Why we need a $15 minimum wage, and why it won’t hurt us

In recent years there has been debate over the minimum wage, from both the right and left.

In 2013 President Obama called for the minimum wage to be raised to $9/hr prompting criticism from many Republicans and conservatives that it would be detrimental to the economy, not a surprising response, but more recently Democratic Presidential candidate Bernie Sanders called for a $15/hr minimum wage, prompting criticism from some Democrats/those on the left who feel this number is too high. His opponent Hillary Clinton for example has supported a $12 min wage, but not 15.

The debate has gotten quite interesting. Some Republicans, such as Ted Cruz, oppose the minimum wage entirely. Some accept raising it moderately, perhaps to $9 or $10 an hour. Democrats/liberals are split on going to $12 or $15.

While the debate rages on, people have taken the matter into their own hands. In recent years there has been a nationwide push for a $15/hr min wage, drawing mockery or being waved off as a bargaining ploy to achieve something more reasonable. However, some cities such as Seattle, San Francisco and Washington DC have passed bills to raise their minimum wages to $15/hr. While this is understandable for such high cost cities, in more bold moves the states of California and New York have passed bills to raise their statewide minimum wages to $15. The fight for 15 must now be taken seriously, (and at the very least the need for some minimum wage increase) but the questions still remain:

Do we need a minimum wage? If so, what is a good number? Is $15 too high? What about worries that it’ll cost job loss, cause price increases, or the argument that it’s unfair burger flippers should suddenly make as much as many other Americans? Let’s look at each of these questions.

Yes, we do need a minimum wage.

First, there is the moral argument that if you are willing to work, you should be able to earn a decent living. It’s actually a very American idea, and indeed polls show over 70% of Americans, including a majority of Republicans, support the minimum wage being raised.[1][2] A recent poll showed only 8% favoring repeal of the minimum wage, while a plurality (30%) supported a $15/hr min wage.[3] A survey of 1000 business executives, done by Republican pollster and consultant Frank Luntz, found 80% support increasing the minimum wage.[4] Other polls have also indicated small business support for a higher minimum wage, with around 60% agreeing it should be raised to 10 or 12 dollars. [5][6]

Sound hard to believe? Well, besides moral reasons, there are realistic reasons to support a min wage. First, even if eliminating the min wage would create more jobs, it wouldn’t do much good if all these jobs paid $4/hr. How would people be able to afford the goods and services created by firms? Afford cars? Rent? Basic necessities? How would people be able to save for the future?

Some argue abolishing the min wage would lower prices, but I find this dubious. If you look at the min wage adjusted for inflation, (seen below) you see it’s been largely stagnant since 1989, yet the cost of living continued to increase over this time. It seems the cost of living and min wage are unrelated, and this makes sense if you think about some of our major expenses. Gas and food prices are dictated by global supply & demand, utilities are an extremely monopolistic market, healthcare costs have grown far beyond the rate of inflation for decades. Clearly theses costs are unrelated to the min wage, as are others like auto insurance. While the min wage will have some impact on prices, it’s obvious the cost of living will increase regardless, thus the min wage should rise over time to ensure working people have some degree of a solid living.

real min wageSecond, our economy has changed from a manufacturing to service economy. This is permanent and simply a result of a developing economy. For example, in Jan 2016 nearly 70% of jobs created that month, (105k of 151k) were in retail and food services/drinking places.[7] Service sector jobs are generally low paying, thus we’ve undergone a fundamental shift to a low wage economy. More proof of this is seen in a study, revealing the plurality of jobs created since 2009 (44%) were in low wage industries.[8] If this is simply how things are now, it’s unfair to leave these industries so low paying.

Third, a min wage hike is a stimulus. When people have more money, they will spend more money, stimulating the economy. This is especially true with lower earners, who tend to spend more of their money than higher earners.  A min wage hike would be a stimulus package that comes at no cost to the government. In fact:

A higher minimum wage will help the government budget. If people make more money, it will lead to higher tax revenue, without raising taxes, and it will also reduce spending on public assistance. One study conservatively estimates a $10.10 min wage would save the government $7.6 billion a year through less public assistance spending.[9]

OK, but doesn’t a minimum wage cost jobs or raise prices?

In reality there is little evidence to suggest min wage hikes hurt employment or has drastic impact on prices.  Numerous studies have been done on  min wage hikes and employment, the most famous being Card and Krueger’s 1992 study. They looked at fast food restaurant employment in New Jersey and Eastern Pennsylvania, before and after NJ implemented a min wage hike while PA did not. This helped isolate the min wage hike impact on employment. They found no negative impact on fast food employment in NJ after the state’s wage hike.[10]

A better study was done in 2010 by Dube, Lester and Reich. One aspect of the study was looking at hundreds of bordering counties, where there was a min wage difference, all over the country from 1990 to 2006. (Seen below) They found no negative impact on employment from min wage hikes.[11]minwagestudy

Other studies have found the min wage to have no negative impact on teen employment, nor on employment even during a recession. One “meta study” took 64 studies conducted from 1972 to 2007, pooled all the data together, and found no negative impact on employment.[9]

During the 50s and 60s when the min wage was higher in real terms, we had a very strong economy with low unemployment. Germany recently implemented their first ever min wage and it had no negative impact on employment. Australia has a high minimum wage, currently $17.70 (AUD)/hr, and they haven’t had a recession in 25 years. How can all this be?

Several reasons. First, is the stimulus impact. People spending more boosts the overall economy, thus helping corporate profits and negating some of the cost.  Second, higher wages may reduce turnover, increase productivity (people working better), and draw more people into the labor force, creating competition for jobs and thus keeping pressure on employees to work harder.

This is nothing new, in 1914 Henry Ford shocked the world by doubling wages, and the result was less turnover, higher productivity, and Ford hailed it as a great cost cutting measure. 100 years later some are re-learning this lesson. McDonald’s recently gave some employees a $1 raise, as well as 5 days paid vacation, and the results have been reduced turnover and improved customer satisfaction.[12] In fact a number of studies have shown min wage increases lead to decreased turnover and higher customer satisfaction.[13]

OK,  but won’t a higher minimum wage just raise prices?

While there will be some price increase associated with a min wage hike, real life evidence suggests they will be very mild. One study estimates a 45% min wage hike would lead to a 2.7% increase in fast food prices.[14] Another estimates a $15 min wage would lead to a 4.3% increase in fast food prices.[15] A review of 30 papers on the topic found a 10% min wage increase would cause no more than a 4% increase in food prices, and .4% increase overall[10] while another study estimates a $1.75(24%) min wage hike would cause a .27% increase in prices.[16] While there is variation in results one thing is clear, a min wage hike will not cause drastic inflation. There will be small price increases, yes, however anyone who says a hamburger will just cost $20, or the min wage hike wont help low wage workers because price increases will wipe it out are simply mistaken.

OK, but what should the min wage be? Isn’t $15 high?

One study found a majority of people earning $12.16/hr and under require public assistance.[17] If you believe that someone who works shouldn’t need public assistance, (which would also reduce public assistance to the role of safety net, rather than necessity) than clearly $12/hr isn’t going to cut it. Especially if you believe working people should earn more than simply survival wages, but enough to enjoy a solid life. That every worker, everyone who chooses to get a job and be productive, should be able to enjoy a decent piece of the pie they help create, and not just surviving. So what is a good rate? $15 certainly would put many workers above the need for public assistance, but will it earn a decent living?

Using data from government/respected sources EPI has calculated the cost of living needed to attain a “modest yet adequate” standard of living for 618 areas of the US. Taken into account is rent, food, child care, transportation, healthcare (both private and public costs), taxes and other necessities such as clothing, personal care items, school supplies and telephone costs for some examples.[18] This has been put into a calculator format to determine the cost living needed for a range of families from single adult to 2 adults, 4 children.

