Saturday, March 12, 2011

Post Wisconsin: Republicans Negative, Democrats Positive in Describing Unions

Based on the media coverage of the last few weeks, one might imagine unions are on the rise in public opinion. Actually, I've found three polls since Friday showing quite the opposite is true. I've also found data that Democrats have dropped a percentage point or two on a general congressional ballot, while Republicans have remained steady. Republicans are about 1.5 percent ahead of Democrats, which doesn't mean much since some districts are very lopsided.

So, how bad are the perceptions of unions in general? According to Gallup this weekend:
Republicans Negative, Democrats Positive in Describing Unions
Among all Americans, 38% have a negative image, 34% positive, and 17% neutral

Americans are slightly more likely to say something negative rather than positive when asked what word or phrase comes to mind when they think of "labor unions." By about a 3-to-1 ratio, Republicans have negative rather than positive things to say about labor unions. By better than 2 to 1, Democrats' impressions of unions are more positive than negative.
Notice this question was generic, not about "public employee unions." It is my guess, and only a guess, that PEUs would poll slightly lower than the labor movement in general. However, this would also depend on the questions asked. If you ask, "How do you feel about teacher, firemen, and police officers?" and then ask how you feel about unions for those groups… trust me, they'd poll better. You can "prime" a poll with questions that remind people of favorable impressions. It's a common stunt, one I've seen in the raw polling methods of groups across the political spectrum.

The question unions should be asking is why if things seem so great in the media and at rallies in Wisconsin have unions not gained broadly from recent events?

When I talk to my liberal / progressive friends and colleagues, they suggest the vast, vast majority of people support unions. The common refrain is, "Didn't you see all the protesters during the week? Didn't you read the polls?"

Okay, there are two clear problems with those points: 1) People with jobs and business owners don't counter-protest during business hours, if at all. 2) The polls asked some rather leading questions.

The question, "Should public employee unions be stripped of collective bargaining rights?" was misleading in several ways. First, the Wisconsin legislation signed by Gov. Walker did not strip PEUs of all collective bargaining. More accurately, the legislation limited the issues subject to bargaining. That's a major point. Second, when you describe almost anything as a "right" the tendency in polls seems to be that voters do not like any "right" infringed. If instead the question asks about "contract negotiations" without the mention of "rights" the polling data are different.

Polling with questions of "limiting" or "reforming" PEU negotiations gives you a different result than polling on "taking away rights." Recent polls were, intentionally or not, slanted to imply Wisconsin was ending all collective bargaining. It is restricting bargaining substantially, but that is different. The polling questions were not accurate and therefore did not capture the national mood.

In the end, people are torn between wanting to reward civil servants, especially teachers and emergency personnel, and the realization that local governments and school districts are financially struggling. Raising taxes in states that have declining tax bases isn't feasible. We can tax "the rich" more, but that will not offset the deficits locally. It just won't -- no matter how you do the math. Taxpayers believe they can't give much more. Schools, generally supported by local property taxes, are especially hard-hit by declining property values, foreclosures, and out-migration from the Midwest and manufacturing centers.

I'm not vehemently anti-union (I belong to a union), but I can see the trends in public opinion aren't good for unions. Unions are going to struggle for years to come. They have not reformed, which they must do, and taxpayers will continue to drift away from supporting labor organizations.

Unions did not win nationally while losing the battle in Wisconsin. There's just not enough evidence to support that claim. The media are making it seem that way, and union supporters are telling each other this is a turning point for unions. The unions and their supporters are engaging in wishful thinking. That's easy to do when everyone around you sees things the same way.

Friday, March 11, 2011

Wealth Disparity, Myths, and Realistic Solutions

In a previous entry, The 90% Tax Rate Myth, I promised to discuss income inequality and offer actual solutions that don't involve merely "redistributing wealth" via taxes.

Michael Moore recently attempted to rally support for unions in Wisconsin with the following:
"Four hundred obscenely wealthy individuals, 400 little Mubaraks -- most of whom benefited in some way from the multi-trillion-dollar taxpayer bailout of 2008 -- now have more cash, stock and property than the assets of 155 million Americans combined."
If you want one examination of this claim, which is accurate statistically, you can read PolitiFact's analysis. The story is posted as Michael Moore: 400 Americans Have the Wealth

Now, I want to go beyond the nonsense of Moore and some of his misleading implications.

