America's Disappearing Middle Class

Three articles in Saturday's papers highlight the decline of the middle class in America. The largest and most pertinent one is in the Financial Times where Edward Luce writes about "The Crisis of Middle Class America." He says:

The annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973 – having risen by only 10 per cent in real terms over the past 37 years. That means most Americans have been treading water for more than a generation. Over the same period the incomes of the top 1 per cent have tripled. In 1973, chief executives were on average paid 26 times the median income. Now the multiple is above 300.

In today’s America if you are born in rags, you are likelier to stay in rags than in almost any corner of old Europe.

“I have this gnawing feeling about the future of America,” says [economist Michael] Spence. “When people lose the sense of optimism, things tend to get more volatile. The future I most fear for America is Latin American: a grossly unequal society that is prone to wild swings from populism to orthodoxy, which makes sensible government increasingly hard to imagine."

The New York Times has a front page article on the how the slowing recovery is dimming the outlook for jobs. It says that businesses are doing well and are investing in capital, but are not hiring.

The crucial driver of growth in the second quarter was business investment in such things as office buildings and equipment and software. Such activity rocketed up at an annual rate of 17 percent in the second quarter, compared with a 7.8 percent increase in the first. The equipment and software category alone grew at an annual rate of 21.9 percent, the fastest pace in 12 years.

The fact that businesses seem to be investing more in equipment than in hiring may be a reason consumers have been reluctant, or perhaps unable, to pick up the pace of their spending.

“There are limits on the degree to which you can substitute capital for labor,” Mr. Ryding said. “But you can understand that businesses don’t have to pay health care on equipment and software, and these get better tax treatment than you get for hiring people. If you can get away with upgrading capital spending and deferring hiring for a while, that makes economic sense, especially in this uncertain policy environment.”

Finally, in a NYT op-ed, Bob Herbert wrote about what corporate American has done to workers. He said:

Many ... workers were cashiered for no reason other than outright greed by corporate managers.

From the fourth quarter of 2007 to the fourth quarter of 2009, real aggregate output in the U.S., as measured by the gross domestic product, fell by about 2.5 percent. But employers cut their payrolls by 6 percent.

Worker productivity has increased dramatically, but the workers themselves have seen no gains from their increased production. It has all gone to corporate profits. This is unprecedented in the postwar years, and it is wrong.

Germany and Japan, because of a combination of government and corporate policies, suffered far less worker dislocation in the recession than the U.S. Until we begin to value our workers, and understand the critical importance of employment to a thriving economy, we will continue to see our standards of living decline.

It is sad that US tax policy favors capital so much over labor that it discourages businesses from hiring. I am beginning to think that the destruction of the middle class started with the Reagan tax cuts. It has taken more than a generation for that effect to become apparent, but nevertheless, there it is. One reason it didn't show up earlier was that Reagan was such a nice guy, he couldn't bring himself to hurt people. When it became obvious that the huge cuts in government services that his advisers wanted to go with the tax cuts would badly hurt ordinary Americans, Reagan balked, and as a result we got the beginning of the huge budget deficits that we are wrestling with today. But the Republicans have never given up on their "starve the beast" policy of cutting government services by cutting tax revenues. So, the Republicans under Bush II and Reagan have been responsible for some of the largest deficits. They have also been responsible for a massive transfer of wealth from the middle class to the upper class. In particular by eliminating the estate or "death" tax, they have created a hereditary aristocracy in America, something that we thought we had left behind when we rebelled against Great Britain. There are no titles, yet, but there are all the other trappings of an aristocracy.

Brazil Resumes Rocket Launches

Brazil has resumed test launching relatively small rockets at its Alcantara launch site, preparing for the launch of larger rockets later. Eventually it will resume testing of large rockets that could launch a satellite into orbit (an SLV in English, a VLS in Portuguese).

Brazil suffered a serious setback about a year ago when a large rocket for the SLV program exploded on the launch pad causing widespread damage.

When I was the science officer at the American Embassy in Brazil back in the 1980s, the US was adamantly opposed to its space launch program, under policies that emanated from Richard Perle at the Pentagon. The Brazilians wanted to buy ground stations to monitor telemetry from satellites passing over the Amazon, in part to track deforestation. The American company, Scientific Atlanta, somehow messed up their bid, and the Brazilians selected the Japanese to build the ground stations. At the Department of Commerce's request, I asked my contacts at INPE, the space agency, if there was any chance to reopen the bidding. They agreed to do so, and the second time around, the American company won. However, the Pentagon then denied the export license for the stations, because it said they could be used for developing missiles. The Brazilians were furious, and that pretty much ended my good relationship with INPE. The stations were not at all suited to do missile tracking, and eventually the DOD decision was reversed, but not until the everybody, especially the Brazil, was unhappy. The ironic thing was that they were intended for an environmental mission, rather than a military one.

Letter to Congress

-- We should let the Bush tax cuts expire,

-- In the short term, stimulus spending is more important than cutting the debt,

-- The intelligence community needs to be downsized, as revealed by the recent "Washington Post" series,

-- Obama should appoint Elizabeth Warren to head the consumer protection agency,

-- We should continue to fund the Afghan war.

