Issue 19: Is the Inequality in U.S. Income Distribution Surging?

Income and wealth distribution is a known inequality in the United States. Both James Cypher and Diana Furchtgott-Roth agree that income inequality is rising but they differ to the extent of this difference and its impact. First off, there are several measurements of income that you should become familiar with when reading about this topic. One is the quintile distribution of income, which is computed by the Census Bureau. In 2007, the highest quintile received about one half of total household income. Here is the link to their website for lots of fun statistics, wohoo! Another measurement is the Gini coefficient/ index ,which ranges from 0 with perfect equality to 1 which represents perfect inequality. For reference, in 2007 the Gini index was at .47.

Economist James Cypher, points out how many heterodox economists look at income and wealth as one of the most important indicators of the overall state of an economy. Cypher believes we are experiencing the largest shift in distribution since the 19th century. He discusses several reasons why income inequality is on the rise. One main reason is the power that wealthy individuals and US corporations have due to the opportunities created by the rapid increase in globalization. He also discusses the government’s role in creating “pro-economic policies” such as NAFTA and tax cuts for corporations and the “frontal assault” on unions. (Please view the youtube video below to further investigae the impact of union busting) Overall Cypher fears that there is nothing to stop the growing inequality among Americans.

Furchtgott-Roth argues that one needs to carefully look at the measures of inequality as the numbers can be distorting. She discusses various reasons for why the stats may not always represent what they say they are. Here are a few examples that she mentions; 1) you need to consider that the tendency of high-income men marrying high-income women, which will increase the inequality among households without actually changing the wealth of the individuals. 2) Measurements under tax policy also create a problem since the tax returns are measured by units (eg: married couple/ family) rather than individuals. Like Cypher, she analyzes the consumption patterns of the rich but comes to a different conclusion- some households in the bottom quintile are not truly poor. She does not believe there is a “surge” in inequality and looks to other factors such as difference in education as a source of inequality. Here is a link to a similar argument about the distortions of census data.

Map of US Income Distribution: The lighter means more equal if you cannot read the legend.

Finally, here is the video I referenced before that talks about the politics of de-unionization has caused income disparity. If you want to save time, start around 2 minutes in.

As always, some questions to consider:

Do you think the government should play a role in moderating the income inequality? If so, what type of market intervention would be beneficial? If not, why do you support a free market?

What did you think about the distortions of census data?

How do previous discussions such as CEO pay, NAFTA, current recession, etc. play into income distribution?

Issue 18: Do the Testing and Accountability Elements of the “No Child Left Behind” Act Prevent a Proper Cost-Benefit Evaluation?

Since at least 1983, Americans have expressed discontent with the effectiveness of the public education system. They point to sub-par student performance as grounds for reform, and in 2002, the No Child Left Behind Act (NCLB) was implemented across the nation (Bonello and Lobo 334). The U.S. Department of Education website describes its goals as four-fold: “stronger accountability for results, more freedom for states and communities, proven education methods, and more choices for parents.” These goals take form in a variety of ways, including state choice of how to spend federal money and educational methods based on scientific research.

On one side of the issue, George Miller acknowledges that NCLB has “brought some positive changes,” including gains in reading, math, and narrowing achievement gaps among groups of students (336-337). However, he contests that it has not been enough. That “we didn’t get it all right when we enacted the law,” leaving the American public with the sense that it is not fair, flexible, or funded (336). He does not advocate abandoning the goals of the act, only seriously changing it to address major concerns. Successful new legislation would include acknowledging school performance, developing better tests that go beyond math and reading, implementing performance pay for teachers and administrators, holding schools accountable, lowering the high school dropout rate, and funding the education system in a bid to build our democratic society (340).
 

