Taxes, Inequality, And Class Power

No doubt about it, the recently passed tax bill is terrible for working people.  But as Lance Taylor states in a blog post titled “Why Stopping Tax ‘Reform’ Won’t Stop Inequality”: “Inequality isn’t driven by taxes—its driven by the power of capital in relation to workers.”  Said differently we need to concentrate our efforts on shifting the balance of class power.  And that means, among other things, putting more of our energy into workplace organizing and revitalizing the trade union movement.

The rich really are different

Taylor uses the Palma ratio to highlight the growth of income inequality.  The measure, proposed by the Cambridge University economist Jose Gabriel Palma, is defined as the ratio of the average income of a wealthy group relative to the average income of a poorer group.  Taylor calculates Palma ratios “for the top one percent vs. households between the 61st and 99th percentiles of the size distribution (the ‘middle class’) and the sixty percent at the bottom.”

The first figure looks at Palma ratios for pre-tax income.  The second figure uses disposable or after-tax income.

In both figures we see growing ratios, which means that the top 1 percent is increasing its income faster than the other two groups, although the gains are not quite as large in the case of after-tax income, suggesting that taxes and transfers do make a small but real difference.

Be that as it may, the ratio of the top group’s after-tax income relative to Taylor’s middle group grew 3.85 percent per year over the period 1986 to 2014, while the ratio with the bottom group grew 3.54 percent a year.  As Taylor comments, “Such rising inequality is unprecedented. These rates are a full percentage point higher than output growth, and are not sustainable in the long run.”

What is also noteworthy is that the Palma growth rates for both the middle and bottom groups are quite close.  This is important because it shows that inequality is largely driven by the top earners pulling income from the rest of the population, rather than a widening income gap between Taylor’s middle and bottom groups.

An IMF study of the relationship between income inequality and labor market institutions in twenty developed capitalist countries over the period 1980 to 2011 came to a similar conclusion, although it focused on the top 10 percent rather than the top 1 percent. As Florence Jaumotte and Carolina Osorio Buitro, the authors of the study, explain (and illustrate in the figure below):

As with measures of income inequality, changes in the distribution of earnings indicate that inequality has risen owing largely to a concentration of earnings at the top of the distribution. Gross earnings differentials between the 9th and 5th deciles of the distribution have increased over four times as much as the differential between the 5th and 1st deciles. Moreover, data from the Luxembourg Income Survey on net income shares indicate that income shares of the top 10 percent earners have increased at the expense of all other income groups. While there is some country heterogeneity, the increase in top income shares since the 1980s appears to be a pervasive phenomenon.  

Class power counts

As we can see in the first figure above, rich households, with a mean income of greater than $2 million a year, have “40 times the income of the bottom 60 percent and 13.5 times payments going to the middle class.” In the figure below, Taylor illustrates the source of that income.  One way or another, he finds that it comes from capital ownership and profits.

As we can see, labor compensation has grown rapidly over the last few years, and now exceeds $500,000 per year.  Still, it represents only roughly nine percent of the total, significantly less than either of the other two main income categories, proprietor’s income and interest and dividends.  Proprietor’s income, interest and dividends, and capital gains all flow from ownership.  So, in fact, does an important share of labor compensation which includes bonuses and stock options.

As Taylor explains:

Given that the bulk of income of the top one percent comes from profits through one channel or another, the obvious inference is that the rising Palma ratios in Figure 1 were fueled by an ongoing shift away from wages in the “functional” income distribution between labor and capital.

The question is why wages of ordinary households lagged.

After examining patterns and trends in business profits, Taylor concludes that the primary answer lies in the ability of firms to hold down wages.  Among the reasons for their success:

Changes in institutional norms (laws, unionization and other of the game) surely played a role. Robert Solow (2015) from MIT, the doyen of mainstream macroeconomics, observes that labor suffered for reasons including “the decay of unions and collective bargaining, the explicit hardening of business attitudes, the popularity of right-to-work laws, and the fact that the wage lag seems to have begun at about the same time as the Reagan presidency all point in the same direction: the share of wages in national value added may have fallen because the social bargaining power of labor has diminished.”