At least two billionaires have died in 2010 while estate or "death" taxes are zero: George Steinbrenner, worth about $1.3 billion, and Dan Duncan, worth about $9 billion. If their estates had been taxed at the old rate, before the Bush tax cuts, of about 55%, this would have increased the government's receipts by about $5 billion, or about one-sixth of the $30 billion cost of the recent extension of unemployment benefits that the Republicans opposed because they were not offset by other revenues or spending cuts. Two rich people could have paid for one-sixth of the cost of keeping food on the tables of over two million unemployed people! Instead, their billions will go to buy private jets, yachts, huge houses, A-Rod, and other extravagances.

The US economy is not yet out of the woods. It is important to continue to try to create jobs and provide a safety net (unemployment compensation, food stamps, etc.) for those suffering the most. It's sad that the fat cats on Wall Street created this financial crisis, but they have come out with bigger paychecks, while workers in America's heartland are paying the price for the fat cats' driving the economy off a cliff. However, we can't run deficits forever. Within a year or two, depending on how things go, we have got to start paying off the debt. We should start by letting the Bush tax cuts expire, then look into cutting some programs -- the wars in Iraq and Afghanistan look like good places to start -- and then start looking at new taxes and cuts.

As an Army veteran of the Vietnam War and a retired Foreign Service officer I am particularly unhappy with the increasing use of contractors to provide government services. It's more expensive than using government employees, and I suspect that they are less loyal. I did not approve of officers and political appointees leaving the Foreign Service to lobby for foreign governments of countries where they had served. I think your first loyalty should be the United States. I worry that many who go to the private sector believe their first loyalty is to the bottom line of the company they work for. This was most recently illustrated in the series of articles by the "Washington Post" about the US intelligence community. I had two assignments in the State Department Bureau of Intelligence and Research during my career, and I think its outstanding expertise despite its small size shows that quality is more important than quantity. At State, I was usually closer to the CIA than other intelligence agencies. The CIA's collection and analysis was better than the other agencies'. I think part of the current problem is that the CIA was too independent for the Bush White House and therefore Bush and Cheney created the new position of Director of National Intelligence to bring the CIA to heel and to promote the more jingoist military intelligence agencies, like NSA and DIA. NSA's electronic intelligence is important, but CIA's human intelligence is even more important.

I believe that Elizabeth Warren would fight for average people, like me. To some extent the consumer protection agency was her idea. I think she would be a good person to lead it.

The Afghan war is a mess, but we have American troops fighting there. We must stand behind them and not expose them to additional danger by capriciously reducing funding for the war. If we are going to change our position on the war, make the policy decisions first, and then withdraw the troops in an orderly manner, rather than suddenly cutting off funding and placing them in a precarious situation.

Israeli Arrow Missile

When I was working on missile proliferation at State under the George H. W. Bush administration, around 1990 the US began cooperating with Israel on the Arrow anti-missile missile. At that time the US was still a party to the Anti-Ballistic Missile Treaty, which prevented the US from working on strategic ABMs. In theory the Arrow was exempted because it was intended for defense against smaller, shorter-range missiles. However, there was concern that the US was using the Israelis to do research on ABMs that would have been prohibited for the US to do under the ABM treaty. Now that George W. Bush has abrogated US adherence to the ABM treaty in 2001, the ABM treaty is no longer an issue. Hopefully the US gets something out of this cooperation with Israel and it is not just a one way street with all the technology flowing from the US to Israel. Israel is so advanced technologically they definitely could contribute, if they are willing to.

Financial Times Austerity Debate

The Financial Times is publishing an important series on the austerity debate: Do we currently need more stimulus, or do we need to start paying off national debts?

I believe we need more stimulus for the moment. The debt is bad, but we need to get out of the hole before we start filling it in. Somebody had an interesting point this morning: Europe doesn't need to provide stimulus, because it can count on the US and China to do so, and their imports will increase exports by Europe and thus provide the stimulus that Europe would have to provide itself. I'm not sure that's correct, but it sounds reasonable. I could be one reason why Europe is much less interested in stimulus than the US.

At some point we do need to start paying down the debt, and it will be painful. But the rich bankers in New York ran the world economy off the cliff, and they have benefited more than anybody from the bailout. The government needs to help the little guys who got clobbered by the bankers, meanwhile trying to keep the bankers under control. Once the middle and lower classes begin to share some of the government largess that has been bestowed on the New York bankers, then we can begin to start paying down the debt.

Somebody had the interesting idea of encouraging Americans to buy US government debt, rather than depending on the Chinese to do it. Americans did this during World War II, and the current debacle is not unlike the stresses we when through then, although it was created by Americans who were willing to destroy America to enrich themselves. This crisis stands on its head the old idea that business is what makes America strong. Business, in particular the banking business almost destroyed America; it certainly made it much weaker. But a handful of people became obscenely rich in the process.