Raymond Simon comes at the issue from a personal viewpoint as a teacher, as well as a government position. He notes the effectiveness of the federal government serving as a “minority funding partner in a voluntary endeavor” (342). He points to the Constitution as the basis for state and local officials to determine standards and assessment practices without government intervention, unless they choose to accept the federal funds (342). Simon believes that the best practices shared as a result of federally-funded “scientifically based research and the gathering and use of reliable data” are one of the best results of the NCLB act (344). Using them, we can raise the bar for poor-performing schools and hold them to it. Simon also believes that modifications based on what we have learned are enough to shore up the strong performance of the act to date (344-345). Secretary Margaret Spellings agrees with Simon. Her “national report card” of proven methods can be found here, and she says that she “look[s] forward to working with Congress to craft a bill that strengthens the law without undermining the foundation of accountability that has turned the tide in American education.”

Here’s an overview of NCLB and some of its shortcomings, complete with track and field analogies!

There are inconsistencies and failings in our current system. Do these factors warrant government subsidization of the private sector? Complete government control? Or should it be left to each state to work out?

President Obama has not finalized a recommendation for NCLB, however, it appears that he will support higher standards and more stringent testing. The Washington Post just reported some opposition to this goal: Republicans have selected a chair of the House Education and Labor Committee who supports “maximum latitude” for states, instead of funding federal testing. “He feels the same sense of urgency I do, that we need to get dramatically better,” Education Secretary Arne Duncan reported. Kline wants to push for higher academic standards but give schools more flexibility to achieve them in order to “be much looser at the local level, let folks innovate.” Kline originally supported NCLB, but “said he soured on it after fielding persistent complaints from educators and parents. ‘Let’s back the federal government out of dictating to schools how they’re going to do their business’ he said.”

What are your findings?

Issue 17: Has the North American Free Trade Agreement Benefited the Economies of Canada, Mexico, and the United States?

For most people, NAFTA is a contentious issue and one that stirs very lively discussion. Whichever side you happen to agree with, there is always room for healthy debate. This topic is particularly interesting to me as I was working in economic development for the Commonwealth throughout much of the 1990s. Specifically, I served as an Associate International Marketing Manager for the Virginia Economic Development Partnership (VEDP). It was during this time that a great deal of attention was being focused on NAFTA and then Governor George Allen traveled to Mexico in support of trade with Virginia. In fact, the agency hired an individual to manage trade relations with Canada and Mexico.

I fondly remember the presidential debates and Ross Perot’s description of the “great sucking sound” that he suggested would represent jobs fleeing to Mexico. The famous Larry King debate between Ross Perot and Al Gore can be viewed on Youtube. Unfortunately, the embedding feature is disabled for this particular video.

Before we begin our passionate discussion regarding job gains/losses, increases or decreases in productivity and the standard of living, and the aggregate impact on wages, let’s take a look at the impact of trade and foreign direct investment on the Commonwealth. VEDP provides information on the impact foreign direct investment has on employment. Here you can see the impact Canadian and Mexican firms have on Virginia employment. The US Department of Commerce, International Trade Administration provides us with specific information regarding the impact of international trade and foreign direct investment on the Commonwealth’s economy. Also, it is interesting to consider Richmond’s top export destinations. Another good resource is “NAFTA: A State Export Perspective 1993 – 2003”.

Finally, take a look at the dollar volume of US trade as it relates to Canada and Mexico. You may wish to explore the official NAFTA web site.

A few fundamental questions to ask are:

1. Has NAFTA improved or diminished the standard of living in the member countries?
2. Has there been a substantial loss of jobs from the US to Mexico?
3. Has the removal of trade barriers facilitated the flow of trade between the three nations?
4. Has the battle over NAFTA been more of an economic discussion or a political discussion?

Issue 17: Is NAFTA Good or Bad for Canada, the U.S., and Mexico?

John M. Melle makes very good arguments in favor of NAFTA. NAFTA was enacted in 1994. Since then, our total trade with Canada and Mexico has doubled, Mexico’s exports have shifted to manufactured value-added goods, and American exported services has increased by nearly 75% since 1993 (pg. 321-322). Ultimately, the facts and figures show that there has been a positive economic improvement. Mexico has seen increases in their manufacturing jobs, Americans get cheaper products and are allowed to sell products for less in those countries, and both Canada and Mexico have received cheaper American services and goods that would have been more difficult to provide before the enactment of NAFTA.

