Maryland and Virginia

First published in the Washington Herald Telegraph

Jobs and the Plight of the Maryland and Virginia Governors

Both of the incumbent governors in Virginia, and Maryland have staked their political plans and reputation on creating more jobs. In Virginia, Governor Robert McConnell has pledged to make jobs his top priority while in Maryland Governor Martin O’Malley is defending his record and priorities on jobs. Given the well published need for jobs their promises are easy to understand, but let’s weigh the prospects for success.

Virginia reached its highest monthly average of 3.76 million establishment jobs in 2008 whereas Maryland reached its highest monthly average in 2007 with 2.61 million jobs. Both had declines for 2009 from their previous average highs. In Virginia, jobs were off by a monthly average of 126,000; for Maryland jobs were off a monthly average of 87,000.

The jobs picture is not improving yet (June 2010). The 2010 monthly average of seasonally adjusted jobs through May dropped another 19,000 in Virginia and by another 16,000 in Maryland. To be fair to the governors though, the last decade has not been a good decade for jobs and both governors face similar problems creating jobs.

Both states have well publicized job losses in manufacturing, but the decline goes back many years. Virginia has a loss of 148 thousand manufacturing jobs since 1990. Maryland is down 80 thousand in the same period. For Virginia manufacturing was 13.4 percent of statewide jobs in 1990, but only 6.6 percent by the end of 2009. In Maryland manufacturing accounted for 9.1 percent of statewide jobs in 1990 but only 4.7 percent now.

Both states need new jobs to replace their lost manufacturing jobs before they can add jobs. That means both states must have faster than average growth in service industry jobs to make up for the decline in manufacturing. Trouble is there are major sectors of the service economy that are not growing at all, or growing too slowly to maintain their share of statewide jobs.

For example, wholesale and retail trade accounted for 383 thousand jobs in Maryland for 1990 but 364 thousand trade jobs in 2009. In Virginia trade jobs were 474 thousand jobs in 1990 and 511 thousand in 2009, but the 2009 total is 14 percent of statewide jobs compared to 16.4 percent in 1990. Both states show a continuously declining share of statewide jobs in trade.

Using computer technology in trade, especially for barcodes and inventory management increases labor productivity. Retail and wholesale sales volumes per work hour are up and sometimes at rates comparable to productivity in manufacturing. Higher productivity limits job growth.

The use of digital technologies and business consolidation has affected labor productivity and jobs in other service industries. In addition to manufacturing and trade Maryland and Virginia have a nearly identical group of service industries that have a twenty year record with a declining percentage of jobs. Include mining, utilities, information services such as publishing, broadcasting, and communications, banking, real estate, and repair and maintenance sectors as service industries losing share in statewide jobs. Maryland’s declining industries lost 10 percent of jobs since 1990. In Virginia the losses are 11.4 percent.

Shares must total 100 percent, which assures a higher percentage of jobs in a shrinking number of other services. These other services are health care especially, along with education and selected professional services, particularly computing. Business support services and restaurant jobs show gradual increases, but they are hardly the services that governors want to promote when they discuss new jobs.

Health care including social services continues to create more jobs month after month in the national economy where it now has 12.5 percent of establishment jobs. The recent expansion of health care insurance passed by Congress will help the states generate new jobs. Virginia lags behind in health care jobs with only 10.1 percent of statewide employment. Maryland health care has 12.7 percent of statewide jobs, slightly above the national average, but both governors will need to support health care expansion and concentrate on producing as much health care within their respective states in order to meet their employment goals.

Education like health care has a 20 year record of steady growth in jobs. Maryland jobs in private and public education are now just over 11 percent of statewide employment, above the national average. Education and health care are both sectors where computer technology and the digital revolution have limited ability to raise labor productivity compared to service sectors like finance and communication. Even though many people write checks and do their financial business with paper, the wider use of digital technology could further erode employment in finance, insurance and communications.

