Gains From Economic Growth No Longer Shared. Why?

The U.S. economy, and European economies as well, have seen a massive increase in the extent to which the gains from economic growth are concentrated in a few, rather than shared widely by all in the economy.  This is mitigated in Europe, and to a much lesser extent in the United States, by a combination of tax policy and social welfare benefit systems.  But, the fact that the new trend has endured for a generation across dozens of countries suggests that it is not simply a matter of policies of particular administrations. 

The folks behind the poster at the top of this post probably have roots in the union movement, and more widely shared gains from growth were found in an era when unions were rather strong.  But, there is room to question the cause and effect relationship in that era.  Were unions strong because workers were in a good bargaining position, or were workers in a good bargaining position because they were unionized?  There is good reason to thikn that the later was true, at least to some extent.

One interpretation is that the technological foundations of our economy have made work traditionally done by less skilled workers more efficient and hence reduced demand for these workers.  For example, e-filing of legal pleadings has gutted the demand for copy room workers and couriers for law firms and reduced postal service volume.  Any one of these changes individually may be insignificant, but one change after the other for decades could have this kind of effect.  Meanwhile, more skilled jobs that are not succeptible to automation have not been eliminated but benefit from the greater productivity that technology has imparted to less skilled workers.  More productive low skilled workers have not been able to reap the full value of their labor in this scenario because the number of people who can do the work greatly outnumbers the number of people needed to do the work.  This hypothesis is behind the characterization of the past few decades as an "information economy" or as an economy where gains are concentrated among "knowledge workers" or a "creative class."

A close variant of this theory suggests that much of the post-war boom was a matter of retooling a wartime economy to meet long unmet domestic demand and shortfalls in the productive capacity of the rest of the war ravaged world, so that not much innovation was required to see record growth at first, but that this situation was exceptional and vanished as routes to greater productivity had to be invented rather than simply being restored or imitated.

Another, somewhat similar analysis would suggest that capital has become a more important factor, relative to labor, in producing economic value.  Physical and monetary capital is much more unequally distributed than human capital, and hence those who have it have benefited greatly, while those who do not have not shared in the wealth.  This fits with the fact that the end of the 1979-2008 time period identified is one where the financial sector had huge profits and much higher compensation levels relative to the "real economy."  But, it also challenges that assumption that efficient markets allocate capital through lending and equity investment transaction to people whose ability to put those assets to work is greatest; an analysis that would seem to mitigate inherited wealth biases.

Of course, it certainly isn't impossible that elite levels of knowledge and skill and great amounts of capital are both necessary for growth and hence share in it, while the relative economic importance of those who are not exceptionally smart or skilled or rich has declined.  Thus, we might have a bifurcated ruling class split between the capable and the wealthy, that leaves out everyone else.

These theories, because they are rooted in economic fundamentals, have the unfortunate tendency to be rather fatalist.  Without further elaboration about what exactly the economy needs in terms of skill sets and how we can broaden the base of people who have those skills, it suggests that there are not any good short to medium term policy fixes to these inequalities in initial market allocations of wealth and that even long term policy fixes rely on assumptions about returns to education and training and other economic policy fixes that are at best unproven and may not work.  If economic value has more to do with IQ and personality than with the value added by education which serves as much as a sorting device as an activity that makes someone more useful economically, public policy may have little capacity to redress gaps in human capital value between the bright and the less bright except through redistributive policies.  Policy may be able to have more impact on the availability of capital, but Americans have historically been skeptical, frequently with good reason, of the returns that result from investment decisions made by government investments in the private sector relative to results produced by the private financial markets.  Government investors tend to be more forgiving of failure than the private sector to a fault.

A third interpretation is rooted in terms of competition both with foreign firms and domestic immigrants.  In this theory, foreign firms in less developed economies have lower labor costs and less costly regulations and taxes, giving them comparative advantage in markets where it is practical for work to be offshored and their less skilled workforces to compete with workers in the U.S., for example, in labor intensive manufacturing enterprises.  Similarly, immigrants to the U.S. from less developed countries, many undocumented, may be willing to work for lower wages on less favorable terms because they are still favorable relative to the labor markets in their homelands, and this competition drives down the market price for all workers, native and immigrant, who compete in the same markets.

A fourth interpretation sees union busting facilitated by weaker labor laws, and pro-big business economic policies as important in this trend.

Both these theories argue that economic policices have promoted cheap labor.  These theories are intuitively attractive, not least of which because their roots in government policy rather than economic fundamentals suggest straight forward solutions to our woes: restrict free trade, limit immigration, and strengthen protections for unions.

But, I am not very comfortable that the cheap labor theories are correct.  Growth in pre-tax, pre-social welfare benefit incomes have not been much more equal in heavily unionized France and Germany than they are in the United States which is much less labor friendly.  Countries like Germany and Japan have continued to have heavily manufacturing oriented economies despite compensation levels of manufacturing workers that far exceed their foreign competitors without having profoundly different international trade regimes than those of the United States.  Econometric studies of the impact of immigration on the wages earned by native born workers have shown the effects to be surprisingly modest and limited to fairly narrow subsets of the workforce.  Economic immigration has been drive to a great extent by the existence of opportunities that native born workers are not filling well for whatever reason.

Economists widely share the view that freer trade in goods and services tends to increase economic output, suggesting that restrictions on free trade and strict immigration laws may do more harm than good.  Unions clearly have some impact on the distribution of profits from enterprises, but it isn't obvious that they have much of an impact for better or for worse on overall economic growth rates.

Japan seemed to be following more of a shared growth model than its competitors, but has been so hard hit by deep recessions that there hasn't been much growth to share in recent decades, so it is hard to confirm that hypothesis.  But, this too could be a product of an economy that, at first, was thriving on imitation rather than invention of more productive technologies and economic institutions, much like the U.S. in the post-war, post-Great Depression era.

Whatever the cause of rising inequality in incomes, there is also the question of what to do about it.  We could follow the European model of redistributing income to make up for the underlying economic trends, or could continue on our current track of treating the market allocation of wealth as presumptively legitimate.  Neither approach seems to be particularly favored empirically in determining the productivity or economic output of a society.  The wealth of nations is indifferent to even significant redistribution of wealth if done well and gradually.

Our future may be that of Japan, a "great stagnation" in which economic growth declines dramatically as all of the low hanging fruit of ideas that could improve productivity are picked, and innovations become more scarce.  The seemingly inevitable end of a global economy based on "cheap oil" is also not very encouraging.  We could move from a regime of unequally shared growth to one in which there is no growth to share.

Is it any wonder that economics is called "the dismal science?"

READ MORE - Gains From Economic Growth No Longer Shared. Why?

Recall Elections Of Six Republicans Go Forward In Wisconsin

Public sector union supporters have successfully gathered enough signatures to force six Wisconsin legislators to face recall elections triggered by the controversial effort of Wisconsin legislators to deny public employees unions in the state collective bargaining rights. Notably, form a political perspective, Republicans has not made eliminating meaningful public sector unions a major point in their 2010 campaign effort which had focused on budget cutting measures, so it isn't unreasonable to expect that independents and Republicans who have some sympathy with the cause of public sector union workers or aren't happy with the fact that Republicans have pushed such a controversial issue in a way that created a media circus could vote to recall Republican state legislators whom they voted for last November.

A state judge in Wisconsin has also ruled that the public employee union law was passed in violation of the state's open meetings law and hence is void.

Thus, while Republicans won the battle to bust public sector unions in Wisconsin, they risk losing the war if voters use the recall elections to hand control of the state legislature, which Republicans won in November's election, back to Democrats. Another fight brought to the voters that was colored by the union busting legislation was, an electoral fight between a conservative and liberal candidate for the state supreme court that had previously been a non-issue that almost assured the incumbent conservative judge's re-election was won by the incumbent by only by a nose after a recount. The recall fights, however, are more directly related to the union busting legislation which they personally voted to enact.

The amount of grass roots support for a recall necessary to get one on the ballot in Wisconsin is suggestive of the amount of political energy and momentum that recall supporters have in this fight:

At no time in U.S. history have attempts been made to recall so many legislators at the same time over the same issue. To recall a senator in Wisconsin, recall organizers had to gather signatures from voters in each district equivalent to 25% of the number of people who voted for governor in November. That meant staff for the board had to review more than 18,000 signatures for each recall attempt.

Keep in mind that these signatures are being gathered in state legislative districts that elected Republicans within the last year, not safe Democratic seats. Also, the level of organization and political intensity displayed by union supporters against Republicans now may decisively influence Wisconsin's vote in the 2012 Presidential elections in favor of Democrats. The union busting move of Wisconsin's Republican leadership has activated vast numbers of otherwise apathetic or only slightly active union members and union supporters in the state, turning them into a political force to be reckoned with, regardless of the outcome of these particular recall efforts. And, if many of the recall elections are successful, it would also pop the balloon of any mandate in popular opinion that Republicans could have claimed based upon their 2010 electoral sweep, only about a year before the next state legislative and Presidential election. Voters, campaign contributors and political campaign volunteers don't like political losers; they want to vote for someone who can win and may lose faith when a candidate's prospects seem diminished.

