A Rising Tide

"A Rising Tide Lifts All Boats".

The 'Rising Tide' in this famous metaphor is the U.S. economy, and supposedly, as the economic tide rolls in all ships will rise with it, whether you own a mega yacht or a little dinghy.

a Little Dinghy is what you would have to be to believe this. An incoming tide breaks on your head if you don't have a boat, and outright drowns you if you're anchored to the ocean floor.

Also known as 'Trickle Down', the 'save the wealthy' theory says that if we all make sure the richest among us stay rich and make most of the money, they will be so generous as to build factories and invest in businesses and perhaps give us a job.

Is it too much to ask that after a session of  'trickle down', they could at least 'wash their hands before returning to work' us over again?

Speaking truth to the power of this metaphorical mantra of millionaires is the chart comparing worker productivity against wages. As is apparent even with a quick glance, as productivity has risen year afte year, and the economy grew throughout the 1980s,1990s and 2000s, wages stayed flat, to the point where the middle class is making less money than they did 30 years ago, once inflation is taken into account.

Despite record-breaking profits due to the combination of more productive workers, increased efficiencies and favorable regulations for businesses,  wages dropped and benefits were removed year after year, and slowly but surely the 2-car garage was replaced by a 2-job barrage of difficulties for the middle class.

Some will argue that 're-distribution of wealth' is something we ought to avoid.  However, as Robert Reich shows in his new book "After Shock", we have already been in a phase of 're-distribution of income' for three decades, as the nation's wealth has been more and more concentrated amongst fewer and fewer people.

Leaving aside the morality of greed vs the benefits of 'Social Darwinism', the real problem with this trend is the effect on the economy. When the Middle Class no longer has the means to raise their lifestyle, the 'Demand' side of the free-market is stifled. This is the problem with 'Supply-Side' economics and it's largely what's wrong with our economy right now.  The people who would normally spend money purchasing flat-screen TVs, i-Pads, 4g-phones and such simply do not have enough money to do so. When the Demand side dries up, the Supply side soon follows, and workers are laid off and investment money sits waiting for a more favorable business climate. When ther eis a Demand, businesses will invest and work to increase Supply to meet that Demand.

Without Demand, the Free-Market system of "Supply and Demand" grinds to a halt.

Henry Ford recognized this way back in 1914, when he began paying his factory workers $5 per day, roughly three times what comparable workers were making elsewhere. His reason? They could then afford to buy his products. Ford's cunning business move was soon vindicated. His Model T, priced at $375, was then within reach of the middle class workers he employed. By paying them higher wages, he turned them into consumers and customers, and Ford's profits more than doubled from $25 million in 1914 to $57 million two years later.

Today, the share of the national income taken by the top 1% is close to 25%, and the top 10% receives a whopping 40% of our overall wealth.  That leaves the rest of the population with fewer and fewer dollars to spend, and has crushed the Demand side of the free-market.

At first, the once-strong American Middle Class was able to cope with stagnating wages by three basic strategies; women moving into the workforce; everyone putting in more and more hours at work; and people spending their savings and borrowing money, a large part of which was secured by their mortgages.

Those were all temporary strategies however,  and with the crashing of the housing bubble, have now all been 'maxed-out' and are no longer available. This is the point where the business cycle really starts to stop, a stagnation caused by a 30-year transfer of wealth from the bottom up.

Not coincidentally, there was also a huge transfer of wealth to the top income brackets in America in the years right before the Great Depression, roughly from 1923 - 1928. This led directly to, well, the Great Depression.

An earlier era eerily emulated eighty years later as the economic engine was eaten by The Great Recession (Hey, don't laugh! I was gonna say she stopped selling sea shells by the seashore 'cause consumers ran out of cash, credit and clams). Ahem.

Anyway, take a look at this chart showing the percentage of income held by the top 1 % during the past century.

Notice the big 'dip' in the middle?    In "After Shock" Reich refers to this period after World War II as "The Great Prosperity". During this time the USA had a more even distribution of wealth, and yet in the middle of the century the American economy was far more successful than at either end. You might notice that this is also the time that people tend to remember as "how great America used to be". They often argue that we need to reduce taxes in order to return to those successful 'good old days'.   The facts, however, show that the opposite is true, as the next chart will clearly prove.

