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Wall Street insiders and elite analysts that were caught off-guard by Brexit should re-examine one of the memorable phrases to come out of former U.S. President Bill Clinton's campaign to unseat George H.W. Bush. Though the senior Bush thought he had the support of the American people thanks to a quick and decisive victory in the Persian Gulf War, he had underestimated the leverage of a negative economy. Regular folks, as it turned out, didn't care so much for the war than what impact it would have on their wallet. Clinton exploited that, and the rest is history.
Many, however, are still playing the same game with Brexit, or the decision by the British people to leave the European Union. International markets were pummeled at the news that the U.K. became the first member state to leave the union. Prominent experts, such as former Federal Reserve chairman Alan Greenspan, denounced the will of the British people. Others chimed in, essentially calling Brexit economic suicide. And based on the tumultuous trading in the financial markets, it would appear that Wall Street feels exactly the same way.
Certainly, Brexit did catch many experts and financial insiders napping. Why else would the Dow Jones Industrial Average lose more than 600 points on the session following the split? With Friday's loss, the Dow gave up all of the gains made in the week leading up to the panicked session. Of course, the biggest shocker of all was British Prime Minister David Cameron's decision to step down.
All for what? So that the British people can determine the trajectory of their country? So that honest-to-goodness citizens of the U.K. can develop British culture the way they see fit? The manner in which much of the international media is portraying Brexit would suggest that people in their own homes should have zero right to pick the color they want to paint their walls.
This is tyranny at its most subtle. Yet the facts are very clear -- the British did not so much as hate excessive government oversight as they did not having the opportunity for a better future. Since the U.K. joined the European Economic Community in 1973, there economy on a broad scale has never looked the same.
Proponents would argue that the nation's GDP grew 6.54% in the year they joined the EEC. However, the biggest surges in GDP post-EEC occurred in 1987 and 1988. From 1989 onwards, average annual GDP growth has fallen to a pedestrian 2%. To put this number into perspective, this number is only marginally better than economic growth during World War I, and significantly less than the World War II years, where GDP averaged 2.5%.
There was really no point in feeding the giant bureaucracy that is the EU. Britons are British first, and European second. Virtually every country would feel the same about their respective identities and culture. To imply that Britons don't have this inherent right is ludicrous. Submitting to a globalist agenda has neither benefitted them economically nor socially -- as the egregious level of radicalization in British neighborhoods can attest.
Rather than view this as a net negative, investors really should take the contrarian view. This is an exciting time for the British people. It's also my personal hope that their courage will be replicated everywhere.
AMERICANS do not go in for envy. The gap between rich and poor is bigger than in any other advanced country, but most people are unconcerned. Whereas Europeans fret about the way the economic pie is divided, Americans want to join the rich, not soak them. Eight out of ten, more than anywhere else, believe that though you may start poor, if you work hard, you can make pots of money. It is a central part of the American Dream.
The political consensus, therefore, has sought to pursue economic growth rather than the redistribution of income, in keeping with John Kennedy's adage that “a rising tide lifts all boats.” The tide has been rising fast recently. Thanks to a jump in productivity growth after 1995, America's economy has outpaced other rich countries' for a decade. Its workers now produce over 30% more each hour they work than ten years ago. In the late 1990s everybody shared in this boom. Though incomes were rising fastest at the top, all workers' wages far outpaced inflation.
But after 2000 something changed. The pace of productivity growth has been rising again, but now it seems to be lifting fewer boats. After you adjust for inflation, the wages of the typical American worker—the one at the very middle of the income distribution—have risen less than 1% since 2000. In the previous five years, they rose over 6%. If you take into account the value of employee benefits, such as health care, the contrast is a little less stark. But, whatever the measure, it seems clear that only the most skilled workers have seen their pay packets swell much in the current economic expansion. The fruits of productivity gains have been skewed towards the highest earners, and towards companies, whose profits have reached record levels as a share of GDP.
Even in a country that tolerates inequality, political consequences follow when the rising tide raises too few boats. The impact of stagnant wages has been dulled by rising house prices, but still most Americans are unhappy about the economy. According to the latest Gallup survey, fewer than four out of ten think it is in “excellent” or “good” shape, compared with almost seven out of ten when George Bush took office.
The White House professes to be untroubled. Average after-tax income per person, Mr Bush often points out, has risen by more than 8% on his watch, once inflation is taken into account. He is right, but his claim is misleading, since the median worker—the one in the middle of the income range—has done less well than the average, whose gains are pulled up by the big increases of those at the top.
Privately, some policymakers admit that the recent trends have them worried, and not just because of the congressional elections in November. The statistics suggest that the economic boom may fade. Americans still head to the shops with gusto, but it is falling savings rates and rising debts (made possible by high house prices), not real income growth, that keep their wallets open. A bust of some kind could lead to widespread political disaffection. Eventually, the country's social fabric could stretch. “If things carry on like this for long enough,” muses one insider, “we are going to end up like Brazil”—a country notorious for the concentration of its income and wealth.
America is nowhere near Brazil yet (see chart 1). Despite a quarter century during which incomes have drifted ever farther apart, the distribution of wealth has remained remarkably stable. The richest Americans now earn as big a share of overall income as they did a century ago (see chart 2), but their share of overall wealth is much lower. Indeed, it has barely budged in the few past decades.
The elites in the early years of the 20th century were living off the income generated by their accumulated fortunes. Today's rich, by and large, are earning their money. In 1916 the richest 1% got only a fifth of their income from paid work, whereas the figure in 2004 was over 60%.
