Stuart’s Thoughts - 12/17/2017
So What’s Next?
Preface:
In asking the question, (So what’s Next?), my intention is to focus on exploring possible paths the U.S. economy might take over the next 30 years. My current interest in this subject stems from a recent OLLI course at NCSU given by Dr. John Pilgrim, a semi-retired, liberal, economist. The course took an in-depth look at economic trends following the Second World War. Dr. Pilgrim described, with copious data, two distinct phases, the rise of a middle class in America in the years following the war and then beyond the 1970s, a subsequent, and ongoing decline in the middle class. I suppose this topic appealed to me because this bi-phasic rise era has tracked the years of my life as well as the lives of most of the other retirees in the class. What soon became evident as we explored social and economic attitudes of different population groups was that living through the war years and its aftermath, even as children, has had a profound effect on our social and economic values and attitudes. Those who were not alive during that era appear to have a vastly different view of how our nation’s legacy may someday play out.
Currently, December 2017, I am 81 years old but surprisingly I still have vivid recollections of that ominous day in December 76 years ago. The Japanese attack on Pearl Harbor on 12/7/1941 was the final straw that plunged the U.S. fully into World War II. I was barely 5 yrs old at the time and while I sensed the deep concern on the faces of the adults around me, I had little inkling of the magnitude of the events that were to follow and certainly how disruptive the next four years would be to our small family and millions of other American families and, indeed, to families the world over.
My father, as well as the fathers, sons and daughters of countless other families, headed into the jaws of danger in foreign lands in Europe and throughout the Pacific. When our loved ones left for overseas duty in the military, we had no idea if we would ever see them alive again.
Conditions at home, although a walk in the park compared to what our loved ones were facing in battle, were under considerable strain. It seemed everything was rationed. Yes, we had food stamps then that were needed to even buy the limited amount of various items that remained available. Many things that we had become used to in peace time were now totally unavailable. Gasoline was rationed as well. No one strayed very far from home. But, as a five year old, I easily rolled with the punches, played my own little war games with model airplanes and toy soldiers and also reluctantly survived on a diet of Spam, Spanish rice and my favorite in those days, canned spinach. I entered the first grade about the time my father enlisted as a young doctor in the Army Air Force and entered Flight Surgeon training.
During that first school year I was in 5 different schools in 4 different states as my mother made every attempt to stay with my Dad until he was shipped overseas. When that day came, my mother, baby sister and I landed in Norwood Pennsylvania in a rented house across the street from my mother’s sister and her family and I concluded 1st grade in Norwood. If it hadn’t been for a wonderful teacher who gave me extra attention every day for an hour or so after school, I would never have overcome the trauma of being in and out of 5 different schools, intermittently missing out on weeks of school time as we jumped around the country from one military base to the next. This experience left me with little ability to read as my first grade school year drew to a close. There was a real chance that I would have to repeat first grade. However, this wonderful and dedicated teacher managed to pull me through by the skin of my teeth and I eventually succeeded in making it all the way to the fourth grade by the end of the war.
Part 1 The War Years
The war resulted in many drastic changes in life style in our country but also throughout the world, particularly in Europe. Lights were essentially turned off along the east coast of the U.S. as German U-boats (submarines), patrolled the Atlantic just a few miles off-shore. Aside from torpedoing supply ships headed for Europe, they posed a threat of possibly attacking U.S. land areas, although, this threat never really materialized. Nevertheless, the great wartime blackout dramatically changed living patterns for millions. By contrast, things were far worse in Europe. A friend, Gino Archidiacano, who I worked with during my graduate studies at Ohio State, emigrated from Italy where he lived, as a child, with his mother through the war years. He related how his mother would have to go out into the street each day to scrape together enough food for the family. He admitted he never really knew what kind of meat she returned with - dog, horse, human or something else too disgusting to even think about. But they survived and he eventually came to the U.S. and became a research assistant. Interestingly, he pointed out that during the war they felt lucky to have the essentials to sustain life, food and shelter and possibly a pair of shoes. He contrasted those needs with what he and others in the 1960s considered the essentials such as a television set, a washing machine & dryer and electric refrigerator. He remarked how funny it is how people’s impression of what they truly need can change so drastically with the times and conditions.