The Wisconsin legislation inspired copycat efforts in a number of other states, some successful, that face a less imminent threat of being overturned after the fact than the Wisconsin legislation.

READ MORE - Recall Elections Of Six Republicans Go Forward In Wisconsin

NFL Labor Action Heats Up

Professional football players look likely to go on strike, for the first time since 1987, in the wake of the NFL players' union's decertification this afternoon.

After 16 days of mediated talks with the NFL, the sides could not reach agreement on a new deal. The current one expires at the end of Friday, and the league could lock out its players.

By decertifying, the union clears the way for individual players to file antitrust lawsuits against the NFL, which opted out of the [Collective Bargaining Agreement] CBA in 2008. It renounced its right to represent the players in contract bargaining.

The CBA was due to expire a week ago and was extended twice.

The union's latest move sets the stage for a lengthy court fight that could potentially threaten the 2011 season. . . . In 1989, the NFLPA also decertified. Antitrust lawsuits by players forced a new CBA in 1993 that included free agency, and the union formed again that year. . . .

"The parties have not achieved an overall agreement," federal mediator George Cohen said, "nor have they been able to resolve the strongly held competing positions that separated them on core issues.

From here

The steps in the dance are unfamiliar to people who aren't labor lawyers, but the bottom line that negotiations have broken down and that professional football won't resume until a deal is reached, seems pretty clear.

READ MORE - NFL Labor Action Heats Up

Friday News Dump

In Colorado

* Colorado's unemployment rate in February, of 9.1%, is the highest the state has experienced since the Great Depression and above the national rate of 8.9%. The oil bust of the early 1980s brought the rate to its previous peak of 8.8%. Also, unemployment estimates for Colorado over the last couple of years turn out to have been greatly understated, since the census revealed that the population figures used in making the original unemployment predictions were too low in high unemployment areas. Colorado's record lowest unemployment, since 1976, was at the turn of the millenium when it dropped to a little under 3%.

State officials have blamed migration to Colorado and the decision of many people who have given up looking for work to return to the workforce. Still, the fact that unemployment is climbing, rather than falling, long after the "recovery" in GDP terms has been underway, is discouraging. Unemployment is alawys a lagging indicator, but the employment situation has been worse and longer lived in the current employment recession than any since the Great Depression.

* Despite an immense state budget deficit, House Republicans in Colorado are still proposing large new tax cuts, in excess of $60 million.

* Colorado's proposed state budget will include more cuts to the Fort Logan psychiatric hospital, continuing a trend of decreasing mental health hospital capacity. The current cuts would close a juvenile ward that current houses an average of a dozen inpatients. The Joint Budget Committee argues that private facilities in the state offer the same services at a lower price and can handle another dozen patients.

In Other State Legislatures

* Both houses of Wisconsin's state legislature has passed a bill ending collective bargaining for public sector workers in Wisconsin's state and local governments. Republican Governor Walker has promised to sign the bill, which he championed. Naturally, the bill received voted only from Republicans, and a few Republicans broke ranks to join with Democrats in opposing it. Protests continue in Madison, with farmers set to encicle the state capitol with tractors next. Public opinion in Wisconsin has shifted decisively away from the Republicans and towards President Obama and the public employees unions in Wisconsin as a result of the union fight. Recall efforts are underway targeting a number of legislative anti-union Republicans, although it isn't clear if these will make the ballot or have a realistic chance at succeeding. Similar efforts are making progress in other Republican controlled states.

* The Governor of Illinois signed a bill abolishing the death penalty in that state, appropriating the funds that would have been used for death penalty litigation to a trust for murder victims, and pardoned the fifteen people on death row there. Illinois is the 16th state in the United States to abolish the death penalty.

* Kentucky has joined the list of states addressing state budget shortfalls with sentencing reforms, particularly with milder sentences for non-violent drug users.

Kentucky . . . became the latest to make the shift when Gov. Steve Beshear signed into law a measure increasing spending on rehabilitation programs and intensive drug testing. The law also reduces penalties for many drug offenses and may allow some traffickers and users of smaller amounts of drugs to avoid prison.

Delaware, Florida, Indiana, Massachusetts and Pennsylvania are among those that have pending bills to reduce penalties for drug offenders, in some cases by directing defendants into treatment programs. Similar laws have taken effect in South Carolina, Colorado and New York in recent years. States have maintained stiff penalties for more-serious drug crimes.

While the changes are part of broader belt-tightening efforts, they also reflect a growing belief among state lawmakers that prosecuting drug offenders aggressively often fails to treat their underlying addiction problems and can result in offenders cycling in and out of prisons for years — a critique long voiced by groups that advocate in favor of defendants' rights. . .

The state measures mark a sharp retreat from the war on drugs, which gathered steam in the 1980s and '90s with mandatory-minimum and three-strikes prison sentences that resulted in some drug offenders being locked up for decades. Drug arrests nationwide climbed from about 580,000 in 1980 to about 1.6 million in 2009, according to the Federal Bureau of Investigation.

Although some states started rethinking drug punishment before the recession, many more states have come on board in the past two years. In 2007, Texas began shifting more drug offenders away from prison, which helped hold down the inmate population. The changes cost $241 million, less than half what the state anticipated it would have spent to build three new prisons.

* Ohio's criminal sentencing commission has released a new report on the causes of that state's prison overcrowding problem. According to the report, "recent growth in Ohio’s prison population — even with mandatory sentences and scores of bills that increase penalties for particular offenses — is not driven primarily by intake (although it is a factor). It’s largely fueled by increases in inmates’ average length-of-stay."

* Connecticut voters in a survey favored the decriminalization of marijuana (79% favor medical marijuana and 65% favor decriminalization), legalizing Sunday liquor sales (65%), and reinstating the death penalty (68% up from 59% in 2005 after a high profile murder). But, majorities there don't favor allowing grocery stores to sell wine or liquor. Connecticut currently has a death penalty but its legislature is considering repealing it.

* Connecticut last year joined a list of states that automatically treat some teens under the age of eighteen as adults in the criminal justice process; New Hampshire changed its law in 2008. Similar proposals are pending in Massachusetts, Wisconsin, and North Carolina. The only other state that automatically tries some teens under the age of eighteen as adults is New York State. Budget savings and increased sensitivity to the distinctiveness of juvenile offenders has prompted the changes. For example, a recent study found that:

[I]nmates in adult facilities (surprisingly) give better reports than youth in juvenile facilities on several measures (including criminal activity and victimization), they also fare much worse on other measures. Importantly, the inmates in adult facilities report substantially and significantly greater rates of PTSD and mental illness symptoms, and are much more likely to be afraid for their safety, compared to those in juvenile facilities.

Colorado never had a law that automatically tried older teens under the age of eighteen as adults, but did give prosecutors the authority to directly file many serious criminal charges against older juveniles as adults without court approval; that authority was recently narrowed by Colorado's General Assembly.

* California is building a new death row prison at a projected cost of $356 million, as a partial response to federal prison overcrowding litigation in the state, in which inmates have been successful on the merits, but not seen many results.

California has 713 inmates awaiting execution. . . . By comparison, Florida ranked second, with 398, and Texas was third at 337. . . About 700 condemned men are confined at San Quentin, north of San Francisco, in facilities built to hold 554, according to the Corrections Department’s website. (Nineteen women face execution and are held in Chowchilla, a prison in the Central Valley.) On average, the men are likely to spend 17 years in the aging cell blocks, according to the prison system. . . . Since 1978, when California reinstated capital punishment, 53 condemned inmates have died from natural causes while on death row. Eighteen committed suicide and 13 were executed. Six died from other causes.

Other Domestic News

* Long Island Republican Congressman King has launched hearings in the House Homeland Security Committee into the radicalization of Islam, over objections that this amounts of a McCarthyistic inquiry that is singling out a single religion that may incite further terrorist sentiment against the United States.

* In Skinner v. Switzer, the U.S. Surpeme Court found, in a narrow 6-3 decision, that a Section 1983 civil rights suit by a death row inmate (as opposed to a habeas corpus suit) was not procedurally barred by prison litigation reform statutes. The inmate challenged an interpretation of a Texas law that prevented him from securing post-conviction access to DNA evidence in his muder case that might implicate another suspect (now dead). The court ruled in his favor because DNA testing itself does not necessarily lead to the setting aside of his conviction, as it could show that he is guilty or be inconclusive (and hence is not duplicative of habeas corpus relief), and does not violate the Rooker-Feldman doctrine because while a "state-court decision is not reviewable by lower federal courts . . . a statute or rule governing the decision may be challenged in a federal action"). The ruling also provided yet another case where heightened pleading standards in federal civil litigation were held not to bar a straightforward lawsuit brought by a prisoner.