The not-so-idle rich
The rise of the working rich reinforces America's self-image as the land of opportunity. But, by some measures, that image is an illusion. Several new studies* show parental income to be a better predictor of whether someone will be rich or poor in America than in Canada or much of Europe. In America about half of the income disparities in one generation are reflected in the next. In Canada and the Nordic countries that proportion is about a fifth.
It is not clear whether this sclerosis is increasing: the evidence is mixed. Many studies suggest that mobility between generations has stayed roughly the same in recent decades, and some suggest it is decreasing. Even so, ordinary Americans seem to believe that theirs is still a land of opportunity. The proportion who think you can start poor and end up rich has risen 20 percentage points since 1980.
That helps explain why voters who grumble about the economy have nonetheless failed to respond to class politics. John Edwards, the Democrats' vice-presidential candidate in 2004, made little headway with his tale of “Two Americas”, one for the rich and one for the rest. Over 70% of Americans support the abolition of the estate tax (inheritance tax), even though only one household in 100 pays it.
Americans tend to blame their woes not on rich compatriots but on poor foreigners. More than six out of ten are sceptical of free trade. A new poll in Foreign Affairs suggests that almost nine out of ten worry about their jobs going offshore. Congressmen reflect their concerns. Though the economy grows, many have become vociferous protectionists.
Other rich countries are watching America's experience closely. For many Europeans, America's brand of capitalism is already far too unequal. Such sceptics will be sure to make much of any sign that the broad middle-class reaps scant benefit from the current productivity boom, setting back the course of European reform even further.
The conventional tale is that the changes of the past few years are simply more steps along paths that began to diverge for rich and poor in the Reagan era. During the 1950s and 1960s, the halcyon days for America's middle class, productivity boomed and its benefits were broadly shared. The gap between the lowest and highest earners narrowed. After the 1973 oil shocks, productivity growth suddenly slowed. A few years later, at the start of the 1980s, the gap between rich and poor began to widen.
The exact size of that gap depends on how you measure it. Look at wages, the main source of income for most people, and you understate the importance of health care and other benefits. Look at household income and you need to take into account that the typical household has fallen in size in recent decades, thanks to the growth in single-parent families. Look at statistics on spending and you find that the gaps between top and bottom have widened less than for income. But every measure shows that, over the past quarter century, those at the top have done better than those in the middle, who in turn have outpaced those at the bottom. The gains of productivity growth have become increasingly skewed.
If all Americans were set on a ladder with ten rungs, the gap between the wages of those on the ninth rung and those on the first has risen by a third since 1980. Put another way, the typical worker earns only 10% more in real terms than his counterpart 25 years ago, even though overall productivity has risen much faster. Economists have long debated why America's income disparities suddenly widened after 1980. The consensus is that the main cause was technology, which increased the demand for skilled workers relative to their supply, with freer trade reinforcing the effect. Some evidence suggests that institutional changes, particularly the weakening of unions, made the going harder for people at the bottom.
Whether these shifts were good or bad depends on your political persuasion. Those on the left lament the gaps, often forgetting that the greater income disparities have created bigger incentives to get an education, which has led to a better trained, more productive workforce. The share of American workers with a college degree, 20% in 1980, is over 30% today.
The excluded middle
In their haste to applaud or lament this tale, both sides of the debate tend to overlook some nuances. First, America's rising inequality has not, in fact, been continuous. The gap between the bottom and the middle—whether in terms of skills, age, job experience or income—did widen sharply in the 1980s. High-school dropouts earned 12% less in an average week in 1990 than in 1980; those with only a high-school education earned 6% less. But during the 1990s, particularly towards the end of the decade, that gap stabilised and, by some measures, even narrowed. Real wages rose faster for the bottom quarter of workers than for those in the middle.
After 2000 most people lost ground, but, by many measures, those in the middle of the skills and education ladder have been hit relatively harder than those at the bottom. People who had some college experience, but no degree, fared worse than high-school dropouts. Some statistics suggest that the annual income of Americans with a college degree has fallen relative to that of high-school graduates for the first time in decades. So, whereas the 1980s were hardest on the lowest skilled, the 1990s and this decade have squeezed people in the middle.
First, pick your parentsGetty Images
The one truly continuous trend over the past 25 years has been towards greater concentration of income at the very top. The scale of this shift is not visible from most popular measures of income or wages, as they do not break the distribution down finely enough. But several recent studies have dissected tax records to investigate what goes on at the very top.
The figures are startling. According to Emmanuel Saez of the University of California, Berkeley, and Thomas Piketty of the Ecole Normale Supérieure in Paris, the share of aggregate income going to the highest-earning 1% of Americans has doubled from 8% in 1980 to over 16% in 2004. That going to the top tenth of 1% has tripled from 2% in 1980 to 7% today. And that going to the top one-hundredth of 1%—the 14,000 taxpayers at the very top of the income ladder—has quadrupled from 0.65% in 1980 to 2.87% in 2004.
Put these pieces together and you do not have a picture of ever-widening inequality but of what Lawrence Katz of Harvard University, David Autor of the Massachusetts Institute of Technology and Melissa Kearney of the Brookings Institution call a polarisation of the labour market. The bottom is no longer falling behind, the top is soaring ahead and the middle is under pressure.
Superstars and super-squeezed
Can changes in technology explain this revised picture? Up to a point. Computers and the internet have reduced the demand for routine jobs that demand only moderate skills, such as the work of bank clerks, while increasing the productivity of the highest-skilled. Studies in Britain and Germany as well as America show that the pace of job growth since the early 1990s has been slower in occupations that are easy to computerise.
