Occupy Wall Street highlights documented structural and political inequalities

This blog post originally appeared on Minnpost on November 17, 2011.

Occupy Wall Street (OWS) is a cacophony of voices speaking a simple message about the structural economic and political inequalities in America and around the world. Sharing affinities to the 1999 World Trade Organization protests against globalization, OWS looks to the growing power of global financial institutions and their stranglehold on governments around the world.

OWS points to how the Bush and the Obama administrations loaned or credited trillions to banks and the too-big-to-fails to bail them out after they gambled on Wall Street, only to see homeowners face record losses in their houses and illegal foreclosures by these institutions. Tax breaks and loans were provided to the big auto companies but little was done to help the unemployed. The banks of Europe were recapitalized by the International Monetary Fund and the European Central Bank, but Greece and Italy was compelled to take the so-called "haircuts." Democracy has taken a backseat to saving capitalism. This is the message of OWS.

While Rome and the rest of the world burn, Nero fiddles. At least in this case, the fiddling is done by the Republican presidential candidates, who assert that all that ails the economy can be cured by more tax cuts and free markets. But while the GOP fiddles, a host of interesting studies have come out documenting and criticizing the ideology of Herman Cain, Michele Bachmann and company, as well as offering some insights into the state of the American economy. These reports are worth noting since they have received scant notice in the mainstream media.

The rich are getting richer, the poor poorer, no matter how you examine it.

In October a Congressional Budget Office report documented the growth in income in the United States from 1979 to 2007. For those in the top 1 percent bracket, their income increased by 275 percent. For those in the top 20 percent, it increased by 65 percent, for the middle incomes it was a 40 percent increase, and for those in the bottom 20 percent it was scant 18 percent. In 2010, the census reported the richest 5 percent of the population accounted for 21 percent of the income, with the top 20 percent receiving over 50 percent of the total income in the country.

Moreover, the latest census figures point to a poverty rate in 2010 of 15.1 percent, representing a record 46 million people in poverty. But earlier this month the US Census Bureau issued a new report recalculating what constitutes poverty — noting that current estimates are based on an outdated methodology from 1960s. This measure for calculating poverty did not include government transfers (welfare) or tax cuts when making estimates, and it also did not reflect the current spending patterns of Americans. Using new measurement tools, which the Census Bureau calls the "supplemental measure of poverty," the study concluded that the poverty rate is actually 16 percent — higher than the old estimate — constituting more than 49 million individuals in poverty. So much for welfare queens getting rich on the system.

The rich and poor live in separate worlds.

There is a geographic basis to poverty. Generally the assumption is that poverty is concentrated to the urban cores of major cities. One way to measure the spatial dimension to poverty is to use census data. Census tracts where 25 percent or more of the households live in poverty are referred to as high-poverty neighborhoods, and those with 40 percent or more of the households in poverty are referred to as extreme-poverty neighborhoods. Concentrated poverty is a problem because of the issues surrounding low economic opportunity, high government social service costs, and crime.

Looking at concentrated poverty across the United States, the Brookings Institution recently concluded that 10.5 percent of all individuals lived in extreme-poverty neighborhoods, up from 9.1 percent in 2000. Estimates are that more than 15 percent overall live in concentrated-poverty neighborhoods, with the most rapid growth occurring in the suburbs. The Twin Cities metro region is not immune, with 9.4 percent of the population living in concentrated poverty neighborhoods that include some suburbs but mostly the Minneapolis-St Paul urban cores. These trends parallel 2000 census data demonstrating the gravitation of poverty from the cities to the inner ring suburbs, creating really a two-tiered metro region marked by affluence and poverty.

Similarly, in the just released Stanford University/Russell Sage Foundation’s “Growth in the Residential Segregation of Families by Income, 1970-2009,” researchers found that America was becoming increasingly segregated by income. In 1970 only 15 percent of families were living in affluent or poor neighborhoods, but in 2007 it was 31 percent. They researchers also found that high-income households were less likely to be found in mixed-income neighborhoods than the rest of the population. In general the percentage of Americans dwelling in middle-income neighborhoods was dwindling and, in fact, these types of residential neighborhoods were shrinking.

