what is to be done
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What Is To Be DoneUS Capitalism in Crisis and Social Market Alternatives
2
Know thy enemy, know thyself. A hundred battles, a hundred victories.
- Sun Tzu, The Art of War
3
Is the Great Recession Over?
Officially ended June 2009 In mid 2012 we have:
A 10 million job shortage 5.2 million fewer employed than in Dec 2007 4.7 million jobs not gained
A $13 trillion loss of housing wealth 12 million households “underwater” (negative equity) $500 billion decline in consumption $400 billion decline in home building activity
Result: A bigger economic shock to private sector than in 1930s
We have gone from financial crisis to economic stagnation
4
CPEG Economic Crisis Workshop - Barclay
Was it just an accident?
5If you remember nothing else from this workshop today…..The financial crisis and economic stagnation were
not unforeseeable accidents.They resulted from neoliberal policy choices.Neoliberalism assumptions:
Markets are the most efficient method of allocating resources.
Markets maximize choice and are therefore desirable from an ethical perspective.
6
Clashing Explanations: Knowing Thy EnemyThe following slides develop a narrative
of what caused the Great Recession.However, neoliberalism also has a
narrative of causes.Accurately understanding the
causes of the Great Recession is essential to designing alternatives.
7
The Argument in BriefUS had three decades of growing
inequality, with huge income growth to the top 1%.
This income inequality generated a rise of speculative financial activity.
Speculative finance drove a housing bubble and financial crisis, followed by economic stagnation.
We must move the political discussion towards social market alternatives.
I. Growth of Economic Inequality
in the USClass Redistribution of Income
9
The Inequality WalkHow much income inequality is there in the US?
How has it changed over time? Used 1979 – 2006 period for comparison: the cause of 2008 economic collapse
10
Why Did Inequality Increase? A Neoliberal ExplanationNeoliberals (conservatives) like to
talk about “skill gaps” and need for more education.Often called “skill-biased
technological change” (SBTC).Thus, when they acknowledge
increased inequality it is in terms of gains to the top 10 or 20%.
Growing Inequality: Top 10% Income Share, 1950 - 2008
25
30
35
40
45
50
55
19501955
19601965
19701975
19801985
19901995
20002005
% o
f Tot
al H
ouse
hold
Inco
me
Top 10% IncomeShare
But is this the real story – or does it mask a more significant story?
11
The Real Story: Income Gains in the Top 10%, 1950 - 2007
5
7.5
10
12.5
15
17.5
20
22.5
25
19501954
19581962
19661970
19741978
19821986
19901994
19982002
2006
Pere
nct o
f Tot
al In
com
e
Top 1% IncomeShareNext 4%
Next 5%
Growing apart
Threshold for a top 1% income in 2007 was about $350,000.
12
13
Why Did Inequality Increase? Another Neoliberal Explanation
Neoliberals: increased inequality simply reflects a globalized market.The top 1% are global “superstars” and as a
result get much bigger income share.If this explanation is true, other
wealthy countries should see similar levels of inequality as the US.
US Inequality Has Grown Much More than in Other Rich Countries
0%
5%
10%
15%
20%
25%
1975 1990 2000s
Income Share - Top
1%
USFranceJapanSwedenUKItaly
14
15
Failed Neoliberal Explanations for Increased Inequality Inequality has grown because an economy based
on advanced technology requires higher skills – and many people have failed to acquire them.
The globalization of markets has not created economic superstars that capture high economic rewards.
In both arguments growing inequality is inevitable – and maybe even good.
Reality does not support these arguments.
16
Why HAS Inequality Grown So Much in the US?
Who are the top 1%? What kind of income does the top 1% receive?
What do they do for a living that results in such high incomes?
Composition of Income for Top 1% (2008)(for bottom 99%, over 95% of income comes from wages and salary)
0%10%20%30%40%50%60%70%80%90%
100%
Capital Income*Labor Income
Fitzgerald: The rich are different from us.Hemingway: Yes, they have more money.But where they get their money from is different.
55.7%
41.4%
*Capital income includes capital gains, dividends, stock options, and interest.
17
Who Is in the Top 0.1% of Income?(Analysis of 2004 tax returns)
Non-Financial Execs, Managers, etc.
