Unjust Spoils and The Right Prescription for an Ailing Economy
Two articles from "The Nation" blame the housing bubble and widening income gap for this economic crisis.

Unjust Spoils

HOT summary of article by Robert Reich, The Nation, 6/30/3010
http://www.thenation.com/print/article/36893/unjust-spoils

Our nation can't thrive with economic growth so lopsided, where an ever larger share of the nation's income and wealth goes to a smaller number of people while everyone else gets a declining share. Natural political forces can, and must, correct the imbalance. HOT shares Reich's concerns and optimism that change is in the air, but it may be a long time coming.

"A virtual pendulum underlies the American political economy. We swing from eras in which the benefits of economic growth concentrate in fewer hands to those in which the gains are more broadly shared, and then back again. We are approaching the end of one such cycle and the start of the next. The question is not whether the pendulum will swing back but how it will swing."

Some have blamed the economic crisis on banks and the trade imbalance -- we buy too much and save too little while they do the reverse. That view misses the biggest imbalance of all.

The structural reason for the Great Recession is America's surging inequality in a repeat of a previous cycle that led to the Great Depression. The richest 1 percent of Americans received 23.9% of the nation's total income in 1928, but After 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 earned only 8-9% of America's total annual income. But the pendulum swung back, and since then inequality has widened again, with more income reconcentrated at the top. The richest 1 percent are back where they were in 1928, with 23.5% of the total by the end of 2007. [The gap is even wider now. Dean Baker, in the following article, puts much of the blame for that gap on decades of federal incentives to promote The American Dream of homeownership.]

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.

We have so far avoided a second Great Depression because the government flooding the market with cash, but temporarily rescuing big banks, builders, and car makers didn't change the economy's underlying structure. Median wages are still declining as unemployment worsens and those at the top get wealthier. The middle class doesn't have enough purchasing power to fuel an economic recovery, so we now face a possible Double-Dip.

Our structural problem began in the 1970s with each new wave of technology (air cargo, container ships and terminals, satellite communications, and eventually the Internet). These technologies reduced the cost of outsourcing jobs abroad. Technologies such as computers, sophisticated software, and robotics took over other jobs, including telephone operators, bank tellers, and gas station attendants. As a result, the tasks of repetitive jobs were either automated or went overseas, and worker pay flattened or declined. Meanwhile, incomes of creative and well-connected MBA graduates soared as they moved into powerful positions in executive offices and on Wall Street.

Government could have counteracted these forces and used the economic gains from increased productivity to justify better schools, early childhood education, more affordable public universities, more extensive public transportation, and Medicare for all. If more money was needed, they could have raised taxes on the truly wealthy. But instead, government partnered with wealthy corporations, deregulated industries, and cut taxes at the top by more than half (from 70-90% in the '50s & '60s to 28-40% in the '70s. Government also allowed the wealthiest people to treat most of their income as capital gains subject to no more than 15% tax and no inheritance tax at all. And they increased sales taxes, taking a bigger chunk of pay from the middle class and poor than the well-off. These government actions, Reich argues, were just the opposite of what should have been done.

Corporations whose research was subsidized by taxpayers should have been required to create jobs in the United States. The minimum wage should have been linked to inflation. And America's trading partners should have been pushed to establish minimum wages pegged to half their countries' median wages. That would have ensured that all citizens shared in gains from trade and creating a new global middle class capable of buying more of our exports.

But instead, companies slashed jobs and wages, cut benefits, and shifted risks to employees (from pensions you could count on to do-it-yourself 401(k)s, and from good health coverage to soaring premiums and deductibles). They busted unions and threatened employees who tried to organize. Wall Street and CEO salaries grew to more than 300 times that of average workers (versus 30 times during the '50s & '60s). [See Cloudy Outlook for Economic Recovery.]

As money concentrated at the top, so did political power, and that helps explain why officials didn't use this recent economic recession to enact fundamental reforms. They focused instead on technical fixes to change how the Street conducts business. Even the Gulf oil disaster could have been used to frame the issue of giant corporations using their influence to capture regulators and impose risks and costs on the broader public. But the debate morphed into technical arguments over how to plug the gusher and regulate deepwater drilling.

