The rich, they are different—and invisible

Americans, as a rule, don’t take kindly to facts. We prefer our own version of the world to anything an academic would suggest otherwise. So, we embrace stories filled with ignorance and, regrettably, loathing of those who are different from whom we see in the mirror.

In his column this morning, Paul Krugman talks about the “invisible” rich. They are invisible because we completely lack any comprehension of just how wealthy they are or how they live, typically out of view to the Rest of Us.

So Americans have no idea how much the Masters of the Universe are paid, a finding very much in line with evidence that Americans vastly underestimate the concentration of wealth at the top.

Last week Neil Irwin told us about the rising inequality in America, which we fail to grasp. I was struck by several charts. Here’s an astounding one (from the New York Times):

Screen Shot 2014-09-29 at 11.30.52 AM

 

Over many posts I have discussed The Great Divergence, which began roughly during the mid to late 70s. Yet, we can see that the rich began accumulating an increasingly larger share of income since the end of WWII.

What may jump out at you in the above chart is the last column, which shows that the top 10 percent has actually grabbed over 100 percent of economic income. How is that possible? Because the Rest of Us (those in the bottom 90 percent) saw our wages decline during that same period.

But the bigger story, if you like, is that almost all of the income gains have gone to just a sliver of the top 10 percent. Here’s another chart from the Times:

Screen Shot 2014-09-29 at 11.37.50 AM

I have been reading my Piketty and Saez, so I am not surprised by these graphics. However, I must be in the minority. Krugman:

The latest piece of evidence to that effect is a survey asking people in various countries how much they thought top executives of major companies make relative to unskilled workers. In the United States the median respondent believed that chief executives make about 30 times as much as their employees, which was roughly true in the 1960s — but since then the gap has soared, so that today chief executives earn something like 300 times as much as ordinary workers.

Missed it by that much. Just an order of magnitude.

Robert Reich was in town over the weekend (Seattle). The P-I‘s Joel Connelly wrote about his visit here. He told his audience that we should not be taken in by the conservative rhetoric of the rich being “job creators.” They are not. Despite siphoning off more and more income and wealth, the rich are depriving the Rest of Us of decent wages, housing, and those things a healthy civilized society provides. Instead of investing their money in the economy, they’re hoarding it.

“American corporations are now sitting on over $2 trillion in cash that they don’t know what to do with,” Reich told his audience.

Krugman scratches his head:

But at least so far confronting extreme inequality hasn’t been an election-winning issue. Maybe that would be true even if Americans knew the facts about our new Gilded Age. But we don’t know that. Today’s political balance rests on a foundation of ignorance, in which the public has no idea what our society is really like.

FDR welcomed the wrath of the wealthy. We, the ignorant, worship them. That is, if we could find them.

A universal electricity rate

Should all utility customers pay the same rate for electricity? That’s the opinion of Kshama Sawant, Seattle City Council’s new socialist member. Her proposal got nowhere, however, failing to receive a second from a committee colleague. Sawant believes that residential customers should pay the same rate as, say, Boeing. After letting Sawant’s motion die, the committee proceeded to authorize Seattle City Light to raise all rates by 4.2 percent next year and by 4.9 percent the following year.

The Seattle Times earlier wrote:

The 2014 average residential rate is 9.04 cents per kilowatt hour, while the rate for very large businesses outside downtown is 5.89 cents. The proposed 2015 residential rate is 9.35 cents, an increase the council’s energy committee is expected to approve Wednesday.*

Utilities, in general, conduct a cost-of-service analysis by customer class. Among the costs considered:

  • transmission
  • distribution
  • administrative
  • energy

The combined costs for each class are then divided by the number of electricity units consumed by that class. The result is typically expressed in cents per kilowatt-hour.

Boeing, a large industrial user, receives its power in high voltages; there is no need for the distribution utility to “step down” the voltage, as it must do to provide electricity to lower-voltage residential customers. Moreover, residential customers are broadly dispersed throughout the distribution grid, which results in greater costs and more line losses vis-a-vis large industrial users..

