The US Medical System: Healthy Profits At People’s Expense

Health care is a big and profitable business.  As a Wall Street Journal article points out:

[The US] will soon spend close to 20% of its GDP on health–significantly more than the percentage spent by major Organization for Economic Cooperation and Development nations. . . .

Health care has become a larger part of the economy, creating powerful constituencies resistant to changing the way the system operates.

The health-care industry overtook the retail sector as the nation’s largest employer in December, giving local economies and their workers a stake in the industry’s growth. Health jobs surpassed manufacturing jobs in 2008.

The revenues of health-care companies represented nearly 16% of the total revenues of firms in the S&P 500 last year, up from about 4% in 1984.

Health-care companies have more than doubled overall lobbying spending since 1998, and have become a bigger percentage of total lobbying by industries.

Unfortunately, as the Wall Street Journal article also goes on to say, “Despite the higher spending, the U.S. fares worse than the OECD on most major measures of health.”

The following chart provides one illustration of the distorted nature of our health care system.  As we can see, the US spends a far higher share of its GDP on health care than the OECD average, yet has a significantly lower life expectancy.

The article highlights drug prices as one of the key drivers of US health care costs, noting that that they “have risen the most of the three largest components of health spending since 2000, followed by hospital care and physician services.”

The power of the drug industry is immense, and their lobbyists actively work to ensure that the industry’s profits will remain healthy regardless of the social consequences.  The text of the recently negotiated United States-Mexico-Canada Agreement (USMCA) makes this clear.

As a Washington Post story explains:

A handful of major industries scored big wins in President Trump’s North American trade agreement — at times at the expense of ordinary consumers in the United States, Canada and Mexico.

The winners include oil companies, technology firms and retailers, but chief among them are pharmaceutical companies, which gained guarantees against competition from cheaper generic drugs. . . .

The pharmaceutical industry won stronger protection for sales of so-called biologic drugs, which are typically derived from living organisms and are administered by injection or infusion. The medicines are among the most costly and innovative on the market and are a major driver of drug spending.

USMCA guards new biologic drugs from cheaper generic competition for “at least ten years,” compared with current protection of eight years in Canada and five years in Mexico.

“By increasing the term to 10 years, there will be less competition and higher prices,” said Valeria Moy, an economics professor and the director of Mexico Como Vamos, a think tank in Mexico City. “Having more protection in that area means higher prices for consumers.”

The agreement provides extra protection to drug companies in the much larger U.S. market, as well. Current U.S. law protects biologic drugs from generic competition for 12 years, but some Democrats, including in the Obama administration, have pushed to lower that to seven years as a way to speed cheaper generics to the market and lower drug spending.

Critics of the trade agreement argued that by setting a minimum of 10 years of protection, the trilateral pact shields the pharmaceutical industry from future legislative attempts in the United States to shorten biologic drug monopolies.

It “decreases U.S. sovereignty,” said Jeff Francer, general counsel for the Association for Accessible Medicines, a lobbying group for generic drugmakers. “It would be much harder for Congress to try to roll back 12 years to seven years if we’re enshrining 10 years in a free-trade agreement.”

In short, our health care system operates very efficiently for the health care industry, and the industry appears well organized to keep it that way.

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Forgotten Workers And The US Expansion

There is a lot of celebrating going on in mainstream policy circles.  The economy is said to be running at full steam with the unemployment rate now below 4 percent.  As Clive Crook puts it in Bloomberg Businessweek, “The U.S. expansion has put millions of people back to work and economists agree that the economy is now at or close to full employment.”

Forgotten in all this celebration is the fact that wages remain stagnant.  Also forgotten are the millions of workers who are no longer counted as part of the labor force and thus not counted as unemployed.

Forgotten workers

One of the best indicators of the weakness of the current recovery is the labor market status of what is called the core workforce, those ages 25-54.  Their core status stems from the fact that, as Jill Mislinski explains, “This cohort leaves out the employment volatility of the high-school and college years, the lower employment of the retirement years and also the age 55-64 decade when many in the workforce begin transitioning to retirement … for example, two-income households that downsize into one-income households.”

The unemployment rate of those 25-54 reached a peak of 9 percent in 2009 before falling steadily to a low of 3.2 percent as of July 2018.  However, the unemployment rate alone can be a very misleading indicator of labor market conditions.  That is certainly true when it comes to the labor market status of today’s core workforce.

A more revealing measure is the Labor Force Participation Rate, which is defined as the Civilian Labor Force (i.e. the sum of those employed and unemployed) divided by the Civilian Noninstitutional Population (i.e. those of working age who are not in the military or institutionalized). Because there can be significant monthly swings in both the numerator and denominator of this measure, the Labor Force Participation Rate shown in the chart below is calculated using a 12-month moving average.

As we can see, the Labor Force Participation Rate for the 25-54 core cohort has sharply declined, from a mid-2000 high of 84.2 percent, down to a low of 81.9 percent in July 2018. Mislinski calculates that:

Based on the moving average, today’s age 25-54 cohort would require 1.6 million additional people in the labor force to match its interim peak participation rate in 2008 and 2.9 million to match the peak rate around the turn of the century.

