EQUALITY, LIBERTY AND FRATERNITY

Inequality is not so much a cause of economic, political, and social processes as a consequence. Some of these processes are good, some are bad, and some are very bad indeed. ~ Angus Deaton    

I have a problem with inequality, and with equality. In this blog I take a tour of the inequality landscape, through its ups (bad) and downs (good).

For the blog’s title I’ve transposed the famous tripartite slogan of the French Revolution – Liberty, Equality and Fraternity – and placed equality first. Equality may have played second fiddle to liberty in late 18th century France, but not now. The current focus of many politicians, commenters and perhaps voters – mostly Democrats –is predominantly on inequality, not as much on liberty and little on fraternity. Except to close them on campuses.

This is hardly surprising. The liberal media is awash with explanations of how widespread and multi-faceted inequality has become; and how it needs to be thwarted before something really nasty happens. Such nastiness might happen, but I haven’t found any quantitative evidence showing that inequality per se actually has caused economic damage. The Nobel-laurate Professor Angus Deaton makes this important point in his quote at the top of this page. It’s a consequence not a cause.

Technical literature examining inequality includes a growing number of qualitative discussions about the harm of inequality, but next to no quantitative findings seem to exist about inequality directly causing economic and socio-cultural loss. No matter, we just know from our gut that rising inequality will eventually cause some sort of revolution.  
The possible consequences of rising inequality have more to do with issues surrounding equity, fairness and lack of opportunity rather than higher unemployment, weaker income increases and lower GDP growth. Whatever its status, the perception of increased inequality in its many forms may lead people to feel threatened and upset. Politicians have capitalized on these feelings, as we know all too well.

When I Googled inequality, 20.3 million results were immediately referenced. Google’s ngram viewer shows that mentions of inequality in the vast array of literature it searches grew by 29% between 1980 and 2000. A recent Pew survey found that 82% of Americans think inequality is either a very or moderately big problem.

Inequality is not a new issue. Paleontologists suggest that after settled agriculture became widespread in the Fertile Crescent and beyond about 10,000 years ago, inequality steadily rose. The owners of land were much richer and wealthier than the people who worked on it; their houses were much larger. It was certainly alive and well during the Middle Ages when Kings, Queens, Dukes and Duchesses ruled the west. If inequality has been present for virtually all of recorded human history, is it really always a problem or more a feature of human society that may even have made a contribution to humanity’s stunning progress? In the minds of capital “P” Progressives, this notion borders on blasphemy.

The general view is inequality, beyond some unstated level (that’s lower than the current one), detrimentally affects our modern society, causing a host of problems. For progressives, we have already arrived at this level. If asked when it started, November 8, 2016 is an often mentioned answer. Inequality has become a crucial, often-stated crisis that must be remedied now. No one in an ivory tower, think tank, public office or sidewalk café knows what degree of inequality will spawn their feared difficulties, but many citizens believe inequality shouldn’t continue to rise, as it has since the 1970s.

How much inequality (or for that matter, equality) should we accept as a society is the ultimate question. What kind of inequality should be our primary focus? And how should it be allayed? Predictably, there are many answers depending on one’s socio-economic, political and cultural perspective.

During the past two years the progressive media and politicians have expanded the scope of inequality beyond its historic confines of just unequal distributions of income and wealth. In researching this blog I counted 11 different, inter-related varieties of inequality that have gained attention and may be candidates for remedy. There are, undoubtedly, more.

Less realized is that eradicating all inequality in its myriad of forms although conceptually beneficial would likely impinge on our freedom as well as our fraternity. Very few folks think about these effects, despite there always being unintended consequences. For some progressives – including many who’ve expressed interest in running against our sardonic, zero-sum, bullet-point president in 890 days– remedying inequality requires imposing significant redistributive taxes on income and wealth. Such taxes can reduce inequality and also pay for new equality- stimulating programs.

Talismanic programs that progressive Democrats believe they must hold close and subscribe to if they want to get support from their base include: universal single-payer healthcare (e.g., Medicare for All), government guaranteed jobs, higher minimum wage (based on a living wage), free college, legalized marijuana and less restrictive immigration rules. These dramatic programs will cost hundreds of billions of dollars to implement and will significantly broaden government’s presence in our everyday activities. More strategically, they will also need to surmount the likely herculean challenge mentioned in numerous surveys, including a Gallup poll, that two-thirds of respondents believe “big government” is the main threat to the nation’s future. One does not diminish inequality with small government.

The seeming sincerity of politicians like Elizabeth Warren, Cory Booker, Kirsten Gillibrand, Kamala Harris, Chris Van Hollen, and Bernie Sanders to drastically reduce inequality is both endearing and concerning. Their urgency reminds me of Kurt Vonnegut’s short story “Harrison Bergeron.”

“Harrison Bergeron” satirically addresses the quest for equality. The story describes the US 120 years into the future. It starts, “The year was 2081, and everyone was finally equal, they weren’t only equal before God and the law. They were equal every which way.” Total equality has been nationally mandated by the passage of the 211th, 212th and 213th Amendments to the US Constitution. Ultimate equality is vigorously enforced by the “unceasing vigilance of the US Handicapper General [H-G],” Diana Moon Glompers. She keeps the nation filled to the brim with equality so it will not edge back “to the dark ages with everybody competing against everybody else.”

Beautiful people are forced to wear masks, or in the case of Mr. Bergeron, a hideous Halloween disguise; strong, athletic people have weights attached to their bodies; smarter than average folks wear headphones that blast screeching, loud, terrible noises every couple of minutes into their heads. By law, every above-average person is handicapped by the H-G back to the mean. Everyone is equal in every way. Vonnegut’s story is a clever illustration of Aristotle’s famed adage, the worst form of inequality is to try to make unequal things equal.

But back to the present…

The standard measure of income and wealth inequality is the Gini index, aka the Gini. The Gini numerically calculates the degree of inequality in in a specified distribution of income or wealth. Corrado Gini, an Italian statistician and sociologist, first described his innovative means of quantitatively measuring inequality in his 1912 paper Variability and Mutability (or as they say in his old country, Variabilità e mutabilità). The Gini index varies from zero, signifying perfect equality in the distribution of income or wealth, to 100%, representing total inequality. The higher the index’s value, the greater is the inequality. The US Gini for income has steadily risen during the past four decades.

I’ll now describe some of the forms of inequality, beginning with income inequality.

Income.  In 2015, the US Gini index for income inequality was 45.41%, according to the Chartbook of Inequality, an impressive assessment of inequality in 25 nations. The top 1% of households received approximately 20% of the pre-tax income in 2013. The CIA World Factbook ranks the US Gini index 41st most unequal for family income distribution out of 156 nations; Finland had the most equal income distribution with a Gini of 21.5%; Lesotho had the most unequal, at 63.2%.

Solutions for alleviating income inequality converge on imposing new fiscally redistributive taxes that can also fund augmented government programs to assist poorer and less fortunate people. As David Brooks put it, progressives generally prioritize and believe in expanding government to enhance equality. However, every politician knows raising taxes is hardly ever an easy lift, no matter whether she/he is a Democrat, Republican, Libertarian or Green party member or an independent. During the past several decades the rare increases in federal income taxes have been passed to directly fund new programs or mitigate budget deficits, not to remedy inequality per se. Because of the needed increases in tax revenues to equalize income distribution, every state-based effort has failed so far when people have voted on reducing income inequality. Yours truly and others have mentioned that the 2017 Tax Cuts and Jobs Act passed by our Republican-led Congress in December is not going to reduce income and/or wealth inequality; instead, it will clearly increase it. So it goes.

