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Is the US system rigged for the rich?

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Is the US system rigged for the rich?

Post by momopi » October 19th, 2010, 10:56 pm ... r-the-rich

Is the US system rigged for the rich?

While the poor get social programs worth $365 million, the rich get more. Subsidies to help the prosperous build wealth added up to $384 billion last year.

By David R. Francis / October 18, 2010

Everybody knows the rich are getting richer, but why they're getting richer remains something of a mystery. Is the system biased?

The shift of income to the top has occurred in the most prosperous English-speaking nations, such as Australia, Britain, and Canada. But it has been most pronounced in the United States. Thirty years ago, the richest 1 percent of Americans got 9 percent of total national income. By 2007, they had 23 percent. Last year, new census data show, the rich-poor income gap was the widest on record.

Wealth is more unevenly distributed. The top 20 percent of wealth-holders own 84 percent of America's wealth. What's causing it?

One factor is federal policy, says a study by the Corporation for Enterprise Development (CFED) and the Annie E. Casey Foundation. It finds that most federal subsidies aimed at building wealth, such as certain tax deductions (officially called "expenditures"), credits, and preferential rates, go to the richest taxpayers.

Of course, many government programs aim to alleviate poverty. Those with low incomes get Medicaid, food stamps, welfare, etc., adding up to about $365 billion. But Uncle Sam's subsidies for building wealth – of little use to the poor – were even larger: $384 billion last year.

This money helps the more prosperous buy homes, save money, start businesses, pay for college, and retire comfortably. More than half of that sum went to the wealthiest 5 percent of tax-payers. The top 1 percent got an average $95,000 in federal help. Upper-middle-income families making $100,000 got $1,600. The poor got less than $5.

That $384 billion is "under-recognized" by the public, though it comes close to basic expenditures of the Pentagon, says Robert Friedman, board chair of CFED, a community development nonprofit in Washington.

This is more than just a question of inequity. Lower-income families need an opportunity to build their savings so they can better "navigate difficult times," notes Andrea Levere, CFED president. "If we are serious about cutting the deficit, Congress could start by trimming these upside-down subsidies and creating a more equitable approach."

There are other explanations for the increasing concentration of income and wealth.

Copyrights and patents, which extend beyond the life of many inventors, put money in the pockets of successful individuals and their heirs, sometimes at the expense of potential competitors, says Frank Genovese, former business school dean at Babson College in Wellesley, Mass.

Weak antitrust enforcement creates a similar dynamic among companies.

The growing weakness of labor in the US, compared with, say, France or Germany, is another factor, says Gary Burtless, an economist at the Brookings Institution, a Washington think tank.

Marginal income tax rates on the rich have plunged from about 90 percent when President Eisenhower was in office to 33 percent today. Tax loopholes lower the burden even further for wealthy hedge-fund managers.

Cultural factors may also play a role, Mr. Burtless says. There seems to be no shame among corporate executives, bankers, and others at their extraordinarily rich pay packages today. These are now "socially acceptable," he says.

Further, Burtless argues, the rich use their influence in Washington to protect their "fruits."

So why is there no political revolt? Perhaps it's because many Americans think they, too, can be rich with enough work, ingenuity, and opportunity. That aspiration runs deep in the culture.

• David R. Francis writes a weekly column.

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Post by momopi » October 19th, 2010, 11:02 pm ... their-ways

Debt and inequality: Why China and US must both change their ways

The clash between the US and China has led to a global economic imbalance that threatens peace and prosperity. The two powerhouses must stop finger pointing and start fundamentally reforming from the inside out.

By Nathan Gardels / October 18, 2010
Los Angeles

As the G20 summit gears up to meet next month in Seoul, South Korea, it is not surprising that the United States and China are at loggerheads. The “clash of systems� between America, (the borrower and consumer) and China, (the saver and manufacturing exporter) has generated an imbalance in the global economy that, if not corrected, threatens the peace and prosperity that has so far been achieved through globalization.

That correction cannot occur overnight and cannot be economic alone. It depends ultimately on the recalibration of democracy in both the West and East.

In China’s case, further democratization would include free labor unions and expanded rights for the rapidly growing urban middle class. Less censorship and more robust forms of political accountability would aid the reorientation of its juggernaut from export-led growth toward domestic consumption. Such changes would inevitably make the well-being of the household competitive, as a political priority, with the factory.

