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Tuesday, April 21, 2009

Cause of Recession

The Cause of the Recession is Low Wages

The problem is low wages --- and the solution is more jobs and higher wages. It’s that simple. People want an answer to how the economy failed, and how we will repair it. No one likes simplistic answers, but I think I can show that complexity bears out this simple answer.

Some say persuasively that unsustainable consumer debt reached a wall and now the economy is downsizing to the limit of real consumer income level; others say that the financial system abuse resulted in a larger net loss and thus overwhelmed the economy --- abuse killed the golden-egg-laying goose; and I maintain that inequality over a thirty year period created the underlying base that brought on the downturn. (For a picture of 7% wage growth over a 34 year period, 1971 to 2005, for 80% of the U.S. workforce, see
Hourly and weekly earnings of production and nonsupervisory workers, 1947-2005 (2005 dollars) [pdf] [xls] --- a snapshot of wage stagnation)But I have been reading economics for only two and a half years. It’s presumptuous for me to try to explain what so many would not even try. Honestly, I don’t know why I write about economics, I’m no expert. Every amateur wants to have the final word. This is my final word. So, explore my arguments, read my references, and take it as an exercise in thinking.

Is This Fair?
Declining wage rates in a growing economy lead to inequality, and that’s a one word cause for our economic problems. Inequality, the bifurcation and polarization of income and wealth, the class conflict between haves and have-nots, is usually recognised as a moral issue of unfairness, a betrayal of just rewards for labor. For instance, if you were to convert the wealth of Warren Buffett or Bill Gates into $100 dollar bills and make two stacks, the two stacks would rise up 30 miles high, at least they did before the stock market collapse. If you stack the wealth of the wealthiest 1% of households, 1.16 million households, their stacks would reach almost 60 feet high, on average. One percent own 33.4% of all the nation’s wealth. If you stack the average savings of the poorer half of the U.S. households then you would see 58 million stacks that reach one inch high. So imagine a circle of 116,000,000 stacks, half are one inch high and in the middle are those towers going up 30 miles into the stratosphere. This graphically describes a large disparity of savings, and the moral question, “Is this fair?” immediately arises.(1)

Over the last decade the wealthiest 10% of U.S. households increased their wealth from $600,000 to $1,200,000, a 94% increase, while the median household increased their net worth not by $600,000 but by $20,000. “Is this fair?” The median saw an increase of 30%, from $68,000 to $88,100, only to lose all that gain when the housing market collapsed. Now the median net worth is $67,776.(2) “Is this fair?” And furthermore we learn that one in six households own no assets, one in four own less than $10,000 in assets. “Is this fair?” is a reasonable question.(3)

Is This Efficient?
But few see inequality as a problem of inefficiency, which it is. Inequality has the potential to destroy the capitalist system, and it is certainly gumming up the works. To understand how inequality severely cripples economic growth, imagine what life would be like if Scrooge McDuck or Daddy Warbucks owned 99% of everything. That’s inequality at the limit. There would be no demand for products or services because only one person would have money. We would be back in feudal times.(4) This is an exaggerated case, but the dynamic remains valid. When there’s more for you, and always less for me, there’s no reason for you to keep me employed because I can’t afford to buy the stuff you hire me to make. Your low wages destroys your profits and eventually causes my unemployment, and now my unemployment impacts your declining profits. It’s a destructive downward spiral. “Income destroys capital” is how Martin Wolf of the Financial Times describes it.(5) Today the top 1% of households earns more each year than the bottom 60%, and owns more than the bottom 91%. (6) And China and the other mercantile countries are not going step in to become the purchasers of last resort to save the U.S. transnational corporations because wages in those countries are very, very low. As Ravi Batra says, production is supply and wages is demand, and they have to be in balance. “Productivity is the main source of supply, whereas wages are the main source of demand.” (7)

With a 1/3rd to 1/6th of the world’s population of 6.5 billion living in poverty, chronic inequality is the likely future trend. Since year 2000 about 1.5 billion low wage workers have entered the international job market as China, India and the former Soviet block countries engage in international production. Richard Freeman calls this “The Great Doubling” of the global labor pool. (8) Inequality may create a permanent heavy drag on wage growth for the indefinite future until a new paradigm for prosperity establishes itself.

Three Possible Causes of the Crisis
Warren Brussee published in 2005 his book The Second Great Depression, Starting 2007, Ending 2020. His prediction predated the collapse by two years. The vast majority of economists never saw it coming. Brussee analyzed the converging effects of debt: Personal Savings Rate, Quarterly Financial Obligations Ratio, Total Household Debt as a Percentage of Disposable Income, and Bankruptcy filings. He replied to a comment I made on his blog (Wbrussee’s Weblog, Word Press, April 7, 2009).

Jeff Madrick, editor of Challenge Magazine and author of Why Economies Grow, speaking on Doug Henwood’s radio show Behind the News (February 28, 2009) had a different explanation, “The proximate cause . . . was the collapse of the housing market, the main cause was excessive abuse of securitization, first the mortgages and then of other loans . . . allowed mortgage brokers and commercial banks to immediately take one percent of those mortgages to the bottom line. . . . a system clearly doomed to fail.”