Drastic changes were also suffered by Japanese American citizens when our government, acting out of irrational fear, forced many of these good people out of their homes and into internment camps. Why not round-up German Americans or Italian Americans as well. We might have wound up with half the population in internment camps - total irrationality.
During most of my subsequent adult life, I rarely studied or gave much thought to the history or details of that war to any significant extent. However, since retiring I have studied it intently mainly through the fantastic documentation of all aspects of war from Hitler’s rise to power to unbelievable movie footage of countless battles, strategy meetings as well as the technology of the war from computers to rocketry.
The History Channel and the Military Channel often show segments of this amazing story. What I realize now, more than ever before, is that it was essentially, The United States, our brave fathers, sons and daughters, that literally saved the world from the tyranny of Hitler, Japan and other axis powers. Had the other side won, Europe would likely now be ruled by the Nazis, and it’s anyones guess as to how the rest of the world would have been divided up among the various axis powers. What would that have meant for the U.S had we meekly stayed out of the war in Europe? Who knows? Would we all now be under Nazi rule?
Cost of the Second World War in lives:
In total the second world war claimed an estimated 70 million lives with approximately 50 million of those being civilians, Military lives lost totaled nearly 20 million wth the following statistics for the major combatants.
More than 16 million U.S. Troops took part in the war with more than 400 thousand deaths and another 670 thousand wounded.
Russia - 7.5 million deaths
Germany - 3.5 million deaths
China - 2.2 million deaths
Japan - 1.2 million deaths
Other European Military - 2 million deaths
Part 2 The Post War Period (1945 - 1979)
With the return of our fighting forces to civilian life, an unprecedented boom in life-style ensued, not only in the U.S. but also in Europe and Japan where the U.S. led the rebuilding of whole countries left in ruin by the massive bombing and other results of warfare firepower. The U.S. spent more than $13 trillion rebuilding Western Europe under The Marshall Plan and the entire world felt new born in this new glorious era of peace. Also during this time, our country witnessed a truly remarkable outpouring of all manner of new appliances, automobiles and an avalanche of other new or improved consumer goods. That revitalization of our country and, indeed, the whole world led, in the eyes of many, to perhaps the greatest and happiest decade in the history of the U.S.
The 1950s were a wonderful reprieve from the dark days of war, and the boom that forged the great U.S. middle class lasted for fully 30 years. People were smiling again and certainly elated to add things like automatic washing machines, dryers, dishwashers, air conditioners and especially televisions to their lives. The U.S. auto manufacturers produced the most beautiful lines of new cars ever conceived. Those cars are now the classics that command many times their original cost. I loved my 1956 Chevrolet convertible and still keep a toy model to remind me of that fabulous car. I often lament that those 1950’s models were so beautiful compared to today’s vehicles, all of which, to me, resemble upside-down bath tubs.
Major advances in civil rights followed in the 1960s and beyond led by Dr.Martin Luther King and others but dark days would return when men filled with hatred assassinated Dr. King and then a popular young President John F.Kennedy. This subject as been the focus of much literature since those days and must necessarily be left here for another time.
Having just completed John Pilgrim’s course “The Rise and Fall of The Middle Class in America”, I have much of the relevant data at hand. During the 30 year post-war period (1947-1977) median household income, adjusted for inflation, more than doubled with all income groups participating equally, i.e., both the lowest household income quintile and the highest doubled, as well as the three intermediate quintiles. U.S. Gross Domestic Product growth rose from being slightly negative at the end of the war to nearly 5% by the late 1970’s. The stock market surged with the Dow Jones Industrial average rising five fold from around 200 to nearly 1000. People were happy and the great U.S. middle class was in full gear. They were at work and labor’s share of total income was stable. Meanwhile, Europe and Asia with the aid in the form of the Marshall Plan and other massive assistance from the U.S were gradually clawing their way back. Today of course both Germany and Japan are totally back, prosperous, and two of our greatest allies.