* Excessive federal child pornography laws continue to produce absurd results:

In the spring and summer of 2006, Eric Rinehart, at the time a 34-year-old police officer in the small town of Middletown, Indiana, began consensual sexual relationships with two young women, ages 16 and 17. One of the women had contacted Rinehart through his MySpace page. He had known the other one, the daughter of a man who was involved in training police officers, for most of her life. Rinehart was going through a divorce at the time. The relationships came to the attention of local authorities, and then federal authorities, when one of the girls mentioned it to a guidance counselor. Whatever you might think of Rinehart's judgment or ethics, his relationships with the girls weren't illegal. The age of consent in Indiana is 16. . . . Rinehart got into legal trouble because one of the girls mentioned to him that she had posed for sexually provocative photos for a previous boyfriend and offered to do the same for Rinehart. Rinehart lent her his camera, which she returned with the promised photos. Rinehart and both girls then took additional photos and at least one video, which he downloaded to his computer.

In 2007 Rinehart was convicted on two federal charges of producing child pornography. U.S. District Court Judge David Hamilton, who now serves on the U.S. Court of Appeals for the 7th Circuit, reluctantly sentenced Rinehart to 15 years in prison. Thanks to mandatory minimum sentences, Hamilton wrote, his hands were tied. There is no parole in the federal prison system. So barring an unlikely grant of clemency from the president, Rinehart, who is serving his time at a medium-security prison in Pennsylvania, will have to complete at least 85 percent of his term (assuming time off for good behavior), or nearly 13 years.

* An NPR executive resigned after remarking in a secretly recorded conversation that the Tea Party was full of racists, despite the fact that this is true.

* Oil prices are rising on Mideast turmoil.

* Blockbuster, the dominant player in the storefront video rental market, reached an agreement with its creditors to be auctioned as a business to the highest bidder, rather than having its assets liquidated. Netflix, video on demand, and kiosk video rentals have destroyed its profitability. The chain, which grew dramatically through acquisition of competitors, also probably simply had too many stores for the market's demand and hasn't been able to shutter them fast enough. For example, in Denver at 6th Avenue and Grant Street, it once had two stores less than a block apart - both are now shuttered.

* Department store H&M has decided to open up stores in greater Denver, with the Saks location at the Cherry Creek Mall which is closing likely to be one of them.

Abroad

* Japan has had two major earthquakes in the last week. One was magnitude 7.2 on the Richter scale, and the last night there was an 8.8 magnitude quake that also gave rise to a Tsunami that reached as far as Hawaiii this morning and will be experienced as far off as Peru. The first Japanese quake produced only minimal damage. The current one killed about a hundred people and led to considerable property damage in a few industrial areas mostly from the tsunami waves rather than the earthquake itself. Similar magnitude earthquakes in Iran, Indonesia and Haiti have produced massive loss of life and long term devistation, but Japan's earthquake conscious building codes and better prepared people prevented the damage from being greater. A smaller earthquake in China this weak produced loss of life and property damage comparable to that experienced by last night's massive quake.

* Civil war continues to rage in Libya and France has recognized the rebels as the legitimate government of the country; NATO nations remain reluctant to intervene militarily there. Egyptians will vote on amendments to military proposed amendments its constitution this month to prepare for prompt democratic elections that will transfer power from a military council to civilians. Protestors in Jordan have complained that a new prime minister is stalling on proposals for political reforms, using the fact that the country's 32 political parties are too fragmented to produce quality elections; the main democratic reform that has been demanded is to shift control of the executive branch from the king to a prime minster selected by parliament. Police in a predominantly Shi'ite part of Saudi Arabia shot five protestors at a small demonstration; protests in the absolute monarchy have been muted compared to elsewhere in the region - in part because Saudi Arabia is more repressive and in part because the current Saudi King is popular with majority Sunnis in the country.

* The Daili Lama in Tibet proposed on the anniversary of the day of Tibet's failed 1959 bid to free itself from China, to transfer political power of the government in exile to elected leaders, leaving himself and his successors as spiritual leaders only. Proposed succession to his position is currently unclear as he has also proposed reforms to the traditional approach rooted in the notion that he is reincarnated. China remains officially outraged at any talk of Tibetan independence, or the notion that Taiwan is not part of China. China is also cracking down in an effort to prevent the Jasmine revolution of the Middle East from spreading to it.

Medicine

* A drug to prevent the spread of M.S. has worked in a mouse model. A mouse model of a drug to treat Alzheimer's disease and damage from minor strokes in the brain has also been successful. A new drug to treat lupus has come on the market. Progress has been made in developing a new class of anti-malaria drugs based on a chemotherapy drug.

READ MORE - Friday News Dump

What Ever Happened To Mortgages?

"11.1 million, or 23.1 percent, of all residential properties with a mortgage were in negative equity at the end of the fourth quarter of 2010, up from 10.8 million, or 22.5 percent, in the third quarter. The small increase reflects the price declines that occurred during the fourth quarter and led to lower values. An additional 2.4 million borrowers had less than five percent equity, referred to as near-negative equity, in the fourth quarter. Together, negative equity and near-negative equity mortgages accounted for 27.9 percent of all residential properties with a mortgage nationwide. . . .

The consensus is that home prices will fall another 5 percent to 10 percent in 2011. If so, the most that negative equity will rise is another 10 percentage points, all else equal. . . .

The aggregate level of negative equity increased to $751 billion in Q4, up from $744 billion last quarter but still below $800 billion a year ago. Over $450 billion of the aggregate negative equity dollars include borrowers who are upside down by more than 50 percent." . . . About 10% of homeowners with mortgages have more than 25% negative equity. . . . Just under $200 billion more is for borrowers who have 25% to 50% negative equity. . . .

In Nevada, over 65% of homeowners with mortgages owe more than their homes are worth [and another 5% have less than 5% equity]. Arizona and Florida are around 50%. Michigan, Georgia and California are all over 30%.

From here.

The total number of mortgages that are upside down or near upside down (which in practice means that sale costs would leave the seller upside down) is 13.5 million. In February, there were 13.7 million people unemployed (an unemployment rate of 8.9%). While there is no doubt significant overlap between the two groups, many of the unemployed don't have mortgages, rent, or aren't upside down in their mortgages, so the combined misery numbers are great. There are far more people in the United States who are upside down on their mortgages, in default on their consumer loans, and/or unemployed than there are who are members of unions (although the two groups, of course, are not mutually exclusive).

In Colorado, about 20% of homeowners with mortgage owe more than their homes are worth, and another 5% have less than 5% equity. Nationally, about half of homeowners have mortgages.

Nationally, about 13% of all mortgages are in default, including about 4.5% that are in the foreclosure process. The 2010 peak was 14.5%. Before the housing bust, 5.5% was typical and about 1% of mortgages were in the foreclosure process at any one time.

While 8.5% of all mortgages are in default (excluding foreclosures which are another 4.5%), the rates vary by loan type. For subprime loans the default rate is about 30% (another 14% are in foreclosure). For option ARMs it is about 20% (another 18% are in foreclosure). For Alt-A is it about 14% (another 8% are in foreclosure). For FHA/VA/etc. loans it is about 10%. For non-agency jumbo prime mortgages it is about 5% (another 2% are in foreclosure). For agency prime mortgages it is about 3% (another 1% are in foreclosure).

Non-agency jumbo prime mortgages are defaulting at the rate the all mortgages combined did six years ago.

About 30% of all real estate sales are either short sales or sales of foreclosed properties.

Three years of recession have trimmed $1.4 billion of consumer debt off the nation's balance sheets, bringing the total to $11.4 billion, but much of that has come from writeoffs rather than payoffs.

About 74% of all consumer debt is purchase money mortgage debt, 6% is home equity revolving credit lines, 6% is car loan debt, and 5% is student loan debt. Credit card debt comprises 6% of consumer debt, and 3% of consumer debt is of some other type. Thus, the vast majority (91%) of consumer debt is either secured by collateral or not dischargable in bankruptcy, and two-thirds of the rest is held by credit card companies. About 10% of all consumer debt is currently in default, more than double the norm in a boom economy.

Sometimes foreclosure sales do cover more than is owed on the loan, but the people losing their homes often only find out about their windfall much later: "In a search of just three Front Range counties — Denver, Arapahoe and Adams — The Denver Post found that dozens of former homeowners were owed more than $653,300 since 2008." The biggest surpluses approach $50,000, and many are in the $10,000 to $30,000 range. Little affirmative effort is taken to find those entitled to the funds (often letters are mailed to the foreclosed upon house!).

A settlement has been reached with five big banks in the Robo-Signing foreclosure process scandal:

The lenders could be fined under the final agreement or forced to write down the value of their loans to borrowers who owe more on their mortgages than their homes are worth. The banks are Bank of America, Citigroup, JPMorgan Chase, Wells Fargo and GMAC. Together, they have 59 percent of all U.S. home mortgages, according to Miller.

Also under the draft terms, a lender's denial of a mortgage modification reportedly would trigger a review by an independent individual or panel.