Overall the study noted the increased economic and racial segregation in this country, with individuals of different classes less and less likely to come into contact with those from other social-economic backgrounds. America has become a tale of two cities.

Taxes really are not job killers.

The canned line from the Republican candidates has been this: high taxes are killing the economy and forcing companies out of business. Three reports again reject this contention.

The Bureau of Labor Statistics compiles data on reasons for mass layoffs. In its most recently survey, which covers 2010 and 2011, factors such as cancellation of a contract or order for goods, insufficient demand for products and increased automation account for the vast majority of layoffs. High taxes do not even appear on the list as a reason.

Second, the National Federation of Independent Business (NFIB) recently completed a survey asking small businesses to identify the single biggest problem they face. Taxes came in third, with poor sales listed as the biggest issue.

Third, the Citizens for Tax Justice recently released a report, “Corporate Taxpayers & Corporate Tax Dodgers,” documenting the biggest businesses that have failed to pay their fair share of taxes. Among the worst offenders, corporations such as GE, DuPont, Boeing, and Wells Fargo paid no income taxes from 2008-2010, let alone the theoretical 35 percent statutory corporate rate. The Citizens for Tax Justice report documents scores of blue-chip American companies that failed to pay any taxes during these three years, questioning the claim that high taxes are depressing employment and their economic growth.

Moreover, in addressing the arguments made by Herman Cain and others that high corporate tax rates discourage American companies from repatriating $1.2 trillion in money being held overseas, the Corporate Taxpayers study points out that corporate tax rates in other countries are often significantly higher. Additionally, if there is a tax advantage to off-shoring jobs it comes only because American law allows for a permanent deferral on foreign profits. The solution is simple: repeal the deferral and do not allow corporations to use the tax code as an incentive to out-source. Overall, the United States government is facilitating this problem by adopting policies that encourage evasion.

The message from all these studies point to a nation increasingly divided by income, region, and class. They point to a country where the rich pay little taxes or better yet, are able to use the tax code to their advantage — and to a world where in reality, unemployment and slow economic growth are not due to high taxes but to other factors.

Occupy Wall Street is about highlighting these facts, seeking to reintroduce the simple concept that capitalism is meant to facilitate democracy and not vice versa.

The Hype on Taxes: They Don’t Matter Much

Taxes impede economic growth. This is the belief among the Republican presidential contenders as they offer plans to cut taxes as a panacea to stimulate the economy. Herman Cain’s “9-9-9” assumes lower income tax rates for corporations and individuals will stimulate the economy. Newt Gingrich wants to cap top rates at 15% and Rick Perry has called for a national flat tax of 20%. Mitt Romney has a 59 point plan that includes tax cuts. Ron Paul wants a constitutional amendment to eliminate income and estate taxes. Michele Bachmann wants a return to the Reagan era tax cuts. All want to make the Bush era tax cuts permanent.

Yet do high taxes really hurt the economy as much as they believe, and will lowering them have much of an impact on stimulating it? The economic literature is clear — tax breaks to encourage economic relocation or investment decisions are inefficient and wasteful. Hundreds of studies reach this conclusion. When businesses are surveyed regarding factors important to their investment decisions, taxes often come in behind proximity to markets, suppliers, and the quality of the labor force. These other factors occupy a larger percentage of a business's budget than do taxes, and all of them are far more critical to long-term success than are taxes. Businesses occasionally admit this. Nearly 62 percent of those interviewed in a California study on hiring tax credits indicated that they had never or rarely affected their decision to employ individuals. Speaking at a recent chamber of commerce event, I asked business leaders whether the Obama tax cuts would encourage them to hire. Unanimously the response was no—they were unwilling to hire until such time that consumers were willing to buy their products and services.