Needless to say there is great variation around the US to attain a modest yet adequate living. In rural Tennessee $49,767 is needed for a 2 parent 2 child family, equating to $11.96/hr. ($49,767 /2 workers = $24,883 per year/2080 hours (40 hrs/week X 52 weeks)). A single adult would need $11.75/hr ($24,444/2080). In Washington DC a single adult would need $20.24/hr ($42,119/2080) while a 2 parent, 2 child family would need $25/hr ($106,493/2 =53,246/2080). EPI states the median is Des Moines, IA which requires $15.32/hr for a 2 parent 2 child family, and $12.89/hr for a single adult. Perhaps in another post I will take a more in depth look at costs of living around the US, but for now I’ll say $15/hr seems to be a good middle point. It will strongly benefit many areas of the country and single adults, (enhancing the stimulus impact) while being of lesser benefit in other areas and for families, (though still a great improvement and more on families in just a bit).

Another, more uniform, thing to look at is productivity. Productivity is basically how much each worker produces. How good a worker you are and how efficiently our economy runs. EPI notes if the minimum rose with productivity, as it did from 1948-1968, it’d currently be $18.67/hr.[19]

mw1

Even if the minimum wage kept up with productivity at 1980 levels (when it went more or less permanently downward) the minimum wage today would be around $15.50

mw2

Personally I like this concept. First, we’re told that if we work harder, get more education, we’ll be rewarded, as productivity goes up so does pay. Second, there won’t be significant inflation as long as wages rise with productivity. Our productivity has continued to rise, we’re increasingly educated, so wages should rise. One could argue those at the minimum wage may not work in productive areas, but teachers, police officers, garbage collectors, child and elder care can’t really be much more “productive” yet we don’t continue to pay them wages from 100 years ago. Everyone has a role to play in our economy, and everyone should get a piece of its growth. By indexing to productivity, we’d ensure wages rise, without causing accelerating inflation, and would maintain a stable ratio of capital-labor share of income. By starting at 1980/leaving a gap I acknowledge the minimum wage while growing in lockstep with productivity, should be at a level to ensure owners, more experience/educated workers and those in more productive fields should get a larger share of growth. Following this, it seems $15 is a very good place to put it. This is high, but if we get there incrementally there should be little risk/negative impact, per previous studies.

OK, but it’s not fair that a burger flipper should make $15 that’s as much as I make!

There is validity to this argument, it would be unfair that someone working at McDonald’s could make the same as a college graduate starting their career. However, a rising minimum wage will raise other wages. Firms want to remain competitive, and maintain their internal wage structures. In other words, if firm X pays you $13/hr and you can now work at firm Y for $15/hr, firm X will need to raise your wage to $15 to keep you there. If you work at firm X for $16/hr and have been there for a few years, having worked your way there, you may be upset to be just above the new bottom wage, thus firm X may give you a raise too, to ensure fairness and incentive. For a visual demonstration of this here is a simple picture of what would happen to wage levels if the bottom is raised.

wage ratcheting

Basically, min wage hikes will “trickle up” the ladder. Is there any proof of this? Yes. One study of a large retail company found that in response to a min wage hike, it raised wages 30-40% across its entire workforce, despite only 5-10% of employees earning the minimum wage. Another found a 10% min wage hike caused a bump up in wages up to the 25th percentile (bottom 25% of workers). One from the UK found a min wage hike, despite impacting only the bottom 5% of workers, had a bump up effect up to the 25th percentile.[20]

EPI estimates a $12/hr min wage by the year 2020 would boost wages for 35 million Americans [21]. EPI has also estimated that a $15 min wage will boost wages for 3.2 million in New York, (about 37% of all workers in the state) for 98,000 workers, (about 27%) in Baltimore, and 114,000 workers in DC.[22][23][24] A UC Berkeley analysis estimates the $15 min wage in California would boost wages for 5.6 million workers, (37% of workers)[25] All of these studies have noted these results would especially benefit minorities, women, and the vast majority of beneficiaries are over 20, even 25, years old. A majority work full time and many have children. Those impacted often contribute around half of their families income, and in some cases over 20% of beneficiaries are the sole earner. Yet another analysis estimates a $15 min wage in Los Angeles will produce $9.2 billion in stimulus, creating over 64,000 jobs and generating $1.3 billion in additional government revenue.[26]

This is the strongest reason to support a rising minimum wage: It will benefit far more than those at the minimum wage. While there are numerous reasons for wage stagnation since 1973, it isn’t coincidence this coincides with minimum wage stagnation since 1973. As EPI said, if the idea of an $18.67/hr minimum wage seems staggering it’s only because the median wage is now so low ($16.30/hr). If the median wage grew with productivity, as it used to, it would currently be over $28/hr.[19] I expect the “ratcheting” up of wages would be significant with a $15 minimum wage, since 42% of Americans make under $15/hr[27] and you would expect those who make a bit above $15 would see raises as well. So to those who ask how is it fair a fast food/retail worker should suddenly make as much as you, I’d say you will see a raise too.

In conclusion, we need a higher minimum wage, and $15 an hour would be a level that makes up for much of the decades of wage loss we’ve seen, and would boost wages for possibly half of American workers, providing a large “bottom up” stimulus to the economy. It should then be indexed to something, inflation, cost of living, productivity, to ensure wages rise continuously. Providing a more living wage would not only benefit tens of millions of Americans, it would reduce the need for welfare and raise revenue. If done in steps, there will be little to no negative impact on jobs, and very minor impact on prices as evidenced by numerous studies.

 

References/Sources

1: http://money.cnn.com/2014/06/09/news/economy/minimum-wage-poll/

2: http://www.raisetheminimumwage.com/pages/polling

3: http://www.huffingtonpost.com/entry/minimum-wage-poll_us_570ead92e4b08a2d32b8e671

4: https://www.washingtonpost.com/news/wonk/wp/2016/04/04/leaked-documents-show-strong-business-support-for-raising-the-minimum-wage/

5: http://www.businessforafairminimumwage.org/news/00573/national-poll-small-business-owners-favor-raising-federal-minimum-wage

6: http://thehill.com/blogs/congress-blog/labor/249857-small-businesses-support-boosting-minimum-wage

7: http://www.bls.gov/news.release/archives/empsit_02052016.pdf

8: http://www.nelp.org/content/uploads/2015/03/Low-Wage-Recovery-Industry-Employment-Wages-2014-Report.pdf

9: http://s4.epi.org/files/2014/safety-net-savings-from-raising-minimum-wage-final.pdf

10: http://cepr.net/documents/publications/min-wage-2013-02.pdf

11: http://www.irle.berkeley.edu/workingpapers/157-07.pdf

12: http://fortune.com/2016/03/09/mcdonalds-wages/

13: http://www.raisetheminimumwage.com/pages/business-case

14: http://www.peri.umass.edu/fileadmin/pdf/research_brief/PERI_fast_food_wages.pdf

15: https://www.purdue.edu/newsroom/releases/2015/Q3/study-raising-wages-to-15-an-hour-for-limited-service-restaurant-employees-would-raise-prices-4.3-percent.html

16: file:///C:/Documents%20and%20Settings/user/My%20Documents/Downloads/cflaugust2013-313-pdf.pdf

17: http://www.epi.org/publication/a-majority-of-low-wage-workers-earn-so-little-they-must-rely-on-public-assistance-to-make-ends-meet/

18: http://www.epi.org/publication/family-budget-calculator-technical-documentation/

19: http://www.epi.org/publication/lagging-minimum-wage-reason-americans-wages/

20: http://equitablegrowth.org/research-analysis/raising-minimum-wage-ripples-workforce/

21: http://www.epi.org/publication/raising-the-minimum-wage-to-12-by-2020-would-lift-wages-for-35-million-american-workers/#epi-toc-1

22: http://www.epi.org/publication/raising-new-york-state-minimum-wage-to-15/

23: http://www.epi.org/publication/raising-baltimores-minimum-wage-to-15/

24: http://www.epi.org/publication/raising-the-d-c-minimum-wage/

25: http://laborcenter.berkeley.edu/15-minimum-wage-in-california/

26: http://economicrt.org/publication/effects-of-a-fifteen-dollar-an-hour-minimum-wage-in-the-city-of-los-angeles/

27: http://nelp.org/publication/growing-movement-15/

True economic recovery has begun, but there’s a long way to go.