For the most talented and skilled, technology has increased the potential market and thus their productivity. Top entertainers or sportsmen, for instance, now perform for a global audience. Some economists believe that technology also explains the soaring pay of chief executives. One argument is that information technology has made top managers more mobile, since it no longer takes years to master the intricacies of any one industry. As a result, the market for chief executives is bigger and their pay is bid up. Global firms plainly do compete globally for talent: Alcoa's boss is a Brazilian, Sony's chief executive is American (and Welsh).
But the scale of America's income concentration at the top, and the fact that no other country has seen such extreme shifts, has sent people searching for other causes. The typical American chief executive now earns 300 times the average wage, up tenfold from the 1970s. Continental Europe's bosses have seen nothing similar. This discrepancy has fostered the “fat cat” theory of inequality: greedy businessmen sanction huge salaries for each other at the expense of shareholders.
Whichever explanation you choose for the signs of growing inequality, none of the changes seems transitory. The middle rungs of America's labour market are likely to become ever more squeezed. And that squeeze feels worse thanks to another change that has hit the middle class most: greater fluctuations in people's incomes.
The overall economy has become more stable over the past quarter century. America has had only two recessions in the past 20 years, in 1990-91 and 2001, both of which were mild by historical standards. But life has become more turbulent for firms and people's income now fluctuates much more from one year to the next than it did a generation ago. Some evidence suggests that the trends in short-term income volatility mirror the underlying wage shifts and may now be hitting the middle class most.
What of the future? It is possible that the benign pattern of the late 1990s will return. The disappointing performance of the Bush era may simply reflect a job market that is weaker than it appears. Although unemployment is low, at 4.6%, other signals, such as the proportion of people working, seem inconsistent with a booming economy.
More likely, the structural changes in America's job market that began in the 1990s are now being reinforced by big changes in the global economy. The integration of China's low-skilled millions and the increased offshoring of services to India and other countries has expanded the global supply of workers. This has reduced the relative price of labour and raised the returns to capital. That reinforces the income concentration at the top, since most stocks and shares are held by richer people. More important, globalisation may further fracture the traditional link between skills and wages.
As Frank Levy of MIT points out, offshoring and technology work in tandem, since both dampen the demand for jobs that can be reduced to a set of rules or scripts, whether those jobs are for book-keepers or call-centre workers. Alan Blinder of Princeton, by contrast, says that the demand for skills depends on whether they must be used in person: X-rays taken in Boston may be read by Indians in Bangalore, but offices cannot be cleaned at long distance. So who will be squeezed and who will not is hard to predict.
The number of American service jobs that have shifted offshore is small, some 1m at the most. And most of those demand few skills, such as operating telephones. Mr Levy points out that only 15 radiologists in India are now reading American X-rays. But nine out of ten Americans worry about offshoring. That fear may be enough to hold down the wages of college graduates in service industries.
All in all, America's income distribution is likely to continue the trends of the recent past. While those at the top will go on drawing huge salaries, those in the broad middle of the middle class will see their incomes churned. The political consequences will depend on the pace of change and the economy's general health. With luck, the offshoring of services will happen gradually, allowing time for workers to adapt their skills while strong growth will keep employment high. But if the economy slows, Americans' scepticism of globalisation is sure to rise. And even their famous tolerance of inequality may reach a limit.
With corporate income tax virtually wiped out, Reagan offers Congress two choices: bleed the workingman or risk economic collapse
Between 200 and 300 persons took part in a march and rally Saturday morning at East High School demonstrate the broad base of support for health and human service programs as a priority in Colorado as well as the nation. Colorado, 1981 Credit: Glen Martin/The Denver Post/Getty Summer has begun a bit early in Washington, and it is nasty. The season promises to be unlike any other in the past forty years, for the politicians of both parties have put themselves in a vicious bind, and they know it. Behind the political filigree of grandly worded budget resolutions, just one question confronts the members of Congress the only question they must answer between now and the elections in November, no matter how you phrase it: Which citizens will be forced to make up for the enormous deficits created by Ronald Reagan's economic policy? Who will pay for last year's mistakes? Who are we going to screw? It's the same old story for legislators. What makes the summer of '82 extraordinary is that it's the wrong season for political pain. Normally, the even-numbered years, when federal elections are held, are when Congress pours the gravy, in the form of tax cuts, new spending programs, subsidies, special favors and redeemed promises from old campaigns. Not surprisingly, this biennial largesse makes citizens feel better about their government. It pumps up the economy and helps return faithful public servants to another term in the House and Senate.
But Congress did its big giveaway last year. The Republicans, aided by the confused "me, too"-ism of the Democrats, enacted $750 billion in tax cuts over the next five years. Everyone now understands that Reagan's celebrated three-year tax cut for individuals was tilted in favor of the rich, but most Americans probably still do not comprehend that last year's legislation amounts to wholesale looting of the Treasury by the Fortune 500. The corporate income tax was virtually wiped out, and business' share in financing the federal government was shifted to individual taxpayers.
This tax giveaway, plus the hoggish feeding at the Pentagon, is what has produced the budget crisis of 1982. The beguiling magic of Reagan's supply-side economics promised that the Treasury would be replenished by a new era of robust industrial investment—more profits, more jobs, more federal revenue. Instead, the country got a long recession, the highest unemployment since the early Forties, rising bankruptcy and fear. The recession was man-made, caused by the tight monetary controls imposed by the Federal Reserve Board with the president's full support. The Fed was supposed to wring inflation out of the economy by holding it back, while the Reagan tax cuts were supposed to propel the economy forward with huge new incentives for real growth. That was the theory, and it didn't work. You can't go both directions at once. Cutting taxes simply meant less revenue, and the high interest rates created by the Federal Reserve Board blighted any prospects for new investment. If Congress doesn't undo the fundamental miscalculations of Reaganomics, the government will be in the red by $180 billion next year and more than $300 billion in a few years.
