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Obama's SOTU: What do Democrats mean by "middle class," anyhow?

I'm being triply non-linear now, because "Tax the Rich" is #3 in the Twelve Point Platform:

3. Tax the Rich

and so not only am I not beginning at the beginning with #1: A Living Wage, I'm not writing part two of my first attempt on #8: Post Office Bank, either (here is part one). Soon! Moreover, I'm reacting, albeit way too slowly, to the news, seeking to use it as a hook to raise larger issues. (These posts might be better thought of as first drafts for a book, rather than as blog posting.)

In any case: In Obama's State of the Union (SOTU) speech we have a seemingly populist tax proposal. Here is the headline summary from AP:

Obama in State of the Union: Tax wealthy, help middle class

And that's a fair summary. But there are some problems with this formulation, among them:

  1. Obama's proposals are fundamentally unserious
  2. The concept of "middle class" is hazy
  3. The unstated premise is that Federal taxes raise revenue (they don't)
  4. There are good reasons to tax the rich, even if raising revenue is not one of them
  5. We don't know how much Obama will really tax the rich
  6. Obama's proposals are unlikely to help "the middle class," however defined
  7. Concrete material benefits should be our focus, not a "tax fight"

Let's take each of these points in turn.

1. Obama's proposals are fundamentally unserious

WaPo's headline:

Democrats, in a stark shift in messaging, to make big tax-break pitch for middle class

The New York Times article:

It takes no masterstroke of political prognostication to conclude that this [budget] proposal is very unlikely to make its way back to Mr. Obama’s desk. But in some ways, that fact makes the president’s game here that much more interesting.

Barack Obama won’t be on the ballot in 2016. But with his speech Tuesday, he will take his best stab at shaping the terms of the debate over American economic policy even once he is spending long hours on a Hawaii beach [than he already does].

Pravda on the Potomac and Izvestia on the Hudson are at odds, aren't they? What kind of person makes a "pitch" that they themselves know they can never deliver on? I mean, besides a fraudster or a con man? The Times calls this "shaping the terms of the debate," albeit terms within an Overton Window that's been firmly nailed in place since the mid-70s; the Economist calls it "pantomime". I call it kayfabe. After all, since the Democrats blew (or threw) the 2014 midterms, Obama's "rain dance" proposals don't have a snowball's chance in hell of passing, and so the kayfabe nature of the entire exercise is grossly obvious to all but the most rube-esque of rubes (or, to be fair, the most deeply corrupt of the Democratic nomenklatura). I mean, even William Rivers Pitt ("Twenty Pounds of BS in a Ten-Pound Bag") gets this.

2. The concept of "middle class" is hazy

As everybody and their sister know, election 2016 is going to be all about the "middle class" (sometimes "middle class families [genuflects]," or "hardworking [genuflects] middle-class families [genuflects]").This is called populism, which is bad, until it isn't. Here's how White House flack Dan Pfeiffer used the "middle class" concept, hammering out some framing for 2016:

"Are they going to agree on everything? Absolutely not. I think we should have a debate in this country between middle class economics and trickle-down economics and see if we can come to an agreement on the things we do agree on," [Pfeiffer] said Sunday on CBS's "Face the Nation." He said the theme of the [SOTU] would be "middle-class economics."

First, to be fair, it's nice to see Democrats making populist noises and sucking up to the left, even if we know they'll betray us again at the first opportunity, exactly as in 2006, when Pelosi took impeachment off the table, and in 2008, with the whole "hope and change" thing. Remember that? What a hoot! Not to mention handing the keys to the economy to the banksters in 2009.[1]

Now let's translate Pfeiffer: First, "middle class." I know the Beltway's idea is that every American is or wants to be "middle class," but I can assure the Acela riders from out here in the sticks that after the Obama depression of 2008 through today, there are plenty of Americans who know they will never work again, or who work part-time, often after concealing their credentials or age, or who have unwillingingly joined the precariat, gotten a crapified job after having a good one, or dropped out of the workforce permanently.[2] That's why the percentage of Americans who identify as "lower," not "middle" class has risen by fifteen points since 2008. And that's before we get to the fact that median income for "middle income" Americans decreased 5% in the 2000s, and median weath (assets minus debt) by 28% (!), according to Pew. (The Russell Sage Foundation gets the same results.) Clearly, whatever vaporware Obama's proposing won't be sufficient to make "middle income" people whole for their 28% loss, right? Or raise real wages by 5%? Therefore, when Pfeiffer claims to speak to and for "the middle class," he can't be. Then who on earth is he talking to?

For now let's approximate: At the tiny tippy-top of America's class pyramid we have the 1% (really 0.01%) of the population who own and allocate capital, at whatever level of remove, who don't (by definition) work for wages, and who "have more money than they know what do with" [3].

Below the 1%, we have perhaps 10% of the population, who do work for wages (salaries, whatever), and who do the credentialled and often obfuscatory work needed to keep the 1%'s capital ownership and allocation systems oiled up and humming: Lawyers, academics, the political class, the national security class, traders, managers, etc.

Below the 10%, we have perhaps another 10% who are 10% wannabes, like faculty adjuncts who think they're "on the way up," or management trainees, or junior partners, and so forth; people who will be very susceptible to rhetoric about a "level playing field" (so they can move up) as well as getting their elders "out of the way" (so they can move up).[4] Here I should add, as a disclaimer, that it's perfectly possible for an individual to act on principle and "against their own class interests"; see Manchester mill owner Engels; any of us will know people who do this. Political economy is complex, dynamic, and never mechanical.