Ravi Batra sees a third explanation. “Productivity is the main source of supply, whereas wages are the main source of demand. If this wage-productivity gap keeps rising over time, supply will rise faster than demand and then we face the problem of overproduction.
Many like [former Federal Reserve Chairman Alan] Greenspan and other economists love the productivity rise, but if it leads to overproduction, that leads to high unemployment such as we are seeing now. Overproduction is a disaster and it leads to depressions.
If businesses don't sell what they produce, they lose money, and when they lose money, they have to lay off people.” (
This is the explanation that I agree with.

I think the new paradigm for prosperity will be capsulized and understood by majority “conventional wisdom” under this simple statement, “Supply is productivity and demand is wages, and the two must be in balance.” Over the past thirty or forty years this is where our economies have run aground, gone a-kilter. Income must keep pace with growth or growth will eventually be cut back to the limit of income. Wages purchase productivity, it can be no other way. In April, 2009, one of three workers, 50,000,000 workers, are either unemployed, working part-time or earning sub-poverty level wages.(9) That is lost purchasing power that limits the extent of economic productivity and in the final analysis the quality of life in a nation. It is neither fair nor efficient. We need more jobs at higher wages.

The Solutions
Briefly, the solutions to resolve the current recession-perhaps-depression are to establish full employment by creating well-paying public jobs, this will serve to maintain a tight job market thus forcing employers to pay higher wages, increase the Earned Income Tax Credit, raise the minimum wage, re-establish a manufacturing base to our economy, reinvigorate the union movement, and provide for asset accumulation through Individual Development Accounts.(10) Other measures include lowering expenses for the vast underpaid majority by subsidizing health care, childcare, housing, food, and transportation expenses. That will tend to lift wages and lower expenses for the vast majority of workers who are underpaid, underemployed, and under-saved.

About one in three workers in April, 2009, are either unemployed, working part-time, or working for lower than poverty level wages. One in three workers is over 50 million adult U.S. citizens. That dramatically diminishes consumer purchasing power. That is inherently inefficient. Their restored purchasing power would serve the economy, not to mention improve their lives. Half the U.S. households own 2.5% of the national wealth and earn 15% of the annual income, as I am never tired of reminding my readers.(11) If you are looking for a lasting solution you have to increase wages globally not just in the U.S.A. That means new trade laws must be designed to create prosperity in contrast to seeking ever lower product pricing. One interesting solution is to create an international minimum wage in exporting industries for all exporting countries.(12)

Though it is counter intuitive (or perhaps absolutely wrong) we have to increase our product costs to achieve prosperity. Apparently our ideas about economic life have to really change. The main argument of this essay is to increase income for the majority of “us” even while we increase product expenses. It should be remembered that 60% of the households earn 20% of the national income. When I mention majority, those are the households I speak of.

A general movement to establish wealth and asset accumulation broadly using the above mentioned policies and additional measures would not only strengthen democratic institutions but establish economic security worldwide. This will usher in an era of world prosperity.

The process of the future is to enlarge the group that guarantees their own security, through democratic action, union power, cooperative association and businesses, boycotts, and education. That will involve the above mentioned policy measures involving full employment, etc., and will mean targeting a distribution slope for both income and wealth distribution. Economists do not waste their time discussing these things because these ideas are so unpopular, unfeasible, impractical and socialistic. But they are worth a little speculative time. Surprisingly today we hear renewed calls for higher marginal tax rates, taxes on wealth, and calls for full employment.(13)

A Short Math Lesson
Did you ever guess that the average income for the bottom half of workers was $30,000 and the other half averaged $170,000?
Most people have not looked at the math or thought through the problem. Follow the math and you’ll slowly be convinced. The math may be the most convincing rebuttal to my dissenters. But my dissenters have not taken into account, or to heart, the underlying compassion inherent in humanity that wishes to provide for the welfare of everyone. The model of always self-serving economic man is not consistent to full human development, and is not reliable.(14) We have an abundance of money and wealth, possessions and values, natural and human resources; we just don’t allocate them effectively. In fact our prevailing models and conventional wisdom have not improved on the poverty rate for over 35 years.

The Math Lesson: Take out a pencil and paper, and see if I do my math correctly.What’s your income, $30,000 or $170,000?
There just over 160 million in the U.S. workforce in April, 2009. Presently, April of 2009, 8.5% are unemployed, reducing the number of active workers by about 14 million to 146 million. We have about 146 million people actively working, and they are producing a product. Last year the GDP was more than $14 trillion. To find the average value produced per worker, you divide $14 trillion by 146 million, and get just under $100,000. Each worker produced, on average, almost $100,000 worth of value.

The median income per worker, the middle income person out of 146 million workers, in contrast, was not close to $100,000, but below $33,000. Another way of putting that is to say, half the workers earned less than $33,000. If half the workers, 73 million workers, earned approximately $30,000 a year then their combined income was $2.1 trillion. Half the workers earned $2.1 trillion, and the other half earned $12 trillion for a GDP total of $14 trillion. One half earns $2 trillion, the other half earns $12 trillion. When you divide $12 trillion by 70 million workers, the average earnings for the top half of the workers was $170,000 per worker.

