Are Public Corporations Becoming Obsolete?

There is a fascinating article in The Economist: The endangered public company. The authors raise the possibility that time has overtaken the form of business organization that has been the engine of capitalism for more than a century. The public company with shareholders as owners has provided an efficient means of raising capital and it has been an effective means of rewarding entrepreneurs and inventors with wealth as they took their enterprises public. There now may be alternative paths available to accomplish these same things.

The authors were somewhat disappointed, or rather, irritated, to note that developing countries did not embrace the traditional public corporation model completely. Variations that include state ownership or even family control seem to be capable of functioning quite efficiently. More troublesome to them was an apparent trend towards obsolescence in the UK and, particularly, in the US.

The evidence that companies are choosing other organizational models can be found in the following charts.

"The number of public companies has dropped dramatically in the Anglo-Saxon world—by 38% since 1997 in America and by 48% in Britain’s main markets."

Further evidence arises from the dramatic decrease in initial public offerings (IPOs).

The authors suggest three attributes of public companies that have gotten worse over the years and may have encouraged others to look into alternate types of organizations. They consist of the temptation for managers to play loose with others’ money to improve their personal financial gain, the increased hassle of regulation, and a growing focus on short-term market issues.

"....their biggest drawback is what economists call the principal-agent problem: the split between the people who own the company (principals) and those who run it (agents). Agents have a nasty habit of trying to feather their own nests."

"Public companies have always had to put up with more regulation than private ones because they encourage ordinary people to risk their capital. But the regulatory burden has become heavier, especially after the 2007-08 financial crisis."

"Companies must strike a balance between the short and long term, satisfying the market’s demand for profits today, while planning for the future.....Leo Strine, a judge with expertise in corporate law, accuses institutional investors of ‘gerbil-like’ activity as they move money from one company to another. Standard Life Investors complains that the noise generated by quarterly earnings has become an "unwelcome distraction" from thinking about the long term."

What have become the main competitors for public companies? In the US the main alternatives have come from the return of partnerships as viable models.

"Now, thanks to three decades of legal reforms, partnerships can offer most of the benefits of listing, such as limited liability and tradable shares. In America they also boast a big tax advantage: partnerships are liable for only one lot of taxes, whereas companies must pay corporate taxes as well as taxes on dividends."

"The result has been a revolution: one-third of America’s tax-reporting businesses now classify themselves as partnerships. They have adopted exotic forms of corporate organisation, such as Limited Liability Limited Partnerships (LLLPs), Publicly Traded Partnerships (PTPs) and Real Estate Investment Trusts (REITs). Private-equity firms are typically organised as private partnerships. The individual funds through which they raise money are limited partnerships. And they treat their managers more like partners than employees, rewarding them accordingly."

Entrepreneurs have a variety of choices available to them if they wish to cash in on the success of their enterprise. One is to go public to bring in big money, but to maintain control of the running of the company.

"Google introduced a third class of non-voting shares despite the fact that its three bosses, Eric Schmidt, Sergey Brin and Larry Page owned 60% of voting shares. Mr Zuckerberg put off taking Facebook public until he had little choice (you have to publish quarterly accounts like a public company once you have more than 500 private shareholders); he will control more than half of Facebook’s voting stock."

Many seem more interested in developing another enterprise than managing the one they just created.

"Venture capitalists are recouping their investment by selling new companies to established ones rather than preparing them for independent life. In 2010 five large companies gobbled up 134 start-ups—more than the entire crop of American IPOs that year. Two of the most talked-about start-ups of recent years—Skype and Zappos—chose to sell themselves to giant firms (Microsoft and Amazon respectively)."

Those who wish to sell their companies while still maintaining control have numerous partnership options that can be created in alliance with wealthy private equity investors or other groups of individuals.

The authors worry that these changes will diminish the dynamism of the economy and lead to less innovation. Being who they are, they try to lay blame for all unfortunate developments on government regulators. There is another issue that the article touches briefly on that ultimately may prove to be more troubling.

One of the positive aspects of twentieth-century capitalism is that ownership in companies was broadened to include a large slice of the population. Pension funds, the popularity of mutual funds, and the rise of IRAs and 401Ks encouraged individuals from all income groups to participate in the economy as stakeholders. This trend may reverse itself as more companies prefer to keep ownership in the private realm.

"Today shareholding is in danger of narrowing again. The reduction in the number of IPOs is making it harder for ordinary people to put money into a future Google. The rise of the private-equity industry and the proliferation of private markets such as SecondMarket gives more power to a magic circle of company founders and experienced investors."

Can it be that wealth has become so concentrated in the hands of a few individuals that young companies no longer need to turn to uncertain public markets for funds? Is it possible that a few extremely wealthy individuals are in a position to select winners and losers for the economy as a whole?

The trend toward fewer publicly-owned companies is particularly pronounced in the US and in the UK. These are the countries that have most avidly embraced what has come to be called "free-market capitalism." In truth, markets in these countries are anything but free. Could this capitalist system be evolving—inevitably—in a direction that gives large corporations and wealthy individuals even greater say over what paths the economy is allowed to take?

Taking companies off the public exchanges and putting them in private hands can only increase the already extreme concentration of wealth.

"Private-equity companies have taken some of the most familiar names on the high street private, including Boots, J.Crew, Toys "R" Us, and Burger King. They also bagged some of the biggest stockmarket beasts: in 2007 Blackstone bought Hilton Hotels for $25.8 billion."

The trends noted in this article bear watching. Not all change is bad, but it is easier to stumble in the many wrong directions than in the few beneficial directions.

Federal Policy, Family Planning, and Abortion

Judith Lewis Mernit introduced us to "the pro-life paradox" in an article of the same name in The American Prospect. The crux of Mernit’s contention is that the intent of legislatures to limit abortion by banning the procedure after a certain date in the pregnancy is driven not by the concern for the comfort of the fetus, but by the desire to eliminate abortions obtained because of the fear of giving birth to a child with a severe disability. The paradox arises because the people who wish to make abortions illegal are the same people who continually vote against providing support for the welfare of children with disabilities. These aspects of Mernit’s piece were discussed in The Paradox of Pro-Life Politics. Mernit’s article deserves further elaboration.

There is another aspect to the paradox. Family planning organizations, particularly Planned Parenthood, have been under siege by pro-life politicians because they are thought to encourage abortions. Mernit points out the folly of this contention:

"These efforts to prevent abortion are at odds with attempts—so far unsuccessful—among Republicans in Congress to deny funding to family-planning clinics, which have a documented record of reducing the number of abortions."

The Guttmacher Institute provides this data on why women choose to have an abortion.

Except for the 3% who fear for the health of the fetus and the 4% who fear for their own health, the rest of the cases are all variations on "I didn’t want to get pregnant in the first place." Providing guidance on how to avoid unwanted pregnancies has tremendous leverage in limiting the number of abortions. A smart pro-life politician would throw more money at these organizations—not less.

There is a fiscal impropriety that is also associated with the pro-life paradox. By limiting abortion, these social conservatives—who are generally fiscal conservatives also—are creating the equivalent of unfunded mandates.

Unwanted pregnancies are much more common among the poor than among the affluent.

"Those pregnancies are also more likely to end in abortion; forty-two percent of the women who had abortions in 2008 were living near or below the poverty line. While abortion rates among middle- and upper-class women declined in that same period of time, among poor women the rate went up 18 percent."

Limitations on abortion fall most heavily on the poor and contribute to their economic burden. The net result is that family and child welfare costs will go up, one way or other, and the state will have to pay for this increase. And who will allocate the funds?

Even with modern methods of detecting fetal abnormalities, data indicate that about 3% of children are born with a birth defect. Mernit discusses Down syndrome children in the context added state costs. This is the most common defect. According to the CDC it occurs in about 1 in 691 cases. Data presented here indicate that over 90% of women who have evidence that there baby might have Down syndrome choose to have an abortion. Eliminating or limiting access to abortion will drive up the number of disabled children who will be born and who will have to be supported by the government.

Federal laws have been passed protecting the rights of people with disabilities.

"Among these laws was the Individuals with Disabilities Education Act (IDEA), which since 1986 has guaranteed early education and therapy to infants and toddlers with disabilities."

Mernit points out that the availability of early intervention programs is critical in dealing with children having disabilities.

"In the first three years of any child’s life, neurons grow axons, and synapses form in a way they never will again. For a child with disabilities, early brain stimulation can mean the difference between whether a five-year-old joins his peers in kindergarten or needs to attend a special school; it may keep the future grown-up out of an institution and allow her to work."