China might learn from the policies of Asia’s development pioneers – Japan, South Korea, or Taiwan – where income became more evenly spread as wages rose to capture productivity increases. A credible safety net was put in place with high and broad levels of investment in education to enable the next generation to move up the value-added ladder. All these neighbors of China managed a middle-income transition by establishing the reliable rule of law that made government accountable, through freer expression and some sense of social security. In a developing market, confident expectations about how society will work widely stimulate greater consumption.

In the US, political reform necessarily involves a shift away from the short-term political horizons and cultural habits of consumer democracy. Unless we can find ways to integrate the long-term perspective in governance and insulate it from immediate political pressures, it will be difficult to adopt policies that lead us back to fiscal prudence, revived productive employment, replenished savings and a middle class built on rising income instead of debt. Absent such a shift, there is certain to be a backlash against globalization – aimed with populist anger at China.

Corrective policies, in other words, must seek to undo the way American and Chinese inequalities have played off each other – a low-wage, export-led economy piling up huge reserves from overconsumption by an American middle class that fills the gap in its falling status through borrowing, at rates pushed low by flush liquidity from China and an accommodating US Federal Reserve.

Former International Monetary Fund chief economist Raghuram Rajan has argued that political pressures to compensate for America’s growing inequality gap over the past 30 years through eased credit by the Federal Reserve, abetted by huge Chinese purchases of US Treasury debt, were a driving dynamic behind the housing bubble.

Since 1975, Rajan points out, the wages of the 90th percentile of the US population (the top 10 percent) grew 65 percent more than the 10th percentile. In 1975, the top 10 percent earned about three times the bottom 90 percent. By 2005 it had risen to five times.

In an economy where consumption accounts for 70 percent of GDP, the gap between the American Dream and the American Reality was bridged by debt. In short, easy credit, not savings, enabled the demoted middle class to “keep up with the Joneses.� By 2007, consumer debt in the US equaled 100 percent of GDP. Rajan sensibly worries that reigniting growth by encouraging renewed purchases of houses and cars through further easy-credit policies, even if it successfully avoids deflation, will only lead us back to an unsustainable bubble.

In the US, the proper tax and education policies (because, in an era of technological change, education is the key variable of income differentials) as well as policies that foster infrastructure investment and domestic production would diminish the rapidly rising inequality Rajan documents. Fairer wage spreads in a developed consumer economy would enable the middle class to once again thrive on earnings and savings instead of seeking to maintain its diminishing status through credit.

Change won’t be easy. Vested interests in China favor export production industries and the associated political stability of continued rapid job growth that goes along with a strategy that has worked for decades. Vested interests and cultural inertia in the US favor a return to the high consumption that has driven growth during that same period.

China, at least, has the political capacity as an authoritarian mandarinate to change course from the top if the Communist Party is confident enough to heed the feedback signals of a burgeoning middle class that is demanding a more open society. Premier Wen Jiabao has said “the people’s wishes and needs for democracy and freedom are irresistible,� that “freedom of speech is indispensable for any country,� and that “without the safeguard of political reform, the fruits of economic reform would be lost.�

It seems an equally daunting challenge to convince an open society used to living off of leverage to mend its ways. But if reality is the mother of fundamental reform in China, it can be no less so in the United States.

Nathan Gardels is editor-in-chief of New Perspectives Quarterly and the Global Viewpoint Network. He is co-author with Mike Medavoy of “American Idol After Iraq: Competing for Hearts and Minds in the Global Media Age.�

© 2010 Global Viewpoint Network/Tribune Media Services. Hosted online by The Christian Science Monitor.

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Post by momopi » October 19th, 2010, 11:04 pm ... ll-triumph

The Christian Science Monitor -
China vs. America: Which government model will triumph?
If the 20th century was about the competition between democracy and totalitarianism, the 21st century pits the excesses of consumer democracy against capable governance with too little democratic accountability.

By Nathan Gardels
posted January 27, 2010 at 12:47 pm EST

Stockholm —
Overloaded with debt and facing a yawning deficit, Athens is seeking to borrow 25 billion euros from Beijing. What could be more symbolic of the new power of the East vis-à-vis the West?