40.8%
Financial Execs, managers, etc. 18.4%
Not Working 6.3%
Lawyers 6.2%
Real Estate 4.7%
Medical 4.4%
Other entrepreneur 3.6%
Arts, media, sports 3.1%
18
19
Why Did Inequality Increase?
Decline of unionization
Shift downward in the tax burden
Inequality as social policy
As Union Density Declined, the Income Share of Top 1% Increased
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
Union Members as a % of US Working PopulationIncome Share Top 1%
20
Collective Bargaining Coverage* and Gini Index, Various Countries
0.00%10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%90.00%
100.00%
Union Coverage
Perc
ent o
f Lab
or F
orce
US = .45Japan = .38N. Zealand = .36Canada = .32UK = .34Australia = .30Switzerland = .34Germany = .28Greece = .33Norway = .28Denmark = .24Italy = .33Netherlands = .31Spain = .32Finland = .26France = .28Sweden = .23Austria = .26
* Percentage of labor force covered by collective bargaining. This is not the same as percentage of labor force who are union members (latter is smaller).
US
21
22
Shifting the Tax Burden - DownwardDecline in top personal income tax rate
70% in 1980 (91% from WWII until 1960s)35% after Reagan/Bush I and IIThis means a $10 million/yr CEO keeps $6.5
million instead of $3.0 millionIncome from capital taxed at lower
rates than income from labor Corporations have
evaded/avoided/scammed the corporate income tax
23
Million $ income families increased their share of total income 7-fold while their tax rate was cut in half
24
Inequality as Social Policy
By 1970s most new jobs were in the service sector.Would these jobs be low wage or high wage?
The minimum wage lagged median and average wage levels.
The attack on unions made organizing service workers more difficult.
The Federal Reserve Board (“Fed”) and Congress abandoned full employment as a policy goal.
25
The Wage Floor: Minimum Wage as a % of Median Wage, 2010
0%
10%
20%
30%
40%
50%
60%
70%
Min
as
a %
of M
edia
n
FranceNetherlandsPortugualAustraliaBelgiumIreland GreeceCanadaUKUSJapan
US
26
The Argument in BriefUS had three decades of growing
inequality, with huge income growth to the top 1%.
This income inequality generated a rise of speculative financial activity.
Speculative finance drove a housing bubble and financial crisis, followed by economic stagnation.
We must move the political discussion towards social market alternatives.
Part II: What Could the Top 1% Do with Their
Increased Income Share?
28
How could the 1% spend their extra $1 trillion/year?Invest and create jobs Luxury consumption Seek more income through financial speculation
29
Have the Top 1% been Job Creators?
NO
As the share of income going to the Top 1% has increased, job creation in the US economy has faltered.
30
Unemployment Has Been HigherPeriod # of months # months with
unemployment under 4%
1945-1975 360 months 75 months (21%)
1976-2011 420 months 5 months (1%)
31
Rabble getting on your nerves? Escape to your own island: this one is going for only $24.5 million – castle included.
One speculator who helped run up oil prices got a huge bonus paid with our (tax) money: He owns this castle.
32
Of course you have to get to your island – and here is the way. Le Grand Blue: a modestly priced yacht - $90 million . It is the 21st longest yacht in the world.
33
Where Did the Money Go?
Much of this money went into finance and financial speculation
The Real vs. the Financial Economy – or What the Top 1% did with Their Money
$200$5,200
$10,200$15,200$20,200$25,200$30,200$35,200$40,200$45,200$50,200$55,200$60,200$65,200$70,200
19801985
19901995
19982001
20022005
20062007
2008
US
$Bill
ions Value of Stock
TradingUS GDP
Activity in the Financial Economy has grown many times faster than production in the Real Economy
34
35
Markers of Financial Sector Growth
My favorite: In 2007, we spent more on brokerage services and investment counseling than on new cars. In 1979, we spent 10 times as much on the latter as the former.