You want shocking? Most of the super-rich were not born that way. According to a 2005 New York Times analysis, 60 percent of Americans move up or down one full income "quintile" each decade. Only a quarter of the middle class stays in the middle class over a ten-year period. Nearly half of all people in the top quintile "fall out" of the top during a decade. They are replaced by men and women from the lower quintiles!

For an interesting graphic of these trends see: 2005 Class Mobility Analysis

The Forbes 400 do have a combined net worth of $1.11 to $1.27 trillion. And, yes, the bottom 60 percent of households have a net worth under $1.22 trillion according to several sources, ranging from the IRS to the Census. So, on the face of it Moore's statement is accurate and indicates an astounding wealth gap.

But is that the entire story?

First, did the Forbes 400 make their money from Wall St. bailouts? Some are investors, definitely, but many of the richest Americans are not involved in banking or investing as their primary activities. Using the Forbes website (http://www.forbes.com/wealth/forbes-400) you can study what these men and women actually do to earn their wealth. Fewer than half of the Forbes 400 are in the "investor class."

Of the top ten, only Warren Buffet (#2) is primarily an investor. Two are computer software pioneers. Four are from retailing giant Walmart. One is media titan Michael Bloomberg. And yes, there are the Koch brothers, who own energy and natural resource companies.

Even after you leave the top ten, you don't find many bankers. You find tech giants listed repeatedly (Google, Dell, Amazon, Microsoft, Apple, eBay, and so on), along with candy makers (yes, the Mars family), publishers, and supermarket chains. You can't forget the entertainment media, either, with names like Lucas, Saban, and Winfrey.

Did George Lucas or Oprah make millions ripping off the "little guy" Michael Moore champions? Seriously, Mr. Moore, do you believe Ray Dolby scammed us with some sort of bailout for movie soundtracks? Oprah Winfrey must have a strange idea of schemes, too, since she spends a lot of time giving away her wealth. Bill Gates also seems to be more than willing to part with wealth to help the world. He might have played to win in the tech industry, but he seems to care a lot about the Gates Foundation and his legacy.

Most people don't realize that in 2010 U.S. households had a total net worth of $54.9 trillion. That means the "super-rich" have 2.3% of the nation's wealth. Or, another way to look at it is that 97.7% of U.S. wealth does not belong to the Forbes 400.

So where is the wealth? With the "upper" and "upper-middle" class, technically, that 40% of households with incomes from $55,331 to $157,176. Yes, the "fourth highest" quintile starts at $55,331, which is not exactly super-rich. The top, top 5% starts after $157,176, but most of the U.S. wealth falls within the narrow range of households earning $55,000 to $150,000 a year.

What this means is that the poorest 60% of Americans are way behind their fellow citizens. But, there are some correlations Moore and others should not ignore (but they often do):

  • 86% of the wealthiest households are married couples.
  • 20% of the poorest households feature a married couple.
  • $56,000 is the median income for a person with a bachelor's degree.
  • $19,000 is the median income for someone without a high school diploma.
  • $36,000 is the median income for someone with a two-year college degree or technical certification.

The basic formula for reaching the upper-middle class (or better): get a degree, get married (and stay married), exercise, and avoid "bad" habits (smoking, drugs, heavy drinking).

Yes, education is the key to upward mobility. Education, education, education. And stable relationships seem to help, too.

I know it sounds simple, but it is. If we can get students through high school, we've already increased their annual income by 50% or more. If we can get students into two-year colleges and technical schools, we can move them into the middle-class or better. That's how important education is. There's nothing, not one thing, more predictive of future success than earning a college degree.

Now for the bad news: nothing predicts college success more than having parents with high school diplomas. Parents without diplomas are likely to have children who do not finish school. And if you do not finish high school, you're at risk of lifelong poverty. Parents with college degrees tend to assume their children will attend college. We need to make at least community college and tech schools the assumed minimum for all students.

If you want to end poverty, you don't redistribute wealth, you invest in education. It is the one thing I believe we must never cut, on a per-student basis. Per-student funding does mean schools with declining enrollments lose money. Some cities are shrinking, and they will have to cut education spending along with everything else.

How do we invest in education wisely? That's something I'll explain in yet another future post. Hint: I believe in some dramatic, even drastic reforms.