Such care is expensive.

"Even the healthiest Down syndrome children will need special education, medical care, and social support. Depending on the child and the severity of his or her affliction, that education and care can run as high as $50,000 just in the baby’s first year."
Clearly a true pro-life advocate will jump at the chance to contribute to the quality of life of those whose condition he had created by arrogantly demanding that all people had to live according to his beliefs—right?

"When the Children’s Defense Fund releases its Congressional Scorecard each year, evaluating members of Congress on how they vote whenever children’s welfare issues come up, the lowest ranking members are always pro-lifers."

Pro-lifers also seem to be quite satisfied with taking the lives of those who might be guilty of a crime. They also seem to appreciate the occasional war. But those must be topics for another day.

The Paradox of Pro-Life Politics

It is only a slight exaggeration to make the claim that for pro-life Republicans, "life begins at conception and ends at birth." In an article in The American Prospect, Judith Lewis Mernit addresses the issues associated with the desire to preserve the life of every fetus during pregnancy, but to ignore the needs and requirements of the child after birth. She titles her piece The Pro-Life Paradox.

Mernit comments on the trend to enact legislation prohibiting termination of pregnancy after 20 weeks. This time specification is supposedly based on the need to protect the fetus from "pain."



"No scientific evidence exists to support the idea that a fetus can feel pain at 20 weeks. (Or in Arizona’s case, 18 weeks, as the law uniquely starts counting from the first day of the woman’s last menstrual period, which is typically two weeks before fertilization.) The part of the brain that registers such a sensation doesn’t develop until much later."

Mernit suggests that the true motive is something much more insidious.



"Every woman who’s ever been pregnant, however, knows what the law really means: Twenty weeks marks a crucial point in a pregnancy, when fetal abnormalities can be detected, often for the first time. Many women confronted with a grim prenatal diagnosis choose to have an abortion. Now, in Arizona, they can’t."

The results of this policy are obvious.



"The post 20-week abortion ban might preserve some healthy pregnancies, but it also forces women to deliver babies who will live for a few brief moments of extreme suffering—or to continue hopeless pregnancies that threaten their future fertility or even their life."

There is another consequence—one which defines the paradox of which Mernit writes.



"More babies will be brought into the world with chromosomal abnormalities such as Down syndrome....Even the healthiest Down syndrome children will need special education, medical care, and social support. Depending on the child and the severity of his or her affliction, that education and care can run as high as $50,000 just in the baby’s first year."

One might think that those whose intent is to force mothers to give birth to disabled children would follow up by providing extra resources to care for the disabled, both at birth and throughout their lives.



"....even as state legislators are finding new ways to interfere with a woman’s or couple’s decisions about baby making, they are reducing the services upon which families depend. Arizona legislators have been particularly harsh. In 2009, Governor Brewer closed her state’s $1.6 billion budget gap partly by eliminating $155 million from the state’s Department of Economic Security—money that had gone toward early-education and therapy programs for the developmentally disabled. The following year, the legislature tried to ax the state’s $9 million Children’s health Insurance Program for low-income families, KidsCare....The Children’s Health Insurance Program remains but with enrollment frozen as of January 2010. In 2008, KidsCare covered close to 65,000 children; now it serves 14,000. The waiting list for the program has grown to more than 100,000."

Arizona is also one of the states that would like to overturn the recent healthcare law that prohibits insurance companies from turning away anyone based on a pre-existing condition. This intent is particularly cruel for families with disabled children.



"....after all, no condition is more pre-existing than the one you are born with."

There is evidence to back up the contention that those most ardent in anti-abortion politics are also the least interested in supporting children’s welfare efforts.



"When the Children’s Defense Fund releases its Congressional Scorecard each year, evaluating members of Congress on how they vote whenever children’s welfare issues come up, the lowest ranking members are always pro-lifers."

Republicans are proud of their fiscal conservatism. Their stated objective is to have no funded effort that is not paid for out of existing resources. The anti-abortion legislation they are so proud of will create additional children with disabilities, and additional families that will need state help in order to care for them. Where will that help come from? Will the Democrats have to come in and clean up the social messes created by Republicans—in the same way they have to clean up their economic disasters?

George W. Bush was elected by promising a "compassionate conservatism." That now seems like ancient history. The fools, knaves and nincompoops who are now in charge of his party have little interest in compassion. Rather, what arises from their zealotry is something more akin to the cruel and unusual punishment from which the Constitution is supposed to protect us.

Could Our Schools Be a Threat to Our National Security?

Diane Ravitch has provided a review, in the New York Review of Books, of the following study:
US Education Reform and National Security
by Joel I. Klein, Condoleezza Rice, and others
Council on Foreign Relations, 103 pp., available at www.cfr.org

In the past, Ravitch has been hard on those who would suggest certain types of reforms of our public education systems—perhaps too hard. In this particular case, her invective is both delightful and deserved.

Clearly, the Council on Foreign Relations would not sponsor a study of the impact of our educational system on national security if they did suspect there was a good story to tell. They selected a team that dutifully returned the tale they expected and wanted.

Ravitch begins by disarming—if not devastating—the principal authors.

"Now comes the latest jeremiad, this one from a task force sponsored by the Council on Foreign Relations and led by Joel I. Klein, former chancellor of the New York City public schools (now employed by Rupert Murdoch’s News Corporation to sell technology to schools and to advise Murdoch on his corporation’s hacking scandals)...."

Condoleezza Rice is similarly relegated to the trash bin of history with this comment:

"....and Condoleezza Rice, former secretary of state during the administration of President George W. Bush."

These luminaries arrive at appropriately alarmist conclusions.

"....our nation’s public schools are so dreadful that they are a threat to our national security. Once again, statistics are marshaled to prove that our schools are failing, our economy is at risk, our national security is compromised, and everything we prize is about to disappear because of our low-performing public schools. Make no mistake, the task force warns: ‘Educational failure puts the United States’ future economic prosperity, global position, and physical safety at risk’."

Ravitch responds with a point that is too often overlooked.

"While the task force points out the problems of concentrated poverty in segregated schools, exacerbated by unequal school funding, it offers no recommendations to reduce poverty, racial segregation, income gaps, or funding inequities. It dwells on the mediocre standing of American schools on international tests, but does not acknowledge that American schools with a low level of poverty rank first in the world on international tests of literacy."

It is absurd to make blanket statements about our educational system when we have states with schools that compete with the best in the world, and we have states that compete with the worst in the world. On average, we are average—but what does that mean or prove? This vast disparity in results can be explained by social, economic, and cultural differences—as Ravitch suggests. In How Your State’s Students compare with Those from Other Countries we provided references to data that ranked each of our states’ schools (including Washington D.C.) against those of other countries on a standardized international test. Our best performer was Massachusetts. It fell between Japan and Switzerland in math proficiency; and between Singapore and Hong Kong in reading proficiency. Our worst performer was Washington D.C. It landed between Thailand and Mexico in math; and between Bulgaria and Trinidad & Tobago in reading proficiency.

The report focuses on standard conservative interpretations of reality including the intent to provide privatized alternatives to public education through vouchers and charter schools. This is red meat for Ravitch. She provides a comment from Linda Darling-Hammond, an author of the report with dissenting views. With regard to high-performing schools, such as those of Finland, Singapore and South Korea, they

"....have invested in strong public education systems that serve virtually all students, while nations that have aggressively pursued privatization, such as Chile, have a huge and growing divide between rich and poor that has led to dangerous levels of social unrest."

Indeed, Chile is the perfect example of how not to do things (Chile, the United States, and Income Inequality provides some insight). Chile, with its privatized system, has managed to fall below Washington D.C. in reading proficiency, landing between Trinidad & Tobago and Uruguay. Its voucher system effectively places a ceiling on what a poor student can receive in terms of education, and provides a subsidy for the wealthy who can afford to send their children to the more expensive schools.

What elevates the report that Ravitch is reviewing to the loftiest heights of inanity is its conclusions with regard to national security.

"The task force has many complaints: American students don’t study foreign languages; American employers can’t find enough skilled workers. Too many young people do not qualify for military service because of criminal records, lack of physical fitness, or inadequate educational skills. Not enough scientists and engineers are trained "to staff the military, intelligence agencies, and other government-run national security offices, as well as the aerospace and defense industries." Thus, the public schools are failing to prepare the soldiers, intelligence agents, diplomats, and engineers for the defense industry that the report assumes are needed. This failure is the primary rationale for viewing the schools as a national security risk."