I'll call (even if it doesn't quite add) the 1% + the 10% + the wannabe 10% the 20%.

And then, at the base of the pyramid, we have the uncredentialled and non-obfuscatory 80% who work for wages, and who (therefore) willl (almost) never accumulate capital. (The closest approximation they will have to capital accumulation is the housing they really rent from a bank, and look what happened with that in the crash!) The Old Mole called the 80% "working class," and why indeed not?

But to answer our question: What is this "middle class" of which Obama's flack, Pfeiffer, speaks? Sorry for the extended set-up, and also for the grossly approximate classification scheme[5]. That said, I'd argue that Pfeiffer's "middle class" is not the 80% of wage workers at all, and hence can only be the top 20%, the "pillars of the regime," who are perhaps the only people left with some pretense of being "middle class," along with doctors and lawyers who think it's hard to live in Manhattan on $200K. Why? Two reasons: First, look at the rest of Pfeiffer's statement: "See if we can come to an agreement on the things we do agree on." And what are those things? Well, things like a Grand Bargain. Or TPP. In other words, continued class warfare against the 80%: Less work, lower wages, crappier and more precarious jobs, and tossing the oldsters -- you too, kidz, faster then you think -- into the rendering tanks. Second, when we get to the spending part of Obama's proposal ("It's unlikely 'the middle class,' however defined, will be helped"), we'll see how the putative benefits of Obama's proposal actually play out, and they don't make middle income Americans whole.

3. Obama's unstated premise is that Federal taxes raise revenue (they don't)

Actually, when I just said that we have "no idea what Obama's proposals will actually achieve," I lied; his proposal does reinforce the central Big Lie in fiscal policy in the United States: That Federal taxes fund Federal spending. Since we've been over this ground many times, I'll just drop this extract (via Randall Wray) from Joe Guinan in Renewal (UK). Following a useful discussion of Gilded Age populist theories of soft money:

With the ebbing of the Populist tide, the ‘money question’ was to pass out of American politics – the last time it was effectively communicated to a mass popular movement anywhere. Given today’s self-defeating austerity and rule by technocratic elites, we could use Populism’s impulse to radical heterodoxy and imaginative audacity. And yet, in many ways we are already over the rainbow. Since 15 August 1971, when Richard Nixon unilaterally terminated the convertibility of the US dollar to gold, bringing to an end the Bretton Woods regime of fixed exchange rates, countries issuing their own sovereign currency have had in place something approximating to the democratic monetary system for which the nineteenth-century Populists struggled. The difficulty lies in the fact that we have yet to comprehend this fully – and to demand that it is used properly.

The notion of a revenue-constrained government budget in a monetarily sovereign state may be a useful fiction for conservatives and rentier capitalists, but it should not have gone unchallenged by the left. As a result, any proposal for investing in social provision, or even in efforts to prevent climate change-driven civilisational collapse, runs immediately into the killer question: ‘How are you going to pay for it?’ (Mosler, 2010, 13).

Take Jodi Ernst's official Republican response, please: "[L]et’s iron out loopholes to lower rates — and create jobs, not pay for more government spending." Then again, Obama is singing from the exact same page in the Beltway hymnal. From the SOTU itself: "Where we too often run onto the rocks is how to pay for these investments. ... Let's close loopholes... and use those savings...." So oddly, or not, both legacy parties accept a fundamental "useful fiction for conservatives and rentier capitalists."

The lack of a convincing response has meant that once again, as in the 1930s, entire populations are being subjected needlessly to an agonising period of deflation and austerity.

That there was an alternative can be glimpsed in the operations of central bankers. Even as public budgets were being slashed, central banks were pumping staggering sums of new money – hundreds of billions in the UK alone – into the financial system to repair the balance sheets of commercial banks through bailouts and quantitative easing (QE). These central bank operations are not new, but their scale is unprecedented – central bank balance sheets are now three times their pre-crisis levels (Streeck, 2014, 39) – and not a penny had to be ‘paid for’ through taxes or borrowing. ‘It’s not tax money’, former Federal Reserve Chairman Ben Bernanke explained in a TV interview: ‘The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed’ (Pettifor, 2014, 24). Free money, in other words, was made available to those who caused the crisis in the first place, but not to the vast majority who continue to suffer its consequences. The only reason governments have been able to get away with this is because of public ignorance, fostered by politicians of all stripes [including Obama, as we have just seen], of the basics of banking and money creation.

Then there is the widespread belief that government must either tax or borrow to fund expenditures, a source of the ubiquitous household analogies for public finance. As Margaret Thatcher told the 1983 Conservative Party conference:

The state has no source of money other than money which people earn themselves. If the state wishes to spend more, it can only do so by borrowing your savings, or by taxing you more. It is no good thinking that someone else will pay. That ‘someone else’ is you. There is no such thing as public money. There is only taxpayers’ money. (Thatcher, 1989, 168)

Note that Maggie Thatcher and Obama (and Jodi Ernst) are in complete agreement on this point. In fact, Obama's entire proposal could be viewed as kayfabe designed to reinforce the Iron Lady's Big Lie that "If the state wishes to spend more, it can only do so by borrowing your savings, or by taxing you more." (Once again, the Bernanke keystroking the big bucks into existence for the banks shows this to be false; in fact, the Big Lie is so obviously false, and must be known to be so by elites, that one can only wonder why Obama continues to reinforce it.)