In understanding the differences between classes, it helps to distinguish between “distribution” and “energy,” with ‘distribution’ as a descriptor for all non-energy costs. Council member Sawant appears to have lumped together the two cost categories, without regard to the significant differences between “distribution” and “energy.” The former varies considerably between classes; the latter is the same—a kilowatt-hour is a kilowatt-hour, regardless of who consumes it.

Now suppose that a distribution utility like Seattle City Light or Snohomish County PUD restructured its retail rates by establishing a fixed charge to recover fixed distribution costs for each class and a variable rate to reflect strictly energy costs. Under such a schedule, Boeing would pay the same energy rate as a residential customers. However, the fixed charge would vary according to customer class.

Let’s assume a utility now charges residential customers 10 cents/kWh and that it’s distribution costs are roughly equal to its energy costs. A distribution charge would recover the fixed charges; the energy rate would vary according to consumption.

Let’s assume further that a residential customer consumes an average of 1,000 kWh per month. At 10 cents per kWh, the customer would pay $100. Under the bifurcated, or unbundled schedule, the energy rate would be 5 cents/kWh and the fixed charge would be $50/month. The customer’s bill would be the same in each case—$100.

And that energy charge of 5 cents/kWh would be universally applied to all customer classes, from small to large. It could then be said that everyone pays the same for electricity. The different costs to serve each class of customer would be reflected in different fixed, or distribution, charges.

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*  There is a discrepancy in the Times‘ reporting. The incremental change from 9.04¢ to 9.35¢ is 3.4 percent, not 4.2 percent. Increasing the residential rate by 4.2 percent in 2015 would result in a rate of 9.42¢/kWh.

Today’s reading: poverty and governance

ARE WE POOR?

Are we poor? asks a reader of Danny Westneat, who writes for the Seattle Times. The answer, of course, depends. For a very privileged few, things are splendid, with the incomes and wealth at the top rising while the Rest of Us have experienced a steady diminution.

But [Chuck] Nevi, a retired high-school English teacher, said he began to notice more ThirdWorld-type stories about us almost every day in the paper. He didn’t think of them that way at first, because this is America. But then he began to chronicle them and look at them as an outsider might.

Crumbling roads and bridges. Insufficient funds for medical care for veterans. Cuts in unemployment benefits. Poverty-level minimum wages.

Speaking of poverty, Thomas Edsall suggests that America is “out of whack,” especially on inequality. Our fabled institutions, both political and economic, no longer work for the Rest of Us. Edsall includes this chart from the Federal Reserve bulletin:

Screen Shot 2014-09-24 at 9.55.19 AM

Reader of this blog need not be surprised by the graphic. I’ve written about inequality many times over several years. The meager, so-called recovery has benefitted only the top sliver of the U.S. population, those who run corporations, often into the ground, while receiving Carnegie-like fortunes during short tenures at the helm. Edsall quotes Business Insider:

“America’s companies and company owners — the small group of Americans who own and control America’s corporations — are hogging a record percentage of the country’s wealth for themselves.”

We know that our federal government long ceased to represent the interests of mere mortals, choosing instead to coddle their wealthy benefactors at our expense. One might expect to see conversations about that institution, including a fundamental question: Is this really the best we can do?

PROPER GOVERNANCE

I was struck by an essay from yesterday’s Vox, written by Dylan Matthews. He looks very much to the south of us, to New Zealand, actually, to give us ample reason to embrace that country’s system of governance. Matthews offers three reasons for doing so:

  1. mixed member proportional representation (more on this below),
  2. a single legislative body, and, hold onto your hats,
  3. monarchy.