The suggested response to this issue involves:

"....the United States should have ‘a national security readiness audit’ to determine whether students are learning the necessary skills "to safeguard America’s future security and prosperity," and ‘to hold schools and policymakers accountable for results’."

Now what exactly might that mean? Ravitch provides one possibility.

"Certainly the task force is right to insist upon the importance of foreign-language study, but it is wrong to blame the nation’s public schools for a shortage of specialists in Chinese, Dari, Korean, Russian, and Turkish. Although some American high schools teach Chinese, these languages are usually taught by universities or specialized language programs. It is peculiar to criticize public elementary and secondary schools for the lack of trained linguists in Afghanistan and other international hotspots."

And as to the perceived national security threat, Ravitch provides this:

"If the international tests are indicators of our national security weakness, should we worry that we might be invaded by Finland or South Korea or Japan or Singapore or Canada or New Zealand or Australia? Obviously not. The nations with higher test scores than ours are not a threat to our national security. They are our friends and allies."

She concludes with this apt summary:

"If future historians want to see a definition of the status quo in American education in 2012, they may revisit this report by a task force of the Council on Foreign Relations. It offers no new directions, no new ideas, just a stale endorsement of the federal, state, and corporate policies of the past decade that have proven so counterproductive to the genuine improvement of American education."

Nothing need be added to that statement.

Manufacturing, Education, and the Future of the US Economy

There were a few recent articles that provided positive facts about manufacturing in the US, but these positives both came with a specific warning.

Hal Weitzman provided an article in the Financial Times that discussed the recent trend towards reshoring of manufacturing jobs and production back into the US. The focus was on new manufacturing operations in general, and, in particular, on the effort by an outfit called Element to make a go of manufacturing large-scale television sets in the US. Weitzman details the costs and benefits of local manufacture and explains the issues that Element faced in generating a successful operation. One of the problems encountered was quite disturbing.

"The company faced another barrier to reshoring: the lack of skills in the US. It came up with an ingenious solution, bringing workers from factories in China to the US for one month to train their American counterparts."

"Other US manufacturers may not be able to copy that idea. The sector has 600,000 unfilled positions because of a lack of qualified skilled workers, according to a report by Deloitte, the consultants, and the National Association of Manufacturers. "There is certainly a question that the lack of skills could hamper the short-term reshoring efforts," says Deloitte’s Craig Giffi."

Our high schools and colleges are cranking out millions of graduates who face the prospect of unemployment or underemployment, and yet our manufacturing sector is hampered by a lack of skilled applicants! What is going on?

A second article from the University of Michigan’s Ross School of Business elaborates on the state of manufacturing and its need for trained employees. It reports on results from a study performed by some of its staff.

"The potential gains are huge, and manufacturing still is ripe for a rebound. U.S. factories produce about 75 percent of what the country consumes, according to the study. The right decisions by both business and political leaders could push that to 95 percent. The wrong decisions could drive it below 40 percent. Manufacturing directly accounts for 11 percent, or $1.47 trillion, of U.S. GDP. That rises to 15 percent of GDP when including economic activity directly linked to manufacturing."

One of the issues that business and political leaders must deal with if this potential growth is to be realized is a lack of appropriately trained individuals.

"An issue that looms particularly large in the U.S. is finding technically trained production workers such as machine operators and maintenance specialists. Low-skill jobs may be disappearing, but high-skill ones are not. Since 1980 the number of high-skill manufacturing jobs in the U.S. has increased by about 40 percent despite a drop in total manufacturing employment."

"The U.S. risks becoming a country with wide divergence between rich skilled workers and poor unskilled workers, Hopp says. Industry leaders surveyed by the study's authors confirmed that technically savvy production workers are hard to find in the U.S. but are more abundant in other countries."

An explanation is suggested for why we cannot provide the necessary workers.

"But other countries have caught up and passed the U.S. in education. American preoccupation with college preparation has marginalized vocation education and industrial arts programs, according to the study. To meet future employment needs, schools must recover their vocational training roles and also become more adept at vocational guidance to ensure that young people realize the diverse career paths in manufacturing."

"’If you talk about manufacturing long enough, all roads eventually lead to education,’ Hopp says. ‘A huge determinant of how many manufacturing jobs remain in the U.S. will be our ability to create a skilled workforce’."


Many countries provide alternate educational paths for their children. At some point they are encouraged, or coerced by rigid testing standards, to follow either a university-bound path or a vocational path. In our school system one graduates from high school and either goes to a college or is pushed out onto the street. It doesn’t have to be that way.

Neither article emphasized sufficiently the role that the manufacturing industry must play in addressing this issue. It is easy to blame our educational system for not providing competent machine operators, but can a single school system really be expected to address all the various and specific needs of such a diverse sector of the economy? Only industry itself can provide the trainers and the tools to be trained on.

Our politicians should be willing to fund and organize such a nationwide training path with subsidized industry participation. It will not work unless there is someone waiting to employ the successful trainee. And it will be cheaper than supporting an unemployed person for the rest of their lives.

Not every child should be vectored towards a four-year college. We would be better off if the marginally interested had some other form of education, and the motivated and capable students were provided better opportunities to get the advanced degrees and skill sets that the economy is demanding today.

How to Make Progress on Global Warming

For those frustrated by the lack of progress on combating global warming, a possible path forward is suggested in a Foreign Affairs article by David G.Victor, Charles F. Kennel, and Veerabhadran Ramanathan: A Climate Threat We Can Beat: What It Is and How to Deal with It.

The authors make the point that the lack of progress on arriving at a viable plan for limiting carbon dioxide emissions should not divert one’s attention from other green house gases that are of considerable importance.

"At least 40 percent of current global warming can be blamed on four other types of pollutants: dark soot particles called black carbon, methane, lower atmospheric ozone, and industrial gases such as chlorofluorocarbons (CFCs) and hydrofluorocarbons (HFCs), which are used as coolants in refrigerators. Nearly all these pollutants have life spans of just a few weeks to a decade -- much shorter than that of carbon dioxide. But although their tenure is brief, they are potent warmers. Emitting just one ton of black carbon, for example, has the same immediate effect on warming as emitting 500-2,000 tons of carbon dioxide."

Limiting these pollutants would not arouse the political and social angst that has hindered progress on carbon dioxide. In fact, a program to address them would be a social and economic boon.

"A few hundred million tons of crops are lost to ozone smog every year; in India, air pollutants have decreased the production of rice by about ten million tons per year, compared with annual output in the 1980s. Globally, the inhalation of soot produced by cooking indoors already kills about two million people each year, mostly women and children living in extreme poverty. And because soot is dark, it traps heat from sunlight and thus speeds melting when it settles on mountain glaciers -- a direct threat to drinking-water supplies and agricultural lands that depend on glacier-fed river systems in China and India, such as the Ganges, the Indus, and the Yangtze."

The technology for controlling these pollutants is already in hand. What is required is the implementation of the appropriate policies. The authors predict that the world is much more ready to address these pollutants than it is to get serious about carbon dioxide.

"Owing to these near-term economic and public health risks, even countries that have been skittish about costly long-term efforts to regulate carbon dioxide are already proving more willing to confront short-lived pollutants."

There is much to be gained in pursuing the short-term goal of minimizing the four identified pollutants.

"Last year, the UNEP [United Nations Environment Program] summarized their work, highlighting the potential benefits of installing new cookstoves, building more efficient power plants [curbing emissions], and plugging the leaks that occur when natural gas is extracted from wells. The UNEP concluded that such steps would make it possible to cut 40 percent of global man-made methane emissions and almost 75 percent of global black carbon emissions by 2030. Those reductions could ultimately prevent as many as five million deaths every year and safeguard as many as 140 million tons of corn, rice, and soybeans every year -- the equivalent of four percent of annual global production. These measures would also halve the global warming expected to occur between now and 2050...."

The emphasis is mine.

The authors claim that it was a strategic error to focus so heavily in climate diplomacy on producing reduced carbon dioxide emissions.

"No permanent solution to the climate problem is feasible without tackling carbon dioxide, but the economic and geophysical realities of carbon dioxide emissions almost guarantee political gridlock."

A multinational approach to limiting these emissions, one in which nations such as India and China would benefit from participation, would set a precedent for cooperation. Once the precedent is set and is successful, it should be easier to let the momentum carry the diplomats on to the next stage.

And buying a little extra time can only help.

