The Middle Class Forum

This web site is titled The Middle Class Forum, yet for almost a week data has been presented related more to low income families. This begs the question of why we, the middle class, should concern ourselves about trends affecting the lowest incomes. We have seen the shares of income held by both middle and low income families trending downwards since the seventies; that by itself suggests that we are in this together. That share of income must be going somewhere else; this provides a common antagonist for both middle and low income families.

Free markets likely existed since prehistoric times; they need no nation state to operate or survive. The same cannot be said about business corporations. “Capital” is a financial tool that can be used in a variety of ways: stimulate production, mitigate economic disturbances, or be redistributed into the hands of a few. “Capitalism” has come to represent mainly the last option, with the business corporation and shareholder model being the main conduit for this redistribution. In truth, neither business corporations nor laissez faire capitalism have the remotest chance of succeeding without centralized nation states providing a whole lot of support and protection for commerce, capital markets and contracts. Adam Smith knew this. Alexander Hamilton knew this. But Puppet Libertarians and the Powell Cabal have become the loudest voice in our economic system, and though they may have similar ideals as Hamilton, they have not one-tenth the integrity.

That “voice” seldom chastises the wealthy. A finger might be pointed at some excesses or gross malfeasance such as Enron, but otherwise the “voice” is not going to betray its master. Nor is the “voice” going to speak out against the middle class, rousing our ire. We may be in decline but united in cause we could be a most formidable group. That leaves only the low income group for the “voice” to use as a foil. Charges of socialist government providing welfare and entitlements to the poor are made, charges that could just as well be made against corporate investors and the rich.  The latter charges are never made because concentrating welfare to the highest incomes is the actual intent of the “voice.”

Politicians listen to the “voice” and legislate. Corporate media listens and amplifies the “voice” to the public. For more than thirty years the result has been a decreasing share of income going to the lowest income families, even as benefits received from government decrease as well. The graph from the previous entry reveals that in 1974 the lowest fifth received only 5.5% of total personal income in this country, yet this was a greater share than the 4.1% the lowest fifth received from both income and welfare benefits from government combined. Meanwhile the share of middle class income has declined as well. Make no mistake, our laissez faire economic system has similar impacts on the middle and low income families, though the “voice” understands the wisdom of not dragging the middle class into their socialist rants.

It’s time now for the middle class “voice” to direct the attention of wealth distribution back towards business corporations and the wealthy, which The Middle Class Forum shall be obliged to do in the next few entries.

Previously on The Middle Class Forum the trend for the % of total personal income earned by the poorest families was displayed.  Their share of income, low to begin with, has been steadily decreasing since the seventies.  Puppet Libertarians and the Powell Cabal maintain that relative amounts do not matter as long as everyone’s income is increasing, and that increasing government benefits compensate for decreasing proportions of income.  Data was provided demonstrating that relative amounts do matter.  If your income is not going up as fast as others, neither is it likely to be keeping up with the inflation of costs.  The graph below addresses the other point, whether increasing government compensation is making up for decreasing proportions of income to the poorest families.  Some further commentary will be provided in the next entry.

Right Click on Graph for Better Image

The trend reported in the last entry was the decline of welfare benefits relative to all social benefits provided by government at all levels. But the majority of benefits that government provides corresponds to old age and health care that is received by all income levels. Puppet Libertarians and the Powell Cabal want to convince us that all government benefits are going up in this “socialist” climate; it’s just that health care benefits are going up faster than welfare benefits.

An earlier entry for The Middle Class Forum revealed that private group insurance is inflating much faster than social insurance. Still, government health benefits are rising fast–at the state level. As private group insurance proves to be an abysmal failure, due to natural market inefficiencies involved with a joint commodity–and as federal government proves reluctant to remedy the problem–state governments have had to step in. The state social benefits received by all income levels, predominantly medical care, increased from 11.5 billion dollars in 1974 to 336.6 billion in 2007. Over that same time period assistance that could be considered welfare benefits for lower incomes at the state level went from 14 billion dollars to 82.1 billion. Inflation of low income benefits by a factor of six over the last 33 years is not much compared to other economic trends featured on The Middle Class Forum. Is it enough to compensate for the declining income shares of the poorest families? The answer to that question is coming up next.