Both states have a third service sector with a continuously higher share of jobs: combined business and professional services. Virginia has the best record here with a 4.4 percent jump in professional service employment from 5.9 to 10.3 percent of statewide jobs from 1990 to 2009. Virginia has been able to attract computing design services, which jumped from 45 thousand jobs in 1990 to 137 thousand jobs by 2009.

Maryland has also done well with professional and business service jobs, which are up to 224 thousand in Maryland for 2009, but only 8.9 percent of statewide jobs. Like Virginia, computer design services have the most jobs in professional services, but 60 thousand jobs compared to 137 thousand for Virginia.

Virginia has also been successful in bringing corporate headquarters to northern Virginia. Jobs in the management of companies reached a high of almost 77 thousand in 2008, an impressive total with 2 percent of statewide employment, higher than the national average. Maryland has 20 thousand jobs in this category.

The professional service part of business and professional services has jobs in law, accounting, architecture, engineering, computer design, management consulting, scientific research, advertising, and veterinary services. The business services part has supporting jobs in administrative and facilities services, employment services, and support services in telemarketing, security, janitorial, landscaping services and a few more.

Professional services have the best chance of any services to be sold in other states and in the global economy. Business support services along with health care, education and so many service industries tend to be local services, whereas professional services give both governors a chance to promote services and jobs the bring money from outside their states to support jobs with exported services.

The reality of shifting jobs within the service industry along with the long term decline in manufacturing limits the options of both governors. If they can generate economic activity and jobs in health care, education, and professional services then these should pull along additional jobs in business support services along with leisure, hospitality, and personal service jobs.

Federal, state and local government jobs in both Maryland and Virginia continue to be the biggest employers in both states. Governments have 19.2 percent of Virginia jobs in 2009 including public education; 19.5 percent of Maryland. Politicians seldom advocate government jobs as a solution to job needs, but neither governor can afford to sit by and let these jobs decline, no matter how unpopular taxes and spending come to be. State and local jobs are spread out geographically and help maintain a core of jobs in many communities. If these jobs decline, other jobs will decline with them.

Both governors will need to maintain construction jobs, but neither can expect there will be enough new construction jobs to help much with statewide job needs. Construction employment in the national economy fluctuates around 5 percent year in and year out. It has not gone above 6 percent in the national economy since the 1940’s.

Both Virginia and Maryland are already doing about as well with construction jobs as any state could expect. Virginia had construction jobs above 6 percent of statewide jobs in some years over the last 20 years and continued above 5 percent even through the recession. Maryland has done quite well also with construction jobs above 5 percent through the last twenty years.

Both governors made promises on jobs that will be difficult to keep. We wish them well and want to remind them they are not alone. There are 27 states showing lower employment in 2009 compared to 2000 but Maryland and Virginia are not among them. If the two governors concentrate on health care, education, and professional services, then new jobs could generate enough new spending to boast employment in the supporting service sectors. They are getting off to a slow start, but we can check their progress at a later date.

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Value and Work

Sometimes I hear people say something like “The wealthy worked hard for that money, and free markets determined what they do is of such high value.”

Such statements raise a question for economists. Can value be measured to show that wages reflect individual productive value?

It is an old question that goes back into the 19th century when British and European philosophers and economists applied science reasoning to the craft industries of the day: wheelwrights, blacksmiths, shoemakers and so on.

These economic philosophers suggested that if a shoemaker works 8 hours a day producing 5 pairs of shoes and then sells them at $10.00 each, he produces $50 worth of value.

Then they had the shoemaker hire a helper to specialize in cutting leather while the shoemaker sews and assembles the final product. Together they make 9 pairs of shoes a day.

We can see right away the shoemaker’s shop went from 5 pairs a day to 9 pairs a day so the helper added 4 more pairs to the total produced in a day. His production can be measured in money terms when the product is sold.