Knowing this, congressional leaders have fastened upon a simple-minded consensus: they must raise taxes and cut spending drastically, before continuing high interest rates sink the economy. This epic bind is producing panic in the herd. Their seasonal instincts tell the politicians that it's time to spread around the sugar before the November elections, but the outlines of economic crisis tell them they must do the opposite. Normally, citizens might derive a little sardonic pleasure from watching their men and women in Washington squirm, but this time the stakes are too scary to be amusing. No politician wants to talk about it openly, but they are driven this summer by another, even deeper, fear: if a political solution isn't found this summer, America could be headed toward a genuine economic collapse. With a little bad luck and more bad policymaking, 1982 could become something resembling 1929. This is the unspoken subtext that compels the nasty choices Congress must make in the coming months.
No responsible economists are predicting the Big D, but for some months now, the most sober-minded analysts have identified the preconditions and envisioned the possibility. One scenario for disaster goes like this: sooner or later, the economy will finally begin to recover from recession and business will pick up again. But the combination of Reagan's huge deficits and the Federal Reserve's tight lid on the money supply will produce a new surge in interest rates, which will squelch the recovery. Scores of corporations, already over-extended on short-term credit from the last recession and having sold off their best assets to survive, won't have enough time to get well. If a new recession hits later this year or early in 1983, many of these enterprises would be pushed over the brink. Then what would happen? With a few dramatic failures, nervous bankers would begin calling in loans from other shaky businesses and a cascade of industrial bankruptcies would spread panic throughout the economy, further fueled, perhaps, by more failed savings-and-loans and farmers buried in debt.
This is not crazy talk from professional merchants of doom. Albert M. Wojnilower, chief economist and managing director of First Boston, a leading investment banking house, warned what might happen if the government doesn't change policies. "Just when the business community is heaving a collective sigh of relief that interest rates may be ebbing a bit, they would shoot up again," he said. "In that event, it is odds-on that a serious credit crunch and a wave of industrial bankruptcy would be precipitated, engulfing the prudent and imprudent with little distinction."
Henry Kaufman, the Wall Street guru from Salomon Brothers, phrases his fears more opaquely, but his message is the same. "The American economy," he said last month, "is still in a very precarious position. I believe that position is more precarious than it was a year or so ago.... The financial fabric of our economic system has been significantly weakened." This is not just another recession, Kaufman emphasized: "We are not in a typical cyclical period. We're in a period in which our financial system has become more fragile ... and therefore we must do things that are extraordinary, that are different, that to some extent are painful."
James K. Galbraith, the young executive director of the Joint Economic Committee of Congress, described the risk: "The cracks are visible in the wall. As an engineering question, you can't predict when the wall will crumble."
***
Most congressional leaders, listening to this somber talk, have accepted the unavoidable question: who must feel the pain so that America can get well? Senate Republicans have drawn up a list of victims endorsed by the president, and it looks very much like their list from last year: Poor people on welfare. College students with government-backed loans. The elderly. Public schools and community health services. Construction workers whose jobs depend upon government highway projects. Federal employees—including soldiers, sailors and airmen—who will not get a pay raise next year. Veterans and other pensioners who won't get their regular cost-of-living increases. People like that.
Old folks, in particular, have been singled out for virtuous suffering. The Republican budget proposal calls for trimming about $300 billion over the next three years (not counting some fanciful predictions about lower interest rates on the national debt), and more than a fifth of that money will come from the elderly. Social security, Medicare, Medicaid, veterans' pensions—cuts from these programs will save about $65 billion. Roughly speaking, the golden agers are going to pick up the tab for the increased spending at the Pentagon.
Reagan hoped they wouldn't notice. The budget resolutions Congress would enact in early summer would speak in generalized terms, and the specific legislation later in the year would define exactly who'd lose blood. The administration planned to wait until after the fall elections before taking a transfusion from social-security recipients, but the Republicans in the House, normally sheeplike in their obedience, rebelled. You see, all of them face reelection this fall, and their elderly constituencies had noticed and were not pleased. Reagan's social-security cuts were thus "shelved," but one can confidently predict that these cuts will reappear after the old folks have cast their ballots in November.
The Republicans also intend to raise taxes, but they are being coy about whose taxes. The Senate finance chairman, Senator Bob Dole (R-Kansas), is pushing a minimum corporate tax to perfume the stench left by the business tax cuts he approved last year. The majority leader, Senator Howard Baker of Tennessee, was talking up a surtax on rich folks in the upper-income brackets, but he couldn't sell the idea to the true believers in his own party. Taken as a whole, the Republican tax proposals will not distress the well-to-do, for the pain is artfully distributed among everyone else. In fact, the increases are designed to conceal the fact that the average American, not the rich, will be paying more taxes if the Republicans have their way. It goes like this:
If you drive a car or truck, you may be paying twelve cents a gallon more for gasoline. This is known euphemistically as an "energy tax," which will discourage profligate Americans from wasting gas. Actually, it is an import fee on foreign oil that will help the domestic oil industry by propping up its sagging prices.
Excise taxes may also add a few pennies each to the price of cigarettes, beer, whiskey, wine and telephone calls.
When they file their income taxes, wage earners may find that the Republicans have closed a few loopholes. Not the big ones for corporate returns, but nickel-and-dime deductions for average folks, such as those for state and local sales taxes, interest payments on consumer credit and the minimum deduction of $150 for health insurance.
For those who are out of work, the administration proposes adding insult to injury by taxing all unemployment benefits as income. The justification is perverse this would make laggards go out and find a job.