A related measure of labor market conditions is the Employment-to-Population Ratio, which is defined as the Civilian Employed divided by the Civilian Noninstitutional Population.  As we can see in the next chart, the Employment-to-Population Ratio of our core cohort has also declined from its mid-2000 peak.

Again, according to Mislinski,

First the good news: This metric began to rebound from its post-recession trough in late 2012. However, the more disturbing news is that the current age 25-54 cohort would require an increase of 1.2 million employed prime-age participants to match its ratio peak in 2007. To match its mid-2000 peak would require a 3.1 million participant increase.

The takeaway

Both the Labor Force Participation Rate and the Employment-to-Population Ratio are useful measures of the employment intensity of the economy.  And in a healthy economy we should expect to see high values for both measures for the 25-54 age cohort. That is especially true for a country like the United States, where the non-market public provision of education, health care, and housing is quite limited, and an adequate retirement depends upon private savings.  In other words, people need paid employment to live and these are prime work years.

The decline, over the business cycle, in both the Labor Force Participation Rate and the Employment-to-Population Ratio for our core cohort strongly suggests that our economy is undergoing a profound structural change, with business increasingly organizing its activities in ways that require fewer workers. More specifically, the lower values in these measures mean that millions of prime age workers are being sidelined, left outside the labor market.

It is hard to know what will become of these workers and by extension their families and communities.  Moreover, this is not a problem only of the moment.  This cohort is still relatively young, and the social costs of being sidelined from employment—and here we are not even considering the quality of that employment—will only grow with age.  We can only hope that workers of all ages will eventually recognize that our growing employment problems are the result, not of individual failings, but an increasingly problematic economic system, and begin pushing for its structural transformation.

US Militarism Marches On

Republicans and Democrats like to claim that they are on opposite sides of important issues.  Of course, depending on which way the wind blows, they sometimes change sides, like over support for free trade and federal deficits.  Tragically, however, there is no division when it comes to militarism.

For example, the federal budget for fiscal year 2018 (which ends on September 30, 2018), included more money for the military than even President Trump requested.  Trump had asked for a military budget of $603 billion, a sizeable $25 billion increase over fiscal year 2017 levels; Congress approved $629 billion.  Trump had also asked for $65 billion to finance current war fighting, a bump of $5 billion; Congress approved $71 billion.  The National Defense Authorization Act of 2018, which set the target budget for the Department of Defense at this high level, was approved by the Senate in a September 2017 vote of 89-9.

In the words of the New York Times: “In a rare act of bipartisanship on Capitol Hill, the Senate passed a $700 billion defense policy bill . . . that sets forth a muscular vision of America as a global power, with a Pentagon budget that far exceeds what President Trump has asked for.”

That Act also called for a further increase in military spending of $16 billion for fiscal year 2019 (which begins October 1, 2018).  And, in June 2018, the Senate voted 85 to 10 to authorize that increase, boosting the Defense Department’s fiscal year 2019 total to $716 billion.

This bipartisan embrace of militarism comes at enormous cost for working people.  This cost includes cuts in funding for public housing, health care and education; the rebuilding of our infrastructure; basic research and development; and efforts to mitigate climate change.  It also includes the militarization of our police, since the military happily transfers its excess or outdated equipment to willing local police departments.

And it also includes a belligerent foreign policy.  A case in point: Congress has made clear its opposition to the Trump administration decision to meet with North Korean leader Kim Jong-un and halt war games directed against North Korea, apparently preferring the possibility of a new Korean War.  Congress is also trying to pass a law that will restrict the ability of the President to reduce the number of US troops stationed in South Korea.

In brief, the US military industrial complex, including the bipartisan consensus which helps to promote militarism’s popular legitimacy, is one of the most important and powerful foes we must overcome if we are to seriously tackle our ever-growing social, economic, and ecological problems.

The military is everywhere

The US has approximately 800 formal military bases in 80 countries, with 135,000 soldiers stationed around the globe.  Putting this in perspective, Alice Slater reports that:

only 11 other countries have bases in foreign countries, some 70 altogether. Russia has an estimated 26 to 40 in nine countries, mostly former Soviet Republics, as well as in Syria and Vietnam; the UK, France, and Turkey have four to 10 bases each; and an estimated one to three foreign bases are occupied by India, China, Japan, South Korea, Germany, Italy, and the Netherlands.

US special forces are deployed in even more countries.  According to Nick Turse, as of 2015, these forces were operating in 135 countries, an 80 percent increase over the previous five years.  “That’s roughly 70 percent of the countries on the planet. Every day, in fact, America’s most elite troops are carrying out missions in 80 to 90 nations practicing night raids or sometimes conducting them for real, engaging in sniper training or sometimes actually gunning down enemies from afar.”