Craft industries would be expected to have small local markets so it might be necessary to lower the price to sell 4 more pairs of shoes a day. If the price is lowered to $8 a pair to sell 9 pairs per day instead of 5, then the revenue jumps to $72. With that knowledge we can see the new hire’s work added $22 = $72-$50 of value a day to the firm.

If the hired helper is paid what he is worth to the firm it will be $22. It is a maximum because if pay exceeds $22 the firm’s net revenue will drop below $50 and the shoemaker would do better without the helper. The wage could be less than $22 depending on how many other people apply for the job and how many other shoemakers compete for hired help.

It might be a surprise to learn I have condensed and summarized what continues to be part of current study in economics courses throughout U.S. colleges. It uses the scientific method because only one thing changes, labor time, while everything else remains constant. The additional product of labor can be precisely determined as part of the experiment. Economists continue to use examples like the shoemaker because it applies science to wages and they want people to believe that today’s wages reflect individual productive value as part of science, and not politics or favoritism.

For those who are comfortable transferring the fable of the shoemaker to the wages and incomes in today’s economy, including the wealthy, they will feel comfortable that the wealthy earn what they produce. For some of us though, it is all bluff.

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Student Aid and Tuition

The Education Trust, a nonprofit advocacy group, recently released a report and statements titled “Opportunity Adrift” that criticizes the financial aid practices of public universities. The report used data from 2003 to 2007.

The report accused public research universities of increasing the amount of aid to students whose parents make at least $115,000 a year by 28 percent, to $361.4 million. Also it reported that public colleges routinely award as much in financial aid to students whose parents make more than $80,000 a year as to those whose parents make less than $54,000 a year.

Apparently public universities do have authority to favor the neediest students over those who are better off, but if tuition is going up at a faster rate than the maximum in Federal government need based financial aid then students of modest means will be crowded out anyway.

Posted in-state tuition at the University of Virginia in the 2002-2003 academic year was $4,595; in 2008-2009 it was $9,505. That amounts to an annual compounded rate of increase of 12.88 percent.

Virginia is not alone. At the University of Arizona the increase over the same years was 14.23 percent; at University of California-Berkeley it was 10.52 percent; at the University of Colorado-Boulder it was 12.63 percent and so on.

Federal financial aid comes primarily from grants and loans and it is not keeping pace with the inflation in college tuition. Grants are the best form of aid since they do not have to be paid back, but grants and loans have yearly upper limits.

From 2003 to 2007 the top Pell grant award was frozen at $4,050, but went to $4,731 for 2008. It should have been $5,832 by 2008 if it was keeping up with inflation as measured by the Bureau of labor Statistics education price index, one component of the Consumer Price Index.

But the price index comparison doesn’t measure the short fall of funding in the years 2002-2008. In the 2002-2003 academic year at the University of Virginia a Pell grant covered all but $545 = $4,595-$4,040 of tuition. In 2008 the gap of funding was up to $9,505-$4,731 = $4,774.

The more grants in aid fall below tuition the more difficult it will be for prospective students from moderate income households to finance their education. In the period from 2003-2007 wages were not keeping up with inflation either. Federal student loans have limits and Congress raised interest rates during the years of the study.

In this way we shouldn’t be surprised that State Universities are channeling more financial aid money to higher income applicants because we suspect they have fewer lower income applicants who can afford to fund the rest of their tuition. It also suggests that the Federal Financial Aid program is the problem more than the state universities.

There is reason for optimism because the Obama administration has increased the Pell Grant maximum $5,350. Of course we shouldn’t ignore the policies of state universities in directing their Financial Aid, but the first place to look for problems is at Federal Financial Aid.

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The Big Short

Michael Lewis, The Big Short: Inside the Doomsday Machine, (New York, NY: W.W. Norton & Co. 2010), 266 pages, $27.95

The Big Short tells the story of the 2008 financial crash by following a small cast of characters who saw it coming. In a brief prologue, titled Poltergeist, Lewis recounts his experience on Wall Street in the 1980’s by summarizing the period as a time when a great nation lost its financial mind. He told that story in his first book on Wall Street, Liar’s Poker, published in 1989. That book is still relevant and makes a good preamble for The Big Short.

