Wednesday, July 28, 2010

American Middle Class - Shrinking?

I decided to look into this issue and publish a post as result of an eye-opening article just written by Michael Snyder in "The Business Insider" in which he concluded that the "middle class is being systematically wiped out of existence in America!" I'm quite aware that the bulk of the commonly called "middle class" is being greatly challenged to survive and prosper these days. However, I'm skeptical of his claim about its imminent extinction, and assume Snyder was probably exaggerating to better gain our attention.

I've learned that President Obama also has significant concerns about this subject and, as a result, as presidents often do, established a Middle Class Task Force under the leadership of Vice President Joe Biden, soliciting ideas from his domestic policy advisors and other people around the country on how his administration should deal with this. Among unspecific initiatives they have in mind so far to promote are creation of a great many new green jobs, supporting high tech manufacturing, and making college more affordable for middle class families.

Who are members of the "middle class"? To effectively analyze this issue and come up with meaningful conclusions, it's helpful to have some definition. We all know "middle class" refers to people who economically speaking are in a broad group in the middle of the population strata, generally considered neither rich nor poor. Some would call the "middle class" just average Americans. Can we be more precise? Yes, although there doesn't seem to be a single definition broadly accepted by sociologists, politicians, and other academics.

Some sociologists think in terms of three classes: "lower income and poor Americans", middle class, and the "rich". Others like to divide middle class into lower and upper. Although the dollar amounts vary over time and also where in the country one lives, lower income and poor Americans tend to have household income, assuming they're employed, up to between $35,000 and $40,000 annually. Generally the employed are blue-collar workers with education up through high school, but usually not more.

The lower middle class tends to have household incomes between $40,000 and something like $80,000, and upper middle class between roughly $80,000 and up to around $200,000. The great majority of these middle class people have high school diplomas and at least two years of college. Many have college degrees. Of the so-called upper middle class, the majority probably have college degrees and often also a graduate degree.

Middle class Americans tend to be managers, supervisors, or professionals, including small business owners, doctors, lawyers, accountants, computer programmers, architects, and politicians, among many others. Financial writer Liz Pulliam Weston has offered another definition of middle class as being those "having the resources to cover all your needs and some of your wants, plus the ability to save for the future." I have no disagreement with that generalization. We can add that while middle class members can have some of their wants, they can't have everything they want!

The rich usually have inherited a lot of money, or have, or have had, incomes well above $200,000 annually, often many millions. Usually they have substantial personal assets in the form of expensive residences, stocks in large companies, and other financial assets. Virtually very brokerage, financial management and private banking firm seeks business relationships with the rich, due especially to their substantial financial assets.

Each firm has their own minimum standards for investable funds and standards to achieve their "preferred", "premium" or "Gold Star" client status, which often gets them waivers for most transaction fees and much more personal service from an experienced adviser. The absolute minimum is usually a portfolio valued at between $100,000 and $500,000. To achieve the higher preferred status, minimum required investable funds tend to vary between $1 million and $10 million. The rich tend to be successful business owners, current or former very senior executives in big companies, real estate investors, or elite professional athletes, authors, actors, and other major popular artists. Occasionally they may also include some successful professional gamblers and major lottery winners!

I haven't seen a current official breakdown of households in these three classes, but, after reviewing some dated surveys on the subject, my guess is that the poor and lower income class now comprises between 30% and 35% of American households, the middle class between 55% and 60%, and the rich between 5% and 10%. This rough breakdown takes into account income, personal assets, and probable standards of living.

Having covered this background, what's going on with the large and important middle class, which Vice President Biden has called the "backbone of this country," in large part, presumably, because of their relatively dominant roles in the job market, consumer spending, political activity, and in voting?

There is no question the middle class is generally being severely challenged by the results of our big national financial crisis. This is evidenced, of course, by the large number of job layoffs, continuing high 9.5% unemployment rate, cuts in pay and benefits, mortgage defaults, home foreclosures, and significant declines in home values and their overall personal financial positions. Moreover, the middle class, and our economy as a whole, is being adversely affected by a disturbing, but understandable, significant level of caution in hiring new employees and making of new investments by our business community.