Tax increases that are targeted by progressives to improve equality by redistributing income and wealth from the rich to the rest of us include a financial transactions tax (a tax on every stock, bond and derivative sale), a wealth tax (e.g., the international 80% tax on estates of $500,000 or more than that Thomas Piketty recommended) and greater income taxes for upper income people. Higher sales taxes have also been suggested at the state level. Other programs advocated to improve equality include raising minimum wages especially by using a “living wage,” one that is sufficient to provide the necessities essential to an acceptable standard of living.

According to the San Francisco Living Wage Calculator, the living wage in SF is $19.63/hr for a one-adult household, $44.19/hr for a one-adult, two-child household. In annual terms these living wages are about $41k/yr and $92k/yr respectively. The current SF minimum wage is $14/hr, the highest in the US. Several labor unions, including the American Federation of Teachers, advocate basing minimum wages on a living wage.

Progressives also have promoted universal Basic Income (BI) programs that unconditionally provide monthly stipends to individuals. Finland has run a BI experiment since 2016 that has given 2000 unemployed Finns with 560 Euros ($660) a month, with no strings attached. Participants didn’t have to prove they were looking for work, and if they did find work they were allowed to keep on receiving the money. The Finnish government prematurely ended this experiment in late April, principally due to its large cost. The banner waved by BI promoters is now at half-staff. It’s hard to imagine it ever flying at the US Capitol.

Wealth.  Wealth and income are different. Wealth refers to the stock of assets held by a person or household at a single point in time. Income refers to money received by a person or household over some period of time, say one year. Here’s a synopsis of wealth inequality, which is closely related to but distinct from income inequality. The US wealth Gini is 80.1%, ranked 6th most unequal, behind Switzerland, out of 139 countries. The Gini of global wealth distribution is close to what the US Gini is, 80.4%. Wealth inequality in the US, as elsewhere, is much higher than income inequality. The richest 1% of Americans own (account for) 40% of the country’s wealth (total net worth). In 2014, the richest 30 individuals in the US owned about $792 billion, while the bottom half of Americans owned 1.1% of our country's wealth, also about $792 billion. So 30 people own as much assets as 157,000,000 people. That’s big-time inequality.

The old faithful, granddaddy gauges of income and wealth inequality, have been supplemented since before the last election. I found nine (9) other inter-related, mostly bitter flavors of inequality: 3 types of educational inequality (by achieved level of education, by gender and by fiscal indebtedness); dental; healthcare; criminal justice; sex; generational; and employment.

Education.  Great news, more people are now attending and graduating from post-secondary schools than ever before. In fall 2017, 20.4 million students attended American colleges and universities, constituting a 33% increase since fall 2000. In 2017, 34.6% of young adult females and 33.7% of young adult males have completed at least 4 years of college. Female graduates have outnumbered male graduates since 2015. This is one important area, among others, where females’ performance supersedes males.

Overall, this increase in college graduation has provided alumnae, and the nation, with significant, lasting benefits. Nevertheless, the majority of young adults does not attend or graduate from college despite all the media attention on college attendance. Employers’ demand for high-school graduates has atrophied. Yet federal, state and/or local governments haven’t created broad-based, effective vocational, skills-based training programs for high-school graduates.

Employment opportunities have become increasingly unequal. Unemployment numbers illustrate the disparity. The unemployment rate for people who have a B.A. or higher is currently 2.1%, 1.8% lower than the general unemployment rate. The unemployment rate for high-school graduates is 4.3%, twice as high as for college graduates. For people who don’t have a high-school or GED degree, the unemployment rate is 5.9%.

A final facet of education-based inequality is the debt owed by students who attend colleges and universities. For quite a while, critics have characterized this as the “student debt crisis.” There’s no doubt that students – whether they graduate or not – are carrying more loans and thus more debt as tuition has continued to increase. It’s not clear whether it’s a crisis or not. College students’ median loan debt is $14,400. The average student loan debt for students who have graduated from public universities (where 77% of high school grads go to college) is $25,500. In addition, some people have complained that there is student debt inequality because women carry a higher debt burden than men. This “inequality” exists for one simple reason; more young women are going to college than men. Last fall 11.5 million females attended colleges and universities versus 8.9 million men.

It’s important to put rising student debt into some perspective. Most college graduates receive a financial reward from having a college degree, higher incomes. The average bachelor’s degree holder earns about $32,000 more per year than the average high school graduate. Bachelor’s degree holders make about $1 million in additional earnings over their lifetime according to the Association of Public Land Grant Universities.

Dental.  This attention-getting headline, “How Dental Inequality Hurts Americans,” alerted me to a previously unrecognized facet of inequality. People are suffering because Medicaid doesn’t provide its recipients with dental care. Other inequalities may seem more important and have more widespread impacts; but tell that to someone whose mouth is filled with pain. Can’t we just brace ourselves and strengthen gum control?  

Healthcare.  Unequal access to healthcare has been a key socio-economic issue. One of the major goals of the Affordable Care Act (ACA) was to decrease the number of Americans without any health insurance coverage, an embarrassing, costly reality in our rich nation. The ACA succeeded. American healthcare inequality has steadily declined since 2013; three years after President Obama signed the ACA. In 2013 the share of people without health insurance was 18%. By 2016 it was 10.9%. In 2017, after the Republican Congress and the president stilted coverage and reduced funding, the percent of Americans without coverage increased to 12.2%. This is a senseless misfortune. It also has energized progressives’ push to enact their universal, single-payer Medicare-for-All healthcare plan once they get back in political power. I’ve discussed how this proposed plan may not be the cure-all Sen. Sanders and his compatriots envisage.

Criminal justice.  Inequities in the implementation of the US criminal justice system for people of color have been noted since before the 18th century. Most recently, the acquittal of Travon Martin’s killer in Florida and police tactics that killed Michael Brown in Ferguson, Missouri and Eric Garner in New York City have brought these inequities front and center. Significantly more people (usually men) of color are prosecuted and jailed than white people. The figure below shows this on-going criminal justice inequality.

Source: Wikipedia

Sex.  Yes, sex inequality, or rather inequality of opportunity for having sex. Inequality’s scope is thus broadened once again. This is hardly a new issue, but it came out from between the sheets and briefly into the forefront of the media spotlight several weeks ago when an incel man (that’s an involuntarily celebrate person, for the thankfully uninitiated) mowed down a bunch of Toronto pedestrians, killing 10 of them while driving his van on a sidewalk. This horrible incident was portrayed by some as a problem that might be settled by making a “Case for Redistribution” of sex, as New York Times columnist Ross Douthat mentioned.

If we can contemplate redistributing income and wealth (see above), why not sex. This reasoning did not go down well with others. Slate writer Tyler Zimmer’s response to the Toronto incident and Douthat’s column was: if we’re serious about sexual fulfillment, we should worry more about economic inequality, and not sex robots (that Douthat suggested as an antidote, perhaps in jest).

The LGBTQ community has made remarkable progress in increasing the awareness of others about the discriminatory practices and harms brought on their members. Laws and regulations have been changed to rectify these inequalities as a consequence of their efforts.

Generational.  When you think about it there will always be generational inequalities. Because each generation (retiring Baby Boomers, adult Gen Xers, early-career Millennials) is by definition at different stages of their lives, relative to other generations. Nevertheless, Millennials’ status has is occupying a fair amount of attention, as they ascend into demographic and commercial prominence. Several stories appeared close to Mothers’ Day making note that nearly 25% of Millennials between the ages of 24 and 36 lives at home with Mom (and Dad), nearly double the 13.5% rate for that age group in 2005. Geographically, multigenerational households have formed, as expected, in the country’s most expensive rental markets. More than 30% of millennials live with their parents in New York, Los Angeles and Miami. What cities are lowest on the living-with-mom list: Austin, Seattle and Denver that aren’t cheap, but are attractive enough that Millennials are willing to leave the nest for them, despite their cost. These Millennials’ location choices echoes Laurence Peters’ quote; In spite of the cost of living, it's still popular. On the other end of the generational divide, Baby Boomers have been retiring in droves, roughly 10,000 per day. Boomers are facing inequities from employers and service providers who maintain ageist practices.

