Those of us who live near the top of the income pyramid are doing very nicely, thank you. Yet our government keeps showering us with Christmas presents. Meanwhile, economic life is pretty miserable for those near the bottom and is getting worse for those in the middle. Does this strike you as fair?

The main story line of the U.S. economy over the last third of a century evokes Charles Dickens’s classic “A Christmas Carol.” Starting in the late 1970s, the labor market turned ferociously against those with less education and in favor of those with more. This was not Ronald Reagan’s fault, nor George Bush’s (either one), nor Mitch McConnell’s. It just happened. And except for a brief shining moment during the Clinton boom, the Great Disequalization has continued unabated to this day…

Wages. When it comes to wages, the basic story of recent decades is redolent of Scrooge. Real average hourly earnings (excluding fringe benefits) now stand roughly at 1974 levels. Yes, that’s right, no real increase in over 35 years. That is an astounding, dismaying and profoundly ahistorical development. The American story for two centuries was one of real wages advancing more or less in line with productivity. But not lately. Since 1978, productivity in the nonfarm business sector is up 86%, but real compensation per hour (which includes fringe benefits) is up just 37%. Does that seem fair?

Taxes. We often hear that the top 1% of income-tax payers pay about 40% of all the income taxes. Sounds like Robin Hood is on the job. But that’s just income taxes. Did you know that the payroll tax (the people’s tax) now brings in about 96% as much revenue as the personal income tax (the rich man’s tax)? As recently as 2000, it brought in just 65% as much. Yes, taxpaying has been radically democratized. Yet the drumbeat from the right continues: We must remove the oppressive yoke of taxation from the backs of the haves, and put it on the backs of the . . . Well, they usually don’t finish the sentence. But someone must pay the bills.

The federal budget deficit. American budget history from the end of World War II until the Reagan presidency was simple: The federal government ran modest deficits in a growing economy, and the debt-to-GDP ratio fell and fell. President Reagan’s huge income tax cuts, which were heavily skewed toward the rich, changed all that. And it took 15 years—and politically courageous actions by Presidents Bush 41 and Clinton—to set things right.

But the nation took leave of its fiscal senses, and simply stopped paying for anything, during President Bush 43’s eight years. Not for huge tax cuts—once again skewed toward the rich. Not for the Medicare drug benefit—which, in fairness, is skewed toward the poor. Not for two wars. That spree was followed by the financial crisis, the Great Recession, and the policy responses thereto—all of which blew up the deficit massively under President Obama.

Forty years of de-regulation, tax cutting, off-shoring and the general erosion of social cohesion has set the stage for the big one. The question is when will it hit?

Yesterday, I posted on the story that the Republican commissioners on the Financial Crisis Inquiry Commission bailed early to release a maddeningly stupid ‘report’ of their own that reiterated all of the non-sense bouncing around talk radio and Fox News, because I felt that it offers us a clear picture of how political power is constructed in early 21st America and how that construct intersects with concrete realities only in an accidental and ad hoc manner. Today, Barry Ritholtz demonstrates why this is important and offers ten questions for any thinking individual to consider in assessing the validity of the claims being made by these public intellectuals. I realize that it is easy to dismiss the whole affair as ‘more of the same’, but I would caution you against such a dismissive conclusion.

Across the political spectrum, the means of constructing an effective political bloc capable of achieving power is through the manipulation of language. Repeat the Big Lies enough and those lies develop what you could call ‘truth effects’ as in they create their own reality in which certain outcomes becomes pre-ordained. Whether its a ‘Fair Tax’ that would push the nation’s tax burden down the income ladder or labelling the few remaining institutions mandated with the task of protecting workers and senior citizens from wage slavery as being Ponzi schemes, it is through the manipulation of language and popular discourse that the Masters of the Universe wield their evil magic.

What sparked this particular rant…? The new Big Lie being propagated in the noise machine that public employees [aided by their evil unions] are better paid than their private sector counterparts is leaking into more mainstream outlets despite being almost total fantasy…

Using the latest federal data, Keefe said the average total compensation for workers in the private sector with bachelor’s degrees is $89,041 compared with $56,641 for public workers.

For workers with professional degrees — lawyers, say, or doctors — the gap is more dramatic: $175,141 in the private sector, $79,330 in the public.

Where public outdoes private is among workers without much education. The average compensation for a public worker without a high school diploma is $41,000, compared with $27,719. With diplomas, employees in both sectors make $44,000.

Public workers are more educated than private — 57 percent have college degrees and higher, compared with 44 percent. Because workers in all sectors are paid according to education and skill levels, lumping them all together — the least skilled with the most — is misleading.

While the middle and working classes continue their descent toward peonage, the nation’s wealth is becoming increasingly concentrated among the noble few, and any resistance to this dynamic is quickly labelled ‘class warfare‘ by the powers that be.

Median household fell to $50,303 last year, from $52,163 in 2007. In 1998, median income was $51,295. All these numbers are adjusted for inflation.