I have not seen any reliable statistics documenting a specific shrinking of the middle class. However, it is very likely that a sizeable number of Americans in the last 2-3 years have moved from the upper middle class to lower middle class, and from middle class to the lower income and poor class. My guess is that these shifts have involved perhaps 15-20% of Americans. Others, though, have no doubt moved lower within their existing classes. So there has most probably been some shrinking. But, as noted at the outset, I do not believe that there is any realistic chance that what we call middle class is "systematically being wiped out."

Our economy will most likely largely come back within the next 3-4 years through renewed corporate hiring and investments, supported by government policies, including tax reform and other actions to contribute to economic growth, but it will be slow and painful, and dependent on sustainable economic recovery in our trading partners, especially in Europe and the Far East.

It obviously isn't advisable for the anxious in the middle class to wait for the economic recovery or government assistance. The majority of middle class Americans will, however, be helped by the anticipated economic recovery, but perhaps more so by their own prudent immediate actions, including continued caution in spending, increasing savings to the extent feasible, and making their future employment opportunities more positive through additional education, more focused job research and effective training. Those who are wise will also focus more on diet and physical fitness to contain healthcare costs and better prepare themselves for working longer hours and longer working careers, considering also what's going to happen with Medicare, Medicaid and Social Security reforms within the next two years.

What government policies and actions can we expect, regardless of the outcome in the upcoming mid-term elections and who wins the presidential election in 2012, although they will obviously vary somewhat in substance and priority, depending on whether the Republicans or Democrats come out on top? A very key focus has to be on policies and actions that will induce small and larger private sector businesses to begin to hire a lot of new employees to relatively well paying jobs and to convert part-time and hourly workers to full-time employment. This will lead to more consumer spending, more business investments, a rising stock market, more government tax revenue, and take some pressure off government to subsidize the unemployed and underemployed.

However, in order for this to have good prospects for happening, corporate tax rates should be lowered to help make businesses more competitive with major foreign firms and give them more cash flow to support growth, and market conditions need to be made more stable and predictable. The latter may have to entail temporarily easing requirements for limiting harmful emissions and some other environmental regulations. Comprehensive tax reform as recommended in an earlier post is also very desirable, including extending the lower income tax rates for small business owners and other middle class households and individuals that are currently scheduled to expire at year-end. Controversial and difficult as it may be, we also need to see a substantial cut in our defense expenditures, including those for the large number of less critical military bases we still maintain abroad, allowing us to move initially toward lower budget deficits, and ultimately a fully balanced budget, as well as a reduced national debt.

Since globalization is with us to stay, we also need to continue close cooperation with our G-20 partners to remove trade barriers wherever possible, promote economic growth, incent our large businesses to build factories and employ people here rather than abroad, and find ways to make U. S. exports of goods and services more attractive to foreign customers. Finally, I agree with President Obama that moving steadily toward substantial energy independence within the next 10-15 years is highly prudent for national security and financial reasons. Equally important, it will help the middle class by leading to the creation of a substantial number of new well paying green and high technology jobs, in addition to helping us environmentally over time with improved air and water quality, benefiting us all.

Wednesday, July 21, 2010

Fitness Program for America

Like roughly two-thirds of our 310 million population judged to be overweight or obese and lacking adequate exercise, and as commented on in dozens of my blog posts over the past several years, America is not close to being as fit a country as it should be. I'm not just thinking of our physical fitness or our widely discussed poor financial fitness, with huge budget deficits, enormous public debt, growing debt as a percentage of our GDP, and the very worrisome state of our Social Security, Medicare and Medicaid programs. I'm thinking of a number of other important fitness issues that are harmful to our country and require urgent, careful and pragmatic attention.

Our politicians in Washington are not solely to blame, nor are the leaders of American businesses solely to blame, nor these two combined, although they certainly stand out as major players. Average working American citizens also must shoulder much of the responsibility.

Aside from the country's poor financial fitness, what am I talking about? What can and should be done, and by whom to restore our overall fitness? Why is all this important? Given the space limitations of a blog post, and the very large scope of this subject, I can only cover a relatively small part here of what in my opinion should be addressed. And, as always, I value any comments my readers would care to contribute.