As the symbol of ancient democracy is looking for cash, the symbol of modern democracy, the United States, is already deeply in debt to the Middle Kingdom. Indeed, in part it was the savings glut of Chinese reserves that helped inflate the mortgage bubble to the point of bursting. While Communist leader Nikita Khruschev blustered at the height of the cold war that the Soviet Union would bury the US economically, it was up to Beijing to extend it enough credit to hang itself.

And that is not all. Google, the very symbol of the information revolution, is locked in a standoff with China’s Communist rulers and their murky party hackers. And the trial run of China’s new “Harmony Express,� the world’s fastest train, took place at virtually the same time as the recent trial of human rights activist Liu Xiaobo. While the Harmony Express streaked from Guangzhou to Wuhan in less than three hours, Liu Xiaobo was sentenced to 11 years in prison.

That a harshly ruled but prospering China is no longer emerging but has emerged is all the buzz at this year’s conclave in Davos, Switzerland. Hopefully, the high-powered buzz will yield a little more introspection in the West – and not just over bank regulation – instead of yet another round of excoriating the East.

Perhaps it is time to take another look at democracy as we know it, not just because of the economic success of authoritarian China, the very emblem of non-Western modernity, but because the West itself has changed.

In much of the West, especially in the US, we no longer live in an industrial democracy, no less the agriculture-based landed aristocracy in which most political systems and their constitutions were originally conceived. We live in a consumer democracy.

In a consumer democracy, where the feedback signals from politics, the media, and the market all steer society toward immediate self gratification, there is scarce political capacity for the kind of long-term thinking, planning, and continuity of governance which has so far been responsible for China’s rise. When scarce political capacity and consumer democracy are joined with robust technological prowess, both the societal and generational impacts are amplified and extended well beyond the present moment and local environment. (Think climate change, a perfect example of how seeming retail sanity of, say, driving a carbon-belching SUV, can add up to wholesale madness.)

This new reality requires the enhanced capacity of governance and the design of better institutional filters – more checks and balances – not only against rule by the short-term tyranny of the “one man, one vote� sovereign will, but against the nearest election term of the permanent campaign, the impending retail purchase, the quarterly report, and the imperative to “monetize attention� in the new media age by supplanting democratic deliberation with partisan programming and reality TV.

No system of governance can endure without the consent of the governed.

But as every political sage from Confucius to Plato to Madison understood, neither can it endure when overruled by popular “appetites� (Plato’s word).

As is often the case, the extreme reveals the essence. Everyone can see that the experience of direct democracy in California, where the popular initiative reigns, has proven ruinous. California’s crisis reveals the delusions of a Diet-Coke civilization that wants sweetness without calories, consumption without savings, and modern infrastructure and good schools without taxes. California’s dysfunction is only a louder echo of American politics as a whole.

It is worthwhile in this context to aerate our assumptions in the West by examining the best practices of China, where the rulers retain a greater political capacity for governance. While the entrepreneurial energies of the population have been unleashed through a free market, the strong hand of the neo-Confucian state tempers all those liberated interests in the name of social harmony and long-term goals.

As Google and Liu Xiaobo are well aware, China’s system is, of course, marred in the opposite way of the West by the absence of personal liberty and free expression as well as the feeble rule of law and weak accountability of the authorities. All too easily the strong hand can become the harsh fist of repression or the open palm of corruption.

As these two systems, which author and historian Niall Ferguson already calls “Chimerica,� interact with each other across the Pacific Basin – the new center of global gravity – their frictions and fusions will yield the opportunity to create something new: a philosophy of governance that balances the individual and the common interest, immediacy, and the long term; a system that mitigates unmediated popular appetites without killing the dynamism of personal pursuit.

If the 20th century was about the competition between democracy and totalitarianism, the 21st century pits the excesses of consumer democracy against capable governance with too little democratic accountability.

Nathan Gardels is the editor in chief of NPQ and the Global Viewpoint Network of Tribune Media Services. He is also a senior fellow at the Nicolas Berggruen Institute.

© 2010 Global Viewpoint Network. Distributed by the Tribune Media Services. Hosted online by The Christian Science Monitor.

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