Thursday, March 10, 2011

What’s Next in Wisconsin

Is President Obama worse than Wisconsin's Gov. Walker?
Far from seeking to strengthen the hand of federal-employee unions, Barack Obama has sought to impose a two-year wage freeze on federal workers through the budget process. If the federal government had a bargaining law like the one Wisconsin has today, he would be unable to do that.
Also consider this fact:
[D]espite the howls coming from the left, Wisconsin’s new policies on public-employee relations will not be especially unusual. Only 26 states have laws that grant collective-bargaining privileges to substantially all public employees.

Economic reality doesn't seem to apply to government or public sector employees right now. Government (and government jobs) only exists with businesses, especially their owners and their employees. Without tax revenues from businesses, there are no government jobs. None. It's time for governments at all levels to start behaving at least a little bit more like the businesses upon which they rely for their existence.

If a business cannot pay its creditors, especially vendors, it doesn't take long for the creditors to push the business into receivership. Cities, counties, and states are near a real risk of defaulting on bonds — meaning they are insolvent. Being unable to pay the people financing your daily operations is bankruptcy, plain and simple.

When a private business becomes insolvent, the court-appointed receiver usually nullifies all contracts, from leases on properties to union agreements. That's the reality of a business failure. Chapter 11 reorganization fails? Then the business lands in Chapter 7 and is entirely liquidated.

Guess what? Your government "business" has failed in state after state. These local and state government failures will have consequences, including changes to union contracts and even the nullifying of contracts in extreme cases. This same process has happened in the airline, automotive, and even publishing industries. Unions have had to accept changes to contracts once believed inviolable.

Public employees (and their "business" of government) are not immune from financial reality. Sorry, but if businesses are struggling, so will the governments they feed. That's a reality public employees don't seem to accept. They can't comprehend that as businesses close or leave an area, the taxes dwindle until there isn't enough left for all that a government wants to do.

Cuts, painful cuts, are inevitable. Elected officials have concluded unions, unwilling to negotiate on some matters, have to dealt with as they are in private industry. I expect a lot of turmoil as public employee unions are forced through what their private sector colleagues have already experienced over the last three decades.

So far, the unions aren't dealing with this reality well. Neither are their supporters.

The Wisconsin GOP state senators are receiving death threats. That's absurd. Radicalism doesn't help the union cause, and I'm sure the GOP-supporting groups will use any misbehavior to make their cases against public employee unions. See: Wisc. GOP state senators threatened

Companies and governments go down (and up) in parallel. However, governments, unlike businesses, don't tend to "hoard cash" during the good times. In fact, government officials and unions often complain about businesses creating "rainy day" funds. That's simply stupid. If governments had created and maintained sufficient funds during the most prosperous times it would now be much easier to slowly downsize with (somewhat) less pain.

Wisconsin is going to happen in state after state, city after city.

Voters can protest, just like public employee unions. Voters could turn against public employees, a risk unions should consider as they protest day after day. I'm sure unions imagine they've "won" the debate. I'm guessing this is a temporary public relations for unions. If forced to raise taxes, cities will find the people who pay for monstrously oversized government can and will take action, too. Remember, California's Proposition 13 was a voter rebellion against taxes.

Right now, many Wisconsin voters believe the unions were "wronged" by the state. Taxpayers, though, can turn fickle in an instant — especially if they are asked to pay for a government that doesn't behave like a decently managed business.

Tuesday, March 8, 2011

The 90% Tax Rate Myth

There is a "myth" that the economy of the United States chugged along at least in part due to higher taxes on the wealthy in the past. First, this myth, like so many about creating prosperity, ignores that U.S. growth came after two world wars wiped out most of our competitors. Second, the implication is that "the rich" were actually paying 90 percent taxes at some point in history. That's never been the case.

The U.S. tax system uses an "Effective Marginal Tax Rate" model. The EMTR is applied on ranges of earned taxable income. Each taxpayer pays roughly the same amount on his or her income within these ranges. According to the IRS, the EMTR schedule for 2011 is:

Tax Rate Income Range Taxed
10% $0 – $8,500 $8,500
15% $8,501 – $34,500 $25,999
25% $34,501 – $83,600 $49,099
28% $83,601 – $174,400 $90,799
33% $174,401 – $379,150 $204,749
35% Over $379,150 N/A

Everyone paying income taxes pays the same 10% on his or her first $8,500. So, to calculate a person's "Composite Real Rate" you must average (in a manner of speaking) what he or she pays in overall taxes on earned taxable income. For example, if you earn $80,000 in taxable income in 2011, your taxes are  $16,125.10. That's a Real Rate of 20 percent. Yes, the marginal rate is 25%, but the Real Rate of tax is weighted towards the 15% bracket.