On modern money, as on so many other things, Thatcher was precisely wrong. As Mosler points out, ‘the funds to pay taxes, from inception, come from government spending (or lending). Where else can they come from?’ (Mosler, 2010, 20). This is the crux of neo-chartalist theory: taxes drive money. For MMT, it is the levying by sovereign governments of taxes denominated in their own unit of account that provides the initial demand for a currency and allows it to become the medium of exchange throughout the economy. The logical sequence is important: ‘those who have obligations to pay currency must obtain it before they can pay, and if government is the only supplier, then government must spend or lend the currency before taxes and other obligations can be paid’ (Tymoigne and Wray, 2013, 8). Taxes, therefore, cannot be a funding source for government spending.

Ding! (I apologize for the length of the extract, but it's such crystalline prose.) The piece goes on to explain the role of taxes generally, but since this piece is about taxing the rich, I will will move on to that more limited point. Since Federal taxes don't raise revenue, we can't and shouldn't tax the rich for that reason. (We should also stop lying to ourselves about how modern money works; see Reform #7: MMT Macro-Economic Policies.) So why should we tax the rich?

4. There are good reasons to tax the rich, even if raising revenue is not one of them

There are other reasons to tax the rich: Dynastic, political, and altruistic.

1. To prevent the formation of an aristocracy of inherited wealth

The goals of conservatism -- both legacy parties are, at this point, conservative -- are well known and can be simply stated:

Liberals in the United States have been losing political debates to conservatives for a quarter century. In order to start winning again, liberals must answer two simple questions: what is conservatism, and what is wrong with it? As it happens, the answers to these questions are also simple:

Q: What is conservatism?
A: Conservatism is the domination of society by an aristocracy.

Q: What is wrong with conservatism?
A: Conservatism is incompatible with democracy, prosperity, and civilization in general. It is a destructive system of inequality and prejudice that is founded on deception [much of the work the 20% does is devoted to this] and has no place in the modern world.

Which seems about right, modulo a discussion of what "liberal" means these days that we can defer for another day[6]. Who would have thought that Reagan-era "family values" would turn out to mean dynastic family values? Be that as it may, the evidence of aristocracy congealing is all around us: Political dynasties: Clintons, Bushes, Romneys, Kennedys, Cuomos. Entertainment dynasties. 30 of the 80 richest (listed) people in the world inherited their wealth. (The New Republic, wouldn't you know, has an amusing article explaining why what's happening can't be.) The Economist points out some of the reasons behind why aristocracy is "incompatible with democracy, prosperity, and civilization":

If one assumes that an economy functions best if the most talented people rise to the top, then inherited wealth rigs the deck. There is a lottery effect; if your parents owned property, or die early (before they spend their savings on nursing care), then you have a big advantage over others who may be just as hard-working or talented. Wealthy people already pass on a lot of advantages to their children; they can afford better education, and a better environment at home (more books, quiet places to study etc).

History, as well as fiction, suggests that being born to inherited wealth is not normally a spur to greater effort; instead, life is devoted to social display or indolence. The world hardly needs a new class of Bertie Woosters.

If only our budding aristocrats led the relatively blameless, albeit coupon-clipping, life that Bertie Wooster led after winning the birth lottery! In any case, so much for the American dream:

The findings [from a study led by Harvard's Raj Chetty] suggest that who your parents are and how much they earn is more consequential for American youths today than ever before. That’s because the difference between the bottom and the top of the economic ladder has grown much more stark, but climbing the ladder hasn’t gotten any easier.

The paper suggests that “it is not true that mobility itself is getting lower,” said Lawrence F. Katz, a Harvard economist and mobility scholar who was not one of the paper’s authors but has reviewed the findings. “What’s really changed is the consequences of it. Because there’s so much inequality, people born near the bottom tend to stay near the bottom, and that’s much more consequential than it was 50 years ago.”

So, if you want a society that's truly meritocratic (as opposed to merely credentialled) you need to minimize the effects of inherited wealth. To my simple mind, that suggest the solution of making sure that there's less inherited wealth; a steeply progressive and greatly increased effective tax rate on the rich would do that.
2. To prevent the rich from buying the government

A second reason to -- let's be frank about this -- take money away from the rich is to make it harder for them to use their loose cash to buy up the government, which ought to work for every citizen, and not just them. Money has always been the mother's milk of politics, but under the hilariously nonsensical decision of the Roberts Court, which literalizes "Money talks" by treating spending as speech and radically narrowing the definition of corruption, money in politics has gotten grotesquely out of control. David Cole in the New York Review of Books:

According to the Brennan Center report, over the five years since [Citizens United and the cases that followed it], super PACs have spent more than one billion dollars on federal election campaigns. And because these organizations are free of any limits, they have proved to be magnets for those who have the resources to spend lavishly to further their interests. About 60 percent of that billion dollars has come from just 195 people. Those 195 individuals have only one vote each, but does anyone believe that their combined expenditure of over $600 million does not give them disproportionate influence on the politicians they have supported? The average contributions of those who give more than $200 to such super PACs are in the five- and six-figure range. The average donation over $200 to the ironically named Ending Spending, a conservative PAC, was $502,188. This is a game played by, and for, the wealthy.

The Brennan Center concurs:

The most stunning consequence is the influence [of Citizens United has been] that a few tycoons and other wealthy donors now wield in U.S. elections. ...

Citizens United’s most striking consequence has been the rise of uber-rich mega-donors — including casino magnate Sheldon Adelson and his wife Miriam, libertarian tycoons Charles and David Koch and liberal investor Tom Steyer. Since 2010, the top 195 individual donors to Super PACs and their spouses gave nearly 60 percent of the total that Super PACs spent — many times the amount contributed by business corporations.