The benefits government provides exclusively to those who need economic assistance has decreased as a proportion of the total benefits that government provides. In 1974 10.8% of social benefits went to programs for low income needs. In 2007 this had decreased to 4.9%. More commentary about this to follow in the next entry.

Right Click on Graph for Better Image

The previous log entry provided data that undermines the claim from Puppet Libertarians and the Powell Cabal that a “rising tide lifts all boats” in our economic system.  At least for those families with the lowest incomes, the amount of “lifting” they are getting from inflationary increases in their incomes is still being drowned by the even greater inflationary increases of things like housing and health care costs.  But wait!  Those Puppet Libertarians from the Powell Cabal, equipped with some impressive academic credentials, have a comeback answer for this.  Welfare!  This series on wealth distribution will start to present data on welfare, broadly defined.  That means we will look at both welfare to the poor and to the rich.  A section from “Essay 6 - Corporate Hypocrisy” in Systems out of Balance provides a little foreshadowing to what this data will reveal.

The Hypocrisy of Welfare

The means by which we supply “too many dollars” to the wealthy adds an intriguing dimension to this hypocrisy. We receive wages for producing goods or services. We receive welfare for producing nothing. However you might feel about people getting something for nothing, welfare to the poor does not disrupt markets much, if at all. Some of the biggest welfare states, such as Denmark, score high in the Index of Economic Freedom developed by the Heritage Foundation and have a high per capita GDP. The impact on markets from providing welfare to the poor would be to actually dampen inflation. Giving welfare to the poor does not make them rich, but lessens the ability of the wealthy of having “too many dollars chasing too few goods.” Since providing welfare to the poor is fiscal policy (pertaining to budgets rather than interest rates) you will not hear monetarists like Milton Friedman recommend this as an approach to curb the inflation they dread, but the point remains that no concrete evidence has ever shown that welfare to the poor inflates or destabilizes markets.

Welfare to the rich, on the other hand, contributes to the inflationary problems caused by redistributing and concentrating “too many dollars” in the hands of the wealthy. We provide welfare for large corporations and wealthy individuals in a few ways, like hyping the compensation of CEOs to be a thousand times that of the bottom level workers in the same industry, such as with WalMart. Executives have not earned such compensation through merit only, but have benefited from the hype and levels of managerial hierarchies integral to the corporations they manage. Even if white collar to blue collar ratios became reasonable by J. P. Morgan’s standards, merit-based wages do not cover the majority of income for many wealthy people and corporate shareholders.

Much of capital investment amounts to welfare, by our operational definition of receiving money for producing nothing. While the middle class benefits somewhat from investment capital, mainly in the form of retirement accounts, the amount of capital that flows to the middle class does not compare with the capital redistributed and concentrated for the wealthy and large corporations. Retirement welfare for the middle class has no more impact on market prices and wages than traditional welfare for the poor, since retired people from the middle class would otherwise have income below the poverty level.

Capital gains from corporations provide substantial welfare for the wealthy. Sure, some gets invested in the infrastructure of production, and some may even trickle down to the merited labor of production, but in an economic climate where greed is good much of the capital ends up as mansions that serve as vacation homes and airplanes used only for the personal needs of executives. Corporate capital also provides welfare through stock options. For example, the compensation for William Steere, Chairman of Pfizer was a cool $40 million without unexercised stock options.[1] This is probably more than one thousand times the wages of the janitors in the company, but a trivial amount compared to the compensation such executives get with their stock options included. In Steere’s case that amounted to over $130 million. That’s a lot of patented Lipitor, baby! Not even this type of welfare, however, compares with what has been the most unmerited source of entitlements for the wealthy: inheritance.