Employment.  I already mentioned the disparity of employment for people with different levels of education. Other issues, including age, gender and race/ethnicity inequalities, also are present in the nation’s labor market. In the first quarter of 2018 the average unemployment rate for all workers was 4.3%; for White people it was 3.9%; for Black/African Americans the rate was 7.3%; for Hispanic/Latinos it was 5.4%; and for Asians it was 3.0%. Unemployment rates for teenagers are more than three times as large as the overall rate: White teenagers’ unemployment rate was 12.1%; Black/African-Americans was 24.8%, the highest of any published rate; Hispanic/Latino teenagers had a 14.4% unemployment rate; Asian teenagers, 6.6%. Men’s overall unemployment rate was 4.6%, women’s was 3.5%.

Although the Q1 women’s unemployment rate was below the overall rate, they are far less frequently employed in the tippy-top echelons of American corporate enterprise. There are merely 26 women CEOs of S&P500 companies. Their presence as corporate CEOs has grown slowly during the past decade. Women also remain far outnumbered by men in the corporate board rooms of American; only 21% of S&P500 company board seats are held by women.

Unlike typical workers, the compensation that CEOs receive has continued its escalation rapidly to thermospheric heights previously unseen. Here’s the 2017 report of the top 200 best paid CEOs of publicly-traded companies. Interestingly, the salary of Mindy Grossman of Weight Watchers International (WWI), the 22nd highest paid CEO ($33.4M, that unbelievably represents just 32% of the highest paid CEO), has the highest CEO pay ratio. Her compensation is 5,908 times greater than the median salary at WWI. Also fascinating, the CEO with the second highest CEO pay ratio, 4,987, is a woman, Margaret Georgiadis, CEO of Mattel ($31.3M). Louis Hyman, a professor at Cornell, accurately portrayed the real-life inequality of these CEOs’ compensation as, “It’s grotesque how unequal this has become.”

But what about the remaining 3.9% of American workers who still can’t find a job, a low rate that we haven’t seen for more than 17 years? The progressive wing of the Democratic Party has come up with a potential answer: give them guaranteed government jobs at decent wages. Critics have said such a program could be seen as a kind of a very large hammer in search of a nail. Proponents haven’t yet offered a means of paying for such guaranteed jobs, just like Republicans blithely declined to specify how they were going to finance the tax “reform” act they passed into law last year. The US labor market would be fundamentally altered if such guaranteed jobs were actually offered by the federal government in ways it hasn’t been since Franklin D. Roosevelt initiated the Works Progress Administration’s programs in 1939, amid bread lines and 15% unemployment.

After examining these facets of inequality I remain convinced that our current state of inequality is a consequence of many inter-laced socio-economic forces, including laws, regulations and most importantly collective and individual behaviors. Some of these forces can be changed, some must be changed. Some have been changed. Many haven’t been changed.

Because every imaginable future with less inequality is not equally possible, difficult but reasoned priorities must be made. I don’t want some Diana Moon Glompers to be legally enforcing strict equality across the board that I think might be preferred in some very leftish quarters. I also don’t subscribe to blanket adoption of absolute equality as a feasible or even reasonable political goal. The quixotic plans of capital “P” Progressives to dramatically redistribute income and wealth are fraught and, I believe, destined to be politically unsuccessful, as they have been in the past. Some observers who ascribe to a more realistic, measured course of action call such plans infeasible and political suicide. I have recounted these large challenges and risks. Progressives’ push for very expensive, large government programs that might reduce some forms of inequality ultimately rest on a foundation that a few public decision-makers have oracle-like insight to justify spending hundreds of billions of dollars to achieve government-led quests to unspoiled equality. I find that prospect impossible to vote for.

Although there’s no magical threshold of equality that will consequently effect more opportunities to more people, I do believe it’s important and wise to provide more public resources to people who need them but don’t have them. These beneficiaries will ultimately improve not just their lives, but all of ours. America has eventually done this for the vast majority of our history. The current administration’s efforts to decrease wholesale economic and cultural equality should be stopped. So by all means make sure to vote this November 6th, and in the on-going primaries to throw these Republican con artists out.

I also think Plato’s characterization of democracy is an apt one: Democracy is a charming sort of government, full of variety and disorder and dispensing a sort of equality to equals and unequals alike. If Democrats prudently chose to not dive into the deep left end of the political pool, and can gain some measure of actual political power in Washington and elsewhere after November, cutting back the administration’s ill-founded hydra of increased inequality will be a superb, initial start to increasing equality, liberty and fraternity.

BUILDING TRADE WALLS: Holding China at Bay?

Trade is the mother of money. ~ Thomas Draxe (1613) 

Unfettered production and consumption of foreign-made goods – aka, “free-trade” – is so old school. Just ask Donald Trump.

Should we hop back to the old days of high tariffs, big customs duties and large quotas on foreign imports to make our country great again? Should we remember what the world was like after our Congress passed the Smoot-Hawley Tariff Act in 1930? Here’s a hint, it wasn’t that good.

Most economists and historians agree this Act, which significantly raised US tariffs to a level not seen in over the previous century on more than 20,000 types of imported goods, not only exacerbated the Great Depression but harmed the public’s economic prosperity due to higher prices. The Smoot-Hawley tariffs were ignominiously rescinded within five years after our major trading partners retaliated with their own increased tariffs on US exports.

But here we are with a president who is ready to roll the free-trade clock backwards by building “protective” tariff walls, not just his physical wall across our Mexican border.

International trade has been a quarrelsome series of policy debates (and much more) for at least the past 250 years. From an economic perspective, these disputes were formalized when Adam Smith stated in 1776 that free trade (trade not encumbered by tariffs or other protective barriers) was the basis of the wealth of nations. In the early 19th century David Ricardo, another British political economist, provided a notional rationale – his theory of comparative advantage – for determining which goods and services should be produced (and traded) to allow each trading nation to benefit from the trading. Unsurprisingly, these debates have continued and, as trade has greatly expanded, have become more consequential.

In our current age of globalization, there's a lot of international trade. It can be argued that the first "early modern age of globalization" in the West began in the 17th and 18th centuries (although inter-regional trade occurred since ancient times) with the development of the Portuguese, Spanish, Dutch and British empires. This early globalization certainly gained importance with the resultant increase in international trade, although its benefits were exclusively realized by the conquering Europeans.

Since the end of World War II the doctrine of trade liberalization – lowering or eliminating import tariffs, quotas and subsidies – has been publicly praised and followed by the majority of (already-developed) Western nations. These nations, with the strong support of many economists, have genuflected at the altar of free-trade. The creation of the World Bank, the International Monetary Fund and the General Agreement on Tariffs and Trade (the predecessor of the World Trade Organization - WTO) by 1950 was predicated on expanding post-war international free-trade across the planet. Virtually all contemporary nations have comported with this vision – that freer trade benefits everyone.

The WTO states that total world merchandise exports were $16.0 trillion in 2016, more than a 150% increase since 2000. The WTO now has 159 member countries, with 24 countries negotiating their WTO membership.

For more than 60 years US exports and imports have followed a bumpy but long-term increase as a share of our real (inflation-adjusted) GDP. This increase has happened as tariffs have been reduced and overall trade has grown.

The US and China are now the world’s largest traders. US exports represented 11.9% of our 2016 GDP, $1.45 trillion (T). Chinese exports represented 19.6% of its 2016 GDP, $2.10T. Germany wears the crown as the most intensive trading nation because its sizeable exports (ranked third-highest) represent an amazing 46.1% of its GDP. That’s a lot of Porsches, BMWs and Mercedes.