This widespread geographic deployment represents not only an aggressive projection of US elite interests, it also provides a convenient rationale for those that want to keep the money flowing.  The military, and those that support its funding, always complain that the military needs more funds to carry out its mission.  Of course, the additional funds enable the military to expand the reach of its operations, thereby justifying another demand for yet more money.

The US military is well funded 

It is no simple matter to estimate of how much we spend on military related activities.  The base military budget is the starting point.  It represents the amount of the discretionary federal budget that is allocated to the Department of Defense.  Then there is the overseas contingency operations fund, which is a separate pool of money sitting outside any budgetary restrictions, that the military receives yearly from the Congress to cover the costs of its ongoing warfare.

It is the combination of the two that most analysts cite when talking about the size of the military budget. Using this combined measure, the Stockholm International Peace Research Institute finds that the United States spends more on its military than the next seven largest military spenders combined, which are China, Russia, Saudi Arabia, India, France, the UK, and Japan.

As the following chart shows, US military spending (base budget plus overseas contingency operations fund), adjusted for inflation, has been on the rise for some time, and is now higher than at any time other than during the height of the Iraq war.  Jeff Stein, writing in the Washington Post, reports that the military’s base budget will likely be “the biggest in recent American history since at least the 1970s, adjusting for inflation.”

As big as it is, the above measure of military spending grossly understates the total.  As JP Sottile explains:

The Project on Government Oversight (POGO) tabulated all “defense-related spending” for both 2017 and 2018, and it hit nearly $1.1 trillion for each of the two years. The “defense-related” part is important because the annual National Defense Authorization Act, a.k.a. the defense budget, doesn’t fully account for all the various forms of national security spending that gets peppered around a half-dozen agencies.

William Hartung, an expert on military spending, went agency by agency to expose all the various military-related expenses that are hidden in different parts of the budget.  As he points out:

You might think that the most powerful weapons in the U.S. arsenal — nuclear warheads — would be paid for out of the Pentagon budget.   And you would, of course, be wrong.  The cost of researching, developing, maintaining, and “modernizing” the American arsenal of 6,800 nuclear warheads falls to an obscure agency located inside the Department of Energy, the National Nuclear Security Administration, or NNSA. It also works on naval nuclear reactors, pays for the environmental cleanup of nuclear weapons facilities, and funds the nation’s three nuclear weapons laboratories, at a total annual cost of more than $20 billion per year.

Hartung’s grand total, which includes, among other things, the costs of Homeland Security, foreign military aid, intelligence services, the Veterans Administration, and the interest on the debt generated by past spending on the military, is $1.09 trillion, roughly the same as the POGO total cited above.  In short, our political leaders are far from forthcoming about the true size of our military spending.

Adding insult to injury, the military cannot account for how it spends a significant share of the funds it is given.  A Reuters’ article by Scott Paltrow tells the story:

The United States Army’s finances are so jumbled it had to make trillions of dollars of improper accounting adjustments to create an illusion that its books are balanced.

The Defense Department’s Inspector General, in a June [2016] report, said the Army made $2.8 trillion in wrongful adjustments to accounting entries in one quarter alone in 2015, and $6.5 trillion for the year. Yet the Army lacked receipts and invoices to support those numbers or simply made them up.

As a result, the Army’s financial statements for 2015 were “materially misstated,” the report concluded. The “forced” adjustments rendered the statements useless because “DoD and Army managers could not rely on the data in their accounting systems when making management and resource decisions.” . . .

The report affirms a 2013 Reuters series revealing how the Defense Department falsified accounting on a large scale as it scrambled to close its books. As a result, there has been no way to know how the Defense Department – far and away the biggest chunk of Congress’ annual budget – spends the public’s money.

The new report focused on the Army’s General Fund, the bigger of its two main accounts, with assets of $282.6 billion in 2015. The Army lost or didn’t keep required data, and much of the data it had was inaccurate, the IG said.

“Where is the money going? Nobody knows,” said Franklin Spinney, a retired military analyst for the Pentagon and critic of Defense Department planning. . . .

For years, the Inspector General – the Defense Department’s official auditor – has inserted a disclaimer on all military annual reports. The accounting is so unreliable that “the basic financial statements may have undetected misstatements that are both material and pervasive.”

Military spending is big for business

Almost half of the US military budget goes to private military contractors.  These military contracts are the lifeblood for many of the largest corporations in America.  Lockheed Martin and Boeing rank one and two on the list of companies that get the most money from the government.  In 2017 Lockheed Martin reported $51 billion in sales, with $35.2 billion coming from the government.  Boeing got $26.5 billion. The next three in line are Raytheon, General Dynamics, and Northrop Grumman.  These top five firms captured some $100 billion in Pentagon contracts in 2016.

And, as Hartung describes,

The Pentagon buys more than just weapons. Health care companies like Humana ($3.6 billion), United Health Group ($2.9 billion), and Health Net ($2.6 billion) cash in as well, and they’re joined by, among others, pharmaceutical companies like McKesson ($2.7 billion) and universities deeply involved in military-industrial complex research like MIT ($1 billion) and Johns Hopkins ($902 million).