Part 3 The Subsequent Years (1980 - 2017)
Things, however, began to change in the eighty’s, ninety’s and 2000’s and currently our middle class is in decline. Without going into excessive detail regarding all of the things that changed early on to stimulate middle class growth nor all of the things that have been changing more recently that have led to reversal and decline of the middle class, several of the most salient factors will be mentioned.
Certainly a victorious conclusion of the second world war was the most important factor in initiating the growth of the U.S. middle class but also changes in the workplace were important. The offering of defined benefit pension plans and company provided medical coverage were key as well as an increasingly educated population.
In 1940, only 50% of pupils graduated from high school and only 5-6% graduated from college. By 1970, 77% graduated from high school and roughly 18% from college. Conversely, some of the factors that led to middle class decline include a decline in labor unions, loss or dilution of many of the employer-sponsored fringe benefits, rising mortgage debt and of course, of great importance, the emergence of China as a manufacturing and economic giant.
So where did that leave us at the end of the Obama administration in 2016? There had been a significant fall in the civilian labor force, annual growth rate halving from about 2% in 1979 to around 1% in 2016. Labor productivity rate similarly declined, federal budget debt exploded from around 10% of GDP in 1979 to about 75% in 2016 and the middle class got squeezed.
The share of wealth in the country has been migrating rapidly to the highest income levels. Between 1979 and 2016 the bottom quintile, rated by household income, rose 12.2% but the top quintile rose 68.3%. This shift in the nation’s wealth is depicted well in a recent Washington Post article by Christopher Ingraham who depicts the shift in wealth with an example, i.e., sharing of 100 slices of pie by the various economic groups. Currently the top quintile (average net worth $8.3 million) gets 90% or 90 pieces of pie, the second quintile (average net worth $274,000) gets 8 pieces of pie, and the third quintile (average net worth $82,000) gets the last 2 slices of pie. The lowest two economic groups (average net worth of $9,000 or less) get no pie. But perhaps the most shocking revelation is that the share of American wealth owned by the top 1% vs the bottom 90% has gone from equality, i.e., both segments possessing about 33% of the nation’s wealth in 1952 to 40% for the top 1% and approximately 20% for the bottom 90% in 2016.
Data such as these have been welcome fodder for many on the political left who would love to see our country abandon free market capitalism for socialism. Indeed, Bernie Sanders was surprisingly successful in the last Democrat Presidential Primary as he gained the support of the younger voters in particular. My own opinion is that our country has a number of serious problems that need to be addressed but the path of socialism would not be a wise choice.
Part 4 Where To From Here - The Economy.
My rationale for suggesting that socialism would not be a wise choice for the future of the U.S. is based largely on its past record throughout history. Socialism has had a few transient successes, but, more often, countless failures.
Sweden is the country frequently pointed to by those advocating for socialism. There is the common misconception that socialism has worked well in Sweden but when you dig into the numbers, a different picture emerges. If Sweden was introduced as a new U.S. state, it would be the poorest based on data reported by the Swedish Institute of Trade in 2002. At that time median household income in Sweden was $26,800 compared to $39,400 in the U.S. Additionally, the very high Swedish taxes make matters considerably worse. In fact, Swedes fare lower than the lowest American socio-economic class. In most cases, as we are now seeing in China, to progress economically a country must eventually move toward capitalism. Quite simply, socialism fails because it disregards basic human nature and ignores incentives thereby destroying an essential component of the human spirit.