36
Financial Sector Profits as a Percent of Total Profits (1980 – 2004)
10%15%20%25%30%35%40%45%50%
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
% o
f Pro
fits
Finance Sector % of Total Profits
ARMs
securitization
CDS
GLB
Leverage
37
Leveraging Finance2004 GS, MS, ML, BS, and Lehman persuaded the
SEC to: Allow them to increase leverage; and Assess their risk using their own proprietary models
Leverage is the ratio between the amount of money you have put down (your equity) to the value of the asset you control When Bear and Lehman collapsed they were
leveraged at more than 35:1
Leverage drove asset price inflation (bubbles) via debt financing
38
Two US Growth Models 1945 – 1975 growth model:
Full employment enabled by Productivity growth that generated wage growth and
thus Aggregate demand sufficient to drive GDP
Neoliberal growth model: Asset price inflation (bubbles) generated Growth of debt plus Globalization policies that ignored manufacturing and Facilitated offshore investment that Fueled a trade deficit
39Growth of Financial Sector in the US Has
Not Produced Faster Growth in the Economy Average Annual GDP Growth per capita, Neoliberal Period (1979 – 2008)
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
1979 - 2008
FranceItalyCanadaAustraliaGermanyDenmarkUSBelgiumSwedenJapanAustriaNetherlandsSpainUKNorway
40
The Argument in BriefUS had three decades of growing
inequality, with huge income growth to the top 1%.
This income inequality generated a rise of speculative financial activity.
The result: A housing bubble and economic crisis.
We must move the political discussion towards social market alternatives.
III. Housing Bubble and Financial Crisis
Finance and the Collapse of the Neoliberal Growth Model
42
The Housing Skit: Mortgage Lending in the 2000s
Although the numbers in the skit are representative of what happened, it is the practices and patterns that I want to highlight.
Mortgage lender made no actual risk assessment of the loan - Why?
Mortgage lender encouraged lying on the application (extra $ from carpentry) – Why?
Mortgage lender encouraged an interest-only ARM mortgage to a weak credit – why?
43
The Housing Skit: What Happened to the Mortgage?
This was a subprime loan
The ARM meant that the risk of changes in interest rates was born by the borrower
The borrower was highly leveraged at 50:1
When the loan reset and housing prices dropped the borrower could not meet the new payments
44Mortgage Lending Practices Drove the
Housing Bubble and Leverage in the Financial Sector
No-doc loans increased the pool of borrowers.Selling of mortgages eliminated incentive to
assess ability of borrower to repay.Lender fraud further expanded borrower pool.High leverage increased default risk.My favorite, NINJA loans.Fed could have intervened but Federal Reserve
Chair Alan Greenspan opposed to regulation.
Mortgage Debt and Financial Sector Debt as a Percent of GDP, 1978 - 2007
10%
30%
50%
70%
90%
110%
130%
% o
f GD
P
Mortgage Debt/GDP Ratio Financial Sector Debt/GDP
45
46
Debt and Wealth Wealth is the other side of debt.
You owe me money – it is an asset (wealth) for me.
Who had the money to lend? Securitized mortgages are both debt (for borrowers) and
wealth for lenders. Increase in household debt for most meant an increase in
wealth for a few. Financial sector converted this debt (securitized mortgages)
into wealth that the top 1% and large financial institutions could own. Hedge funds and other investment vehicles of the top 1%
demanded more and more of these issuances. In turn, these positions were leveraged.
Finance Responds: Growth of Subprime and Alt-A* Issuances, 2001–2006
$50
$150
$250
$350
$450
$550
$650
2001 2002 2003 2004 2005 2006
Bill
ions
$U
S
Subprime Alt-A**Alt-A mortgages are riskier
than prime mortgages but not as risky as subprime.
47
48
The Argument in BriefUS had three decades of growing
inequality, with huge income growth to the top 1%.
This income inequality generated a rise of speculative financial activity.
The result: A housing bubble and economic crisis.
We must move the political discussion towards social market alternatives.
IV. Social Market Alternatives
50
On Being a Socialist“From each according to their ability, to each
according to their need” – socialist principle of distributive justice One person, one vote – in the political economy
Distributive justice: how the things that we value should be allocated among members of a society
Contrast with how capitalist economies function: one dollar, one vote in the economic market place
51
Thinking about Reforms“Reforms” (steps backward) Reforms Social Market Alternatives (non-reformist reforms)
52
Let’s Start with MarketsWhat happens in markets?Market exchanges are the buying and
selling of commodities. Markets are also the mechanism by
which the unequal distribution of wealth and power are maintained and reproduced.