On the first, Matthews explains:

The best proportional representation (PR) system, then, is a twist on party-list voting known as mixed-member PR, or MMP for short. MMP has voters select both a candidate in their local district and a party they’d like to win a majority. Everyone who wins a district gets a seat, and then additional seats are given out to ensure that parties are represented in proportion to their share of the party vote. This has a number of advantages. Unlike party list representation, people still have representatives with at least some time to their area, for whatever that’s worth.

Neither a Seattle conservative nor a liberal Kansan finds electoral support in America’s peculiar brand of representative democracy. The Founding Fathers fell in love with the politics of dirt, setting geography above ideology. Rather than criticize the fundamentally flawed system, we worship it, or else. PR comes to the rescue to ensure that voices are heard. Besides, citizens can actually vote for someone rather than try to block the more egregious candidate.

And why the hell do we need two congressional houses? New Zealand and others, including “Sweden, Norway, Finland, Portugal, Denmark, Israel, Iceland, and Taiwan,” do fine with one.

As to monarchy, here’s Matthews’s take:

Monarchs are more effective than presidents precisely because they lack any semblance of legitimacy.

 

Housing the Rest of Us

The Puget Sound area entices many, given its natural amenities. But there are constraints, notably: Where will the people live? Michael Luis, writing for Crosscut, details the challenges, which are significant.

After 20 years of growth management we still don’t have a very good grip on this question. We know we do not want to sprawl forever, like the big, fast growing cities of the Sunbelt. But we have never come up with a plausible alternative.

Seattle is increasingly home to only the affluent, as housing prices outstrip median household incomes. Those further down the wage ladder must live farther out.

But there is a problem, a very big one. And that is transportation. Once removed from the city, suburbanites confront congestion horrors.

So, back to cities. How do we fit a growing population into urban centers confined by both geography and transportation? Luis suggests three immovable objects to doing so.

  1. Urban Growth Boundary, mandated by the Growth Management Act
  2. resistance to density
  3. lifestyles

Those who live in single-family homes strenuously object to multi-family units in their neighborhoods. Though inhabitants of other countries, as Luis points out, have lived in densely packed built environments for centuries, Americans, in the words of James Kunstler, desire their own “log cabins” in the cities. Luis:

The fact remains that preservation of existing low-density zoning is a primary expectation of local governments, and there is no constituency outside the housing industry pushing for higher densities. The political formula is simple: Most voters already own homes and have no stake in expanding the supply of them.

Young people may start their families in multi-family units, but then seek larger accommodations with yards and fences to raise their children. But unless they can afford to spend upwards of a million dollars or more, they’ll be forced into the cheaper suburbs, necessitating dreaded commutes along the always-congealed freeway corridors.

Luis does not seem optimistic about our collective ability to solve the problem. He concludes:

The problem of providing housing for the next wave of growth is not a planning or economic question, but a political one, and it is a question that the region’s leaders need to get a grip on. Growth management, as carried out at the local level, has had two big successes: preserving the Cascade foothills and creating vibrant urban centers. There is no technical barrier to city and county leaders doing the rest of the job, primarily finding creative ways to house families that don’t involve lengthy commutes.

But before they can do that effectively, the state, which created this political mess in the first place, needs to come back to the table. The GMA needs to be tweaked to acknowledge two important truths. First, planning for population growth and unit count is too abstract; we need a finer grain of planning that considers real people and households and their needs. Second, local governments are hardwired to respond to their current residents, not their future ones, and assuming they will take tough votes on density without strong guidance and incentives is unrealistic.

Ah, politics. Oh, and planning. We Americans are not very good at either.

Missing the good old days

Take a look at the charts in this piece from Quartz. Consider:

us-inflation-adjusted-median-household-income-us-median-household-income_chartbuilder

Matt Phillips, author of the linked article, concludes:

In a consumption-dominated economy like the US, consumers need to spend. And if consumers don’t have the wages to spend, the only way to keep the consumption engine going is by extending debt to people with extremely shaky finances. That’s a recipe for a future full of financial crises.