Wednesday, June 20, 2012

Class Warfare in the United States

During the Republican presidential primary season, Mitt Romney accused President Obama[i] of class warfare. Then again, when Romney suggested he would be willing to limit tax deductions for mortgages on second homes based on income, Newt Gingrich accused Romney of the same offense as he claims those on the left employ.[ii]

I take it that from Gingrich’s perspective, anything other than a flat tax or sales tax or best yet, a per capita tax, is unfair and promotes class warfare. As with many of Romney’s positions, it’s not clear what he deems class warfare, except that he’s against it and the other side’s policies nurture it.

All of this is a tempest in a teapot because the American people don’t (yet) much believe in class warfare. I think there are three main reasons for this:

1. Our social roots are based on the immigration of our ancestors seeking opportunities to succeed. Even those of us who can trace their ancestors to the Mayflower surely recognize deep down inside that they came because America provided opportunity they did not have in their homeland. What class system existed at the time of their immigration did not prevent perspiration, inspiration and a dollop of luck from allowing the poorest to become the richest, for a worker to become a capitalist. Even if such a rise could not occur in the immigrant’s generation then it was possible in the next or the next.

North American society has always had a top 1% (by definition). Most people know they have very little possibility of attaining that level of income or wealth, but do not begrudge those who have on account of their perspiration, inspiration and luck.

We do, however, have little sympathy for those “born with a silver spoon in their mouth” unless these people serve the public in some manner; then we tend to adore them. Witness the general regard for the Kennedy clan.

What we as a nation have historically begrudged were the most recent wave of immigrants because their hard work and cheap(er) labor threatened those who had recently reached the lower middle classes. Consider as examples the high levels of discrimination against the Irish on the East Coast during the middle 1800s and the Chinese laborers when they flooded our shores to build our western railways. This economic fear drives much of the current angst against illegal immigrants.

2. The burden of our local, state and national governments has always been shouldered disproportionately by those with higher incomes or accumulated wealth. Despite Gingrich’s statements about Romney’s tax policy reeking of class warfare, this differentiation in tax structure has been a part of our social structure from the get go.  We are a country primarily founded on English law, which does have social classes. England (and other feudal societies) developed a system of property taxes, which by their very nature skew the cost of government to those who have wealth.

After the 16th amendment to our constitution was approved, our first income tax structure provided for a 1% rate on income over $3,000 graduating up to a 6% rate for income over $500,000. That was 1913. Adjusting for inflation, the $3,000 would now be about $70,000 and the $500,000 is equivalent to over $11.7 million![iii]

I will grant that the tax rates were not high, but my point is that from its birth, the income tax targeted those well off, and only later were the less well-off included in the tax.

Voters in North Dakota, a state currently flush because of oil and gas revenues, just voted by a 3-1 margin against eliminating the property tax. North Dakota is not exactly a bastion of liberals. They are simply expressing their vision of part of the social contract: those well off have a greater obligation to fund our public goods.

3. Lastly, most members of the US society are themselves among the 1%. To be in the top 1% of earners within the US requires an income in the $400,000 range (it varies from year-to-year because of bonuses, capital gains and so on). However, when we extend our view to the world, most of us are no longer among the 99%; we are the 1%—and at least subconsciously we know it. Depending on whether and how one adjusts for purchasing differences across the world, all it takes is an income of $34,000-$41,000 to be included in the world’s top 1% of earners.

We Americans aren’t drawn to the idea of class warfare because we intuitively understand people in glass houses should not throw stones. However, if those at the top of the income and wealth scales in the US continue to call down the “class warfare” card over each and every proposal that does not actively shrink their financial burden for our public weal, at some point the masses may well decide that in fact class warfare is in operation, except it is the rich warring on the rest of us.

We are in the midst of a great dispute over what public goods should be included in our social contract. That discussion is needed and healthy. Regardless of how that debate is resolved through our democratic processes, we still need to agree on how to pay for government. We have no current agreement.

As a society we are complicit with the malfeasance of political leaders of both parties who have chosen to fund current government expenditures through continual deficit spending, placing the burden on the backs of future taxpayers. Our current predicament is caused by three major factors. (1) We have not recognized the true costs of the social programs we have adopted through bipartisan votes (i.e. Social Security and Medicare). (2) The Bush tax cuts have starved the federal government of cash at a time it is needed. (3) We have engaged in a series of unfunded wars that have dramatically increased expenses without adding a single penny of revenue.

There are people who want to solve all three problems on the backs of the middle class by decreasing government spending that provides them income and adjusting the tax code so the rich will pay less (which implies others will have to pay more.)

