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Thursday, May 1, 2008

Elk Lake, morning September

What Government Can Do

What Government Can Do

In the U.S.A., with a workforce of more than 150 million workers,
1 out of 3, or 50 million workers, can’t find work that pays above the poverty level. (24.5% work for poverty wages, 5.1% are unemployed, 3.7% are underemployed or have dropped out of the workforce. Combined, 33% of America’s workers are working in poverty or not working. See State of Working America, 2006/2007, pages 126, 232,,

The wealthiest one percent own almost 700 times more wealth than the average wealth of the bottom 50% of households. To clarify, the average net worth per household is $25,000 for the lower half of the 114 million households, and for the top one percent the average net worth is $16,675,000. This is a ratio of 1 to 667. (See U.S. Federal Reserve report Survey of Consumer Finances, Currents and Undercurrents, Arthur Kennickell, 2006, page 11.)

The question must be asked, what can be done to raise and equalize the share the lower income households' receive? Raising wages in a global capitalist system does not work. Not across the board.
What can government do to create conditions of rising wages? It can promote the conditions where jobs are abundant, workers are in demand, and pay is high. Commonly this is call "full employment." Economist L. Randall Wray in his book Understanding Modern Money makes a Keynsian argument to create government employment as a system of "employer of last resort." There are other economists arguing for these proposals. Forty years ago an average house cost twice the median family income; today houses cost 4 times the median household income. How can we raise incomes and wages for all? Government can:

Taxes --- Implement progressive taxes on the rich, and lower taxes on working people. The top marginal income tax in 1980 was 70% on incomes over $400,000, or today’s $1,006,760. For 40 years, 1943 to 1983 the top marginal income tax rate averaged 80% and the economy did not die. On the contrary, some claim that was capitalism's golden age. Today’s top rate is 35%. The institute Citizens for Tax Justice, in a 2004 report on overall taxes, claims that the lower 20% of workers, receiving $10,400 pre-tax income pays an overall tax rate of 19.7%. The upper one percent whose income averages $978,000 a year pay an overall tax of 32.8%. This is hardly progressive. The middle quintile pay an overall tax rate of 27%. (See tax rate)

Job Creation --- Create government jobs promoting infrastructure repair, school building improvements, clean energy, municipal services, and child support programs. See the web site and the Apollo Project web site.

Unions -- - Support workers’ rights to form unions.

Interest Rates --- The Federal Reserve should maintain low interests rates and fight inflation by targeted price control measures.

Trade Treaties --- Create policies that do not ship jobs to Mexico and China. Articles by Jeff Faux at the EPI.ofg web page are good on this issue.

. Work Supports --- Promote policies for sick leave, family leave, unemploymentinsurance, health care, childcare, food stamps, housing vouchers, raising the minimum wage and the Earned Income Tax Credit, and asset increasing measures such as Individual Development Accounts. The Center for Economic Policy published a report Bridging the Gaps, 2007.

Education --- Extend educational grants to students at all levels beyond high school. Make education free or affordable.

Reduce Work Hours --- Create mandated vacations with pay as they do in Europe. Reducing work hours puts more people to work. In Europe governments have imposed a statutory minimum vacation. Germany, for example, mandates 4.0 weeks, while actual holiday and vacation time is 7.8 weeks. Their average work week is 6 hours less, and their per capita GDP is $25,823, not bad when you consider that their distribution is far more equal than the the U.S.'s $39,728 in 2004. Lower work hours puts more people to work.

Universal Health Care Coverage --- Nationally we spend about 15% of the economic product on health care. Other countries spend less than 10%, sometimes less than 7%, and have better medical performance.

Capital Gains Tax Reform --- Reward investment and penalize gambling in the financial area. Promote a time-stepped capital gains tax. This idea comes from Lawrence Mitchell, author of The Speculative Economy. Eliminate tax giveaways to hedge fund billionaires.

Corporate profits have been high. Workers’ incomes have been flat over the past 30 years. The wealthiest one percent have increased their annual share of the national income from less than 8% in 1970 to more than 22% in 2006. Annually the top one percent earn more than the bottom 60%. The top one percent own more than the combined wealth of 91%. Eighty percent of workers have had a thirty year pay freeze while hourly productivity went up 80%.

If the United States as a democracy for the people desires to maintain a high living standard and quality of life for all, this shift in income and wealth has to be reversed.

Demand-led economic growth is the most powerful factor in growing an economy. (See Jeff Madrick’s Why Economies Grow) That means purchasing power of the great majority of the people has to be promoted. The recent $160 billion “stimulus” "rebate" giveaway shows how weak demand is, how weak purchasing power of the majority is. The only longterm solution is for voters to create the conditions that maintain high wages. High wages occur when jobs are abundant and workers are in demand. Government can create those conditions, but only by democratic consensus and determination. Corporations seek low wages and ship work “off shore” to foreign countries where labor cost are very low, 3% in China, 6 to 12% in Mexico, relative to U.S. labor rates. Voters must focus on improving the lot of the majority of workers and take back the economy from the wealthy minority who have made all the gains in the past 30 to 40 years.