The president, naturally, has excluded himself as much as possible from these distasteful propositions. In fact, if you listen to White House rhetoric, Reagan is against raising anyone's taxes. He only went along reluctantly with the nervous Republicans in the Senate. Strangely enough, this is probably the truth. To understand the president's utter calm in the midst of general panic, you have to appreciate that Reagan has already accomplished most of what he came to Washington to do. He has launched a massive buildup of armaments. He's bamboozled Congress into enacting lopsided tax cuts that favor folks at the top end of the income scale. He's given oil and other industries everything they wanted. The deficits frighten others, but they don't bother Reagan because he sees them as a club, driving the congressional herd where he wants to go: toward a smaller federal government. It's not even clear how distressed the president is by the ruinous economic conditions. Last month, when the latest unemployment numbers were announced, the president was on the South Lawn, dressed in that ridiculous riding outfit that makes him look like a Hollywood director from the Twenties. Reporters asked how he felt about 9.4 percent unemployment; the Gipper said he felt bad. He blamed the Democrats. Then, with a wave and a smile, he went horseback riding. Reagan keeps proclaiming his faith that supply-side prosperity is just around the corner. But he also quarrels with unemployment figures, as though bad statistics were to blame. His handlers keep posing him for media photos in earnest conversation with poor people. But he does seem awfully happy with himself. Indeed, perhaps Reagan has wrought exactly what he wanted. And he is pleased. Back in the spring of 1978, when he was still a presidential candidate and before his rhetoric of economic recovery had been fully developed, Reagan had an unguarded conversation with reporters. They were discussing the economy and what was needed to make things right. "Frankly," said Reagan, "I'm afraid this country is just going to have to suffer two, three years of hard times to pay for the binge we've been on." In those days, Reagan used to preach that the country must endure a big "bellyache" before it could get well. Pain is good for you. His advisers persuaded him to drop the bellyache from his speeches.
***
The Democrats are immobilized by their own confusion. They can't describe the future convincingly, and they seem to have forgotten their own past. Groping to understand, many of them became fearful that maybe Reagan's conservativism is the future. Since the cowboy blew them out with his 1980 landslide, the party of the bleeding hearts has been taking lessons from the party of the bottom line. Last year, the Democrats learned about capital investment. Their version of corporate-tax giveaways was nearly as obscene as the Republican bill that was enacted. This year, the liberals discovered deficits. They pronounced themselves appalled. Now the Democrats are pulling frantically in different directions, unable to exploit the Republican disaster because they've really become three parties in one. The oldest and largest contingent is composed of aging "red-hots," who came to Congress when liberalism was in flower, mostly from big-city, working-class districts or rural backwaters of poverty. They know what they believe in, and it is not smaller government. Their ranks are dwindling. In the middle are the "boy scouts," bland and earnest and anxious to sound more responsible than the red-hots. They want business as a pal. They talk up high-tech as the big solution to every social ill (columnist Mark Shields calls them "Atari Democrats"), and they would like to believe that the old class differences of poverty and race are passé. On the Democratic right wing are the "porkers," mostly from the South and West, sometimes known as "boll weevils." Behind a veneer of conservative rhetoric, they practice old-fashioned pork-barrel politics — taking care of oil, the defense industry, sugar, cotton, peanuts. They do pretty well, too, because they are willing to take their votes wherever they smell the bacon cooking. This melange has produced its own conflicting lists of who should pay for the deficits, but none is especially comforting. For one thing, the Democrats propose a three-year freeze on domestic spending that's only slightly less restrictive than the Republicans'. It is sugared with a few million here and there to create the appearance that the Democrats aren't hurting the same folks, though of course they are. The Democrats admittedly would take a much bigger bite out of the defense budget, which the Republicans barely nicked. The Democrats are also rallying around the old folks, promising to protect them from the Republican barbarians. This is smart politics for November, but the promise isn't worth much in the long run.The social-security system does face insolvency next year, just as the Republicans say. Sooner or later, somebody will have to pay for that, too—either the elderly who get the checks or the young wage earners who pay the taxes. The Democrats propose to raise taxes even more than the Republicans, and they are even less precise about naming the victims. Their fundamental confusion has led many boy scouts, such as Representative Jim Jones of Tulsa, chairman of the House Budget Committee, to propose a repeal of Reagan's third-year tax cuts for individuals, the final ten percent due on July 1st, 1983. This would save the government big bucks, but it would also hurt the very people Democrats are supposedly representing: striving middle-class families, including those blue-collar union families who used to vote Democratic. It would set the Democrats up for Reagan's accusation that they are the party of big spenders who tried to raise the workingman's taxes. Maybe the Democrats will rediscover old principles this season, but it doesn't seem likely.
