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America R.I.P.

During the second half of the 20th century, the United States was an opportunity society. The ladders of upward mobility were plentiful, and the middle class expanded. Incomes rose, and ordinary people were able to achieve old-age security.

In the 21st century, the opportunity society has disappeared. Middle class jobs are scarce. Indeed, jobs of any kind are scarce.  To stay even with population growth from 2002 through 2011, the economy needed about 14 million new jobs. However, at the end of 2011 there were only 1 million more jobs than in 2002.

Only 426,000 of these jobs are in the private sector. The bulk of the net new jobs consist of waitresses and bartenders and health care and social assistance. According to the Bureau of Labor Statistics, over the 9 years, employment for waitresses and bartenders increased by 1,188,000. Employment in health care and social assistance increased 3,087,000.  These two categories accounted for 1,000% of the net private sector job growth.

As for manufacturing jobs, they not only did not grow with the population but declined absolutely. During these nine years, 3.5 million middle class manufacturing jobs were lost.

Over the entire nine years, only 48,000 new jobs were created for architects and engineers.

In the 21st century the US economy has been able to create only a few new jobs and these are in lowly paid domestic services that cannot be offshored, such as waitresses and bartenders.

The lack of jobs, especially high value-added, high productivity jobs, is the reason real median household income has declined and the distribution of income has worsened. Without rising real household income, there cannot be a consumer economy.

In the early years of the 21st century, the Federal Reserve substituted a rise in consumer debt to drive the economy in place of the missing rise in consumer incomes. Low interest rates drove up housing prices, and people refinanced their mortgages and spent the equity. The Federal Reserve kept the economy alive by loading up consumers with debt that housing prices and consumer incomes would soon be unable to support.

When debt and real estate prices reached unsustainable levels, the bubble popped, and the ongoing financial crisis was upon us.

The cause of all of the problems is the offshoring of Americans’ jobs. When jobs are moved offshore, consumers’ careers and incomes, and the GDP and payroll and income tax base associated with those jobs, go with them.  When the goods and services produced for American markets by offshored labor are brought into the US to be sold, the trade deficit rises, and downward pressure is put on the dollar, pushing up domestic inflation. (On October 12, statistician John Williams ( reported that “third-quarter wholesale inflation jumped to an annualized 6.2%.”)

Jobs offshoring is driven by Wall Street, “shareholder advocates,” the threat of takeovers, and by large retailers, such as Walmart. By cutting labor costs, profits go up.

It is that simple.  However, as a result of sending American jobs to cheap labor countries, US consumer incomes go down. The end result is to destroy the domestic consumer market. What would have been US consumer income growth becomes instead profit growth for US corporations.

Keynesian economists use in their textbooks the example of how the aggregate effect of individual saving could be the opposite of the effect intended by the individuals.  Whereas each saver seeks to improve his position by building wealth, in the aggregate saving could exceed investment, resulting in a decline in aggregate demand and a fall in income for all.  Offshoring has the same logic. Each corporation can expect to gain more profits from moving US jobs offshore, but the aggregate effect is a fall in American consumer incomes and a reduction in the American consumer market.

I have told this story many times. But policymakers, the media, and economists seem unable to connect the dots.

Jobs offshoring has substantial implications for Social Security and Medicare. The US has the least adequate social safety net of any developed country. The two major components of the US social safety net are Social Security and Medicare for the elderly. Social Security and Medicare are financed by a payroll tax.  The combined tax is 15.3% of payrolls.  For the past quarter of a century the Social Security portion of the payroll tax has built up a surplus of over $2 trillion. Recently, the Medicare portion began running in the red.

Right-wing Republicans, free market ideologues, and the left-wing have all indoctrinated themselves with incorrect beliefs about Social Security and Medicare.  The right-wing claims that a safety net financed with 15.3% of payrolls is a “Ponzi scheme” and an “unfunded liability.”  If that is the case, then so are veterans benefits, military pensions, and federal pensions, all of which are financed by the income tax, the basis for the payroll tax.