In conclusion, one half earns $30,000 a year, the other half earns $170,000 a year. The ratio between the two halves is about 1 to 6. One half earns $1 while the other half earns $6. The wealth ratio is $1 to $39. Half own 2.5%, the other half own 97.5%.(15)

Problem? Is my math wrong, are my assumptions wrong, or is the economy wrong? I conclude that the economy is wrong, in the sense that excessive inequality is both unfair and inefficient. When comparing household incomes, not worker incomes as above, the ratio is about the same, one to six. Income in the U.S. is divided into three categories, (1) wages and salaries (64.5%), (2) business income (18.1%), and (3) “other” (17.3%)which includes Social Security, pension income, IRA distributions, unemployment compensation, welfare (TANF), SSI, alimony and the like. So my exercise is incorrect? Not really. It’s basically accurate, but not precisely.(16)

The Rights of Man
Thomas Paine wrote in The Rights of Man:
“When it shall be said in any country in the world, my poor are happy; neither ignorance nor distress is to be found among them; my jails are empty of prisoners, my streets of beggars; the aged are not in want, the taxes are not oppressive; . . . when these things can be said then may that country boast of its constitution and its government.”

We might write in The Wrongs of Man:
“Our jails have never been fuller, there are people sleeping under the bridges and overpasses, hunger is a reality, panhandling is common, and in the land inequality of income and wealth has never been greater. This is not an exaggeration.”

Why Economies Grow
The best book I’ve read on the topic is Why Economies Grow by Jeff Madrick. The summation of Madrick’s book is that economies grow slowly over centuries only by dint of accretion of individual personal property, and a system of laws that protect that property, which allows for markets to form and strengthen and reinforce prosperity. He states, “[B]ut I also maintain that there is no single dominating cause of growth, only a tendency of markets to be first among equals. What is clear is that supply side view has gone too far. . . . I argue that economic growth is demand driven both in the short run and the long run, if nevertheless complex and organic at all times.” “This book argues that the growth of markets through trade, colonization, and domestic expansion was the predominant factor in Western economic development.” “If we were to place them on a continuum, with those factors that are more cause than consequence on the left, market size and dissemination of information are furthest left and are closest to first movers or true leaders.”(17)

When Markets Collapse
Markets are weakened when the broad mass of participants lose property, when there are fewer participants with means to buy what they produce. Therefore markets are destroyed through natural disaster or wars, or when property shifts from the many to the few. That’s what creates a depression. The Great Depression was a series of collapsing bank failures that wiped out ungauranteed savings of millions of depositors. Similarly, today, when homes are foreclosed, the few banking institutions and their shareholders take back property from the many, thus destroying purchasing power in a weakened economy suffering from a prevailing low wage condition.

The Federal Reserve reported in February 2009 that the median net worth for U.S. households dropped by 22.7% between 2007 and 2009, from $88,100 to $68,000. (18) This wiped out a decade of gain. The gain was real estate asset inflation that subsequently burst. This will polarize wealth further. The average equity portion on mortgages is at an all time low, around 44%. When the money-lending few foreclose on the many after strongly pushing a faulty credit scheme, the transfer of wealth resembles fraud or theft. The property of the many flow into the accounts of the few. Even though the value of the assets deflate, the wealth concentrates from the many to the few. Purchasing power disappears. Depression ensue. Forty percent of the households with incomes in the lower 20% pay more than 40% of their post-tax incomes in debt payments. Among households in the fourth quintile with incomes between $59,600 and $90,000 some 12.5% are dangerously in debt, paying 40% of their income in interest payments. (19) Even though nobody was forced at gun-point to enter into a home mortgage contract, a student loan, or a car loan, and many borrowers failed to prudently assess their risks, even so, loans were aggressively sold with assurances that asset values would rise perpetually. Bad judgment and self-interest were pandemic. For the protection of the overall economy government has to regulate lending practices, credit markets, and usury laws.

The Great Credit Default Swap Market
After the Great Depression the Chairman of the Federal Reserve, 1934 to 1946, Marriner Eccles, explained in his memoir the causes of the Great Depression. He states that the economy is like a poker game, when the losers run out of credit the game is over. He also said that a “giant suction machine” sucked the profits out of the system making reinvestment in productive enterprise unprofitable. Today the profits have been reinvested in China or sunk into the incredible Credit Default Swap markets. Economist Jack Rasmus (20), drawing from the Federal Reserve’s Flow of Funds report, states that between 2001 and 2007 corporate debt grew by $18 trillion. (I e-mailed Mr. Rasmus, and he states that his source is correct.) Eighteen trillion is one third the net worth of the entire country! In those six years the combined national debt increased an incredible $22 trillion or by 80%. Most of it, 78%, was an increase in financial corporation debt. It is impossible that a debt of that magnitude could be productive debt on genuine productive enterprise. It was gambling. What else could it be? It was debt created by decades of excessive profits subsequently placed in a gambling casino known as an unregulated insurance market, or Credit Default Swap market. AIG insured the whole thing and the taxpayers are now paying for their incompetence. Or was it? Naturally, a professional economist would use more benign terms, but Frank Partnoy and Lawrence Mitchell use words like “gambling” and “lightly regulated casino” when referring to the Credit Default Swap market and the New York Stock Exchange. (21)

Other Economists’ Views
This essay is long enough at this point. I will recommend a few writers who promote similar opinions.

