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Thursday, July 31, 2008

Infectious Greed Overwhelms the U.S. Economy

Income --- 1% earn more in 2006 than 60%

Wealth --- 1% own more than 91%
(see Currents and Undercurrents, the Federal Reserve study of 2006 called the Survey of Consumer Finances, by A. Kennickell)

Poverty --- 28% of the workforce are either a) working for below poverty wages (16.4%) or b) unemployed (5.7%) or c) working part-time involuntarily or dropped out of looking (6.1%). 28% of the workforce equals 43 million U.S. adults, 2 out of 7 in the workforce.
(see njfac.

Our economic problem is badly distributed profits leading to weak consumer purchasing power and recession. It is happening worldwide, it will last. See Nouriel Roubini RGE, his article of August 6, 2008, Navigating Towards a Global Recession?

I quote FDR's Chairman of the Federal Reserve to show what is coming our way soon.
This essay simplifies the previous one about Economic Rights.

Dear Liam, my friend in Myrtle Beach, (and Dear Reader), July 31, 2008

It’s 4 in the morning, I should be sleeping. But you got me thinking. I should be able to explain my thesis in simple words. And I’m going to try, right now.

The Nation magazine had an issue on “The New Inequality,” dated June 30, 2008, and in the several articles comprising the issue was a contest to name the era we’ve just gone through. One economist, Paul Krugman, has called “our past three decades of growing inequality The Great Divergence. Berkeley economist Harley Shaiken speaks about the Great Disconnect, his tag for years of stagnant and declining wages amid a growing economy.” My first impression was too call it The Ken and Barbie Doll Went Shopping Era. But that’s inadequate. I finished with this tag: The Buying with Debt while Profits go to the Wealthy Era. It’s unwieldy but that is what happened. People bought with debt, the profits of enterprise went to the wealthy.

I’ll explain.
In 1911 America passed a tipping point when more than half of the population had moved from farms to cities. Self-sufficient farmers continued to live in idyllic freedom, an American ideal, but most people became dependent on a corporate paycheck, or were dependent on their neighbors’ corporate paycheck. We made things collectively. Corporate enterprise, industrial factories and the age of mass production took hold. Production efficiency and living standards rose. Consumption rose. Profits grew. But the rewards of work were not shared equally.

Capital is the essence of profit, and it can be either distributed to employees in wages, salary and compensation, or it can be routed into corporate expansion, they way Ford built up his factories, or it can be distributed through dividends into the private accounts of stock holders and owners. In the last thirty years, 1975 to 2007, profits have been routed to the owners, or invested overseas, or lastly distributed as wages and income. But mostly wealth has gone to the wealthy; the stock market tripled in value between 1994 and 2001, for instance. The average worker did not see any increase in his income. Like I tried to show, in a household where the wife did not enter the workforce, over the past 35 years, that household showed less than 1% increase in income. More women entered the workforce, so median household income rose by 20%, but individual incomes did not rise much. Couples became dependent on two incomes in order to buy a house and live at a level they had lived during the 1950s and 60s. Workers went into debt, while owners invested internationally and created paper assets. Paper assets are inherently unproductive, they are, after all, simply paper. John Edwards in 2004 gave a speech about the Two Americas, the common family and the wealthy royalists who owned a lot of paper assets. So wealth became concentrated; Microsoft owners and Wal-Mart owners became the wealthiest people on the planet. Most of their wealth is stock. Stock value is based on future earnings, not present sales price of tangible assets.

This also happened in the 1920s. I’m going to attach an essay by the head of the Federal Reserve, Marriner Eccles, during the F.D.R. years. I’ll attach a section of his memoir called Beckoning Frontiers. He explains the problem of the Great Depression of the 1930s. I tried in my essay to show that the only means of exiting the Depression and returning to a healthy economy was to redistribute wealth. (In fact, I advocate a wealth tax today.) Consumer power was destroyed in the Depression, and Roosevelt tried many ways to revive it. I tried to show that the WWII war expenditures, financed through war bonds, created full employment of the 1940s, and that made possible the restoration of consumer power, which economists call aggregate demand. The national debt increased by 16 times, 16 fold, between 1932 and 1945. This was in essence a transfer of wealth. Eventually the nation paid off the loan to the wealthy bond holders. The 1950s did not resemble the 1930s precisely because there was widespread consumer demand. All the boats rose in a rising tide, or everyone helped everyone. Capitalism resembled a cooperative enterprise. We have lost the cooperative side; we have lost sight of the importance of equitable distribution of profits of corporate production. It’s a democratic thing. People have to understand why the system works when it works, and if they don’t they will lose their prosperity, which is what is happening in 2008.

Franklin Roosevelt had to contend with this dynamic of capitalism. I quote him in the essay at length. He never got his “economic rights,” a “Second Bill of Rights” put into our Constitution. (See Cass Sunstein’s book.) Those rights to a good job, to health care, and to education are not legalized, not yet. Eleanor Roosevelt saw that they were proclaimed in a U.N. document called The Declaration of Human Rights. But no one can sue anyone in court or take the government to court if they can’t get health care. It’s not a legal right, but Roosevelt wanted to make it legally binding.