The history of the utopian society movement of the late 19th century in the U.S. is an excellent collection of cases which demonstrate how any attempt to create a perfect society where everyone works to achieve total equality, “fairness” and happiness for the entire group, invariably fails. Freedom is the most cherished quality of life in the U.S. and has been so since it’s founding in 1776. It’s firmly engrained in each of us and provides the spark that ignites our lives. Most are negatively inclined to having it abridged to any significant degree.
But, we need to explore the concept of socialism a bit further. I think we all realize that the United States is by no means a pure capitalistic democracy. There are many facets of socialism firmly embedded in our socio-economic structure that we would not even consider eliminating. National defense, the highway system, public education, social security and medicare, to name a few, are necessarily provided collectively by government.
Recognizing now that there are some serious issues that our country should deal with, immediately brings up the question of how far we should go in assigning additional responsibility, thus more power, to the government. For the present discussion, we can think of there being a continuum of politico-socio-economic ideology, picture a yard stick ranging from pure free market capitalism having little or no government involvement at one end and pure communism at the other end where government exerts iron-fisted control over everything and everybody. Currently, the U.S. is somewhere between the extremes but, perhaps, maybe only about 25% of the way from the pure Capitalism and 75% of the way from the pure Communism end. We could also say that nations considered to be socialist states are likely to be 50% or more of the way from the Capitalism end toward the Communism end of the continuum. Naturally, these measures are purely arbitrary and only intended to serve as an orientation for further theoretical discussion.
Our country faces many significant issues but several of those with immediate serious impact on our way of life and, in fact, survival of the middle class are 1) rapid recent growth in income inequality, 2) high cost of medical care, 3) unaffordable increases in the cost of higher education 4} and, perhaps, the gorilla in the room, our massive national debt. Also of utmost importance in my mind is 5) the breakdown of two essential pillars of support needed for the survival of our democratic way of life, behavioral adherence to the rule of law and peaceful transfer of government authority and power from one administration to the next.
I’ll deal with each of these issues in turn and consider what may be the best course of action, a bit more socialism or something else?
- Income inequality - Perhaps the simplest way to depict the degree of income inequality that we currently face is to picture Christopher Ingrham’s example. The top economic quintile of our pie sharing get 90% of the pie while the second two quiniles (the middle class) get 10% with virtually nothing left for the bottom two quintiles. Now, we have to recognize that Ingrham’s politics are quite far left and that the case is not nearly as clear cut when conservative analysts look at the data but for current purposes, we’ll assume that Ingrham’s example is accurate.
Just as an aside, throughout the course of these economic discussions, keep in mind that two different economists, both looking at the same data set, can easily produce graphic examples to substantiate their divergent conclusions. Manipulation of data to prove a point can be easily done, especially graphically, and nearly always occurs.. This occurs because of a basic truth of human nature i.e, we all are inherently and frequently unintentionally biased, with bias often seeping in at the subconscious level. Thus, as we discuss opinions and articles we need to proceed with caution ever keeping this point in mind.
Returning to how we might solve the problem of income inequality, several simple basic options are to simply shift wealth from the top quintile to the lower quintiles and since the government can’t simply grab money from the rich and give it to the poor (the Robinhood approach), their option is to differentially increase taxes on the rich while not raising or, perhaps, even lowering taxes on the poor. However, tax policy is unlikely to have any direct effect on the wealth of the poor because the lowest 40% currently don’t pay any income tax. Although, lowering tax rates for the middle class could help that second pair of quintiles. The major question being debated as our congress formulates a tax reform package is what the effect of lowering the marginal tax rate for the wealthy will have on both income inequality and the national debt.
In 1974, Art Laffer, a conservative economist, described the famous, at least in the world of economics, “Laffer Curve”, which in theory is not al all controversial and accepted by all economists. How it plays out in reality, however, is loaded with controversy.