The BLS has put out their March 2016 jobs report, and there is some good news. 215,000 jobs were added that month, a solid number. There is some much better news however: The labor force grew by 396,000. The labor force participation rate is now up to 63%[1] This is on the heels of a strong February report where 555,000 people joined the labor force[2], and March was the 6th straight month of labor force growth.

This is significant because for years while millions of jobs were being created, millions of people were also leaving the labor force. Often more people were leaving than were finding jobs. Part of this has been due to people retiring, but much has been because of people simply giving up looking for work. This trend started to level off in 2014, and it seems that people may finally be returning to the labor force, finding jobs or looking for jobs. This is seen in the chart below:

lfpr

 

There are always ups and downs, but this has been the strongest labor force return in 6 years, and it seem very possible this is a longer term trend, not just a temporary blip. While this is great news, it means people are gaining confidence in the economy, it also means that strong recovery has only just started. We have a long way to go to just fill the hole left by 7 years of people leaving the labor force. The official unemployment rate is 5%, still a bit behind the level reached under Bush (4.5%) and a good bit behind Clinton’s (3.9%). Baby Boomers retiring will help those entering the labor force, but still there is a long ways to go to fill the hole left by the great recession, especially when considering population growth.

In Jan 2015 EPI calculated at a job growth rate of 246,000 a month, which we have largely followed, it would be August 2017 when we return to pre recession employment, with population growth taken into consideration.[3] This would be 8 years after unemployment peaked, and means we still have a year and a half to go, just to reach pre recession employment levels!

EPI

This brings up another long term issue: Wages

With so many people out of the labor force, even as employment grows there has been almost no upward pressure on wages, and even now as people return to the labor force, because so many left, I forsee little upward pressure on wages anytime soon. In fact, as people return, it’s possible there will be even less wage pressure as there could be more competition for jobs.

Making this situation worse is the fact lots of job growth has been low wage. In January 2016 151,000 jobs were added, 105,000 of which came in retail and food/drink services.[4] That is 70% of jobs created coming in low wage sectors. This is not a one time or recent phenomenon either. A study shows the bulk of jobs created, (44%) since 2008 have been low wage.[5]

It’s not just a problem at the lower end either. Across the board wage growth has remained sluggish despite the steadily falling unemployment and years of solid job growth. In fact wage growth remains well below the 3.5 to 4% range that is consistent with Fed targets of inflation and productivity. These are both seen in the chart below by the Economic Policy Institute[6]

epi

When broken down by percentile, we see that for half of American workers wages remain flat from or less than where they were in 2007, as seen in the chart below.

epi

This report also notes that from 2014-2015 most of the rise in real wages were due to lower prices rather than significantly higher wages. Also interesting to note is the rise of wages in the bottom 10% of workers for several years, which has been due largely to minimum wage hikes happening in many states around the country.[7] It can be seen that wage growth in the bottom 10% has now exceeded those at the 30 and 50th percentiles, showing the power of minimum wage hikes for those at the bottom.

So, while there has been good economic news in recent months, the recovery still has a long way to go. We are not at risk of the economy getting “too hot” and in fact we are only starting to see signs of true economic recovery. This is especially true of wages which have only started to see an uptick for 70% of US workers in the last couple of years, and remain well below where they need to be.

Sources/References:

1: http://www.bls.gov/news.release/archives/empsit_04012016.pdf

2: http://www.bls.gov/news.release/archives/empsit_03042016.pdf

3: http://www.epi.org/blog/at-an-average-of-246000-jobs-a-month-in-2014-it-will-be-the-summer-of-2017-before-we-return-to-pre-recession-labor-market-health/

4: http://www.bls.gov/news.release/archives/empsit_02052016.pdf

5: http://www.nelp.org/content/uploads/2015/03/Low-Wage-Recovery-Industry-Employment-Wages-2014-Report.pdf

6: http://www.epi.org/nominal-wage-tracker/

7: http://www.epi.org/publication/wage-inequality-continued-its-35-year-rise-in-2015/#epi-toc-2

 

The Depression of 1920. Government spending enabled swift recovery.

The depression of 1920-21 was a very sharp downturn with a rapid, robust recovery that started the roaring twenties. You see and hear very little about this recession. However, it has some received some attention on the internet, usually from subscribers of the Austrian school of economics, as well as some general libertarians and conservatives, who have cited this recession as proof their theories work.

I was walking through Barnes & Noble recently when I saw a book on the topic: “The Forgotten Depression: 1921: The Crash That Cured Itself” by James Grant. The first mention I’ve personally seen of this recession outside the internet, and it rekindled my interest in the topic.

The story goes like this: During this recession the government cut taxes, cut spending, then did nothing else. Without government interference, the recession bottomed out and rapidly recovered. Due to it’s short nature and/or the fact it was resolved without government action, it’s been called the “forgotten depression”, and “the depression you’ve never heard of.” [1][2]

The Austrian take is best summed up in “America’s Great Depression” by Murray Rothbard. “There is one thing the government can do positively, however: It can drastically lower its relative role in the economy, slashing its own expenditures and taxes, particularly taxes that interfere with savings and investment.” “Any reduction in taxes, or of any regulations interfering with the free market, will stimulate healthy economic activity.” “In sum, the proper governmental policy in a depression is strict laissez-faire including stringent budget slashing, and couple perhaps with positive encouragement for credit contraction.” (Rothbard) He quotes a Benjamin M. Anderson as having said this was “our last natural recovery to full employment.” (Rothabrd. p 186)

So, according to the Austrians during the recession the government cut taxes, spending, kept their hands off after that and we had rapid, robust recovery. There’s a few issues with this story however:

1: The tax cut was passed on Nov 23, 1921 [3] while the  recession ended in July 1921[4]. So the tax cut could not have helped end the recession, since it was already over by then. Also keep in mind the cuts passed in 1921 would not have taken effect until 1922 when recovery was already well under way.

2: Most of the spending cuts occurred before the recession ever started, (January 1920) as seen in the graph below. [5] So, this could not have ended the recession.

wwi gov scale down

3: While there was no fiscal stimulus the government did intervene in a couple of ways: A tariff was passed, (The Emergency Tariff of 1921) and the Fed cut interest rates.

All this and other issues has been largely discussed already however. Here is a link to a wonderful collection of posts about the topic, and also a paper by Daniel Kuehn who first discussed how it was Woodrow Wilson who is responsible for most of the cuts to government expenditure, before the recession ever started, as well as some other points of critique. I encourage everyone to read these works, but for now  I instead want to look at a new aspect:

Private spending 

From 1920 – 1922 there was a surge in private spending. Using data compiled by Steve Keen, I estimate the private debt level rose from 53 to 69% of GDP in that span. This is an estimation, but as seen in the graph below clearly there was a big spike in private spending from 1920-22.

US private debt 1920-22

After the horror of WWI there was a want to return to “normalcy” and given the fact wages soared during the war, thanks to full employment and strong union positions, there would’ve been plenty of money to spend spend spend. This is strengthened when we look at the period right before.

From about 1915 – 1919 private debt falls from 75 to 51% of GDP  a 24% drop. This put the private debt level the lowest it’s been in nearly 20 years. As seen in the graph below.

US private debt 1915-19

It appears there really was “pent up demand” after WWI. Years of less spending lead to a boom in spending, aided by a high savings rate and high wages. This is what fueled rapid, robust recovery. This is not shocking in any way. Consumption is the major driver of our economy. People spending on air flights to take vacations, appliances, cars, houses all boost the economy. In economic terms: Y= C + I + G+ NX. With most else stable, the massive increase in C will lead to a large increase in Y.

However, it’s not enough to simply say the private sector spent its way out of the recession. There’s another piece to the story.

That fall in private debt, 24%, is a massive number, you can see how large it is on the graph above. Usually, falls in private debt correlate with recessions/stagnation. This makes sense, it’s the reverse of the process described above. Just to verify this, I checked the list of US recessions and compared it to the graph, which yielded this result:

uspdr

Most of the very large drops in private debt correlate with recessions, some of them are our longest and worst ones: The depression of 1839-43, 1873-79, the Great Depression, the Great Recession. Even the  early 90s recession, while not terrible, was followed by low growth and lingering unemployment lasting until around 1995, which correlates with a drop in private debt.

