’t, as David Dayen wrote:

“ It clearly stands in for inequality, as all the wealth accumulated from the productivity gains does go somewhere, mainly into the hands of a rentier class.”

While the top 1% and corporations are happy that workers don’t benefit from increased productivity, we hear a lot of complaints from these same people that high taxes redistribute wealth unfairly, or that we are “hunting” the rich. Or that job creators will have less incentive to invest. Let’s take a look at some economic fundamentals to see if these claims are true.

How does business thrive?

In the modern business world, there are three factors necessary for success that do not show up on corporate expense statements:

1. Infrastructure (highways, airports, trains, power plants, dams, bridges, the development of the internet)
2. Government regulators to protect property rights and insure a level playing field in the market (no collusion, no coercion, no predatory pricing by subsidized foreign companies, etc.)
3. A skilled work force

Without these three factors, Donald Trump and his ilk would still be trading beaver pelts for rifles or food, just like anybody else. I would hope it’s obvious to everyone that our taxes already pay for the infrastructure and keeping the playing field even. But what about creating a skilled work force?Here’s a summary of who bears those costs and whether business is paying its fair share.

First, we need to provide some historical context.

Super high tax rates have no correlation with a bad economy…

From 1946 to 1973, America enjoyed its greatest economic expansion, in spite of 71–91% taxes rates for the top earners. But nobody actually paid those taxes. By 1960, the effective tax rate was 31% in 1960. To reduce their tax burden, wealthy business owners simply reinvested their profits back into their businesses in the form of new factories, more employees, and research and development. As a result, the economy continued to grow. A side effect of these policies is that CEO salaries were maintained at lower levels to minimize tax liabilities. The CEO to worker compensation ratio in 1973, was about 22 to 1; by 2013, the ratio was 295.9 to 1.

During this period, the middle class expanded rapidly, and one income families could afford to own a car, buy a house and send their kids to college. The state heavily financed public universities because we understood the need for a well educated work force to power the post war economy. In return, businesses provided generous employee benefits and a guaranteed retirement plan, knowing that healthy and secure employee would be far more loyal and productive.

The American Dream seemed to be working for a lot of people

Look at some of the key prices that determined whether someone could afford the American Dream:

In 1946, median household income was $2,500, tuition at UCLA was $58 per year, the cheapest new car cost $1,280, the median house cost $5,600, and median rent was $35 a month.

In 1973, median household income was $8,983, tuition at UCLA was $1500 per year, the cheapest new car cost $2,250 the median house cost $32,500, and median rent was $175 a month.

In 2013, median household income was $51,759, tuition at UCLA was $13,251 per year, the cheapest new cars cost approximately $15,000, the median house cost $220,000, and median rent was $905 a month.

Here’s a graph that shows how our shift in priorities has completely screwed modern college students and their families. Remember, if we consider business and society’s gain in having a productive, trained worker, we have shifted the costs on to the individual, which is an incredibly regressive “tax” that hurts the poor and the middle class. Also, it should be noted that in large coastal cities, the median rent would be a significantly higher percentage of median income, and greatly reduce disposable income.

So what changed? It’s them damn socialists!

Taxpayers have been conned by big business and the rich to enable a number of wealth distribution policies that would warm the hearts of both Karl Marx and Bernie Madoff.

Socialist scam #1: shift the costs of educating a skilled work force onto private individuals as regressive “hidden taxes.”

How did a UCLA education go from being 2.3% of the average household’s income to 16.7% only twenty-seven years later (up to 25.6% currently)?

The answer is provided by a couple of grad students how wrote a detailed history of the slow death of public higher education:

The California student movement has a slogan that goes, “Behind every fee hike, a line of riot cops.” And no one embodies that connection more than the Ronald Reagan of the 1960s… When Reagan assumed office, he immediately set about doing exactly what he had promised. He cut state funding for higher education, laid the foundations for a shift to a tuition-based funding model…

From 1981 to 1986, President Reagan reduced the highest tax rate from 70% to 28%, while increasing defense spending, producing massive budget deficits. The response was to cut funding of various services, like higher education. He was able to institute his policies on a national basis, and we’re still paying the price. By shifting the costs onto private individuals, Reagan achieved the double whammy of creating another regressive hidden “tax” on poor and middle class families, who either could no longer afford college, or took on massive debt to go to college.