So why is there any oppostion to the trade agreement at all? Sandra Polaski does a good job of summarizing the reasoning many opponents to NAFTA have. The major results opponents point out is the loss of agricultural jobs for Mexicans in Mexico and the loss of manufacturing jobs in the United States. Here is an interesting debate pre-NAFTA between candidate Ross Perot and Vice President Al Gore:

Here is another argument against NAFTA:

These arguments depict what John Melle’s statistics do not: that NAFTA has in fact caused a great deal of economic harm to our country in indirect ways. For instance, many believe NAFTA has put Mexican farmers out of business because American farms are able to produce food at a much lower cost through the use of subsidies and technology. Thousands of workers in Mexico that once worked on those farms have entered America illegally and legally in the search for work. If NAFTA was never signed and made into law, it’s logical to conclude that there may not be anywhere near as many illegal immigrants or the costs that are inherently associated with them. Further, although American service industries are expanding into Mexico and Canada, our manufacturing businesses are losing tremendous amounts of jobs and are forced to move into these countries, in particular Mexico.

I believe NAFTA works effectively but should also come with many other stipulations. I believe it is possible for us to benefit from free trade while also cutting off those negative characteristics of NAFTA. We need stronger borders, we need to do a better job of protecting American jobs, and we also need to be sure that our trucking industry is not dismantled in favor of Mexican truck drivers. In 2004, NAFTA created a U.S. trade surplus of 14.2 billion dollars. This is tremendous, but I believe our trade surplus could be and should be even higher.

Issue 16: Are Spending Cuts the Right Way to Balance the Fed Gov’t’s Budget?

Issue/Topic for July 13, 2009 Monday 

 

 Issue 16:  Are Spending Cuts the Right Way to Balance the Federal Government’s Budget? 

The 1978 Full Employment and Balanced Growth Act lists economic goals for the federal government and the FEBG Act mentions the goal of a balanced federal budget.  In short, the federal government has failed to balance its budget. Moreover,  recent deficits have been large. [“Between 1940 and 1975, there were only two instances when the deficit was in excess of $50 billion. Between 1980 – 1990, the fed gov’t deficit averaged about $140 billion. Budget deficits continued until fiscal year 1998: Budget surpluses were recorded in that fiscal year and in each of the next fiscal years. But the budget returned to deficit and the estimates are for deficits of $423 billion and $354 billion for fiscal years 2006-2007” (Bonello 302).]

 

(As of July 2009,  our national debt is 11.5 trillion, according to http://www.federalbudget.com or http://www.brillig.com/debt_clock/ ) 

It is important to remind us, BTW, that there is a difference between national debt and deficit. See: http://www.afn.org/~concord/coalition/debtdef.htm  

 

According to the text, the public/national debt is the total of outstanding gov’t securities.  When the fed gov’t runs a deficit, the public debt increases by the amount of the deficit. When the fed gov’t runs a deficit, it sells treasury bills, notes, and bonds. The public/national debt is a summary of all prior deficits. The gross fed  debt was $8.6 trillion by Dec.  2006. 

More info can be found at: http://en.wikipedia.org/wiki/United_States_public_debt#Components

 

Our text authors ask “why do deficits arise ?” on page 302.  Bonello and Lobo (B&L, hereafter) list a few possibilities, one of which is the ratio of gov’t spending and revenues it receives/collects. We learned when we took Macroecon (or you will in the future) that the Budget deficit is equal to the difference between what the gov’t spends and what it collects in taxes, or also known simply as, G-T. When G exceeds T, the gov’t must borrow from the public to finance its deficit. (G= Gov’t purchases, T= Net taxes (the collection of taxes, the pymt of transfer pymts.) 

 B &L say deficit is likely to increase if the economy enters a recession. (We know this to be quite true as we’ve read about this in recent months. See the U.S. National Debt graph in the UTube video embedded below. )

B&L list reasons in the middle of the aforementioned page, as to why this phenomenon is true (i.e.  Less economic activity decreases tax revenues or lower incomes mean less tax revenue, Increase gov’t spending  or more expenditures for subsidy programs such as unemployment benefit or compensation programs and the like). The authors  remind the readers and us of other possibilities or reasons that cause/create a deficit.