Oil, Natural Gas, Fracking, and Market Movement

We reported here on an article that suggested the United States could one day become the new "Saudi Arabia of energy." One could justifiably view such a claim as dubious—but who knows? The energy future of the US seems to lie in the future of nontraditional sources. The explosion in fracking wells in recent years is viewed as a prime mover. If the process proves environmentally sound it will open up huge reserves of both oil and natural gas. The US would also benefit from being the technology leader in this area, generating considerable revenue for those able to transition the expertise to other countries. The issues involved with the fracking process were discussed in To Frack or Not to Frack.

Two recent articles discuss interesting developments in the oil and natural gas arenas. The first is by Mathew Brown in Bloomberg Businessweek: Fracking is Flopping Overseas. It seems that the geology gods have smiled on the United States.

"U.S. gas deposits within shale fields are among the world’s cheapest to exploit, thanks to accommodating geology. European basins tend to be smaller and occur in shapes that are less cost-efficient to access, says Pawel Poprawa, formerly a geologist at the Polish Geological Institute. Projects in parts of the Northeast U.S. can turn a profit selling gas for $3 per million Btu. In Poland, the cost is likely closer to $9. That’s bad news for ExxonMobil, Chevron, ConocoPhillips, and other companies that grabbed 109 licenses in Poland in recent years in hopes of a U.S.-style gas gold rush."

Fracking costs have also been projected as being very high in a number of other countries. Not only does the US have the best technology—they also seem to have the best shale. Consider this chart provided in the article.

The US should benefit greatly from this cheap source of gas in the long run.

"The relatively slow development of shale abroad should benefit the U.S. Japanese utilities were paying $20.87 per million Btus for Yemeni gas in January—eight times U.S. gas prices at the time. The bigger the price gap, the greater the profit for shippers of gas from the U.S."

The second article points out that in a commodities market, a "glut" of product is not necessarily a good thing. Roben Farzad provided an interesting article in Bloomberg Businessweek: High Oil Prices Fuel the Gas Glut. It would seem that so much natural gas is being produced that the market price is falling below the cost of producing it. This seemingly paradoxical result arrives because the gas and oil supplies have become more tightly coupled.

"One reason: Oil drillers produce gas as a byproduct, and with oil prices high, oil drilling is in gear. ‘It’s very attractive to drill for oil, so that will continue,’ says Grubert. ‘Associated gas from oil wells will offset reduced drilling specifically for natural gas.’....Gas pumped as a byproduct of oil and other liquids will represent 75 percent of the increase in natural gas production this year and as much as 90 percent next year, according to Barclays research. Such byproducted output, as it is called, will probably keep rising as long as oil remains above $75 a barrel, the bank says."

What effect has this had on the market for natural gas?

"There’s an unprecedented price gap in the energy patch. Oil has traded above $100 a barrel since February, while natural gas prices have dropped below $2 per million British thermal units—from $4.85 in June of last year. A divergence like this ‘has never happened before,’ says Duane Grubert, an energy analyst with Susquehanna Financial Group. The last time natural gas prices were this low, in 2002, oil was at $20 a barrel."

With predicted high supplies and low prices, hard times have fallen on gas producers who were expected to benefit from the abundance of shale gas.

"Natural gas producers are cutting production in hopes of bringing down supplies and therefore increasing prices. The industrywide gas rig count fell by 23 last week, to 624, the lowest in 10 years, according to driller Baker Hughes. Yet production keeps growing."

"Shareholders are feeling the pain as well. Chesapeake Energy, the second-largest gas producer in the U.S. after ExxonMobil, has seen its stock fall 50 percent since August 2011. Shares of Canada’s largest producer, Encana, have fallen 50 percent in 11 months. The price of natural gas is ‘ridiculously bullish for U.S. consumers,’ says Raymond James analyst J. Marshall Adkins. ‘But the producers? At $5 natural gas, everyone was making great money. At $2, it’s hard to make any profit’."

It will be interesting to see how this plays out. If fracking can be carried out in an environmentally sound manner, the US should be able to lower its oil imports considerably, while at the same time being able to ramp up natural gas exports. Both developments should do wonders for our balance-of-payments deficit.

The Hidden American Welfare State

Bruce Bartlett has produced a useful book providing just about anything anyone would want to know about the tax system in the United States: The Benefit and the Burden. The subject here is "tax expenditures."
"....some tax preferences are, in effect, spending programs. These provisions, which economists call ‘tax expenditures,’ are a major source of complexity, unfairness, and economic distortion. Sometimes they reduce the tax liability of a business or family by exempting or excluding income from taxation; at other times they involve tax credits that reduce tax payments directly. And in some cases these credits are refundable for those with no income tax liability to offset, making them identical to a direct spending program in all but name."

These tax expenditures have come to replace direct funding approaches because they are easier to pass into law, and they maintain the appearance of limiting the size of government. They are generally intended to encourage behavior that is considered socially beneficial. Hence, most can be labeled social expenditures. The magnitude of this form of social spending is about a trillion dollars per year. The funds do not show up in the published budget numbers, and in many cases, beneficiaries of the federal largess are unaware that they are participating in a government-sponsored program.

We have recently discussed the effects of these tax expenditures in supporting the growth in income inequality by favoring the wealthy in Tax Policies and Income Inequality. The deleterious effects of this form of legislating on the functioning of a democracy were considered in Governance in the United States: Confronting the Submerged State. Bartlett provides yet another context in which to view US governance: "the hidden American welfare state."

"A recent OECD study calculated social spending as a share of GDP in major countries, taking account of things such as tax expenditures that consume economic resources without showing up in the budget or standard measures of government as a share of GDP."

The results are presented in the following table as a percentage of GDP.

Occasionally, a conservative politician will complain about a spending bill by saying something like: "You’re trying to make us into France!" Well, we aren’t quite France yet, but we are almost Sweden, and we have left Italy, Denmark, and Norway in the dust when it comes to social spending.

Actually, it is unfair to the above countries to compare them to the US. They still persist in the old technique of trying to solve a problem by directly applying funds to a solution. The US approach seems to consist of scattering money widely in hopes that some of it will trickle down to those who need it. How successful is this approach? Recall Bartlett’s words:

"....tax expenditures are a major source of complexity, unfairness, and economic distortion."

In other words, much of our social expenditure is not only a waste, but it is counterproductive.

Tax Policies and Income Inequality

The rise in income inequality coincides with a period in which the top income tax rates have been drifting downward. This begs the obvious question as to whether or not there is a correlation. Timothy Noah addresses this concern, and others related to tax policy, in his book on the growth of income inequality: The Great Divergence.

Noah concludes that the top marginal rate can only be a small contributor to inequality because the effect of the various deductions and rebates available to the top earners had always lowered the effective top tax rate. This effective rate for the wealthy was, in fact, little changed over the years.

Noah suggests that tax policies do play a role in generating inequality, but the means and mechanisms are more subtle and not so easily identified. The US does have a progressive tax system, less so than most assume, and it does contribute to a redistribution of wealth. However, the extent of the redistribution seems to have diminished over time.

"The Congressional Budget Office calculates that in 1979 the combined effect of federal taxes and government benefits on income inequality (as measured by the Gini index) was to reduce inequality by 23 percent. By 2007 the combined effect remained progressive. The federal government was still distributing money downward. But it was reducing it by 17 percent. That means that during the Great Divergence the federal government has reduced its direct redistribution—through collecting taxes and awarding benefits—by about a quarter. So the effect of all federal taxes and benefits is significant—much more so than the effect of income taxes alone."

Some data provided by The Economist based on OECD analysis and presented here provides a look at how the US compared with the redistribution efforts of other countries in 2009.

In this analysis the US redistribution activities lower the Gini index by about 23%. It is not clear that the two data sets are comparable, CBO and OECD, and in 2009 the Great recession was still providing temporary influences on both incomes and government transfers. One thing is clear: policy decisions can have a large effect on inequality and the US does less than most European countries in alleviating it.

Noah suggests that "institutions and norms" have contributed to the growing inequality. He defines this phrase as "stuff the government did, or didn’t do, in more ways than we can count." Noah quotes Paul Krugman, from his book The Conscience of a Liberal: "....a strong circumstantial case for believing that institutions and norms....are the big sources of rising inequality in the United States." The notion that there are varied and subtle ways in which income distribution can be affected by government policy is supported by data that compares growth in income by income level under Democratic and Republican presidents. Republicans produce an environment in which income is heavily skewed toward the wealthier citizens; the Democrats produce a much more uniform growth in income. This issue was discussed in Democratic Presidents vs. Republican Presidents: Income and Jobs.

So "institutions and norms" contribute to income inequality. But what exactly does that mean?