First, the overall quality of our elected politicians and their work in both Washington and most of our state capitals is not at all satisfactory. This is evidenced by a number of things, including excessive and imprudent spending, unbalanced budgets, frequent blatant partisanship, inaction on what should be priority issues like fixing Social Security and Medicare, and numerous publicized shameful scandals, among many others. The clear impression we get is that most of our politicians, besides following orders from party bosses, originate and support legislation which primarily benefits their local constituents and special interests, i. e. those who finance their election and reelection campaigns, with much less concern for what's probably in the best interest of the country.

Moreover, the politicians, especially in Washington, but also in local municipalities, when considering salaries, benefits and perks, are overpaid relative to the work they do and the results achieved. The most egregious example of this is probably what we've recently discovered going on in the poor, little town of Bell near Los Angeles with a population of under 37,000. The town's Chief Administrative Officer Robert Rizzo is making an annual salary of $787,637, about twice that of President Obama, and the Police Chief Randy Adams makes $457,000, about 50% more than Police Chief Charlie Beck in Los Angeles, a large city of about 4.0 million residents. Incredible!

There are many reasons for this unsatisfactory quality and state of affairs. A key reason is that voters don't pay enough attention to qualifying and understanding who and what they vote for when we have our elections. A related reason is that too many people don't register and vote, only 50-55% in national elections and between 25-35% in local elections. That's pathetic! The common excuse is that they're too busy and simply don't have time. I can't accept that. The problem is that for too many people following what's going on in government and voting is a low priority.

Another reason is that many superior potential candidates for public office prefer to remain working in the corporate private sector, in academia, or in non-profit institutions. They don't have the funding to adequately finance election campaigns and/or are turned off with the tradition of using a year or two of their time to raise funding from wealthy donors or major companies, frequently having to make imprudent pledges or commitments to support certain legislation or causes in return. A further related reason is that the present political system requires candidates for new office or reelection to spend so much time campaigning and fundraising that they don't have enough time to research and understand the important issues and, when in office, to do the work they were hired for and expected to complete.

The Congress and Executive Branch, as well as their state counterparts, need to examine what changes and reforms can be instituted to improve the quality of our elected officials and the quality and productivity of their work. Valuable contributions can also be made by many of our leading academic institutions, especially those with a curriculum that includes government or government administration. Private citizens and the media should also be encouraged to contribute. The many issues to be examined might include public financing of campaigns or using the Federal Communications Commission to mandate certain free time for political candidates on TV and radio stations when licenses are issued or renewed.

Second, as discussed in one of my posts in January 2009, our federal income tax system is highly unfit and needs a great deal of surgery and therapy. It is unnecessarily complex and expensive for both the government and taxpayers, corporate and individuals. Part of the evidence is that our tax code and related regulations, believe it or not, run over 60,000 pages and the IRS has a total of 400 or so different forms to complete! Furthermore, more than $190 billion annually is spent complying with filing requirements! The IRS has around 10,000 employees, yet the agency apparently doesn't have enough auditors to monitor compliance, and tens of billions of tax obligations are not paid annually due largely to fraud such as unreported income and failure to file. Our corporate tax rates are among the highest in the world, harming our competitiveness and encouraging companies to build factories and distribution and research centers abroad in lower tax jurisdictions abroad. This also has an adverse impact on corporate investments and hiring employees domestically, impairing economic growth.

Urgent reform is a no-brainer. It's talked about frequently, but very little is done, probably due to distractions from needing to deal with other important priorities, poor leadership and partisanship in Congress, and lobbying by the accounting, tax return preparing and consulting industries who love the ridiculous status quo.

Third, our overall system for educating our pre-college children in the country as a whole is clearly not fit, despite widespread awareness of the problem for many years and successful reforms in a relatively limited number of school districts. As has been well documented, the problem seems to be most acute in many of our larger cities, like Los Angeles, and some of our rural areas, while a good percentage of our suburban schools in higher income areas seem to be performing quite well. The evidence of the generally unsatisfactory fitness is found in many places, including test results, graduation rates, drop-out rates, high growth in home schooling by parents, ineligibility for college entrance, and rejection in job applications.