 

Edwards and Stenholm’s views on this topic/issue are both compelling backed up with sufficient data and explanations. They both agree that budget deficits must be cut but they disagree on how to accomplish it. They talk about how to go about preventing the public debt from rising or getting worse, also.  Edwards’ reasons revolve around overspending by the gov’t and defends  supply-side tax cuts, whereas Stenholm’s reasons revolve around condemning and  criticizing borrowing money from our children and their children which is our current method/approach, which he appropriately calls  “borrow and spend” which he thinks is worse than the “tax and spend” method of the past (312). There are other statements made by E & S which I will intentionally omit and leave it up to you, my fellow yearning-to-learn colleagues/bloggers, to delve into and touch on. Let the discussion (verbal blood bath 🙂  begin!

 

Check this video out.  Enjoy! I like the way he describes things in a rather non-chalant & laid-back manner.

 

Laura Tyson’s Comments on the 2nd Stimulus Plan. Enjoy!  This is a bonus clip, I’m including. She talks about deficits towards the end of the segment.

Will Biofuels Like Ethanol Reduce U.S. Dependence on Foreign Oil?

Biofuels are fuels that are made from nonfossil (recently dead or even living) biological materials. There are several methods in which biofuel can be made: Used cooking oils can be recycled; ethanol can be made from plants rich in sugar or vegetable oils; and cellulosic ethanol is produced from wood and its byproducts.

The Energy Policy Act of 2005 was signed by President Bush in an attempt to address energy concerns such as our country’s dependence on fossil fuels, especially those of foreign origin. A major part of this Act was the creation of the Renewable Fuel Standard (RFS), which dictated that the amount of biofuel mixed with gasoline would increase over time, specifically to “4 billion gallons by 2006, 6.1 billion gallons by 2009 and 7.5 billion gallons by 2012” (source). Then, the Energy Independence and Security Act of 2007 (a copy of which is available here) was passed. This new Act further raised “Taxpayer funding for increased production of biofuels. The total amount of biofuels added to gasoline is required to increase to 36 billion gallons by 2022, from 4.7 billion gallons in 2007” (source).

This increase is one that Bob Dineen of the Renewable Fuels Association says “could reduce greenhouse gas emissions by some 176 million metric tons, equal to removing the annual emissions of more than 27 million cars from the road” (p. 291). Dineen supported the 2007 Act, especially the RFS increase component. As for why RFS the increase is so important, he claims that the U.S. biofuels industry would create jobs, increase income, and enhance tax state and federal revenues. In addition, increasing biofuel content would remove some of the economic burden of rising gas prices from consumers. And lastly, the increase in RFS would mean that a proper renewable fuel infrastructure could be built to increase efficiency and reduce costs.

On the opposite side of the spectrum is Charles T. Drevna, president of the National Petrochemical and Refiners Association. Drenva claims to have no problem with alternative fuels but does not support having the amounts mandated, and so would rather see the “integration of alternative fuels into the marketplace based on market principles” (294). He believes that the RFS increase has a negative impact “on energy markets, consumers, and the American economy” (p. 294). Drenva cited a USDA study about increased food costs (especially for corn, a chief component in many biofuels), and an NREL study talking about the inefficiencies of the renewable fuel infrastructure, mainly its high transportation costs. In addition, he pointed to worldwide food shortages, high costs of cellulosic ethanol production, and potential problems for the auto industry.
So now, for your viewing pleasure, are two videos. The first is a segment called “Fuel for Thought” from The News Hour with Jim Lehrer (there is a big focus on fuel economy, so be prepared for that, but the biofuel stuff starts around 6:45). It talks about the pros of the Energy Independence and Security Act of 2007. The second video is against the biofuels mandate and shows the negative impacts of ethanol production on poor Ecuadorian farmers, food prices, and the environment (fast forward to 1:45 to get to the actual start).