***
The obvious target that Democrats seem unwilling to go after is the lost revenue from the wholesale tax reductions for business. The business tax cut was last summer's scandal. This summer's scandal is that neither party has mustered the courage to reopen the subject of corporate taxes and restore some of the lost revenue, not to mention a semblance of justice. Consider the numbers: business tax cuts will total $250 billion over the next five years and $500 billion by 1990—plenty of loose change to help curb deficits. The corporate share of federal revenue will decline drastically, from 12.4 percent in 1980 to 7.1 percent in 1987 (back in the flush times of 1965, it was 21.8 percent). And it's individual taxpayers who'll be picking up the slack: they provided 74.6 percent of the revenue in 1980, and by 1987, they will be paying 85.2 percent of it. As everyone knows, the new "incentives" for business have not produced the anticipated surge in investment, but they did yield a crazy quilt of windfall dollars on corporate tax returns. General Electric not only owed no taxes on its 1981 profits of $2.6 billion, it actually collected a $100 million refund from the government on previous years' returns. Occidental Petroleum, being a resourceful oil company, hasn't paid federal taxes for four years; finding that it couldn't apply its tax breaks to its own 1981 return (since it didn't owe anything), the company sold its windfall for $25 million. The choicest bonbon was a new provision called "leasing," which allows companies to sell their surplus tax breaks to other companies for use as write-offs. To underscore the Democrats' confusion about all this, consider that Charles Manatt, the Los Angeles businessman who is Democratic national chairman, is actually campaigning with corporate tax lobbyists against the repeal of leasing. The new depreciation rules, coupled with the investment tax credit, have actually created negative tax rates on new investments. Roberr S. McIntyre, director of federal tax policy for Citizens for Tax Justice, a labor-consumer group, explained what a negative rate means: "If you earn one dollar on a new investment before taxes, you earn two dollars after taxes. The new deductions are so generous that they will not only shelter income from new assets but also other income from a company's regular operations." This reality is artfully disguised in the Council of Economic Advisers' 1982 report, which nevertheless acknowledges that investments in construction machinery, general industrial equipment, and trucks and trailers all now enjoy negative tax rates. By 1986, if a company earns a 2.6 percent return on its new machinery, the federal government will make sure its after-tax profit is four percent. While theoretically every business can benefit, the tax lobbyists who drafted the new code stacked it in favor of their employers, the largest corporations in America—specifically, the oil, mining, railroad, auto and steel industries. Some of these didn't need help from Uncle Sam, and some of them can't get well even with the help. Oil and gas interests, by McIntyre's estimate, will save at least $60 billion from depreciation over the decade, plus $33 billion from the reduced windfall-profits tax also lobbied through Congress. But these tax breaks contain another element that is perhaps more damaging—a bias against jobs. If you run down the list of which industrial sectors enjoy negative-incometax status with the government, the bias is revealed: the capital-intensive industries (oil, chemicals, mining) were the big winners, and labor-intensive enterprises like building construction suffered. The tax bonuses available to a company that buys a new machine instead of hiring a worker are going to tilt every decision made by corporate planners in the obvious direction. A company would be foolish not to buy a machine, even if hiring a worker is more economical. Given all this, it seems strange that the party that presumes to speak for the little guy isn't raising a righteous fury. A few Democrats — like Representative Jim Shannon of Massachusetts — are, but most politicians from both parties fervently wish to ignore this great source of potential revenue. If one asks why, the whispered answer around Capitol Hill is simple: the PACs. American business and its network of Political Action Committees scare Congress, especially the Democrats. In 1976, the business PACs poured $7 million into congressional elections, and by 1980, the business money had increased almost fivefold to $30 million in campaign contributions. If $30 million sounds like a lot, the return on this investment was $250 billion in tax reductions. "The business interests are really powerful," Shannon explained. "You get exposed on two levels if you question these business tax cuts. First, they say you aren't allowing them to work. Then you get exposed on a more personal level — because the business lobby that put these things together has a hell of a lot of money to throw around." Democrats are anxious to get campaign money from business, but liberal Democrats are even more fearful of being targeted as antibusiness by the U.S. Chamber of Commerce, the Business Roundtable and the National Association of Manufacturers—organizations that coordinate the flow of money from corporate PACs. A PAC can dump a million dollars into an obscure congressional district and buy a lot of TV time for an unknown Republican challenger. Even righteous liberals think twice about stirring up that kind of opposition. In the old days, they'd have called it blackmail. "The PAC money plays a big role," Shannon said darkly. "Nobody wants to admit it. But you have to think about that. Nobody wants to get targeted."
***
If by summer's end Congress is still stalemated over the budget crisis, and if the national economy is truly on the brink of catastrophe, the political debate will turn swiftly to another solution. The elected representatives, regardless of party and ideology, will rediscover an old and simple rule: the way to control high interest rates is to control high interest rates. That means, in addition to any congressional action on the budget, the Federal Reserve Board must relent in its tight money policy and force interest rates down to a bearable level. For several years, the Fed and its imposing chairman, Paul Volcker, have had the politicians spooked. The Fed's slow growth in the money supply was the mysterious "inflation fighter" and, as long as inflation was the main aggravation, none dared challenge this approach. After all, it was working: inflation was declining dramatically. The Reagan administration fully embraced Volcker's approach and shared in the glory of lowered inflation rates. But now the politicians are beginning to attack. When Volcker started his policy in October 1979, the United States was in the fifty-fifth month of the longest peacetime expansion in history. Unemployment was below six percent. Industrial production was rising. Since then, the country has gone through two recessions and interest rates have climbed to a level that, in the old days, would have been called by its honest name — usury. Even if the recession ends this summer, the brightest hope for 1983 is that industrial production might return to the high point it reached in 1979 before Volcker introduced his magic. Liberal Democrats have been flailing at Volcker and his crippling interest rates for some months. Representative Henry Gonzalez of San Antonio even introduced a resolution of impeachment. Now the Democrats are being joined by congressional Republicans. Both House and Senate budget resolutions include exhortations to the central bank, demanding that it ease up on the tight money. So far, Volcker has ignored these commandments and offered no comforting hints that he intends to change course. If it comes to that, Congress can force Volcker to lower interest rates, but this is the kind of institutional confrontation Washington abhors. Without relief from the Fed, however, there is absolutely no guarantee that whittling down the deficit will actually produce the lower interest rates and economic recovery the politicians long for. Volcker's policy has, in fact, squeezed harder than intended. The figures from 1981 demonstrate that the Fed held back the growth of money even more than its own guidelines prescribed. That in itself gives Congress a strong argument for forcing relaxation by the Federal Reserve, but Congress is now in a double bind. If Congress forces Volcker to relent without taking convincing action of its own on the budget deficits, a burst of hyperinflation and high interest rates would surely follow—probably worse than anything we have seen before. If it comes to a choice between catastrophe and the return of double-digit inflation, the politicians will doubltlessly choose inflation, but someone has to suffer to get out of this mess. How much pain can America take? Even if things work out, even if Congress acts and the Fed relents and a full-scale collapse is averted, analysts like Henry Kaufman are not exactly bouyant about the years ahead. "If we can muddle along without weakening the fabric of our system over the next couple of years," Kaufman allowed, "then perhaps by the time we get into the latter half of this decade, we will be on sounder footing. But the intervening period will be a very difficult one for us."