So, why did the 24% fall in private debt from 1915-19 not have similar results and in fact saw an economic boom? Government debt rose from 2.7% to 30%[6], a 27.3% increase. This spike in government spending boosted the economy, allowing people to save without feeling an economic crunch. So when the scale back came the population had plenty of savings ready to be spent, buoying the economy.

Some say the slashing of government quickly ended the 1920 recession and fueled robust growth, but it was actually the previous build up of government spending, that laid the foundation for recovery!

 

 

 

 

 

References/Sources:

Rothbard, Murray. America’s Great Depression. 1963. The Ludwig von Mises Institute. Auburn, AL.

http://link.springer.com/article/10.1007%2Fs11138-010-0131-3   Daniel Kuehn paper

http://www.itulip.com/forums/showthread.php/26157-Steve-Keen-revises-his-private-debt-estimate-for-USA-and-other-countries    Private debt data and chart

http://socialdemocracy21stcentury.blogspot.com/p/the-us-recession-of-19201921-is.html Info on 1920-21 recession

https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States

1: https://mises.org/library/forgotten-depression-1920

2: http://fee.org/freeman/the-depression-youve-never-heard-of-1920-1921/

3: http://legisworks.org/sal/42/stats/STATUTE-42-Pg227.pdf

4: http://www.nber.org/cycles/cyclesmain.html

5: http://krugman.blogs.nytimes.com/2012/01/23/more-than-you-want-to-know-about-warren-harding/?_r=0

6: http://www.theatlantic.com/business/archive/2012/11/the-long-story-of-us-debt-from-1790-to-2011-in-1-little-chart/265185/

Trade bills have cost the US 6 million jobs, and TPP will make it worse

In mid 2015 TPP, (the Trans-Pacific Partnership) became a major issue. There was widespread concern about the potential trade bill, specifically it’s impact on American jobs, the back door nature in which it was drafted, environmental concerns, and people from both parties and various sources calling the bill “Crony Capitalism” and “managed trade”. Then TPP seemed to disappear from the news, and the deal was signed, though it still needs to pass the US Congress. What can we expect from TPP?

This report by EPI shows that trade with the TPP countries cost the US 2 million jobs in 2015 alone, with every state seeing losses. The hardest hit state was Michigan, with over 5% job loss, others badly hit being Indiana, Kentucky, Ohio, Tennessee, Alabama as well as Oklahoma and Wyoming. The report notes 52% of jobs lost were in manufacturing, the biggest chunk of that, (36.4%) being in motor vehicles.[1] While all states and many sectors were impacted, clearly the worst pain was dealt to US manufacturing, which continues to leave not just it’s traditional upper mid west base, but now the south.

TPP

The above graph shows jobs loss per state by % of jobs lost. It struck me that a state could lose far more jobs than another, but have a larger population thus lose a lesser percentage. With this in mind I used the EPI data to make the map below, showing the 10 hardest hit states by TPP country trade by the number of jobs lost, while also taking population into account.

tpp jobs

All this was before TPP was even implemented! This has just been the impact due to current trade with the 11 TPP countries, imagine how much worse it will be if the bill is actually implemented. The US will continue to see a net loss of jobs, particularly hurting manufacturing, and overall putting more downward pressure on wages, (due to both job replacement being lower wage and having to compete with low wage labor in other countries). The erosion of the American middle class, and thus increasing inequality and worsening social mobility, will continue if TPP is implemented.

This is nothing new however. TPP is just the latest in a series of trade bills, which have had a negative impact on the US economy.

NAFTA:

Passed by Congress and signed by Bill Clinton in 1993, NAFTA was a trade agreement between the US, Canada and Mexico. NAFTA has cost the US 682,900 jobs. All 50 states and DC saw a net loss of jobs. Nearly 61% of jobs lost were in manufacturing, and nearly 38% of these jobs lost were in computer, electronics and automobiles.[2] The 10 worst hit states in terms of number of jobs lost, and as a percentage of their workforce were Michigan, Illinois, Indiana, Kentucky, Ohio, Pennsylvania, New York, Texas, Florida and California as seen in the map below, made using EPI data.

nafta jobs

China:

In 2000 permanent normal trade relations with China was passed by Congress and signed by Bill Clinton. Since 2001 trade with China has cost the US 3.2 million jobs, with all 50 states and DC seeing a net loss. 75% of jobs lost were in manufacturing. Jobs displaced due to trade with China, for those who were able to find one, paid 17% less, and trade with China cost the US $37 billion in wages per year.[3]

china trade

Korea:

In 2011 a US-South Korean trade bill was passed by Congress, signed by Barack Obama, (and supported by Secretary Hillary Clinton) which cost the US 75,000 jobs between 2011 and 2014. Over 79% of the growth in trade deficit with South Korea came in manufacturing, with 75% of that coming in auto vehicles and parts. The EPI report notes the deal isn’t fully implemented, with some protection of the US auto industry still in place. However, these expire in 2021, meaning the loss of auto vehicle/part manufacturing will only accelerate after that. [4] It is also noted the agreement with Korea opened up access to American auto markets but without guaranteeing equal access to Korea’s.[5] This virtually ensures a loss of American auto manufacturing jobs.

There have been numerous other trade agreements signed. Ones with the US and Jordan, Bahrain, Morocco, Oman, Panama, Colombia, as well as CAFTA a multi lateral deal with the US and Central America and the Dominican Republic. While I can’t find any analysis on most of these bills, EPI notes that each of these trade agreements is with low wage labor countries. Also, these agreements put US labor in competition while protecting US skilled professions.[5] This is not only managed trade, deciding who gets protected from competition and who doesn’t, but worsens inequality. To make matters worse, EPI also finds that trade with low wage countries puts downward pressure on wages even in jobs not lost. On average yearly wages were $1,800 lower for Americans without college degrees, due to competition with low wage labor, and with roughly 100 million non college educated workers in the US, this is a roughly $180 billion yearly loss in wages.[6]

This is what we do know:

Trade agreement – Loss of jobs – % lost in manufacturing

NAFTA – 682,900 – 61%

CHINA – 3.2 million – 75%

KOREA – 75,000 – 79%

TPP counties- 2 million – 52%

TOTAL: 5.96 million  – 66.75%

These 4 trade agreements, our largest, have cost the US 6 million jobs. While all sectors and states have been impacted, two thirds of these jobs lost have come from manufacturing, hitting particularly hard the rust belt from New York to Illinois, the upper south, (Kentucky and Tennessee), Texas and California. These trade bills have directly or indirectly lowered the wages for tens of millions of working Americans, and thus has been a major factor in the erosion/weakening of the US middle and working classes.

We need to renegotiate our trade bills, not put up tariffs, to ensure trade works for American workers, not against us, including stopping TPP before it can be implemented.

Sources/References:

1: http://www.epi.org/publication/trans-pacific-partnership-currency-manipulation-trade-and-jobs/

2: http://www.epi.org/files/page/-/BriefingPaper308.pdf

3: http://www.epi.org/publication/china-trade-outsourcing-and-jobs/

4: http://www.epi.org/blog/u-s-korea-trade-deal-resulted-in-growing-trade-deficits-and-more-than-75000-lost-u-s-jobs/

5: http://www.epipolicycenter.org/blm-trade_and_jobs.pdf

6: http://www.epi.org/publication/unfair-trade-deals-lower-the-wages-of-u-s-workers/

 

 

Yes, Bernie Sanders can win the nomination, and the election.

Bernie Sanders was a surprise in 2015 to say the least. The obscure, New Deal style Senator from Vermont announced he was running for President and had very little name recognition, no money and no party support…going against a candidate who had all those in abundance. He shocked everyone with the strength of his polling, crowd sizes and fundraising ability. More importantly, he shocked everyone (Republican and Democrat) with the popularity of ideas written off by most as extinct since Reagan, and too out there for the US.