Not surprisingly, given how lucrative these contracts are, private contractors work hard to ensure the generosity of Congress. In 2017, for example, 208 defense companies spent almost $100 million to deploy 728 reported lobbyists.  Lobbying is made far easier by the fact that more than 80 percent of top Pentagon officials have worked for the defense industry at some point in their careers, and many will go back to work in the defense industry.

Then there are arms sales to foreign governments. Lawrence Wittner cites a study by the Stockholm International Peace Research Institute that found that sales of weapons and military services by the world’s largest 100 corporate military suppliers totaled $375 billion in 2016. “U.S. corporations increased their share of that total to almost 58 percent, supplying weapons to at least 100 nations around the world.”

Eager to promote the arms industry, government officials work hard on their behalf.  As Hartung explains: From the president on his trips abroad to visit allied world leaders to the secretaries of state and defense to the staffs of U.S. embassies, American officials regularly act as salespeople for the arms firms.”

More for the military and less for everything else

The federal budget is divided into three categories: mandatory spending (primarily social security and medicare), discretionary spending, and interest on the debt. Two trends in discretionary spending, the component of the budget set each year at the discretion of Congress, offer a window on how militarism is squeezing out funding for programs that serve majority needs.

The first noteworthy trend is the growing Congressional support for defense (base military budget) over non-defense programs. In 2001, the majority of discretionary funds went to non-defense programs,  However, that soon changed, as we see in the chart below, thanks to the “war on terror.”  In the decade following September 11, 2001, military spending increased by 50 percent, while spending on every other government program increased by only 13.5 percent.

In the 2018 federal budget, 54 percent of discretionary funds are allocated to the military (narrowly defined), $700 billion to the military and $591 billion to non-military programs. The chart below shows President Trump’s discretionary budgetary request for fiscal year 2019. As we can see, the share of funds for the military would rise to 61 percent of the total.

According to the National Priorities Project, “President Trump’s proposals for future spending, if accepted by Congress, would ensure that, by 2023, the proportion of military spending [in the discretionary budget] would soar to 65 percent.”  Of course, militarism’s actual share is much greater, since the military is being defined quite narrowly.  For example, Veterans’ Benefits is included in the non-defense category.

The second revealing trend is the decline in non-defense discretionary spending relative to GDP.  Thus, not only is the military base budget growing more rapidly than the budget for nondefense programs, spending on discretionary non-defense programs is not even keeping up with the growth in the economy.  This trend translates into a declining public capacity to support research and development and infrastructure modernization, as well as meet growing needs for housing, education, health and safety, disaster response . . . the list is long.

The 2018 bipartisan budget deal increased discretionary spending for both defense and non-defense programs, but the deal did little to reverse this long run decline in non-defense discretionary spending relative to the size of the economy.  A Progressive Policy Institute blog post by Ben Ritz explains:

The Budget Control Act of 2011 (BCA) capped both categories of discretionary spending as part of a broader effort to reduce future deficits. When Congress failed to reach a bipartisan agreement on taxes and other categories of federal spending, the BCA automatically triggered an even deeper, across-the-board cut to discretionary spending known as sequestration. While the sequester has been lifted several times since it first took effect, discretionary spending consistently remained far below the original BCA caps.

That trend ended with the Bipartisan Budget Act of 2018 (BBA). This budget deal not only lifted discretionary spending above sequester levels – it also went above and beyond the original BCA caps for two years. Nevertheless, projected domestic discretionary spending for Fiscal Year 2019 is significantly below the historical average as a percentage of gross domestic product. Moreover, even if policymakers extended these policy changes beyond the two years covered by the BBA, we project that domestic discretionary spending could fall to just 3 percent of GDP within the next decade – the lowest level in modern history [see dashed black line in chart below].

The story is similar for defense spending. Thanks to the pressure put on by the sequester, defense discretionary spending fell to just under 3.1 percent of GDP in FY2017. Under the BBA, defense spending would increase to 3.4 percent of GDP in FY2019 before falling again [see dashed black line in following chart]. Unlike domestic discretionary spending, however, defense would remain above the all-time low it reached before the 2001 terrorist attacks throughout the next decade.

In sum, Congress appears determined to squeeze non-defense programs, increasingly privileging defense over non-defense spending in the discretionary budget and allowing non-defense spending as a share of GDP to fall to record lows.  The ratio of discretionary defense spending relative to GDP appears to be stabilizing, although at levels below its long-term average.  However, discretionary defense spending refers only to the base budget of the Department of Defense and as such is a seriously understated measure of the costs of US militarism.  Including the growing costs of Homeland Security, foreign military aid, intelligence services, the Veterans Administration, the interest on the debt generated by past spending on the military, and the overseas contingency operations fund, would result in a far different picture, one that would leave no doubt about the government’s bipartisan commitment to militarism.

