Wednesday, 27 September 2006
By Dr. Abbas Bakhtiar
Some months back, I
wrote an article “the Coming Financial Crises” as a warning to the American
people about the US debt, budget and trade deficit. Since then the situation
has continued to worsen and no-one it seems is willing to address this
important issue.
When George W. Bush became president in 2001, the United States’ public
debt was 5.8 trillion dollars. Today the public debt stands at 8.3 trillion
dollars [1 ]. Of this over amount, $2.2
trillion dollars is held by foreigners [2 ].
United States has a GDP of 12.4 trillion dollars. This gives U.S. a Debt/GDP ratio
of 66%, placing it in 35th place (out of 113) on the ranking of the Debtor
Nations [3 ]. The current account
deficit of over 7 per cent has long passed its danger levels of 4-5 per cent.
In 2005 the U.S. government paid $325 billion dollars in interest payments.
Added to this are the future obligations such as Medicare $30 Trillion
dollars, Social Security: $12.7 Trillion dollars, Federal debt: +$4.3 trillion
dollars, Federal and Military pensions $3.9 trillion dollars and other debts of
$2.2 trillion dollars. These obligations amount to $53 trillion dollars will
become due in 2008 when over 78 million baby boomers begin to retire. [4 ]
It seems that these astronomical sums worry only a few in the academia
for the politicians, the Wall Street experts and the media constantly talk
about the continuing good times and/or a controlled cooling down of the
economy. This simply doesn’t add-up. Who are they fooling and why?
The fact is that those in power do not want to be blamed for this mess.
Bush can not in all honesty justify his huge tax-cut to the rich in the face of
these economic imbalances, nor can he explain the necessity of spending so much
on such things as his elective War in Iraq. The long-term cost of the Iraq war
is estimated to be between $1 to $2 trillion dollars [5 ].
He is also thinking about starting another war with Iran that will be even more
costly than the Iraq and Afghanistan wars. How is he going to justify his
fiscal irresponsibility if it came out that there was no money for pensioners
or social security?
A pertinent question to ask would be why the opposition party is not
informing the public about the economic crisis facing the US. The simple answer
is that the opposition does not want to ruin it’s chances of being elected. It
is unlikely that voters would cast their ballot in favour of a candidate/party
who is going to increase taxes and cut social spending. Also the current political
system is such that anyone that goes against the rich and the special interest
groups will not receive the necessary funds for his/her election campaign.
If we look at the election results we see that money plays a central and
important role in determining the outcome; in other words, money talks.
Money talked with a roaring voice in the 2002 midterm elections,
according to a post-election analysis by the non-partisan Center for Responsive
Politics. Just under 95 percent of U.S. House races and 76 percent of Senate
races were won by the candidate who spent the most money, the Center found.
That translates into 413 of 435 House races and 26 of 34 Senate races. The
findings are based on candidates' final reports for the 2002 election cycle
filed with the Federal Election Commission. [6 ]
Running for a seat in the Senate or the congress is prohibitively
expensive. Running for president is even more expensive than the senate or the
congress. The actual costs are immense. For example in 1992, the two political
parties spent $220 million dollars on behalf of their presidential candidates.
The total cost with government’s contributions etc, was $550 million dollars.
“The
costs of electing a president -- some $550 million -- represent about one-sixth
of the nation's $3.2 billion ($3.200 million) political campaign bill in 1992.
The remaining funds were spent to nominate and elect candidates for Congress
($678 million), to nominate and elect hundreds of thousands of state and local
officials ($865 million), and to pay the costs of state and local ballot issue
campaigns and administrative, fund-raising and other expenses of party and
non-party political committees.”[7 ]
But where did all this money
come from and why? Some money was provided by people like you and me with
donations of maximum of $1000. But just to cover the presidential election we
would need 200000 people each sending in $1000 to the party headquarters.
We know of course that this wasn’t the case. It was the special interest groups
and the lobbyists that provided a substantial contribution to each candidate’s
campaign costs. Of course the rich (owners of corporations etc) can not
contribute directly, so they contribute to Political Actions Committees (PACs)
which in turn make donations directly to candidates.