Despite dedicating a huge amount of resources in Iowa, Clinton won by just .2% taking 23 delegates to Sanders’ 21. Sanders then won New Hampshire by 22% the largest, non incumbent, NH victory in the Democratic Primaries since JFK in 1960. Nevada, which was supposed to be Clinton’s firewall, turned out to be a 6 point victory, with the delegate split being 20-15. Polls have shown Sanders closing the gap nationally, and that he has the support of voters under 45, and especially under 30 (which he wins consistently by over 80%). While acknowledging all this, most dismissed Sanders simply because he had no chance anyway.

Indeed, after Clinton’s big win in South Carolina it was declared over. People, pundits, and articles all spoke about how Clinton had it in the bag, noting constantly her large lead with African American voters, and the dominance of African American heavy states on Super Tuesday would seal the deal.

Sure enough, Clinton won Super Tuesday 7 states, (and American Samoa) to Sanders’ 4 with massive leads in the southern states. It has been declared over, or at least unofficially over and we just need to wait for the inevitable. She also has a massive lead in Super Delegates, which basically gives her a 400 delegate cushion.

While Sanders faces an uphill battle, it is far from over. I think he has a realistic chance to take his fight all the way to the convention, and have a very strong showing while doing so. A path to the nomination may be slim, but it does exist. Here’s how.

First, let’s note Super Delegates are “soft” meaning they are not locked in. They can change their vote whenever they want, and vote for whoever they want want the convention. As has been widely reported, Clinton and Howard Dean held super delegate leads in 2008 and 2004, just to have them all move to Barack Obama and John Kerry.

In terms of “hard” delegates, those won in the state primaries and are locked in to their candidate, Clinton leads 608-413. Large, but far from the 1000-400 picture that is often painted by including super delegates, and there are still 35 states to go. In fact, now that Super Tuesday has passed, the map gets a lot more favorable for Sanders. The map becomes a lot more white, liberal and rural/blue collar.

Super Tuesday proved Sanders can win big in both these types of states. While he did poorly in the south, as expected, it wasn’t reported that he did better than expected in the other states. Vermont was no surprise, but he won quite handily in Minnesota, Colorado and Oklahoma, by 23, 18 and 10 points respectively. Oklahoma’s result, at least the size of victory, was particularly surprising, and shows Sanders can do well even in very conservative states.

Also of note from Super Tuesday. It seems Sanders did very well with Hispanic voters in Colorado. Courtesy of the New York Times:

CO

This syncs up with a poll that had Sanders lead among Hispanics[1], and also Nevada where it seems he also performed well with that demographic. Also evident from this picture: Sanders did well in places that favored Obama over Clinton in 2008, which also syncs up with results from Iowa, NH and Nevada.

Keeping all this in mind, let’s look ahead. March 5 & 6 has 4 states: Nebraska, Kansas, Louisiana and Maine. It’s very possible Sanders can win 3 of these states, Nebraska, Kansas and Maine, and by solid margins. This would chip into Clinton’s delegate lead a bit, and give Sanders some momentum going ahead, which could be helpful for March 8. Mississippi is likely to be a large Clinton win, but Michigan has 130 delegates, and is more favorable to Sanders. His message about creating jobs, boosting wages and railing against trade bills that send our jobs overseas, could play very well in the state. While a win would be spectacular, a strong result would at least be very beneficial both for delegates and chipping away at Clinton’s “inevitability” image.

March 15 is another critical day with 5 states voting, all delegate heavy. The day doesn’t look favorable to Sanders at the moment, so the key will be picking up as many delegates as possible. He can have a good day delegate wise, Florida has a solid amount of white liberals, Illinois, Missouri and Ohio all have solid to large numbers of white working class voters. A win, Ohio and possibly Missouri are likely candidates, will be spectacular for Sanders’ media image, but more importantly he will need to win as many delegates as he can on this day to keep Clinton within realistic striking distance, and to pad his numbers because the map becomes very favorable after this.

Arizona, Idaho, Utah, Alaska, Hawaii and Wyoming are all states either Obama won in 2008 or look favorable to Sanders’ demographics, especially if he continues to do well with Hispanics in the west and working class whites. During this time are two states with a lot of delegates, Wisconsin and Washington, that look very good for Sanders. Winning these states by large margins, which is very possible, would give Sanders some good delegates, capping a span where he can win most of the states.

Then comes New York. A state that is favorable for Clinton, (not only her home state but the New York City area is a base of strong support) but it does also have a high number of white liberals, as well as working class voters. Sanders will need to win as many delegates as possible, possibly by doing very well in upstate NY taking working class voters.

April 26 has 5 northeast states, 3 of which Obama won in 08: Delaware, Connecticut, Maryland while Clinton took Rhode Island and Pennsylvania. Sanders can compete in all of these states, with a strong chance to win some. Pennsylvania will be particularly important, given it’s large amount of delegates and it’s very large white, working class population. Outside of Philly and it’s suburban area, much of the state is rural and blue collar, Pittsburgh still has a strong labor tradition, and lots of the state has been hard hit by loss of jobs where Sanders’ message can resonate. This is a state Sanders should focus on, a strong result or even win would be huge.

After this are several states that could be favorable for Sanders: Oregon, North & South Dakota, and West Virginia. Oregon is clearly a strong fit, a white liberal state that went for Obama in 08, and even in July 2015 a poll showed Sanders within striking distance…while polling out of West Virginia shows Sanders very much alive if not leading. A very white, working class state that has been badly hammered by job loss, could be a big win for Sanders. Montana is a white rural state, with a populist streak that Obama won in 08 and the last poll from there indicated a strong support for Elizabeth Warren. Kentucky and Indiana are very conservative states, but white and rural, not far off from Oklahoma. New Mexico is a fairly liberal state, and if Sanders can continue to do well with Hispanics in the west this could be another big win.

Much of these states are small however. There is one state that could be essential, if Sanders was to build momentum in this way described above:

California.

The state has 475 delegates up for grabs, and has large numbers of liberals, college students and Hispanics. In 2008 Clinton won the state 51.5% to 43 and results show Obama did well in the coastal areas, as well as some inland counties, while Clinton took the rest of the state, and won the Hispanic vote with 65%. The liberal vote, (51% of the state in 2008) was split 48-48% between them.[2]

It’s very possible Sanders can win Obama’s support in 2008, and by bigger margins. It’s also possible liberals comprise a bigger number, as has been the case in much of the US. The liberal coastal area alone makes the state tighter for Sanders, and if he can maintain and ideally expand this support among Hispanics, get strong youth turnout, and continues to win Independent voters, California could be a big win for Sanders. If Sanders can make it all the way to California, perhaps even in a good position by successes in earlier states, this could be the state that decides the nomination.

So, after surviving Super Tuesday the map becomes a lot more favorable for Sanders going forward, with some large states that could be in play for him. He can win the majority of states starting tonight going forward, which would help his momentum and image. The biggest hurdle Sanders faces, is how widely it’s reported the nomination is over. As well as other discouraging tactics such as reports including super delegates to lessen the strength of his victories in places such as New Hampshire and Colorado. If Sanders can win states and keep doing so, it can help erode these media portraits, and bring more name recognition to his campaign, helping in bigger states where it will be critical he can win delegates. Voters in a state may like Sanders, but if they feel the campaign is already over, it of course doesn’t matter. This could be come a self sustaining cycle either way. If he finds continuing success, it will continue to strengthen his polling numbers, making him seem more likely, etc etc

Momentum, name recognition, turnout especially from youth and less general appearance of impossibility will be critical for Sanders taking advantage of the demographically favorable states coming up.

