I recently came across some graphs by former Clinton Labor Secretary Robert Reich designed to elicit a emotional response to the increasing income inequality in America. Reich split up economic distribution from 1947 to 1979, years dominated by Democrats, and 1980 to present. The years, according to his graphs, should have been split up from 1947 to 1971 and 1971 to present if the income inequality gap is the criteria that is to be focused upon.
Reich points out that pay rose with productivity from 1947 to 1979. The actual split appears to be around 1971, the year Nixon took the United States off the gold standard, not 1979.
First cause of the divergence between productivity and income would appear to be the size of the labor force.
Sure enough a little digging reveals that “From 1930 to 1950, the foreign-born population of the United States declined from 14.2 million to 10.3 million, or from 11.6 percent to 6.9 percent of the total population. These declines reflected the extremely low level of immigration during the 1930s and 1940s. The foreign-born population then dropped slowly to 9.6 million in 1970, when it represented a record low 4.7 percent of the total population. Immigration had risen during the 1950s and 1960s, but was still low by historical standards, and mortality was high during this period among the foreign-born population because of its old age structure (reflecting four decades of low immigration).”
“Since 1970, the foreign-born population of the United States has increased rapidly due to large-scale immigration, primarily from Latin America and Asia. The foreign-born population rose from 9.6 million in 1970 to 14.1 million in 1980 and to 19.8 million in 1990. The estimated foreign-born population in 1997 was 25.8 million. As a percentage of the total population, the foreign-born population increased from 4.7 percent in 1970 to 6.2 percent in 1980, to 7.9 percent in 1990, and to an estimated 9.7 percent in 1997.” US Census Bureau.
In other words the foreign-born population reached a record low in 1970 of only 4.7% of the total population and increased up to 9.7% in 1997, when Reich was Labor Secretary, and 12.4% today. You would think a United States Labor Secretary could understand the relationship between supply and demand for blue collar labor, but he blames it on the evil rich capitalist and Republicans.
One of the big fallacies that economists like to feed the public is immigration is good for the economy because increasing the population results in economic growth. This is the equivalent of saying John Wilkes Booth is a great actor, leaving out the fact that he assassinated Abraham Lincoln. Yes Wilkes was a great actor but he was also a cold blooded killer. A slight omission of the facts.
Estimates of the cost of services provided illegal’s range from $11 billion to $22 billion, plus $1.9 billion for food stamps, plus $1.6 billion for jail time (21% of US prisoners are illegal aliens), plus $10 billion from the federal government, plus $2.5 billion for Medicaid, according to the Center for Immigration Studies and the Personal Liberty Digest. There is nothing free about immigration.
Recently “There were 11.2 million unauthorized immigrants living in the United States in March 2010, virtually unchanged from a year earlier, according to new estimates from the Pew Hispanic Center. The number of unauthorized immigrants in the workforce, 8 million, also did not differ from 2009. Both the population and workforce estimates are below their 2007 peaks, apparently driven by a decline in the number of Mexicans, the largest group of unauthorized immigrants. The report also includes estimates of state populations of unauthorized immigrants and of annual births to unauthorized immigrants.”
“In the year following the end of the Great Recession in June 2009, foreign-born workers gained 656,000 jobs while native-born workers lost 1.2 million. As a result, the unemployment rate fell for immigrants while it rose for the native born. The reasons that only foreign-born workers have gained jobs in the recovery are not entirely clear. It could be greater flexibility among immigrants, normal business cycle ups and downs, typically more severe for immigrants, or a return of immigrant workers following a recent hiatus. But employment for immigrants remains below its level in 2008 and their wages fell sharply in 2009-10.” Pew Hispanic Center.
So we have increased immigration since 1970 from a low of 4.7% foreign born persons to 12.4%, but former Labor Secretary Reich blames capitalism, rich people, and Republicans for the lower wages and unemployment in the bottom 20 percentile of the population. Really?
I giggle and have to ask myself is Reich really this stupid or does he just believe the public is this stupid? Inquiring minds want to know.
For the record labor is a impute, just like steel, glass, wheat, corn, apples, or any number of producer imputes. If the supply increased and the demand decreases wages will fall. If the supply increases and demand remains stagnant then wages will fall. If wages are not allowed to fall, such as during the Great Depression due to wage restriction imposed by FDR, unemployment will increase. Simple supply and demand analysis.
What else happened between 1948 and today?
Total government consumption of the GDP was increased from a average of 26% from 1948 to 1971 up to 31.4% from 1971 to today. Currently the White House numbers show 35% of the GDP is consumed by government at the federal, state, and local level. This is certainly understated due to accounting procedures for the calculation of the GDP. Some organizations, including the Wall Street Journal, put federal, state and local consumption of the GDP at 42.6% to 45.4%. Whatever the exact number one thing is certain, Uncle Sam is getting a larger share of today’s workers income.
Reich ignores this and also ignores who gets the money. In 2008 Social Security recipients received 21%, defense 21%, interest on the national debt 8%, other mandatory programs 10%, Medicaid and Medicare 23%, and other discretionary expenditures 17%. Vote buying and special interest groups.