On Thursday, the U.S. Supreme Court ruled 4 to 3 in Fisher v. University of Texas that universities can continue using race as one of multiple factors in their admissions decisions. (Saul Loeb/Agence France-Presse via Getty Images)
As the president of the Institute for Higher Education Policy, Michelle Asha Cooper has worked to give low-income, minority and other underrepresented groups a pathway to a college degree. Inclusion is a key part of the nonprofit’s mission, just as it is central to Thursday’s historic Supreme Court ruling to uphold race-conscious college admissions. But the decision is about much more than that, Cooper says. She wrote the following post to offer a broader perspective on the significance of Thursday’s decision.
By Michelle Asha Cooper
Affirmative action has been and still is legal. That summarizes the conclusion of the latest round of court debates.
In Thursday’s 4-3 decision, the U.S. Supreme Court ruled that the consideration of race, along with other factors, in college admissions is constitutional. The Court’s ruling in Fisher v. University of Texas not only affirms that diversity is a compelling educational interest, it also marks the fourth time in four decades that the same ruling has been determined by the Court. Thereby, confirming that we don’t yet live in a post-racial society.
Historical remnants of discrimination, which undeniably still plague this country, are now compounded by contemporary forms of bias and intimidation. Because college campuses are microcosms of the larger community, societal wounds can surface in these environments quite easily. For example, we have all heard stories about students engaged in racist activities, such as the incidents at the University of Oklahoma and University of Mississippi.
Contemporary forms of discrimination, unlike these overtly racist acts, are often structural and masked as “good intentions.” The ongoing affirmative action debate is a clear example. Arguments against race-conscious policies are shrouded in the language of equality and meritocracy — the belief that individuals should just “pull themselves up by their bootstraps.” But this belief in merit fails to see that some people don’t even own boots, and as a result do not have straps upon which to hoist themselves.
The Supreme Court’s decision confirms the reality of the struggles of many Americans. It affirms the country’s willingness to take bold, and for some even unpopular, steps to remedy America’s most vexing challenges. And, it shows support for educational equity and solidifies diversity as a hallmark of American higher education. In other words, the Court’s ruling validates the need for sensible reflection and implementation of race-conscious policies that can enhance diversity, remedy discrimination, and combat structural racism.
Another point inherent in the ruling is recognition that affirmative action is about the economic bottom line — a strong workforce and a strong economy. This ruling comes at a time when the importance of attaining a postsecondary degree or credential is critical. By 2020, 65 percent of all jobs will require some higher education and training, an increase from 28 percent in 1973. But even as demographic shifts alter the face of America, far too many students of color lack the opportunity to access and complete a college education.
In fact, fewer African Americans (29 percent), Latinos (21 percent), and Native Americans (24 percent) obtain college degrees compared to Whites (45 percent). Research has consistently shown that it becomes much harder to secure jobs and earn decent wages without having attended college. Unemployment rates for African Americans (8.2 percent) is almost two times higher than Whites (4.1 percent) and the national average (4.7 percent), showing that even as the economy improves, people of color still experience much volatility. And while some may argue that education cannot account for all the factors that cause unemployment, with such contrasting data, it is hard to argue that the inability to access quality education and the implicit nature of discrimination do not affect these outcomes.
In today’s increasingly diverse society and globally-interconnected world, diversity and access to opportunity is just as much an economic imperative as it is a social one. As a result, our nation’s colleges and universities must recruit, develop, and maximize the talent of individuals from diverse communities. They must ensure that all students, regardless of racial background, have the cultural currency — the attitudes, skill sets, and experiences — to work in and among diverse clients and communities. After all, in the 21st century, affirmative action is not just about opening doors. It’s about developing a pipeline of talent that reflects the composition of the broader society and is prepared to assume leadership roles to sustain America’s economic and global competitiveness.
It consists of three Ps: profit, people and planet
Nov 17th 2009 | Online extra
·
The phrase “the triple bottom
line” was first coined in 1994 by John Elkington, the founder of a British
consultancy called SustainAbility. His argument was that companies should be
preparing three different (and quite separate) bottom lines. One is the
traditional measure of corporate profit—the “bottom line” of the profit and
loss account. The second is the bottom line of a company's “people account”—a
measure in some shape or form of how socially responsible an organisation has
been throughout its operations. The third is the bottom line of the company's
“planet” account—a measure of how environmentally responsible it has been. The
triple bottom line (TBL) thus consists of three Ps: profit, people and planet.
It aims to measure the financial, social and environmental performance of the
corporation over a period of time. Only a company that produces a TBL is taking
account of the full cost involved in doing business.
In some senses the TBL is a
particular manifestation of the balanced scorecard. Behind it lies the same
fundamental principle: what you measure is what you get, because what you
measure is what you are likely to pay attention to. Only when companies measure
their social and environmental impact will we have socially and environmentally
responsible organisations.
