Wall Street's banditry was the proximate cause of the Great Recession, not its underlying cause. Even if the Street is better controlled in the future (and I have my doubts), the structural reason for the Great Recession still haunts America. That reason is America's surging inequality.
This article is based on Robert Reich's upcoming book, Aftershock, due out in September.
Consider: in 1928 the richest 1 percent of Americans received 23.9 percent of the nation's total income. After that, the share going to the richest 1 percent steadily declined. New Deal reforms, followed by World War II, the GI Bill and the Great Society expanded the circle of prosperity. By the late 1970s the top 1 percent raked in only 8 to 9 percent of America's total annual income. But after that, inequality began to widen again, and income reconcentrated at the top. By 2007 the richest 1 percent were back to where they were in 1928—with 23.5 percent of the total.
Each of America's two biggest economic crashes occurred in the year immediately following these twin peaks—in 1929 and 2008. This is no mere coincidence. When most of the gains from economic growth go to a small sliver of Americans at the top, the rest don't have enough purchasing power to buy what the economy is capable of producing. America's median wage, adjusted for inflation, has barely budged for decades. Between 2000 and 2007 it actually dropped. Under these circumstances the only way the middle class can boost its purchasing power is to borrow, as it did with gusto. As housing prices rose, Americans turned their homes into ATMs. But such borrowing has its limits. When the debt bubble finally burst, vast numbers of people couldn't pay their bills, and banks couldn't collect.
China, Germany and Japan have surely contributed to the problem by failing to buy as much from us as we buy from them. But to believe that our continuing economic crisis stems mainly from the trade imbalance—we buy too much and save too little, while they do the reverse—is to miss the biggest imbalance of all. The problem isn't that typical Americans have spent beyond their means. It's that their means haven't kept up with what the growing economy could and should have been able to provide them.
A second parallel links 1929 with 2008: when earnings accumulate at the top, people at the top invest their wealth in whatever assets seem most likely to attract other big investors. This causes the prices of certain assets—commodities, stocks, dot-coms or real estate—to become wildly inflated. Such speculative bubbles eventually burst, leaving behind mountains of near-worthless collateral.
The crash of 2008 didn't turn into another Great Depression because the government learned the importance of flooding the market with cash, thereby temporarily rescuing some stranded consumers and most big bankers. But the financial rescue didn't change the economy's underlying structure. Median wages are continuing their downward slide, and those at the top continue to rake in the lion's share of income. That's why the middle class still doesn't have the purchasing power it needs to reboot the economy, and why the so-called recovery will be so tepid—maybe even leading to a double dip. It's also why America will be vulnerable to even larger speculative booms and deeper busts in the years to come.
The structural problem began in the late 1970s, by which time a wave of new technologies (air cargo, container ships and terminals, satellite communications and, later, the Internet) had radically reduced the costs of outsourcing jobs abroad. Other new technologies (automated machinery, computers and ever more sophisticated software applications) took over many other jobs (remember bank tellers? telephone operators? service station attendants?). By the '80s, any job requiring that the same steps be performed repeatedly was disappearing—going over there or into software. Meanwhile, as the pay of most workers flattened or dropped, the pay of well-connected graduates of prestigious colleges and MBA programs—the so-called "talent" who reached the pinnacles of power in executive suites and on Wall Street—soared.
The puzzle is why so little was done to counteract these forces. Government could have given employees more bargaining power to get higher wages, especially in industries sheltered from global competition and requiring personal service: big-box retail stores, restaurants and hotel chains, and child- and eldercare, for instance. Safety nets could have been enlarged to compensate for increasing anxieties about job loss: unemployment insurance covering part-time work, wage insurance if pay drops, transition assistance to move to new jobs in new locations, insurance for communities that lose a major employer so they can lure other employers. With the gains from economic growth the nation could have provided Medicare for all, better schools, early childhood education, more affordable public universities, more extensive public transportation. And if more money was needed, taxes could have been raised on the rich.
Big, profitable companies could have been barred from laying off a large number of workers all at once, and could have been required to pay severance—say, a year of wages—to anyone they let go. Corporations whose research was subsidized by taxpayers could have been required to create jobs in the United States. The minimum wage could have been linked to inflation. And America's trading partners could have been pushed to establish minimum wages pegged to half their countries' median wages—thereby ensuring that all citizens shared in gains from trade and creating a new global middle class that would buy more of our exports.
But starting in the late 1970s, and with increasing fervor over the next three decades, government did just the opposite. It deregulated and privatized. It increased the cost of public higher education and cut public transportation. It shredded safety nets. It halved the top income tax rate from the range of 70–90 percent that prevailed during the 1950s and '60s to 28–40 percent; it allowed many of the nation's rich to treat their income as capital gains subject to no more than 15 percent tax and escape inheritance taxes altogether. At the same time, America boosted sales and payroll taxes, both of which have taken a bigger chunk out of the pay of the middle class and the poor than of the well-off.