First Ravi Batra explains the current downturn in a recent article at Dr. Batra insists that pursuing economic policies that begin to reverse a decline in the real wages of individual consumers is the only way to heal the limping economy. Changes in the "wage-productivity gap" - or the difference between how much consumers earn and the value of goods and services an economy produces - can explain the current situation and can help guide policy-makers out of it.
I spoke with Professor Batra about the current meltdown and how it can be viewed through the lens of the wage-productivity gap.
Matt Renner: What is the wage-productivity gap and how does it affect the health of an economy?
Dr. Ravi Batra: The wage-productivity gap is the gap between the real wage and labor productivity. The real wage is the purchasing power of the average salary. If productivity rises fast and the real wage rises slowly, then a wage-productivity gap develops and grows.

Several economist predicted the present day downturn, notably at the Monthly Review John Bellamy Foster and Fred Magdoff. Here Foster is interviewed on his book, co-authored with Magdoff, The Great Financial Crisis।

The real underlying problem, as indicated above, was stagnation. Explaining stagnation is a long and complex process. It was analyzed in depth by Paul Baran, Paul Sweezy, and Harry Magdoff. For a fuller understanding, beyond what I am able to give in this short space, I recommend our book The Great Financial Crisis and earlier works by Baran, Sweezy, and Magdoff, especially Baran and Sweezy's Monopoly Capital. There are two factors basically to consider: maturity and monopoly. Maturity stands for the fact that industrialization is an historical process. In the beginning, i.e., the initial industrial revolution phase, there is a building up of industry virtually from scratch as in the United States in the nineteenth century and China today. During this period the demand for new investment seems infinite, and if there are limits to expansion they lie in the shortage of capital to invest. Eventually, however, industry is built up in the core areas, and after that production is geared more and more to mere replacement, which can be financed out of depreciation funds.

Peter Morici predicts a depression, see his article in Counter Punch, Girding for a Depression,

“Money spent on imported oil and imports of Chinese goods cannot be spent in the United States. Quite simply, those dollars don’t come back to purchase U.S. exports in sufficient amounts, and the resulting trade deficits are a huge structural drag on the demand for U.S. goods and services. That is why huge federal deficits are needed to keep the economy going but can’t be sustained indefinitely. Ultimately, trade deficits on oil and with China must be dramatically reduced to achieve adequate demand for U.S. production and employment and accomplish sustainable economic growth.”

Both James Galbraith and Robert Kuttner warn of an even more severe downturn. These authors also predicted years in advance the current downturn:
Richard Duncan in The Dollar Crisis, 2001, Robert Shiller in Irrational Exuberance, 2001, Jeff Faux in The Global Class War, 2006, Warren Brussee in The Second Great Depression, 2005.

I contributed a comment to Warren Brussee’s blog at WordPress, and he responded. His argument was desvastating, but I still think it folds into a larger picture. It should prove interesting for those who search for the cause of the latest downturn. See

Finale -----------------------------------
This essay has been too long. In closing, according to Meher Baba, two things make God laugh, (1) when a doctor says to a patient, “I will cure you,” and (2) when one man draws a line in the soil and says to the other man, “This side belongs to me, and that side belongs to you.” Perhaps from a viewpoint of omniscience our petty divisions and quiblings over property seem insane. Mankind has to embrace its unity. Man proposes and God disposes. It is time to propose anew.

As I said in the beginning, the problem is low wages --- and the solution is more jobs and higher wages. And a healthy appreciation of each one’s divine right to flourish and succeed.

1. See Ben Leet, this blog,, A Wealth Tax to Eliminate Poverty, or Federal Reserve report Currents and Undercurrents, Arthur Kennickell, 2006, page 11.

2. Federal Reserve report Survey of Consumer Finances, 2009, as reported in, February 23, 2009.
“In 2007, the highest-income 10 percent of U.S. families held nearly double, after inflation, the wealth they held in 1998. Over nine years, these high-income families saw their median net worth jump 94 percent to $1.2 million.”

3. See footnote 1, Federal Reserve report.

4. See L. Randall Wray, Understanding Modern Money, for an historical narration of the invention of money. See Robert Reich, Super Capitalism for a description of modern obsession with low wages, production costs and high profits.

5. Listen to interview with Martin Wolf, at Behind the News, a Doug Henwood radio program, October , 2008

6. See Mishel, Bernstein, Allegretto, State of Working America, 2006-2007,
page 79 for income; see Currents and Undercurrents, footnote one for wealth

7. See Ravi Batra,, March 13, 2009

8. See, Richard Freeman, The Great Doubling: The Challenge of the New Global Labor Market, in Ending Poverty in America, page 55.

9. See, statistics for Bureau of Labor Statistics, Dept. of Labor; 8.5% are unemployed, 7.1% are working part-time involuntarily or are discouraged job seekers, and 16.2% work for sub-poverty level wages; 50,880,000 workers total.

10. See Barry Bluestone, Teresa Ghilarducci, Rewarding Work: Feasible Anti-Poverty Policy, American Prospect, May 1,1996 for a description of EITC and minimum wage policies. See,, and (National Jobs for All Coalition) for jobs creation programs. See Michael Sherraden and Mark Schreiner, Can the Poor Save?, (Transaction Publishers, 2007) for IDA policy.

