The Melting Pot and Income Disparity

I read an item recently (didn't note the source unfortunately) suggesting that income inequality correlates with the homogeneity of a countries population.  The more homogeneous, the less income inequality, the more diverse the greater the income inequality.  It is an interesting notion.  When we feel like our countrymen are like us we are more inclined to insure that everyone gets a piece of the pie.  When we start dividing ourselves in different "tribes"  on political and ethnic lines we become less concerned about other American "tribes" and more of a winner take all society.

Looking back over more recent American history certainly doesn't contradict this theory.  The last time income disparity became so glaring was in the 1920's leading up to the great depression.  The decades before 1920 had been marked by a huge wave of immigration that filled our cities with ethnic enclaves and politically often faced off city dwellers against the largely home grown rural and small town folk.

Then the income disparity shrunk greatly after WW II.  Perhaps the war effort made people become American's first and all the political and ethnic divisions faded in significance?  Guys from all parts of the country, all ethnic and political views bunking next to each other in the barracks, or sharing a foxhole, can certainly break town tribal instincts.

The high levels of income disparity disappeared in the years after WW II.  Clearly there was a different attitude then as the tax code imposed marginal rates of up to 90% on the most wealthy Americans as part of the effort to pay off the deficit from WW II and the great depression.   The capstone of this tax effort occurred with the 1954 tax code passed by Congress which was, amazingly, passed during the only session between 1932 and 2000 where the Republicans controlled both houses of Congress and the Presidency. (Clearly the Republican party of 1954 was not the Republican party of 2011).  Income disparity was then relatively low for the next couple decades - it began to grow again in the late 1970's, and accelerated greatly in the 1990's and 2000's, a time when immigration has become a hugely controversial issue and politics is bitterly partisan.

Why don't we maintain institutional memory - why do we have such different attitudes today than we did in after WW II?  Probably because each new generation starts from our brains tendency to break the world in groups of us and them.  Until each new generation has some learning experience to teach them the value of inclusiveness they see others outside their immediate group as less human and threatening.

I hope we don't need WW III to pull us back together as a country.  Might not work anyway, since we abolished the draft after the Vietnam War.  In WW II everyone served.  In modern US warfare generally only the folks at the bottom of the income spectrum serve in the military, the kids of the well to do go to college and on to careers, seldom interacting with people who are not similarly blessed.

Constructive goals Occupy Wall Street could pursue - the housing market

We are not going to find a solution to the housing crises that involves either Wall Street or the Federal Government any time in the near future and our economy will not recover until we deal with the housing mess.   In any economy the driving force is the people from 35 to 50, people still young and energetic, but with the experience and maturity to build or grow an economy.  To use the latest Republican buzz word, the job creators.  In my experience it seems it is the people in this group that have been hammered the worst by the housing market collapse.  The hard working, imaginative and ambitious who got to the point where they felt like they could finally buy a house in the middle of the last decade are now locked into houses they can't afford to own the way they are currently financed, but also can't afford to sell.  We are financially crippling the dynamic heart of our economy.


Government is not going to solve the problems in the housing market, for both partisan ideological reasons and structural reasons.  The feds have created programs to refinance loans with great fanfare, then virtually no loans get refinanced.  Occupying foreclosed  houses will get some publicity and wring some concessions out of banks in the short term on individual properties but will not result in any action by the private sector or government that will begin to solve the problem.


What is the problem?  It appears to be twofold.


1.  The political problem - Republicans are living in an economic fantasy world and Democrats are ineffectual without Republican help.  It really doesn't matter why Republicans policies are so out of touch with reality - whether it is an irrational belief that making money is proof of goodness, or simply they see rich folks as their constituency and are protecting their constituency the result is the same.  They will not consider any plan to address the housing market that doesn't involve laws benefiting the same folks that caused the problems.


2.  Structural problems - Getting a home loan used to be pretty simple, you went and talked to the bank, if they thought you were reliable and had the income to make the payments, they made the loan then held the mortgage in their portfolio until it was paid off.  Gradually all those smart people on Wall Street started making it more and more complicated.  No bank, to my knowledge, holds loans they make to maturity anymore.  Banks make loans anticipating the mortgage will be sold in secondary mortgage markets, maybe sold repeatedly.  So now instead of having to convince the banker across the desk from you that you are reliable and can pay the mortgage back, that guy across the desk from you has to meet the criteria set by a bunch of different people you never met.  The old simple transaction has become a complex and tangled bureaucratic minefield, so even if you had the money in the bank to buy the house outright you still might not qualify for the loan. 


