Thursday, August 6, 2009

Where did the 10 Trillion Dollar Debt go (and who has it now)?

I'm not an economist, and I have no interest in ideological debates between different schools of thought. I think the average tax-payer finds no useful purpose for that type of discussion, but is interested in economics and the way economic policies impact their lives. The esoteric discussion of technical views promoted by one school or another tend to obscure the reality that is accessible to the informed person and the discernible trends that show where the country is headed, and to which the government policies are pertinent.
In the political debate about taxes and spending political ideology always seems to be the opinion driver, and facts and figures are easily concocted to support one point of view or another.
I have recently been furnished a table (shown) that plausibly makes the point that top income earners pay most meaningful taxes and therefore it's at the top that tax relief is warranted... until you add another column to figure out the effective tax rates, and find out that at the top of the income range the tax rates drop significantly, from 35% to 24% and 21% (which would defeat the point being made). And in fact, for the richest Americans, the rate was 17%. The analysis is always framed in terms of the tax burden on each income range group, as if that really told the hole story. But is that really a true picture of reality? Heck NO!

The truth is:
1. reality is dynamic, with accellerating changes in last 25 years.
2. in real terms the tax burden is being shifted downwards in the US as income moves massively towards the top earners (America's Tax burden Shifts Downwards
3. since supply side economics was appropriated by conservative politicians there has been a historic wealth transfer effect towards the top fraction of the 100 percentile (fraction of the top 1% earners).

I've seen a variety of articles claiming one thing or another, but my curiosity lead me to the raw data published by the IRS (
In that mountain of data I managed to discern a real trend that explains why the working poor have to work multiple jobs to earn less money today than when the the GDP, even in per capita terms, was less than half what it is now. All that growth was floated up towards the top.
Reagan came to office in 1981 and introduced the notion that by cutting taxes the economy would grow. Without debating the merits of that aspect, the actual policy resulted differently depending on your income bracket. There was no growth for the bottom half and a huge expansion of wealth towards the top. When I say top I'm talking about a fraction of 1% but most IRS data does not discriminate beyond that 1%.
So, in 2006, last numbers available, the top 1% had expanded their share of earnings to 22.06% of the total American Pie, from 8.31% 25years prior, in effect sucking up a large part of the wealth effect of GDP growth that the average citizen assumes was distributed by all Americans.
Paraphrasing J. K. Galbraith, it is a seldom admitted fact that more equitable economies perform better than ones where the wealth is held in high concentration. You know, he's comparing evolved countries to the proverbial Banana Republic. Clearly we are moving backwards on that scale. Is that inevitable? That does not happen in other developed economies that don't follow our model... but, we are the best - let's not forget that! No argument works better than patriotism to prevent us from learning from others.

It is the function of the government to determine fiscal policy, and the result of the policy of the last 30 years has been this huge displacement of the wealth towards the top layer, no! sliver. When the tax topic is discussed the issue is always framed in terms of the burden placed on the highest income earners. In 2006, they say, the top 1% paid 40% of all taxes up from 20% in the early 80's. True, but if you look deeper and figure out that they almost tripled their share of the income pie, having only doubled the share of the tax pie was a pretty good deal. In fact their effective tax rate dropped from 33.37% to 22.79%. And this figure is misleading in the sense that the richer you are the less tax you paid. The actual percentage for the top 400 tax-payers in 2006 was 17.17% (IRS figures).