Let’s now consider China, the world’s largest exporting nation and Mr. Trump’s proclaimed nemesis. One analyst diplomatically characterizes the shifting US international trade priorities as a “protectionist crouch.” Others perceive it as a retreat from the leadership the US has provided for decades in the international economic community. Predictably, China sees Trump’s change in US policy as an opportunity and is very willing to assume more leadership in the world economy. Beijing is presenting itself as a benign alternative to the US in the international policy sphere. China’s rising geo-political influence has been caused by several reasons; the largest is its export-driven economic growth. Mr. Trump’s priority of building tariff walls specifically to protect domestic manufacturing jobs is simply policy icing on China’s expanding geo-political cake. For perspective, just 7.7% of the US labor force was in manufacturing in 2016.

China’s growth from a poor, “lesser-developed country” 40 years ago began when Deng Xiaoping took power in 1978 and instituted significant economic reforms. China’s much heralded growth and development has been founded on government-led economic planning, large state-owned and subsidized enterprises in strategic industries, direct state control of capital markets, restrictive rules for any foreign manufacturer wanting to operate in China, and little concern for the traditional guidelines of free trade. Despite such centralized planning and obstructive trade policies, China gained membership into the WTO in 2001. China’s growth hasn’t relied very much on Adam Smith’s “invisible hand” of competitive market forces for its economic progress; it’s a centrally-planned economy with a dose of market interaction around the edges. The Communist Party of China describes its economic system as a “socialist market economy.”

China’s development into a more modern, industrialized economy via restrictive, non-free trade policy has an interesting parallel in US history. This history exposes the myth that we have always practiced free-trade throughout our economic development.

Several years after winning the Revolutionary War and freed from British control, Alexander Hamilton successfully argued before the first US Congress that our new nation should be protected from established, more developed countries like Britain, France and Spain. He coined the compelling phrase “infant industries” to claim that strong tariff protection was needed for our new nation. Congress agreed with his request. Domestic industries that benefited from tariff security included textiles and iron, and later steel. Some specialists believe this early, vigorous trade protectionism of our nascent industries allowed the American economy to be one of the fastest growing throughout the 19th century and into the early 20th century.

With this trade protection, revenues from US tariffs (also called customs duties) were a very large part of the federal government’s total revenues for over a century. Using high tariffs thus served two purposes, they helped protect our infant industries from foreign imports and they provided revenue to our federal government. It wasn’t until the 1913 passage of the 16th Amendment which legalized the federal government’s use of a personal and corporate income tax that customs duties’ fiscal importance began to wither.

The table below shows that customs duties accounted for at least 81% of the government’s total direct revenues from 1792 through 1850. Even in 1900, more than 100 years after protectionist tariffs were initiated by our government, customs duties accounted for over one-third of the government’s revenue. Notice the significant bump in federal customs duty revenues in 1930 because of passage of the Smoot-Hawley Tariff Act.

US Federal Government Revenue, 1792-1950 (millions $)

Year	Customs Duties & Fee Revenue	Total Direct Revenue (TDR)	Customs Duties Percent of TDR
1950	$407.0	$39,443.0	1%
1930*	$561.0	$4,830.2	12%
1920	$294.2	$7,380.4	4%
1900	$238.2	$669.6	35%
1850	$39.7	$49.1	81%
1800	$9.1	$11.1	82%
1792	$3.4	$3.7	92%

Source: usgovernmentrevenue.com *Smoot-Hawley Tariff Act passed.

Trade protectionism was very much alive and well during the initial industrialized growth of the US in the late 18th and the 19th century. This long period of US non-free trade policy is forgotten by most modern economists and politicians. Why should they remember; it’s now the age of globalization.

Many people say that the development of the US into the world’s macroeconomic power was because of a straight free-trade hit. But it’s not a hit, it’s a myth. It’s a myth that we’ve always used free-trade policies to achieve our greatness. We didn’t, as explained above. Ah, what a difference a century or so of growth based on protective “infant industries” tariffs followed by decades of freer-trade as a fully-developed nation makes.

For the past 65 years the US and many other nations have largely adhered to the free-trade faith of reducing tariffs on many goods and services. Significant and broadly beneficial bilateral and multilateral trade agreements have been implemented by the US with other trading partners. US free trade agreements include 20 bilateral free-trade agreements, the Tokyo Round, the Uruguay Round and the North American Free Trade Agreement (NAFTA). That is not to say that the US, or any nation, allows all foreign products to be imported with no tariff. Nope. The US International Trade Commission states that many agricultural products like sugar, cotton and vegetables, as well as live foxes, umbrellas, and nuclear reactors are subject to import tariffs.

It’s a different world now. Or is it? Is our blinkered, zero-sum micro-man leader Donald Trump returning to our forgotten olden days of uniformly high tariffs to battle specifically with China on the international trade stage? It seems so.

China has the second largest GDP in the world and, like the US, is a member of the Group of Twenty (G-20) nations. Nevertheless, its GDP per capita is $8,123 and not high enough to be ranked in the top 50 nations. Its investment- and export-led economic growth over the past 30 years has been impressive. Equally notable, the Chinese government had extensively raised literacy and life-expectancy levels, and reduced poverty. In 2017 its GDP growth slowed to 6.5%, the 16th highest in the world according to the World Bank. The US GDP growth for the last quarter of 2017 was 2.6%, less than half the Chinese growth rate.

As a candidate, Mr. Trump denounced the “false song of globalism.” In his first week as president, he canceled US participation in the Trans-Pacific Partnership (TPP), a large regional trade deal with Japan, New Zealand and nine other pacific-rim countries that was initiated in 2005 to contain China. Mr. Trump has publically criticized Canada, China, Germany, Mexico and South Korea for exporting more to the US than they import from us. He is renegotiating trade pacts with Canada, Mexico and Europe to get a better deal for American workers. Mr. Trump has expressed a strong preference for bilateral trade agreements rather than larger, multilateral ones like NAFTA and the TPP.

Last month his administration decided to impose tariffs on imported washing machines and solar cells and modules from China, Malaysia and South Korea to help domestic firms’ workers. The tariffs’ overall effect on the US solar power industry will be to raise consumer prices of solar panels and also reduce employment by thousands of US workers. Also, the Trump administration started an investigation into claims that China has infringed on American intellectual property that could occasion investment restrictions or further tariffs.

On February 16, the Commerce Department recommended that the president impose substantial tariffs or quotas on imported steel and aluminum from China, Brazil, India, Hong Kong, Russia, South Korea, Venezuela and Vietnam to save American jobs. US auto makers complained that such trade restrictions will increase their costs and raise vehicle prices.

Mr. Trump dismissed objections to these trade measures, saying that the United States was considering tariffs, quotas or both. “You may have a higher price, but you have jobs.”

This quote typifies the president’s myopic view of raising tariffs on specific goods. The consequent price increases will directly affect millions of consumers (in this case of steel- and aluminum-using products like cars and trucks); the possible benefits are aimed at far, far fewer workers. Mr. Trump’s interest in building tariff walls scorns the historically high likelihood of other nations retaliating against these US tariffs with ones of their own, and filing formal complaints before the WTO.

In fact, America’s direct options for punishing China’s huge, worldwide increase in steel and aluminum exports are fairly limited. Why? Because the Obama administration already imposed a series of restrictions on Chinese steel imports in previous years; only 2% of American steel imports came straight from China in 2015. So, it may be media-worthy politics that possibly saves jobs (depending on how they’re counted), but ultimately it’s bad economics for consumers as prices will rise.

Protectionist tariffs certainly can serve useful economic purposes for developing nations, as they did for infant industries in the US well over a century and a half ago, and as they have more recently for Japan, South Korea and other Asian Tiger nations. But it’s been a very long time since we’ve been a nation of infant industries, despite the claims of domestic manufacturers. Erecting high tariffs to shield established industries (like US aluminum, steel, consumer appliances and agricultural products) in already-developed countries like ours at best only provides narrow, micro benefits and causes economic pain for the general consuming public.