Companies were allowed to slash jobs and wages, cut benefits and shift risks to employees (from you-can-count-on-it pensions to do-it-yourself 401(k)s, from good health coverage to soaring premiums and deductibles). They busted unions and threatened employees who tried to organize. The biggest companies went global with no more loyalty or connection to the United States than a GPS device. Washington deregulated Wall Street while insuring it against major losses, turning finance—which until recently had been the servant of American industry—into its master, demanding short-term profits over long-term growth and raking in an ever larger portion of the nation's profits. And nothing was done to impede CEO salaries from skyrocketing to more than 300 times that of the typical worker (from thirty times during the Great Prosperity of the 1950s and '60s), while the pay of financial executives and traders rose into the stratosphere.
It's too facile to blame Ronald Reagan and his Republican ilk. Democrats have been almost as reluctant to attack inequality or even to recognize it as the central economic and social problem of our age. (As Bill Clinton's labor secretary, I should know.) The reason is simple. As money has risen to the top, so has political power. Politicians are more dependent than ever on big money for their campaigns. Modern Washington is far removed from the Gilded Age, when, it's been said, the lackeys of robber barons literally deposited sacks of cash on the desks of friendly legislators. Today's cash comes in the form of ever increasing campaign donations from corporate executives and Wall Street, their ever bigger platoons of lobbyists and their hordes of PR flacks.
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UH OH! No wonder the nation and leftist don't want to talk about BP and big oil anymore!
Less than four months after President Barack Obama took office, his new administration received a forceful warning about the dangers of offshore oil drilling.
The alarm was rung by a federal appeals court in Washington, D.C., which found that the government was unprepared for a major spill at sea, relying on an "irrational" environmental analysis of the risks of offshore drilling.
The April 2009 ruling stunned both the administration and the oil industry, and threatened to delay or cancel dozens of offshore projects in Alaska and the Gulf of Mexico.
Despite its pro-environment pledges, the Obama administration urged the court to revisit the decision. Politically, it needed to push ahead with conventional oil production while it expanded support for renewable energy.
Another reason: money. In its arguments to the court, the government said that the loss of royalties on the oil, estimated at almost $10 billion, "may have significant financial consequences for the federal government."
The U.S. Court of Appeals reversed its decision and allowed drilling in the Gulf to proceed"”including on BP PLC's now-infamous Macondo well, 50 miles off the Louisiana coast.
The Obama administration's actions in the court case exemplify the dilemma the White House faced in developing its energy policy. In his presidential campaign, President Obama criticized the Bush administration for being too soft on the oil industry and vowed to support greener energy forms.
But, once in office, President Obama ended up backing offshore drilling, bowing to political and fiscal realties, even as his administration's own scientists and Democratic lawmakers warned about its risks.
7. posted by: whatizzit at 07/05/2010 @ 5:24pm On second thought I am glad you have a pension that secures your retirement,good for you.How many people did you step on to have that happen.
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Just the lazy fools like you who wouldn't mow lawns, do farm and ranch work, work concrete grain elevator construction, do janitorial, work 12 on and 12 off 6 day weeks, work through college, do commericial insurance underwriting, run an insurance agency; all through the last 53 yrs since 10!
Now I just leasurely take care of a 91yr. old mother, a widowed daughter with 3 kids under 9, run a one man insurance agency, mow about 5 acres for the church, daugther and self. But, I did find time to help build a 3200 sq.ft. metal shop building, completely remodel the son in laws house and prior home, and aide the son in law salvaging all the metal trash the lazy rich like you throw away!
Pensions don't secure retirement, but hard physical work does along with sacrificial saving, being grateful and thankful to God in all things, doing his will, and generously supporting his work monetarily and pysically.
7. posted by: DejaVu at 07/05/2010 @ 4:58pm
Idiot you know nothing. A pew is the closest I get to a pulpit. You've been posting here long enough to know that mr. short term memory.
Why do Leftists trust politicians seeking votes to run an economy more than businessmen seeking profits?
What recommends the politician as an arbiter of value?
If politicians make and change the rules that governed YOUR business, wouldn't you have a lobbyist in Washington DC?
What, other than the sanction of government, distinguishes a union from an extortion racket?
Name one monopoly that either is not sanctioned or wasn't created by the government?
If capitalists run the US government, why do they give hundreds of thousands of dollars to supposedly powerless politicians?
If businessmen run the country, why do they allow themselves to be dragged in front of televised tribunals to be harangued by their "employees?"
Why do businessmen have lawyers, but senators and congressmen have lawyers AND guns?
If the Democrats are for the little guy, why have the 10 poorest municipalities in the US been solely governed by Democrats for decades? When do things start working?
Social Security is a Ponzi system. Is that how FDR sold it? If not, was FDR lying?
If the world contradicts your firmly held beliefs - check your premises.
China, Cuba and Russia, among numerous countries, had solved the problem of "Unjust Spoils" for half-a-century......I wonder why they now WANT the same root `problem' Reich thinks is our current sin?????
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