The left-wing claims that the rich do not pay high enough payroll taxes, because the income subject to Social Security payroll tax is capped at about $110,000. But the benefits are also capped. Social Security is not supposed to be an income redistribution scheme from rich to poor, and it is not supposed to be a pension system for the rich. The pension paid is supposed to correlate with the pre-retirement income level of the retiree. Those who had higher wages or salaries and consequently paid more in payroll taxes receive a larger Social Security check than those who had lower wages and salaries and paid less payroll taxes, although there is favoritism toward the lower income earners who receive proportionally more in respect to their payroll taxes than higher income earners.

There is no cap on income subject to the Medicare portion of the payroll tax. Moreover, Medicare charges a Medicare Part B premium that is deducted from the Social Security monthly check. In addition, there is a further Part B premium based on retirement age income.  For example, someone working beyond retirement age and making $250,000 per year pays about $3,800 in Medicare Part B premium in addition to the Medicare portion of the payroll tax of about $7,500.  The annual premium he pays for his “free” Medicare for which he has paid all his working life with a payroll tax is about $11,300.

Moreover, Medicare by itself is insufficient coverage. To actually have medical coverage, those covered by Medicare have to purchase a supplementary private policy to cover the large gaps in Medicare. Depending on the range of coverage, a supplementary policy costs approximately $100 to $300 per month.

As the person making $250,000 per year is likely to go for the most coverage, he will be paying about $14,900 (excluding deductions and co-payments) per year for his “free” Medicare. This is despite having paid the Medicare payroll tax each year of his working life. A person who made $250,000 in taxable income per year for 30 years would have paid $217,500 into Medicare at the current Medicare payroll tax rate.

The right-wing’s notion that Social Security and Medicare are handouts, part of the welfare state’s bread and circuses, and the left-wing’s idea that the rich get a free ride are equally untrue.

(Note: $250,000 is the politicians’ dividing line between the rich and everyone else. For a person making $50,000 a year, an income five times larger can seem rich. However, a $250,000 annual income leaves a family or person far distant from the lifestyle of the rich. Upper middle class incomes are generally associated with high-tax, high-cost urban areas in states with high income taxes. After federal income and payroll taxes, state income and sales taxes, and property taxes, what appears to many as a large income disappears. In New York City, the federal income tax will take about 25% of the $250,000, New York state will take about 9%, and New York City will take about 3.65%. The combined city and state sales tax is 8.875%. The property tax is high. The conclusion is that in New York City a $250,000 income is reduced to $125,000 or thereabouts. Those who claim “the rich don’t pay taxes” are not talking about $250,000 incomes.)

Social Security and Medicare have served the country well. They protect the individual from his own mistakes, from crooked and incompetent money managers, and from financial crises, and they protect society from the moral dilemma of confronting large numbers of fellow citizens who through fault or no fault of their own cannot provide for their livelihood and medical care.  After the financial scandals and crisis of the past five years, it is a stretch to believe that any but the astute can manage their personal wealth, whether small or large, in today’s situation of unregulated financial markets, zero interest rates, currency uncertainty, and highly complex investment instruments with computers programmed with mathematical models dominating equity trades.

The argument that conceptually a person could do better by investing his payroll taxes in the stock market is a poor basis for old age security policy. The person can do better as long as he or she doesn’t fall into the hands of a Bernie Madoff or a Goldman Sachs, doesn’t receive zero interest on his bonds because the Federal Reserve has to bail out the “too big to fail banks,” doesn’t experience a decline in currency value due to monetization of enormous federal deficits, and doesn’t experience a bear market as he approaches retirement.

The right-wing ideologues who try to scare old age security out of existence go on and on about rising medical costs, about an aging population living longer, declining birthrates and a worsening ratio of workers to retirees, about people learning to rely on handouts rather than their own means, and about Washington’s rising unfunded liabilities.

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About the Author

Paul Craig Roberts

Paul Craig Roberts
Dr. Paul Craig Roberts was Assistant Secretary of the US Treasury for Economic Policy in the Reagan Administration. He was associate editor and columnist with the Wall Street Journal, columnist for Business Week, and the Scripps Howard News Service. He has had numerous university appointments. He is the author of numerous books, including his most recent, How America Was Lost: From 9/11 to the Police/Warfare State