First let me say that there are many excellent diaries/stories out there touching on one or another aspect of our current economic situation. I am attempting to synthesize things in a relative short article that covers all the important bases. My main concern here is that most people seem to have little working knowledge of economics or history and therefore no basis at all for their thinking about the economy. Also, most of the prior articles touch on only the economics, but I find the cultural issues even more disturbing so I write a lot about that.
What is a Good Economy?
We need to start with a question. What is a good economy? People in most countries base their assessment of the state of their economy on the growth of Gross Domestic Product or GDP (a measure of total output of goods and services). Indeed, this measure can relate to employment levels, poverty levels, and so on. The problem with this single measure is that it does not necessarily capture the character of the growth. It certainly does not take into account the question of sustainability. In other words, will the system work over the long haul. A really nasty characteristic of pre-1930's unregulated capitalism was that about every 20 years the economy would go into a tailspin resulting in a depression. Since GDP is not sufficient, we need a more informative indicator, which brings up a new and important attribute that I call "long term economic well-being". This is consistent with the mandate of the US Constitution to "promote the general welfare" and is clearly a more meaningful dimension than simple growth. If we are to use economic well-being as an indicator of a "good economy" then we need to look at such things as: poverty levels, employment levels, wealth distribution, health care and education needs, life expectancy, infant mortality and so on. I maintain that a good economy is one that is good for most, if not all, and is sustainable. Also, I will argue that the economy has been sick for a long time. The recent troubles are simply the endpoint of an ongoing and chronic dysfunction. So what happened?
How We Got into This Mess
Currently, the US economy is currently not "good" because most people in it are not doing well, and it could get a lot worse before it gets better. The objective statistics are bearing this out in spades. Virtually all of the indicators are in freefall. Unemployment is headed way up, poverty is way up, foreclosures are rampant, healthcare in America is twice as expensive per capita than any other developed country and outcomes are worse, wealth disparity is one of the worst in the industrialized world, our education is becoming second rate, etc. So it is clear the economy sucks for all except the rich, CEO’s, and politicians. What is not so clear is what went wrong.
First, no matter what you have read recently about mortgages, banks and so on, this crisis took a very long time, maybe 25 to 30 years to culminate in this current meltdown. But, things have been declining for the 80 percent of wage earners for at least that time. I want us to deal with the systemic causes rather than the immediate symptoms. Median income for most of us stopped increasing around the time Reagan came into office and have stayed stagnant since then. As president, Reagan started rolling back all the reforms of the New Deal and began to implement policies that started a serious redistribution of wealth and income, from the middle class and the poor to the already wealthy, while declaring war on working people in a number of ways but mostly by disempowering unions and ignoring anti-trust laws. In essence, he and subsequent administrations have been working to bring the US economy back to pre-Roosevelt predatory capitalism. In its simplest form, these policies were designed to reward investment in paper (not necessarily hard assets) and penalize wealth producing work and pandered to the ethos of greed. Up until the New Deal, there were severe depressions every 20 years or so and they seem to be part of the DNA of capitalism. As we moved into the industrial age, they happened in 1819, 1837, 1857, 1873, 1893, 1907, and 1929. Until now, there have been no further serious depressions because of the regulatory reforms put in place by Roosevelt during the last one. The New Deal worked at creating a somewhat sustainable prosperity and gave a real shot for most people toward upward mobility. The GI Bill is a great example. This was not a good thing for the plutocrats who saw their power and wealth threatened as their ability to game the system was limited. Reagan was a hired hand for these people who wanted to return to the Roaring 20’s. Of course, this repudiation of the New Deal was called Reaganomics. It involved among other things: the reduction of taxes on higher incomes, the reduction of taxes on investment, the deregulation of industry, the lowering of corporate taxes, and an effort to undermine the economic power of workers, etc. These policies were sold to the public and to our politicians through the support of the so-called "free market" types who supposedly believed that regulation was stifling growth. The main mechanism by which all this was supposed to benefit us was called "trickle down" or "supply side" economics. Although many call this an ideology, it was really a very well orchestrated and systematic program to re-concentrate wealth and political power to the already wealthy. Roosevelt called these people "economic royalists" and saw them as being contrary to American principles of democracy. As we now know by direct observation, he was right. Reaganomics, which was continued by both Bushes and was somewhat supported by Clinton, has been completely discredited by the facts and only those who think they can still gain personally are continuing the delusion in the face of the disaster it has brought us. And what has it brought us?
