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Sunday, March 22, 2009

Blog Contents, December, 2008

Warren Brussee answers questions at his blog, and this is my comment of March 22, 2009.

Warren says, “Well, actually it was the CONSUMER who got us into this mess.”
Since solutions to the ongoing problem will be tied to the cause, I offer another viewpoint. Probably the expansion of the economy (GDP/percapita) outpaced the expansion of wages, and this snapped the economy. A short version is to say that inequality caused the downturn. GDP grew 77% between 1980 and 2005, productivity grew by 62% and hourly wages by 14%. As Marriner Eccles said of the Great Depression, when the losers run out of credit the poker game is over. The “losers” could no longer buy the stuff they were producing. This gets into a long discussion, and I’m an amateur, but I’ll give it a try. Professors Edward Wolff and Emmanuel Saez say, between them, that in the last 35 years over 50% of the economic gains (growth of GDP) went to the top one percent. Saez says (Striking It Richer) that the share national income of the top ten percent of households grew from 35% in 1980 to 49.7% in 2005. The share of the bottom 80% is now 40% of national income, and for the bottom 60% of households it is 20% (page 79 of State of Working America, 2006/2007, from a Brookings/Urban Institute Tax Policy Center report). Because of that I do not think the “consumer” drove the economy over the cliff. Recently I read from another professor of economics, Jack Rasmus, (at Z Magazine and that in 1978 the financial portion of the national debt was 11% of the total national debt, and in 2005 the financial portion was 33% of the national debt. He says that of the $49 trillion national debt, 22 trillion was added since 2001, and of that 22, 18 trillion was financial debt. He gets his figures from the BEA Flow of Funds report. Therefore he concludes that, ““In the U.S. alone, over the past three decades since 1978, total debt --- i.e. finance sector, consumer, government and non-finance business debt --- has risen from $3.6 trillion in 1978 to more than $47.7 trillion! . . . The answer is the orgy of speculative finance and speculative investing. Speculative investment and finance has been the driver of the massive debt run-up. . . . This is not a case of workers and consumers buying too many cars or houses they cannot afford. Workers-consumers debt is the consequence of the increased use of credit cards and housing refinancing in order to maintain standards of living and make up for the essential freeze in pay, adjusted for inflation, since 1982। According to U.S. government Labor Dept. data, the 110 million non-supervisory production and service workers in the U.S. --- the heart of the American working class --- earn less real take home pay in 2008 than they did in 1982 as a group. . . . The massive debt run-up in the U.S. economy is thus clearly financial debt.”

I think this accounts for the growth of hedge funds, LBO operations, SIVs (shadow bank entities, or Special Investment Vehicles) that shifted the majority of investment from banks to these other non-regulated entities. I mention all this, because, as an amateur, an armchair detective, I don’t think the high unemployment rate and other corresponding economic dysfunctions will be over until the differential between wages and GDP growth is pulled into closer alignment। That will mean a serious jobs creation and retention program, and that policy will run directly counter to the prevailing sentiment of a major political party that almost won the last election। And it will be expensive, but not as expensive as a Depression. The part that scares me is when I heard Martin Wolf, writer for the Financial Times, state that the one possible outcome, out of three better ones, of our mess was that “income destroys capital.” That means that the spiral goes on and on, and the capital base of our economy is severely damaged. Not a pleasant thought. So, the consumer had a role, but not the decisive role, more like a trigger that set-off this train of defaults, bankruptcies, layoffs, and lower expectations. And thank you for the very thought provoking blog, and your participation. (I wrote a summary of Rasmus’ articles at my blog,

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