One quick note about super delegates. As mentioned earlier, they can change their vote at any time for whoever. Super delegates have never decided a primary, they always back the leading candidate. This is why Sanders must do well as possible going forward. If he has the delegate lead entering the convention, super delegates will back him. If Clinton has the lead, they will back her. Some worry the party may refuse to back Sanders, but I find this unlikely. It would be dangerous to go against the candidate with the lead, and if it was done could be even more dangerous given the unfair treatment and roadblocks many Sanders supporters feel the Democratic Party has given him, and their already voiced concerns about the super delegate itself. There are also over 230 super delegates left unpledged at the moment. If Sanders was to win the majority of states going forward, including some big wins, and continue to strengthen his polling both against Clinton and Republicans (which already look favorable) it’s possible more Super Delegates will pledge for Sanders, a few may even jump from Clinton to him.

Which leads me to a final point: Electability.

Many worry about Sanders’ electability, but this should not be a concern. Sanders can absolutely win the Presidential Election.

There are several factors to keep in mind.

1: Anyone can vote in the general election. This means Independents, who seem to strongly back Sanders.

2: Youth. Sanders has very strong support with the under 30 crowd, and while youth turnout is famously low, they did come out in record numbers for Obama in 2008, and given the fervent support Sanders enjoys, its possible that at lest a small bump in youth turnout will happen, which could be enough to ensure some states on the fence are tipped his way.

3: The blue states will vote blue. The red states will vote red. As always the election will be decided by the swing states. Can Sanders win these states? I think the answer is yes, and this leads to my next two points.

4: The republican candidates. The one with the most broad appeal, John Kasich, has a near 0 chance of winning the nomination. Even if he did, his platform of increasing defense spending, cutting entitlements, and general support of Reaganomics may not play very well, especially against Sanders. His elimination of estate taxes while raising the cigarette tax in Ohio, pushing for increased military spending while cutting entitlements, writes the Sanders “working people paying for the rich” campaign line for him.

Trump and Cruz are intensely disliked outside the Republican Party. Even if every Republican came out to stop Sanders, moderates are no guarantee to support either, some Republicans may just not vote at all if they have Cruz or especially Trump as their nominee. An Independent Trump run would only help Sanders, as would be Republicans get siphoned off to him. Rubio pushes standard Republican economics which again may not fare well against Sanders’ campaign about the working and middle class, creating jobs and boosting wages. “Socialism” as a political attack is nothing to be worried about. It may strengthen Republican support, but it may do very little outside of the party. Recent polls have shown increasing numbers of Americans embracing the word socialism. [3][4] I feel perhaps the tactic is actually backfiring on conservatives. When a word is over used it loses its impact, and now that a candidate is no longer running away from the word, even embracing it, as people look at Sanders they may think “Hmmm this is Socialism? I kinda like this guy”. It’s looking very likely that socialism as an insult is losing its impact.

5: Sanders’ ideas. Bernie Sanders has run a campaign dedicated to the middle class. Specifically the erosion of it thanks to jobs sent overseas and stagnant wages. He’s attacked Wall Street excesses, and money in politics. He wants to create 13 million jobs rebuilding the US, boost wages, tax Wall Street speculation to fund tuition free public college and fund Social Security by asking the wealthy to pay into the system. He’s railed against the too big to fail banks which are now even bigger, and Citizen’s United which polls show 80% of Americans disapprove of. Many areas of the US, even conservative ones, do have a deeply populist and anti elitist streak in them.

Will this let Sanders win states like Oklahoma, Utah, Kansas and Alabama? No. However, it will play very well in more moderate, working class states, that will vote Democrat, especially ones that have seen jobs sent away. States like Ohio, Iowa even West Virginia which was a Democratic stronghold into the 90s though has gone increasingly Republican due to increased liberalism, and abandonment of labor, by the Democratic Party. States that some feel could be in play like Pennsylvania or Michigan will almost surely back Sanders and his strongly pro labor, union and working/middle class campaign. Can Sanders platform win in states like Ohio, Iowa, Colorado, Nevada, New Mexico, Virginia and Florida? Absolutely, and he wouldn’t need all. Certain combinations would do the trick, Ohio and Iowa could do it, Florida alone would be enough.

So, does Bernie Sanders have an uphill battle in the Democratic Primary? Yes. He needs to start winning states tonight, win the majority going forward and pick up some large ones. Is it impossible? No. The map favors him and name recognition/momentum could take him a long way. Some of the large states do have demographics in his favor. Bernie Sanders has an uphill road in front of him, but the nomination is not already over, and in fact he can take a legitimate fight all the way to the convention. If Sanders could force a 2008 type primary, perhaps even in a loss he (pushed by supporter campaigning) could be given a cabinet position, as happened in 2008. Sect of Labor Sanders could push his jobs program and wage hikes, perhaps bring in some more progressive economists such as Robert Reich and Joseph Stiglitz. At the very least, be a voice for the progressive movement in the cabinet to keep the Democrats honest. It would surely influence the Democratic Party, with a growing progressive movement and Elizabeth Warren in the waiting.

Sanders campaign was like that of Ron Paul in 2012: Hoping to influence the party, but probably understanding there was a slim chance of winning. Sanders has surpassed everyone’s expectations, perhaps even his own. He will go to the convention and try to leave a lasting imprint on the party, this I am sure of. However, he has the potential to go farther, and it starts this weekend with Maine, Nebraska and Kansas.

 

Sources/References:

http://www.huffingtonpost.com/entry/bernie-sanders-2016_us_56b91726e4b01d80b2478746

1: http://freebeacon.com/politics/free-beacon-poll-sanders-overtakes-clinton-in-colorado/

2: http://politics.nytimes.com/election-guide/2008/results/states/CA.html

3: http://www.politico.com/story/2016/02/democrats-poll-socialism-219600

4: http://www.marketwatch.com/story/42-of-democrats-are-in-favor-of-socialism-2016-01-31

 

Limited government: Globally rejected and creates its own worst enemy

In the US there has a been a powerful, and increasing, swell in the limited government movement since 2008. However, in 2015 there was a counter reaction from the left: the rise of Bernie Sanders. Social media is buzzing about him, his campaign has raised large amounts of money, coming largely from lots of small donations, [1][2] and has drawn unexpectedly large crowds at his speaking events. In fact, over  a 3 month period earlier in the year Sanders fundraising fell just short of Hillary’s (26 million vs 28 million) shocking in itself, and more so that he’s achieved this with few fundraisers. [3] In just 4 hours after the first Democratic debate Sanders received $1.3 million in donations [4] and two days later that number was $3.2 million [5]

Over the last 3 months of 2015 Sanders raised $33 million, again just short of Clinton, bringing his total for the year to $73 million.[6] Over the year Sanders’ polling numbers jumped from 3% to over 30% as of Jan 10 standing at a highest yet 34% He currently leads Clinton in New Hampshire, and isn’t terribly far behind in Iowa.[7] He’s achieved all this despite the fact Clinton is the established candidate, and one of the most popular, powerful names in the Democratic Party… all while refusing to use a Super PAC, instead relying solely on individual donations. More important than fundraising and polls though, Sanders has influenced the party. He’s forced Hillary to the left on many issues and in her rhetoric. The first Democratic debate seemed dominated by his campaign, and Clinton was even asked to prove she’s a progressive. This is a drastic change from just 10 years ago, (more on this later).

It seems Bernie is the real deal.

Sanders has run a progressive campaign, advocating high taxes on wealth, taxes on financial transactions, breaking up the “too big to fail” banks, higher wages, creating jobs in the US, and stronger government support for the middle class, poor, elderly, workers rights in general, free public college and has been a fierce critic of inequality, wealth concentration and what he’s called a “rigged economy”. He’s also been a fervent supporter of environmental policies.

It’s not just Sanders though, there has been buzz around fellow progressive Elizabeth Warren, and inequality has become a major issue, seen in the Occupy Movement, 2012 election and Thomas Piketty’s bestselling “Capital in the 21st Century”. There has been open discussion of an unfair economy, even class warfare, much to the disdain of the right. There is an irony here: I think the limited government movement itself has helped create this environment, the very sentiments they loathe have been fueled by their movement. To understand why, a quick history lesson.

In the 19th and early 20th century there was laissez-faire (limited government) capitalism, and socialism. These were your only two options. So to oppose laissez-faire meant you had to support socialism. Laissez-faire (also known as liberal capitalism) was the dominant system for a long time, especially here in the US, though socialism always lingered and fought. Even in the US socialism was a force in the early 1900s. They often worked through the labor movement, but also won mayorships, local elections and Eugene V Debs won 6% of the vote in the 1912 Presidential election, running as a Socialist.