Politically, the President’s retreat from our nation’s half-century record of trade liberalization seems to have boomeranged internationally and instead has provided China with an opening to fill the policy vacuum Mr. Trump created. Perhaps he recognized his mistake in building new trade walls – a very faint hope –when he offered a slightly different tune about trade at the January 26 Davos meeting saying, “America first does not mean America alone” and “America is open for business.” Did the listeners believe him? Doubtful, very doubtful. Just ask the Chinese, Canadian, Mexican and South Korean leaders whose businesses will be subject to higher US tariffs.

Mr. Trump’s foray into the dark, high-tariff past may provide ephemeral, slender benefits that will be paid by the consuming public’s much broader pain from higher-prices. If, somehow, we millions of consumers were to gain influence comparable to that of far narrower private interests, public decision-makers like our occluded president might support of our interests of broad choices and fair, low prices. Politicians like Mr. Trump always support these consumer interests in their campaign speeches but disdain them once elected to office. That’s why Thomas Draxe’s 405-year old quote remains relevant.

A CAUTION LIGHT FOR DRIVERLESS VEHICLES

Technology can be a useful servant but a dangerous master. ~ Christine Louis Lange 

If you believe the hype now surrounding self-driving, autonomous vehicles (AVs) you would think they will be widely available just around the corner, certainly within the next few years. The automobile and tech industries are abuzz with fantasies of AVs conquering the byways and changing society from the tires up. The “go” green light shines brightly for them.

Sizeable financial bets have been placed on who among the AV competitors may win this contest. Some think the traditional automakers can’t succeed (because, uh, they’re “traditional”) and the high-tech Alphabet/Waymos will win. No one has any real idea about the outcome, despite all the breathless media attention from AV wannabes. All kinds of pronouncements regularly erupt from the media; like this pro-AV story; fewer critical reports like this one also pop up.  

But don’t believe the hyperventilation. At this point, I vote to take the “auto” out of autonomous vehicles. I think the AV publicity barrage’s singular goal is to raise the hundreds of millions of dollars needed to further develop AV technologies rather than soon place actual, fully-automated cars on the highways. Droves of fully-autonomous cars and trucks will not appear on streets anytime soon.  

Instead, I hope AVs will be taking many, many test drives on circuitous routes in Arizona, California, Michigan and elsewhere until they prove to the National Highway Transportation Safety Administration, and more importantly to potential buyers, they’re able to consistently move safely on our crowded byways. Autonomous vehicles have a long, bumpy, non-GPS’d road to travel before that happens. To be charitable, the wheeled techies’ acceleration to introduce software-driving cars to the public is at best premature.

Autonomous vehicles face large challenges that advocates mostly understate. Perhaps the largest is how unenthusiastic most drivers now feel about using an AV. According to a Pew Research Center poll, 56% of Americans are wary of driverless cars and would prefer not to ride in one. According to the MIT Technology Review, “The relationship between human and robot driver could be surprisingly fraught.”

The recently-launched Las Vegas autonomous shuttle took just an hour before it got into an accident that displayed an overabundance of “A” (artificial) and a lack of sufficient “I” (intelligence) – as in autonomous-driving’s touted AI. Remember the accidents that killed Tesla drivers using Autopilot in Florida and in China last year? What could possibly go wrong in the all too near future (according to proponents), when herds of AVs start sharing the road with normal, capricious human drivers? Among the obvious safety issues, these incidents have raised important and unresolved liability concerns about injuries and fatalities connected with AV accidents.

Nevertheless, folly or not, self-driving cars are the prospect that nearly every major auto manufacturer now thinks it must bet on. Alongside the billions of dollars being raised by AV proponents and manufacturers, a yellow caution light should be blinking on AVs.

Safe, successful driving is a miracle of neurobiological coordination that involves the flawless, simultaneous execution of a billion tiny and subtle reflexes, as one expert conceded. It’s a much more complicated task for a computer to properly drive an AV, than teaching it to play chess or robotically assemble transmissions. A fully self-driving car must correctly identify and label millions of objects, understand city layouts and traffic laws and safely operate in a variety of road conditions. It has to be taught to handle everyday driving hazards (high-speed merges) and rarer incidents (objects in the road), as well as issues that would never affect a human driver like a chunk of road debris that flies up and knocks out a sensor.

To operate successfully, self-driving cars’ systems need to approach driving not just a mechanical, reactive task but as a social act cooperating with all other vehicles in the vicinity. Autonomous vehicles’ algorithms will need to understand the norms that dictate driving’s acceptable customs. This is a tall order. As anyone who has driven in different places knows, these norms and customs vary considerably by locality. New York City drivers’ norms, which David Brooks characterizes as “foreplay to genocide,” are very distinct from Seattle’s, “dawdling” drivers.

Thus, safe self-driving cars will need to recognize and respond to how human drivers actually behave on roads, not merely how they should from a legal/regulatory standpoint. These technical and behavioral AI challenges facing AV systems’ development are in part why most major automakers expect fully-AV cars to be available in no less than 15 years from now, not the hyperbolic day after tomorrow vision of Elon Musk.

There are six different “levels” of automation for vehicle control systems, based on the system’s sophistication; Level 0 through Level 5. A Level 0 vehicle has no automation, like a 2005 Porsche 987 or a 2017 Chevy Malibu. Level 5 – Full Automation – rules the other, driverless end of the automation scale. A Level-5 car will operate without a human driver on any road and in any conditions that a human driver could negotiate. After the driver enters the destination into the vehicle’s GPS-based map, he/she can sit back and relax with no further active involvement needed during the journey.

No AVs now operate anywhere close to Level 5, but Waymo—formerly Google’s driverless-car project, now a separate division of Alphabet—is using a fleet of 600 Chrysler Pacifica hybrids to develop its AV technology for future production, as shown below. In this fully-automated level, no human control of a vehicle is needed at all, at any time. Level 5 vehicles won't require any pedals, steering wheels, or controls for a human to take charge. It’s the Jetsons car travelling on properly-augmented roadways. 

Waymo AV test vehicle

Real-world vehicle systems are now available that can operate at Levels 1 and 2. Level 1 is Driver Assistance where the car can control either the steering or the speed, but not both at the same time. The driver performs all other aspects and has full responsibility for the vehicle at all times. An example of a Level 1 technology is Adaptive Cruise Control now available in some automobiles. Level 2 is Partial Automation, where the car can steer, accelerate and break in certain circumstances. The driver remains responsible for virtually all “tactical maneuvers” (e.g., responding to traffic signals and changing lanes). Audi, Cadillac, Mercedes, Nissan, Tesla and Volvo have such partial, semi-automation systems in certain cars now. Some knowledgeable people believe Tesla’s revised Autopilot system can operate at certain times as a Level 2 system.

At this point, there are no AVs that can operate at Level 3 (Conditional Automation), Level 4 (High Automation) or Level 5 (Full Automation). In a Level 4 car the driver might manage all driving duties on surface streets then become a passenger as the car enters a highway. Ford expects to put Level 4 AVs – actually a fleet of autonomous, self-driving taxis (aka, robotaxis) – operating on city streets by 2021. Ford says it hopes to have a "high-volume, fully autonomous" car working commercially by offering a "ride-hailing or ride- sharing service." This goal sounds like Ford is operating very close to the bleeding edge with its three-year timeline. Waymo is making similar plans. I’m betting that Lyft drivers need not worry in 2021.

Finally, there’s the crucial issue of an AV’s cost that usually goes unmentioned, probably because technical and safety questions have dominated discussions so far. Nevertheless, if AVs are to occupy space on American roads, their purchase price will need to pass interested customers’ value proposition. That is going to be a challenge over the short-run, just like it has been for electric vehicles.