The desire of the wealthy to perpetuate large inheritances seems strange. My middle class parents did not leave us much money. With assistance from public schools they did something better; they raised us to be able to attain our own goals. In turn Cindy and I will not be leaving our children much money when we pass away, but we have devoted ourselves to providing an education and an independent spirit for the most precious people in our lives. We have confidence they will be able to attain their own goals without us giving them large amounts of welfare.

Many people who by their own merits acquire great wealth appear determined to prevent their progeny from doing the same. One reason wealthy parents may not wish to restrict what their children inherit would be a lack of confidence in their children’s ability to succeed on their own. You have to feel sorry for this “silver spoon” progeny. Though our commercial world portrays these rich young adults as people to be envied, they must sense the lack of faith their parents have in them. Another reason for the wealthy depriving their children the opportunity to succeed on their own would be if they considered their own means of acquiring wealth as having been unpleasant. If a self-made man equated success with being ruthless and hypocritical, he understandably might want to spare his children this process by enabling them to inherit their wealth instead. The inheritance is still welfare that provides a disincentive for labor, whether done through loving concern or not.

Puppet libertarians protest that people should have the “liberty” to give the money they earn to whoever they please.  They have a good point, for the money that people earn.  On the other hand, large returns on investments or on formerly inherited money do not satisfy the definition of “earned.”  A strong case can be made that neither does compensation that exceeds twenty-five times what the least compensated worker in the same industry receives.  This is just welfare derived from welfare, or greedy indulgence.  Coming from the same folks that protest the loudest that we should not be dishing out welfare, this whiffs of hypocrisy.

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[1] Refer to the charts of executive compensation provided by Family USA at www.actupny.org/reports/drugcosts.html.

Essay 6 on Corporate Hypocrisy has just been uploaded to the web site.  Some people who have been reviewing my essays claim this one to be their favorite in the economic part.  If you read just one of my economic essays, this may be the one to choose.

To recap this wealth distribution series to date, we first witnessed that the proportion of income distributed to the middle 20% of families has decreased steadily since 1974, revealing an economic system out of balance. We then witnessed that this income has not been lost to the poor, the decrease in their proportion of income has been even more dramatic in relative terms. The clever Puppet Libertarians from the Powell Cabal have an answer for this, as long as everyone’s income increases it does not matter that the income for the rich increases at a greater rate. A rising tide lifts all boats! Most recently we have seen data on The Middle Class Forum that gives a mixed message as to whether this claim might be true or not. The cost of living, with a few caveats, seems to track closely with the upper limit income of the lowest income families. However, this is based on dollar conversion factors which are based in turn on the Consumer Price Index, and the little snag in the “rising boat” argument has to do with what this Index is really measuring. Let us take a look.

Right Click on Graph for Better Image

Unfortunately, this data only goes back to 1984. Just as it would be nice if mean income for families was not discontinued, it would also serve the public well if the U. S. Census Bureau could track consumer expenditure costs back farther. But we should add a further stipulation that we surely do not want them using dollar conversion factors to make estimates for this purpose.

The CPI inflation line is really the inflation of the 2005 constant dollar conversion factors, but using terms like that results in more glazed eyes and, as we have established, the two are tightly correlated. The other lines correspond to all consumer costs that amount to at least 10% of our total consumer costs, as provided in the Statistical Abstracts. The one exception is health care costs, which is less than 10% of total costs still at this point, but I could not resist. These are all, by their size, significant consumer costs. Only food inflation tracks at about the same rate of the CPI. I suppose if the only thing we did in life was eat we could consider the CPI a remarkably good Index.