The challenge ahead

Fighting militarism is not easy.  Powerful political and business forces have made great strides in converting the United States into a society that celebrates violence, guns, and the military. The chart below highlights one measure of this success.  Sadly, 39 percent of Americans polled support increasing our national defense while 46 percent think it is just about right. Only 13 percent think it is stronger than it needs to be.

Polls, of course, just reveal individual responses at a moment in time to questions that, in isolation, often provide respondents with no meaningful context or alternatives and thus reveal little about people’s true thoughts.  At the same time, results like this show just how important it is for us to work to create space for community conversations that are informed by accurate information on the extent and aims of US militarism and its enormous political, social, economic, and ecological costs for the great majority of working people.

Living On The Edge: Americans In A Time Of “Prosperity”

These are supposed to be the good times—with our current economic expansion poised to set a record as the longest in US history. Yet, according to the Federal Reserve’s Report on the Economic Well-Being of US Households in 2017, forty percent of American adults don’t have enough savings to cover a $400 emergency expense such as an unexpected medical bill, car problem or home repair.

The problem with our economy isn’t that it sometimes hits a rough patch.  It’s that people struggle even when it is setting records.

The expansion is running out of steam

Our current economic expansion has already gone 107 months.  Only one expansion has lasted longer: the expansion from March 1991 to March 2001 which lasted 120 months.

A CNBC Market Insider report by Patti Domm quotes Goldman Sachs economists as saying: “The likelihood that the expansion will break the prior record is consistent with our long-standing view that the combination of a deep recession and an initially slow recovery has set us up for an unusually long cycle.”

The Goldman Sachs model, according to Domm:

shows an increased 31 percent chance for a U.S. recession in the next nine quarters. That number is rising. But it’s a good news, bad news story, and the good news is there is now a two-thirds chance that the recovery will be the longest on record. . . . The Goldman economists also say the medium-term risk of a recession is rising, “mainly because the economy is at full employment and still growing above trend.”

The chart below highlights the growing recession risk based on a Goldman Sachs model that looks at “lagged GDP growth, the slope of the yield curve, equity price changes, house price changes, the output gap, the private debt/GDP ratio, and economic policy uncertainty.”

Sooner or later, the so-called good times are coming to an end.  Tragically, a large percent of Americans are still struggling at a time when our “economy is at full employment and still growing above trend.” That raises the question: what’s going to happen to them and millions of others when the economy actually turns down?

Living on the edge

The Federal Reserve’s report was based on interviews with a sample of over 12,000 people that was “designed to be representative of adults ages 18 and older living in the United States.”  One part of the survey dealt with unexpected expenses.  Here is what the report found:

Approximately four in 10 adults, if faced with an unexpected expense of $400, would either not be able to cover it or would cover it by selling something or borrowing money. The following figure shows that the share of Americans facing financial insecurity has been falling, but it is still alarming that the percentage remains so high this late in a record setting expansion.

Strikingly, the Federal Reserve survey also found, as shown in the table below, that “(e)ven without an unexpected expense, 22 percent of adults expected to forgo payment on some of their bills in the month of the survey. Most frequently, this involves not paying, or making a partial payment on, a credit card bill.”

And, as illustrated in the figure below, twenty-seven percent of adult Americans skipped necessary medical care in 2017 because they were unable to afford its cost.  The table that follows shows that “dental care was the most frequently skipped treatment, followed by visiting a doctor and taking prescription medicines.”

Clearly, we need more and better jobs and a stronger social safety net.  Achieving those will require movement building.  Needed first steps include helping those struggling see that their situation is not unique, a consequence of some individual failing, but rather is the result of the workings of a highly exploitative system that suffers from ever stronger stagnation tendencies.  And this requires creating opportunities for people to share experiences and develop their will and capacity to fight for change.  In this regard, there may be much to learn from the operation of the Councils of the Unemployed during the 1930s.

It also requires creating opportunities for struggle.  Toward that end we need to help activists build connections between ongoing labor and community struggles, such as the ones that education and health care workers are making as they fight for improved conditions of employment and progressive tax measures to fund a needed expansion of public services.  This is the time, before the next downturn, to lay the groundwork for a powerful movement for social transformation.

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This post was updated May 31, 2018.  The original post misstated the length of the current expansion.

Class, Race, and US Wealth Inequality

People tend to have a distorted picture of US capitalism’s operation, believing that the great majority of Americans are doing well, benefiting from the system’s long-term growth and profit generation.  Unfortunately, this is not true.  Median wealth has been declining, leaving growing numbers of working people increasingly vulnerable to the ups and downs of economic activity and poorly positioned to enjoy a secure retirement.  Moreover, this general trend masks a profound racial wealth divide, with people of color disproportionally suffering from a loss of wealth and insecurity.