So, what do you think about all of this? Will biofuels reduce our dependence on foreign oils? Or is biofuel more trouble than it’s worth (considering all of the changes that would have to be made, negatives, etc.)? Should the government have raised the RFS requirements? Should the government have even mandated it all?

Issue 14: Loan Mitigation to Ease Housing Foreclosures?

As David Kittle and Julia Gordon outline, our nation is undergoing a housing crisis that means foreclosures and empty homes in many neighborhoods. This handy-dandy little tool from the Department of Housing and Urban Development, lets you search by zip code to determine the volume of vacancy properties and foreclosures problems in your area.  

 

The tool is part of the Neighborhood Stabilization Program, which provides stimulus funds for rehabbing abandoned and foreclosure properties in severely affected neighborhoods. With it, you can figure out why your property values might have dropped in the last couple of years.

Many of the loans contributing to the problem were the result of a housing boom. The frenzy of that time period contributed to adjustable interest rates and an increase in subprime lending to poor credit risks. Some of the mortgages were the result of “predatory lending,” where lenders willfully steered borrowers into loans beyond their financial means.

“What we are seeing right now is quite a number of households that have sought loan products for which they were not necessarily suited,” says Jeanne Fekade-Selassie , homeownership specialist at a Washington community-development charity. “While they may have been able to meet their mortgage obligations based on the terms of the loan at the beginning, when the loan resets they don’t have the means.”

What David Kittle proposes is that the social and financial burdens to society that come from a foreclosure situation outweigh the binding legal and financial concerns of the lending institutions. He highlights the fact that as much as 30-60% of an oustanding loan balance can go toward the foreclosure process through such expenses as lost servicing income, advanced interest and principal, advance taxes and insurance payments, attorney and court fees, inspections and upkeep, staff salaries, closing costs, property restoration, and loss of unpaid principal balance (Bonello 263-4). Foreclosure is a lengthy process made even more cumbersome (and expensive) by state laws regarding every aspect. His solution? Loan mitigation, or a personalized attempt to keep people from defaulting on their loan by using a number of measures: forbearance, repayment, modification, partial and advance claims, refinancing, and short sales and deeds. He summarizes the approaches that his industry has taken to alleviate the problem, citing everything from advertising, to toll-free help lines, to in-home counselors. Here’s one sample checklist for avoiding foreclosure. While acknowledging the breadth of problems facing this approach, and that the remedy shouldn’t be used in every situation,  Kittle concludes that enough people are being helped that the process of loan mitigation should continue.

In response, Gordon concludes that the faulty loans were most certainly caused by “faulty lending,” and suggests that improper loan servicing could make the situation even worse. In her words, “it is far harder to obtain an affordable loan modification for an unsustainable loan that it was to take out the loan in the first place” (274). She goes on to demonstrate that loan institutions will follow the money: they continued with the risky loans even when they knew it wasn’t a wise investment. Gordon disagrees with Kittle on his claims of effectiveness. She holds that loan servicers are paid more for foreclosures than for modifications, that the voluntary actions are not expansive or thorough enough, that they require homeowners to waive their legal rights, and that the modifications themselves are often “temporary or unsustainable.” She suggests reductions of principal or of interest rates over the long term as an alternative to short-term “fixes.” She also recommends H.R. 5679 because loan servicing is not subject to typical free market choice on the homeowner’s part (279); H.R. 6076 in order to “freeze” the crisis while the industry responds with more capacity (280); and H.R. 3609 in order to let bankruptcy courts assist with the loan modification crisis (280).

Are these bills going to prove effective? Will they solve the problem or just smooth it over? Can the private sector tackle the problem it created, or does it need some supervision? Should taxpayers shoulder the burden of defaulted loans, or will they get it either way? What of the carryover to our communities? The drop in property values, higher crime rates, lost tax revenue, jobs in related sectors? Is there some other approach legislators should be considering, (i.e. through financial education or loan oversight) to prevent this from happening so frequently? Or do the homeowners need to take responsibility for their own actions?

Is a Fair Trade Policy Superior to a Free Trade Policy?