During this time of prosperity, tax rates on the upper income levels rose to as high as 91%!!

 

 Did those ridiculously high tax rates squash productivity? Investments? Jobs?  Not at all. 

This bit of history completely crushes the contention that we can't raise taxes on wealthy people for fear of hurting our economy.

What these charts clearly reveal to us is that just before both the Great Depression and the Great Recession, as the top earners were taking a larger and larger share of the American Pie, they were also giving less back through lower and lower tax rates. The result of that was a huge imbalance of wealth leading to catastrophic failure of the financial system. Twice.

Now, one doesn't have to advocate returning to the outrageous tax rates of the war and post-war years to understand that America does better with a more even distribution of wealth.

This is one of the problems with modern politics by the way, as virtually every issue that ought to be discussed using evidence and common sense is instead demagogue'd to the lowest possible result, such that anyone calling for higher taxes on the wealthy is decried as a 'socialist" or some such nonsense. 

This refusal to use evidence as the basis for rational discussion of our problems has led to the current morass in our wildly unpopular Congress. At least being unpopular is bi-partisan.

Leaving aside our Latin friends reductio ad absurdum and argumentum ad hominem tactics for the moment, the facts clearly show us that America performs better when there is more of a balance in the share of income received by all Americans.

 

This is not a new realization. The term "American Dream", although nowadays thought to refer to something like "with hard work, anyone can rise to the top",  when originally coined by historian James Adams really meant "a better, richer, happier life for all our citizens of every rank".

"A better, richer, happier life for all our citizens, of every rank".

All of our citizens.  Of Every rank.

The American Dream has been cut in two, as the better, richer, happier life is increasingly more difficult to obtain except for those already in the top income brackets.  The tacit agreement that when labor performs well and businesses make a profit,  both would share in the rewards of that success, has been broken.

Middle Class Americans have not been spending too much money and saving too little, they haven't been immorally wasting time chasing unaffordable luxuries, and they certainly haven't been lazy.  The reality is that our workers have increased productivity and have been working longer and longer hours, but they haven't been receiving the benefits that are supposed to come with that success.

Henry Ford understood what Robert Reich calls the "Basic Bargain" which lays at the heart of a modern, highly productive economy. Workers are also consumers, their earnings are continuously recycled to buy the goods and services other workers produce. If earnings are inadequate, the economy produces more goods and services than it's people are capable of purchasing, leading directly to job losses and economic stagnation.

Consider for a moment how income inequality stops the flow of money through our society. If one person receives $100 million dollars in one year (as did Ken Lewis, CEO of Bank of America in 2007, as he led them to financial collapse and eventual absorption by Merril-Lynch),  they can't possibly spend it.  Without a strong business climate, it doesn't get invested in new business either. Take that same $100 million and divide it amongst 2,000 people, each receiving $50,000, which is close to the median income. They will spend all or most all of that money in a single year, providing the necessary fuel for our economic engine to continue chugging along, delivering it's cargo of  prosperity to everyone. The American Dream.

All of this ought to lead us to the conclusion that the path to restoring America to her former glory days, the so-called Great Prosperity",  is simple. Raise taxes reasonably on the wealthiest income brackets, while ensuring that government spending is aimed towards investing in growth and job creation, and providing a safety net so our population can weather slumps in the growth cycle. The combination of revenue enhancement and investment spending leads to balanced budgets and growth, as we saw during the Clinton years.

Factual information like this also ought to alert us to the fallacy of the cries of the 'don't tax the job creators' crowd, because as facts show us, the true job creators are the American people, living the American Dream. 

Our metaphorical middle class catamarans ride the swells of the economic ocean on the twin hulls of jobs and fair wages.  When we all share in the rewards from our hard work and increased productivity, Port and Starboard together, we shall keep the American economy riding atop the waves of commerce on an even keel, through sun or stormy weather, gliding full sail with the wind at our backs towards the dawn of our country's bright future.

At that point, then yes indeed, a Rising Tide will lift all of us.