These mega-donors wield more influence than either the justices or their critics seem to have expected. Adelson, for example, seems in many respects more important than most official party leaders. In 2012, he and his wife gave about $93 million. Their backing literally kept Newt Gingrich’s presidential campaign afloat. That fact was not lost on top Republican hopefuls for 2016, who gathered last March in Las Vegas for a series of closed-door events dubbed “the Sheldon Primary.”

All this is happening as ordinary Americans are giving less to political campaigns. In 2014, the number of reported federal contributors (those giving $200 or more) dropped for the first time in decades. Small donations are also down. In fact, the top 100Super PAC donors of 2014 gave almost as much as all 4.75 million small donors combined.

During this time of historic wealth inequality, individual mega-donors have more clout than at any point since Watergate.

Given that politics is about values and interests, it's not unexpected that policies would change to reflect the priorities of these 195 donors. Returning to David Cole:

The domination of electoral politics by the super-wealthy and the growing irrelevance of campaign spending limits have real-world consequences, because, as F. Scott Fitzgerald noted, the “very rich … are different from you and me.” A recent report by Demos chronicles how big money reinforces racial inequity. The rich are of course disproportionately white, and the poor are disproportionately black and Latino. The more influence that money has in electoral politics, the less influence racial minorities have. Common Cause’s report has similar findings, noting how large financial contributions have skewed the politics around several issues favored by a majority of voters, but not by big business and the wealthy, including minimum wage, climate change, and student loans.

And minimum wage, climate change, and student loans are relatively anodyne policy proposals. I wonder what those 195 people -- do you think they are in the 80%, the 20%, or the 0.01%? -- would think of the 12 Points and the 12 Reforms in their totality?

As before, the solution to "money in politics" is to go to the root of the matter: Don't try set up yet another complicated and rickety system to regulate "campaign contributions." So make sure that the rich have less to spend on trophies like politicians -- I mean, come on. Newt Gingrich? In 2012? -- with a steeply progressive effective tax rate.[7]

3. For the psychological and spiritual well-being of the children of the rich themselves

We know that money can't buy happiness, but as it turns out, money often brings unhappiness. (Ask any lottery winner.) This is true for many rich kids, as Suniya Luthar writes in Psychology Today:

In the mid-1990s, I was recruiting youth in a prosperous suburban community in the Northeast as a comparison sample for a study of inner-city teens. Much to my surprise, the affluent teens turned out to fare significantly more poorly than their counterparts of low socioeconomic status on all indicators of substance use, including hard drugs. I later replicated those findings among 10th-graders in a different Northeast suburb. And other researchers have since corroborated the findings of high alcohol use, binge-drinking, and marijuana use among offspring of well-educated, white, high-income, two-parent families.

But substance use is not the only errant behavior among the children of privilege. Crime is also widely assumed to be a problem of youth in poverty, but I have found comparable levels of wrongdoing among well-off suburban students and inner-city youth. What does differ are the types of rule-breaking—widespread cheating and random acts of delinquency, such as stealing[8] from parents or peers, are more common among the rich, while inner-city teens are apt to commit crimes related to self-defense, such as carrying a weapon.

Luthiya continues:

The children of wealth have serious internalizing problems as well. In 1999, I reported significant depression in one in five girls. Since then, studies I have conducted show that, on average, serious levels of depression, anxiety, or somatic symptoms occur twice as often or more among these boys and girls, compared to national rates.

Such problems are not confined to the East Coast or to schools in suburbs. We have studied private schools in large cities and affluent communities in the Northwest. Students in the Northwest did not show the extremes of substance abuse we observed on the East Coast (where rates of being drunk in the past month were about twice those of national norms), but they did display high levels of depressive and anxiety symptoms, self-injurious behavior such as cutting and burning, and rule-breaking behaviors. The bottom line: Across geographical areas and public and private schools, upper-middle-class youngsters show alarmingly high rates of serious disturbance.

The high rate of maladjustment among affluent adolescents is strikingly counterintuitive. There is a tacit assumption—even among those most affected—that education and money procure well-being, and that if children falter, they will swiftly get the appropriate services. ...

I have spent the last decade researching why this is the case. The evidence all points to one cause underlying the different disturbances documented: pressure for high-octane achievement.

(The Thomas Gilbert case is, then, an extreme case of a phenomen that's class-wide -- that occurs in the 20%. It's also interesting to imagine what happens when the so-called "Boomers" whose wealth hasn't been destroyed pass their inheritances on to the next generation of lottery winners.)

Again, the real answer is not to palliate, but to attack the problem at its source: A steeply progressive effective tax rate will make sure the rich have less financial muscle to put pressure on their kids, who may as a result actually have time to be kids.[9]

5. We don't know how much Obama will really tax the rich

Just for starters and for comparison purposes, here's what the income tax looked like during the Eisenhower Era. First, there's that famous 91% top rate. From Joseph J. Thorndike, "Soak-The-Rich Republicans? The Puzzling Persistence of High Tax Rates in The 1950s":

In recent years, the apparent paradox of 1950s taxation – high rates coupled with high growth–has received a lot of attention from contemporary analysts. The era seems to demonstrate that high tax rates are not, in fact, a danger to prosperity. “Growth was actually fastest in years with relatively high top marginal tax rates,” observed Michael Linden of the Center for American Progress in 2011.“ Back in the 1950s, when the top marginal tax rate was more than 90 percent, real annual growth averaged more than 4 percent. During the last eight years, when the top marginal rate was just 35 percent, real growth was less than half that.”