However, by the 1930s laissez-faire was under heavy attack from both sides: not just socialism, but communism, as well as fascism. Even in the US people turned to the government in an unprecedented manner, establishing what I’ll call moderate capitalism. While diverse, all these ideas shared some common ground: A rejection against laissez-faire.

As Hayek noted in his famous “Road to Serfdom” fascism was an outgrowth of socialism, and it was opposed to laissez-faire as well as communism. Mussolini was originally a socialist. Fascism featured central planning and government jawboned cartels. The Nazi Party was originally founded, under a different name, by a locksmith Anton Drexler who called for “socialism for the middle class” the small business owner, and was opposed to both liberal capitalism and communism.

In fact part of the reason fascism became so popular was because it branded itself a “third way” between wild, inefficient liberal capitalism, and barbaric communism. It also sought to put an end to class warfare, albeit in a diff way than socialism…unions and corporations were forced together into cooperation under the government. Different social classes and interests were given their role to play in, and share of, society under state cooperation. Both socialism and fascism wanted to end the social strife created by liberal capitalism, the former chose abolishing capitalism while the latter chose to organize society vertically, all people and sectors working together as parts in the whole machine…like a business or the military.

After WWII most of the developed world embraced moderate capitalism. There were variations, but they all shared some common features: Institutions to buffer people from the markets (unemployment, disability, social security), welfare, restrictions on the free markets, government investment in the country and more equitable distribution of wealth. It was widely agreed capitalism was the way to go, but we needed to “trim the excess” it can create, and give everyone at least some share of the pie.

So, be it socialism, communism, fascism, or moderate capitalism…most of the world rejected limited government. I’d say the best possible of those alternatives prevailed after WWII, but as time has gone on the world, and especially US, has been slowly drifting from this back to laissez-faire, the system that most of the world rejected.

A decent number of libertarians seem to understand this. Some have discussed a political spectrum ranging from less government to more, stating that many ideologies left and right are actually on the same “side” and all opposed to limited government. They are correct in this observation, but then choose the system they acknowledge has been widely opposed. This is due to ideological beliefs, which may blind them from historical observation: limited government capitalism produces extreme inequality, and with it social strife as well as concentrated political power. All of which has been repeating in the US. The middle class has shrunk and become poorer, and many feel the economy no longer works for them. That opportunity is becoming lesser, hard work means less, that social mobility is disappearing…that the system is becoming rigid and the government serves only the higher rungs of society. This sounds shockingly like Old Europe and is the very thing America was opposed to.

In the US both parties are accomplices. While the Democrats are more supportive of moderate capitalism, starting in the 90s they largely abandoned this and embraced limited government, more on this in another post. 10 years ago the goals of liberal Democrats were shockingly mild in terms of economics: A return to Clinton era taxes for top earners, a 4.6% increase, middle class tax cuts (or at least maintaining reduced tax rates) and some discussion of re working trade agreements, (which never happened and President Obama has in fact expanded them). The boldest plan was universal healthcare, though this was only vaguely discussed and when it was, did so timidly. As Paul Krugman said in 2006 “Even liberal economists and scholars at progressive think tanks tend to shy away from proposing a straightforward system of national health insurance. Instead, they propose fairly complex compromise plans. Typically, such plans try to achieve universal coverage by requiring everyone to buy health insurance, the way everyone is forced to buy car insurance, and deal with those who can’t afford to purchase insurance through a system of subsidies.”[8] This is exactly what we ended up getting with ACA (“Obamacare”).

This platform of mildly higher taxes on top, vague middle class benefit, discussion of jobs and universal healthcare is what more liberal candidates such as Howard Dean and Barack Obama ran on. What many on the right didn’t realize is how mild these demands were. It was unthinkable even in 2008 to suggest any higher taxes than Clinton era, job programs, significantly higher min wages, middle class wages, increasing social security and direct universal healthcare. To do so got you looked at like an insane person, and such things were advocated by the small, fringe group of progressive Democrats. Fast forward to 2016: The 3 Democratic candidates are vying to show who’s the most dedicated/successful progressive. There’s talk of a $15 minimum wage, boosting middle class wages, job programs, (Bernie is the most detailed calling for 13 million jobs to be created rebuilding the US infrastructure) and Sanders has called for greatly higher taxes on the wealthy. This all has shocked the right, but it didn’t just pop out of nowhere for no reason. It has been a response to both long and short run movements in the  right.

We have all forgotten that when no moderate alternative is present, people must turn to more radical options. This is what smart leaders like FDR and Otto von Bismarck understood, and that to keep socialism at bay you need to give up some to the masses. It was Bismarck, an aristocratic conservative who hated socialism, who implemented the first modern welfare state. The US pioneered moderate capitalism, which killed socialism as a legitimate idea here, because it worked. Socialism was unnecessary, we created a capitalist system that was able to boost the working class, provide opportunity and protection for the masses, ensured some amount of wealth turned over, and kept many people connected to the political process. The abandonment of this since the 80s, hastened since 2008, caused the economic and political conditions that fueled the left’s continual drift. It’s the result of economic stagnation for many, and lack of/frustration with current liberal options.

Its not a US thing either. The UK Labour Party has recently elected Jeremy Corbyn as their new leader in a massive victory, despite the fact he was considered a fringe candidate and that he would doom the party. Corbyn has advocated positions such as reversing austerity policies, re-nationalizing railroads and public utilities, and a “People’s Quantitative Easing” saying the Bank of England should print money to fund government projects. In Spain there has been the meteoric rise of Podemos, a populist left wing party. It was when researching Podemos for this blog post I found the first person to make the same observations I have. A Chantal Mouffe said “There is too much consensus and not enough dissent [in leftwing politics],” and that “To her, the rise of rightwing populists such as Marine Le Pen’s Front National in France or Nigel Farage’s Ukip in the UK is proof that the post-Thatcherite consensus – cemented by “third way” social democrats such as Tony Blair – has left a dangerous vacuum.”[9]

So the limited government movement, in trying to slowly dismantle government by calling everything socialism, is actually creating an environment more conductive to real socialism. It has helped fuel the ideas it wants to destroy. To those who want to take the US back to the laissez-faire days, I say prepare then to battle the same battles of the old days.

 

 

References/Sources

1: http://www.huffingtonpost.com/2015/07/02/bernie-sanders-fundraising_n_7715180.html

2: http://www.nytimes.com/politics/first-draft/2015/09/17/bernie-sanders-raises-1-million-off-attack-from-allies-of-hillary-clinton/

3: https://www.washingtonpost.com/news/the-fix/wp/2015/10/01/bernie-sanderss-26-million-cash-haul-is-a-major-problem-for-hillary-clinton/?tid=sm_fb

4: https://www.washingtonpost.com/news/post-politics/wp/2015/10/14/bernie-sanders-says-debate-performance-prompted-1-3-million-in-donations/

5: https://berniesanders.com/press-release/big-numbers-of-small-donors-fill-sanders-campaign-coffers/

6: http://www.cbsnews.com/news/bernie-sanders-hauls-in-33-million-in-fourth-quarter/

7: http://www.realclearpolitics.com/epolls/2016/president/us/2016_democratic_presidential_nomination-3824.html

8: http://www.nybooks.com/articles/2006/03/23/the-health-care-crisis-and-what-to-do-about-it/

9: http://www.theguardian.com/world/2015/mar/31/podemos-revolution-radical-academics-changed-european-politics

Martin Shkreli sums up what financialization has done to our country

Martin Shkreli, dubbed by many “The most hated man in America” got a taste of justice recently after he was arrested for securities fraud, and has been fired from his position of CEO at KaloBios. There has been widespread joy at this news, and rightfully so, but I have a somewhat different take on the whole situation.