Anecdotal stories and illustrations also confirm the tax fallacy. High tax states such as Minnesota have generally fared better in terms of economic growth, unemployment, median family incomes, and location of Fortune 500 companies, than low tax ones such as Mississippi and Alabama. In many situations high taxes, and with that, government expenditures on education, workforce training, and infrastructure, correlate positively with income, low unemployment, and business retention. One needs to look not just a one side of the equation—taxes—but the other side too—what taxes buy—to see what value businesses get out of them in terms of educated workforces and infrastructure investments. Most debates fail to do this.

Bureau of Economic Analysis statistics demonstrate how economic growth is related to tax rates. One can compare annual economic growth as measured by the percent change in the gross domestic product (GDP) percent based on current dollars to the highest federal individual tax rate and the top corporate tax rate since 1930. If taxes are a factor affecting economic growth, one should see an inverse relationship between growth of the U.S. economy and higher tax rates. The GDP should grow more quickly when top individual and corporate tax rates are lower. If taxes are a major factor deterring economic growth, lines on a graph should go in opposite directions: As tax rates go up the GDP should go down.

No such pattern emerges between high taxes and GDP growth over 80 years. During the Depression of the 1930s corporate and individual taxes rates increased, but in 1934 through 1937 the GDP grew by 17%, 11%, and 14% annually. Top corporate tax rates climbed to over 50% through the 1960s, again with no discernable pattern associated with decreased economic growth. The same is true with top tax rates on the richest which were 91% into the 1960s. Conversely, since the 1980s after Kemp-Roth and then after 2001 with the Bush era tax cuts, there is no evidence that the economy grew more rapidly than in eras with significantly higher tax rates on the wealthy and corporations. Looking at time periods when tax rates were at their highest, GDP often grew more robustly than when taxes were cut. Visually, the attached graph simply fails to demonstrate that tax rates negatively impact economic growth. (Click on the graph to get a better view of it).

Pictures are worth a thousand words, but statistics are priceless. Statistically, if a tax hurts economic growth, the correction with it is -1. If they positively facilitate growth the relationship is 1, and if they have no impact the relationship is 0. The correlation between GDP and top individual taxes is 0.29, between GDP and top corporate taxes is 0.32, and among the three it is 0.14. Statistically, there is a slight positive impact on either top individual or corporate taxes or economic growth, but overall almost no connection between tax rates on the wealthy and corporations and economic growth in the United States.

But what about taxes as job killers? Again running similar statistical tests, there is little connection. Using Bureau of Labor Statistics data on unemployment rates since 1940, the correlation among top individual and corporate taxes and the annual unemployment rate is -0.02—essentially no connection at all.

The simple claim of Perry, Cain, and others that high tax rates on the wealthy and corporations hurt economic growth and job production is false. The evidence is simply not there to support assertions that high taxes alone hurt the economy or that cutting them will have the stimulus effect asserted.

What Obama Should Do: A Real Jobs Bill for America

President Obama came to Minneapolis to the American Legion Convention talking jobs. . . sort of. As of yet Obama has yet to propose a jobs program and in Minneapolis he spoke of a tax credit to hire a vet. As typical, the proposal was too little, too modest, and lacking vision.

Were the vet tax credit adopted it would help only a small spectrum of those unemployed, pitting other unemployed against vets for jobs, ensuring a resentment of the former against the latter. Moreover, there are questions about the job skills for many of these vets and whether military skills have civilian application. For many, workforce training, medical assistance for war injuries, and serious enforcement of the Sailor and Solder’s Act to prevent employer discrimination against vets would be even a better idea.

Yet the tax credit Obama is proposing is typical of the timidity of his vision. His 2009 stimulus bill, panned as a failure by many, did its job but was probably half the size of what it needed to be to make a real impact according to most experts. The best study of the stimulus bill, “The Net Fiscal Expenditure Stimulus in the U.S., 2008-9: Less than What You Might Think, and Less than the Fiscal Stimuli of Most OECD Countries,” by Joshua Aizenm an and Gurnain Kaur Pasricha, concluded that the federal money made available by the stimulus mostly just replaced budget cuts at the state and local level. All it did was to prevent the Great Recession from getting worse–it merely replaced state money with federal money. No significant stimulus as a result.