There are many reasons for this poor fitness and many pages can be devoted to the issue. However, while there are many differences of opinion on this, I think some of the main ones include inadequate pre-K opportunities for parents, too much bureaucracy with overlapping federal, state and local officials getting involved in administration, too many marginally qualified or unqualified teachers, inadequate authority for principals, too many students per class, unacceptable levels of crime on and near campuses, limited understanding of English for children of immigrant families, and poor parenting as reflected in irregular school attendance, poor studying habits, and level of respect shown to teachers in the classroom. Another important one is schools and districts not having a well thought-out posted and enforced code of conduct for students and reviewing it with parents.

This must be a high priority for our whole society and virtually everyone has a responsibility to contribute to restoring our education fitness. It's certainly not just government's job. "Best practices" employed by more successful school districts and principals should be circulated more widely. Parents can do a better job raising and preparing their children, setting reasonably high expectations, talking to the teachers their kids have, and attending PTA meetings as often as possible. Better teachers and principals can be employed. Local businesses, non-profits and foundations can be contacted for potential support.

Achieving good fitness nationally will most likely take years and not every school and obviously not every student will succeed. A lot can be done on a local level with the guidance of a good school board, support of parents and the right principal. The lead can be taken by the U. S. or state Department of Education, but it can also be taken by any or all of the local players.

Other very important areas of national fitness include, among others, our national security; our infrastructure of highways, bridges, ports and airports; needed social services provided by our government and other institutions; higher education provided by our universities and colleges; competitiveness of our industries; energy sources and independence; and the quality of our environment, including air, water, beaches, and our national and state parks.

The objective of all these fitness issues should be identifying and implementing specific measurable reforms that will improve America's overall fitness in terms of such as financial condition, government performance and efficiency, educational excellence, business climate, employment market, infrastructure, health care, environment and standards of living. It should be amply clear why achieving a greater level of fitness is very important and urgent. The bottom line is that all of us are directly or indirectly affected by the unsatisfactory fitness and for most Americans it is harmful to our expected quality of life in the coming years, and this applies even more to our children and grandchildren.

While we're figuring out what our individual roles should be in this national program, we might as well also do what we need and can to achieve satisfactory personal physical fitness. I'm confident I'm on track at this point, but the challenging journey continues.

Wednesday, July 14, 2010

Cap and Trade Legislation

One of my regular readers recently suggested I write a post on this subject. Initially I resisted because it's rather complicated, not widely understood, and, more importantly, most likely not one that most readers are currently very interested in. However, after some research and reflection, I decided to go ahead because I value the reader's input and it's an issue that can ultimately have a very significant impact on our overall economy and our quality of life. What's it all about, why is it important, and where does it stand? To start off, "cap and trade" has to do with concerns about climate change and global warming, but it's also connected to our energy sources and desire for more energy independence.

"Cap and trade," also known as emissions trading, is a flexible environmental regulation mechanism that sets an overall mandatory limit on allowable emissions of one or more undesirable pollutants (greenhouse gases), but allows companies which can more easily reduce emissions to sell credits to other companies for which such reduction would be more difficult. For example, the U. S. government, working through the Environmental Protection Agency (EPA), might set a national limit on emissions of selected pollutants, such as carbon dioxide, for a particular year or years and then allocate a portion of that total limit to major utilities (especially coal-fired power plants), refineries and other manufacturing companies which historically were deemed to have been responsible for the bulk of the emissions in this country.

Utilities and these manufacturing companies would become incented to reduce emissions each year to reduce their costs and potentially add revenue by selling (trading) unused parts of their cap to other companies who may have temporary or more permanent difficulties in staying within the emission cap established for them. These buying companies would become incented to work harder at reducing their emissions, since it would presumably reduce their costs and perhaps ultimately an opportunity to earn more revenue if they came in the position over time of having room within their caps. The private sector is incented to lower costs and become more efficient, while the public and our ecosystem benefits from a lower level of pollutants in the air we breathe and water we drink. Sounds sensible, right?