The “Laffer Curve” is a very simple plot describing the theoretical relationship between the highest marginal tax rate and government tax revenue. It’s generated by just three points, a tax rate of 0%, a marginal tax rate of 100% and a undefined point midway between (marginal tax rate = x%). The graph generated is a simple hyperbola which indicates at tax rates of 0% and 100% there would be no government revenue. Who would work if the government intended to take 100% of your earnings?
However at some intermediate tax rate, one concludes that, if that marginal tax rate happens to fall on the hyperbola to the left of center, i.e., the rising arm of the hyperbola, a tax rate increase will result in enhanced government tax revenue but if it falls to the right of center, i.e. on the descending arm of the hyperbola, a tax rate increase will actually cause a fall in government tax revenue.
As I mentioned previously, this theory is solid and no-one refutes it. However, what is never known for sure is where we are currently on the hyperbola and thus, the uncertainty and controversy of what effect a change in tax policy will have on government revenue, and most importantly on national debt. This is a major reason for much of the disagreement when tax reform is being considered.
The disagreement regarding the effect of changing tax policy is, as mentioned, where the current tax position is on the “Laffer Curve” but also on the hyperbolic shape of the curve. Is it squewed to the left or to the right rather than being symmetrical. Additionally, there may be multiple “Laffer Curves” for various segments of the economy. You can see how this very simple and straightforward economic model may become essentially useless in forecasting what effect future tax policy will have on government tax revenue and thus, the national debt.
Thus, we end up with conservatives predicting that cutting taxes will provide an economic stimulus that will lead to increased government revenues while the liberals predict a loss in government revenue.
For you and me to judge which outcome we believe will occur, we can only look at what has happened in the past when tax policy was dramatically changed. The case always cited by the conservatives is the Reagan years and what happened when he drastically lowed the top marginal tax rate. In spite of usual political wrangling and attempts to obfuscate hard data, it seems to be quite clear that when the top marginal tax bracket was reduced in 2 steps from 70% to 30% between 1980 and 1988, federal tax receipts more than doubled over the ensuing years. By claiming that the Reagan tax cuts unleashed a 20 period of unprecedented economic expansion, the conservatives are citing this to justify further tax rate reduction, including for those at the highest bracket. However, it’s unclear whether such a response will occur if the highest marginal rate is modestly cut from an already comparatively low level of 39% to something like 35%.
Regarding our related concern for the widening gap in wealth inequality, this issue has been around forever. After all, those who are most successful in life will garner considerably more wealth during their lifetime than their less successful counterparts. However, there has been an almost explosive widening of this gap in the past decade and there is fear among some that the middle class is rapidly shrinking. The question is should something be done to try to narrow this gap and, if so, what?
There are really only two options for attempting to narrow such a gap. The first option would be to directly shift wealth from the more wealthy to the less wealthy by appropriate wealth assessments or taxes. However, with this strategy, the nation’s total wealth would, at best, theoretically remain constant. The second option would be to leave the wealthy alone in their fortunate position of high wealth and through structural economic adjustments, simultaneously raise the level of wealth for the less well off. With this option, the nation’s total wealth should increase. In my view, the second option is preferable, although, designing such a plan, acceptable to the majority, could present a significant challenge.
Alternatively a highbred combination of both approaches may fill the bill. Since only a tiny fraction of our population qualifies as super-rich, the tendency for thinking of most of us is to feel that “those super-rich people have far more than they need and further more, are not that much more deserving than many of us less-rich, good, hard working people.” I have to admit when I hear of entertainment and sports figures earning 10 million dollars or more per year, I ask myself are they really worth that much, e.g., 200 times more to society than an excellent, hard working, teacher who has such a strong and direct impact on the next generation? I don’t think anyone can answer that question affirmatively using conventional logic.