Analysis

The fact that five banks have 59% of all U.S. home mortgages is itself remarkable. Their bad decisions (and bad decisions by lenders whose loans they purchased, often at a discount), are coming to roost, and in much of the nation a huge share of all families are under pressure as a result.

How do you even begin to have an economy on a basis that makes sense when 70% of homeowners with mortgages are upside down or have less than 5% equity, and your state has recourse loans, as Nevada does? I'd be willing to guess that Nevada also has a below average rate of free and clear homeownership, and that Nevada has a disproportionate share of loans that are more than 25% upside down which make up the lion's share of bank losses.

Why save money when you could be foreclosed upon at any time and have your savings seized for a deficiency judgment? Why pay your credit cards when you are in default on your mortgage, will lose you home in short order, and you will be subprime and unable to obtain new credit for the next seven years no matter what you do? The credit card company has no realistic possibilty of collecting out of your non-existent home equity, or your non-existent savings, and will have to compete with a huge deficiency judgment if you file for bankruptcy diluting their claim against any assets that you may have. They can hope to be first in line to garnish your wages for a while, but that is about it.

If the bankruptcy code provided for a cramdown for residential real estate, the creditable threat of it might lead to a mass produced mortgage modification wave with the consent of lenders in distressed real estate markets like these. But, it doesn't, thanks in part to the recalcitrance of people like Colorado Senator Bennet. So, tens of millions of people with upside down homes will soldier on with no incentive to make money. No amount of tax cuts can create an incentive to encourage people to maximize their productive earnings if creditors are in a position to immediately take all the tax savings away.

The priority that the tax code gives to child support and maintenance also creates a strong economic incentive for couples to divorce and shield some income from creditors (and squeeze out other garnishments of wages). Add to that the pressures that economic strife already places on families, and the situation becomes corrosive to families (althought this may be a ticking time bomb, right now, people can't afford to move out and form new households or hire divorce lawyers, so divorces are temporarily down).

There is really very little chance that the real estate in Nevada or California or Arizona or Florida will recover to their previously price levels any time soon either. Real estate in all of those states was grossly inflated by a price bubble that was deeply out of touch with any reality based measures.

If banks actively seek to enforce deficiency judgments against Nevada home owners, it isn't unthinkable that a third of more of all Nevadans could go bankrupt. A handful of banks are the beneficial owners of the lion's share of the real estate in Las Vegas and Reno.

READ MORE - What Ever Happened To Mortgages?

Did Unions Create The Middle Class?

Many people . . . believe there would be no middle class in America if unions did not organize a third of the workforce after World War II. That post-war era, the sixties, still represents one of the most prosperous eras in the nation's history. But that lesson has been lost on most people who oppose unions.

From here.

Krugman agrees.

I don't oppose unions. But, I am also deeply skeptical of the claim by union supporters, and of liberal economists like Krugman, that they were as important an ingredient in creating the American middle class as claimed.

The Comparative View

Consider, for example, Japan and Western Europe. Both societies are far more economically egalitarian than the United States. They pay their executives less, and have a far more even distribution of wealth. But, they do it in two radically different ways.

Japan's big businesses are formally unionized, but their unions are company sponsored affairs that are actually forbidden by law in the United States on the grounds that they would be too management controlled. Japan also has a fairly small public sector, a very paternalistic government, a fairly weak public sector welfare state, and role for married women that is anything but equal even though unmarried women have substantial economic equality with their married peers.

Western Europe is heavily unionized (compared to the United States) with unions that are much more vigorous in asserting their rights than American unions, and those nations also uniformly have a much more comprehensive public sector social welfare state than either the United States or Japan. Germany gives workers at public corporations seats on the Board of Directors of their companies. France tolerates the kidnapping of executives in the course of union-management negotiations and gives public sector workers a frequently exercised right to strike. Sweden has very high taxes that finance a public sector welfare state that makes marriage an economically unnecessary part of being a parent.

The United States has a union movement that was almost as powerful as that of Europe through the 1960s, but that has declined in the four decades since then. It has a public sector welfare state, but it is anemic. We work more hours per year than workers in any other country in the world, and have the most unequal distribution of wealth in the developed world, together with low taxes by developed world standards overall, as measured by tax revenues collected relative to GDP. We have arguably the weakest private sector union movement in the developed world, but have a large, but timid public sector union movement.

The Weak Chain of Cause and Effect

The weakening of private sector unions has not had some of the results that you would expect. Workplace safety is profoundly improved from the standards that prevailed four decades ago when unions were much stronger. The workers whose wages have stagnated have been in industries where unions were strong, not in industries where unions have never had much of a foothold, although, in those industries, union workers tend to be paid more than non-union workers. Disgruntled workers in an American workplace are more likely to call a trial lawyer than a union organizer. American workers have less job security than their peers in either Japan or Europe, although in Japan this is mostly due to a private sector understanding of fairness, while in Europe it is mandated by law.

Income inequality in the United States has risen more or less steadily since 1947. Changing rates of unionization have done very little to alter the trend line, which has arguably flattened a little for families in the bottom 95% of the income distribution in the last decade. Earned income inequality is risen in Europe as well, but has been mitigated by their tax codes and social welfare state, rather than fundamental differences in the structure of economic relationships between people within businesses.

Public sector workers in the United States got job security and good benefits first, and unionized second, many decades after the prevailing accommodation on the shape of public sector employment terms, conditions and compensation were well established.

Did Ethnic Diversity Play A Role?

Some people would argue that American tolerance for inequality has roots in a lack of shared ethnic identity found in both Europe and Japan. I can't rule that out. There is circumstantial evidence that heavy immigration in the late twentieth century has frayed the European consensus on the social safety net and management-labor relations.

Then again, the union movement in the United States has historically been strongest in places where massive immigration has been attracted by job creation, not economically stable places, or places with homogeneous populations. The only place in the agriculture sector that there has ever been any meaningful effort at unionization, for example, has been among immigrant farm laborers. To my knowledge, there are not now, and never have been any unionized plantations. Rural America has produced a great many co-operatives but very few unions.

The deepest economic inequalities in the United States are not in the South where there is the greatest ideological and historical tolerance of inequality in the form of slavery and then, in post-slavery racism, and where opposition to unions has historically been strongest. The plutocrats who have captured such an immense share of the national wealth tend to be based in places like San Francisco and New York City where the financial sectors are strongest, despite the high and progressive taxes that they face there and the strongly liberal local politics. The strongly anti-union Deep South is the home not just of pervasive black rural poverty, but of pervasive white rural poverty.

Southern anti-unionism at the grassroots level may be a product of discontent, in the context of Southern efforts to a great extent successful, to create the "New Rust Belt" in the American South, with existing union efforts to keep new manufacturing investment in the "Old Rust Belt" where their members held jobs in manufacturing companies. From their perspective, Northern manufacturing unions most important position was their opposition to relocating jobs to the South where they lived, rather than any deep felt concern about what it was like to work in a union shop, something few Southerners have experienced.

The current hotbed of union busting sentiment, Midwest states like Wisconsin and Ohio, have historically been relatively homogeneous and inclined to have politics that focused on the collective good. Wisconsin was the epicenter of Garrison Keillor's somewhat idealized middle class heartland where petty village quibbles and small town values prevailed over deep ethnic strife. Where Swedish Lutherans and German Lutherans considered their unions to be mixed marriages. Ohio was one of the first states to proudly embrace a land grant funded system of public education.

Working Class v. Middle Class

Another part of the conundrum of identifying the union movement with the middle class, is that until the relatively recent rise of public sector unionization, unions have been largely the province of the blue collar working class (aka lower middle class). The history of the American union movement is full a smudge faced miners, rank and file factory workers, postal workers trudging through rain, sleet and snow, firemen stinking of smoke, truck drivers and skilled tradesmen.

Today's union movement is more middle class than it used to be because the working class jobs that used to be its core constituency are gone or no longer unionized, while the relatively few middle class unionized jobs have survived and grown relatively more important to the movement as a whole.

The minimum wage and hour laws that unions worked to enact were all but irrelevant to middle class workers who were paid salaries and often exempted from their application. The workplace safety protections and worker's compensation regimes that unions pushed to enact didn't mean much to people who sat behind desks and cash registers all day. The fact that employers started to offer health insurance was as much a product of World War II era wage controls as it was a product of a healthy union movement and benefited non-union workers in factory offices as much as it did union workers on the factory floor.

The entire social class that was at the heart of the union movement has contracted, and the middle class that it now claims used to identify itself with management. Bank tellers have a great deal in common with factory floor workers. They aren't paid much. They are micromanaged. They are rank and file employees of large enterprises that thrive on coordinated mass production. But, factory workers who identified as working class unionized, while bank tellers who identified as middle class, didn't.