In the four decades that the Census Bureau has been tracking household income, there has never before been a full decade in which median income failed to rise. (The previous record was seven years, ending in 1985.) Other Census data suggest that it also never happened between the late 1940s and the late 1960s. So it doesn’t seem to have happened since at least the 1930s.

The key here is to remember that this long slide toward a Banana Republic is not something that is being done to us [the body politic] by evil Republicans or Democrats but is something that we are doing to ourselves. We internalize discourses that do not only bear little resemblance to reality but also undermine our own self-interests as citizens of the republic, and this is where education enters the picture. The reason the Masters of the Universe use the Big Lie and marketing techniques to achieve political ends is that it works. Only a well-educated populace capable of critical thinking and rational inquiry can immunize the republic from this growing kleptocracy, and it only takes a quick glance at education statistics to understand that we’re in deep trouble.

Let’s look at a few inconvenient facts. We had housing bubbles in the UK, Australia, Ireland, Spain, Iceland, Latvia, Canada, and a lot of Eastern Europe. Can we blame the CRA and Fannie and Freddie for that? How about the M&A boom, which resulted in a ton of leveraged loans being issued at super low spreads? If the Fed and other central banks had not driven rates to the floor, we’d see a good bit more distress and dislocation in this sector of the market. Oh, and how about the fact that banks in Continental Europe, which had no housing bubble in their home markets, and no evil Fannie or Freddie analogues, also nearly keeled over in the crisis?

This whole line of thinking is garbage, the financial policy equivalent of arguing that the sun revolves around the earth. Yes, the US and other countries provide overly generous subsidies to housing, and curtailing them over time would not be a bad idea. But that’s been our policy for decades. Calling that a major, let alone primary, cause of the crisis, is simply a highly coded “blame the poor” strategy, In reality, both the runup to the crisis and its aftermath were one of the greatest wealth transfers from the citizenry at large to a comparatively small group of rentiers in the history of man.

However, lest you think that these public intellectuals actually believe this garbage, it is important to note that not only have these commissioners been MIA during committee sessions since August but they are quickly scrubbing their bios to eliminate any mention of their previous advocacy of de-regulation.

It appears that the web editors at the AEI have been busy.

Peter Wallison, currently a member of the Financial Crisis Inquiry Commission,
was also the co-director of AEI’s Financial Deregulation Project, along with his co-director, Columbia professor Charles Calomoris.

Over at Calomoris’s bio, his status as co-director of AEI’s Financial Deregulation Project is the first sentence;

Not so on for his co-director Wallison. Indeed, any reference to his participation on the Financial Deregulation Project is gone from Wallison’s AEI bio.  Instead, the language has been replaced with the more benign “codirector of AEI’s program on financial policy studies.”

Why the change? After all, it is the AEI’s position that deregulation was not a cause of the crisis.

The language change is a poor attempt to hide Wallison’s role in the radial deregulation of derivatives, banking, leverage and sub-prime mortgages from casual inspection.

This Intellectual dishonesty is telling, but unnecessary. Many people from across the political spectrum agree with the AEI that the bank bailouts were wrong, that corporate giveaways are inappropriate, and that the government created Moral Hazard.

However, some of those people consider data, facts, details, as part of their analysis.

Barry Ritholtz appears to be more forgiving than I as he points toward cognitive dissonance as the driver of this scrub-job. From where I’m sitting, this looks like pure cynical politics. These guys saw the writing on the wall in August and bailed to protect their careers in the right-wing noise machine. They know damn well that this is a bunch of non-sense, and that is why they are scrubbing their bios. But who cares? If they tow the party line like good little boys then they can look forward to well paying jobs and enjoying a prominent position in popular discourse. It’s best for everyone involved if they simply cut Trotsky their long embrace of de-regulation out of the picture.

What we are witnessing in Europe and the US is an increasing divergence of wealth and the vast majority. Instead of a recognition that the political economy of the past thirty years, and one should argue the political economy of the past hundred, can no longer provide for the majority, we get in national economies a continued squeezing of the bottom and middle, while the top floats above in a global bubble induced by the world’s central banks. The one thing we’ve learned about financial bubbles is they don’t cause inflation, they pop, leaving a lot of worthless debt. This one will too, but how long? Place your bets, though one thing about this life is the irrational can last a lot longer than anyone would conceive reasonable.

David Brooks conjures up the Four Horsemen of the Apocalypse, and Dean Baker reveals Brooks to be the idiot that he is… Seeking Alpha

Of course, if Brooks really wants to tell a story of national humiliation, he just has to look around beyond the streets and restaurants that he and his friends frequent. The country has more than 25 million people who are unemployed, underemployed or who have given up work altogether. Tens of millions of people are underwater in their mortgages and millions face the imminent prospect of losing their home through foreclosure.

This might not be the apocalypse, but it should be humiliating to the nation, especially since this suffering is entirely due to incompetent economic policy and therefore was and is entirely avoidable. And, Brooks doesn’t even have to wait for 2020 to talk about this picture.