As can be seen this system is skewed in favour of the candidates with
money. Those candidates are in turn beholden to their party and PACs, making
them dependent on the rich and powerful for finances. In the end, the candidate
has to consider the interest of these powerful groups before making any
decision. That is why sometimes one sees different administrations adapting
policies that are against the long-term interest of the nation without any
meaningful protest by the people’s representatives in the congress or the
Senate.
The current economic crisis was not created by this administration alone
(although they contributed greatly to it) and can not be solved by the next
president either. It will require a long and painful change in the spending
habits of the people, a marked reduction in their economic expectations, and a
better and more equitable distribution of wealth and income. But most
importantly, it requires a restructuring of the current election system and
it’s financing. But until then (if that day ever comes), the government has to
somehow pay the debt, reduce its expenditure and substantially increase taxes.
No matter how one looks at it, the majority of the people will feel the coming
financial hardship.
The Economic Situation of the
Americans
For the country the solution is simple enough (on paper): reduce
expenditure and increase income. This is usually done by cutting some of social
services and benefits on the expense side and increase the income by increasing
the taxes. Of course this doesn’t have to be simultaneous. But considering the
size of the budget deficit, trade deficit and the coming obligations, a
combination of both will be necessary.
But we know that any reduction in services will impact the living
standard of those relying on those services. A reduction in welfare support
will affect not only the recipients but also their dependants. A reduction in
healthcare services will affect a large number of people and again their
dependants. Of course any reduction in social spending by the governments will
have a minimum impact on the wealthy. They seldom use government services such
as healthcare or subsidies. Yes they use the courts and roads and the police,
etc, but all-in-all the effect of social expenditure cuts on their lives will
be minimal.
Furthermore, an increase in taxes will impact various groups
differently. For example, any increase in taxes will either not affect or
minimally concern those 23 million households that earn close to $15000 dollars
per year or less. However the working poor and especially the debt laden middle
classes will be hard pressed to cope.
To get a proper understanding of the people’s economy and their ability
to cope with any reduction in services or a substantial increase in taxes, we
shall look at the population as presented by congressional budget office.
Please note that the poverty threshold for 2004 was set at $19,307 dollars for
a family of 4.
The table above (you will
have to go online for table) reports values both for the entire population and
for quintiles (quintile = 20%) of the income distribution. The Quintiles are
supposed to contain equal numbers of people, but because households vary in
size, the quintiles provided by the Congressional Budget Office generally
contain unequal numbers of households.
According to this table, in 2003, the bottom quintile or 23 million
households earned $14800 per year while the top quintile or 22.8 million
household had an income of $184500.
a. The Lowest Quintile
According to the US Census
Bureau, from 2000 to 2004 the number of people living in poverty in United
States increased by 5.4 million people, going from 31,6 million to 37.0 million
[8 ]; of which 36% or over 13
million were children [9 ].According to Martha Burt,
principal research associate in the Urban Institute's Center on Labor, Human
Services and Population, during a year about 10% of these people or close to
3.7 million people will experience homelessness.
These 37 million people are at the bottom of the society and to a large
extent ignored by others, even the government. The government has tried to
reduce it’s expenditure by restricting access to social benefits and in some
cases, by requiring the poor to work.
For example, the new law passed in 2006 requires that welfare recipients
work for at least 30 hours per week, 20 hours of which must be in approved
activities such as public or private jobs, training related to a job,
vocational training, job search, community service, or providing day care for
persons performing community service.
This rule and others like it are created to reduce the budget deficit
rather than helping the poor. For example this rule was included in a $39
billion budget-cutting bill that Bush signed in February 2006. What Bush and
others seem to have forgotten is that if a single parent is forced to go to
work, who is going to look after the children. According to the U.S. Census
Bureau, in 2005, there were close to 4 million poor Female householders with no
husbands present. If these mothers were to go to work, who is going to look
after the children? Naturally if the law requires that a welfare recipient
should work, the burden of enforcing the rule is put on the state authorities.
They are the ones that have to pay for the child care services.