53
Reforms and MarketsThree kinds of reforms:
The reform may strengthen or expand the role of markets as the mechanism through which a good or service is provided.
The reform may constrain or provide incentives to market participants to change behavior or access to a good or service.
The reform may remove the provision of some good or service from the market, distributing it through non-market means (usually some level of government). These are social market alternative policies.
54
Health Care: 1Voucher systems (e.g., GOP’s Paul Ryan’s
proposal) that would provide $$ to people so they could “choose” their health care.
What kind of reform is this – why?
What is its appeal to many people?
What would be the outcome in terms of the scope of markets?
55
Health Care: 2Affordable Care Act (aka
“Obamacare”)
What kind of reform is this?
Why?
56
Health Care: 3Various proposals for/existing versions
of universal health care systems
What kind of reform is this – why?
How does it differ from the other two proposals?
57
Outcomes of Health Care Policy Choices - Cost
Japan
Austr
alia
Finlan
d
N. Zea
land
Canad
a
Switz
erlan
d
German
yFra
nce US0.00%5.00%
10.00%15.00%20.00%
Health Care Expenditure as a % of GDP
58Outcomes of Health Care
Policy Choices –Life Expectancy (2007 – 2009 data)
Japan
Switz
erlan
d
Austr
alia
France
N. Zea
land
Canad
a
German
y
Finlan
d US747678808284
Year
s of
Life
59
Education: 1Over the past several years for-profit colleges
have grown significantly.Vouchers have become a favorite tool of some.
What is happening here in terms of the scope of markets?
The US public schools system (K-12) What is the relationship of this system to markets?
(How are most of our K-12 systems funded?)
60
Education: 2
In Finland, education through college is funded through national income tax and is free/low cost to users.
What kind of reform would this be?
61
Educational Outcomes
Finlan
dJap
an
N. Zea
land
Canad
a
Austr
alia
German
y
Switz
erlan
d USFra
nce460480500520540560
PISA
Sci
ence
Sco
re US
PISA: Program for International Student Assessment
62
Reforming Finance: 1New Deal legislation restricted what different
types of financial institutions could do (Glass-Steagall Act).
New Deal also built upon the Federal Home Loan Bank Act (1932) that used part of the financial system – savings and loans – to provide mortgage loans.
What is the outcome in terms of the scope of markets?
63
The World of Glass-Steagall
64
Reforming Finance: 2 Banks and banksters did not like these restrictions. Beginning in the 1980s a series of actions occurred
that: Removed interest rate ceilings on deposits and credit
cards Allowed S&Ls to enter new areas of business Expanded the capability for securitizing loans In 1999, Gramm-Leach-Bliley repealed Glass-Steagall’s
3-part division of finance
What is the outcome in terms of the scope of markets?
65
CPEG Economic Crisis Workshop - Barclay
65
After Glass-Steagall Act’s Repeal “one-stop shopping”
66
Reforming Finance: 3North Dakota has a state bank (BND)
All public monies in the state are deposited in BND BND works with community banks to increase credit
availability to home buyers/owners, small businesses – and is the largest source of college loans for ND HS grads
BND does not compete for deposits – state funds are primary source of deposits
How does this differ from the standard model? What kind of reform is it?
67
Reforming Finance: 4 In the Basque Country of Spain there are a
large number of worker owned cooperative businesses – Mondragon Cooperative.
To meet their credit needs, the Mondragon Coops established a central bank. Mandate is to serve the needs of the more120
worker owned coops
What is the outcome in terms of the scope of markets?
68
The Market for Labor: 1How do we reduce unemployment?One argument is the maximize labor market
“flexibility.”What does this mean?
In terms of who is responsible for solving the unemployment problem?
In terms of businesses ability to hire and fire? In terms of collective voice/action by employees?
What is the role of markets in this reform?
69
The Market for Labor: 2A large part of the American
Recovery and Reinvestment Act (aka “stimulus”) was tax breaks and/or incentives for business to hire workers.
What kind of reform is this in terms of the scope of markets?