Divide-and-rule in a “fissuring” labor market, as described by David Weil (2014) is one aspect of this process. Globalization, which came to the forefront in the 2016 Presidential election, also played a role.

The IMF study again provides support for this conclusion. A simple correlation test of the relationship between labor market institutions and inequality produced “a strong negative relation between the top 10 percent income share and union density.”  Econometric tests that attempted to control for technology, globalization, financialization, tax rates and a host of other variables confirmed the relationship.  As the authors explain:

Our benchmark estimates of gross income inequality indicate that the weakening of unions is related to increases in the top 10 percent income share. A 10 percentage point decline in union density is associated with a 5 percent increase in the top 10 percent income share. The relation between union density and the Gini of gross income is also negative and significant.

On average, the decline in union density explains about 40 percent of the 5 percentage point increase in the top 10 percent income share . . . . By contrast, the decline in unionization contributes more modestly to the rise of the gross income Gini, reflecting the somewhat weaker relation between these variables. However, about half of the increase in the Gini of net income is explained by the decline in union density, evidencing the additional and statistically significant relation between this institution and redistribution. The decline in union density was a widespread phenomenon which, as our estimation results suggest, could be an important contributing factor to the rise in top income shares.

The takeaway

Taylor doesn’t minimize the significance of the ongoing tax changes.  But as he states:

it took 30 or 40 years for the present distributional mess to emerge. It may well take a similar span of time to clean it up.  Progressive tax changes of $100 billion here or $50 billion there are not going to impact overall inequality. The same is true of once-off interventions such as raising the minimum wage by a few dollars per hour.

Long-term improvement requires changes to the present situation that can cumulate over time.

And that requires rebuilding labor’s strength so as to secure meaningful wage increases and a transformation in economic institutions and dynamics.  As the IMF study makes clear, fighting for strong unions must be an important part of the process.

The 2016 Survey of Consumer Finances paints a grim picture of working class finances

The Survey of Consumer Finances (SCF) is a triennial survey of U.S. families that is sponsored by the Federal Reserve Board (Fed) and carried out by the NORC at the University of Chicago.  It includes information on families’ balance sheets, pensions, income, and demographics. As the Fed notes, “No other study for the country collects comparable information.”

Sadly, as we see below, the wealth data from the 2016 survey paints a grim picture of working class finances, reinforcing what many people already know, that US capitalism works to enrich the few at the expense of the many.

The following figure and table from the 2016 survey shows trends in the median net worth for all families, measured in 2016 dollars.  Strikingly, the median in 2016 was 8 percent below what it had been in 1998.

Of course, while the median value is useful for capturing broad trends, the next figure and table, also from the 2016 survey, makes clear that capitalism’s motion does not treat all families equally.  More specifically, the bottom fifth of families saw their net worth fall by 24 percent over the period 1998 to 2016, while the next lowest income tier experienced an even greater decline, 34 percent.  Those in the next two higher income tiers basically treaded water.  In sharp contrast, the top ten percent enjoyed a net worth increase of 146 percent over the same period.

Matt Bruenig, drawing on data from the survey, provides an even clearer picture of wealth inequality in the following figure.  As he explains:

[it] shows what percent of wealth is owned by each wealth decile.  The way this reads is as follows: the bottom 10 percent owns -0.5 percent of the wealth in the country (they are net debtors) while the top 10 percent owns 77.1 percent of the wealth in the country.

In fact, wealth is even more concentrated than it appears in this figure.  In 2016 the top 1 percent owned 38.5 percent of the wealth, more than the bottom 90 percent combined. This was a sharp rise from the 29.9 percent share they held in 1989.

So, the next time you hear media analysts celebrate US capitalism as a great wealth creating machine, remember that they are celebrating a social system that largely works for the benefit of a very few.

Media Complicity Increases The Possibility Of A New Korean War

Tensions between the US and North Korea are again rising in the wake of North Korea’s November 28^th test of an ICBM that experts believe has the potential to deliver a nuclear bomb to cities on the east coast of the US, including Washington D.C.