According to Arizona Republic, “State welfare officials are concerned
that the new requirements will be costly to the states. The Bush administration
provided an additional $500 million for child care over the five-year program,
a fraction of the $4 billion that the nonpartisan Congressional Budget Office
said was necessary for parents to meet the new work requirements” [10 ].
The proponents of the work-for-welfare scheme argue that this will help
the poor by weaning them off the system and thereby making them more
self-reliant. But assuming that it was possible for all these people to find
full-time work, they still would be living in poverty, since the actual value
(purchasing power) of the minimum wage is at its lowest level since 1955. Two
working adults, let alone a single parent, can not afford to pay for housing,
child care, health care and transportation with working for minimum wage.
According to Economic Policy Institute “today, the minimum wage is 31%
of the average hourly wage of American workers, the lowest level since the end
of World War II” [11 ]. It is clear that the poor
will have severe problems in alleviating their economic condition by simply
working for minimum wage. If they work hard they may be able to join the
working poor.
The government can only reduce services to the poor. It can not raise
any money in from of taxes from this group.
b. The Second Quintile
The working poor families are those families that earn $34000 per year.
According to a 2005 report by the Urban Institute, over 13 million families
including 26.5 million children are living at the edge of the poverty (median
income = $38000). According to this study “many children today are growing up
in families with low incomes and with a parent working a substantial amount.
The picture we have drawn here is one of low-income families with relatively
high work effort at low wages, with jobs that often do not provide basic
benefits, and with expenses roughly in line with their incomes. A subset of
these families is experiencing material hardships related to food, housing, and
health care, and many children in these families are not doing well on a range
of measures. The economic circumstances of low-income families in part reflect
their lower levels of educational attainment and poorer health (which could itself
be a consequence of economic circumstances) than those families on the next
rung up the economic ladder” [12 ].
Any increases in taxes or reduction in services will push (in reality)
most of these people into the first quintile.
c. The Middle and Fourth Quintile
There is no agreed upon
definition of Middle Class. Some such as Washington post consider those that
earn from $40000 to $90000 [13 ]
to belong to the middle class, while others consider any family that have an
income of $20000 to $90000 as middle class. Here since we use the Congressional
Budget Office’s quintile system, we combine the middle and fourth quintile to
define our middle class group. Then according to this classification a middle
class family is a family whose income is between $51900 and $77300 per year.
The middle class is considered the backbone of the consumer society.
Their health and wealth is extremely important to the economy. They tend to be
better educated than the lower quintiles, healthier and more politically
engaged. Their size and economic health determines the prosperity of the
nation.
When one looks at the income of a middle class family one would expect
that at least this group would be in a good financial position. But all the
reports point to the contrary.
The middle class is squeezed from all sides. The costs of housing,
healthcare, transportation and education for the kids, have skyrocketed; making
it exceedingly difficult to make ends meet.
According to the Department of Housing and Urban Development (HUD),
"affordable housing" should cost less than 30% of a family's income,
either in rent or a monthly mortgage. Yet many middle class families have to
pay much more of their disposable income for housing. “From the end of 1994 to
the end of 2004, housing prices rose 46 percent faster than overall inflation.
In the period of a weak labor market, from March 2001 through the end of 2004,
housing prices outpaced overall inflation by 25 percent” [14 ].
Many people own only the home that they live in. The rising house prices don’t
really help these people, except in allowing them to re-mortgage their homes to
raise extra loans; which eventually they have to pay back. If they sell their
homes and move to a cheaper neighborhood, they can earn a good profit, but
almost no-one does that. So if majority of the middle class only own the homes
that they live in, the rising house prices do not really help them. On the
contrary it creates the illusion of wealth, encouraging these people to borrow
more and spend more. Eventually these loans have to be paid back, and when that
time comes, most people find it hard to manage.
Do the middle class families face more hardship now that they did
before? According to Harvard Law School Professor Elizabeth Warren they do.