The fact that labor is taxed so much more heavily than capital is a huge problem. The Republicans complain about the high taxes on the rich, but by historical measures they are low, unless you go back to the days before income tax. The rich may pay the lion's share of taxes, but they earn an even larger lion's share of income. In addition, they don't pay the tax rate they should on much of their income. For workers, gross income is usually pretty close to net income on which they pay taxes. The rich hide their gross income and then have huge reductions on the gross income that they grudgingly report. They hide their wealth in corporations, in off-shore accounts, with various tax loopholes, etc. They pay lawyers and accountants millions of dollars to reduce the taxes they pay by many more millions. One of the most egregious examples was the recent death of billionaire George Steinbrenner, whose estate paid no estate ("death') taxes. This is taking food out of the mouths of the unemployed and giving it to the filthy rich.

Republicans Made a Mess

The Washington Post story on the intelligence community shows that the community is a mess. But this is what the Republicans wanted. After 9/11, Bush and Cheney wanted somebody to blame, and they wanted intelligence to support their desire to go to war with Iraq, although Iraq had nothing to do with 9/11. The CIA, which was the leading intelligence agency, with good reason, was vulnerable on both counts. It did not predict 9/11, although it did produce the famous President's Daily Brief article warning of a similar attack, and it warned of the danger from Osama bin Laden and al Qaeda and other terrorist organizations, which Richard Clark said were ignored. In addition, it did not have intel supporting going to war with Iraq, although when Colin Powell made his infamous speech to the UN, it scraped the bottom of the barrel and found intel to support him, although most of it turned out to be wrong. So Bush and Cheney set out to destroy the CIA, on the one hand by replacing the professional leadership with political hacks, and on the other by taking away CIA's leadership role and giving it to someone isolated from intelligence collection and, except for Negroponte, someone who tended to support the military over civilian intelligence.

So now we have this huge intelligence apparatus that no doubt pays a fortune to political hacks of all persuasions, but mainly Republicans, because Bush and Cheney had more time to get their guys in. No doubt there are still some well educated, skilled intelligence professionals in the ranks, but they are lost among the mediocre. I would guess that particularly the private companies, the loves of Republicans, are more willing to say whatever the bosses want them to say than career professionals, , who have some cover except in extreme cases, for example when Bush and Cheney ran a vendetta against them.

The good news is that the terrorist threat is not great, nothing like a more historical threat by another nation against the US. By and large these terrorists are poorly funded, not well trained, and poorly led. They may have access to hundreds of millions of dollars, but what is the US defense budget, something like a trillion dollars. It's non-conventional warfare, and in the eighteenth and nineteenth centuries, the Indians inflicted some serious defeats on the white soldiers, but in the end the whites won easily.

Currently, the economic threat from China is much more serious. And if China ever decides to pose a military threat to the US, it will dwarf the terrorist threat from Muslims.

Article on Israeli Nuclear Program

This is sort of a "space cadet" article about the Israeli nuclear program, but it's interesting.

Lula, Celso Amorim and Me

Actually there's nothing about Lula and me, but I did have a run-in with his Foreign Minister, Celso Amorim. While I was the science officer at the US embassy in Brasilia, the US proposed a high level science exchange. At that time, Celso Amorim was the foreign policy advisor assigned to the Science Ministry. The Science Minister and I actually had a good working relationship. Things were going along relatively smoothly until Celso Amorim got involved. He was a real Brazilian nationalist, and was very suspicious that the US had some nefarious intention for promoting the cooperation. Brazil has been suspicious of US scientific cooperation for many years, since an American discovered the huge mountain of iron ore in Brazil that became Vale do Rio Doce, now one of the world's biggest iron producers.

When Celso Amorim became involved, the negotiations for the joint scientific meeting went from being cordial to adversarial. I finally felt that I had hit a dead end and asked the ambassador's office for some help. Presumably somebody from high up in Itamaraty, the Foreign Ministry, told Celso to be more cooperative, and we eventually reached agreement on the meeting. Celso and Lula probably share a Brazilian nationalism which was probably a factor in Brazil's recent involvement in Iran's offer to ship some enriched uranium to Turkey in return for more highly enriched uranium for its research reactor.

Brazil no doubt sympathizes with Iran because it faced a similar problem created by the United States. Back in the 1970s, Brazil bought a nuclear reactor from Westinghouse in the US. Just before the reactor was finished, then Senator John Glenn passed a law that prevented the US from supplying fuel for the reactor unless Brazil agreed to "full scope safeguards" under the Nuclear Non-Proliferation Treaty, which had not been part of the original agreement. Brazil was then a party to the Tlatelolco Treaty on peaceful uses of nuclear energy in Latin America, but not the NPT, which it considered discriminatory because of the different ways it treated nuclear and non-nuclear countries. When the US changed the terms of the sale, Brazil balked. It then had a billion dollar reactor, and no fuel for it. It embarked on a program to develop a fuel cycle to produce its own reactor fuel, which could have enabled it to produce weapons grade uranium, placing it in much the same situation Iran is today. The Brazilian situation was defused (I would like to think) partly due to my efforts while science officer there. But no doubt the Brazilians, including Celso Amorim who was in Itamarty at the time, have a keen appreciation for Iran's situation.