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Friday, October 14, 2011

More on Occupy Wall Street

There has been a lot of discussion on the facebook pages of friends of mine regarding the core reasoning behind the Occupy Wall Street movement.
I appreciate it when people challenge my views because they force me to reinforce my ideas with critical analysis and research.

I have one friend who is obviously very much against the entire movement and believes that the root causes that people are upset about are manufactured. This friend has challenged many of my positions on the movement and, as a result, I have done more research including crunching some solid numbers.

This post is all about those numbers.

One of the major tenants of the 99%'s complaints is that the value of their income is decreasing with each passing year.
One of the major counter arguments against this opinion is that in the past 20 years the minimum wage has gone from $4.15 to $7.25 an hour. This amounts to a raw 75% INCREASE in the raw number value. The people who disagree with the OWS movement demand an explanation about how a 75% increase in the raw figure can possibly be considered a decrease in effective wages.

Here is how:
The first thing that one must acknowledge is that $4.15 in 1994 is equivalent to $6.25 in 2011 money (You can check for inflation-corrected values here). $7.25 is higher than $6.25 so it still APPEARS that the minimum wage is a better deal to those confined to it for their incomes.

But they are not better off because the costs of living NOT rolled into the CPI exceed the increase in pay.

Here are the core comparison points that need to be considered when examining the minimum wage differences between 1994 and today:

1. The number of people on minimum wage in 1994 for whom the minimum wage was their primary household income is different from the people today for whom that is a reality. There are more people today trying to earn a full living for their families on minimum wage and fewer trying to merely supplement the household income on that pay scale. Lower pay works great for supplementary jobs (and jobs of people whom are not supporting themselves) but it is hardly a means to generate wealth for the primary "breadwinner" of a family. I will readily admit that I have not done the research to back up this perception, but I do believe that research will support the assertion that more primary incomes are on minimum wage now than ever before.

2. In 1994 there were still many companies that provided pensions for people who had worked for them for the duration of their careers. This was a no-cost benefit that the companies provided as a reward for loyalty. This was in the age of people working for a single employer for their entire career. Those days are gone. Pensions are almost entirely extinct and people must contribute to the retirement plan in order to get anything out of their employer toward retirement. This means that a benefit has been removed from the base pay of 1994 and it has been turned into a cost. This affects the effective pay on both ends: decreasing compensation AND increasing cost of living.

3. Health care costs have risen far faster than many other things in this country. The CPI accounts for some of this change, but it does not account for other aspects of it. The raise in the cost of health care is an added adjustment for many. Furthering this is the growing trend for employers to provide smaller and smaller percentages of the healthcare package as a benefit. If one includes ALL increases in cost of healthcare as part of the CPI-adjusted purchasing value of the dollar one still must consider whether or not a particular subject had full coverage provided for them in 1994 but must pay a portion of it now.

4. New costs that are considered essential have appeared in society. In 1994 the idea of going without electricity or a home phone was ludicrous. People assumed that everyone had both of these items and to NOT have them meant you were excessively poor or truly eccentric. Today the home phone has migrated to a cell phone, electricity is just as important as it was in 1994 (more so) but there is a new core utility: internet service. Many people can still get by without this new utility but children in school are finding that their schools are relying more and more on internet-based tools and content to save money on supplies and textbooks. To have a school-aged child in 2011 without home internet access is just as irresponsible as having no telephone was in 1994. This is a NEW expense and, therefore, the CPI does not incorporate it into the adjusted buying power of the dollar.

5. A budgetary affect that occurs only for people who have children is that of school supplies. When I was in school there were a great many supplies supplied by the school. In 2011 economic conditions have forced many schools to scale back on the supplies that they have available to students at no charge. Each and every piece of paper, pencil, pen, etc that a family has to purchase for their school-aged-children that they did not before is a new cost that is not included in the CPI. This new cost varies widely by school district and age group so it cannot be a standardized item that is applicable to all.

6. Additional government fees and regulations applied to the individual. An example of this is the state in which I live. In this state there is a car inspection. There has ALWAYS been a car inspection for the entire duration of my life. I currently possess a vehicle that will not pass inspection this year. The estimated repair cost is $2,000 for one of the problems and an unknown amount for the other. in the mid 90s I drove cars that were in worse condition that the one I am referring to now. I drove them and they passed inspection each and every year. The inspection criteria have both gotten stricter AND been more highly enforced. The reasoning for this is that each inspection attempt generates a fee (which has more than tripled in size since 1994) regardless of the pass or fail status. Each failure generates a list of work that MUST be completed to pass inspection. That work generates a sales tax. The net story is that the state has increased the fee AND made passing more difficult in a way to force more business to automobile service providers AND generate more tax revenue. The end result is that many people are driving cars without valid inspections because the "bogus" safety violations are NOT a danger to anyone and are too costly to fix. This is a cost that is NOT rolled into the CPI because it is an increase in the volume of car repairs required and not simply an increase in the cost of the car repairs themselves.