According to her “more and more families today are sending both parents into
the workforce – it has become the norm, it is what we now expect. The
overwhelming majority of us do it because we think it will make our families
more secure. But that's not how things have worked out. By the end of this
decade, one in seven families with children will go bankrupt. Having a child is
now the single best predictor of bankruptcy, and this holds true even for
families with two incomes.
So we looked at the data for two-income families today earning an
average income. What we found was that, while those families certainly make
more money than a one-income family did a generation ago, by the time they pay
for the basics -- an average home, a health insurance policy, a second car to
get Mom to work, child care, and taxes -- that family actually has less money
left over at the end of the month to show for it. We tend to assume with two incomes
you're doubly secure. But if you count on every penny of both of those incomes,
which most families today do, then you're in big trouble if either income goes
away. And obviously, if you have two people in the workforce, you have double
the chance that someone will get laid off, or double the chance that someone
could get too sick to work. When that happens, two-income families really get
into trouble, and that's how a lot of families quickly go bankrupt” [15 ].
This group (i.e. the middle class) will be the one that will be the
hardest hit of all groups. They will see their disposable income reduced
substantially. On one side they will have to pay higher taxes, while they have
to pay more for government services that were previously either free or
subsidized. Many will have difficulty paying their debts (mortgages, etc) and
will have to reduce their living standard substantially to stay solvent.
d. The Highest Quintile
The highest quintile represents the top earners of the society. But it
would be wrong to look at the average income of this group as the
representative income for the whole group, because, unlike the other quintile,
there is a very large difference between the top 1% and the rest of the group.
According to the Congressional Budget Office (CBI), in 2003, the top 1% had an
average income of $1,022,400 while the top 10% earned a quarter of the top
earners or $260,000. In any other quintile, if you divide the average by 4, the
resulting figure would be in a lower quintile. So here we shall look at the
data provided by CBI for the top 16%.
In the past few decades we have seen a huge increase in inequality in
America. According to the Economic Policy Institute, a Washington think-tank, between
1979 and 2000 the real income of households in the lowest fifth (the bottom 20%
of earners) grew by 6.4%, while that of households in the top fifth grew by
70%. The family income of the top 1% grew by 184%—and that of the top 0.1% or
0.01% grew even faster. Back in 1979 the average income of the top 1% was
133 times that of the bottom 20%; by 2000 the income of the top 1% had risen to
189 times that of the bottom fifth. “Once all income sources are taken
into account, including capital gains, the extent of income concentration at
the end of the last business cycle was remarkably high by historical standards.
Using newly available income data that goes all the way back to 1913, income in
2000 was only slightly less concentrated among the top 1% of households than
during the run-up to the Great Depression, which was the worst period of uneven
income concentration in the last century. In 2000, the top 1% held 21.7% of
total income, compared to 22.5% in 1929” [16 ].
Since 2000 the inequality has only increased. According to Center on Budget and
Policy Priorities (CBPP), the after-tax income of the rich has been increasing
at an alarming rate. From 1979 to 2002 the after-tax income of the top 1%
increased by 111% while 96% saw a very modest increase; with the poor and the
working poor seeing only 5% and 12% increase in their disposable income.
The inequality in income has
been made worse by President Bush’s tax-cuts for the rich. Gene Sperling the
former President Bill Clinton's top economic adviser, in an article in
Bloomberg, condemned the tax cuts, arguing that:
“While some middle-class tax
relief -- and additional temporary tax cuts to stimulate the economy after the
recession of 2001 -- was warranted, it is hard to justify the enormous windfall
that President George W. Bush is seeking to bestow permanently on the very
Americans who have been doing so much better than 99 percent of the rest of the
populace.
Analysis of new Internal
Revenue Service data by New York Times tax reporter David Cay Johnston found
that those making $1 million a year collect 43 percent of all the new
investment tax cuts. Those making more than $10 million have collected about
$500,000 in tax relief -- a take he says will likely climb in the years to
come.
The fiscal impact is just as
striking. If the president's tax cuts are made permanent in the next decade,
the top 1 percent of earners (who make about $400,000 today) will collect more
than $1 trillion in new tax cuts. Those making more than $200,000 in today's
dollars will take in a whopping 40 percent of all the recent tax relief during
the next decade” [17 ].