The first-generation Google/Waymo AVs were Priuses laden with $150,000 worth of lidar (LIght Detection And Ranging) and radar sensors and related AV equipment. An AV’s lidar sensor (the bulky attachment on the car’s roof, shown in the picture above) is the single most expensive additional requirement. This sensor bounces multiple laser beams off nearby objects all around the AV to create accurate, real-time 3-D maps of their surroundings. The previous generation lidar sensor, built by a leading manufacturer and used by Waymo that was never mass produced, cost $75,000 to $80,000 per unit. Waymo now builds its own lidar and related AV equipment. A second-generation (pre-production) lidar sensor uses 128 laser beams – twice as many as previously – with an effective range of possibly 300m (more than twice as long as before). Such a sensor could cost “thousands of dollars” when it enters mass production, although it is not clear when that will happen. Even if eventually newer, improved lidars’ cost can be reduced by 90% as the market expands – an often-cited, but never documented statistic by AV techies –that would translate to a still-pricy $7,500/unit, which represents slightly over 20% of the average price of an entire 2017 car.

These sizeable incremental costs of driverless Level 4 and 5 AVs are a likely the reason Ford, GM, Waymo and other AV technology players are aiming first at commercially-owned AV vehicles, including Uber (who has heavily invested in its own AV technology, and faces a lawsuit with Waymo who claims Uber stole its technology), Lyft (who signed a $500 million partnership with GM last year to use self-driving Chevy Bolt EVs, and recently also signed an agreement with Waymo) and perhaps even good ol’ taxi and rental-car fleets. Notice that at the AV party, everyone is now dancing with practically everyone else.

A lidar manufacturer’s CEO stated that some ride-sharing companies have told him, “if you had an autonomous car that just worked, they’d be willing to purchase these cars for $300,000 to $400,000 apiece and buy as many as you could possibly make.” He said, “that’s because the total vehicle cost—including the price of sensors—is less important than it is in a consumer-owned car. This steep investment in AVs could be recouped quickly by keeping a vehicle on the road nearly 24 hours a day.”

The AV hype blows from many directions, including CEO offices. His rationale is fiscal fantasy. Profitably operating such super-expensive Lyft/Uber/taxi AVs by running them continuously would increase the cars’ operations and maintenance costs and lead to lower operational lifetimes. No vehicle, including steeply-priced ones with lidar, can continuously run “nearly 24 hours a day” without costly mechanical consequences. Even without such cost consequences, Lyft/Uber AVs’ high costs could result in folks who take an AV Lyft having to pay a super-premium “AV all-hours surge” price that I doubt would be popular, except as an extravagance. Thank goodness for hedge fund execs’ expense accounts and high-school proms (with parental indulgence)? 

If AV manufacturers and stakeholders want their vehicles to become our future vernacular means of transport, they will need to satisfy two goals. First, the complex AV technology systems will need to be proven safe and reliable. Given the existing, remarkably low accident rates for regular automobiles (1.27 deaths and 78 injuries per 100 million miles driven[1] in 2016), AVs would need to be driven hundreds of millions of miles before being able to demonstrate their relative safety and reliability. Waymo’s AVs have driven far more than any other player, a bit over 630,000 miles. According to Nidhi Kalra, a researcher at RAND, there is no practical means at present for testing the safety of AVs before their use becomes common. There have simply not been enough AV miles driven to calculate a defensible safety estimate.

However, she also believes that waiting for the “perfect AV” may cost lives. I am not suggesting that we wait for the “perfect” AV. She’s right; perfection always takes a lot longer and hasn’t been achieved in a century by human-driven cars. My caution about introducing AVs is founded on simply requiring them to be comparably safe and reliable to that of existing driver-controlled cars and trucks, not perfect. AV safety depends on: lidar sensors’ accuracy and reliability, the AV code algorithms’ degree of optimization, precision and predictability and the entire system’s flawless high performance.

The second, related goal is the cost of AV cars must be reduced if their appeal will reach beyond rich aficionados and wealthy ride-sharing firms. Cost reductions may likely occur as more AVs are built and their production process becomes “scalable” (a favorite term of techies, including the AV clan), just like they have for many other new technologies, from photovoltaic solar panels to lithium-ion batteries. Li-ion batteries’ cost dropped by a factor of 4 over the past seven years. But, will such scalability and production efficiency apply to AV technologies? AV proponents hope so.

Like other new automotive technologies from the past (e.g., air-conditioning, automatic brake systems), AV capabilities will first be sold in higher-priced luxury cars, as companies already plan. In the next decade or so if AV manufacturers want to sell to the far broader “regular” market of individual buyers like Jane and Joe Van and capture larger production scale economies, prices will need to be value-comparable with non-AV transport. This value comparability would include some added premium based on the hopeful higher worth of being a driverless car. I doubt the acceptable AV premium will exceed 10% for non-luxury cars. Attaining these lower prices will pose a key challenge for AV component manufacturers. Will they be able to sufficiently reduce their sensors’ and AV algorithms’ unit prices at the same time as manufacturers undertake costly redesign and miniaturization?

Discussions of AVs’ future rarely mention the ancillary local, state and federal government expenditures needed to upgrade streets and highways to be Level 4 or 5 AV-compatible. Forget about just filling pot holes, also dump the Dots as part of AV infrastructure enhancement. One unexpected change to California highways now being undertaken to help AVs is Caltrans’ on-going removal of Botts Dots lane-markers. According to a Sacramento Bee story, “After more than a half century of service, the Dots are expected to be relieved of duty because they are a bad fit as a lane marker in the emerging world of AVs that rely on sensors to ‘read’ and understand lane lines.” Such public spending will take money, effort and time.

In a previous blog about electric vehicles (EVs) I mentioned that despite nearly a decade of marketing, incentives and subsidies, the far simpler-to-produce EVs’ national market share remains dismal – less than 1%. Will herds of AVs be traveling on our future streets and highways? Perhaps, and it’s unlikely to be anytime soon. As the philosopher Yogi Berra once remarked, the future ain’t what it used to be. Regarding AVs, my fingers are cautiously crossed that this technology will serve, not master us.

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[1] Total motor vehicle deaths (or traffic fatalities) are far more often reported, but are less meaningful. In 2016, 40,200 people died in motor vehicle accidents according to the National Safety Council, a 6% increase from 2015. The vehicle death rate (deaths per 100 million miles driven) provides a more important, proper perspective than the absolute number of fatalities. The 2016 level of fatalities occurred as US driving rose to 3.2 trillion vehicle miles travelled. 

THINGS THAT SHOULDN’T BE AND SOME THAT SHOULD

Be realistic: Plan for a miracle. ~ Osho

Reflecting on the past 12 months, I offer here my resolutions about things that shouldn’t be around (but are) and things that should remain (please).

things that shouldn’t be

The Republicans’ fiscal follies.  As I noted previously, the Republicans’ hasty, nasty, damaging tax “reform” foibles will impede growth, exacerbate income inequality, eventually hike taxes of all who aren’t already wealthy, provide large, unneeded tax reductions for the 1% and require giant, growth-deflating deficit-financing. The passage of this miserable “reform” will initiate the Republicans’ long-desired slicing of Medicare and Medicaid expenses among other government discretionary expenditure reductions; all in the hypocritical name of deficit reduction. What’s not to loathe?  

A yellow light for autonomous cars.  Call me a Luddite, but I vote to take the “auto” out of autonomous (self-driving) vehicles (AVs), or at least be very cautious about AVs. The wheeled techies’ acceleration for introducing software-driving cars is foolhardy hype. Autonomous vehicles face very large challenges (beyond mere code) that advocates underrate. It only took one hour for the recently-launched Las Vegas autonomous shuttle to get into an accident that displayed an overabundance of “A” and a lack of sufficient “I” (as in autonomous-driving’s AI). Remember the accident that killed a Tesla driver in Florida last year? What could possibly go wrong when in the all too near future (according to proponents), herds of AVs start sharing the road, any road, with scads of unpredictable, entirely human drivers? I seriously doubt it will be pretty. Raising more caution signs and yellow blinking lights for AVs now is compulsory. More on this later.