Thorndike goes on to warn that "mining the past for policy business is a tricky business," and I agree. However, we note there is nothing remotely as progressive as an the Eisenhower marginal rate on offer from Democrats, including Obama.

More centrally, it's not the marginal rate that matters, but the effective rate -- that is, the amount the rich actually write a check for after gaming the system taking their deductions, and doing whatever else it is their (20%) accountants tell them to do. Here is IRS data [PDF] from 1992 to 2012 for the top 400 taxpayers (the 1% of the 1%): You can see that their effective has been steadily decreasing:

I like this chart because it's not just an average; it breaks out the changes in the effective tax rate by tax bracket. Unfortunately, I'm not enough of a spreadsheet jockey to turn this into an eye-catching chart (readers?), so all I can do is appeal to you to look at the numbers: In 1992, we had six of the top 400 in the 0 –10% effective rate category; and in 2012, we have 32. For 10–15%, 10 in 1992, 147 in 2012. In 25–30%, 234 and 28, respectively.[10]

So, if Obama's budget proposal really is a "Robin Hood" tax plan that "would take from the rich and give to everyone else," as Politico claims, what would you expect to see? That's right, you'd expect the effective tax rate on the rich to go up; you'd see moving more people to the top brackets of the effective tax rate set as a goal. That's the litmus test; and none of this "pay their fair share" weak mushmouth shit. Will we see that? Let's go look. From AP, this is Obama's SOTU tax proposal (we'll get to the policy proposal later):

—Eliminate a tax break on inheritances. The White House says the provision costs the government hundreds of billions of dollars in annual tax revenue.

—Increase the total top capital gains rate on couples with incomes above $500,000 to 28 percent, what it was under President Ronald Reagan [and why not Eisenhower?]. The top capital gains rate has already been raised from 15 percent to 23.8 percent during Obama's presidency.

—Impose a fee on big financial firms, those with assets of more than $50 billion. The White House said the idea is in line with a proposal that was in a comprehensive tax overhaul plan unveiled during the previous session of Congress by then-Rep. David Camp, R-Mich., at the time the chairman of the tax-writing House Ways and Means Committee.

Raising the capital gains rate, ending the break on inheritances and imposing a fee on financial firms would generate $320 billion in revenue over a decade, according to administration estimates.

So where's the beef? Leave aside the fact that (putatively) helping people by jiggering with the tax code is a classic Repblican ploy. See anything about the effective tax rate? No? So Obama's plan is all bullshit, all a con. If taxing the rich is the goal, we simply have no idea what Obama's proposals will actually achieve. We don't know the bottom line! Sure, I'm seeing some figures about "billions," but that's not an effective rate. Suppose Robin Hood took ten shillings from some Lord's money chest. Wouldn't you want to know the effective rate? Were those ten shillings 10% of what was in the chest? 1%? 35%? 90%? Of course you would. What we want is a steeply progressive effective tax rate. There's no way to tell whether Obama's proposals will achieve that, and Obama doesn't go there. But what are the odds?

6. Obama's proposals are unlikely to help "the middle class," however defined

Here are the bullet points. Why Obama would want to combine small ball with kayfabe is beyond me, but that's our Democrats.

—A new $500 "second earner" tax credit for families where both spouses work. An estimated 24 million couples would benefit; the credit would apply to families with annual income up to $210,000.

—Expand the child care tax credit to up to $3,000 per child under age 5. The administration says the proposal would help more than 5 million families pay for child care.

—Consolidate six overlapping education tax breaks into two. Republicans have been open to the idea of streamlining education tax breaks.

—Expand the Earned Income Tax Credit to workers without children and to noncustodial parents.

—Boost retirement savings by automatically enrolling in an Individual Retirement Account people who don't have access to a workplace retirement plan, and expand access to employer retirement plans for certain part-time workers.

Let's start with the last point: Nudging people into IRAs. We've already noted that middle income wealth decreased 28% after the Crash and during Obama's "recovery" [snort], and vaporizing retirement savings, and IRAs in particular, was part of that. In 2008:

Chances are, 2008's market meltdown did a number on your retirement portfolio. Misery had plenty of company. The year's 401(k) and IRA account summaries have been rolling in, and they don't look pretty: In 2008, employees, on average, lost 14 percent—or about $10,000—of their retirement savings, according to Hewitt Associates. Some lost much more. Fidelity, the nation's largest retirement-plan administrator, says the average balance in its customers' accounts dropped $19,000 in 2008.

So if you were thinking of retiring in 2008, good luck with that, pal. You just lost the lottery. But the overall effects were much worse and persisted longer. From Alicia H. Munnell and Matthew S. Rutledge, "The Effects Of The Great Recession On The Retirement Security Of Older Workers" [PDF]:

The Great Recession had a profound effect on the retirement security of older Americans, and the slow recovery from the downturn will have a lasting impact on their quality of life. The nature of today’s retirement system left older households exposed to the collapse in the equity and housing markets, and induced many to plan for a later retirement. Instead, more late-career workers experienced job loss than in previous recessions, often with long jobless spells, encouraging record numbers of early Social Security retirement claims and disability applications. Going forward, workers who lost a job can expect lower earnings and more instability, and potentially poorer health. Even households that avoided job loss will have less money available for spending in retirement due. ...

In the case of 401(k) plans, participants took a direct hit. Individuals saw the value of equities in their 401(k) plans or IRAs decline by $2.8 trillion [in 2007-2009]. ....