Here is the link to Ramon’s summary of issue 13. Please post your comments here rather than on his personal blog.

DO UNSKILLED IMMIGRANTS HURT THE ECONOMY?

According to our text, between 700,000 and 900,000 LEGAL  immigrants enter the United States each year. In 2003 immigrants made up 12 percent of our population with 34 million people. Regardless of which side you may support, there is no denying that immigrants help shape our economy whether for the good or the bad.

We will be discussing the opposing views of columnist Steven Malanga and Diana Furchtgott-Roth, senior fellow at the Hudson Institute. Mr. Malanga believes that immigrants are bad for the economy for several different reasons. First, they raise our unemployment while taking jobs from native born workers. Second, they drain our welfare and social programs of funds that could go to native workers. Finally,cheap labor drives down the wage’s of everyone in the workforce,etc. In his argument he distinguishes between the benefits of the migration at the turn of the twentieth century and the high cost of today’s situation. In the end, Mr. Malanga gives credit to some immigrants and admits they have helped the economy. However, their contributions do not make up for the shortfall of the remaining immigrants.

Diana Furchtgott-Roth believes that immigrants are actually good for the economy. In her argument she states that immigration makes up a very small part of the labor force. Next, she discounts the claim that the unemployment rate of the unskilled workforce is 30 percent. Next, she cites data from a senior economist that claims “foreign-born Americans are more likely to work than native-born Americans” and they are employed in expanding industries, not shrinking. She states that immigrants do not depress wages and are willing to take the jobs that natives are not willing to do. Finally, she defends the use of immigrant labor on farms and questions the facts that immigrants are twice as likely to be on welfare.

Check this video out. Are immigrants fleeing the U.S. becuase of its economic condition?  

Here is a link to the AFL-CIO showing some of their opinions on immigration:http://www.aflcio.org/issues/civilrights/immigration/

There are many issues to consider when looking at the impact of unskilled immigrants on our economy. Some to consider are:

Do unskilled immigrants take jobs from native workers? Do they lower the standard of living in America? How do they impact our  health care system and public school system? What would the economy be like without them? Is there any more support for legal immigrants versus illegal?

Should Minimum Wage and Living Wage Laws Be Eliminated?

The issue we will be discussing today is the economic benefits and consequences of a minimum and living wage. A brief history- minimum wage was established in 1938 by the Fair Labor Standards Act (FLSA) at $0.25/ hour. The minimum wage has increased over the years and currently (as of July 24, 2008) the minimum wage stands at $6.55. Interesting enough, the minimum wage is due to increase this month on the 24th to $7.25. Please check out this website to further read about the history of the federal minimum wage and the current increase that will be occurring this month.

In our text, D.W. MacKenzie argues that minimum and living wages should be eliminated because these wages adversely affect teenagers, minorities, and the elderly. On page 217, he cites many statistics about the high unemployment rates for ethnic minorities. Mackenzie also argues that minimum wage increases the overall unemployment rate 3 percentage points higher than if the law was not in place. Finally, he argues that eliminating minimum wage would create an increase on GDP since every 1% increase in unemployment will cause GDP to fall by 2-3%. (According to economist Arthur Okun)

For the counter-argument, Jeannette Wicks-Lim points out that businesses are generally able to absorb the increase in wages and that these increases create greater productivity and lower turnover rates, which in turn, “reduce the impact of these costs.” She discusses the chain reaction or “ripple effect” of increasing the minimum wage and how the impact truly depends on how high the minimum wage is set. Overall, she argues that living wages are “reasonable, as well as potent, way to fight poverty.”

Few questions to consider when thinking about this topic:
Do you think eliminating the minimum wage will provide greater economic benefits for the labor force?

What about when employers are forced to fire “unproductive workers” due to increases in minimum wage? Wouldn’t these workers be better without imposed wages?

Any thoughts about the upcoming increase in minimum wage this month? Link to deparment of labor website.

Are minimum wages more or less important during the economic recession we live in?

Finally, here is a video about Milton Friedman speaking in opposition of minimum wage law.