The idea enjoyed some success in
the turn-of-the-century zeitgeist
of corporate social responsibility, climate change and fair trade. After more
than a decade in which cost-cutting had been the number-one business priority,
the hidden social and environmental costs of transferring production and
services to low-cost countries such as China, India and Brazil became
increasingly apparent to western consumers. These included such things as the
indiscriminate logging of the Amazon basin, the excessive use of hydrocarbons
and the exploitation of cheap labour.
Growing awareness of corporate
malpractice in these areas forced several companies, including Nike and Tesco,
to re-examine their sourcing policies and to keep a closer eye on the ethical
standards of their suppliers in places as far apart as Mexico and Bangladesh,
where labour markets are unregulated and manufacturers are able to ride
roughshod over social and environmental standards. It also encouraged the
growth of the Fairtrade movement, which adds its brand to products that have
been produced and traded in an environmentally and socially “fair” way (of
course, that concept is open to interpretation). From small beginnings, the movement
has picked up steam in the past five years. Nevertheless, the Fairtrade
movement is still only small, focused essentially on coffee, tea, bananas and
cotton, and accounting for less than 0.2% of all UK grocery sales in 2006.
One problem with the triple
bottom line is that the three separate accounts cannot easily be added up. It
is difficult to measure the planet and people accounts in the same terms as
profits—that is, in terms of cash. The full cost of an oil-tanker spillage, for
example, is probably immeasurable in monetary terms, as is the cost of
displacing whole communities to clear forests, or the cost of depriving
children of their freedom to learn in order to make them work at a young age.
Further reading
Elkington, J., “Cannibals with
Forks: the Triple Bottom Line of 21st Century Business”, Capstone, 1997
Savitz, A.W. and Weber, K., “The
Triple Bottom Line: How Today's Best-Run Companies Are Achieving Economic,
Social and Environmental Success—and How You Can Too”, Jossey-Bass, 2006
Willard, B., “The Sustainability
Advantage: Seven Business Case Benefits of a Triple Bottom Line”, New Society
Publishers, 2002
More management ideas
This article is adapted from
“The Economist Guide to Management Ideas and Gurus”, by Tim Hindle (Profile
Books; 322 pages; £20). The guide has the low-down on over 100 of the most
influential business-management ideas and more than 50 of the world's most
influential management thinkers. To buy this book, please visit our online shop.
And where the presidential candidates
stand on them.
After two
straight elections dominated by economic issues, 2016 is shaping up to be …
another election dominated by economic issues. In polls, voters consistently rank the economy as their top
concern, and candidates from Jeb Bush to Bernie Sanders have put dollars and
cents at the center of their campaigns.
But far from offering a clear advantage to one party, the
economy offers risks and opportunities for all the candidates. Unless things
change significantly in the next 12 months, the economy is neither good enough
nor bad enough to provide either side with a completely clean narrative.
It is general election time in Canada and
economics matter to leaders and parties because economics matter to voters. How
a government has performed with respect to job creation, incomes and inflation
is a key element for Canadians in judging the performance of a government and
the willingness of Canadians to see it continue in office. How each party’s
platform and campaign propose to manage the economy to achieve sustainable
prosperity are key issues in determining which party Canadians will embrace on
Election Day.
Economics matters in a fundamental way to
charities too. Donations move in lockstep with economic performance. The more
incomes grow, the more charities will be able to raise. The same holds true for
other elements of charitable income – revenue from governments, revenue from
sales of goods and services and memberships – are all influenced strongly by
the growth or lack of it on the overall economy. When it comes to economics,
charities are in the same position as a lot of Canadians, worrying about the economy
and about the proposals of the various parties for managing the
economy well.
Conversely, and in a way that is as yet not
fully appreciated by political parties, the way charities perform is important
to Canada’s economic success and sustainable prosperity. Over the last decade
or so, charities have grown faster than gross domestic product in Canada
contributing significantly to Canada’s solid economic performance in a
turbulent global economy. Today, the charitable sector broadly defined
accounts for about 13% of the total workforce in Canada and about 8.1 % of
gross domestic product. And the sector delivers the social and cultural
services that an aging and increasingly diverse population wants and needs. The
charitable sector is jobs and growth and value in action.
Where
is the charitable sector in party platforms this election?
This relationship of charities to the core
economic values of Canadians has not been featured as an issue in the election
or in the party platforms to date. In part, this is not surprising. The
platforms are quite general in nature with the only in-depth mention of
specific sectors being energy (largely from an environmental perspective) and
housing. In part, however, this gap results from a lack of awareness at the
policy and platform making level. There is an ongoing perception that charities
exist somehow outside the economy as a whole and a corresponding under
appreciation of the role that charities play in sustainable prosperity.
This is more than a perceptual problem. It
results in promises and proposals that focus, for example, on areas (wrongly)
felt more vital to the economy than the charitable sector. There is nothing
wrong with creative policy proposals paying attention to, for example, science
and technology and engineering and mathematics (STEM); or to the growth of the knowledge-based economy as a whole; or to
infrastructure. These are genuinely important and worthy of inclusion in the
various party platforms. But the charitable sector has a proven track record of
jobs and growth. Lack of awareness can lead to exclusion from some imaginative
and valuable policy proposals.
Correcting ingrained misperceptions is a
tough business. It requires a good story, backed by solid evidence (which
charities have in abundance) as well as patience and persistence. But there is
no better time than now when policy agendas and platforms are being formulated,
when parties are uniquely open to voters and to new ideas for charities to
creatively assert themselves in the electoral process.
First, pick your parentsGetty Images