Today, the top 20% of households in the US earn about 76 percent of all before-tax income, and the same people own about 83 percent of total net worth of the country. And even this is somewhat misleading, because it is the top one percent where this concentration of wealth really occurred. These people own around 40% of the wealth by themselves. Today, the wealth disparity in the US is possibly the worst in the industrialized world and is the same or worse than that in 1929. Common sense would lead one to believe that this situation is at the very least not fair. But fairness aside, it has never been sustainable as we should have known. And, one certainly cannot argue that 30 years of Reaganomics created a better economy for all.
Here is a synopsis of the dynamics of Reaganomics and its effects. These may give some hints about how to fix it.
Tax Cuts for the wealthy didn’t and still don’t create jobs or growth in investment. Reagan/Bushes cut the marginal tax rate at the top from 70% to 28% today. A lot of the cuts took place in the last seven years. Job growth in that period has been some of the lowest since the 30’s and capital investment has been moribund at best. The cuts simply made the rich richer. The wealthy really don’t need another refrigerator so what they do with most of the extra money is simply buy more stocks or bonds bidding up the price of these pieces of paper, which is why the market became overvalued. The ‘trickle down" fans want us to think that buying stock is investment in companies. It is not. When one buys a share of GM, the company never sees that money. It goes to a broker who uses it to pay a private seller. COMPANIES NEVER SEE THE PROCEEDS OF STOCK PURCHASES EXCEPT AT THE INITIAL OFFERING. How about the wealthy entrepreneur? Does he use his tax break to increase capacity by hiring people? Only if there is increased demand for his product or services. And what typically creates increased demand? Of course, the answer is increased worker wages. And since wages have not increased since 1980, we have tapped ourselves out to keep the illusion of prosperity going. More about this in the next paragraph.
As mentioned above, another tactic of Reagan/Bushonomics was to disempower unions and to ignore anti-trust and labor laws. This is hardly ever talked about in the media because the consolidation in that industry is probably the most egregious. The FCC has not done its job to protect the public interest and media consolidation is a good example of the results of deregulation. Clear Channel has some 1200 radio stations presently and pre Reagan might have been allowed 10. But this consolidation also includes big pharma, oil and gas, banking, insurance, defense, etc. Undermining unions also resulted in suppression of wages so that since 1980 virtually all the gains from increased productivity were diverted to the management and shareholders of companies, while allowing artificially high profits. Until the advent of Reaganomics, workers were rewarded with increased wages when output per capita (productivity) increased. This in turn increased demand which increased employment, etc. Reaganomics destroyed this source of prosperity for the middle class. To maintain household standard of living, we went increasingly to two wage earners per household. Then this wasn’t enough so there was more and more use of credit. Savings rates went to virtually zero. And finally we tapped into home equity which is the only significant asset available to most middle class members. And as we now know, the housing market problem is simply the last stage in the long decline. This brings us to the sustainability issue I mentioned earlier. As long as corporations with the help of politicians were able to suppress wages and divert the marginal increase in profits to shareholders and CEO’s, there had to be a point where middle class savings go negative and regular households tapped out all resources to maintain themselves, which culminated in the mortgage crisis and ended all discretionary household spending. We are now going back to saving by paying off debt. The fact that the final crisis took this long to happen is what is surprising to me. I really didn't think people would risk their houses to buy more stuff.
Another policy was corporate tax cuts. In 1980, corporations paid 4% of GDP in taxes and today they are paying 1% of GDP. It is not useful to talk about tax rates since corporations are masters at abusing the system to avoid taxes regardless of statutory rates. What is interesting is that the corporate share of the tax burden is lower today in terms of actual payments to the IRS than it has been since the 1930’s. Again, this has not increased employment at all. It has simply created a bubble in corporate earnings, which in turn boosted stock prices, which again benefited no one but the wealthy and CEOs, and some hedge fund managers.