Who Will Pay the Piper
It is said that if you owe the bank $1000 dollars you are in trouble,
but if you owe the bank $10 million dollar, the bank is trouble. Some
politicians and economists like to use this example to brush-off this enormous
problem. Their argument is to a certain extend valid. China and other emerging
countries need US market for their goods; but how long will they continue
financing a mushrooming trade and budget deficit. Somewhere along the way they
would want their money back.
How about the pensioners? Who is going to pay for their pensions? Who is
going to pay for health care, social security, unemployment benefits,
maintenance of the infrastructure such as roads and bridges? We can argue that
Chinese, Arabs, and others are willing to finance the trade deficit; but we can
not expect them to pay for the American pensions or maintenance of the US
infrastructure. According to the latest report (2005) by the American Society
of Civil Engineers, US government needs to invest $1.6 trillion dollars to keep
the system from falling apart[18 ].
This figure excludes the security costs. The truth is that at the end of the
day it is the American people that have to pay. This will be in the form of
higher taxes and reduced governmental services. In other words lower living
standards.
The poor and the working poor do not have anything to give. Their
contribution will be in form of statistics. The number of people living bellow
poverty line will increase. They will suffer because they rely on many services
that will be cut or reduced. The rich will always find some loop-hole to avoid
paying the major part their share. Even if their wealth is reduced by 10%, they
will see no hardship. This leaves us with the Middle class. This group will be
hit the hardest. They will see their taxes and expenses increase
simultaneously. A good portion will have to live on far less than they are used
to. Many will work longer hours just to stay solvent. Many may also join the
working poor. It all may sound rather apocalyptic but the numbers do not lie.
Politicians may avoid this problem for now, but sooner or later someone has to
pay the piper.
FOOTNOTES:
1. Bureau of the Public Debt, “The Debt To the Penny”
2.
Hodges Michael, Grand
Father Economic Report Series
3.
CIA Word Factbook, “Rank Order - Public debt”, 16 May,
2006
4.
USA Today, “The looming national benefit crisis”,
5 October 2004
5.
Bilms Linda, and Stiglitz Joseph E., “The Economic Costs of the Iraq War: An Appraisal Three Years
After The Beginning of The Conflict”, Harvard University
6.
Opensecrets.org: The Center for Responsive Politics, “MONEY IS THE VICTOR IN 2002 MIDTERM ELECTIONS”
November 6, 2002
7.
USINFO.STATE.GOV: International Information Program, “FINANCING PRESIDENTIAL ELECTION CAMPAIGNS”,
USIA Electronic Journals, Vol. 1, No. 13, September 1996
8.
US Census Bureau,2005 Annual Social and Economic Supplement
(ASEC), the source of official poverty estimates.
9.
National Coalition for the Homeless, “Why people are homeless”, 2201 P. St.
NW ❜
Washington, DC 20037, June 2006.
10.
Arizona Republic, “300,000 more must work under welfare plan”,
Jun. 28, 2006
11.
Economic Policy Institute, “Minimum Wage- Facts at a glance”, July
2006
12.
Gregory Acs and Pamela Loprest, “Low-Income Working Families”, The Urban
Institute, 2100 M Street, NW ,Washington, DC 20037. September 2005
13.
Washington Post, “What is middle class? ”, November 30,
2003
14.
Christian Weller, “For Middle-Class Families, Dream of Own House Drowns in a
Sea of Debt”, Centre for American Progress, May 2005
15.
Mother Jones, “The Two-Income Trap”, November 08 ,
2004
16.
Economic Policy Institute, “The State of Working America 2004-05”, Cornell
University Press edition , January 31, 2005
17.
Bloomberg.com, “A Disappointing Decade for Reducing Inequality: Gene
Sperling”, April 12, 2006
18.
American Society of Civil Engineers, “Report
Card for America’s Infrastructure” 2005
*************
Dr. Abbas Bakhtiar lives in Norway.
He is a consultant and a contributing writer for many online journals. He's a
former associate professor of Nordland University, Norway.