Shkreli was a hedge fund manager who founded the company Turing Pharmaceuticals where he made headlines by raising the price of a drug, Daraprim, by over 5,000% That’s not an error, the price was jacked from $13.50 per pill to $750[1], an increase of 5,455% Daraprim is “the only approved drug for a life-saving parasitic infection called toxoplasmosis”[1] something that impacts many, especially those with AIDS and cancer. Shkreli drastically raised the price of a drug that many people simply have no choice but to buy, helped by the fact US drug market is extremely monopolistic, (more on this in another post) and faced no real competition for the drug. There is no other way to describe this besides price gouging.

This caused a national outrage, made worse by his defenses of his actions, and his remorseless, condescending, often immature and combative attitude. The best example of this being a tweet Shkreli posted saying, “And it seems the media immediately points a finger at me, so I point one back at ’em, but not the index of pinkie”[2] Not exactly the most becoming of responses.

He’s claimed his motives were altruistic and that actually he should’ve raised the price more. Despite whatever he may say about making drugs more available, R&D investment etc etc Shkreli has made it very clear in numerous public statements that maximizing profit has been, and is, his ultimate goal.

While his criticism has been near universal, and I’d say justified, there’s something I want to keep in mind about all this:

Despite the intense hatred he’s received for his price gouging, that is not what got him in legal trouble. He got in trouble for securities fraud.

It seems he looted $11 million from another drug company he was CEO of, Retrophin, to pay back investors in one of his hedge funds that lost money. It has been said “Shkreli essentially ran his companies like a Ponzi scheme, where he used each subsequent company to pay off the defrauded investors in the prior company”[3] Note: He was fired as CEO of Retrophin in 2014 after “the board concluded that Shkreli had committed stock-trading irregularities and other violations of securities rules.”[4]Now, this is wrong and he should be punished for it, but it was this and not the price gouging of a life saving drug, that landed him behind bars.

Basically: Despite all the public outcry, it wasn’t until he impacted rich people that he got in actual trouble.

 

Shkreli didn’t create this drug, or have anything to do with its creation. He simply bought the drug, jacked up the prices for his profit, (and to pay off his hedge fund) didn’t improve the drug or add any value. This whole situation sums up perfectly what financialization has done to our country. Now, there is obviously a role for finance to play in our economy, but it should be limited to that role. If left unrestrained and unregulated we end up with a finance class dominated by Martin Shkrelis…Looking to get their hands on everything to inflate the price for their profit, with no care or remorse.

Sound harsh? Remember our last housing bubble: banks making incredibly irresponsible loans, bundling said loans into deceptive packages to sell to investors, lenders pressuring appraisers to inflate housing prices and blacklisting those who refused to play ball. People were encouraged to treat houses as an investment. Buy a big one. Put everything you have into it. Put those additions on to boost its value more. Sell it in 30 years and retire a millionaire! Can’t afford it? Don’t worry! Housing prices will go up forever!

Sure, people got houses out of this…but how many couldn’t afford them and went into debt to do so? How many people defaulted, had to foreclose, saw their retirement get wiped out? Big finance didn’t care, they got their sales, their profits, hedge funds benefited, investors benefited from the booming stock market, the executives got their quarterly bonuses.

Remember the dot.com bubble: Investment banks threw money at hair brained, (often in the red), internet companies, inflated the price of their stocks using fraudulent techniques[5] and sold them to investors. Inevitably, most of these companies quickly went under, wiping out trillions of dollars of wealth in the stock market crash it brought, caused a recession, but the investment banks didn’t care. They made their killing with the massive IPOs they hyped up and sold, the execs got their quarterly bonuses.

The early 80’s deregulation fueled the Savings & Loan crisis, where many S&Ls took on unsound lending, investment strategies and fraud. This led to a housing bubble, as well as a boom for S&L owners, investors and sellers of junk bonds. The biggest name in all this, Charles Keating, ran his S&L over $100 million into the red with his debt based, reckless investments, sold to unsuspecting buyers. Seriously, a sales document from his company once noted “always remember the weak, meek and ignorant are always good targets.”[6]

Financial companies have speculated on oil prices, driving up the price of gas[7][8][9], speculated on food prices, driving up the price of food, (which, while difficult for developed countries, led to mass starvation and even political unrest in some poor countries)[10][11] and some even bet against their own assets!

Remember the bankers that insisted they still be allowed to receive large bonuses, and did, even as their company got bailed out? Stephen Schwarzman, with a net worth of $11 billion[12] said a proposal to raise taxes on hedge funds was comparable to Hitler invading Poland.[13]Mitt Romney’s bluntly stating he disregards nearly half the nation since, in his eyes, they are irresponsible, dependent and entitled? (A bloc of people that consists of many working poor and elderly). Romney’s close friend Ed Conard not only defended all the financial madness of our last bubble, but said that it’s actually good for the middle class…going so far as to claim Warren Buffet needs to “Quit taking a victory lap,” in regards to his charitable donations, since “That money was for the middle class.”[14]

These comments strike me as either cognitive dissonance, or delusional, given the shrinking and weakening of the middle class over the last several decades, despite increasingly pro wealthy/investment/finance politics of the era. This disconnect is exemplified by a crashed secret meeting of top bankers/finance/wall street people, which saw jokes made about seven figure bonuses and getting bailed out.[15] Jokes or not, a little disturbing to see this at a time when unemployment was 8.3%, most people saw falling wages and everyone left, right and center were livid about the bank bailouts. All this isn’t new either. Charles Keating not only refused to accept responsibility for his actions, but blamed the regulators for causing his companies trouble, said they had a personal vendetta against him, and resorted to paying off, (or is it contributing to?) five senators to stop the regulators.

It’s true this does not apply to every bank/investor/financial institution/finance person. In fact it doesn’t even apply to the majority of them. However, when you have a large, unregulated financial sector the worst rise to the top. Those who will seek predation over production, will go to any length to make a dollar without any regard to the consequences or remorse. Those who in fact seem to take a personally combative view of it all, a “me vs everyone else”, social darwinian view. People who blast others for being entitled and irresponsible while flying to the government on a private jet to ask for a bailout. People who say the government can’t spend a penny on the people, while tens of trillions have been spent on bailing out and propping up their companies.

So, Martin Shkreli isn’t an extreme outlier. He isn’t a rare exception. He actually sums up what financialization of the economy brings out in society. While we should be appalled by his actions, we shouldn’t be surprised.

 

 

References/Sources

1: http://www.huffingtonpost.com/entry/reviled-pharma-ceo-martin-shkreli-resigns_567445fee4b06fa6887d23f8

2: http://www.dailymail.co.uk/news/article-3243938/Ex-hedge-funder-32-hated-man-internet-defends-jacking-prices-AIDS-medication-5500.html

3:http://www.cnbc.com/2015/12/21/martin-shkreli-fired-as-ceo-of-kalobios-pharmaceuticals.html

4: http://www.bloomberg.com/bw/articles/2014-10-02/biotech-company-retrophin-fired-ceo-because-of-stock-irregularities

5: http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405?page=3

6: http://articles.latimes.com/1990-09-19/business/fi-692_1_bond-sales-program

7: https://www.imf.org/external/pubs/ft/wp/2014/wp14218.pdf

8: http://www.peri.umass.edu/fileadmin/pdf/research_brief/PERI_AFR_Research_Brief_June20.pdf

9: http://www.nytimes.com/2012/04/11/opinion/ban-pure-speculators-of-oil-futures.html?_r=0

10: http://www.huffingtonpost.com/johann-hari/how-goldman-sachs-gambled_b_633436.html

11: http://science.time.com/2012/12/17/betting-on-hunger-is-financial-speculation-to-blame-for-high-food-prices/

12: http://www.forbes.com/profile/stephen-schwarzman/

13: http://fortune.com/2011/12/20/the-triumph-of-blackstone-on-wall-street/

14: http://www.nytimes.com/2012/05/06/magazine/romneys-former-bain-partner-makes-a-case-for-inequality.html?login=email&_r=3&pagewanted=all&&mtrref=undefined

15: http://nymag.com/daily/intelligencer/2014/02/i-crashed-a-wall-street-secret-society.html#