Thus, the vet tax break along with his rumored infrastructure bank proposal and his desire to extend the payroll tax break, will be insufficient and short of the mark. Obama will be limited in how much money he can invest in jobs, hemmed in by the constraints of the debt ceiling deal he capitulated to. No, Obama, will propose too little, compromise too much, and in the end, it will die a victim of the 2012 election politics. If by some chance a jobs proposal is adopted, it will have little impact, giving Republicans even more ammunition to argue that Keynesian economics has failed, the government is inept, and that Obama must be thrown out of office, only to be replaced by more of the bankrupt Ayn Rand economics that got America into the mess it currently is in.

The Republicans are not going to do anything to help Obama and the economy. This means instead of proposing anemic measures that will not succeed, propose a grander vision and set of ideas for jobs. Offer the alternative, run on it, and make that the theme for 2012.

What should a broader jobs vision include? Such a vision should recognize the need to produce jobs across several sectors of the economy. It needs to be sufficient in size to make a difference. It must also be sustainable.

So an infrastructure bank to rebuild roads and bridges is good. Ever since the collapse of the I-35 bridge in Minneapolis in 2007, it’s been obvious we need to rebuild our infrastructure. The American Society for Civil Engineering places the price tag for rebuilding this country’s infrastructure at $2.2 trillion dollars. Yet even if money is spent for this, only some will find jobs. Yes construction workers would be helped, but not white collar, older, and many female workers. Face it–56 year-olds unemployed by the recession for over a year are not getting construction jobs. They would be left out. As would young people still looking for a first job.

Moreover, infrastructure would do little to help the housing industry which is still ailing. Latest HUD reports find single-family home building permits down 10% this quarter compared to the same period last year; actual sales of new single-family homes were down 6%; and total delinquencies for all homes stood at 8.32%, up from the last quarter of 2010. Thus, a jobs bill needs to address many aspects of the economy and the diversity of types of people unemployed. Moreover, it needs to be big–big enough to help many of the different sectors. It needs to address infrastructure, workforce development, and housing.

But finally, a jobs program must be sustainable. Sustainable means capable of actually stimulating the economy enough so that it will actually grow. Sustainable also in that it pays for itself in the short and long term. Thus, how to pay for it? Three ideas.

First, Wall Street Journal articles report U.S. companies sitting on nearly $2 trillion in cash, unwilling to invest it in jobs. Second, Bloomberg News and other sources note another $1 trillion in offshore earnings and accounts. In the Iowa debate earlier this month Republicans proposed a tax holiday to bring the money home to invest. Again good theory but the last time the holiday occurred, businesses did not invest in jobs. They spent it on mergers and acquisitions, dividends, stock buybacks, and executive bonuses. None of these is useful for job production. Let’s require companies to use this money to invest in American jobs, or tax it and lend it to businesses that will provide jobs. Use the tax code to make corporations invest in jobs and not rely on taxpayer dollars.

Finally, use treasury bonds to finance capital jobs projects. Bonding is still the best way to pay for long term infrastructure. Demand is still high for treasury bonds-as evidenced by the fact that when Wall Street heaved after the S&P downgrade of the U.S. credit rating, money poured into T-bills.

Thus, here is a proposal for Obama to stimulate job production and the economy.

* Five year $2.2 trillion bonding bill to repair U.S. infrastructure.

* 100% tax credit for solar equipping all homes and buildings (the added bonus here is on energy savings and costs).

* 100% tax credit on all individual workforce training expenses for unemployed workers.

* Principal-only repayment of all existing student loans.

* Principal-only repayment on all FHA, VA, Fannie Mae mortgages.

* 100% tax rate on all cash savings by corporations held domestically unless used to hire, train, or reinvest in workers.

* Tax amnesty on all offshore corporate savings repatriated to the US if used to hire, train, or reinvest in workers. Conversely, impose a tax penalty on US corporations that fail to repatriate and invest in jobs.

The exact details of a proposal like this can be refined, but they addresses many problems ailing the economy, while also drawing significantly upon the private sector to finance or invest in producing jobs.