A distorted picture of wealth inequality

In a 2011 article, based on 2005 national survey data, Michael I. Norton and Dan Ariely demonstrate how little Americans know about the extent of wealth inequality.  The figure below (labeled Fig. 2) shows the actual distribution of wealth in that year compared to what survey respondents thought it was, as well as their ideal wealth distribution.  As the authors explain:

respondents vastly underestimated the actual level of wealth inequality in the United States, believing that the wealthiest quintile held about 59% of the wealth when the actual number is closer to 84%. More interesting, respondents constructed ideal wealth distributions that were far more equitable than even their erroneously low estimates of the actual distribution, reporting a desire for the top quintile to own just 32% of the wealth. These desires for more equal distributions of wealth took the form of moving money from the top quintile to the bottom three quintiles, while leaving the second quintile unchanged, evincing a greater concern for the less fortunate than the more fortunate.

The next figure reveals that respondents tended to have remarkably similar perceptions of wealth distribution regardless of their income, political affiliation, or gender.  Moreover, all the groups embraced remarkably similar ideal distributions that were far more egalitarian than their estimated ones.

Capitalist wealth dynamics

Wealth inequality has only grown worse since 2005.  As I previously posted, in 2016, the top 10 percent of the population owned 77.1 percent of the nation’s wealth, while the bottom 10 percent owned -0.5 percent (they are net debtors).  Even these numbers understate the degree of wealth concentration: the top 1 percent actually 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.

Perhaps more importantly, median household wealth is not only quite small–not nearly enough to provide financial stability and security–but is actually growing smaller over time.  In fact, median household wealth in 2016 was 8 percent below what it had been in 1998.

 

The racial wealth divide

Of course, not all families receive equal treatment or are given similar opportunities for advancement.  While US capitalism works to transfer wealth upwards to the very rich, it has disproportionately exploited families of color.  This is made clear by the results of a 2017 study titled The Road to Zero Wealth by Dedrick Asante-Muhammad, Chuck Collins, Josh Hoxie, and Emanuel Nieves.

As we saw above, median household wealth has been on the decline since 2007, despite the growth in overall economic activity and corporate profits.  The figure below shows median wealth trends for White, Black, and Latino households.

As of 2013, median White household wealth was less than it had been in 1989. However, the wealth decline has been far worse for Black and Latino families.  More specifically, as the authors write:

Since 1983, the respective wealth of Black and Latino families has plunged from $6,800 and $4,000 in 1983 to $1,700 and $2,000 in 2013. These figures exclude durable goods like automobiles and electronics, as these items depreciate quickly in value and do not hold the same liquidity, stability or appreciation of other financial assets like a savings account, a treasury bond or a home.

Education is supposed to be the great equalizer, with higher levels of education translating into more income, and then wealth.  But as we see in the figure below, the combination of class policies on top of a history of discrimination and exclusion has left families of color at a significant disadvantage. For example, the median wealth of a family of color with a head of household with 4 year degree is far less than the median wealth of a White family with a head of household with only a high school diploma/GED.

The authors have created their own measure of “middle class wealth,” which they define:

using median White household wealth since it encompasses the full potential of the nation’s wealth-building policies, which have historically excluded households of color. More specifically, we use median White wealth in 1983 ($102,200 in 2013 dollars) as the basis for developing an index that would encompass “middle-class wealth” because it establishes a baseline prior to when increases in wealth were concentrated in a small number of households. Using this approach and applying Pew Research Center’s broad definition of the middle class, this study defines “middle class wealth” as ranging from $68,000 to $204,000.

As we can see in the figure above, only Black and Latino households with an advanced degree make it into that range. Moreover, trends suggest that, without major changes in policy, we can expect further declines in median wealth for households of color.  In fact,

By 2020, if current trends continue as they have been, Black and Latino households at the median are on track to see their wealth decline by 17% and 12% from where they respectively stood in 2013. By then, median White households would see their wealth rise by an additional three percent over today’s levels. In other words, at a time when it’s projected that children of color will make up most of the children in the country, median White households are on track to own 86 and 68 times more wealth, respectively, than Black and Latino households. . . .

Looking beyond 2043, the situation for households of color looks even worse. . . .If unattended, trends at the median suggest Black household wealth will hit zero by 2053. In that same period, median White household wealth is expected to climb to $137,000. The situation isn’t much brighter for Latino households, whose median wealth is expected to reach zero by 2073, just two decades after Black wealth is projected to hit zero. . . . Wealth is an intergenerational asset—its benefits passed down from one generation to the next— and the consequences of these losses will reverberate deeply in the lives of the children and grandchildren of today’s people of color.

Of course, knowledge of the fact that capitalism’s growth largely benefits capitalists, and that people of color pay some of the greatest costs to sustain its forward motion, does not automatically lead to class solidarity and popular opposition to existing accumulation dynamics.  Still, such knowledge does, at a minimum, help people understand that the forces pressing down on them are not the result of individual failure or lack of effort, but rather have systemic roots.  And that is an important step in the right direction.

Tax Cuts: Its All About Capitalism

Powerful corporations and the rich in the United States continue their winning ways.  By narrow margins, both the House of Representatives and Senate have agreed on a budget proposal that calls for an increase in the federal deficit of $1.5 trillion dollars in order to fund a major reform of the US tax system that will make the rich and powerful even more so.