On top of the complexity of the transaction the banks that control the process are understandably not enthusiastic about converting a bunch of loans on which they are getting interest of 6, 7 or 8% to loans on which they will getting somewhere around 4%.  So they are perfectly happy to just wring their hands in sham sympathy and quietly let the complex process not work.


So what can OWS do?  Here are some ideas:


1.  Start organizing all the people out there who bought houses at the peak of the boom, are struggling to keep the house, and could keep the house with some financial restructuring.  When they are dealing with the banks one by one they are helpless.  But if hundreds or thousands get organized and are prepared to take concerted action, they could have the power to strike fear in the heart of Wall Street.   Suppose half a million homeowners pledged to stop paying their mortgage payments on March 1 if some real refinance option was not in place.


2.  A back up strategy (because it would take longer to implement) would be create an fund to make direct refinancing loans using local or state government bonds working through refinance agencies set up by branches of government.  Local governments, for example, can offer tax free status on their bond issues to make the bonds attractive.  Local governments could perhaps reduce the loan balances in some cases and take back an equity interest in the home as a way of protecting property values within the community.


At the State level an option that could get refinancing up and running pretty quickly in California would be to open up the Cal-Vet loan program to allow refinancing, and maybe even open up the program to non-veterans due to the dire economic situation in the State.  The Cal Vet loan program has been around for decades, it is entirely funded by bonds paid off through the payments on the loans. 


A non-government option would be to create a non-profit that little folks can invest in to create a pool of money, then use the money to refinance home loans, starting with those with the highest interest rates first.  Google, Apple or other tech companies are making a lot of money off the generations that have been hurt by the housing collapse, why can't they kick in some money to create a fund to provide an alternative to the banking system?


Until there is an option to the banking system that threatens to damage the banks bottom lines, the banks are going to keep dragging their feet.  If private sector banks started to see their highest interest rate loans disappearing from their balance sheets, and their loan portfolio's shrinking they might discover that maybe refinancing loans isn't such a bad idea.

Constructive Goals Occupy Wall Street could pursue - engaging Republicans

The emotion and outrage that fuels occupy wall street is a powerful force, but I feel like the reason we have a disfunctional Congress is because we have too many people in this country whose views have been cast in concrete by linking ideas with the strong emotions that are generated by confrontation.

Back in the 1960's and 1970's the social movements of that time galvanized young people on the left side of the political spectrum, who really felt like they were on the side of all that is true and right and anyone opposed to them deserved to be dismissed.

History has shown their was a degree of truth to their beliefs - much of what were radical ideas at the time - particularly in civil rights - are now commonly accepted as truths of what America stands for.

But I believe the dismissive and somewhat arrogant attitude of the leftish movements are to some degree the source of the irrational group-think and obstructionism that marks current Republican politics.  People of a Conservative persuasion who are running the Republican party now were young folks growing up during those years and got pummeled for expressing Conservative views.  So they learned to express their views among themselves rather than trying to engage the left.  You see the results in the extraordinary Republican primary playing out before our eyes, where political views that ignore history, objective data and common sense cannot even be expressed by a candidate without the candidate being marginalized in the party for not toeing the party line.  Republican ideology has become the political equivalent of a bulldog - so inbred it is littered with genetic defects.

Occupy Wall Street should avoid going down that same road.  OWS should be arranging discussions of basic policy questions in a format that protects participants from abuse and inviting Republican organization to join to present their views.  A format for discussions that focuses on data rather than ideology and encourages people to think about whether their political beliefs actually accomplish the goals they seek can be found at www.Theidp.org

I believe if this kind of engagement could occur in enough parts of the country we could break the logjam in Washington in a few years, and it would certainly contribute to a more civil and productive government in the longer term.

This is not a path to be pursued by those just out for the experience.  Engagement requires discipline, research and tolerance.  You have to want to be a force for good.

Grab bag of tax proposals

The tax code should have an income tax exemption for veterans, so $600 for each year of service up to a maximum of 5 years.  Often veterans give up more than they realize.  The people that don't serve are often further along in their careers when veterans begin their non-military working career - a head start that may make it almost impossible for the Veteran to ever make up the lifetime income gap.  That sacrifice should be recognized in the tax code.


We should raise taxes on the wealthy, in particular stop encouraging rampant speculation and asset bubbles with low capital gains taxes.  But we should also bring back income averaging, so those people who first hit the big strike can keep more of the income than those whose high income is a long term phenomanen.


Any organization that is granted limited liability should have to abide by a salary standard - mean, median and Mode - across the range of all employees.