Back in 1989 Lewis had hope the finance sector would improve. Now he is disgusted that nothing has changed, but he wants to set the record straight by telling the story of the people who not only saw it coming but also had the nerve to bet on the outcome.

The story begins when we meet the first in a cast of characters: Steve Eisman. Eisman got a chance to operate his own hedge fund, Front Point Partners, after some years working at Oppenheimer securities. He invited several other like minded colleagues to help: Vincent Daniel, the numbers guy, and Danny Moses, the trader. Before long Daniels began to notice a high rate of defaults on manufactured housing sold with sub prime mortgages. It was the first in a long list of evidence showing the sub prime mortgage bonds had no real earnings.

In Chapter 2 we meet Michael Burry, who was finishing medical school and starting his medical internship, but found time to pursue his fascination with stock and bonds. He started his own hedge fund: Scion Capital. Mike Burry found he could earn good returns as a contrarian who bet against popular trends, the perfect approach for the sub prime mortgage market.

After we meet Michael Burry but before we meet the partners of Cornwall Capital, the third of the three hedge funds that Lewis features, we meet Greg Lippmann. Lippmann is a Deutsche Bank bond trader who is the wild card of the sub prime mortgage meltdown: an oddball among oddballs. He not only decided that vast numbers of home mortgages were certain to default as soon as home prices stopped rising, he developed a 42 page presentation to promote and sell the idea. The presentation was titled “Shorting Home Equity Mezzanine Tranches.”

To make money the Lippmann way required buying Credit Default Swaps on the worst sub prime mortgage bonds. The Credit Default Swap is a contract sold as an insurance policy against the risk of bond default. A buyer pays periodic premiums over the years of the contract to insure against the loss of principal in a default.

Credit default swaps are not regulated as insurance so it is up to the buyer to discuss the seller’s reserves, or ability to pay if there is a default, but the hedge fund does not need to be insuring against a debt they own. They can enter into a contract to buy a credit default swap because they expect, or hope, a bond will go to default and they will get a payoff.

Markets with buyers of credit default swaps need sellers of default swaps, which turned out to be the insurance giant AIG. They were willing to sell billions of credit default swaps. Beginning on page 72 and going to page 77 we learn more details. We learn that Front Point Partners and Scion Capital were not the only ones buying Credit Default Swaps, Goldman Sachs was also buying them. That put Goldman Sachs in the position of selling bonds to customers while betting on them to default.

There is more however, because Goldman Sachs apparently reasoned that Credit Default Swaps generated a cash flow from premiums payments that was similar to the cash that bond holders get from bond interest. From this idea Goldman Sachs began selling a bond called a synthetic CDO where the buyer received the amount of the credit default swap insurance premium as long as the underlying bond did not default.

To sell these so-called bonds they had to pay what Lewis calls “fat fees” to Moody’s and Standard and Poor’s to falsely rate their synthetics with a triple A rating. In a footnote on page 77 Lewis tells readers they get a gold star if they followed the story so far. I may not deserve a gold star, but readers should be warned I read these pages several times to understand whatever I understand.

By chapter 5 we learn 13,675 hedge funds reporting results and that despite the hard sell of blunt talking Greg Lippmann only 10, or perhaps as many as 20, of these hedge funds are actively bet against sub prime mortgage market.

Chapter 5 is also where we meet the managers of Cornwall Capital, the final hedge fund the Lewis describes. The founders, if that is the word, were two thirty year old guys with a $100,000 Schwab account: Jamie Mai and Charlie Ledley. Later they brought in their neighbor Ben Hockett who had Deutsche Bank experience.

They started by turning a $26,000 purchase of Long Term Equity AnticiPation Securities(LEAPS) into $526,000. LEAP’s we learn are a contract to buy a stock at a fixed price in the future. Eventually Cornwall Capital bought Credit Default Swaps that ended up as millions when the crash came.