By 2013 – the date of this writing – the stock market had returned to its previous peaks. This development will certainly increase 401(k) balances. But as shown in Figure 3, older workers have essentially experienced six years (2007-2013) of no return on their equity investments.

They call it an investment vehicle because it's designed to drive off with your money, right? Whatever possessed Obama to double down on the disaster of privatized retirement instead of strengthening Social Security, where you can retire when you need to retire, instead of waiting your winning ticket from the stock market lottery, if indeed there ever is one. Why, I can't imagine:

Move over, 401(k): IRA fees are what really hurt

You've likely heard the complaint: Retirement plan fees are too high and are cutting into your long-term investment returns. Even if you haven't heard it directly from Jack Bogle—and didn't see the "Frontline" examination in which the Vanguard Group founder was featured lambasting the 401(k) industry for fee-gouging—you've probably been convinced somewhere along the way that 401(k) fees are excessive.

But what about individual retirement accounts (IRAs)? If you don't hear as much about high IRA fees, you should listen up. ...

"IRAs, where 401(k) assets unfortunately end up, have as high if not even higher fees on average," said Mercer Bullard, a law professor at the University of Mississippi School of Law and longtime critic of the fund industry.

From that Frontline documentary:

It’s all about fees. While reporting on retirement plans for FRONTLINE, nothing has been more surprising to me than the corrosive effect of fees on our retirement savings.

It’s this simple: Fund fees can erode as much as half or more of your prospective gains.

"It's all about the fees." Indeed. So what Democrats are billing as "middle-class economics" is really a scheme to divert more fees to the finance industry. What a shocker.

[Here let me pause to throw up a little in my mouth.]

So, summing up: I questioned what Democrats meant by "middle class," and claimed they meant the 20% (and not the 80%). Now we see my claim is true. Obama's proposals are designed to benefit what they call "the middle class." Therefore, to know who they think the "middle class" is, we only need to look at who benefits from their poposals. As it turns out, the 20% benefit a lot: Rentiers and brokers get a ginormous giveaway, in terms of a huge new wave of IRA fees. The fees also amount to theft from the 80%. And the 80% get some scraps and crumbs, just enough for the 20% to salve their consciences; they get Bill Clinton-esque "school uniform"-scale "second earner tax credit," "child care tax credit," and "streamlined education tax breaks" (although, to be fair, expanding the Earned Income Tax Credit isn't such a bad thing, even if this expansion doesn't affect very many people). Ergo, by "middle class," Obama and the Democrats mean the 20% (the "pillars of the regime"), not the 80% (the working class). QED.

7. Concrete material benefits should be our focus, not a "tax fight"

Finally, since this theory-of-everything post is already way too long, I want to say a word about the "tax fight" -- "trickledown economics vs. middle-class economics," as Obama's flack Pfeiffer puts it -- that the SOTU, IMNSHO, seeks to put in play. (You can bet you'll hear lots of squealing from the 1% if Obama's tax proposals get even a semblance of traction, but as we have seen, if Obama doesn't set a steeply progressive effective tax rate as a goal, and then follow through on it [snort], it's all kayfabe.) As I wrote:

Ultimately, people support government programs because they deliver concrete material benefits; that's why programs like single payer in Canada or the NHS in the UK or Social Security and Medicare in this country are hard to dislodge, no matter who hard the neo-liberals work to degrade, privatize, and loot them.

And programs that deliver concrete material benefits are hard to dislodge because they develop constituencies and institutions that support them. Show me the enduring constituency for (say) a steeply progressive tax code! There isn't one. And why? No concrete material benefits for voters, that's why. Suppose the Piketty media boomlet turns into a constituency of sorts. Show me why that constituency is going to end up more powerful than a program like Social Security, that sends you a check in the mail (even today), or a program like Medicare, that gets you medical care (even today).

That's why the best course is the one that Wray advocates: Pre-distribution. I'm a big fan of "Show me the money." "Show. Me. The. Money." Pre-distribution shows me the money. Messing about with the tax code does not. I can read about a "tax fight" in the papers, but at the end of the day I have to ask a question: "And I get?" What do I get out of your Distributionist plan? Read it through, and you'll see the answer: Nothing. Zip. Zilch. Nada. A big fat zero. Actually, to be fair, I get the good feeling of having taken revenge on evil-doers (and evil they are!). But feelings don't pay the grocery bills, and a check in the mail does. Show me the money! (You can't, because Federal taxes don't fund spending anyhow). And I get? The only answer is nothing. I read the proposal, and there's nothing in it for me.

Now, to be fair, Obama's SOTU didn't offer "Nothing. Zip. Zilch. Nada." He offered some small-ball tax breaks and humongous giveaway, via the IRA system, to the finance sector. That said, the Bolsheviks won their campaign on the slogan: "Peace, land, bread": Concrete material benefits that the Romanov dynasty could not deliver. They did not campaign on Tsarist taxation. Nor should we.

Conclusion

The strategic point of Obama's SOTU is to reinforce a Big Lie: That Federal taxes fund Federal spending. Even though the political class has agreed to pretend that they do, they don't. Tactically, the SOTU is meant to set up a "tax fight," to -- modulo the Big Lie -- redistribute income from the rich to the "middle class" (however defined). As we have seen, the only useful metric for the tax aspect of "redistribution" is a steeply progressive effective tax rate, about which Obama has nothing to say. And as we have seen, the spending aspect of Obama's proposals falls far short of any possible "defense" of the middle class, which would involve some reasonable approach toward making them whole from the Crash. However, Obama's proposals do benefit the 20%, so we can only conclude that the Democrats mean the 20% when they say "middle class." Finally, for the 80% -- the working class -- the appropriate "pitch" is not a tax fight, but "what you get with a basic life" in America. The 12 Point Platform provides a basis for such a pitch.