Fees for luggage placed in planes’ overhead bins are very high highway robbery. This grievance is particularly directed at you, Maurice Gallagher, CEO of Allegiant Airlines, but unfortunately not limited just to you. Airlines’ unbundled pricing has steadily gained altitude since American Airlines began separately charging for checked baggage in 2008. Last year the airlines’ “ancillary revenues” totaled as sky-high $82 billion. Such stratospheric over-monetization of services should be permanently grounded, now.

The FICA tax wage limit, currently set at $127,200. No one pays social security tax on income over this wage limit. There should be no upper wage limit for the FICA payroll tax that underwrites the Social Security (SS) Trust Funds. In October, Social Security benefits, totaling $77.87 billion that were provided to 67.76 million recipients. The wage limit makes the FICA Social Security tax unnecessarily regressive and deprives SS of millions of dollars every year. For almost one-half of unmarried middle class beneficiaries, SS provides at least 90% of their total income. US median household income increased by just 3.2% last year. American CEOs got an 8.5% raise in 2016, their biggest pay increase in three years.

The top 16% of income-earners make $127,000 or more. They can afford the 6.2% FICA/SS tax; why aren’t they paying their share on all their income like the other 84% do? Oh I remember, the Republicans always protect their wealthy, VIDs (Very Important Donors). Among several advantages, eliminating the FICA/SS wage limit would shore up the Social Security Trust Funds that are expected to be exhausted by 2035 and may extend the solvency of the fund by 58 years. I know it’s a dream, but eliminate the FICA/SS tax wage limit.

Dark new energy subsidy.  The administration has recommended a new energy subsidy that shouldn’t happen. The Secretary of Energy recently proposed that electric utilities operating coal-fired power plants be mandated to have an extra 90-day supply of fuel at each plant to enhance the “reliability and resiliency” of the electric power grid. This is utter twaddle. A decision from the Federal Energy Regulatory Commission is expected by January 10. Extra fuel stockpiling is unnecessary and costly for rate-payers (you and me) and everyone else. If the FERC does its job properly (rather than taking a political low-road), each Commissioner will vote down this bunkum proposal. Creation of this subsidy for coal producers flies in the face of well-established plant and grid operations, rationality and market reality. The tax-expenditures for this nasty subsidy will cost plenty in terms of atmospheric CO2, NOx and SOx.

Critics have called this “emergency” coal supply proposal a misguided “cash for cronies” scheme to help the coal industry that has strongly backed the president. Their interests as well as those of other fossil-energy producers are well represented in the current administration’s Cabinet and senior policy-makers. This costly change will continue coal-fueled electricity generation that produces an unhealthier, browner future. Speaking of which…

Coal-fired power plants.  Each of the nation’s 381 coal-fired power plants (down from 616 in 2006) should stop operating tomorrow. Burning coal to produce electricity despoils the environment and contributes to higher personal and public health costs. Last year, fossil fuels accounted for about 65% of the nation’s electricity generation mix, coal accounted for 30.4%. Total renewable energy that includes hydropower, wind, biomass, solar and geothermal accounted for 14.9%; nuclear energy was 19.7%. My local utility, PG&E, has 30% renewable sources and no coal. Thankfully, there is not one coal-fired generation plant anywhere in California. The sun is justifiably rising for solar, wind and other renewable generation; it should set ASAP for wholly horrid coal.

Removing protections from America’s wild places.  The president’s recent removal of at least 1,143,800 pristine wild acres within Canyonlands and Bears Ears National Monuments for private uranium, petroleum and gas development reflects yet another misguided facet of the president’s fundamentally mistaken priorities. Go Patagonia! Keep America as wild as possible.

Scott Pruitt, Administrator of the US Environmental Protection Agency. This man and his title is a first-order oxymoron, with emphasis on the last word’s second syllable. Remove him.

The final thing that shouldn’t be is our zero-sum, Kylo-like President Donald J. Trump. QED.

WHAT I’M THANKFUL FOR

Despite my listed nine “things that shouldn’t be,” there are, fortunately, five superior items in my life that more than compensate for the previous nine. I remain an Optimista because of them. I’m thankful for these important, valued (but usually unspoken) people, places and things.

Upbeat Music.  Music of all sorts is a joy to listen to. I’m thankful for this curiously surprising story that concluded “Sad songs have become less common all over the world.” It presents results of researchers from my grad school alma mater that found during the past seven years English-language songs are more upbeat than before. The media incessantly presents the world and our neighborhoods as going to hell in a handbasket, and that the world is in persistent “crisis” of one sort or another. Maybe we should listen to music more and be Optimistas rather than Pessimistas. It’s a wholly worthy thought. Are our musical glasses half-full, rather than half-empty? I hope so. Upbeat music makes it far easier.

Good health.  With the staunch support of my family and friends, together with my own active efforts, I’ve managed to retain reasonably good health as I’ve become a septuagenarian. Here’s hoping it may continue for me, and you.

Yosemite National Park and each of the other 57 national parks. I take only Yosemite for granite. Thank goodness for Half-Dome, Crater Lake, Valley Forge, the Grand Tetons, Zion and the Everglades, among others. Thank you, Teddy. We need to keep all 58 vital.

My marvelous friends and my treasured family: Courtney, Lindsay, Cody, Ainslie, Elias, Liam and Alder. You’ve given me fun, hope, smiles, reward, satisfaction, education and promise. Thank you.

And most of all, Patrice.  Thank you dear Patrice for being the best part of my life and for putting up with my eccentricities and shortcomings. 

PUTTING THE GINI BACK IN ITS BOTTLE

A tax loophole is something that benefits the other guy. If it benefits you, it's tax reform. ~ Sen. Russell Long

Liberals have been understandably concerned about the distribution of income and wealth in the US. Over the past four decades an ever-higher share of the nation’s total income and wealth has been garnered by a small number of rich, wealthy Americans. This blog discusses the vicissitudes of income and wealth inequality over the past seven decades and how this inequality is related to the Republicans’ current legislative focus, their Tax Cuts and Jobs Act.

This unequal distribution is seen as the few very rich people gaining control of a growing amount of our nation’s income and wealth. Such concentrated control likely has serious implications and consequences.

Economists commonly account for the nature of a nation’s income and wealth distribution using the Gini index. The Gini index is a measure of inequality of a nation’s distribution of income (or wealth). It was pioneered by the Italian statistician and demographer Corrado Gini in his 1912 paper, “Variabilità e mutabilità” (Variability and mutability). The Gini index has a maximum value of 1 (signifying total inequality) and minimum of 0 (signifying complete equality). A perfectly equal distribution of income would be when each income decile of a nation’s households accounts for 10% of its total earned income, including the highest- and lowest-deciles of households. The lower the value of the Gini index, the more equal is the underlying income (or wealth) distribution. The higher the index is, the more unequal the distribution of income becomes.

The table below shows the share of US income and wealth held by the Top 1% rising since the since the 1940; the income-based Gini index is also presented from 1955 to 2015. Both the 1%’s share of income and wealth and the Gini index have steadily risen since 1975, signifying growing inequality.

Economic Inequality in the US, 1940-2015

Year	Share of Top 1% for Gross Income	Share of Top 1% for Total Net Wealth	Gini Index (Household Income)
1940	15.7%	39.7%	NA
1955	9.2%	27.5%	0.377
1975	8.0%	22.8%	0.371
1995	13.5%	27.9%	0.433
2005	17.7%	32.1%	0.450
2015	18.4%	37.2%	0.454*

Source: Chartbook of Economic Inequality. *2014 value, last year available.