A college education and a union card used to be considered contradictions in terms; alternative directions in life. Union leadership is how smart young working class men who couldn't dream of securing a college education or the management jobs that came with it found a way to exercise power in the large institutions where they worked, just as they did as non-commissioned officers did in the military. Yet, a college education is now often considered the defining element of the middle class.

How did access to the college educations that were the thresholds to membership in the middle class open? Mostly through the GI Bill, and after that through the shift of selective institutions of higher education to merit based admissions in the 1960s and the parallel expansion of of state institutions of higher education to accommodate the needs of former soldiers entitled to it as a result of the GI Bill. The political resistance of the civil service that was created to meet this need to being downsized (at a time when higher education employees largely weren't unionized) and student radicalism, rather than labor union efforts, does more to explain why the gates to higher education remained open.

Conclusion

Does all of this mean that unions can't play an important role in strengthening the American middle class? No. They are eager to step up to the challenge and remake themselves as a movement, and it is a task worth taking on.

But, as a matter of history, it is not at all clear that unions played an important part in creating the middle class, which was instead apparently driven by the widening availability of higher education. Instead, unions actually worked hard to secure justice for the American working class and seemed to be making good headway in doing so until sometime around 1970, when that social class in American life entered a period of seemingly permanent economic stagnation.

READ MORE - Did Unions Create The Middle Class?

State Pension Shortfalls Driven By Financial Crisis

Most of the shortfalls in state pension funds are due to investment losses in the first year of the recent financial crisis (2007-2008), not overly generous promises made to public employee unions.

READ MORE - State Pension Shortfalls Driven By Financial Crisis

Wisconsin and 2012

Democratic partisans are fond of saying that anti-immigrant measures advanced by Republicans are good for Democrats because they alienate a large Latino population that would otherwise be inclined to vote Republican (see e.g. "Even More Opportunities for GOP Latino Alienation").

The Republican anti-union showdown with public employees unions playing out at the moment in Wisconsin (and the Denver Post's AP story advises me in other states across the country like Ohio, Tennessee, Indiana, Nevada and Florida) may have a similar effect.

One of the crucial sources of the big Tea Party wins in 2010 was union member ambivalence about voting for Democrats. While Democrats have near unanimous support from the leadership of organized labor, union members themselves barely favored Democrats more often than Republicans in 2010 election in many key races.

But, the current multi-state Republican jihad against labor unions, whether or not it is successful, may change that in 2012. By reminding the public that the Republican brand hates unions and favors making deep spending budget cuts substantially on the back of union member compensation, the Tea Party union members of 2010 may return to the Democratic fold in 2012.

Half of union members in the United States are public employees who are directly affected by the stance Republicans have taken in Wisconsin, and the other half don't have to be particularly prescient to see Republican attacks on public sector unions translating into attacks on their economic interests should Republicans gain control of the federal government as well.

READ MORE - Wisconsin and 2012

The Showdown In Wisconsin

Republican Governor [of Wisconsin] Scott Walker . . . is pushing a proposal that would eliminate collective bargaining rights for public workers and make them pay half the costs of their pensions and at least 12.6 percent of their health care coverage. The changes amount to about a seven percent salary cut.

From here.

The budget shortfall that is being used to justify the step cuts to state employee pay and denying unions their collective bargaining rights, of course, is a crisis of Governor Walker's own making created by tax cuts that he backed. Unions are willing to discuss compensation custs, but not the loss of their collective bargaining rights.

A core principle of American political conservatives is that unions are bad and should be busted at every available opportunity. As I've noted before at this blog, one of the key points in the Republican playbook at the moment is that public employees, particularly unionized ones, are overpaid relative to private sector workers (despite evidence to the contrary) and that they employees should bear a large share of the public spending cuts that Republicans campaigned on in the 2012 election.

In Wisconsin, where the 2012 election left Republicans in charge of both houses of the state legislature and the Governor's office, they have the votes to put that ideology into action. While private sector union-management relations are governed by the federal government's National Labor Relations Board, states have considerable freedom to adopt laws concerning the rights of their public sector unions.

Since they don't have the votes to win this battle in the legislative process, Wisconsin union members have marched in force (25,000 strong) on the state capital as the legislature considers the bill and state senate Democrats have removed themselves to an undisclosed location to deny Republicans in the state senate the quorum they need to pass the bill, echoing a similar tactic used in Texas redistricting battles within the last few years. Wisconsin also lacks the citizen's initiative process present in states like California and Colorado, that might have given public sector union members in Wisconsin an end run around the normal legislative process. The unions have President Obama's support, but he has little power when it comes to labor relations in state and local government, an area where even the expansive commerce clause power of Congress probably does not extend.

America's private sector union movement in the United States is close to moribund. Maybe this is due to legislative changes, like labor laws that permit the permanent replacement of striking workers and tolerate significant management misconduct in organizing elections. Maybe it is due to the changing character of the economy that has reduced employment in traditionally unionized industries. Maybe labor is a victim of its own success. The causes are a matter of great debate and controversy. The result, however, is not. American private sector unions haven't been so impotent in numbers or as disinclined to cause work stoppages since long before the United States passed its first national labor laws during the Great Depression.

But, public sector unionization has soared and continues to grow in most states. (Colorado is an exception to the trend.) In part, this is because public sector unions, unlike private sector unions, have employees who can't easily be offshored and employers who can't convincing argue that their wages must be kept low in order to prevent them from losing their business to the competition. Civil service protections that public employees hold to protect them from politically motivated corrupt patronage systems have also made it safer to public employees to organize without fear of losing their jobs than comparable private sector employees. Recall that:

In 1950 . . .the unionized workforce of 14.3 million workers . . . made up 31.5% of the total work force.

In 2008 . . . the unionized workforce of 16.1 million workers who made up 12.4% of the total workforce. The public sector which is 36.8% unionized, is as unionized as the private sector was at its peak. The private sector, which is 7.2% unionized, has the lowest level of unionization in the private sector since the 1920s, if not earlier.

This is a huge deal. As I've noted before, policy more often changes through widespread imitation at historic moments than it does through isolated case by case rational analysis. If Wisconsin is successful in breaking its public employees unions and slashing public employee compensation, the trend will almost surely spread to almost every Republican controlled state in the United States. If public unions lose big in Wisconsin it could mean the end of organized labor unions as a potent force in the American economy and political system entirely for much of the United States.

While looming labor-management disputes in the NFL have attracted lots of attention, public sector unions at the state and local government level in places like Wisconsin are the bread and butter of the labor movement in the United States today. This dispute alone involves hundreds of thousands of middle class workers and their families losing three and a half weeks of pay a year.

Public sector unionization is a different animal than private sector unionization. Protection from unfair unemployment termination has generally been a secondary issue for them because they already have civil service protections. Some public sector unions are legally prohibited from going on strike. While private sector unions can organize politically for labor laws and other laws favorable to their members, public sector unions can organize politically to put union friendly politicians in direct control of their employer.

But, the potential for strikes by public employees to rise to the level of general strikes and to bring vital government services to a halt, whether or not it is legal for them to do so, has always loomed in the background, and covert "sick outs" and work to rule slowdowns remind negotiators of that fact. Denver's police (who publicly deny that this was the case) recently carried out just such a slowdown last year over dissatisfaction with the vigor with which the City of Denver had finally decided to apply to cracking down on instances of police misconduct. Wisconsin is experiencing its own sick outs right now.

Assuming that the political process will eventually prevail in Wisconsin and result in public sector union crushing legislation being passed there, the question is how Democrats and labor unions will respond. With the next election almost two years away, working through the normal political process may not seem like a sufficient response to a powerful political player that is facing deep pay cuts for every single one of its members without any opportunity to collectively bargain the matter and is also facing something close to their very extermination as a means by which the economic cause of state workers can be advanced.

If anything can produce a high profile showdown that could shut down the government of the State of Wisconsin entirely through a work stoppage, legal or otherwise, this frontal assault on public employees unions seems to be a good candidate for it. If public employees' unions in Wisconsin lose this fight, they may be gone for good, and may see much of the rest of the public sector labor movement follow them.

Can they win? There is really no way to know until it happens. The last general strike in the United States outside Puerto Rico was in 1934. But, if public sector unions in Wisconsin manage to inflict decisive political pain on the Republican party in the state, even if they lose on the legislative front for the time being, they may have a real shot at remaining a relevant force in American politics.

READ MORE - The Showdown In Wisconsin

Should Liberals Care About NFL Unions?

NFL owners are seriously considering a lockout to push NFL players, who are unionized, to agree to an eighteen game season and other pro-football player contract reforms. Atrios says (via Steam Powered Opinions):

[L]iberals should care and side with labor, even if some of the players do make a lot of money. This is about how the pie gets split, and that matters even if it is a really big pie.

Analysis

I can't say that I share that sentiment very emphatically. Honestly, I don't have strong feelings about union-management relations in pro-sports generally.

The fact that pro-sports, and most of the performing arts, are organized into unions at the industry level is notable. This shows the potential for union power in industries with employers that are either small, or ephemeral (e.g. a movie production company or Broadway show run), which are ill suited to an employer based organizing approach.