An income of $150,000 a year? The Real Rate is 24 percent. And that's not the "real rate" as most of us would think of a "real" tax rate. Why is that? Because taxable income is not even close to what most people actual earn. Earned income and taxable income are two different things in government speak.

So, let's get more complicated. When there was a 94% top rate in 1944-45, there were so many deductions and exclusions that the taxable income was not comparable to someone's entire income. First, the top rate started at $200,000, which today is equal to $2,413,059.90 — so the maximum EMTR would apply only to incomes of $2.5 million. But, that's still taxable income, not earned income.

In 1944, you could deduct business meals, all business travel, all forms of interest payments, and much more. You could even deduct spousal travel expenses on a business trip! (Why travel alone?) Companies could also "loan" or "provide" almost anything to an employee, from an apartment to standard benefits. It was possible to shelter tens of thousands of dollars from taxable income. Three-martini lunches and expense accounts were important realities, skewing tax calculations.

As a result of deductions and exclusions, even the theoretical maximum Real Rate of taxation at 60% in 1944 overstates taxation dramatically. The reality? On earned income, the richest U.S. taxpayers paid close to 40 percent of their earned incomes in taxes in 1944. We simply didn't count much of the compensation as taxable income. 

Allow me to introduce you to Hauser's Law. Published in 1993 by William Kurt Hauser, a San Francisco investment economist, Hauser's Law suggests, "No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP." This theory was published in The Wall Street Journal, March 25, 1993. For a variety of reasons, we seem to balance tax collections within a narrow range.

Since 1945, U.S. federal tax receipts have been fairly constant in terms of Gross Domestic Product (GDP), with taxes ranging from 15 to 20 percent of GDP. The graph is as follows:


When people demand higher taxes on the rich, usually phrased as paying a "fair share," they are ignoring how our tax system has functioned historically. We could create more brackets, to tax the top 1% at a higher rate once again, but the net increase in tax revenues wouldn't be dramatic. Why not? Because government spending is near historical highs: we are spending at near-WWII levels. It would be nearly impossible to tax enough to pay the federal bills, and doing so would likely crush the economy.

So, how could we address income inequality if not through increasing taxes? That's really what people are asking when they demand fairness. The real complaint is the gap between rich and poor. I'll address that issue in an upcoming blog entry.

Sunday, March 6, 2011

Heavily Unionized, Still Stagnating

I recommend:

http://www.economist.com/blogs/democracyinamerica/2011/03/middle-class_stagnation

While the above is primarily a short summary of other columns and blogs, it makes a great point: Western nations with a widely unionized workforce are still experiencing increases in wage disparity between the top 20 and bottom 20 percent (upper and lower classes). The middle class (usually defined as the middle 40-60 percent) is stagnating, as well.

I've written on this blog about the "Superstar Effect" and income. See:


Also:


The reality is that the marketplace is constantly changing. Technology has, for centuries, eliminated jobs and reduced the "value" of the lowest-level, least-specialized workers. Unions are not going to be able to offset the loss in value within some jobs. Quite bluntly, if there is any chance your job can be automated in any way, via software, robotics, or some other technology, your job will decline in "value" for a time.

Now, oddly enough, there is a point when the "low-value" job becomes high value. This is a reflection of supply and demand, as well as something known as the "exclusivity principle." Here's one example:

Cars used to be built primarily by hand. As a result, pieces were always slightly different. Quality was good, not great. Automation and assembly line techniques improved quality and reduced the "value" of the manual laborer in car assembly. Eventually, companies automated most of the automotive assembly process. Some companies can assemble a car with fewer than ten humans on that assembly line. (Though multiple lines and parts handling still require 1000 or more employees at the most automated car plants in the world.)

But which cars are the most expensive in the world? Cars made by the highest-paid production employees. The hand-assembled Rolls Royce and Lamborghini automobiles come to mind. Rolls Royce even employs some of the best-paid "leathersmiths" to prepare interiors.

It's a paradox: automation undercut the lower- and middle-class workers, to a point. The best of the best, however, improved their standings. The gap between the highly skilled specialist and the "average" worker widened. We see this in automotive plants, and we see this throughout the economy.

I'm not sure there is a solution, other than fewer people. I don't believe for a moment we can or will automate everything, including the repair of the machines, but we might be getting closer than anyone likes to admit. That's going to leave the lower-class at even more of a disadvantage.

Something to ponder.