The Puppet Libertarians and the Powell Cabal might accuse me of cherry-picking here. There are some items in the consumer expenditure costs tables that actually have inflated less than the CPI. Tobacco, alcohol and life insurance appear to be pretty good deals, inflating at a slow pace. While we might all appreciate the irony in these three costs tracking well together, none of these items amount to even 1% of total consumer costs. And I might as well come clean and admit to you that apparel costs, not presented here, also inflated significantly less. We no doubt have a lot of children in Southeast Asia to thank for that, but the proportion of this cost is still less than 10% of our total budget.

The CPI has inflated about 1.8 times since 1984. Total housing costs, which amount to about a third of our overall budget, has inflated about 2.3 times. The shelter portion of housing (includes renting) alone takes up about one sixth of our budget and has inflated by a factor of 2.5. Travel costs have inflated by 1.9, but I would bet all our country’s off line refineries that’s even higher now. Pension costs have inflated by 3.0 and health care costs by 2.5, revealing that the insurances for living are not as good a deal as the insurance for death. If we really want a bargain in life the best thing to do is die quickly. Finally, overall consumer expenditure costs have inflated by 2.1 since 1984.

The CPI must be doing a good job for some vested interests. If you would like to see the poverty level underestimated as much as possible, then the CPI is right for you. However, I can’t help but feel the CPI is at best worthless, and even harmful, to the middle class and lower income families. Not being an economic scholar, void of the type of academic pedigree that legitimizes the Puppet Libertarians from the Powell Cabal, I suppose I’m just missing something here in this “rising tides” argument. But you don’t get an impressive academic pedigree by being a one trick pony. These folks have additional talking points to explain away increasing wealth disparity. We are not done with this series yet.

Thank you to the people who have commented so far.  There have not been many posted because of a requirement I have that is not commonly met.  This is now stated in the Comments Policy under Forum Features.  I require that you include a given name, town and state, since The Middle Class Forum is intended to be more of a community forum than a special interest group portal.  For people who would like to enter their comments again, meeting this requirement, please feel free to do so.  I apologize for the inconvenience.

I don’t get to see many comments, because my automatic spam checker just gobbles them up before I see them.  The amount of spam is incredible.  The ratio of spam to legitimate comments is almost as bad as the ratio of CEO salaries to blue-collar workers.  If any legitimate poster is a victim of my spam checker making a mistake I apologize once again.

Now to get back to the series on wealth distribution.  I’ve posted a few graphs in the past few days showing long term trends of greater wealth disparity.  Today was originally intended to place this in context by showing what has been happening with the inflation of consumer prices, but the comment policy needed to take precedence.  Tomorrow I will post a graph that compares the conversion factors for 2005 dollars with the inflation of various categories of goods, such as housing, health care, and pensions.  Since the conversion factors are based on the Consumer Price Index, also used for such things as indexing poverty and Social Security, we will get an idea of how relevant the CPI really is.

The graph I will share with you today raises a few questions, and otherwise seems to diverge from the message of this series about increasing wealth disparity.  Things will become more clear when the graph for the next log entry is presented, but for now I will present and discuss only the parallel trends of inflation for both consumer prices and the lowest income of families.

Right Click on Graph for Better Image

Consumer prices are being represented by the conversion factor for 2005 dollars.  This conversion factor is used to estimate real/constant dollars from previous years, given the impact of inflation.  The conversion factor is derived from the Consumer Price Index with a few fudge factors thrown in.  There are a few years in the Statistical Abstracts where data is not directly available for the upper limit of lowest income family.  I could have used indirect measurements provided by Statistical Abstracts, using conversion factors for constant dollars, but you will understand why I don’t believe in this after the next log entry.

Inflation of consumer prices and lowest income tracks together nicely up until 1993.  At that point lowest income families seem to do better, their “boats have been lifted” as Puppet Libertarians and the Powell Cabal would claim.  Then in 2000 those “boats” appear to start sinking and they capsized in 2005.  But this data is misleading in three ways.