Labor actions in these high profile fields are among the only labor actions that receive public attention in a modern union-management relations climate in which work stoppages have never been more rare.

But, these labor actions have not cast those unions in a very favorable light. The most recent writer's strike in Hollywood appears to have led to a permanent shift in favor of reality TV formats that have undermined union members. Appearing to deprive average Americans who have no strong economic stake with the owners or the talent of entertainment isn't a good way to make them your friends. The general American public has also been habituated to a distaste for public conflict over compensation in tough, battling ultimatum driven negotiations, something that they rarely experience in their own lives.

Indeed, in sports even more than in the other performing arts fields, the public media coverage of the money issues seems to take away from the enjoyability of the game itself. It tarnishes the images of all involved and the institution itself.

This isn't to say that I have lots of warm and fuzzy feelings for pro-sports team owners and management either. But, players and owners alike have a strong shared economic interest in extracting as much money from fans as possible. Why shouldn't liberals care as much about the size of this particular pie as they do about how it is split?

To be perfectly honest, despite Atrios' appeal to our liberalism, since I am not a die hard sports fan who stays abreast of the business of sports as well as the conduct of sports, I have very little sense of what share of the pie players, referees, and owners and managers of our professional sports leagues receive now, let alone whether there is any sensible reason for this mix. I do have a fairly fine tuned understanding of why different players get paid different amounts relative to each other and relative to other people in the labor market, from general economics discussions, but I know more about the relative split of profits in small enterprise, in movie productions, in investment banks, in utilities, in government and in industrial companies, than I do about industry specific divisions of loot in professional sports. (In fairness, he cites a Daily Kos diary that makes the case that players do get the shaft relative to franchise owners.)

Any responsible person, before taking sides in a dispute where someone seeks to change the status quo, ought to understand the status quo better than I do, rather than simply jumping on a bandwagon without regard to the merits. Surely, there is some fundamental sense in which the status quo is more or less fair, and favors one side or the other. Is the player's share fat or lean? Are management's demands sensible or oppressive? I certainly don't know the answer to those questions personally and would hesitate to have an opinion on how their negotiations should come out until I knew. While a presumption of unequal bargaining power between labor and management is reasonable in some contexts, it isn't at all obvious that such a presumption is appropriate in the case of NFL football players.

And, suppose that the split of the pie between NFL players and owners in the current status quo is unfair. My instinct is to wonder how that came to be, given that the status quo itself was a product of union-management negotiation. Perhaps, something else in the system of union-management negotiations is broken. And, if it isn't broken, why should anyone involved care what I or anyone else in the blogosphere thinks? If union-management negotiations generally produce good results, why should we fear that it won't do so this time around?

Do Unions Benefit Athletes?

Any effect that these unions have had in reducing compensation inequality among union members is less than obvious from pro-sports and the performing arts which have increasingly gravitated towards a winner takes all model, that owners have appeared (for the selfish reason of wanting a larger share of the pie) to advocated more than the talent. Is the second string outfielder or linebacker, or the chorus member in a Broadway show, or the infrequently recurring soap opera actress really better off because of the union? Perhaps, but these gains are often invisible to the general public, and are hard to quantify even for expert economists.

It is also far from obvious that pro-athlete unions do an adequate job of helping people who mostly have very high flying but short careers convert their brief moments of bounty into long term financial well being. I've known financial planners who specialize in that, but the extent to which they are used and the extent to which they are successful in achieving those ends, is decidedly mixed. Lots of athletes get feted and then thrown out and find that they have squandered their brief moments of plenty. Perhaps it is presumptuous to think that this is a job for athlete's unions, but being a liberal, I do think that.

The case that unions provide a negotiating edge is also atypical in pro-sports, because many or most pro-sports union members, unlike most ordinary union members, have professional agents on retainer who are charged with negotiating their contract terms to their advantage. While a typical union provides its members with both savvy in negotiations and power, the pro-sports player's union is purely a means by which to maximize employee power.

Liberal Instincts On The Organization Of Sports

My "liberal" instincts are instead to question whether it really makes sense for pro-sports teams to be organized as "for profit" entities at all, particularly in light of the ample public subsidies in the form of stadium construction and less tangible assistance in the form of public goodwill and loyalty, that members of the public provide to these teams.

Watching George W. Bush and his cronies in a box at the Superbowl brings to mind the underlying story about all that is bad about corporate sports. It also brings alive a question. Why, if the publicly held corporation is the secret to all great economic blessings, are pro-sports teams organized as closely held for profit businesses, rather than publicly held ones? These are capital intensive enterprises, so why don't they raise funds for stadiums with stock offerings and bond issuances?

A lot of the attraction of professional supports comes from tribal rivalry rather than the absolute quality of what actually takes place on the field. The fact that our professional soccer players aren't nearly as elite as our professional baseball players and get paid far less has only a modest impact on our feelings about rooting for the home team. If there was a national salary cap on compensation for pro-athletes of $100,000 per player, per year, we would still love pro-sports just as much. Appropriating that civic pride for private gain feels a little dirty to me.

In my ideal world, pro-sports teams might be owned by non-profits, perhaps affiliated with local governments and perhaps not, or organized as player owned organizations, although I can see that the very unequal and different in kind contributions of talent to these organizations might make a player owned form of organization problematic, because groups of co-owners tend to do a poor job of negotiating compensation arrangements with any degree of complexity among themselves.

On the other hand, I can't say that the college sports model, in which the immense enterprise that is centered around college athletes at large universities deprives those athletes of any compensation beyond scholarships, popularity and prospects of a pro-sports career, in the name of amateurism, is any better. In that circumstances, recognition of their legitimate contributions to the enterprise, which involve a great amount of work and commitment and produce economic benefit, are treated as a form of corruption.

Indeed, I am ambivalent about the linkage between education and organized sports at all. There is much to be said for the European model of having sports clubs independent of particular schools or colleges at all levels of competition. There is no deep reason that we should expect aspiring professional football, hockey and basketball players to attend college, while allowing aspiring professional baseball players to chase their dreams in the minor leagues instead.

READ MORE - Should Liberals Care About NFL Unions?

Historic Moments

Conventional political science exams questions like regime change and legislative change primarily as domestic events with domestic causes. But, this model doesn't do a good job of capturing what is going on in either process.

Historic Moments

One of the defining features of regime change, and of most notable (and many not so notable) legislative policy changes, is that neither happens in a vacuum. While political science likes to neatly divide itself into foreign affairs and domestic politics, the reality is that domestic politics is generally strongly influenced by regional context. These kinds of changes happen in waves at historic moments.

Moments of Regime Change and International Domestic Policy Change

We did not see an isolated dictator case of a dictator being replaced in Tunisia. We saw one man's suicide in Tunisia over bureaucratic hassles in a dictatorship that denied him a livelihood set of a public uprising region wide that has produced a change of regime in Tunisia after decades of dictatorship, a change of cabinet in Egypt accompanied by a promise of the existing dictator to depart in the fall and a promise that his son will not seek to replace him, a promise in Yemen to hold elections soon in which the current leaders will not seek re-election, the sacking of Jordan's cabinet, a promise of prompt local elections in the Palestinian Authority, and the possibility of further tumult in Syria and Sudan.

We did not see an isolated change in government in the Soviet Union. We the non-Russian Republics in the Soviet Union granted independence, the dismantling of Yugoslavia, and the abandonment of a Soviet Communist political and economic system to a greater or lesser degree by every Warsaw Pact country, and every successor nation of the Soviet Union and Yugoslavia.

The Colonial powers of Europe did not one by one decide to grant independence to their colonies. They did so en masse in the years around 1960, granting independence to dozens of newly independent nations all at once.

In Post-War Western Europe, each nation did not decide in a vacuum what kind of regime they would create. Essentially every regime that had been interrupted by World War II in Western Europe created a multi-party parliamentary system, reinstated a civil law judicial system, renounced the death penalty, developed political parties dominated by a Social Democratic party on the left and a Christian Democratic party on the right, and put in place a comprehensive social welfare system supported by fairly high taxes with payroll taxes and value added taxes constituting a fairly large share of the total tax burden.

In World War I, a single assassination in Serbia sparked a bloody world war. The Russian revolution in its wake rapidly spread Soviet Communist to the whole of Eastern Europe.

The process by which Latin American nations secured their independence and put in place republics was so similar from nation to nation and involved a wave of change so clearly linked in time that one studies of the "Latin American Wars For Independence" when one studies the region historically, rather than trying to understand any one of them independently.

Italy and Germany came into being as democratic states, and democracy took hold for good in France in the 1870s.

Democratic revolutions hit almost every monarchy in Europe in 1848.

Moments of Subnational Political Innovation

State constitutions change in much the same way. One year, no state has a prohibition on dueling in its state constitution. Half a decade later, they are widespread. One year, no state has merit appointment of judges. A decade later, the Missouri plan for merit based judicial appointments subject to retention elections is widespread. One year, no state grants women the right to vote. A decade later, women's suffrage is the norm.