Robert Shiller channels the NewSpeak of Behavioral Economics to polish the turd… Naked Capitalism

Shiller’s insistence that the public is so dumb as to confuse a windown with a bailout reveals his lack of connection with popular perceptions. The reason the public is so angry with the bailouts is no one, particularly among the top brass, lost his job, and worse, the firms were singularly ungrateful, thumbing their noses as taxpayers and paying themselves record bonuses in 2009.

An old one but a good one… Your brain is broken… The Big Picture

New research suggests that misinformed people rarely change their minds when presented with the facts — and often become even more attached to their beliefs. The finding raises questions about a key principle of a strong democracy: that a well-informed electorate is best.

Just when you think that Arthur Laffer couldn’t become any more irrelevant or intellectually dishonest, he always finds a way to deliver… EconoSpeak

The reduction in employment is because folks are voluntarily leaving their jobs? There isn’t much of an unemployment problem? If Laffer really believes this – he might write that there was a movement along the supply curve rather than say “the supply is limited”. After all, the distinction between movement along a curve versus shift of a curve is found in almost every beginning textbook given to college freshman. Or was this a shift of the demand for labor schedule? Laffer’s writing is incredibly confused.

Click here to view the embedded video.

[Thomas] Friedman shows that the U.S. economy still has good paying jobs for people without skills by writing a column that addresses economic issues with no apparent awareness of most of the relevant facts.

I’m certainly not in agreement with all of the points made in the two posts, nor am I really claiming expertise knowledge of macro-level political economy. More specifically, I think their belief that the mythical “middle class” will rise up in order to re-establish a new America is as utopian as is the free-market ideologies they critique. There is a telos to this narrative just as virulent as any classical interpretation of Marxism that ends in a new democratic republic and post-capitalist economy. If and when good old class conflict kicks in the nature of that conflict will be determined by the nature of the social structure through which it plays out. Polarization is not exclusively an economic phenomenon; it encompasses knowledge, culture, and political power as well. If society continues to polarize then the nature of any possible social conflict could yield any number of new articulations. Fascist authoritarianism is just as possible an outcome as is a new American republic.

That said, I would encourage you to take notice of this trend and to take note that this is coming from classically trained economists! Even with the flaws I’ve identified, I would say that I’m in agreement with the general theme of the post in that I do not see how our current trajectory is sustainable over time. The posts are full of good quotes so I’ll just share a few random points…

GOP’s next leaders will fail: “Cutting taxes and mindless deregulation are not the answer.” We need the revenue. They have no real plan to trim “$1 trillion from federal spending … few believe deregulation will fix health care or Wall Street.” The GOP has no “effective government solutions to health care, Wall Street, fixing trade with China, and dependence on foreign oil.” And the Tea Party “only offers a purer form of failed Republicanism. Tax and spend less, and turn the country over to the robber barons.”

Wall Street banks are “back to their old tricks,” warns Morici, “hustling municipal governments into the kind of quick-fix budget schemes, like selling parking meters and airport fees.” Why? Wall Street’s “hustling shoddy corporate bonds that lack adequate collateral and may never be repaid” to justify their absurd mega-bonuses. And they’ll keep doing it till the revolution creates a new non-capitalist banking system.

Morici simply dismisses “Obama’s two signature initiatives — health-care reform and financial services reregulation.” They “simply don’t work.” Why? Politicians “failed to address the root problem, Americans pay 50% more for doctors, hospitals and drugs, than subscribers to national health plans in Germany, France and other decadent socialist European countries.” Yet, insurers hate reform, will self-destruct America first.

What I find most interesting is how this narrative is gaining traction in a least some circles beyond the cesspool of the ZeroHedge comment section. Is this a growing trend…? The first signs of mass social unrest? Or, is it the cries of perma-bears and cranky old men? Interesting times we live in… interesting times…

The lesson of the 1930s is that politics can turn ugly as slumps drag into a third year, and voters lose faith in the promised recovery. Unemployment is already 20pc in Spain. If Mrs Salgado is wrong, Spanish society will face a stress test.

We are seeing a pattern – first in Ireland, now in Greece and Portugal – where cuts are failing to close the deficit as fast as hoped. Austerity itself is eroding tax revenues. Countries are chasing their own tail.

The rest of EMU is not going to help. France and Italy are cutting 1.6pc GDP next year. The German squeeze starts in earnest in 2011.

Given the risks, you would expect the ECB to stand by with monetary stimulus. But no, while the central banks of the US, the UK, and Japan are worried enough to mull a fresh blast of money, Frankfurt is talking up its exit strategy. It risks repeating the error of July 2008 when it raised rates in the teeth of the crisis.

The ECB is winding down its lending facilities for eurozone banks, regardless of the danger for Spanish, Portuguese, Irish, and Greek banks that have borrowed €362bn, or the danger for their governments. These banks have used the money to buy state bonds, playing the internal “carry trade” for extra yield. In other words, the ECB is chipping at the prop that holds up Southern Europe.

One has to conclude that the ECB is washing its hands of the PIGS, dumping the problem onto the fiscal authorities through the EU’s €440bn rescue fund. That is courting fate.