The remainder of the book’s narrative follows the trials and troubles of the managers of the three featured hedge funds as they cope with the rest of the financial sector. Even after Cornwall Capital has amassed $30 million we read how they cannot get the “bigshots” of structured finance to take them seriously. We go with them to a Las Vegas conference in January 2007 where Steve Eisman stands up and tells the featured speaker he is wrong and a fool.

Over more than a hundred pages readers learn the personal burdens of predicting a crash. Running a hedge fund full of credit default swaps requires spending money on insurance premiums with nothing coming in until a default and the payoff. The delay of more than two years before the crash took its toll as nervous hedge fund investors questioned the whole strategy. The crash came and the payoffs were millions, but the winners Lewis interviewed sounded depressed more than vindicated. Realizing the financial sector was really out of its mind was not something they wanted to celebrate.

The book ends with an epilogue where Lewis has lunch with his former boss from the 1980’s, John Gutfreund. Recounting the lunch conversation helps tie the recent abuses to their beginning, which Lewis puts at 1985.

In the end the losers lost little because the federal government stepped in to save the bankrupt firms of Wall Street and their CEO’s who gambled with other people’s money and lost. Lewis reminds readers that Congress appropriated funds intended for Secretary Henry Paulson to buy sub prime mortgages from banks, but apparently the money was handed over to Morgan Stanley, Goldman Sachs and others with no strings attached.

Lewis avoids suggestions for reform, even something as simple as a 90 percent tax bracket for the income over several million dollars. I am reminded of a comment of Will Rogers speaking about the scandals of the 1920’s and the Harding Administration. He said it is hard to convince a jury of corruption in these lush times because the jurors secretly admire the people who get away with it. We will hope those sentiments have changed, but it is hard to tell even after reading a book like the Big Short.

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Jobs and Deficits

I clipped a news article way back on August 11, 2005 when the Associated Press reported President Bush’s comments on a new transportation-spending bill. “President Bush calls the massive $286.4 billion transportation spending bill he signed into law Wednesday a job creator.”

The article goes on to describe the bill that will pay for 6,000 favored projects in the districts of nearly every member of Congress. Even though the legislation is $30 billion more than the President recommended he is quoted as “proud to sign it.” Remember too that 2005 was a year when the government reported a Federal deficit of $418.3 billion.

We have to admire President Bush’s candor in this matter because few politicians are prepared to emphasize that transportation projects are for creating jobs instead of transportation.

The effort of President Bush to create jobs sounds very nearly the same as President Obama’s economic stimulus plan. If President Bush recognizes the job creating potential of government spending shouldn’t all the politicians around the country recognize these same intentions in the Obama stimulus plan?

The current worries about the growing Federal deficit could make us forget that deficits are part of government spending. The deficit in 2008 reported by the government’s Bureau of Economic Analysis jumped to $933.6 billion, which was part of the $5.025 trillion of Federal expenditures. Eliminating $933.6 billion of deficit funded Federal Expenditures will eliminate $933.6 billion pumped into the spending stream; spending that both President Bush and President Obama agree helps to create jobs.

If America has less government spending then private sector spending will have to make up the difference. The country needs more spending to create jobs, but we are a country with 10 percent unemployed, and 43 million jobs paying less than $25,000 a year.(1)

We are also a country with a growing inequality of income where entertainers, sports figures and corporate chiefs are paid tens of millions of dollars. Recently NBC announced entertainer Conan O’Brien will get a $33 million dollar salary even though he is leaving his job. If his $33 million salary was divided into $50 thousand dollar pieces it would be $50,000 salaries for 660 families.

Those 660 families might buy 660 cell phones, but we have to doubt Mr. O’Brien will buy that many cell phones. Those 660 families might go to restaurants a couple of times a month. That would be 15,840 (2x12x660) restaurant meals a year, but we have to doubt Mr. O’Brien will eat out that much or create many restaurant jobs. Maybe those 660 families will go to the movies twice a month, and so on?