* Legislative Innovation

You see the same thing in legislation in state legislatures in the United States, even on matters where federal government policy doesn't apply. California passed no fault divorce and it swept the nation in a few years. Pre-trial release programs that allowed recognizance release of carefully screened defendants awaiting trial went from an experiment to the national norm in less than a decade. Dozens of states passed smoker's rights bills in a few years. The original Uniform Commercial Code was adopted by a large share of all states in a short time period and that area of law has continued to be guided by Uniform Law Commissioners ever since, as have the areas of partnership law and a number of other "uncontroversial" areas of private law. All but a handful of states adopted court rules based on the federal rules of civil procedure in short order, and likewise codified state ethics rules for lawyers based on a bar association model in one big sweep. Most states adopted laws providing for condominiums in about half a decade. Gay marriage and civil union laws have rapidly swept the nation, when less than a decade ago there wasn't even one. States put in place public school systems and structured the financing of state institutions of higher education all at about the same times in about the same ways, and followed suit by consolidating public school systems at the same time decades later. The deinstitutionalization of the mentally ill was done at the state level but happened mostly within the span of a few years without any national guidance. The replacement of orphanages with foster care happened in a similarly sweeping movement in a short period of time.

Worker's compensation laws, minimum wage and hour laws, child labor laws, local "dry laws," married women with property acts, heart balm acts, and laws regulating union-management relations swept state legislatures in very similar forms in the Progressive era. Local zoning laws that were very similar in structure and content were enacted in almost every major (and minor) city in the nation in a small number of years.

A contagion model of innovation dispersal better explains most legislative policy change and regime changes than a conventional account of purely domestic struggles between political factions in individual states or even in individual countries in a region.

* Judicial Innovation

Courts are every bit as prone to waves of innovation as legislatures and indeed, are sensitive to both legislative and judicial trends. A court decision in one state that there is a constitutional right to gay marriage or civil unions produces legislative action in another, and visa versa. The shift to court rules based on the federal rules of civil procedure was adopted legislatively in some places, and by judicial rule in others.

These waves are not confined to areas of the law where there is an arguable common federal constitutional basis for the requirement, and this is justified by the doctrine of persuasive common law authority. Thus, for example, strict product liability in tort, once adopted in California by the California Supreme Court, rapidly became the law of the land in almost every state. A cause of action for unjust enrichment, which was an obscure, mostly European legal concept until the critical moment, rapidly became a standard part of every commercial lawyer's arsenal of causes of action.

Moments Of Economic Change

Economists tend to be more conscious of this than political scientists, although the economists who recognize that economic change is follows a path dependent, evolutionary contagion model of change than acting like a thermodynamic system that is perturbed around an immutable natural equilibrium are still in the minority.

An innovation like franchising or "big box stores" comes along, and, in a decade of two, they are the dominant means by which retail sales are conducted. An innovation like subprime mortgage financing goes from being a trivial part of the mortgage finance industry to an immensely rapidly growing significant part of the whole over a decade and the vanishes almost entirely from the economic landscape in a year or two. A deregulated telephone industry engages in an intense marketing effort for long distance plans and phone service features like caller ID for less than a decade then suddenly starts almost giving long distance services and phone features away and launches into a competition to cell broadband access and mobile phone packages.

Economic collapses tend to spread even more rapidly than the spread of new economic models. The steel industry in the United States went under in the blink of an eye. The textile industry collapsed almost as fast. Airline bankruptcies have happened in waves. Travel agencies were culled in a couple of fell sweeps. Free standing investment banks organized as such disappeared from the economy in a matter of months, despite the fact that many of these firms had been around for more than a century. It took about sixteen years for the housing bubble that led to the financial crisis to reach its peak and only about three years for housing prices to collapse, with most of that devaluation happening in the first year.

There have been gradual, long term shifts in the economy, like the slow decline of the private sector labor union over about four decades, or the shrinking share of agriculture as a percentage of the labor force. But, if anything, these incremental charges are the exception, rather than the norm, and even these gradual changes conceal more dramatic shifts in particular industries and subindustries, and in particular regions.

Outlines of the Contagion Model Of Legal Innovation

What does a contagion model of political, economic and social change look like?

Political, Economic and Social Change Generally Happens In Sweeping Moments

Most of history, by which I mean political, economic and social change, happens not in gradual, uncoupled rational change by individual governments or businesses, but in sweeping historic moments that change the whole landscape in a flash like a disease outbreak, in a way that is path dependent and evolutionary in character.

Waves Of Legal Innovation Are Not Driven Primarily By Formal Legal Mandates

This happens even if there are no political or legal institutions with any formal authority to compel this to happen, and even if the changes adopted in one place have little spill over effects. The United States Constitution was very carefully drafted to make it possible for different states to have different suffrage rules without changing the federal balance of power. Yet, women's suffrage spread rapidly none the less and was the law in almost every state by the time that the 19th Amendment made it mandatory in federal elections, and while the U.S. Constitution does not expressly guarantee women the right to vote in state elections, few people doubt that the 14th Amendment equal protection clause (which clearly did not compel women's suffrage in practice at the time that it was adopted) would be held to compel states to give women the right to vote today.

It is the power of the idea that seems like a good one in its context, once it is cast in the spotlight communicated to the right outsiders, and not outside compulsion, that drives waves of innovation.

Sometimes there are coordinating forces. Federal legislation, or international treaties, or U.S. Supreme Court rulings may force state or national governments to follow a larger trend. But, as often as not, these compulsions are addressed to recalcitrant holdouts from trends that have already taken hold as they are influential in bringing about the bulk of the trend. By the time that Jim Crow laws were dismantled in the U.S. Civil Rights movement, apartheid laws had vanished from most of the world already -- and South Africa was for decades, the only country in the world that had to be compelled by international pressure to dismantle its apartheid system until it eventually submitted. Federal laws governing union-management relations were enacted only after they had become widespread at the state level. The European human rights treaty that banned the death penalty in member nations was adopted only after almost every nation in Europe had already done so.

Waves Of Change Have A Trigger

A wave of political, legal or cultural change generally has a clear identifiable trigger that starts it, focusing the attention of people with the power to act upon it on an idea or possiblity or reality.

The current uprisings in the Arab world were triggered by the Jasmine Revolution which in turn was triggered by the self-immolation of a particular young man in Tunisia. The fall of the Soviet system began when Mikhail Gorbachev started to implement Perestroika in late 1988.

The "no fault" divorce wave of legal innovation was triggered by California's enactment of its "no fault" divorce law. Women's suffrage didn't take off until Wyoming, which had adopted women's suffrage as a territory in 1869, became a state in 1890 (and was followed by Colorado in 1893 and many other states soon afterwards).

The Great Recession was triggered by a short sequence of economic events in the fall of 2007. The Great Deprssion was triggered by the stock market crash of 1929.

A First Innovator Is Often Not The Trigger For A Wave Of Change

Clearly, it does not mean that the first place to innovate will set off a wave of change. Indeed, much of the time, the first innovator or two will stand alone for decades or more before the wave of change takes hold. California clearly set off the "no fault" divorce legislative wave, but other states had no fault divorce for decades before it adopted it. India was granted independence from colonial rule more than a decade before decolonialization became the norm and a decade and a half before it reached its 1960 peak. Wyoming had had an obscure limited liability company law on the books for many years before changing tax regulations caused this kind of company to become one of the primary means of organization for closely held businesses in the United States. The United States, France, Switzerland and Iceland were the only nations to have had republican forms of government for almost a century before democracy became the norm in Europe.

Indeed, a well proven test case may be important in making widespread adoption of an innovation happen more smoothly when a wave of change takes hold. Tunisia's Jasmine Revolution would not have spread had demonstrators there been swiftly gunned down and failed to secure any change. The revolutions of 1848 in Europe would probably not have begun had France and the United States not established that Republican government might be a viable possibility decades earlier.

Waves Of Change Can Only Be Triggered When the Time Is Right

Most of the time, the status quo prevails. Yesterday's dicatorship will almost always be tomorrow's dicatorship. Yesterday's fault based divorce law will remain on the books until the moment comes when no fault divorce sweeps the nation. Last year's housing prices will be a good predictor of this year's housing prices.

An single young man's suicide would not have triggered the Jasmine Revolution in 1985, when the latest dictator had been in office for only a few years, and the Soviet Union appeared to provide evidence that one party states could be powerful and economically successful. No fault divorce wasn't ripe to sweep the legislative landscape until lawyers and members of the same social class as legislators had become familiar with just how ugly and hypocritical the increasingly common incidence of fault based divorce had become, and would not have happened without the ferment caused by the sexual revolution at a cultural level. Limited liability companies weren't very attractive until they received a desirable tax treatment. The Financial Crisis that gave rise to the Great Recession wasn't possible until a housing price bubble had reached an unsustainable level, and the entire financial industsry was exposed to more housing default risk than it could easily bear.