A subject that economists refuse to discuss are the cultural changes resulting from Reaganomics. The standards of conduct were transformed in the business and the political world so that greed became an acceptable and even desirable attribute among the wealthy elite, CEO’s and politicians. And it wasn’t just greed, it became a stupid form of greed. The term "exit plan" came into common use in the business world. It was a euphemism for "I’m not really interested in creating any lasting value, only enough perceived short term value so as to benefit myself and get out before reality sets in". The Bush adminstration didn't quite get out in time. Sustainability was no longer a consideration in executive thinking. Instead of determining and investing in sustainable competitive advantages, they were only interested in next quarter. So they did deals, off shored jobs, laid off people, ripped off shareholders, or committed outright fraud. These are "no talent required" kind of opportunistic activities. And, certainly easier than building healthy, sustainable organizations. And, of course, the deregulation movement enabled this behavior, while the regulators moved back and forth between the regulatory agencies and the industries that were supposed to be regulated. The personal income tax reduction helped the evolution to outright greed along. When marginal tax rates were high, there was no point in paying huge salaries to CEO’s or anyone else. It would be taxed away anyway. So CEO’s tended to see themselves as stewards with responsibilities to all stakeholders including labor, and weren’t in it strictly for the money. Furthermore, with strong regulations in place, there was no pay off in behaving irresponsibly anyway since one could go to jail. When de-regulation hit and the tax cuts were in effect, the possibility of huge take home checks arose and a new generation of CEOs driven more by money than achievement took over. And when stock options became the main form of compensation to these folks, any semblance of professional responsibility was gone. Short term stock appreciation became the new prime directive and situational ethics became normal.
Again, what is so surprising to me is that it took so long to finally crater the system. That is a testament to the reforms brought by the New Deal.
Another unmentioned scandal is that studies have shown that in the US today, it is much harder to move up the class ladder than any time since 1930. And, when compared to other developed countries, we are less likely to move up as well. Remember all that crap about "in America if you work hard...."? The truth is if you are really interested in upward mobility and are young, you need to move to Scandinavia. I am really saddened by this because as the grandson of two sets of immigrants and the first of my family to go to college, I was blessed with a successful career as an engineer and later as an executive. I doubt very much that my achievements would be repeatable today. I am even more saddened that along with the decline of the middle class, we now have the most corrupt and possibly the most shallow executive corps in the world. They have wildly succeeded in their primary motivation of enriching themselves as quickly as possible. The same thing goes for our politicians and lobbyists. These people have moved into the same class as executives and hedge fund managers in terms of earnings and wealth. Washington DC is now one of the richest towns in the US and most of this new wealth occurred since 2000. We have had financial media clowns like Cavuto, Kudlow, cheering this national disgrace on, while we have been in some kind of stupor knowing at some level that something is really wrong, but not knowing exactly what it is or how to fix it. It is worse than disgusting to me to know that our institutional leaders have completely breached our trust in them and worse have taken to outright lying, cheating and stealing.
By now the fixes for all this become apparent. Again, there has been some excellent writing on the Daily Kos about these, as well. They really boil down to three general things:
- Do whatever it takes to empower working people and unions to drive up wages in the US commensurate with productivity and punish off-shoring with high tariffs on foreign labor content. I think we need to restrict immigration as well.
- Re-regulate across the board to restore some balance between public and private interests. Of course this means we must return to hiring public servants with integrity, so the revolving door must be closed. This includes the enforcement of the anti-trust laws to restore breathing room for smaller and independent enterprise which boosts competition and employment since these are the companies that do most of the job creation.
- Roll back the Reagan tax cuts so the wealthy are taxed at pre-Reagan levels. The inheritance tax needs to be restored also, so that the formation of wealthy aristocracies is stifled. We can no longer afford the domination of the political process by the wealthy whose allegiance is only to themselves and we need to restore responsibility to the executive suites and weed out greed.
Let's draw some encouragement from the fact that we have faced these dragons before and we slew them then and can do it again.