First, the Clinton administration could very well have been labeled “merger mania.”  Financial and oil industries consolidated during this time.  Corporate media consolidated tremendously during this time, with more dire consequences politically then economically.  This was also the time of the dot com bubble.  Thus, whatever credit we might give the Clinton administration for “rising boats,” the foundation was being laid for what was to occur in the new millennium.

Second, the abrupt “capsizing of the boat” in 2005 is likely due to two factors.  The economy has been tanking for everyone, so the lowest income families need not feel alone.  Also, a new method of determining distribution of income from population surveys was employed by the U. S. Census Bureau in 2004.  If this new method is indeed better, the lowest income families probably have been tracking below the inflation of consumer prices for quite some time.  But I would not have complete faith in this new method because …

Third, the Consumer Price Index upon which the conversion factors are based is peculiar, at least from a middle class perspective.  Indeed, the more complex the economic indicator the more peculiar they often seem to be.  This is what the next entry will deal with.

OK. These graphs are still terrible looking even after you right click.  I’ll need to come up with something better, but right now I’m too focused on this series for wealth distribution.  We have seen that the proportion of total income received by families in the middle has declined by about 3% since 1974, soon after the Puppet Libertarians and the Powell Cabal started setting up shop.  Where has that extra proportion gone to?  We hear a lot from Puppet Libertarians and the Powell Cabal about how we are heading towards becoming a welfare state.  Perhaps the poor are getting more in our laissez faire market economy (not to be confused with a free market economy, though confusion is precisely what the Powell Cabal wants).

Right Click on Graph for Better Image

The steady downward trend for the poor appears worse for the lowest 5th of families than for the middle 5th.  You could protest that the unremitting decline, representing a system out of balance with no fluctuations, is only 2% and that I’m being clever with the scale used on the Y axis.  But 2% is a much bigger chunk out of the starting point of 5.5% than 3% is to 17.5%.  In other words, in relative terms the decline of the proportion of income to the poor has been more dramatic.  I’m middle class myself, but I’ve got to give props where they are due.  The poor has suffered more from laissez faire economics than even the middle class.

Ah, but business corporations have not spent billions since the seventies on a nice academic pedigree for nothin’.  The Puppet Libertarians and the Powell Cabal earn their keep by coming up with explanations for trends such as these.  For example, they have claimed that it matters not that income goes up mightily for the rich as long as it goes up a little for everyone.  Yes, sir, “a rising tide lifts all boats.”  Let us check into into this claim next time.

In a meritocracy, where people receive income strictly according to their merits, and there was no greed to redistribute income that was not earned, the median and mean incomes for families would be the same.  Concentrating unearned income with the wealthy shifts the mean/average income upwards above the median of what the family in the middle earns.  Unfortunately, the Statistical Abstracts stopped tracking mean family income in recent times.  The NIPA table records mean wages, but this is not transferable because more families now have multiple wage earners.  The government really should continue tracking both mean and median, but where there is a will there is a way.

The proportion of income received by the middle fifth reveals the same thing as comparing median and mean incomes.  In a meritocracy, where mean equals median, the middle 20% of families should receive 20% of the income.  The upper quintiles would receive more than 20%, the lower quintiles less.  Yesterday I featured a graph that showed the proportion of income going to the middle fifth of families, the middle of the middle class.  The proportion of income this middle fifth receives has decreased from 17.5% in 1974 to 14.6% in 2005.  We received less than 20% even back in the seventies, before the Puppet Libertarians and the Powell Cabal had much impact, but perhaps that is a normal cost of capitalism.

However, since the seventies this distribution has trended steadily worse over the long term.  Once again, this reveals an economic system out of balance, incapable of making adjustments through cyclical fluctuations.  It is not hard to understand why.  Laissez faire markets designed to maximize capital with shareholders and investors who have not provided productive labor will trend this way.  But that is jumping the gun a little bit and warrants further proof.  This series on wealth distribution will continue to provide some of that proof.