7. There is also the factor of the average debt load of the average college graduate. Those entering the work force from college now are bringing an average debt load of approximately $23,000 with them. Compare that to the rates of approximately 10 years ago and you see a nearly 77% increase in the volume of debt that people START their professional lives with. That increase in debt means an increase in debt payments which, in turn, is a decrease in the available money for other living expenses. At 5% interest for 15 years this increase in debt load translates to an increase of $79 in monthly payments. This alone is approximately equal to $.49 / hour in pre-tax income. That, alone, is nearly half the surplus generated by the new minimum wage as compared to the equivalent buying power of the minimum wage in 1994.

When you add up all of the factors listed above it rapidly becomes apparent that the $.90 hourly discrepancy between the effective $6.25 per hour and the actual $7.25 per hour is completely consumed by new expenses and items not covered by the CPI adjustment.

I am a solid example of this situation. I checked the factors listed above (salary, retirement planning, healthcare provision, etc) along with the expected time at work for the job I held in 2003 and the job I hold now. I did the inflationary adjustment on the 2003 figures. The end result is that my post-healthcare, post retirement planning, post taxes current income is a 49% reduction in buying power as compared to that of the position I held in 2003. Is my current gross pay higher? Yes but the effective purchasing power of my money is significantly less after all of my critical expenses are adjusted for.

One of my friends who is critical of the movement directed me to a "fact checking" article that did its best to normalize all of the tax revenue data for all income earners in this country. The end result of that article was the claim that the top 1% (who own 40+% of all the wealth) pay their fair share of the income taxes at 32.1% of the taxes and that that means that they are only earning 32.1% of the income. That article, at best, is reporting the figures on the IRS-labeled taxable income; at worst it is blatantly warping the data to misrepresent the wealth distribution. Either way, the math is just-plain-WRONG. In a situation where there is a volume of wealth and a means to both increase and decrease that wealth (income and expenditures) each and every year the net volume of wealth of any population group will asymptotically approach the income value for the group. If the income is below the wealth holdings then the holdings will decrease over time until they equal the income level and vice-versa. I believed this to be true and then I build a spreadsheet to prove it (the non-pretty version is here). If you adjust the starting amounts (currency, not percentage) for each of the population group's starting cash, income and outflow you will quickly see that if the income % is above the owned percent then the owned percent rises and if it is below the owned percent the owned percentage falls. You will also see that for any one group's net ownership to go up another group's wealth must fall by an equal amount. This is a VERY simple model but it is effective at demonstrating the core principles at work.

These are the reasons that the bottom 99% are unhappy. These are the seeds that led to the OWS protesting. These seeds have been properly cared for and watered to germinate into the full protest movement against the upper class because the actions of the upper class over the last decade have generated a greater squeeze on the already tightening budgets of the middle class. When pensions are being cut and life-savings are being drained from corporate holdings while the CEOs are taking multi-million dollar bonuses there is a HUGE problem. When bankers are developing schemes to trick (yes, stupid) investors into borrowing more money than they can afford to pay back and then foreclosing on their homes and making them homeless there is a problem. When corporations are making bad business decisions and losing all of their customers only to receive a handout from the government because they are "too big to fail" while smaller companies have to make it on their own there is a problem. When mega-corporations are receiving bail-outs from the government and the executives in charge of the companies are still collecting salaries that are many times that of the average worker there is a problem. When one of the richest men in this country (Warren Buffet) is stating in no uncertain terms that the loopholes in this country's tax codes allow him to pay a much smaller percentage of his income in income taxes than ANY employee he has while he has the greatest level of disposable income in the company there is a problem.

I am not advocating that all of the wealth be evenly spread out for that would result in a larger problem than we have. I don't care if the top 1% own 40% of the wealth. I care that the remaining 99% be able to live and survive on what they have. I want the taxation to be applied equally for all, regardless of what income bracket they are in. I want everyone to have their chance to work hard and save and make their own lives better. I want an end to people getting further behind the harder they work because that leads to a self-perpetuating system of poverty that the masses CANNOT escape without a violent revolution (see the French Revolution and half the current conflicts on the African continent for details). I want to avoid a situation where the ultra-wealthy have sequestered money above their threshold of being able to reasonably spend it because that capital gets locked away and ceases to power the economy. The economy requires money MOVE. Once people reach a threshold where they cannot spend all of their income their savings rocket upward and the volume of money that is poured back into the economy decreases.

When greed runs unchecked the problems of society get magnified and destabilization occurs. Greed has been running unchecked in this country since about 1986. It has finally caught up with us.

There are MANY historical examples that closely mirror the current situation that all lend support to the feelings behind the OWS movement. The times leading up to the Great Depression, Germany after WWI, the economic crunch in the mid 1800s in the US (broken only by the HUGE inrush of capital from the gold rush in the Rockies), the economic conditions that led to the revolution in Russia (allowing communism to take root), the economic conditions that led to the French Revolution, the banking crisis in the 1300s that destroyed the European economy so completely that we suffered the 400 years of the Dark Ages.... the list continues onward. All of these historical events have economic forces that drove them, all of them have similar scenarios to where we are today in this country.

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