Labor relations shouldn't be adversarial

Labor relations in the US are built on an adversarial basis.  Labor against management.  This seems counterproductive to me.  In virtually every other aspect of business we strive to build teams, not encourage adversarial relationships.  It is sort of like a football coach on a road trip pitting his linemen against his ball handling players to negotiate who sleeps in a motel and who sleeps on the bus, and then expecting them to go out and play as a team in the game.

We didn't develop an adversarial system intentionally.  Nobody figured out the best way to encourage productivity and competitiveness, then devised a system to make it work.  It is an accident of history.  Business people were allowed to exploit men, women and children for competitive advantage.  When the exploitation got really bad, the workers rebelled and formed unions to protect themselves.

Unions are not a really a good solution for the problem of worker exploitation.  Unions have a history of abuse by their management, they have a history of being oblivious to the health of the underlying enterprise, and many people don't like be forced to join a union to work.

We should use tax policy to encourage companies to organize themselves as teams in a way that makes unions irrelevant.  Create a qualification mechanism - if the payroll structure spreads the company wealth fairly (mean, median and Mode) and grants employees's a say on working conditions, the company can qualify to pay a lower corporate tax rate.

Qualifying for a lower tax rate will be very attractive to investors, since it makes a bigger pie available for them to take a piece of, and a little side benefit of qualification is it will reduce the ability of CEO's to use their power over the Corporation to extract excessive salaries and golden parachutes.

The Middle Way

Surveying the last 200 years of economic history the single most dominant theme is the theoretical battle between capitalism and collectivism.

Largely unfettered Capitalism, following the theoretical underpinnings of Adam Smith that individual self interest was the most efficient economic engine, ruled the 1800's (albeit often with a huge dose of state support).  Growth and development often bordered on manic, but it chewed up workers with little regard for their welfare.

The sheer brutality of its treatment of workers provoked the worker backlash that produced the communist revolutions of the early part of the 20th Century that led to the biggest chunk of the worlds population living under despotic communist regimes for much of the 20th Century.

In the United States the worker backlash was channeled into laws to protect workers that moderated the tendency toward exploitation that the markets produce.  While much of the world was turning communist we enacted workers compensation laws, minimum wage laws, payroll laws, worker safety laws and laws to give labor unions more bargaining power in the early part of the 20th century.  That calmed the worker unrest, but didn't address the tendency of unfettered capitalism to speculate itself into a crisis, so our unfettered free markets let the scramble to get rich obscure good judgment and we led the world into the stock market crash of 1929 and the subsequent depression.  After the stock market blew up in 1929 and we sank into the great depression, we enacted a series of laws to put some limits on unfettered capitalism.  This mix of capitalism with state regulation (which also occurred in most other western democracy's) proved to be much more conducive to growth than the communist state planning approach.  For the rest of the 20th Century we enjoyed a long period of economic stability and growth.

But late in the 20th Century, probably because times were good for so long, people drifted away from labor unions and capitalists chaffing under the government restrictions put in place after the 1929 Stock Market collapse began to sound sensible to voters. When the Soviet Union collapsed in 1989, the true believers in unfettered free markets declared the total victory of Capitalism over collectivist notions and over the next decade and a half dismantled much of what had been enacted after the 1929 crash.  The unfettered market did what it always does, lost sight of common sense in the scramble to get richer and richer and in 2007-08 we led the world economy into disaster once again.

So now we are back in what will probably be years of high unemployment and slow growth, and are seeing worker unrest again.  The Occupy Wall Street protests in the US, and workers unrest around the world are sort of aimless shouts of pain at this point.  Will they coalesce into some pendulum swing toward a collectivist future in some countries?

We need to hash out a middle way.  A coherent body of theory that recognizes the ability of capitalism to organize people and generate growth, but also recognizes that the human emotions that drive capitalism sometimes need to be restrained and channeled.

The notion of a middle way is timeless, from Aristotle teaching moderation in all things, to traditional Chinese culture based on yin and yang, the balance of opposites.  As individual voters we need to cultivate more recognition of Yin and Yang and try not to allow the excesses of the last two decades toward free markets push us into excesses in collectivism.

History has made Republicans reactive

Historically in my lifetime there have always been more voters registered Democratic than Republican.  I don't know how far back in history that situation has existed, but it certainly has been the case in the last 60 years.

Ideologically I have always understood that Republicans champion individual self responsibility and government fiscal responsibility.  Those are goals that I certainly think are basic and fundamentally required to formulate good public policy.  But as I contemplate political history for the last thirty years I find Republican fingerprints on virtually all the really major policy mistakes we are currently trying to clean up.