Working Americans have wages too low and taxes too high to keep us employed with their spending, but the wealthy are not making up the difference in spending or in taxes. If the politicians want to lower the deficit and create jobs in combination they will have to lower taxes on working Americans and raise taxes on the Conan O’Brien’s of the country. It no longer matters who thinks it fair or unfair. When it comes to jobs and deficits, distribution matters.

(1) Occupational Employment Survey, U.S. Bureau of Labor Statistics

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Can They Do That?

Lewis Maltby, Can They Do that? Retaking our Fundamental Rights in the Workplace (New York: Portfolio, Penguin Group (USA) Inc., 2009) 248 pages, plus 6 short appendix.

Lewis Maltby writes in the preface of his book that “Learning how to run a productive, profitable company without violating employees’ human rights became the focus of my life.” The focus of his life took shape after law school, a period as a criminal defense lawyer, board member of the Pennsylvania ACLU, followed by corporate lawyer for a new company and then Head of the Department of Human Resources. The focus of his life is also the focus of the book.

Readers start with an introduction that has examples of the doctrine of employment at will: a legal doctrine of work without due process rights. First, there is a woman who was fired for having a John Kerry bumper sticker. Jobs in America come without freedom of speech. Second, jobs come with surveillance where employers can legally monitor and judge email, cell phones, arrest records, medical histories, credit histories, driving records, and demand drug tests, personality tests and psychological evaluation. Jobs in America come without rights of privacy.

The first eight chapters from a total of sixteen chapters cover the varied issues of free speech and privacy in more detail. Readers learn of the origins of employment at will and how it has been applied over many years, and more recently with the evolution of surveillance technologies. Maltby believes many of these policies are unnecessary and fail as well, but there are many practical examples and legal cases to illustrate these points and help job weary Americans protect themselves. These chapters introduce periodic appeals to get active and help change the system; appeals that are sprinkled throughout book.

In Chapter 4 we meet Roger Boisjoly, an engineer at Morton Thiokol, who warned his higher ups that the company’s O-rings on the Challenger space shuttle were likely to fail in the freezing weather at the Florida launch pad. They did fail and he got fired for being right because due process of law does not apply to America’s jobs. American’s can lose a job for any reason or no reason.

In Chapter 7 we meet Becky Thompson who lost her job in a drug test even though she did not use drugs. That is common because companies sometimes contract with sloppy labs that find many false positive tests. Congress decided to require lab certification for all companies doing government funded drug testing, but nothing for people like Becky Thompson who still have no rights because Congress does nothing about the doctrine of employment at will. Many of the same issues apply to dismissals for medical conditions and gene testing; other issues where Congress has been weak or evasive.

The focus changes from Chapter 9 through Chapter 14. Chapter 9 covers plant closings. Federal legislation passed during the Reagan administration requires 60 days notice for dismissing employees, but then readers learn why so many companies ignore the law. Most are bankrupt and without money to pay and a majority have fewer than a hundred employees, which exempts them from the law.

The next five chapters take the reader through labor law and the rights we do have. Chapter 10 has labor law for union organizing and contract negotiations, which means the National Labor Relations Law and amendments. There is discussion of the trials and troubles for labor organizers and the weaknesses of labor law, but also a reminder that unions help secure labor rights by negotiating labor contracts for members, contracts that courts do enforce. Chapter 11 is titled “The Judge Is Not Your Friend” so we can tell what to expect. Narrative here gives a summary of some major labor law cases, especially appellate court review before the Supreme Court. The chapter that follows has a fairly detailed guide to arbitration applied in labor disputes.

Chapter 13 covers the legislated exceptions to employment at will; those dismissed for reasons of race, creed, color, religion, gender, age, nationality and lately genes have some rights. Enforcement to protect these rights can be expensive and difficult even with some help available through the Federal government’s Equal Opportunity Employment Commission. This chapter includes discussion of the Fair Labor Standards Act and what to expect from America’s minimum wage and overtime rules. Also there is brief mention of defamation by employers.