Cap and trade was first tried on a significant scale twenty years ago under the first Bush administration as a way to address the problem of airborne sulfur dioxide pollution - known widely as acid rain - from coal-burning power plants in the eastern United States. A limit was imposed on emissions from the power plants, and utilities were allowed to buy and sell permits to comply. It's generally considered one of the most effective environmental initiatives we've had, and both environmentalists and our industrial sector have in recent years supported the idea of cap and trade as a centerpiece of government initiatives to address global warming and the growth of our oil imports. Less than a year ago, cap and trade seemed to be the policy of choice for dealing with the issue of climate change.

Environmental groups and their foes in industry joined hands to support the approach. President Obama praised the concept in his first federal budget and the House of Representatives' climate and energy bill passed last June was largely built around it. However, in recent months it seems cap and trade as an economy-wide government measure is currently virtually dead! What's happened?

The answer appears to be partisan Washington politics energized by our weak economy, very low public opinion polls for Congress and President Obama, upcoming mid-term elections, concern with higher front-end costs for industry compliance and U. S. competitiveness, and the general complexity of how cap and trade would work and its net benefits. Another factor was likely the impact of lawsuits filed by a handful of utilities in North Carolina in 2008 where the U. S. Court of Appeals for the District of Columbia Circuit ruled that the EPA had over-stepped its authority in expanding cap and trade markets and that parts of new rules conflicted with existing Clean Air Act regulations.

Despite these concerns, Senate Majority Leader Harry Reid is still trying to put together a comprehensive climate and energy bill to introduce to the Senate during the week of July 26th, less than two weeks away. Reid's current draft apparently has four parts: an oil spill response in the wake of the BP disaster in the Gulf which will likely increase the financial liability of oil companies in the event of another spill; clean energy job creation and consumer savings; reducing oil consumption and increasing energy independence; and reducing pollution among utilities, presumably with some type of a more limited cap and trade component. When questioned about the latter two days ago, Reid declined to elaborate. However, one can assume it will be a cap and trade compromise approach that environmentalists will modestly applaud and that utilities will generally be able to live with.

Ther expectation is that Reid's bill would set a cap on annual emissions over the period 2012 to 2050 and would require the regulated companies to hold allowances to emit the pollutants or greenhouse gases. After allowances are initially distributed, companies would be free to buy and sell parts of their cap to others who are interested in buying them. Electric utilities are expected to be required to meet 20% of their electricity demand through renewable energy sources by 2020, sources such as solar, wind, geothermal or hydroelectric. There's also an expectation that the bill would provide subsidies for new clean energy technologies and energy efficiency. To an unknown extent there will probably also be some protection for consumers on energy price increases.

Until one has an opportunity to read the entire final bill, or at least an executive summary, it's impractical and difficult for interested parties to conclude specifically how they feel about the legislation and its prospects for approval in Congress. Certainly there's a chance, due to its expected complexity, controversial language and lobbying pressures, that voting in the House and Senate on a final bill that has a reasonable chance of approval will be postponed until next year. But it's fairly certain that Obama and congressional Democrats will push hard for approval before November to enhance prospects for their candidates in the mid-term elections.

In evaluating the final bill, I think the focus should primarily be on anticipated impacts of the following important factors: clean energy job creation, national energy independence, air quality, national debt and federal budget, U. S. unemployment rate, energy costs for U. S. consumers, and the competitiveness of our major industries. Obviously there are many other relevant factors that should be taken into account, such as the scientifically determined impact on climate change and what other major developed and developing economies are doing or expected to do on this subject. One can assume that, like with the health care and financial overhaul bills, most of the Democrats will vote for approval for obvious reasons and most of the Republicans will disapprove for various reasons, some very legitimate and some not. Again, support of the Independents will likely be key to success.

Friday, July 2, 2010

Immigration Reform Revisited

On July 1st President Obama gave a speech on immigration reform at American University's School of International Service in Washington, D. C., basically repeating most of what he's said before on the subject about the need for a comprehensive bill to fix a "broken immigration system." While I admire the president and support him on a number of political issues, I have concerns with his stand on this one, as I outlined in my blog post back in April last year, "Amnesty for Illegal Immigrants?"