As I have written before, we desperately need to change US foreign policy towards North Korea.  North Korea’s leaders continue to seek talks with the United States, with all issues on the table, those of concern to them and those of concern to the US government.  But the US government continues to refuse.  The Trump administration has even rejected North Korean offers to freeze its production and testing of missiles and nuclear weapons in return for a halt to US war games directed against North Korea.

Instead, Trump continues Obama’s strategy of responding to every North Korean missile launch or nuclear test with new military threats and sanctions.

Unfortunately, changing US foreign policy towards North Korea is no easy matter.  One reason is that there are powerful forces opposing a de-escalation of tensions.  Sadly, the tension is useful to the US military industrial complex, which needs enemies to support its desire increase in the military budget.  It is also useful to the US military, providing it with a justification for maintaining troops on the Asian mainland and in Japan.  The tension also helps the US government isolate China and boost right-wing political tendencies in Japan and South Korea, developments favorable to our own militarists and right-wingers.  Of course, the costs of US policy fall on ordinary people.

Another reason for the difficulty in changing US policy towards North Korea is that the US media does little to provide the context necessary for people in the United States to understand its lawless and destructive nature.

The illegality of Trump administration threats of destruction

The Trump administration has repeatedly threatened North Korea with total destruction.  What is missing from media accounts of these threats is the explanation that they represent a violation of the UN Charter and international law.  As Gavan McCormack explains:

According to the UN Charter’s Article 2 (3), disputes between states must be settled by peaceful means and (4) “All members shall refrain in their international relations from the threat or use of force against the territorial integrity or political independence of any state …” [italics added]. Article 33 further specifies the obligation of parties to any dispute likely to endanger international peace and security to “first of all, seek a solution by negotiation inquiry, mediation, conciliation … or other peaceful means of their own choice.” By ruling out negotiations with North Korea and insisting only on submission, the US, Japan and Australia ignore or breach this clear rule (and Japan breaches also the proscription on the “threat or use of force as means of settling international disputes” in its own constitution). Going beyond that, President Trump has also not only insulted the North Korean leader from the platform of the UN General Assembly but actually threatened his country with “total destruction,” by “fire and fury, and frankly power the likes of which this world has never seen before.” That surely qualifies as threat. It is even genocidal, and therefore criminal behavior, not only on the part of those (Trump) who utter it but on the part also of those like Abe and Turnbull (to whom perhaps now India’s Modi is to be added) who endorse and encourage it.

Moreover, in 1996, the International Court of Justice, in response to a UN request, ruled that threats to use nuclear weapons against another country are a violation of international law except “in an extreme circumstance of self-defense, in which the very survival of a State would be at stake.”  In certainly seems clear that the US is in violation of international law because of its repeated threats and military exercises designed to practice a nuclear attack on North Korea.

Tragically, the US media has remained silent about this lawlessness on the part of the US government.

The illegality of US-initiated UN sanctions on North Korea

The US has aggressively pursued the adoption of UN sanctions on North Korea.  The ones adopted in August and September are the most sweeping yet. They call for blocking North Korean exports of coal, iron, iron ore, lead, lead ore, seafood and textiles, all of which are important earners of foreign exchange. The resolutions also ban countries from opening new or expanding existing joint ventures in North Korea or renewing labor export agreements.  They also impose a cap on the amount of oil North Korea is allowed to import and call for a total ban on the country’s import of natural gas and condensates.  If rigorously enforced these sanctions will devastate living conditions for the great majority of North Koreans.

However, sanctions that target an entire population with the aim of causing economic collapse, such as those being imposed on North Korea, are illegal under the UN charter.  As McCormack points out:

Only sanctions carefully tailored to apply to those who act in the name of the government and bear responsibility for its offensive actions may be legitimate. . . . The point is clear that that those imposing sanctions bear an obligation to ensure they impact only upon those who are in a position of power, not on innocent civilians. There is reason to wonder if the United Nations itself, by the ordering of collective punishment of the entire North Korean people for offenses committed by their government, may be acting criminally.

Again, where are the stories pointing out the lawlessness of US and UN actions?