Where is Main Street in this picture?
According to the White House the percent of taxes collected, regardless of the top tax rate, generally falls between 18%, and in boom times 20%, of the GDP. The post WWII record is 20.6% in 2000 and the low 14.4% in 2010. Generally the percentage of tax collections rise and fall due to strong or weak “aggregate demand.”
So why blame the rich and advocate for higher income taxes when the rich do not pay income taxes, as Warren Buffett correctly points out. Income taxes are for the little people. They always have been and always will be. In the 1950s when the top tax rate was 90% the rich simply reinvested into their companies or received other compensation packages that were not taxable. Company cars, business trips, medical plans, dental plans, company lodging, and other benefits. 20% of the GDP is the upper limit for tax collections, in a good economy.
But what about going off the gold standard in 1971?
Prior to 1971 the United States was on the “Bretton Woods system” where foreign central banks could redeem dollars for physical gold. This inhibited the Federal Reserve from printing too many dollars creating inflation.
The inflation rate, as measured by the Consumer Price Index (CPI-1982-84 dollars), from 1947 to 1971 averaged 3.5%. From 1971 to present the CPI inflation averaged 11.7%.
Gold prices increased an annual average increase of 0.7% from 1947 to 1971. From 1971 to present gold prices have increased 111.7% annually, despite the best efforts of the world’s central banks to suppress the price of gold.
Does Reich take into account this loss of purchasing power due to inflation?
Of course not. Reich would never blame the government, or the Federal Reserve, for anything bad that happens. It’s a con game by Reich and most politicians. The Democrats straw man is the rich and Republicans. The Republicans straw man is the Democrats and “big government.” It’s all designed to make the people ignorant and angry, and it works quite well.
But where does the “lost” purchasing power go?
Silly question. I bet everyone reading this knew in a New York minute where the “lost” money goes. The first, and most obvious beneficiary, is the Federal Reserve. When the Fed creates money out of thin air, and inflation, it buys bonds from Wall Street and the federal government. Wall Street and the federal government get the new money and get to purchase goods and services at the old price level. From these institutions the next in line are the politically connected contractors and powerful Fortune 500 corporations. It’s like a food chain and Main Street is at the anus part of the food chain. We get the crap, inflation, in the form of higher prices and the politicians, Wall Street, and Federal Reserve get to wine and dine in luxury.
Who created this unjust system?
Government. Something that neither party will ever admit.
Who gets hurt by a rigged inflationary system combined with unlimited low wage workers immigrating into America?
The poor and middle class. Most poor and middle class workers are struggling to make ends meet and generally lack the economic knowledge and skills to protect themselves from inflation like the upper highly educated government class and rich do. Inflation hurts the least educated and most venerable members of society. Inflation is a huge transfer payment from the middle and low class private sector workers to upper middle class government workers and the rich.
By allowing illegal immigration, the elites have created a permanent second class citizen that can be exploited in the labor force and be used to drive down blue collar wages.
Where is the indignation from Reich and the Democrats?
There is none because Hispanics vote, often times illegally, overwhelmingly Democrat. In 2008 67% voted for Obama. Despite the popular belief that only Republicans are rich the fact is 7 out of the top 10 richestmembers of congress are Democrats. Cheap, exploitable labor appeals to both Democrat elites and Republican elites.
A third area that Reich ignores is transfer payments. According to John P. Hussman “22 cents of every dollar of U.S. personal consumption is now financed with transfer payments.”
Simply put government transfer payments are now substituting for wage income to the greatest extent ever observed in history. In 1970 the percent of wages received in relation to the GDP peaked at about 53.5%, and transfer payments accounted for approximately 7.5% of the GDP. Today wages make up 44% of the GDP, and transfer payments almost 16% of the GDP. The government is literally stealing money from people’s right pocket, taking their cut, and giving it back to their preferred recipients in the left pocket.
Needless to say this disincentive to work and incentive to becoming a member of a politically connected group produces nothing but injustice to the workers who rightfully earned their paycheck. Nothing is gained from this transfer of wealth and much lost for the workers without political connections. Politicians and the rich elites gain and the blue collar working-class lose.
I am sure there are many other factors involved in the shrinking middle class but the main message is government creates inequalities in society while professing to be for a “fair playing field” for all.
The result of government intervention in the marketplace is almost always a concentration of wealth into the hands of a few and the creation of a large protected highly educated upper middle class of government workers. Both groups work in unison to extract wealth from the less educated middle and poorer classes of private sector workers.
There are two Americas, to quote John Edwards, the rich and upper middle classes of government workers, and the exploited middle and poorer classes of mostly private sector workers. Since 1971 this trend has accelerated alarmingly.
America, and Europe, got caught up in the illusion that government could provide for the masses. Government sold America on this promise. What people forgot is some very simple rules of economics, if you are not in the private sector producing something other people want then you have a negative drag on the economy. A parasite. Much like parasites invading a health host, sooner or later if there is no intervention the healthy host will get sick and die. We need to realize the problem is government and force government to go bankrupt and reorganize. Its not the politicians, its the system. Only when the federal system is reorganized will we become economically healthy as a nation.