However, I also dislike the thought of direct government meddling with the freedom of each person being able to earn as much as the market will bear. Thus, I favor leaving the very fortunate ultra-rich alone. Actually, confiscating a big chunk of their money and redistributing it to the less rich would not accomplish much because of the dilution effect brought about by the overwhelming number of people below the super-rich bracket. A much better approach might be for the government to facilitate structural economic changes that would elevate the lower economic groups toward those higher brackets. With such a scenario, it is possible for everyone to win.
Finally, a major advantage that may not always be considered is the tremendous incentive for innovation, accomplishment and ultimate success which exists simply due to the presence of such a tempting target as ultra-wealth. In the final analysis, This is likely a key factor that differentiates the success of a more capitalistic economy from a more emotionless socialistic economy. We currently see this realization coming to former far left countries, e.g. Russia and China, as they adopt more and more capitalism into their systems.
To explore just what kind of economic structural changes might reverse the trend of wealth inequality, we should consider the nature of changes that may spark excitement and provide optimism for the less wealthy that they too can experience success and accumulate increasing wealth over time. Professor Pilgrim detailed during his course a variety factors that he regarded as major players in the great convergence of wealth that occurred between 1940 and 1970 and then the ongoing divergence that began beyond the 70s and reached the accelerated levels of the 2000s.
Just to underscore a few, some of the main factors causing convergence were significant economic growth in the post war period, averaging about 4% per year in the 1960s and 1970s, a growing labor force and employment as men and women returned from the military and the war-time economy, a national preference for a willingness and ability to save, a fall in taxes from a wartime high of slightly greater than 100% of GDP to an ultimate low of about 25% of GDP in the post-war years. In short, our nation enjoyed a remarkable economic rebound, strong growth, strong employment, strong productivity, lower taxes and a positive saving/wealth-building attitude of the population.
However, beyond 1970, things changed. The above positive trends were reversed and with the advent of easy credit an attitude of spend, spend, spend descended upon the nation. We are all too familiar with that scenario because that has been our lives. We want and buy all manner of consumer products whether we need them or not. We routinely buy, and occasionally binge buy, using our credit cards or we refinance our homes for big ticket items. As a result, for the average person, spending rises rapidly, savings shrink rapidly and voila, wealth begins to disappear. Professor Pilgrim believes that reversing these trends and going back to the post-war mindset is extremely unlikely to occur although, I think most people would agree that it would be preferable to escape the spending binge, become satisfied with a less opulent life style, and dramatically ramp-up savings.
Current generations have become impatient and want it all now. Thus, growing the overall economy may be the best chance for things to noticeably improve for the less wealthy. Whether you love or hate our current President, the policies he has articulated and led in the last year seem to be bearing favorable results. Economic (GDP) growth has climbed out of the stagnate 2% range of the past decade and is now in the range of 3%, resulting in a tremendous boost of national wealth growth. This is reflected by the facts that consumer confidence, employment and the stock market are at 17 year highs, with the stock market setting new all-time records almost daily. The key question is, will this trend continue into the foreseeable future or will everything unravel tomorrow?
Certainly, if current trends in the economy continue, most of us will see family wealth gain and regardless of how anyone else fares, it will be good for most of the middle class. But what about the really big issue in my view, our out of control national debt, now standing as I write this at 20.6 trillion dollars or roughly speaking each family of four is in debt for a quarter of a million dollars. It’s like every family carrying another hefty mortgage.
While economic expansion may help to cut into annual budget deficits and slow the rate that “more water is leaking into the ship”, the ship will still eventually sink if we don’t stop the leak altogether at some point and, eventually, begin a modest initiative to “pump the bilge”. Stopping the leak altogether means the government would need to live out the foreseeable future with balanced budgets and if we intend to begin “pumping the bilg”, we will actually need budget surpluses. These are simple economic facts that are as true as the laws physics. There is only one correct way to address our looming budget crisis, government must cease spending more than they take in. Printing more money is a favored government copout and only pushes the problem down the line and, realistically into the laps of our children and grandchildren.
Part 5 - Other Significant Middle Class Challenges
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