Consider this data from The Economist on the ten largest tax expenditures under US policy. Tax expenditure is a term that refers to government distribution of funds via tax deductions, rebates and credits, rather than by direct budgeting of monetary transfers.

It is not difficult to conclude that each of these is designed to provide a greater benefit to the higher income members of society than to those at the lower end of the scale. Just those ten tax expenditures add up to $705B—with the total of all such expenditures adding to over $1T. The article provides this additional insight.

"...the bottom 40%....they collectively enjoy just 11% of all tax expenditures....the preferential rate on capital gains and dividends; 75% of those benefits go to the top 1% of households."

Suzanne Mettler addresses the issues associated with tax expenditures in her book: The Submerged State: How Invisible Government Policies Undermine American Democracy. She provides data on how three of the largest and most popular deductions are shared by the various income groups.

One might think that the deduction for employer provided health insurance would be neutral, but Mettler points out:

"As of 2009, in the lowest income quintile, only 16 percent of Americans under age sixty-five had employer-sponsored health insurance—compared to 85 percent of those in the top quintile....[in 2004] 30 percent of the benefit was allocated to families in the top 15 percent of the income distribution."

The deductions for mortgage interest and retirement contributions are even more biased toward the wealthy.

"The most skewed distribution accompanies the Home Mortgage Interest Deduction and the tax-free status of retirement benefits: in 2004, 69 percent and 55 percent of the benefits from each of these policies, respectively, were conferred on Americans with household incomes of $100,000 or more—the top 15 percent of the income distribution."

Mettler focuses on the tax expenditures specifically aimed at encouraging "socially useful" behavior. As of 2010, they were 151 in number.

"The costs are substantial: on net, as of 2008, the amount lost in federal revenues due to social tax breaks was equivalent to 7.4 percent of GDP, up from 4.2 percent in 1976. To put this in perspective, ‘visible governance,’ meaning total direct federal spending—on all domestic programs, the military, and interest on the debt—amounts to approximately 18 percent of GDP, making social tax expenditures comparable to between one-third and one-half as much."

While it is not possible to associate all, or probably even the majority, of the growth in income inequality to federal tax policies, clearly they have played a role. The net effect of these tax expenditures is to funnel money out of the general tax base and flush it preferentially upward towards the higher income earners—hopefully, not what most legislators were sent to Washington to accomplish.

Mettler’s book and some of her findings are also discussed in Governance in the United States: Confronting the Submerged State.

Income Inequality and the College Premium

Could it be that the major cause of the growth in income inequality over the past 30 years has simply been our inability to educate and train students in a way that prepares them for the demands of an evolving economy? Timothy Noah seems willing to accept that notion in his book investigating the factors that may, or may not have, contributed: The Great Divergence.

Depending heavily and the studies of two economists, Claudia Goldin and Lawrence Katz, he presents this statement:

"Goldin and Katz calculate that the increase in economic returns to education is responsible for about 60 percent of the increase in wage inequality between 1973 and 2005."

What is it about our education system and its relationship with our evolving society and economy that has allowed this "Great Divergence" in incomes to occur? Noah provides a compelling explanation.

It is convenient to divide jobs into three categories: low-skill, mostly service positions that require little training and little education; middle level positions that require a greater level of training and education, and involve decision making; and an upper level that demands initiative and knowledge, and, thus, a high degree of education and skill. The dynamic that seems to be in effect is mostly technology driven. Activities that require a modest level of physical or intellectual skill have been easily replaced by automation and by computers. While the economy continues to produce low skilled jobs that require human activity, it is the moderately skilled activities that are being phased out. This is a phenomenon that seems common to all advanced economies. The Japanese have coined the term kudoka to describe it. Others use the term "job polarization."

College-educated workers have always earned more, on average, than those with a lower level of education. This difference in expected earnings between a college graduate and a high school graduate is referred to as the "college premium." The same dynamic that is hollowing out the mid-level jobs is placing greater emphasis on a college education, but apparently not just any college education. The nature of business and technology today seem to be demanding more intense or more specialized knowledge which would come from a degree focused on a particularly valuable skill such as engineering, or on the capabilities inherent in acquiring a post-graduate or professional degree.

Noah provides an interesting chart that indicates the relation between supply and demand for college-educated workers over the years.

College attendance during the post-war years expanded rapidly producing an oversupply, but demand would begin to accelerate its growth in the ‘50s finally equalizing with supply around 1970. There was then an interesting little surge in supply that is attributed to students flocking to college in greater numbers in order to avoid being drafted for the war in Vietnam. This phenomenon caused a glut of graduates and some rather tough times for the highly educated in the mid-‘70s, a time some of us remember quite well. Since that time, the demand has always exceeded the supply.

The college premium is significant. Consider this chart:

The earnings potential of a college graduate is nearly double that of a high school graduate. Integrated over a lifetime that is enough money to justify a significant investment in one’s education. Why then has supply not kept up with demand?

"The gains [in educational attainment] virtually halted with 1976’s cohort of twenty-four-year olds. Educational attainment started growing again in the 1990s, but at a much slower rate. Here’s another way to put it: The average person born in 1945 received two more years of schooling than his parents. The average person born in 1975 received only half a year more of schooling than his parents. In 1970 the high school graduation rate fell: after that it leveled off at about 75 percent."

Since it seems to be a unique trend associated with the US, it is hard to blame it on technology, or globalization, or whatever. According to OECD data, the US was once the leader in producing a college-educated population, but was surpassed by many other developed countries around the turn of the century.

"And while the college attendance rate in the United States has continued to rise, growth in the college completion rate has slowed sufficiently to put twenty-five to thirty-four-year-olds in the United States behind Australia, Belgium, Denmark, Ireland, Norway, New Zealand, Canada, Japan, and Korea. ‘We have the most-educated fifty-five-year-olds in the world.’ Katz told me. ‘But we’re in the middle of the pack for twenty-five-year-olds’."

There is no clear answer to why our gains in educational attainment have slowed. It is easy to blame this effect on our primary and secondary schools, but one should at least provide an explanation for why it happened. Neither Noah, nor his experts, seem to have a ready answer. Clearly college education has become more expensive as the increasing value of education has driven up its market value. And recently, public colleges have become much more expensive due to funding cutbacks caused by the recession. Yet, it seems there is more involved than simple costs. The issue is worthy of a longer and more detailed discussion.

Noah points out that the college premium’s growth has also slowed down over the last decade or so. He attributes this to the increased demand for post-graduate degrees. The benefit from this more advanced educational path is demonstrated by this chart from a New York Times article by Catherine Rampell.

Clearly experience and an advanced degree payoff in the occupations studied.

What is the bottom line in terms of advanced education and growing income inequality? The 60% effect on income inequality may or may not be numerically very precise, but it makes compelling the notion that if we are to solve our social and economic problems we are going to have to improve our educational attainment results. Going to college and acquiring a random four-year degree seems to be no longer sufficient; one must emerge from the experience with a skill or a demonstration of the capability of accomplishment that exceeds what was expected of earlier generations.

Actually, it was rather refreshing to encounter an explanation for income inequality that did not require conjuring up rapacious capitalists or irrational politicians. This is something even our wounded society should be able to deal with.

Noah’s presentation on the subject suggests that our troubles extend beyond merely improving math and reading scores on standardized tests. Such an accomplishment does not necessarily provide greater motivation to students, nor does it instill a love of learning. Both are necessary if our children are to be willing to make the increased personal investment required to compete in the current economy.

The Birth of Austerity and the Death of "Europe"

Europe has occupied a special position in the world as humanity hurtled into the new millennium. It provided the example of societies that could successfully combine market-based capitalism with a commitment that even the least citizen would be provided for. It was a place where workers could take pride in their roles, however minimal, and find comfort in economic security. Europe provided the counterpoint to the US model in which workers are mere economic units, united and motivated mainly by a fear of being fired. And Europe provided hope that one day the US could revert to a kinder, gentler, calmer version of itself. 

Abraham Newman provides an article in Foreign Affairs that reminds us that yes, the good do die young, and to hope is often to take refuge in fantasy: Austerity and the End of the European Model: How Neoliberals Captured the Continent. In Newman’s account of Europe’s economic travails one is forced to ponder various conclusions: the absurdity of life, the existence of a neoliberal conspiracy, or even that a cruel and vengeful god is at work—take your pick.

Before the financial disaster and the Great Recession, social democrats in Europe were in retreat from the ascendency of unfettered capitalism and the demand for market solutions to all problems.