The inequality trend can't continue, and the pendulum must swing back. That's because the "lopsidedness not only diminishes economic growth but also tears at the social fabric of our society." The "establishment" must eventually succumb to reform as they realize their continued success, and that of the nation, depends on a stable economic and social system, and as they face a mad-as-hell populace determined to "take back America" from them.

The Right Prescription for an Ailing Economy

HOT summary of article by Dean Baker, The Nation, 6/30/2010
http://www.thenation.com/article/36891/right-prescription-ailing-economy

Like Reich, in the article above, Baker offers a unique perspective of the economic crisis, criticizes the recovery plan, and seems to support our view that decades of federal programs promoting The American Dream of homeownership (1) widened the income gap between the wealthy elites and the rest of us and (2) fueled the housing bubble that sparked the global recession.

He says we didn't need to bail out Wall Street and the banks. "In the worst-case scenario, the major banks would have been taken over by the Fed and FDIC." Yes, there would have been more uncertainty and lawsuits, and a sharper fall in the short-run, but it wouldn't have caused a second Great Depression.

The problem is simply that consumers are tapped out. Healthy banks aren't lending, and cash-rich companies aren't expanding, because weak consumer demand makes any investment risky. Weak demand is directly tied to the economic imbalance.

The story of economic weakness being the result of a broken banking system, he says, is a complete fabrication. It's a good story if your intention is to get more money to the banks, but it's not a good story if your goal is getting the economy back to full employment.

The extreme wealth created by the housing bubble in 2006, and the smaller bubble in nonresidential real estate, was generating more than $1 trillion in annual demand. This took the form of more than $500 billion in excess construction demand as builders rushed to complete projects with bubble-inflated prices. It also led to more than $500 billion in additional consumption, as consumers spent based on $8 trillion worth of bubble-generated home equity.

In the three decades after World War II, there were no notable bubbles in the economy. Productivity growth translated into wage growth, which in turn led to more consumption. The increased demand led to more investment, productivity growth and wage growth.

This virtuous circle was broken, however, by Reagan-era policies of deregulation and tax cuts for the wealthy. These policies favored big corporations and weakened the power of ordinary workers such that wages no longer kept pace with productivity growth. They also eliminated the automatic link between productivity growth and demand growth and led to excess capacity in the economy and an oversupply of housing.

If the workers' bargaining power had not been weakened, these bubbles would not have been possible. The Fed would not have needed to lower interest rates to sustain demand. Demand would have kept pace without artificial stimulus. [This reinforces our contention that market failures in a free-market society occur when artificial stimulus favors a special interest over competing or social interests.]

Since rising inequality is at the center of the current economic crisis, reversing that trend seems possible. Some of the remedies are well-known.

Restoring discipline to CEO pay would be a great first step and address the top 1% of wage distribution. One way to do that would be to change the rules on corporate governance and require that compensation packages be approved by stockholders [as opposed to board of interlocking directorates who support higher wages for each other. The preceding article by Robert Reich expands on the CEO compensation issue.]

Taxing financial speculation would help moderate the multimillion-dollar salaries on Wall Street. [That's like the sales tax that I suggested for each stock transaction and home sale as a way encourage long-term investment but discourage short-term speculation such as buy-and-sell day trading, house flipping, and other forms of gambling. The financial reforms that Congress is considering would bar banks and Wall Street firms from speculating with other people's money, but they don't go far enough. With the current bill, lenders will still be able to sell the loans to 3rd party investors.]

Restructuring trade and immigration policies to subject the top 2-3% of wage distribution (doctors, lawyers, dentists, etc.) to the same international competition that non-college-educated workers face when competing with low-paid workers in the developing world. That competition would put downward pressure on wages equally and, theoretically, raise real wages for the rest of the workforce by lowering the price of goods and services produced by higher-paid professionals.

Protecting unions and the right to organize have long been a major force in reducing inequality, but policies since Reaqan have diminished that power.

[Restoring the progressive income tax is a concept discussed in the following article, along with several other suggestions for fixing our sick economy.]