11. See, Ben Leet, “Half Own 2.4%, Half Earn 15%”

12. See Richard Duncan, The Dollar Crisis (John Wiley and Sons, 2005) page 233

13. See, April 14, 2009, reporting on Thomas Pikkety advocating
an 80% marginal tax on incomes over $1.3 million. See Institute of Policy
Studies, Collins, Cavanaugh, Goldberg, Pizzigati, Paying for a Strong Economy,, March 2009. See Good and Greed by Sam Pizzigati (Apex Press, 2004), for a discussion of a ten times rule for income rates. See Ending Poverty as We Know It, by William P. Quigley (Temple University Press, 2003) for a discussion of a Constitutional amendment guaranteeing a job at a living wage.

14. See Ken Lux, Adam Smith’s Mistake,

15. median income, SWA, 200-2007, page

16. See SWA, page 79

17. See Jeff Madrick, How Economies Grow, (Basic Books, 2002) pages 200, 2, and 3.

18. See, March 17, 2009, reporting on the preliminary Survey of Consumer Finances, 2009

19. same as footnote 18

20. See Jack Rasmus,, Epic Recession Revisited. And essay of the progress of the recession, January, 2009

21. Hear Lawrence Mitchell on Against the Grain,, archives for
Hear Frank Partnoy on Fresh Air with Terry Gross, archives for
Additional Resources
Robin Hahnel discusses the standards for rewards in his book Economic Justice and Democracy.
David Korten has recently published another ground-breaking analysis of the economy and our future in Agenda for a New Economy
Frank Stricker in his Why America Lost the War on Poverty -- and How We Can Win It supports the idea that our economy never produces enough jobs to employ all the workers who seek employment.
For details on the creation of a federal jobs program see, njfac, and note the proposals by Senator Edward Kennedy and Representative Lynne Wolsey.

Someone who agrees with me

I recently found one political economist who reflects the ideas I’ve presented in this paper. Finally.
From the Vienna University of Economics and Business, economist

Ozlem Onaran offers a full proposal, March 11, 2009. The Political Economy Research Institute at University of Massachusetts in Amherst reprinted his analysis where he claims that the effects of past crises has been a “pro-capital redistribution.” In effect, labor’s compensation, wages and income, has been reduced and sacrificed in the thirty years of neo-liberalist economic global policy, and in repeated past crises labor has paid more than capital. Therefore policy measures must switch the cost to the capital side.

From the Crisis of Distribution to the Distribution of the Costs of the Crisis: What Can We Learn from Previous Crises about the Effects of the Financial Crisis on Labor Share?
Onaran, Özlem | 3/11/2009
The paper compares crises in developed and developing countries, currency crises and domestic financial crises and concludes that “Despite differences, the cumulative effect is in both cases a dramatic pro-capital redistribution. Building on these lessons, the paper discusses the possible different effects of the current global crisis in the developed countries, Eastern Europe, and developing countries, and concludes with policy alternatives to avoid the socialization of the costs of the crisis.”

On page 17 he states, “This is not just a crisis of improperly regulated markets, but also a crisis of unequal distribution, and it should be asked why labor should go on paying the costs of this crisis further. The major crisis calls for a major policy restructuring:

a) First fiscal policy has to incorporate a public employment program, and a distributional policy to reverse the negative demand effects of the crisis. Public expenditures in labor intensive services like education, child care, nursing homes, health, as well as in public infrastructure and green investments are important area of target. . . .
For the finance of an extensive stimulus packag budget deficits are in the short run reasonable. But more progressive income and wealth taxes, higher corporate tax rates, inheritance tax, tax on financial transactions are the only way to make the responsible pay for the costs of crisis. This is also the only way to avoid future budget cuts in social expenditures, education, health, child and elderly care.

b) In order to fundamentally solve the problems of this crisis, economic policy must most of all solve the distributional crisis. A new socio-economic and political paradigm is required focusing on full-employment, productivity led wage growth, and a shortening of work-time.

c) Next the redesign of the financial sector is urgent, on which most of the alternative literature is also focusing. . . .Thus there is need for a large public finance sector to foster stable growth. . . .

d) Last, but not least the crisis has important policy implications for the global dimension. . . . Thus redefining the rules of the game, . . . to create conditions that are fairer to labor. . . . This defines new roles and tasks for the trade unions in each country, since they are the political agents who have interest and the potential to push for such a shift in policy at the global level. . . .

Sunday, April 5, 2009

Blog Contents

Dear Reader,

Contents of this web site:
I write essays on economics.
The most recent essays are at the top, oldest at the bottom.
If you read only one essay, choose
August, 2008, Half Own 2.5%, Half Earn 15%.
That will get you going.
Click the ? in the Contents area to open the month and see the essays for any month.

27. A lengthy letter to Obama advising that he nationalize the failed banks.
I quote James Galbraith at length.
26. A Reply to Warren Brussee about the causes of the recession.

25. Jack Rasmus’ Alternative to the Obama Recovery. I summarize this plan by economist and writer for Z Magazine.

24. U.S. Ranks 75th out of 126 Nations -- inequality of income

23. Why We Need Full Employment
This is my shortest, a one page effort full of facts well documented.
December 29, 2008

22. The Case for Full Employment
Both a historical overview of previous government actions, and a review
two scholars’ approach to solving paucity of jobs in our economy.
I think this is sound policy and a good, brief look at the employment problem.