In 2016, the Top 1%ers had household income of $430,600 and net worth of $10,374,030. The inequality of wealth distribution has long been far more pronounced than of income, as shown in the table. You can readily see that control exercised by the 1% over the nation’s wealth is roughly twice that of the nation’s income.

The 75-year period shown in this table spans significant economic growth and change as well as economic booms and busts. The Gini index grew more than 20%, the income and wealth shares increased much less. Between 1940 and 2015, the US real GDP grew by 13 times.
To state the obvious, the Republican tax “reform” legislation now has no economic or social justification. Following the widely-accepted view, expansionary fiscal policy (broadly lowering tax rates and increasing government spending) should be enacted when the nation is suffering from a recession. Like what was happening in 2009 when unemployment was 9.9% and GDP shrank by 2.7%. Since 2010, the US has enjoyed steady if minimal economic growth, in no small part due to the Obama stimulus legislation. The Republicans vehemently opposed Obama’s 2009 $787 billion fiscal stimulus because it would increase federal deficit and debt.

Hypocrisy now abounds. The US is already at full employment, the unemployment rate is 4.1%, 0.63% below the natural (full-employment) rate of unemployment. The Republican inequality-enhancing tax “reform” bill would increase the national deficits at least $1.5 trillion, probably much more, over the next decade. This time, nary a word of opposition has been heard from the two-faced Republicans with regard to this significant deficit escalation. This fiscal policy “reform” that overwhelmingly supports the 1% is not needed for any economic reason except to compensate the Republicans’ most important donors.

If your legislative preferences conflict with the narrow fiscal priorities now espoused by those who exercise political power in Washington DC, you’re likely to be grasping at short straws for some time to come regarding somehow remedying inequality.

Higher inequality and slower growth have created market warriors and market worriers. An example warrior in the news now is the Federal Communications Commission (FCC) Chairman, Ajit Pai, who is strongly pushing to slay “net neutrality” and give ISPs more power. Two other market warriors are Representative Paul Ryan and Senator Mitch McConnell who have led the Congress in nearly passing the Republican Tax Cuts and Jobs Act that will increase inequality by providing the already-wealthy with significant tax reductions and thus even more income and wealth, despite what these two warriors deceptively claim.

Example worriers include Senator Elizabeth Warren and economists Paul Krugman and Thomas Piketty, who envisage economic and social havoc arising from ever-escalating inequality. Sen. Warren and Dr. Krugman are irate about the Republicans’ tax “reform” success and its expected deleterious effects on many middle-class families.

Although the Republican tax bill hasn’t yet been finalized, it’s easy to see that the many changes likely to be approved by the House/Senate Conference committee will ultimately increase income and wealth of the already rich. These gains appear to be the principal goal of the Act, notwithstanding Republican pronouncements. Inequality will rise.

The Tax Cuts and Jobs Act will reduce taxes for upper-income people, and especially for corporations (which after a series of Supreme Court decisions, including Citizens United, are “people” too). About 67% of the Act’s total tax cuts will benefit corporations.

The list of this Act’s likely stipulations that will accelerate inequality is unfortunately long. They include: reducing the marginal tax rate for high-income individuals that among other effects will increase their disposable income – relative to lower-income people – and provide disincentives for those people to provide tax-deductible charitable donations that provide significant financial assistance to the less fortunate. Drastically lowering corporate tax rates will principally benefit the already-rich and will likely decrease the well of money going into the Low Income Housing Tax Credit that funds affordable housing. Less affordable housing will be built.

Among other wrongs, the House bill removes the deduction for student loan interest. Unlike other tax deductions, the student loan interest deduction is usable even if you don’t itemize your deductions, so it won’t lose its value as the standard deduction rises. For the majority of college students who borrow money to get college educated, their costs will rise, their disposable income will fall and fewer will be able to afford going to college. For the very first time, graduate students will have to pay tax on the value of their tuition waivers in the House bill; both the House and Senate bills will require private universities to pay tax on their endowments’ capital gains.

But how to rein in the growth of inequality – putting the Gini back into a smaller bottle – is far from agreed, and deviously difficult to implement within an existing political system. Many revolutions have been fought through history to enhance equality; peasants and indentured farmers-servants finally rose up to improve their lives. An example is the 1789 French Revolution whose rallying cry was Liberty, Equality, Fraternity. 

Reducing inequality through specific legislation or economic policy has rarely been attempted. Most direct legislative remedies are not politically popular or feasible because they involve raising taxes on well-connected, powerful, upper-income people. As shown in the table above, the last time inequality dropped in the US was during the decade or two after the end of WWII, which was a startlingly exceptional time for our nation. This post-WWII drop in inequality was an historic exception. The norm for the past 70 years and before, is that inequality has been present and gradually risen.

The only way anyone can even partly rationalize the Republicans’ tax “reform” effort is to concede it as an article of faith for true believers in the Covenant of the Latter-Day Wealthy, to which Mr. Ryan, Mr. McConnell and the president are its triumvirate of leaders. The Republicans’ unified support behind this deeply-flawed, mean legislation shows them shedding their ephemeral disguise as sponsors of working-class interests. In the Senate bill the much-flaunted increases in the “reform’s” personal deductions and child tax credit are scheduled to disappear entirely in 2025. This triumvirate probably believes (with reason) that most of the voting public doesn’t care much about seven years from now. They only care about this year and next year, when Trumpian voters will likely see their taxes drop some.

The issue of rising inequality has been at a slow to medium boil on liberals’ political stoves for a while, but it’s not a new issue. Nope, significant income and wealth inequality have been present for millennia, in far greater degrees than now.

Thomas Piketty’s best-selling Capital in the 21st Century showed sizeable inequality was present in the 18th Century. More recent analytical excursions into the past using paleo-data on house-size as a wealth proxy illustrate the virtually-eternal challenges of reversing wealth and income inequality going back 10,000 years. This study’s authors who suggest that inequality was present in later Neolithic societies blame the advance of formal agriculture. Inequality rose steadily after the shift into settled agriculture.

Solutions to inequality such as an international tax on capital that Mr. Piketty recommended are impractical. While worthy of momentary consideration, having the UN improbably establish the legal ability to enact and then enforce a global wealth tax on every very rich person on Earth has absolutely no practical value as a realistic solution. No nation has ever established inequality-reducing taxes on the already-wealthy of the sort Mr. Piketty suggests; an annual levy starting at 0.1% and increases to a maximum of perhaps 10% on the greatest fortunes. He also suggests a retributive 80% tax rate on incomes above $500,000 or so. Good luck with that Thomas.

We now live in a period when our government is proposing to eliminate entirely the very narrowly-defined estate tax. No nation – capitalist, socialist or communist – has punitively taxed wealth, but several have simply absconded with privately-held land, capital and/or assets. In the longer-term, few such seizures have worked out that well for anyone. For example, China’s Cultural Revolution or most recently Venezuela’s chaotic confiscation of property and businesses owned by the elite.
So how about taking a one-way ride in Doc Brown’s DeLorean back to allegedly more-equal early Neolithic society? I didn’t think so.

Here’s a heretical thought. Potentially inequality may effect economic and other harms. But if inequality has been present for most recorded human history (think Queens, Kings, Dukes, Princes, Genghis Kahn and Pharaohs), is it really a serious problem or more a “feature” of human society that may even have contributed something to humanity’s stunning progress over many centuries? What I’m suggesting is that income-wealth inequality may not necessarily be nasty per se, but is problematic beyond some as-of-yet undefined level. Although the literature includes a fair amount of qualitative discussion about such potential harm, little quantitative evidence seems to exist about inequality itself actually causing economic and socio-cultural damage. Is the post-hoc fallacy at work here? Perhaps.

But turning the clock forward to the present, there’s little doubt the Republicans’ tax “reform” will cause rising inequality in the US over the next decade. They’re gleeful; the rest of us, including many middle-class Trumpians, may not be as the clock keeps ticking.