Let's add some perspective to this data:
What the data tells us is that since reaganomics was introduced as a fiscal policy of "small government and low taxes", it was used to create a huge health effect biased towards the top layer of tax-payers, leaving 50% of working Americans out in the cold while the economy more than doubled (116% economic growth per capita and adjusted for inflation, 2.5% total growth in 25 years for half of tax paying Americans).
In my view it is not much use to debate the low tax small government aspect, which seems to be palatable to most people, but that is not what in reality happened. What happened, in this age where lobbyists multiplied and PAC contributions to politicians mushroomed, the interests of the pay masters were well looked after, while the democratic power of the little guy shrunk. Welcome to US democracy in the 21st century! The century inaugurated with the Florida fiasco that turned the political destiny of this country in the opposite direction of what the other 49 states had determined! Sorry, off topic... or maybe not!
But let the dupes for the so called conservative right understand that one out of two Americans are worst off than ever in 25 years in spite of large productivity increases. As their income stagnated, housing, health care, education, all the benefits of an aspiring upwardly mobile society were priced out of their means. Higher Education, which was practically free 30 years ago, requires now that even higher middle class students (80-95 percentiles) mortgage their futures for decades. Housing, by virtue of the bubble bursting, associated with unemployment resulting from the 2008 crash, has become a mechanism of wealth destruction reversing the traditional role of wealth growth motor of the middle class. And health care costs which have zoomed past GDP growth as executive salaries and shareholder returns are prioritized by a profit seeking insurance industry have become a luxury out of reach of a large part of the population, leading to the current debate on reform. Meanwhile, as we have become increasingly aware, there is a thin slice of society who spends their vast means figuring out how to profit from the activity involving the savings of all Americans (401-ks, pension funds, investments), therefore producing nothing, and effectively taxing our savings as a whole, to award themselves multi-million dollar bonuses when luck strikes, and getting bailed out by tax payers when their inflated leveraged pies in the sky fall back to earth. No accident, these slick operators are exactly in the part of the curve where the tax rate drops precipitously from 35% to 17%. That's the sweet spot! It is in fact somewhat unfair to place everyone in the top 1% in the same class. Anyone making less than $1 million actually pays the highest tax rate, but the IRS does not provide details within that 1% class where all this happens.

Ultimately I think there is a challenge here for the economists of all the various vociferously competing schools of thought: how do you explain to the average Joe how we got here, why we should continue or change, and where different trends will lead us. I think it's fair to say that supply siders did not get us what they promised (trickle down, remember?), so a fair share of suspicion is warranted on anything they have to say for themselves now... but, give them a chance to talk (1st Amendment and all that!). Once we know what the choices are, then it's a political choice, not up to economists.

Finally, to give us a perspective we can relate to the size of the growing debt:
In 1981 the top 1% (Richie) earned 8 times the average of the other 99% (Joe); 25 years of trickle down and in 2006 Richie earned 28 times as much as Joe.
At 1981 income distribution levels each Joe (all 99 out 100 Americans) would have added $8,319* to their 2006 income, and $74,716** to their accumulated income since 1981, while Ritchie would have more than doubled his wealth. All Joes would have an aggregate wealth gain in 2006 of $10.039 Trillion***, which is the actual wealth transfer effect of these 25 years. This is enough to pay off most of the debt and secure the viability of Social Security and Medicare, in spite of the gross mismanagement of the last 8 years.
When we hear politicians proclaim their fiscally conservative principles, here is a useful fact: the cost of the fiscal fiasco we find ourselves in is about the same as the amount of wealth transferred to those Americans that already had it pretty good in 1980, presumably operated through our government fiscal policy through the Reagan-Bush-Bush eras. Although the Clinton era was not a complete reversal, it did reverse the deficit spending trend, which is what the effect adds to.
So when you hear someone say "we can't afford it!", just ask yourself: are they talking about wasting money in a new Ferrari for Nino (okay, that sounds like an example from the Sopranos - not what I intended)? Or are they talking of paying for life saving access to medical care, access to education for growth and opportunity, or sustaining the ultimate safety net of Social Security? Well, when you have the answer, then you'll know if they're serious.

Notes on calculated values (all figures from IRS data):

*((2006 earnings of top 1%) -total AGI x (1981 share of top 1% earnings))/(99%of population)=
=(1,791,886-8,122,040 x .0830)E6/(1,357,192 x 99)=8,319

**same calculation for each year from 1982 through 2005 and accumulated

*** 99% of population x per capita accumulation=
1,357,192 x 99 x 74,716= 10.039 E12 = 10.039 Trillion

****population is #of tax returns

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