21. Full Employment
Basic logic on full employment.

20. Meltdown/Bailout Suggestions
Two suggestions about nationalizing banks and reworking underwater
home mortgages.

19. Nationalize the Banks or Bail Them Out
I quote a professor, Peter Dorman, and a financial consultant, John Hussman। Both offer plans radically different than Treasury Secretary
Paulson’s. I review radio program This American Life, to explain the
subprime mess. I wrote it for my sister.

18. Understanding the Financial Crisis
William Springer, head of the economics department at Howard University
made the same comments on the radio the week after I wrote this.
I claim that the financial part of the crisis is phase one. Much more bad news will unfold.

17. Justice Revolution
A little more documentation, but basically the same essay as the last.
It is better in some ways.

16. Half Own 2.5%, Half Earn 15%
Read this one if you read no other.

15. Celebrate $100,000 a year as the average U.S. income
Hard to believe, but that’s correct. Read it to believe it.

14. Infectious Greed Overwhelms the U.S. Economy
I quote Marriner Eccles about the Great Depression. I tried to simply
the previous essay for a friend who has no background.

13. Economic Rights for the Two Out of Seven Who Are Not Making It
July 22, 2008
Inequality, weak purchasing power, Roosevelt’s State of the Union, ‘44,
and much more. Not too pessimistic. About 3,000 words.
Really interesting says the author.

12. What the Government Can Do
May 1, 2008
A two page reduction of the essay There Are Solutions. A quick read on
ways to increase employment and incomes without stalling the economy.
Maybe my ‘Best.’ Short, to the point.

11. Three Short Pieces
June 15, 2008. To the KPFA Morning Show, The Next Wave of Political Reform, and another review of Robin Hahnel’s book Economic Justice and Democracy.

10. My Second Letter to Pete Stark, Congressman
A little note about shrinking aggregate demand, how to grow an economy,
and why worldwide depression is possible. I had just read Jeff Madrick’s
Why Economies Grow.

9. There Are Solutions
This 4,000 word essay details and reviews three plans for revitalizing the American economy.
First, I take a look at Frank Stricker’s book Why America Lost the War on Poverty --- and How to Win It, and his 17 point plan called What Needs to Be Done.
Second I look at the Center for American Progress’ plan “From Poverty to
Finally, I review “Decent Work and Public Investment,” a plan authored by members of the National Jobs for All Coalition, Helen Lachs Ginsburg and Gertrude Shaffner Goldberg.

8. White Birds --- a poem not about economics. About love.

7. A Wealth Tax to Eliminate Poverty
This may be my best effort. It is a reduction of my original essay A Modest Proposal to Tax Wealth Annually in the U.S.A.

6. The Art of Living Together
A short vagrancy, a fissure, an errant meander, a lunacy. Something burst.

5. A Letter to My Congressman, Pete Stark. February 5, 2008
I break down wealth and income distribution, and suggest sources for
the Congressman to pursue.

4. A book review of Robin Hahnel’s Economic Justice and Democracy
This essay was published in the Alameda County Green Party News in
October, 2007.

3. Odd, Very Odd. March, 2008. A recapitulation of old ideas. Nothing special.

2. Is There a Middle Class?
The 40 to 1 ratio between two halves of the U.S. population impressed me. I was listening to Michael Krasny on KQED FM radio talk about the middle class. He did not take my e-mail, so I wrote this essay and sent it to him.

1. Progressive Economic Reform, 2008
January, 2008
This essay presents an array of eleven different sources that argue that our economy does not serve the American people.
The people at Econo-atrocity, the commentary site at Center for
Popular Economics, posted it. It’s my third favorite after What Government Can Do, and
A Wealth Tax to Eliminate Poverty, second best.

Oregon Lake

Saturday, April 4, 2009

Why Obama should nationalize the banks

Dear Mr. Obama, March 26, 2009

Why you should nationalize the failed banks

This letter tries to persuade you to lift the low income group in our nation, and stop the hemorrhage of public money going to the wealthy bankers. The New Yorker magazine keeps a file of “Letters We Never Finished Reading.” The first letter begins with the words, “Dear Fathead . . .” This is not that type of letter.

In 2006 the net worth of the entire U.S.A. was estimated at over $50 trillion, according to the Federal Reserve report “Currents and Undercurrents” by Arthur Kennickell. Between 2001 - 2007 the combined net debt of the U.S.A. --- including consumer, government and corporate debt --- grew from $27 trillion to $49 trillion, a $22 trillion or 81% increase in net indebtedness in seven years (according to the Flow of Funds report from the Federal Reserve). Of the $22 trillion increase in indebtedness, $18 trillion originated from financial corporation debt. This was the Credit Default Swap market.

It is very obvious that the size of the American economy could never generate that much genuine business loan activity. Another species of loan had to be created, and it was the Credit Default Swap market, an unregulated insurance business, better understood as a gambling casino. According to Frank Partnoy, business law professor at U.C. San Diego, it serves as a ballast against unwise investments, but there is no reason that government should not require full transparency of its shadowy valuation. An article in the MultiNational Monitor by Robert Weissman details the regulation needed in this area, March, 2009.