Here I will remind everyone of my version of a fair income tax structure [ ]. If we adopt a tax system that is socially fair, we will continue to avoid real class warfare. If, however, the rich continue to shirk their social obligation and entrench their privilege by eliminating estate taxes so that generations of rich enclave themselves as a privileged subset within the US, then perhaps the rich will push the country into true class warfare.

Such a conflict will not be good for anyone in the US. The usual result of such a conflict is that the middle and lower classes suffer a significant decrease in their standard of living as society falters. The rich who do not flee quickly enough lose most of their property and many lose their lives.

It is not the poor who cause class warfare; it is rich. If they keep raising the banner of class warfare to try to gain short-term financial gains at the expense of the masses, they may end up causing that which they most fear, and they will have no one to blame but themselves.

~ Jim

[i] The Boston Globe reported [] that in Iowa Romney indicated that Obama’s policies will substitute envy for ambition and poison the American spirit by pitting one American against another and engaging in class warfare.”
[ii] reported Gingrich to say, “Governor Romney’s proposal to limit certain tax deductions based on income, including the deduction for mortgage interest on second homes, is a surrender to the class warfare rhetoric of the Left."
[iii] The CPI-U [ ] in Jan. 1913 was 9.8. In May 2012 it had increased to 229.815, a ratio of ~23.45.

Friday, June 15, 2012

Cutting Cents Yields Real Dollars

Everyone agrees the United States has a long-term deficit problem, and everyone agrees—at least in theory—that we should cut government waste.

Here’s an approach that makes sense: stop making cents. Kill the penny, what the US Treasury officially calls the one-cent piece.

Here’s a short history of the US penny. We started with large cents in 1793 and only introduced the small cent piece in 1856. The Lincoln head became standard in 1909, marking the 100th anniversary of his birthday. In 2012 it costs the mint 2.41¢ to produce a penny. Eliminating the penny would save $60 million a year—not enough to solve the deficit problems, but not nothing either.

Canada (whose dollar is almost par with our own) is ditching its penny this fall. Not that we want to be led by that country to the north. After all, if we followed their direction in the 1970s we would have long ago adopted the meter and thrown away our yardstick. Then what would we do with all those duplicate wrench sets to cover both metric and English measurements?

Back to the penny. In 1793 a penny could buy something more than a dime can today. Because of a penny’s value, we also minted a half-cent starting in 1793. It was discontinued in 1857 at the same time the large cent disappeared. Note that it took over 150 years to get rid of the half-penny. Since another 150+ years have slipped by, we have permission from the previous example to get rid of the penny.

Lots of people don’t use pennies now. They rely on the ubiquitous penny container at every checkout to round their purchase to the nearest nickel.

Opponents suggest eliminating the penny will result in inflation. Ever hear of rounding? We do it all the time at the gas pump when they charge us a price ending in .9¢ for a gallon of gas. Sales tax is rounded up or down on every transaction. Some things would even become less expensive. For example, an item priced at $9.99 will have to drop to $9.95 to stay under $10.

In the spirit of full disclosure, I must report that only four years after the half-penny’s demise the US plunged into a Civil War. I don’t think one caused the other, but our politics are currently looking pretty ugly.

I don’t know about you, but I’d be willing to forego the penny to save $60 million a year, even if I do risk being blamed for the Civil War of 2017.

~ Jim

Thursday, June 7, 2012

Recall Elections are Bad for Democracy

Despite leading Wisconsin to one of the weaker economic state recoveries, Governor Walker handily won his recall election.

I know recall elections were instituted so elected officials who engaged in truly egregious behavior could be ousted by an outraged public. From what I can tell, unless the behavior is clearly illegal (and sometimes not even then) most recall elections are nothing but a waste of time and money. 

Worse, they inhibit a functioning democracy. Holding open the possibility of recall only hardens political positions: if you are in the minority, why compromise when you can ask the voters for a redo to “throw the bum out.” This is pernicious to good government, where compromise is necessary for democracy.

A majority of one should not be a tyranny over the minority; nor should the current minority do everything in its power to make the incumbents fail, especially if the public is harmed (as US Senator Mitch McConnell has perversely recommended as the means to insure President Obama is defeated in his reelection attempt).

A reasonably quick, but thorough, impeachment process will take care of the truly illegal behavior since it will require members from both parties to agree the actions were beyond the pale. Otherwise, we should elect officials for their full terms and evaluate them when the term is completed. Then we either re-elect them or turn them out of office.

Political parties and their supporters in the US must recognize that the vast majority of Americans are centrists, swaying right or left primarily as a reflection of the excesses of the side currently in power. Recall elections pander to the extremes of the parties, and the middle is right to vote for incumbents in the majority of the cases—which is what happened in Wisconsin.

~ Jim