NOTE: Like so many scams, the end result is restricted upward social mobility and increased income inequality, as money from those groups who can least afford these increased costs flows to the powerful groups who control the purse strings. Here are a few examples:

• Banks borrow Federal Reserve money at 0% charging an outrageous premium above the Prime Lending Rate on government-insured student loans
• For-profit colleges make billions off federal grants while providing sub-par education and false claims of employment
• Textbook publishing companies churn out new educational programs every few years that offer no real educational benefits but cost school systems hundreds of thousands of dollars to retrain teachers and buy expensive guides, workbooks and textbooks
• By saddling young people with massive debt, they are more afraid to quit their low paying jobs, giving corporate employers more negotiating leverage

Socialist scam #2: shift the costs of a healthy work force onto the public

There are many reasons that Walmart is one of the most profitable companies on the planet. So why do they need the U.S. government to foot the bill for health care, food stamps and subsidized housing? In 2014, Walmart’s low-wage workers cost U.S. taxpayers an estimated $6.2 billion in public assistance.

But WalMart is not the only culprit. Nearly three-quarters of the people helped by programs geared to the poor are members of a family headed by a worker. According to a study by the UC Berkely Labor Center:

Low Wages Cost U.S. Taxpayers $152.8 Billion Each Year in Public Support for Working Families

Socialist scam #3: shift the costs of a retired work force onto the public

For decades, American business made a promise to their workers: “be responsible, productive and loyal and we will take care of you after you retire.” But that dream was betrayed:

“…since 1985, corporations have killed 84,350 pension plans — each of which promised secure retirement benefits to dozens or hundreds or even thousands of men and women.”

Laws written since the Reagan era have allowed corporations to find all kinds of loopholes to cheat their workers out of benefits that were promised and funded years before. And where do their aged retirees turn with no pension? You guessed it, taxpayer financed government aid.

• Bonus Socialist scam: assume the risk of shady investments by Wall Street

I couldn’t end this article about socialist wealth distribution without mentioning Wall Street bail outs. Everyone knows the rough details of the financial metldown in 2008. What’s sad is that nobody seems to remember that we bailed out banks and financial markets in the 1980s, and 1998, as well as 2008. You would think Wall Street would learn to stay away from highly leveraged, ethically questionable get rich quick schemes. But if you get to keep the profits when your horse wins, and the government pays your bookie when you lose, why would anyone stop gambling?

The most amazing thing is that Brooksley Born warned us about the danger of derivatives when she was the chairman of the Commodity Futures Trading Commission between 1996 and 1999. Unfortunately, she was stopped by Wall Street lifers who served as cabinet members and naive free marketers like Fed Chairman Alan Greenspan who admitted that he had put too much faith in the self-correcting power of free markets:

“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.”

• Bonus Socialist scam #2: create all kinds of corporate subsidies while distracting us with alarmist calls about “welfare fraud”

In spite of record corporate profits, and $2.1 TRILLION in untaxed corporate profits held overseas, 5% of the Federal budget goes to corporate welfare.

I get so sick of uninformed people whining about social programs because of the spectre of “welfare fraud.” For a little context, Corporate welfare accounted for $93 billion, or about 5.0% of the federal budget.

According to Congressional testimony, the Office of Management and Budget determined that only 1.9%, of all Unemployment Insurance benefit payment programs was attributable to fraud or abuse. In other words, “welfare fraud” accounts for $530 million, or about 0.028% of the federal budget. Just to repeat, corporate welfare amounts to over 175 times more money than welfare fraud.

And here’s another form of corporate handjob not counted as a tax break or subsidy. Medicare Part D was a piece of legislation rammed down the throat of the American people during the darkest days of the Bush administration. It prohibited medicare from negotiating for volume discounts from the pharmaceutical industries. Yes, those free market advocates, the Republican Party, created a bill which prevents a huge buyer shopping for the best deal. according to the Congressional Budget Office:

Simply empowering Medicare to get the same bulk purchasing discounts on prescription drugs as state Medicaid programs would save the federal government $137 billion over 10 years.

The cost of this little piece of political corruption is $13.7 billion per year.

Here’s a nice little infographic to show the difference in magnitude between the various types of abuse of the system. (For people playing a home, the volume of a dollar bill is: 6.14 inches × 2.61 inches × 0.0043 inches = 0.06890922 cubic inches. 1728 cubic inches = 1 cubit foot)

Remember the earlier estimate that Low Wages Cost U.S. Taxpayers $152.8 Billion Each Year in Public Support for Working Families? These are also not part of corporate subsidies or tax breaks. Compared to the graphic above, that building is over one and a half times larger than the Pentagon.

A final word to the real job creators

No, I’m not talking to the Paul Grahams, or VC groups, or the Mitt Romneys of this country. Because they aren’t really the ones who make this economy go. It’s you, every taxpayer, who is helping to provide everything that entrepreneurs need to have the chance to launch a successful business. It’s you, the consumer that keeps the economy going with your purchases. Give yourselves a pat on the back. And stop being such chumps.