The missing explanation of North Korean responses to US policy

The reporting on North Korea’s November 28^th ICBM test offers another example of the US media’s failure to educate its readers. For example, here is the LA Times:

The launch is North Korea’s first since it fired an intermediate-range missile over Japan on Sept. 15, and may have broken any efforts at diplomacy meant to end the North’s nuclear ambitions. U.S. officials have sporadically floated the idea of direct talks with North Korea if it maintained restraint. . . .

Italy’s U.N. Ambassador Sebastiano Cardi, the current Security Council president, told reporters late Tuesday that “it’s certainly very worrying. Everybody was hoping that there would be restraint from the regime.”

This reporting certainly suggests that North Korea just doesn’t want peace no matter how hard the US and broader international community try.  But the story changes if we provide some missing context.

Since 2013 North Korea has offered to halt its testing of missiles and nuclear weapons if the US would halt its war games.  The US organizes two different annual war games in South Korea, the first is held over March and April and the second is in August.  But from time to time, it also engages in other smaller military exercises on and near the Korean peninsula.

The August 2017 war games included planning for a nuclear attack and “decapitation” of North Korea’s leadership.  These August war games are smaller than the March-April ones but still large.  This one included some 20,000 US and 50,000 South Korean troops.  And this year, for the first time, they were combined with a separate 18 day live-fire exercise involving US and Japanese forces on the northern Japanese island of Hokkaido.

North Korea responded to these threatening maneuvers by first firing a missile over Hokkaido on August 29, the day after the completion of the US-led exercises.  Then on September 3, it conducted its sixth and largest test of a nuclear weapon.  And finally, on September 15, it tested a new intermediate-range missile to demonstrate its ability to hit the major US air base in Guam.

There are 75 days from September 15 to November 28; this is an important interval.  The reason is that the US had publicly called upon North Korea to halt its missile testing for at least 60 days to show its good will.

For example, in August, Secretary of State Rex Tillerson told a group of reporters that “The best signal that North Korea could give us that they’re prepared to talk would be to stop these missile launches . . . We’ve not had an extended period of time where they have not taken some type of provocative action by launching ballistic missiles. So I think that would be the first and strongest signal they could send us is just stop, stop these missile launches.”  And in October, Joseph Yun, the U.S. State Department’s top official on North Korea policy, told an audience at the Council on Foreign Relations “that if North Korea halted nuclear and missile testing for about 60 days, that would be the signal the United States needs to resume direct dialogue with Pyongyang.”

As we have seen, the North Koreans did refrain from missile launches and weapon tests for more than 60 days.  But, what did the US do during that time to encourage North Korea?

On September 23 the Pentagon sent B-1B Lancer bombers, nicknamed “the swan of death,” to fly over international airspace just off the coast of North Korea, the first time since the Korean War that a U.S. bomber flew over North Korea’s east coast.

Then for five days, starting October 16, the US conducted joint naval exercises with South Korea that included the nuclear aircraft carrier Ronald Reagan, three nuclear submarines, Aegis destroyers and more than 40 other battleships and numerous fighter aircraft.

In November, the US conducted more navel drills.  This time it was a four-day exercise involving three aircraft carriers–the USS Ronald Reagan, Theodore Roosevelt and Nimitz–and their multiship strike groups in the waters between South Korea and Japan.  This was the first time all three aircraft carriers were together in the Western Pacific in a decade.  South Korean and Japanese warships also participated in the exercise.

Also in November, President Trump placed North Korea back on the list of state sponsors of terrorism, which meant new sanctions.  And finally, again in November, the US announced yet another war game to be scheduled for the period December 4-8 involving US, Japanese, and South Korean forces.  Called Vigilant Ace, the military announced that this exercise would include “enemy infiltration” and “precision strike drills” and involve 8 air bases, 12,000 soldiers, and 280 aircraft, including the two stealth fighters, the F-22 and the F-35.  This was to be the first time that the F-22 and F-35 would be used in war games on the Korean peninsula.

So, after waiting 75 days, and observing US actions, all of which were hostile, North Korea not surprisingly responded with the launch of its most powerful ICBM, showing the US that it could target even its capital if attacked.  But by presenting this missile launch without the appropriate context the media made it appear as just another example of North Korea’s recklessness and hostility.

 

Sadly, we have a lot of work to do.