NOTES

[1] I mean, it's not like there isn't a history here. There is exactly one way to prevent the Democrats from betraying the left: Fear. The Democratic leadership must fear that the left will cause them to lose elections. As Ian Welsh formulates the issue: "The left must be seen to repudiate Obama, and they must be seen to take him down." I would urge that the left repudiated Obama in the 2014 midterms, but passively, by staying home, just as in 2010. This time, as opposed to 2010, at least Democratic insiders seemed to recognize what happened. Or maybe, since a shit ton of their precious Blue Dogs got vaporized, "they have no place to go." A happy thought! Nevertheless, the "be seen to" part is just as hard for those who remain Democrats as the "repudiate" part, maybe even harder, because of tribalism, personal ties, etc.

[2] Fun fact: "Hiring from oil-producing states such as Texas, Oklahoma and North Dakota has accounted for 67 percent of U.S. jobs growth since 2007, data compiled by Bloomberg show" (hat tip, kimsarah). In other words, Democratic loyalist and Obot triumphalism on the disemployment numbers, even as it generally ignores the labor force participation rate, is based on the fracking bubble. I wonder how that's going to play out?

[3] I think that "have more money than they know what do with" is the layperson's way to say that the rich have a lower marginal propensity to consume. But that's treating wealth as income as opposed to capital, and the rich have more capital than they know what to do with, too. If we look at the farcically bad capital allocation in the series of bubbles we've had during the neo-liberal era, there's no special reason to think that the capitalist class is doing an especially good job at their main social function, if that be defined as anything more than corruption and looting -- the MacMansions of the housing bubble are an excellent example, as is sending all the good jobs overseas, as are the endless wars, domestic and foreign -- and so perhaps they need "as much money as they know what do do with," i.e., a lot less.

[4] It's a sign of the weakness of my analysis that I can't come up with a good word for the 20%. The comprador class? The bullshit class? It might be best to think of the 20% as "pillars of the regime," with the understanding that pillars of the regime are there to be split. For example, there are academics who are working for what IMNSHO is the right sort of change, as well as neo-liberals with bad recto-cranial inversion problems in the Economics Departments at the Ivies. So whatever name we eventually adopt, it's got to serve that splitting function, and something too pejorative (the "bullshit class") won't do that. The "narrator class"? We sometimes forget that narratives in politics involve real lives, not fictional ones. The White House Iraq Group, for example, was clearly creating a narrative, even if it was a mis- and disinformative one. The "information class"? Here is a diagram from 1912 (in French, though oddly printed in Cleveland):

This pyramid not, of course, the master key to 21st Century social relations. To take one obvious example, what about Flexians? This pyramid also omits the vexing case of "small business owners," like the owner of my coffee shop, or me, wearing my landlord hat, who look an awful lot like capitalists, and may even identify that way, but when you factor in all the hours and all the costs, look a lot more like self-exploited wage workers with a comforting set of illusions about how they allocate their time.

In any case, I like the fact that this pyramid names the "classes" (levels) by function ("We rule you," "we fool you," "we shoot at you," instead of the vacuous income-based "upper," "upper middle," "middle," "lower middle," and "low" categories, of which we'll see an example further on in the main piece. Why, it's almost as if those names were chosen to obscure relations, rather than describe them! The moral of this footnote is that I need to do some serious analytical work at some point, and start drawing diagrams of (intersectionality and) class power, backed by some really solid set membership functions. This effort really is turning into a book.

[5] This chart from Pew (via Hope Yen of AP) in 2008 is suggestive:

Of course, this chart is based on self-identification as upper, middle, or lower "class" based on income, not on social relations (i.e., working for wages or not). Still, it looks to me like I've got a correct though crude approximation: My 80% working class is this chart's 53% middle class + 25% lower class; my comprador/bullshit/information/pillars of the regime class is this chart's "upper class"; and it is this 20% that Obama is addressing as "middle class." Confusing, eh? It's almost like we as a society don't want to think clearly about this stuff.

[6] I suggest a simple operational definition: Support the 12 Points and 12 Reforms in their entirety.

[7] In this section, I've focused on individuals (the 195). Campaign finance reform advocates often raise the issue: "But what about corporations?" However, I'm told that, at least where the corporation is owned by private equity, the corporate contributions are done at the behest of the investors. In other words, the corporation is a straw for the individuals who control it. ("Soylent Green is people.") Note that The 12 Reforms include #4: Public Campaign Financing. But public financing alone won't be able to "get money out of politics", should such a thing even be possible; there are too many other ways to purchase (the simulation of) loyalty besides campaign contributions.

[8] As so often, what we consider education doens't occur in school.

[9] In making this argument, I do confess to some amusement at the delicious "for the children" framing. However, I would never wish the terrible suffering of depression on anyone, and so my point is, ultimately, quite serious.

[10] Not all the cohorts have decreases as radical as those I called out; since the sample size of 400 is so small, I assume personal preferences are showing up. Nevertheless, it's clear how the center of gravity for the effective tax rate changes for 0.01% squillionaries, considered as a class.

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nippersdad's picture
Submitted by nippersdad on

Though it found its' way into a conversation just this afternoon. Very useful stuff!

I told you that you were a good analyst.