I have began to understand, I think, why Republicans have made such major mistakes in public policy matters, from the Reagan tax cuts in the 1980's that first exploded the deficit, to the Republican changes in tax law and financial regulations laws that led to the great recession, to the Bush II tax cuts and changes in Congressional rules that redirected the trajectory of the deficit skyward early in the last decade.

Republicans have become reactive.  Because there are more Democrats, Democrats controlled the agenda.  Between 1955 and 1980 Democrats controlled both houses of Congress - the period when most the current Republican political leadership, and most current voters, were developing their political ideas.  So to the extent there were good policies to be enacted, Democrats got to claim them.  Republicans were left trying to distinguish themselves from Democrats by looking for mistakes and hammering on them.  They become so focused on being something different than Democrats they picked up ideas that are contrary to Democratic positions without really critically thinking through the consequences.

The first example is the Reagan tax cuts in the early 1980's.   Republicans had found a chink in the Democratic electoral armor - everyone likes paying less taxes.  They found an economic theory that would allow them to make tax cuts without making sufficient cuts to offset the loss of revenue - supply side economics, the theory that giving more money to rich folks would cause it to "trickle down" to the rest of us.  Mr Reagan sold the theory to American voters with slogans like "a rising tide raises all boats".   I voted for Ronald Reagan, and his willingness to embrace supply side was one of the things that turned me into Democrat.  I respected Mr. Reagan, and still do.  I believe he had the best intentions, and I think he was masterful in his handling of the Soviet Union.  But even at the time I had a hard time understanding how a "conservative" could build his view of how to build an economy on an Ivory Tower theory that seemed to contradict history, human psychology and common sense.  How could cutting government revenues without cutting expenses produce anything other than a deficit?

Immediately after the Reagan Tax cuts the deficit skyrocketed.  And now a couple decades later the "rising tide" data is in.  To continue the rising tide analogy, the rising tide only lifted the yachts, the rest of the boats are now submarines.  Virtually nothing trickled down over the last 25 years.

I think what happened was Republicans rejected the Keynesian economic theories of the time that tolerated small deficits because it was associated with Democrats.  Republicans had been out of power so long they were in an emotionally reactive mode where they latched onto something, not because it was sensible, but because it was different, and it allowed them to promise voters tax cuts.  Sort of like giving out candy to curry favor with the kids.  It is effective but not good for the kids in the long run.

In foreign policy George Bush II came into office in 2001 determined to do foreign policy differently.  The Clinton years had been marked by worldwide engagement, largely avoiding muscle flexing in favor of soft power.  We were highly admired around the world, Mr Clinton helped broker the (hopefully) final resolution of the problems between Ireland, Northern Ireland and England, and came close to resolving the Palestinian issue.  Although this approach seems to me to be carrying forward the policy of the great Republican Teddy Roosevelt (walk softly and carry a big stick) Republicans had predictably taken an anti-Democrat stance, arguing we should be tough guys.  Mr Clinton was to nice.

Mr. Bush came into office with the notion we were the biggest kid on the block and everyone else needed to respect that.  He made a point of snubbing the Palestinians, basically turned his back and stopped all efforts to solve the problem.   The rest of the worlds view of the US began sinking.  Then 9/11 happened and the world extended their support and sympathy, but it evaporated as we threw our weight around, and then invaded Iraq.  By the time Mr. Bush left office in 2008 Iraq had become widely viewed as a terrible mistake and the rest of the world disliked and distrusted us.  Mr. Bush seems to be a likable guy, whom I believe acted from good, if mistaken motives.  As I try to understand how he, with all the assets and knowledge afforded a President, could have made this kind of mistake, I find myself back to the notion that people emotionally attached to the Republican party have to be the anti-Democrat.  They have to find theories that distinguish them from Democrats, and become so focused on Democratic flaws they don't allow themselves to question the sensibility of the policies they are pushing.

In economic policy the Republicans obsession with being "not democrat" gave us the Bush II tax cuts.  The data was already trickling in that trickle down theory did not in fact work and the Reagan tax cuts had blown up the deficit, but Reagan's tax cuts had worked wonderfully politically.  So even though we were engaged in two wars, Mr Bush and the Republican Congress went back to supply side theory - big tax cuts, no effort to insure spending would match the loss of Revenue.

Now here we are, three years into the economic doldrums, carrying a huge debt load and Republicans are still obsessed with being the anti-Democrat, espousing proposals that history, economic data and common sense notions about human behavior say are almost certain to make things worse.

Voters need for Republicans to stop obsessing about distinguishing themselves from Democrats and start formulating policies with an eye to history, economic data and common sense about human behavior.  The fundamental Republican message is important but has been ill served by their reactive policies of the last three decades.