When the subprime housing mortgages began to default in late 2007 it caused the tail to wag the dog, according to Partnoy, that is, the value of the mortgages was much smaller than the mountain Credit Default Swaps tied onto the mortgages. They were tied on as gambling stakes in a casino market that has no contractual connection with the underlying values. As in a cock fight, the value of the wagers exceeded the value of the cocks.

We have no business committing tax revenue to the losses of this insane casino, nor offering non-recourse loans to anyone to entice them to buy up this junk.
A non-recourse loan is essentially a gift of money to the holder of the loan if the loan goes bad, becomes uncollectable.

Writing at, on March 27, 2009, one professional economist offers a companion to the Obama plan:
There is one bailout bill waiting for some action. The Los Vegas casinos are hurting. I know: boo hoo. How could the government bail them out? They could lend me money to gamble. I will be obligated to share my winnings with the government, but they agree that I do not have to repay the loans if I lose. So, I would stand to gain a great deal with little risk.

How is my casino plan different from the present plan of creating a market for "legacy" [Isn't that nicer than saying toxic] assets, other than that financial firms will have to put up a wee bit of their investment.

The best we can hope for from Obama would be to continue to embarrass himself with the obsequiousness toward rich and powerful in such a way as to spark a massive protest comparable to the 1960s. Let's stop dithering. Any takers?

Another economist at had this to say,
Remember that old Gary Larson cartoon in which two scientists are standing before a blackboard crammed with math? One furrows his brows and says he has doubts about Step 3. Standing apart from all the Greek letters and operators above and below it, Step 3 says, “And then a miracle occurs....

I believe that Mr. Geithner should leave your cabinet. He seems committed to betting other people’s money, our tax dollars, on the wrong horse, over and over again. Furthermore, it is unconstitutional for the executive branch to commit revenues without the approval of Congress. A growing popular disapproval and consensus feels that these Credit Default Swaps are non-enforcable contracts that amount to pure gambling.

Another economist, Peter Dorman, writes about setting up an independent government financial entity, bypassing the “negative frozen assets” or “toxic” or relatively worthless assets fictitiously insured by AIG, held by major banks, hopefully to be purchased by PIMCO and other private investors.
Incidentally, there are two routes to public banking. The most direct, which I have advocated in this blog since last September, is to simply set up the system from scratch right now and capitalize it with funds redirected from bailouts. I admit there are loose ends to be dealt with, especially having to do with resolving the international obligations of the existing system, but that’s to be expected with any program. The second route is to hang onto the existing banks after nationalizing them. I have argued against this idea, since it would put the liabilities of these institutions on the public ledger. Perhaps this downside could be reduced by giving the banks’ creditors and counterparties a Paulson-style haircut, but this strikes me as very difficult to pull off, and, at the limit, it simply converges with the “good new (public) bank” proposal I have been pushing.

So: (1) This is a fantastic article by Jamie. [James Galbraith’s article “No Return to Normal” in the Washington Monthly, March 19, 2009, posted at] I hope it is widely read and discussed. (2) I think we need to be willing to go a little further on the financial front and to take more account of how economically interwoven our world has become.

James Galbraith, "No Return to Normal"
James Galbraith is highly skeptical of the Geithner-Obama plan, saying in part,

Geithner's banking plan would prolong the state of denial. It involves government guarantees of the bad assets, keeping current management in place and attempting to attract new private capital. (Conversion of preferred shares to equity, which may happen with Citigroup, conveys no powers that the government, as regulator, does not already have.) The idea is that one can fix the banks from the top down, by reestablishing markets for their bad securities. If the idea seems familiar, it is: Henry Paulson also pressed for this, to the point of winning congressional approval. But then he abandoned the idea. Why? He learned it could not work.

Paulson faced two insuperable problems. One was quantity: there were too many bad assets. The project of buying them back could be likened to "filling the Pacific Ocean with basketballs," as one observer said to me at the time. (When I tried to find out where the original request for $700 billion in the Troubled Asset Relief Program came from, a senior Senate aide replied, "Well, it's a number between five hundred billion and one trillion.")

The other problem was price. The only price at which the assets could be disposed of, protecting the taxpayer, was of course the market price. In the collapse of the market for mortgage-backed securities and their associated credit default swaps, this price was too low to save the banks. But any higher price would have amounted to a gift of public funds, justifiable only if there was a good chance that the assets might recover value when "normal" conditions return.

That chance can be assessed, of course, only by doing what any reasonable private investor would do: due diligence, meaning a close inspection of the loan tapes. On the face of it, such inspections will reveal a very high proportion of missing documentation, inflated appraisals, and other evidence of fraud. (In late 2007 the ratings agency Fitch conducted this exercise on a small sample of loan files, and found indications of misrepresentation or fraud present in practically every one.) The reasonable inference would be that many more of the loans will default. Geithner's plan to guarantee these so-called assets, therefore, is almost sure to overstate their value; it is only a way of delaying the ultimate public recognition of loss, while keeping the perpetrators afloat.

Delay is not innocuous. When a bank's insolvency is ignored, the incentives for normal prudent banking collapse. Management has nothing to lose. It may take big new risks, in volatile markets like commodities, in the hope of salvation before the regulators close in. Or it may loot the institution-nomenklatura privatization, as the Russians would say-through unjustified bonuses, dividends, and options. It will never fully disclose the extent of insolvency on its own.