For more, see

Or read Squandering of America by Robert Kuttner
Field Guide to the U.S. Economy by J. Teller-Elsberg
The War at Home by Jack Rasmus
Why Economies Grow by Jeff Madrick
Nemesis by Chalmers Johnson
Ending Poverty in America by Edwards, Crain, and Kahlberg
Why America Lost the War on Poverty --- and How To Win It, F. Stricker
or see,,,

Elk Lake, Oregon, September, 2006

Another Letter to Congressman Pete Stark

Dear Congressman Stark, May 1, 2008

I am sending you a short essay (above) titled What Government Can Do. In a small space it marshals a complete plan for economic rejuvenation.

First, parenthetically, thank you for two things: voting against the military budget bill, and endorsing Impeachment. Both were courageous and appropriate. How many citizens can say what I’ve just said? Not many. See Chalmers Johnson’s essay Going Bankrupt at that asserts the military budget is $1.1 trillion, not $481 billion.

I differ from other economists in that I believe the dollar decline is a tremendous, underrated drag or sink on the world and U.S. economy. If you read John Mauldin’s popular weekly analysis “Outside the Box” you believe it is a drag. If you have read Richard Duncan’s Dollar Crisis you have learned how the dollar decline is a lead weight.
The Brookings Institute and other scholars disagree, but who knows? It is an assessment of global purchasing power, or aggregate demand. If there is enough global purchasing power foreign customers will buy our exports, if not, the global economy will flounder, and the U.S. economy will likely sink. An economist with Schwab and Co. says that 53% of the Chinese economy is directed at exports. American consumers cannot afford imports as the dollar falls and inflationary prices rise, therefore profits all over the world are threatened. The purchaser of last resort, the American consumer, is tapped out, and the Asian one is not decoupled from our purchasing power. In past recessions, this has been the case. How strong their purchasing power is ultimately depends on their consumers, their wages, their distribution of income. China's labor rate is 50 cents an hour, or 3% the U.S. rate. I don't like the promise of depending on the Chinese worker to save my economy.

The essence of the problem is weak aggregate demand. Jeff Madrick, editor of Challenge Magazine, author of Why Economies Grow, editor of Challenge Magazine, argues convincingly that aggregate demand is the primary influence, and historically since the Renaissance has always been the primary influence, in growing robust economies. Other factors such as invention and innovation, supply side investment, and infrastructure improvements weigh in below the greatest market improver that is gradually expanding, broadly based aggregate demand. The Swedish economy has been predicated on this thinking.

But the key to today's global expansion, its growth hormone, is cheap labor costs. But low wages suppress purchasing power or demand.
Richard Duncan, author of The Dollar Crisis, was employed with the World Bank when the economies of Thailand, South Korea, Singapore, Malaysia, and others, blew up in 1997. Duncan argues that successful export trading to the U.S.A led to impetuous expansion in the Asian countries during the 1990s, the expansion exceeded local demand, and banks consequently went into bankruptcy, entire economies collapsed. His solution, in part, is to institute in trade treaties a universal minimum wage in exporting industries. He retired and wrote a book about the reasons for this event, and predicted that the structural imbalance of world trade will cause the greatest economic event of the 21st Century -- a big collapse.

Duncan's 2002 introduction states, "In recent years, severe boom-and-bust cycles have wrecked the financial systems and government finances of countries with large balance of payments surpluses; excessive credit creation has fueled over-investment and culminated in strong deflationary pressures around the world; and the debt expansion in the United States that has impaired the creditworthiness of its corporate and consumer sectors to such an extent as to preclude that country from continuing to serve as the world's engine of growth.
In short, the world economy is in a state of extreme disequilibrium and is at risk of plunging into the most severe downturn since the Great Depression."
And his 2005 edition introduction concludes, "The dollar standard is inherently flawed and increasingly unstable. Its collapse will be the most important economic event of the 21st century."

The wage race to the bottom is what propels global expansion. Socialist thinkers insist that capitalism cannot exist without exploitation of labor. Eventually, as former Federal Reserve member Marriner Eccles pointed out in his memoir, it resembles a poker game where the winners can only keep the game going by loaning money to the losers. Recently Congresswoman Nancy Pelosi said that the recent Congressional “stimulus” of $160 billion was aimed at increasing “demand.” “Go buy something made in the U.S.A.” is the key idea. Instead of increasing wages and income, the poker winners are just tossing a few chips to the losers. It's a pretty lame plan, in my evaluation. And when you look at where the stimulus money actually goes, it is even lamer.

My little ten point essay "What Government Can Do" contributes another and better plan.

Mr. Stark, you should --- SHOULD --- not my favorite word --- contact Jeff Madrick. Ask him for a full-sized plan. He is not a wild wobbly radical.

My last suggestion, before you turn to the essay --- try to form something like what the Sierra Club has, an institution that rates legislation. Voters need to consult an authoritative source to vote in a concerted way to promote plans and policies similar to what I have laid out. If the Sierra Club did not tell me how to vote --- on state propositions to city council seats --- how would I know?

I give the Alameda County Green Party money for their voter’s guide every election. Their analysis is better than anything else. They even published an essay I wrote about Robin Hahnel’s book Economic Justice and Democracy. He teaches in Washington D.C. at American University. He is a libertarian socialist; he advocates a socialist economy of consumer councils and producer councils, and he argues to replace capitalist economies lock-stock-and-barrel. Invite him to dinner, he’d probably enjoy talking with you. Say hello from me, even though we’re strangers.

Thank you Mr. Stark,

Ben Leet

see my blog:
where I have posted this essay and seven others.