He said in his speech that we should not hesitate to make the illegals take responsibility for their illegal actions, but all he is recommending we do is get them to acknowledge that they broke the law, require them to register, pay their taxes, pay a fine, learn English, and get in back of the line to earn their citizenship. He also wants to punish employers who knowingly hire illegals, something I fully agree with, though I think it's important that the punishment be material. A $500 fine for a large business, for example, is not going to change their hiring practices. A $10,000 fine for the business for each illegal hired, plus a $5,000 personal fine to the CEO, would be more appropriate and effective.

It's interesting that Obama's fix is very similar to the one recommended by his predecessor, President George Bush, except that, as I recall, Bush also wanted a formal guest worker program, which I think makes sense, as long as it's set up and managed properly.

Here are my main concerns with President Obama's approach:

1. From his recommended system fix I get the impression that he thinks most, if not all, the illegals' primary objective in coming here is to become U. S. citizens, when I believe their overwhelming aim is only to earn much better wages than is possible for them in Mexico, so they can send money back to support their families. That's why I think a strong guest worker program should be part of a new program.
2. What he is recommending is really pretty close to a blanket amnesty opportunity for all the 11-15 million illegals, except those who are convicted felons. That is basically what was done back in 1986, when President Reagan signed the Immigration and Reform Control Act, when there were less than 3 million illegals. Now there are at least 8 million more illegals. His recommendations, if approved by Congress, will likely induce many more millions to try to come across the border in the hope and even expectation of still another amnesty.
3. As I understand Obama's recommendations, he does not distinguish between those who just came illegally across the border to seek work, and those who did that and also broke other laws, like not paying taxes, driving without insurance or a valid license, and using falsified identification documentation. That doesn't make sense!
4. One of my other concerns is that the fine involved in his recommendations will be relatively nominal and will perhaps not vary, regardless of the laws that have been broken. When one considers the very large differences in wages for unskilled workers in Mexico and the U. S., a fine of $500 or less, for example, will not serve as much of a disincentive to cross the border illegally. $500 should be the absolute minimum, it seems to me, and $1,000 is more appropriate, with a greater amount applying if several laws have been violated.
5. Acknowledging that they have broken the law, registering with the immigration authorities, paying back taxes, waiting at the end of the line, and having to learn English don't add up to very much of either a disincentive to come here illegally, or as very meaningful in terms of illegals taking adequate responsibility for their actions. Keep in mind that deporting all the illegals is within our rights and would be done in a number of other countries. I'd agree, however, that a significant fine can alter the equation to a certain degree.
6. An issue that hasn't come up very much in the discussions I've heard about so far is whether or not an illegal who successfully gains citizenship through a reform program automatically gets to have family members join him in this country. If he or she does, what family members would that cover? How would they support themselves? Given our financial problems and already high levels of population growth, that's an issue of concern.

Other thoughts on a reform program I'd support? As the majority of Americans probably would agree, convicted felons among the illegals should be deported if at all possible. I also think serious consideration for deportation should apply to illegals who are among the leaders in gangs involved in criminal activities, whether or not they have been convicted as felons. Illegals who have come here recently, say in the past 3-5 years, who have no employment or other legal means to support themselves, should perhaps also be considered for possible deportation. Priority for remaining in this country and gaining an early "path to citizenship" should definitely go to those illegals who: a) have not broken other laws, have paid any income taxes due, have a good track record of employment and can support themselves, who already have their immediate families living with them here, and also have lived and worked here for a long time, say five years or more. As indicated in my earlier post, I think we must also collaborate closely with the Mexican government, and the governments of other countries the illegals come from, to try to initiate measures to provide improved employment opportunities in these countries to help limit incentives to try crossing our border to seek work here.

Meaningful incentives and disincentives for both illegals and employers are vital for success. It's also vital that any reform program takes into account the need for limited bureaucracy and costs in implementation, monitoring and enforcement.

My guess is that liberals for the most part will consider my views as unreasonably tough and that most conservatives, especially on the far right, will think I'm too lenient in supporting a path to citizenship for many of the illegals. However, moderates on both sides of the aisle, I believe, would think my thoughts on this issue are pragmatic, balanced and reasonable, with good prospects for obtaining congressional approval for a reform bill along these lines.