The fifth chapter of the labor rights chapters shifts to international labor rights in the global economy. Free trade agreements like the North American Free Trade Agreement (NAFTA) usually include minimum standards for labor rights for countries to be eligible for free trade, but alas readers learn they are weak and poorly enforced. Reforms are suggested.

The final two chapters leave specific issues for general and gentle persuasion. Chapter 15, Capitalism and Freedom, argues that capitalism and economic growth do not conflict with human rights. The book ends with a wrap up and suggestions for taking back our rights, meaning taking back human rights on the job.

There are six appendixes: an employee bill of rights, a model corporate privacy policy, sample letters and a National Workrights Membership Application. The book does not have a bibliography and virtually no footnotes or footnote references.

Maltby uses an easy to read conversational style intended for a broad audience. He does not cover job issues related to immigration, nor job issues related to ex-cons who have served time. He avoids partisan politics even though labor and human rights permeate America’s politics. The only exception comes at the end when he lists the labor legislation that gives some protection for employee rights with a reminder that all were passed by Democratic votes and the opposition of the Republican Party.

In my experience people who press to make and enforce more rules in employment, or otherwise, do so with an agenda of control. More rules like drug testing give controlling types of people more opportunities to assert authority and tell others what to do. Evidence that drug testing does not work or leads to unfair results will not persuade controller types, they press forward in relentless determination. Too often people looking for jobs find employers who act like they do us a favor to offer a job. Can They Do That will help you remind these people a job in America is a requirement that should be part of your rights.

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The Estate Tax

Some national politicians continue to support abolishing the estate tax, a tax on the value of assets at death before ownership is transferred to heirs. The Estate tax has been subject to similar pressures and changes as the federal income tax. Up to 1981 estate tax rates up to 70 percent were applied to the entire value of an estate with only a $50,000 exemption.

Since the early 1980’s Congress has repeatedly reduced the number of estates subject to the estate tax, mostly by raising the exemption. By 2001 the exemption was $1 million and the top tax rate 55%, but 2001 was also the year the Congress agreed to a 10 year phase out of the Estate tax. It is a 10 year phase out because next year, the tenth year, the estate tax is eliminated, but only for one year. The Bush era revisions to the estate tax expire in 2011.

Under the rules that remain for 2009 the first $3.5 million of an estate is exempted from estate taxation and the article reported that only around 100 estates will be subject to any tax, which would bring in $266 billion of revenue despite the small numbers.

At a time of colossal federal deficits the Congress has to make up its collective mind and decide if it wants to amend the current law to avoid losing that much revenue for 2010, when the tax will be zero. The decision for 2010 only applies to one year and only a small amount of revenue, but estate taxes have important social repercussions overtime.

Citizens are not citizens just because they live in the same country and share the same geography. Citizens need to share some common experience to understand each other and cooperate politically and socially. One of those common experiences is the need to finish school and find self supporting work.

If the heirs of the 100 people mentioned above receive $266 billion dollars they have no need to work, ever. They can afford household servants, private tutors, and lavish lifestyles without working and without understanding what other people have to do. They also have enough money to influence media and political agendas and perpetuate their status.

As the matter stands the estate tax of 2011 will be restored to the estate tax of 2001 unless the Congress can agree on new legislation. That was as far as Congress could get toward eliminating the estate tax in the early days of the Bush administration.

Critics in Congress keep pushing to permanently eliminate the estate tax. Eliminating the estate tax will begin building a small class of families with extraordinary wealth that can be diversified around a global economy and permanently protected from market forces.

The term “banana republic” describes a pattern of inequality, usually in Latin American countries, where a few dozen land holders have 90 percent or more of the wealth and the rest live on whatever is left. Despite a well documented increase in income inequality the United States distribution of income and wealth is still a long way from that, but abolishing the Estate tax is a step in that direction.

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