Proposed tax changes

Republicans in each house of Congress still need to work out the specifics of their desired tax reform and then negotiate any differences before they can send the budget to President Trump for his signature.  But, there seems to be general consensus on the following business tax changes:

  • slash the top tax rate on pass-through business income from partnerships and limited liability companies or sole proprietorships from 39.6 percent to 25 percent; most law firms, hedge fund and real-estate companies are pass-through companies in which profits are counted and taxed as the owner’s personal income
  • reduce the corporate income tax from 35 percent down to 20 percent
  • repealing the corporate alternative minimum tax
  • replace the current global profit tax on business with a territorial tax, which means corporations will no longer be required to pay taxes on their foreign earnings.
  • institute a one-time lower tax rate on repatriated corporate profits currently held outside the country.

The Tax Policy Center estimates that these and other less significant changes would give corporate America a $2.6 trillion tax cut over the next decade.

There will also be changes to the personal tax code, although in dollar terms not nearly as large as the likely business tax changes highlighted above.  There seems to be agreement in both the House and Senate on ending the inheritance tax and alternative minimum income tax and reducing the number of individual income tax brackets from seven to three, with tax rates of 12 percent, 25 percent and 35 percent, although some members of congress would like to add a fourth higher bracket for very high-income earners.

The only serious disagreements involve whether to raise funds to offset the huge deficits that will be generated by the business tax cuts by ending federal deductions for state and local government taxes and restricting the yearly contributions taxpayers can make to their tax deferred 401(k) retirement accounts, both changes that would hit middle income earners hard.

The Tax Policy Center estimates that the likely personal income tax changes would be roughly revenue neutral, although as much as two-thirds of the likely personal income tax cuts would go to the top 1 percent of income earners.

No doubt as both houses of congress set to work, public attention will be directed away from both corporate tax cutting, which is the main aim of the tax reform and the primary driver of a growing federal debt, and the various tax give-aways to high income earners, and towards possibly heated congressional debates over the possible loss of personal tax deductions enjoyed by middle income earners.

Business, at least for now, no longer cares about the deficit

It is the business community that is driving this push to slash corporate taxes.  As an article in Bloomberg Businesweek explains:

It was only about five years ago that powerful people in finance loved talking about the horrendous consequences for the U.S. if it didn’t get its finances under control. They warned that the federal debt—and the interest payments—could eventually get high enough to drag down the economy, burden future generations, and even threaten national security. Chief executive officers of five of the biggest U.S. banks joined a campaign called Fix the Debt, signing on with hedge fund billionaires, asset managers, and private equity executives, as well as former lawmakers and others.

It was not long after Trump’s election that everything changed.  From then on, the business community, including most of the leading members of Fix the Debt, embraced tax cuts without concern for the deficit:

Case in point: Goldman Sachs Group Inc. CEO Lloyd Blankfein, a Fix the Debt supporter who in 2012 told CNBC he’d be for higher taxes if they helped mend the fiscal gap. After the election, Blankfein told colleagues in a companywide voicemail that Trump’s proposals, including tax reform, “will be good for growth and, therefore, will be good for our clients and for our firm.”

He wasn’t alone. It’s “about capitalism,” JPMorgan Chase & Co. CEO Jamie Dimon said in February, as he pushed Washington to lower corporate taxes. He suggested that if corporate rates fell, wages would come up. A few weeks earlier, Bank of America Corp. head Brian Moynihan said Trump should focus on cutting taxes. They were part of the antidebt campaign, too.

Dimon is right—it is about capitalism, which means that business leaders have one goal—maximize profits.  And if their desired tax cuts cause deficit problems down the road, well, these business leaders will effortlessly shift their message back to “fix the debt,” which translates into the need to slash critical social programs, all in the name of promoting a healthy capitalism.

Ideological cover

Of course, there is always an attempt to present policies designed to enrich the powerful as beneficial for all.  The argument has to be made and publicized, regardless of who really believes it.  And here it is: Kevin Hassett, the Chair of President Trump’s Council of Economic Advisers, has announced that the corporate tax cuts being discussed could be expected to increase a typical American household’s income by $3000 to $7000 a year.

The argument made by Hassett and the rest of the Council of Economic Advisers is that high corporate taxes force companies to invest overseas and reduce hiring in the United States.  In contrast, lower corporate taxes ill lead corporations to invest and complete for workers, all of whom would be more productive thanks to the investment, thereby driving up growth and worker earnings.

There is, in fact, little support for this notion that tax cuts lead to higher wages.  As the New York Times reports:

Other research has cast doubt on the theory that businesses would pass tax savings on to their workers in the form of higher wages. A 2012 Treasury Department study, which Treasury recently removed from its website, found that less than a fifth of the corporate tax falls on workers. A Congressional Research Service report last month concluded that the effects of corporate taxes fell largely on high-income Americans, not average workers.