"At first, the global financial crisis seemed like a turning point; it made clear that markets do not always efficiently distribute goods and services. Banks had taken advantage of limited regulation to repackage bad investments and sell them to unwitting customers. Policymakers, particularly in Europe, seized on the turmoil to push back against neoliberal policies that had dominated since the turn of the millennium. They also championed their own social-market model, which had cushioned workers from the initial blow of the financial crisis. In 2008, German Finance Minister Peer Steinbrück declared that ‘the cause of the crisis was the irresponsible exaggeration of the principle of a free, unrestrained market’."

The markets grew angry at such disrespect and returned with fury. The weakest were separated from the herd and attacked.

"Some countries, such as Greece, face an old-fashioned debt crisis: Governments borrowed too much money during the boom and have no viable means of repaying it. In other countries, such as Ireland, the financial crisis forced governments to bail out the banking sector and absorb its debts. Still other countries, such as Spain, suffered a crisis of liquidity after bond purchasers demanded higher interest rates on government debt. In the latter two, markets, not governments, were the primary culprits."

Many within the herd quickly lost faith and were caught up in fear. One, in particular, concluded (for the third time) that it was necessary to destroy Europe in order to save it.

"But that has not stopped politicians in Germany and the Netherlands from singling out government -- inefficient, bloated, and profligate -- as the problem."

The strongest became traitors to the cause and forced others to commit to a path of social destruction.

"Given the need to conserve public sector resources, proponents of austerity argue, firms and individuals are required to step in to provide core services, as is the case with the Big Society initiative in the United Kingdom. At the same time, governments are increasingly forced to privatize segments of their economies; Spain and Ireland have put everything from electricity to airports up for auction. What’s more, in the name of labor productivity, workers are asked to bear the burden of economic recovery through cuts to wages, pensions, and other benefits. German Chancellor Angela Merkel’s focus on structural reform in her 2012 speech at Davos typifies this trend. Austerity politics, then, necessarily reinforces the belief that in the wake of the crisis only markets can determine the contours of the European economy."

Newman suggests that there is more at work here than merely a response to an economic crisis.

"Austerity politics in Europe is not simply a short-term fight between the surplus countries in the center and the deficit countries on the periphery. It is a long-term political agenda that privileges lenders over debtors and capital over labor and, as such, should be seen through the lens of partisan politics. Center-right governments in Germany, the Netherlands, and Spain have been among the most vocal proponents of austerity."

Newman chooses to see "irony" in the turn of events, while "absurdity" might be more appropriate.

"What is clear is that austerity will transform Europe’s political economy in the long term, lending credence to neoliberal ideas of limited government and loosely regulated markets. The irony of this transformation is that it reinvigorates the very ideas that helped cause the financial crisis in the first place; after all, it was the unyielding faith in markets and weak regulation that allowed the financial bubble to swell. At the same time, a response to the sovereign debt crisis based on austerity precludes any alternative social-democratic framework that would emphasize growth and protect citizens from the vagaries of the market."

The world wants and needs its Europe back.

"For a middle-class worker in India worried about corruption, or an Indonesian farmer fearing the shock waves of financial crisis, European austerity offers little hope. Gone is the idea of Europe leading a global third way between laissez-faire capitalism and managed socialism."

The final chapters of this tragedy have yet to be written.

"Reviving an alternative agenda for the political economy of Europe would first require social democrats to convince voters that the crisis is not just a story of profligate governments but also of reckless markets....For if austerity is allowed to run its course, and Berlin and Brussels continue to starve the beast, Europe could quickly become a hotbed of widespread social unrest."

Newman’s article was written before the recent elections in France and Greece. France is important, and surely he was anticipating Sarkozy’s fall. Stay tuned. Perhaps other voices will be heard and the neoliberals and their market allies can yet be defeated.

Soyez un homme courageux, Monsieur Hollande!

Governance in the United States: Confronting the Submerged State

Suzanne Mettler has produced an important new book: The Submerged State: How Invisible Government Policies Undermine American Democracy. She focuses on how the means of enacting socially-useful legislation have transitioned from direct programs with recognizable goals, costs, and benefits, to a labyrinth of indirect incentives, subsidies, and deals for special interests. The result is that government has become inefficient, it has slanted the playing field to the benefit of the wealthy and corporations, and, most importantly of all, its efforts have become invisible to those who benefit from them.

Mettler provides this description of the "submerged state."

"The submerged state includes a conglomeration of federal policies that function by providing incentives, subsidies, or payments to private organizations or households to encourage or reimburse them for conducting activities deemed to serve a public purpose."

How did this "submerged state" come about?

"Over the past thirty years, American political discourse has been dominated by a conservative public philosophy, one that espouses the virtues of small government. Its values have been pursued in part through efforts to scale back traditional forms of social provision, meaning visible benefits administered fairly directly by government."

Scaling back direct funding for social purposes does not make the social needs go away. It has been necessary to try to regain social provisioning by indirect means, using the tax code or direct payments to nongovernmental entities to enable a distribution of funds. Since 1980 these types of efforts have expanded dramatically in size and scope.

It is often overlooked by the public, but a tax deduction for an IRA contribution, for example, is equivalent to a federal expenditure. The recipient receives funds from the government that would otherwise be collected in taxes. If the intention was to ensure that people have a secure retirement, that could be accomplished by directly contributing extra funds to the social security system, or by some other means of providing funds to people who need them. That would be efficient, but not consistent with small government. We are forced, then, to come up with his indirect incentive that mostly benefits the wealthy—those least in need of assistance.

"Most of these ascendant policies function in a way that directly contradicts Americans’ expectations of social welfare policies: they shower their largest benefits on the most affluent Americans."

How large are the funds associated with this submerged state?

There are a trillion dollars at play in the submerged state. That is about 7% of our GDP, and about 40% of the nonsubmerged state.

Compare some of the social spending efforts in the two levels of government.

Note that programs associated with what would be considered direct social spending are tiny compared to the indirect spending activities in the submerged state. This is a toxic situation because people see their taxes going to support people receiving direct aid, while they are often unaware of how much aid they receive themselves. They don’t think of their mortgage deduction as an example of the largesse of the state, but it is and the state receives no credit for this reimbursement. And, of course, the wealthy benefit most from this and other tax deductions.

Mettler views this lack of understanding as dangerous for our society and its governance.

"....the policies of the submerged state remain largely invisible to ordinary Americans: indeed, their hallmark is the way they obscure government’s role from the view of the general public, including those who number among the beneficiaries. Even when people stare directly at these policies, many perceive only a freely functioning market system at work. They understand neither what is at stake in reform efforts nor the significance of their success. As a result, the charge leveled by opponents of reforms—that they amount to ‘government takeovers’—though blatantly inaccurate, makes many Americans at least uncomfortable with policy changes, if not openly hostile toward them."

Mettler refers often to our healthcare system. Reform there is viewed by many as excessive government intervention in a largely private arena. Few voters realize that about half of all healthcare dollars come from the various levels of government. Healthcare could not function without all the grants, subsidies, and tax deductions that the state makes available to physicians, medical schools, hospitals, drug companies, and device manufacturers.

"Our government is integrally intertwined with everyday life from health care to housing, but in forms that often elude our vision: governance appears ‘stateless’ because it operates indirectly, through subsidizing private actors. Thus, many Americans express disdain for government social spending, incognizant that they themselves benefit from it. Even if they do realize that benefits they utilize emanate from the government, often they fail to recognize them as ‘social programs.’ People therefore are easily seduced by calls for smaller government—while taking for granted public programs on which they themselves rely."

This invisibility of the submerged state makes it an ideal playground for special interests to encourage legislated benefits for their constituencies. This, and the inherent benefits that accrue to the wealthy from trying to produce social change through the tax code, have contributed to the dramatic rise in income inequality that has been observed over the last 30 years.

Mettler summarizes her fears:

"As long as the submerged state exists in its shrouded form, American democracy is imperiled. Contrary to popular claims, the threat to self-governance is not the size of government, but the hidden form so much of its growth has assumed, and the ways in which it channels public resources predominantly to wealthy Americans and privileged industries."

Democratic Presidents vs. Republican Presidents: Income and Jobs

We know, deep down in our souls, that Republicans support policies that favor the rich and Democrats support policies that include support for the poor. But how often are we presented with graphic data that support our most basic—and fondest— political beliefs. Timothy Noah provides the favor in his book The Great Divergence. 