Submitted by lambert on

I've got two worries:

1) I'm not sure I got the list of "tax breaks" putatively middle class programs right; so the balance between the IRA fees (for 20%) and the rest (for 80%) may be off. But no time to go back and looking for detail now, with the cesspool of Democratic corruption at the Post Office to look at;

2) The name for the 20%, which is a grab bag for a lot of classes/flexian networks/families, factions. I'm leaning toward "pillars of the regime" but which does make at least one of their functions clear.... What it does not make clear is the flow of rents, which when I posted on the Minimum Wage, was something Okanagen among others insisted was critical, and I agree.

nippersdad's picture
Submitted by nippersdad on

FWIW, historically, the middle classes were most simply defined as those who have the resources to employ servants but lack much in the way of plant/capital. Marx employed both a maid and a manservant (on Engels' dime) purely so that he would be able to call himself middle class (and so that he would have someone to sleep with, but that is another issue). I always thought that ironic.

Anyway, I believe that the term has been debased since the 50's to create the concept of an all inclusive "American Dream". And it was so successful (in a more supposedly egalitarian, or, at least, one that seeks to define itself that way, society) that virtually everyone considered themselves as some form of middle class just prior to the crash.

Long way of saying that perhaps your task would be more easily understood in a much simpler Edwardian frame, wherein the people who actually were the pillars of the regime ALSO lived on their rents and everyone else just worked for them (wage labor), or died, or went into prostitution, or crime......Those were your options: abject poverty or wage labor (around eighty percent), living on rents (around fifteen percent) and/or capitalists (around five percent) owning the infrastructure at the top.

Your points look like classic wealth distribution in an end term capitalist society to me. I think that in your book, were you to footnote the IRA stuff in some way and streamline the main points you would get more input from readers because the underlying info is dense and wonky in a way that people like myself are unused to. Who, short of experts in a series of fractured fields, is going to argue your points?

Just my .02, and prolly worth about that. :)

Submitted by lambert on

Saw this over at NC:

You can tell how you rank in society by whether you’re encouraged to work harder by being paid more or being paid less…

I think that might actually be true, and if it were, that would be nice, since you could look to non-wage forms of payment (like bonuses or fees) as an objective litmus test. Speaking engagements would be a big one, perhaps.

nippersdad's picture
Submitted by nippersdad on

Hillary Clinton prolly has a speechwriter so that she can spend more time with the Davos crowd. So much of their "work" is outsourced that they could more properly be viewed as amalgamators or front men than workers.

Look at the Treasury nominees: it is so clearly viewed as being ones' turn in the barrel to the degree that they are paid millions in bonuses just to undertake it. That is not working harder, that is just a corrupt investment looking for future profits.

I think that they are outside your purview in that they really cannot be viewed as workers in the strictest sense. These are gatekeepers, pure and simple, and that does not require much sweat equity or even intellect these days. It is just Bertie Wooster fulfilling his Aunt's (the establishments') wishes at this point. Mario Draghi is about to get shot in spite of how well he has been paid for his performance; prolly by those who have been paying him. Versailles is a pretty building, and was a radical departure in cultural management of the Nation state in its' time, but Louis Jr. (and his friends) still lost his head in the end. The rich, as F. Scott so famously said, are different from you and I. They and their motivations are quite beyond description for most of us which is why their works are so endlessly fascinating. As with the flu virus taking over the biological system to propagate itself, the strategem works only so long as the virus does not become too deadly to the larger host of organisms.

Political expendability is an issue as well.

They are a given, almost a caricature, at this point. I think I would concentrate a little lower on the social scale; something less parasitic and a little more accessible to the real world view that most actually possess.

Submitted by lambert on

... than we have to include the capitalists in the flows. There's no other way. I don't want to concentrate on their cultural minutiae, except for polemic purposes when they behave badly (another way of saying I don't want to be reactive anymore).

nippersdad's picture
Submitted by nippersdad on

though. Were all of the QE out there to be dumped into the real economy we would be carting around thousand dollar bills in wheelbarrows to buy a stick of gum. The issue with bringing the upper crust into the conversation is not merely cultural, it is economic as well. They truly live in a different world than we do, and I have to wonder if their inclusion would unnecessarily skew your points on how to get the real economy working for real people.

Speaking of lopping off an entire socio-economic entity, I sent an op-ed to my rep. yesterday and asked him for his input prior to publication. As I specifically called him out as a traitor and then pointed out the legal remedy for such in the piece, it will be interesting to see how he reacts.

Submitted by lambert on

Well, I'm not sure about that. Income is not the same as capital. That said:

1) It's well known that the multiplier effect is way smaller for rich people's income, since they tend to hoard it or spend it on yacht covers, whereas the 80% go out right away and spend their income on things that keep the economy humming, like food, home improvement, yadda yadda yadda

2) It looks to me also that we're undergoing a classic "overproduction crisis" in that we have a lot more capital floating about than can be invested for what capitalists regard as a reasonable rate of return. The usual answer is to destroy a lot of capital and then rebuild. And the usual technique for that is war. However, (a) even our insane elites think twice about a world war, because nuke (hmm. Mars? Montana compounds?) and (b) the sort of war we have evolved -- special forces, drones -- doesn't destroy enough capital

3) Yes, QE had no effect on the real economy; the "loanable funds" theory is and always was a steaming pile of crap; and if (per point 2) there's no place to invest it (from the perspective of capital) it wound't. Hence, nonsense like Uber, and so on.

All this said, capital is a flow. I need to integrate, mentally, the entire flow, which actually and literally flows through people's bodies IMNSHO (and how else, when you think about it?)