Waves of Change Follow Long Periods of Inaction.

Awareness of the problem that will be addressed by the spread of innovation doesn't have to be front and center in the public discussion. Indeed, it may be that a wave of innovation is possible only in circumstances when a problem or imbalance is widely known to exist by everyone involved but is considered an off limits issue or an issue of secondary importance that is not publicly acknowledge by all but a fairly small group of activists.

When a problem is the subject to active public discussion as an important public issue that receives wide attention and is not "off the table," the status quo is less likely to fall so far out of balance that a new wave of innovation, other than any wave of innovation that is already being ridden and worked through at that very moment, can be triggered.

A seven year old regime isn't going to trigger an uprising unless it is very bad. A regional political climate in which most of the region has been governed by local strongmen for three decades of more will.

Political innovations like term limits may be important in securing political stability because they prevent incumbency from allowing the political leadership to grow stale and prevent incumbency from being used with full force to suppress other political views (perhaps even intraparty, rather than partisan opposition, views).

Waves Of Legal Change Are Often Incomplete

A wave of innovation also often does not completely run its course. While the vast majority of the world's colonies secured independence by the 1970s, a handful remained colonies into the last decade of the 20th century and a few colonies remain today. The United States was a hold out against international norms on slavery and apartheid and remains a hold out among developed nations on the question of the death penalty, which is uses more widely than any other developed nation. Cuba held onto a Soviet style communist regime despite the fact that all such regimes in Europe were replaced. Spain had a dictator long after the other nations of Western Europe had genuine multi-party democracies.

This is true at the subnational political level as well. Almost every major city in the United States adopted a zoning code, but Houston was a hold out. The move to replace the grand jury with a preliminary hearing as the main way of determining if probable cause existed to bring criminal charges swept the Western United States, but did not upset the constitutional entrenched rules of almost any of the Eastern states. New York State and California resisted the national trend to adopt state civil procedure rules modeled on the Federal Rules of Civil Procedure. Nebraska uses a unicameral legislature notwithstanding the fact that every other state in the country has a bicameral one. Lousiana and Oregon permit non-unanimous jury verdicts in felony trials contrary to the rule of every other state.

Waves Of Legal Change Do Not Require Genuinely Superior Proposals

The hold outs from waves of innovation tend to disprove the theory that waves of innovation happen because the change that has swept across many jurisdictions actually has overwhelming superiority on the merits.

The differences in the criminal justice process between Oregon, which permits non-unanimous felony jury verdicts and Washington, which does not, is subtle. New York State's refusal to adopt civil procedure rules modeled on the Federal Rules of Civil Procedure has not caused an exodus of business litigation from the state, despite the ability of businesses to agree to other forums. New York State's failure to adopt no fault divorce laws until a year ago did not prevent people from moving there or attract people to the state. Houston's land use patterns are not much different from those of other large Texas cities that have zoning codes (it has more multi-family housing in single family neighborhoods and a few more neighborhood convenience stores, but otherwise isn't much different). North Carolina has suffered few obvious ill effects from continuing to permit alienation of affection lawsuits that have been banned in almost every other state. Cuba's communist economic and political policies have not made it the poorest or more oppressed nation of Latin America. The places that remained colonies long after most of the world had decolonized, like Hong Kong and the British Virgin Islands, are not obviously any worse off than those countries that gained their independence, indeed, on the whole, they are better off than their peers that gains independence sooner.

It is enough that a proposed legal change is widely believed to be superior. Indeed, even proposed legal changes that empirically proved after the fact to be clearly dysfunctional, like the adoption of Western style democratic systems and legal regimes in newly independent nations that were former European colonies, which led to long periods of one party states, dictatorships, or military regimes in short order in almost every place they were attempted the first time (and often the second and third time) that they were attempted, did not prevent legal changes from being rapidly adopted on a widespread basis.

Wave Of Legal Change Have "Natural Boundaries"

Legal and political innovations (and no doubt economic and cultural ones, as well) do not automatically sweep the entire world. They have an impact only on jurisdictions where changes elsewhere are viewed as relevant.

The impact of the Jasmine Revolution in Tunisia has spread to almost every other Arab state in region with a generally similar history. But, it shows no signs of extending to dictatorships in former Soviet Central Asia, and doesn't even seem to be spreading to dictatorships in Sub-Saharan Africa or Southeast Asia.

Chinese style communism had enough of a distinct identity of its own that it did not collapse when Soviet Style communism did.

Political innovations in Europe in the 19th century had little impact on most of Asia and Africa that were seen as different in kind than European nation-states, but did have an impact on North American and Latin American colonial states whose significantly European populations did see their situations as more parallel to those of Europe.

Western European nations in the post-World War II era have generally seen political and legal innovations in other Western European nations as relevant to them, but have generally been oblivious to political innovations in Eastern Europe, the Third World or the United States. Latin America, Canada, Australia and New Zealand have paid more heed to innovations in Europe than in the rest of the world, with Latin America being particularly strongly influenced by Iberian political and legal development, and Canada, Australia and New Zealand being particularly strongly influenced by English political and legal innovation.

The United States, by and large, has borrowed relatively little from the rest of the world politically, legally or culturally considering the amount of information available to it from the rest of the world. For example, even innovations adopted everywhere else in the world, like the metric system, have only made modest inroads in the United States. Indeed, the general disregard that American policy makers have had for the rest of the world, and their tendency to focus heavily on federal rather than state and local politics for reasons explained by the national level of organization of academic scholarship, may explain the relatively insensitivity of American legal scholars and political scientists to the profound role of waves of legal and political innovation that is so obvious elsewhere.

Lousiana has resisted many legal innovations that are widespread in the rest of the United States because it sees itself as a civil law jurisdiction unlike the other 49 states in the Union, although this sense of exceptionality appears to be waning. Utah, similarly, is a place where political and legal innovations may arise despite not being found elsewhere, and may not spread very readily when Utah alone innovates, as its identity as a predominantly Mormon state limits the tendency of other states to follow its lead.

Political innovations like the realignment of Christian conservatives from the Democratic to Republican party have been profound in the Southern states where there was previously a dominant party system in which the Democratic party controlled everything and was the only viable political party, but have played out very differently in places that had a viable two party system before the Republicans adopted the Southern strategy.

To the extent to which jurisdictions are within the same "natural boundaries" and receive information from each other, they will strongly tend to follow the same course of political and legal innovation. But, places outside those natural boundaries will tend to follow courses of political and legal evolution independent of those within those boundaries.

"Natural boundaries" of Legal Innovation Aren't the Same In Both Directions.

The strength of the natural boundaries aren't necessarily the same in each direction and flow from historical ties and relatively scale. Japan, for example, to a much greater extent than any other nation in Asia, due to the lingering impacts of U.S. involvement in the post-World War II reconstruction of the nation, is influenced by the U.S. much more than other nations of Asia that tend to receive the U.S. influences that do impact them second hand through Japan.

For example, after U.S. occupation, the Japanese began to celebrate Valentine's Day, although in a different way than in the United States. In Japan, women express their romantic feelings for men on February 14 (generally with gifts of chocolate), but men reciprocate towards women romantically not on Valentine's Day but on "White Day" on March 14, and this modified Valentine's Day-White Day tradition has spread from Japan to South Korea, urbanized China and Taiwan (South Korea, in turn, had further innovated with "Black Day" on April 14, when singles who lacked Valentine's Day and White Day suitors commisserate together.) The Japanese have also adopted a version of the American criminal jury trial, baseball, a form of the American Thanksgiving celebration (in Japan they have KFC Chicken instead of the grand Turkey feast), Western clothing styles, American style toilets, and their own versions of the American comic book tradition.

But, Japanese political, legal and social innovations have had considerably less penetration into the American scene, and Japan, because it is considerably different from the U.S. has adapted rather than directly copied many of the innovations it has brought from the United States and Western nations generally. In the same time period, in contrast, South Korea, which sees Japan as within its national scope of relevance as a model, has heavily borrowed from the Japanese model in its laws, form of economic organization and culture.

Dominant Players More Strongly Resist Innovation From Others

It also seems to be the case that the more dominant a political and cultural unit is, the less prone it is to be influenced from contagions of innovation from elsewhere. New York, California and Texas are more comfortable being outliers that ignore legal and political innovations from outside their states than Connecticut, Washington State and Oklahoma. The United States was more comfortable ignoring innovations in the rest of the world than the nations like Canada, the United Kingdom, France, Germany and Italy.

The fact that Egypt could be so strongly influenced politically by developments in much smaller, but otherwise very similar Tunisia is a testiment to Egypt's lack of dominance in the region and its lack of a strongly distinct self-identity from its neighbors as a culture of its own as opposed to as a large generically Arab state, at this moment in history. Its unique identity has been swallowed in its understanding of itself by its regional identity, something that was not true in the ancient world, were it was a dominant player on the international scene that largely went its own way.

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