Noah evaluates the potential causes for the dramatic increase in income inequality over the past several decades (The Great Divergence). One of his postulates is that changes in governance could be responsible. In his study of the issue he came upon the work that Larry Bartels published in 2008 in his book Unequal Democracy: The Political Economy of the New Gilded Age.

Noah provides this blunt summary of Bartels’ findings.

"You don’t like income inequality? Then don’t vote Republican."

Between 1948 and 2005 there were five Democratic presidents and six Republican presidents. By looking at average annual pretax income growth, Bartels assembled the following data.

I can't ever recall experiencing such delight at the appearance of a single chart. It clearly demonstrates that under Republican administrations the wealthy are favored over all others. It also demonstrates that Democratic administrations tend to take care of everyone about equally. And it shows that even the wealthy do better under Democrats than under Republican leadership. Everyone does better when there is a Democrat in the White House!

But we are not finished yet. Today we are doubly blessed with data that warms our political hearts. Today, Bloomberg came out with an article by Bob Drummond with the lede: Private Jobs Increase More With Democrats in White House. This information is provided.

"The BGOV Barometer shows that since Democrat John F. Kennedy took office in January 1961, non-government payrolls in the U.S. swelled by almost 42 million jobs under Democrats, compared with 24 million for Republican presidents, according to Labor Department figures."

"Democrats hold the edge though they occupied the Oval Office for 23 years since Kennedy’s inauguration, compared with 28 for the Republicans. Through April, Democratic presidents accounted for an average of 150,000 additional private-sector paychecks per month over that period, more than double the 71,000 average for Republicans."

This graphic is provided.

　

The chart conveniently points out that in the eight years of George W. Bush not a single net job was created. Eight years!

Interestingly, while the small-government, small-economy Republicans had trouble creating private sector jobs, they were rather proficient in proliferating public-sector jobs.

"Republicans, campaigning on pledges to cut government spending and programs, had a relatively better record at creating public-sector jobs. Since January 1961, federal, state and local government employment grew by 7.1 million under Republican presidents and 6.3 million when Democrats were in the White House. Government agencies added an average of 21,000 jobs per month under Republicans, compared with 22,000 for Democrats."

If there is anyone out there actually contemplating voting Republican for president in anticipation of a return to the good old days, watch what you wish for.

The Myth of the American Dream

The term "The American Dream" was coined by the writer James Truslow Adams. Wikipedia provides this definition.
"The American Dream is a national ethos of the United States in which freedom includes the opportunity for prosperity and success, and an upward social mobility achieved through hard work. In the definition of the American Dream by James Truslow Adams in 1931, 'life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement’ regardless of social class or circumstances of birth'."

In his book, The Great Divergence, Timothy Noah discusses income inequality. In the process he devotes a chapter to the investigation of the viability of this "dream," and how our perceptions betray us as we try to focus on the problem of inequality.

Noah provides data on how people in the US have accepted a paradigm of dubious validity.

"A survey of twenty-seven nations from 1998 to 2001 asked participants whether they agreed with the statement "People are rewarded for intelligence and skill." The country with the highest proportion answering in the affirmative was the United States (69 percent) compared to a median among all countries of about 40 percent."

"Similarly, more than 60 percent of Americans agreed that "people get rewarded for their effort." compared to an international median of less than 40 percent."

"When participants were asked whether coming from a wealthy family was ‘essential’ or ‘very important’ to getting ahead, the percentage of American affirmatives was much lower than the international median: 19 percent versus 28 percent."

Noah then puts this optimism into a more specific economic context.

"A poll taken six years before by the Gallup organization found that 31 percent of Americans expected to get rich themselves before they die, with ‘rich’ defined by respondents....(roughly in the top 10 percent). Among those eighteen to twenty-nine, 51 percent expected to get rich."

And what is the reality?

"Only 6 percent of Americans born at the bottom of the heap (defined as the lowest fifth in income distribution....) ever make it in adulthood to the top (defined as the highest fifth in income distribution....)."

The surest way to end up in the top income quintile is to be born there.

"Parentage is a greater determinant of a man’s future earnings than it is of his height and weight. Height and weight are influenced by the genes passed from parents to children. Future earnings are not. But you wouldn’t know that from available data on economic mobility in the United States."

In other words, economic privilege, or the lack thereof, is stronger than genetics.

Noah attempts to explain how people in the US can be so confused. Partly it comes from the propaganda-like effect of writings of authors such as Horatio Alger Jr. and James Truslow Adams, neither of who could be said to have risen from the bottom. Although successful, both came from established families and attended, at least for a time, Ivy League universities. Adams, in fact, spent much of his life overseas and penned the book with the phrase "The American Dream" while living in London.

Another support for the misperception arose from the economic data available in the past. It was only in the early 1990s that quality data and analyses became available. These studies found that economic mobility, while not as high as perceived, was greater in the past and has been declining since the ‘50s and’60s.

Noah provides a graphic representation of how the US ranks against other countries in economic mobility. The metric applied is intergenerational mobility—a measure of how correlated a child’s ultimate income is with that of his parents. Another way to express this same relationship is in terms of income heritability. The larger the value, the greater is the correlation between income of parents and children.

By this measure, economic mobility in the US is considerably lower than European countries, save Italy and the UK. Usually England infects the English speaking countries it spawned uniformly with its defects, but in this instance, Canada and Australia seem to have escaped and have arrived at relatively egalitarian societies.

Noah provides this pertinent comment.

"A common American criticism of the ‘socialist’ countries of western and particularly northern Europe is that by providing guaranteed health care and a social safety net for the poor and unemployed that is more comprehensive than the one in the United States, these nations diminish their economies’ ability to create economic opportunity. That argument is refuted by the evidence presented here that western and northern European countries provide, in fact, greater opportunity than the United States to move up the economic ladder."

He seems to be suggesting that we should imbue our children with a lust for a "European Dream."

This misperception about how great the odds of success are in our society has positive as well as negative implications. People who have an irrational exuberance about success will take risks that more sentient individuals might not take. This will occasionally lead to spectacular success, although the exception does not make the rule. On the other hand the excessive belief in personal opportunity can lead to excessive guilt and disappointment when success is not attained.

"The American reluctance to regard disappointing outcomes as anything other than failed personal agency....is not only painful to the spirit; it is also an obstacle to constructive forms of collective action such as forming a labor union or organizing a political movement."

This discussion is much more than a mere aside in Noah’s investigation of income inequality.

"My interest is in a particular consequence of Americans’ overconfidence in upward mobility. It has become the rational for indifference toward income inequality—a rational built on a demonstrably false premise."

May we all have the same interest and concern.

Psychiatry’s Bible: A Book Based on Revelation

There was a time when a psychiatrist could be counted on for counseling and long verbal therapy sessions. That is a time of the past. Virtually all treatments for "mental illness" involve drug therapies. This is a much more time-efficient and a much more remunerative approach—and it is so simple that almost anyone who can read can do it.

The American Psychiatric Association (APA) is about to publish a new edition of the Diagnostic and Statistical Manual of Mental Disorders (DSM). Each new edition manages to unearth another suite of mental disorders that an unaware public did not know existed. Each new malady generates new revenue for the psychiatrists for whom it lobbies and for its sponsors and teammates: the drug companies.

Not everyone is thrilled with this development. Paula J. Caplan, in a Washington Post article titled Psychiatry’s bible, the DSM, is doing more harm than good, is not happy. Marcia Angell, in a New York Review of Books article titled The Illusions of Psychiatry, is also not happy.

The APA is particularly proud of the newest version (DSM-5 or DSM-V). Angell provides this insight.

"In 1999, the APA began work on its fifth revision of the DSM, which is scheduled to be published in 2013. The twenty-seven-member task force is headed by David Kupfer, a professor of psychiatry at the University of Pittsburgh, assisted by Darrel Regier of the APA’s American Psychiatric Institute for Research and Education."

"In particular, diagnostic boundaries will be broadened to include precursors of disorders, such as "’psychosis risk syndrome’ and ‘mild cognitive impairment’ (possible early Alzheimer’s disease). The term ‘spectrum’ is used to widen categories, for example, ‘obsessive-compulsive disorder spectrum,’ ‘schizophrenia spectrum disorder,’ and ‘autism spectrum disorder. And there are proposals for entirely new entries, such as ‘hypersexual disorder,’ ‘restless legs syndrome,’ and ‘binge eating’."

The term "spectrum" allows considerable leeway in defining symptoms, including potential or anticipated behaviors—another way of saying one can be drugged even if there are no definite symptoms at all.