So, how did the Hassett and the Council get its result?  Jared Bernstein, a Senior Fellow at the Center on Budget and Policy Priorities, examined the model used.  As he explains:

The interesting economics question is to why the model predicts such an unrealistic result for the US economy? Which of the assumptions most fail to comport with reality? To the extent that we want to train students to be useful practitioners as opposed to proficient, yet unrealistic, modelers, answering those questions would also provide some real educational value-added.

In this case, the model assumes that the US is a small, open economy such that capital inflows instantaneously fund more investment, such investment immediately boost productivity, and the benefits of faster productivity immediately accrue to paychecks. The simple model ignores the extent to which these inflows would raise the trade deficit as well as their impact on revenue losses and higher budget deficits.

The model assumes away imperfect competition, which is relevant today as a) monopolistic concentration is an increasing problem, and b) the one thing economists agree on in this space is that in these cases, the benefits of the corporate cut flows to profits and shareholders, not workers, other than maybe some “rent sharing” with high-end workers.

 

It may well be too late to stop this round of tax giveaways to business and the rich.  But it is not too late to use the moment to help working people develop a clearer picture of how capitalism works and a more critical understanding of the arguments used to defend its interests.  It wont be long before new economic tensions and difficulties present us with another opportunity to resist and hopefully, if we have used this time well, advance a meaningful movement for change.

Budget Wars: The Rich Want More

The rich and powerful keep pushing for more.  And the odds are increasingly good that they will get what they want through the federal budget process now underway. As the Center on Budget and Policy Priorities explains:

Congressional Republicans this fall are poised to launch step one of a likely two-step tax and budget agenda: enacting costly tax cuts now that are heavily skewed toward wealthy households and profitable corporations, then paying for them later through program cuts mostly affecting low- and middle-income families.

The potential gains for those at the top from this first step are enormous.  For example, the Republican plan currently calls for ending the estate tax, slashing the top tax rate on pass-through income from partnerships and limited liability companies from 39.6 percent to 25 percent, lowering the corporate income tax rate from 35 percent down to 20 percent, and repealing the corporate alternative minimum tax.  Republicans are also considering a tax holiday on repatriated multinational corporate profits.

The Tax Policy Center estimates that the Senate tax plan would lower personal income taxes by an average of $722,510 for the top 0.1 percent of income earners compared with just $60 for those in the lowest quintile; as much as two-thirds of personal income tax cuts would go to the top 1 percent.  Corporate America, for its part, would be reward with a $2.6 trillion cut in business taxes over the next decade.

Naturally, President Trump and his family are well positioned to gain from these changes.  Democracy Now reports that the Center for American Progress Action Fund estimates that “President Trump’s family and Trump’s Cabinet members would, combined, reap a $3.5 billion windfall from the proposed repeal of the estate tax alone.” And capping the pass-through income tax rate “would give Trump’s son-in-law, his senior adviser, Jared Kushner, an annual tax cut of up to $17 million.” The Center for American Progress estimates that Trump, based on his 2016 financial disclosures, would enjoy a $23 million tax cut.

As for the second step in two-step agenda, it would work as follows: the Senate’s budget resolution provides a very general outline of federal spending and revenues over the next decade.  It calls for an allowed increase in the budget deficit of $1.5 trillion as well as the achievement of a balanced budget within a decade.  House leaders are hopeful that the House will approve the Senate budget resolution with few if any changes, thereby speeding the path for the House and Senate to quickly agree on the specific tax changes that will drive the budget deficit and then deliver the completed budget to President Trump for his signature before the end of the year.

However, all independent analysts agree that the Republican tax plan will push the deficit far beyond its stated limit of $1.5 trillion.  The table below, based on estimates by the Tax Policy Center, is representative.

It shows that business tax cuts are likely to lead to $2.6 trillion in lost revenue, producing an overall estimate of a $2.4 trillion deficit increase.  What we can expect then, is the return of the “deficit hawks.”  If Republicans succeed in passing their desired tax cuts, and they produce the expected ever growing budget deficits, we can count on these legislators to step forward to sound the alarm and call for massive cuts in social spending, targeting key social programs, especially Medicare and Medicaid, thereby completing the second step.

Not surprisingly, the Republican leadership denies the danger of growing deficits.  It presents its tax plan as a pro-growth plan, one that will generate so much growth that the increased revenue will more than compensate for the tax cuts.  It’s the same old, same old: once we get government off our backs and unleash our private sector, investment will soar, job creation will speed ahead, and incomes will rise for everyone.  The history of the failure of past efforts along these lines is never mentioned.

Of course, it is possible that political differences between the House and Senate will throw a monkey wrench in the budget process, forcing Republicans to accept something much more modest.  But there are powerful political forces pushing for these tax changes and, at least at present, it appears likely that they will be approved.

One of the most important takeaways from what is happening is that those with wealth and power remain committed to get all they can regardless of the social consequences for the great majority.  In other words, they won’t stop on their own.  If we want meaningful improvements in working and living conditions we will have to do more to help build a popular movement, with strong organizational roots, capable of articulating and fighting for its own vision of the future.