70
The Market for Labor: 3CPEG jobs program – goal: a job for anyone
willing and able to work. Create 4.5 million new jobs/yr for five years Most of those jobs would be hires in the public
sector Would pay a living wage ($18/hr) Included training for youth entering the labor force
What kind of reform would this be in terms of the scope of markets?
Employment Protection* and Gini Index, OECD Countries
0
0.5
1
1.5
2
2.5
3
3.5
Leve
l of E
mpl
oym
ent P
rote
ctio
nUS = .45Canada = .32UK = .34N. Zealand = .36Australia = .30Japan = .38Switzerland = .34Denmark = .24Sweden = .23Iceland = .25
Netherlands = .31Finland = .26Austria = .26Italy = .33Germany = .28Norway = .28Greece = .33France = .28Spain = .32
45
*Employment protection – high score is more job security for workers: (i) protection of permanent workers against dismissal; (ii) regulation of temporary forms of employment; and (iii)specific requirements for collective dismissal
US
71
72
Principles of Neoliberal Capitalist Ideology Markets are the fundamental mechanism for societies. Markets maximize efficiency.
Government intervention is always second best.
Therefore: Expand scope of markets. (This is called “deregulation.”)
Therefore: Reduce size of government (cut spending for social goods).
Markets maximize individual freedom, Therefore: Favor choices made by individuals over collective
action (individualism).
Therefore: Promote globalization (“free trade”).
73
Outcomes of Neoliberal Policies Commodification (privatization) of services Reduced public sector and thus public employment Declining percent of labor force in unions/covered by
collective bargaining The free development of each individual lies in the hands
of the individual and is achieved by freeing oneself from the constraints of the collective
All of which leads to
Growing Economic and Social Inequality
Percent of Population with Incomes Less Than 50% of the Median (2007/2008)
0
5
10
15
20
25
% o
f Pop
ulat
ion
Denmark Austria Netherlands France Norway Finland SwedenSwitzerland Germany Belgium Ireland Poland New Zealand OECDUnited Kingdom Canada Italy Greece Portugal Spain AustraliaKorea Japan United States Israel Mexico
1 in 6 workers in the US earn less than half the median income.
In Denmark, only 1 in 16 workers earn less than half the median income.
74
75
Principles underlying Social Market Alternative Policies Humans exist prior to and outside of markets. Markets tend to concentrate income and wealth. Therefore: The aggregate structure of demand is skewed in
favor of the consumption desires of a small portion of the population. Thus market outcomes are neither distributionally optimal nor
morally good
Therefore: Reduce the role of the market for production of shared goods and services (de-commodification).
Therefore: Favor choices made by collectivities via the state, workplace associations and other groups.
Increase the role of the state as a mechanism for providing shared goods and services.
76
Outcomes of Social Market Policies Socialized provision of shared goods and services A larger public sector Greater portion of labor force covered by collective
bargaining agreements More women in government The free development of each is bound together with the
free development of all
All of which leads to:
Greater Economic and Social Equality
Social Spending* % of GDP and Gini Index, OECD Countries
0
5
10
15
20
25
30
35
Publ
ic S
ecto
r % G
DP
US = .45Canada = .32Iceland = .25Australia = .30N. Zealand = .36Japan = .38Switzerland = .34Greece = .33Netherlands = .31Spain = .32UK = .34Norway = .28Italy = .33Finland = .26Germany = .28Denmark = .24Austria = .26France = .28Sweden = .23OECD Total
45
US
*Pensions, working age income support, health care and other
77
78
SummaryUS had three decades of growing
inequality, with huge income growth to the top 1%.
This income inequality generated a rise of speculative financial activity.
The result: A housing bubble and economic crisis.
We must move the political discussion towards social market alternatives.
79
Some Suggestions for Reading Kevin Phillips - Bad Money: Reckless Finance, Failed
Politics, and the Global Crisis of American Capitalism
Mark Zandi – Financial Shock: A 360º Look at the Subprime Mortgage Implosion
Michael Hudson - The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America and Spawned a Global Crisis
Bill Barclay, “The Financial Crisis: Roots and Remedies,” Democratic Left, Fall 2008
CPEG: “A Permanent Jobs Program for the U.S.: Economic Restructuring to Meet Human Needs” at http://www.cpegonline.org/reports/jobs.pdf.
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