"....Kupfer and Regier wrote in a recent article in the Journal of the American Medical Association (JAMA), entitled "Why All of Medicine Should Care About DSM-5," that ‘in primary care settings, approximately 30 percent to 50 percent of patients have prominent mental health symptoms or identifiable mental disorders, which have significant adverse consequences if left untreated.’ It looks as though it will be harder and harder to be normal."

So—the APA is coming with a document that will allow up to 50% of us to be declared mentally ill. Wow, shouldn’t we be worried? Well, actually we shouldn’t be worried, but those foolish enough to believe this claptrap should fear for their lives.

Angell reminds us that psychiatry is not the practice of medicine as we have come to understand it. There is no precise definition of mental illness; there is no way to measure it; and there is no scientific validation for its treatment with the various drugs that are utilized.

"Unlike the conditions treated in most other branches of medicine, there are no objective signs or tests for mental illness—no lab data or MRI findings—and the boundaries between normal and abnormal are often unclear. That makes it possible to expand diagnostic boundaries or even create new diagnoses, in ways that would be impossible, say, in a field like cardiology. And drug companies have every interest in inducing psychiatrists to do just that."

Angell quotes Daniel Carlat from his book Unhinged: The Trouble With Psychiatry—A Doctor’s revelations About a Profession in Crisis, as to what this means in practice.

"Our diagnoses are subjective and expandable, and we have few rational reasons for choosing one treatment over another."

Using DSM as a guide, symptoms are tallied and compared with a list associated with a given condition. If a patient exhibits a specified number of the listed symptoms, the psychiatrist can make a diagnosis. Unfortunately, with over 300 maladies designated, the symptoms are not necessarily unique to a given condition. Carlat reported on a patient who provided him with seven different diagnoses according to the DSM. What is one to do? This matching procedure, according to Carlat, provides:

"....the illusion that we understand our patients when all we are doing is assigning them labels."

The use of a drug to treat depression, for example, leads to side effects that require other drugs to control. This cascading effect leads to patients swallowing what is usually referred to as a "cocktail" of drugs. Again, from Carlat:

"We target discrete symptoms with treatments, and other drugs are piled on top to treat side effects."

From Angell:

"A typical patient, he [Carlat] says, might be taking Celexa for depression, Ativan for anxiety, Ambien for insomnia, Provigil for fatigue (a side effect of Celexa), and Viagra for impotence (another side effect of Celexa).’
　
And again from Carlat:

"Such is modern psychopharmacology. Guided purely by symptoms, we try different drugs, with no real conception of what we are trying to fix, or of how the drugs are working. I am perpetually astonished that we are so effective for so many patients."

All of this might be less scary if one were convinced that DSM possessed a firm scientific basis. Angell provides this perspective:

"Not only did the DSM become the bible of psychiatry, but like the real Bible, it depended a lot on something akin to revelation. There are no citations of scientific studies to support its decisions. That is an astonishing omission, because in all medical publications, whether journal articles or textbooks, statements of fact are supposed to be supported by citations of published scientific studies."

The contents of DSM are apparently arrived at by selecting a panel of experts in given areas that arrives at conclusions as to what is and (hopefully) what is not mental illness. This is a typical process for arriving at a document.

Legislators proceed along similar lines in arriving at a legislative bill. It is a known, but unfortunate fact that legislators receive campaign donations from those organizations that might benefit from the laws they promulgate. How great would be the outrage if congressional representatives were routinely receiving personal funds, equivalent to a salary or stipend, from those affected by their legislation? Felonious corruption would be the call and a clamor for prison terms would arise.

Not so in the medical profession where corruption is quite common and accepted. Receiving money from drug companies is particularly likely in psychiatry because there is so much of it to be made by all. Participants in formulating DSM take funds for personal use from companies that stand to make billions of dollars from their decisions.

"Of the 170 contributors to the current version of the DSM (the DSM-IV-TR)....ninety-five had financial ties to drug companies, including all of the contributors to the sections on mood disorders and schizophrenia."

Caplan describes her experience in working on a version of DSM.

"The marketing of the DSM has been so effective that few people — even therapists — realize that psychiatrists rarely agree about how to label the same patient. As a clinical and research psychologist who served on (and resigned from) two committees that wrote the current edition of the DSM, I used to believe that the manual was scientific and that it helped patients and therapists. But after seeing its editors using poor-quality studies to support categories they wanted to include and ignoring or distorting high-quality research, I now believe that the DSM should be thrown out."

Caplan then provides this noteworthy comment.

"Allen Frances, lead editor of the current DSM, defends his manual as grounded in science, but at times he has acknowledged its lack of scientific rigor and the overdiagnosing that has followed. ‘Our net was cast too wide,’ Frances wrote in a 2010 Los Angeles Times op-ed, referring to the explosion of diagnoses that led to "false ‘epidemics’ " of attention deficit disorder, autism and childhood bipolar disorder. The current manual, released in 1994, he wrote, ‘captured many "patients" who might have been far better off never entering the mental health system’."
　
The DSM is not likely to be discarded. From Angell:

"When....DSM-III was published in 1980, it contained 265 diagnoses (up from 182 in the previous edition), and it came into nearly universal use, not only by psychiatrists, but by insurance companies, hospitals, courts, prisons, schools, researchers, government agencies, and the rest of the medical profession."

So we have simple recipes for diagnosing mental illness that can be used just about anyone. Do you remember this passage:

"....Kupfer and Regier wrote in a recent article in the Journal of the American Medical Association (JAMA), entitled "Why All of Medicine Should Care About DSM-5," that ‘in primary care settings, approximately 30 percent to 50 percent of patients have prominent mental health symptoms or identifiable mental disorders, which have significant adverse consequences if left untreated.’ "

The quote seems to suggest that primary care doctors should be on the lookout for symptoms and initiate treatment with mind-altering and brain-damaging drugs even though they have no training in psychiatry, or even any experience with the drugs themselves. Apparently this actually happens. Caplan provides this example:

"About a year ago, a young mother called me, extremely distressed. She had become seriously sleep-deprived while working full-time and caring for her dying grandmother every night. When a crisis at her son’s day-care center forced her to scramble to find a new child-care arrangement, her heart started racing, prompting her to go to the emergency room."

"After a quick assessment, the intake doctor declared that she had bipolar disorder, committed her to a psychiatric ward and started her on dangerous psychiatric medication. From my conversations with this woman, I’d say she was responding to severe exhaustion and alarm, not suffering from mental illness."

"When a social worker in the psychiatric ward advised the patient to go on permanent disability, concluding that her bipolar disorder would make it too hard to work, the patient did as the expert suggested. She also took a neuroleptic drug, Seroquel, that the doctor said would fix her mental illness."

"Over the next 10 months, the woman lost her friends, who attributed her normal mood changes to her alleged disorder. Her self-confidence plummeted; her marriage fell apart. She moved halfway across the country to find a place where, on her dwindling savings, she and her son could afford to live. But she was isolated and unhappy. Because of the drug she took for only six weeks, she now, more than three years later, has an eye condition that could destroy her vision."

This is an example of what happens when amateurs become convinced that a corrupted document like DSM is valid medical science. This is an example of what can happen when the drug companies and their psychiatrist agents encourage the dispensing of dangerous drugs by amateurs. And physicians are not the only ones involved. There are also teachers, counselors, judges, and lawmakers who have fallen under the DSM spell.

What to take away from this information? As Carlat suggests in his book, psychiatry has become "unhinged" and is appropriately said to be in "crisis." And when drugs are involved, "Just say no!" is always a good first response. Half of us are not mentally ill, so if someone tells you that you are, the odds are that you aren’t. Act accordingly.

Caplan tells us that "patients" are beginning to fight back. How encouraging!

"About 10 people who received diagnoses from the current DSM edition are filing complaints against the manual’s editors. (I have worked with the patients to prepare their complaints, and I’m filing my own as a concerned clinician.)"

"The complainants allege that the DSM’s editors failed to follow the APA’s ethical principles, which include taking account of scientific knowledge and respecting patients’ welfare and dignity. They are asking the APA to order the editors to redress the harm done to them — or in one case, to a deceased relative — and to anyone else hurt by receiving a label. They want the APA to hold a public hearing about the dangers of psychiatric diagnosis to gather information about the extent of the damage and look for ways to minimize it. Additionally, they are asking the APA to make clear to therapists and to the public that psychiatric diagnoses are not scientific and that they often put patients at risk."

Emphasis is mine. Good luck with that. Remember that the drug companies garner 10s of billions of dollars in revenue from these "not scientific" diagnoses.