Those rights are expensive; they cut into corporate profits. The owners believe in cowboy independence. They say that each one of us can make a fortune, we can all become multi-millionaires, we don’t need fishy “economic rights.” It sounds like a communist idea. Joe McCarthy probably thought FDR was a commie. The tendency of owners to sequester the profits of mass production, to hoard the gold and cash, and to cut wages plagues capitalism. It’s a world-wide problem. The working masses can be exploited and impoverished. Elections are bought by the wealthy. Democracy goes down the tube. The working multitudes must seek access to credit and debt. Eventually the system can’t sustain itself, the paper asset castle crashes. Unemployment reached 25% in the 30s, producing massive poverty.

I’m going to attach this quotation from Marriner Eccles to help you understand. As director of the Federal Reserve during the FDR years he advocated high incomes taxes that eventually reached 94% for the highest earners in 1942. You should remember that from 1942 to 1963 the highest incomes, incomes over today’s $5 million, were taxed at about 91%. These years were capitalism’s most successful years. The wealthy still found loopholes and the effective tax rate was closer to 51%. But today a hedge fund billionaire pays about 15% of his billions in taxes. The guy that delivers his pizza would have to work 10,000 years to earn what that guy made in one year. Also by the 1950s a third of all workers were represented by feisty labor unions. But now only 7.8% of the private sector are unionized, and the fruits of labor have been sequestered by the wealthy.

All the same, you shouldn’t lose the bigger picture. It’s a collective enterprise, we’re all working together. The glass of water you drink came to you via the labor of some peon digging a ditch. Sixteen percent of the workers receive pay that is less than the poverty level. But if excess capital is not distributed fairly to the workers, the system buckles and fails. In the mid 1970s we began to lose this fair payment for work. I quote an article from the New York Times (July 20, 2008, The American Way of Debt) that shows that between 1920 and 2007, an 87 year period, in only 4 years did national household savings exceed household debt. Those years were 1942, 1943, 1944, and 1945. Young men were in the military fighting, everyone else was working, few people were buying houses and going into debt. In the 1950s the ratio of savings to debt grew from 1 to 4 in 1950 to 1 to 7 in 1960, and that ratio just kept growing. Mushrooming is the best way to see it. Today that ratio has mushroomed to 1 dollar saved to 271 dollars committed to debt. Is that sustainable? Whose to blame? We just don’t cooperate well. That’s all. At least we are not shooting and bombing, but cooperation is missing and most fall victim to economic warfare!

You have to ask, why so much debt? Our economy is shuddering. Two of seven are either working in poverty, unemployed, working part-time involuntarily or dropped out of looking for work. The median annual wage for adults is $32,140, while our economy generates about $87,000 per worker. The top one percent earn more annually than the bottom 60% and own more than the bottom 91%. Yet Ken and Barbie went shopping. In China we are duplicating the process by paying $5 a day wages. Soon all this will come to a crashing halt. The dollar will collapse in the Dollar Crisis (read the book of that title by Richard Duncan, a former World Bank officer). This is an extension of the same story, the exploitation of labor for the cause of high profits. Will we ever learn? People may scoff in 2008, but in 2011 they will not scoff. We are about to see another era of extremely slow growth and widespread poverty.
Got it?

It’s a shame. I should be sleeping. Now I’m going to find that Marriner Eccles quote. Imagine naming your child Marriner! They lived in Utah, he was a Utah banker before he went to Washington, D.C. What were his parents thinking?

Inequality of wealth and income
Marriner S. Eccles, who served as Franklin D. Roosevelt's Chairman of the Federal Reserve from November 1934 to February 1948, detailed what he believed caused the Depression in his memoirs, Beckoning Frontiers (New York, Alfred A. Knopf, 1951)[22]:

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. [Emphasis in original.]

Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations.

But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants.

In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low.

Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers' loans, and foreign debt. The stimulation to spending by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time.

Had there been a better distribution of the current income from the national product -- in other words, had there been less savings by business and the higher-income groups and more income in the lower groups -- we should have had far greater stability in our economy.

Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929.

The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality underconsumption when judged in terms of the real world instead of the money world.

This, in turn, brought about a fall in prices and employment.

Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed.

And thus again the vicious circle of deflation was closed until one third of the entire working population was unemployed, with our national income reduced by fifty per cent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay.

Fixed charges, such as taxes, railroad and other utility rates, insurance and interest charges, clung close to the 1929 level and required such a portion of the national income to meet them that the amount left for consumption of goods was not sufficient to support the population.

This then, was my reading of what brought on the depression.

Marriner S. Eccles

This Eccles piece from wikipedia/Great Depression was posted on Robert Reich’s blogspot on Saturday, 26 July, 2008.

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