The most likely scenario, should the Geithner plan go through, is a combination of looting, fraud, and a renewed speculation in volatile commodity markets such as oil. Ultimately the losses fall on the public anyway, since deposits are largely insured. There is no chance that the banks will simply resume normal long-term lending. To whom would they lend? For what? Against what collateral? And if banks are recapitalized without changing their management, why should we expect them to change the behavior that caused the insolvency in the first place?

I’m going to make this essay a little longer because the James Galbraith piece is so good and important any reader at this point should read more of his essay.
A new paper by the economist Marshall Auerback has usefully corrected this record. Auerback plainly illustrates by how much Roosevelt's ambition exceeded anything yet seen in this crisis:

[Roosevelt's] government hired about 60 per cent of the unemployed in public works and conservation projects that planted a billion trees, saved the whooping crane, modernized rural America, and built such diverse projects as the Cathedral of Learning in Pittsburgh, the Montana state capitol, much of the Chicago lakefront, New York's Lincoln Tunnel and Triborough Bridge complex, the Tennessee Valley Authority and the aircraft carriers Enterprise and Yorktown. It also built or renovated 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and a thousand airfields. And it employed 50,000 teachers, rebuilt the country's entire rural school system, and hired 3,000 writers, musicians, sculptors and painters, including Willem de Kooning and Jackson Pollock.

In other words, Roosevelt employed Americans on a vast scale, bringing the unemployment rates down to levels that were tolerable, even before the war-from 25 percent in 1933 to below 10 percent in 1936, if you count those employed by the government as employed, which they surely were. In 1937, Roosevelt tried to balance the budget, the economy relapsed again, and in 1938 the New Deal was relaunched. This again brought unemployment down to about 10 percent, still before the war.

The New Deal rebuilt America physically, providing a foundation (the TVA's power plants, for example) from which the mobilization of World War II could be launched. But it also saved the country politically and morally, providing jobs, hope, and confidence that in the end democracy was worth preserving. There were many, in the 1930s, who did not think so.

What did not recover, under Roosevelt, was the private banking system. Borrowing and lending-mortgages and home construction-contributed far less to the growth of output in the 1930s and '40s than they had in the 1920s or would come to do after the war. If they had savings at all, people stayed in Treasuries, and despite huge deficits interest rates for federal debt remained near zero. The liquidity trap wasn't overcome until the war ended.

And to conclude with Galbraith:
A brief reflection on this history and present circumstances drives a plain conclusion: the full restoration of private credit will take a long time. It will follow, not precede, the restoration of sound private household finances. There is no way the project of resurrecting the economy by stuffing the banks with cash will work. Effective policy can only work the other way around.
Does the Geithner team, forged and trained in normal times, have the range and the flexibility required? If not, everything finally will depend, as it did with Roosevelt, on the imagination and character of President Obama.
I encourage to read the entire Galbraith essay at, March 19, 2009.

Pressing Problems and Inequality
Our nation has pressing problems far more important than the solvency of billionaire hedge fund managers and their cohort, whom you are so intent on protecting. Nationalizing the banks seems at this point to be the most rational and efficient solution to the financial system meltdown. Let the chips fall, as it were.

The driving force for this unpleasant mess has been the 30 year growth in inequality, since Reaganomics took hold. This period has seen the top one percent of households double their ownership share of the nation’s property. The lower half of the U.S. households own 2.5% of the nation’s wealth, while the other half own 97.5% of it. For every one dollar owned by half the other half owns 39 dollars. When comparing the bottom half, 58 million households, with the top one percent, 1.1 million households, the ratio is one dollar owned by the lower 50% to 668 dollars owned by the top one percent. The top one percent own more than the bottom 91% of households, or 3 million people have a net worth equal or greater than that of 273 million people.

You were elected to relieve the tension that inevitably is created when resource allocation is so unequal or disparate. Many pressing social problems grow out of this misbalance of resources, and you were placed in your position of authority and power to adjust this gross imbalance. Your years of work in the Chicago neighborhoods of poverty should make you keenly aware of this injustice. Presently the annual income of the top one percent exceeds the income of the bottom 60%, and if rewards are to be justly allocated according to sacrifice, then this is a gross imbalance and a serious social injustice.

Throwing tax money at the financial casino is immoral, in my view. I think you should be able to cut the losses, nationalize the failed banks, re-regulate the entire system, and move on to solving the problems of those who do not eat well, have no place to sleep at night, can’t afford healthcare, childcare or education.
We elected you for that job, not to wipe up the stupid mess of stupid gambling addicts. We are with you and support you.

Yours truly, Ben Leet in San Leandro, California

About the subprime tail wagging the Credit Default Swap dog listen to Terry Gross’s conversation on Fresh Air, NPR, March 25, 2009, with Frank Partnoy, law professor at U. C. San Diego. See economics professor Jack Rasmus’ article “Epic Recession Revisited” about the explosion of financial corporation indebtedness from 2001 - 2007 at For details about U.S. wealth distribution see the aforementioned Federal Reserve report, Currents and Undercurrents. For details on the distribution of annual national income see State of Working America, 2006/2007, page 79. Regarding the collapse of the financial sector read MultiNaitonal Monitor, March 2009, Robert Weissman, Thomas Donahue.