Wednesday, June 24, 2009
3rd Letter to Congressman Stark
Greetings to Congressman Stark, June 21, 2009
--- from Ben Leet, resident of San Leandro
Re: What if the economy slips into a Depression, have you a plan?
The Recession may not end on January 1, 2010, as many predict. It may get worse. The only author I know of who actually predicted the downturn, Warren Brussee, predicts a worsening of the economy. His book The Second Great Depression, Beginning 2007, Ending 2020, was published in 2005. He has a monthly blog at wordpress.com. which I recommend. Almost all economists failed to see this tidal wave coming, I know of a few: Dean Baker, Jeff Faux, Richard Duncan, Nouriel Roubini, and Robert Schiller, but none of them wrote a detailed book two years prior to the onset. If you know of some other, let me know. Out the tens of thousands of professional economists, Brussee is unique. Naturally I have had his book for several years.
Now, in June, 2009, if the economy continues to shed jobs at half its rate for the last six months, that is at 300,000 jobs a month, we will be above 11% unemployed nationwide by January 2010. The highest unemployment in the 1980s was 9.6%, so we will be in 1930s territory soon for comparison. More women are working than men, and that’s a first. Foreclosures also run at about the same pace, over 300,000 a month.
You can see that we are tracking the Great Depression, see this article, A Tale of Two Depressions at web page: http://www.voxeu.org/index.php?q=node/3421&ref=patrick.net
I suggest that the Progressive Caucus prepare a response that includes (one) a greatly expanded public jobs program; (two) a tax increase on high incomes, either a 2% tax on wealth for only 5 years, or a Eisenhower era income tax rate of 90% on income above $3.2 million; and (three) a Clean Election campaign funding plan. When the bottom 50% of U.S. households own only 2.5% of the national wealth, according to the Federal Reserve report Currents and Undercurrents, 2006, how can real reform compete against all the campaign donations from the wealthy few? (Shame on the Democrats!)
The Democratic Party should recreate their New Deal credentials or pedigree. How bad is the economy today? Consider that 9.4% are unemployed, another 10% are either involuntary part-time workers or are discouraged workers, and 16.2% are working for wages that pay less than the poverty threshold. Add it up, 35.6% --- more than a third of the labor force, over 55 million workers in a workforce of 155 million --- are out of work, working too little, or working for too little. In all, that’s about 1/3 who can’t buy very much stuff, whose low purchasing power is crippling “the economy.” Purchasing power is also called aggregate demand, and it is the driving force of a working economy. (See njfac.org for details on BLS statistics, and see Jeff Madrick’s book Why Economies Grow for an understanding of aggregate demand).
I’ve studied the U.N. Human Development Index and the U.S. ranks down at 75th place among 126 reporting nations in “Inequality of Income and Expenditure” and other inequality measures such as the Gini coefficient. We rank number 15 on the overall composite index, but we are last among developed nations in inequality. This is why I am pessimistic about recovery. “Where will the jobs come from?” ask many economists, without a good answer. Without purchasing power widely distributed there will be no rationale for rehiring workers. It’s not over-production, it’s under-consumption that is dragging down the economy today. I read that one in nine buy their food with food stamps, nationwide, so those are the people who are “under-consuming.” Children in poverty is at 27.3%, up from 17% in just one year; those parents are underconsuming. (data from EPI.org) People don’t have income as before, and they have “blown” their credit. As Marriner Eccles, the Chairman of the Federal Reserve from 1934 to 1948, said, it’s like a poker game, when the losers run out of credit, the game is over. “Game over,” as our Governator likes to say.
My blog is at http://benL8.blogspot.com --- I have cogent and concise essays about economics that argue these points. If you are really interested.
This is my one quote from my latest essay:
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)
One percent own 33.4%, the next 9 percent own 36%, the percentiles 50 to 90 own 28% and the lower 50% of households owns only 2.5% of the net worth or savings of the nation. --- Currents and Undercurrents, Federal Reserve, 2006. This end result of our economic system should be conclusive that something “is rotten in Denmark.”
In 1938 the unemployment held at 19%, and in 1943, ‘44, ‘45, it held below 2%
--- the net result of massive “public jobs.” The effect was the resurgence of widespread purchasing power, aggregate demand, after a transfer of wealth from the rich to the unemployed poor. The lasting effect was several decades of economic vitality instead of a repeat of the 1930s. Our future in 2009 depends on a similar transfer of wealth. You might find that hard to believe. I don’t think it will happen until a certain collective change of heart takes place.
I predict a different reality than recovery. Probably the inertia of ignorance and greed, sorry to say, and political timidity will perpetuate a pitiful economic picture for quite some time. I hate to say. In about 12 months we’ll know, we’ll be able to tell from the unemployment figures.
This is what the Progressive Caucus and Pete Stark might do:
I read Dollars and Sense Magazine, and many contributors are professors at University of Massachusetts, Amherst. I think if you were to request from them a plan, they would create one. The Economic Policy Institute also has a list of public jobs that the nation needs to accomplish. Then the Progressive Caucus could show the world a well thought-out, detailed and persuasive alternative. You might then have the pleasure of an “I-told-you-so” moment.
Here are some details I carry around in my head: 7 million jobs have been lost since January, 2008, durable goods orders in the U.S. are down 35% from one year ago, housing prices have fallen 31% and have another 12% more to fall, children’s poverty rate jumped from 17% to 27.3%; international stocks dropped in value 46% in 12 month period, international trade is off by about 17% and industrial output down 12%, tracking the Great Depression. Economists do not agree about “green shoots” in the economy.
I applaud all your efforts, especially the health care reforms. But I think that we, the public, need to hear a realistic alternative to the bland and even obnoxious proposals that centrist Democrats put forth. For instance, there was no excuse for pouring $700 billion into bankrupt banks, and guaranteeing $12 trillion in their absolutely miscalculated loans. There were far cheaper alternatives that Americans by and large, conservative and liberal, did endorse. If you listen to Air America, you can hear people complain, as today I heard, after 55 years of registering Democrat one lady is switching to “Independent.” With over 70% of the population asking for a “single payer” health system, and the Dems are refusing to talk about it --- what do you expect? It’s like the late ‘60s when people just won’t take it any longer. That’s positive.
Finally, I am a believer in God. When I hear you derided for your agnosticism I am amused. You might tell the critics, “By their fruits ye shall know them.”
Keep up your good works.
Yours, Ben Leet
--- from Ben Leet, resident of San Leandro
Re: What if the economy slips into a Depression, have you a plan?
The Recession may not end on January 1, 2010, as many predict. It may get worse. The only author I know of who actually predicted the downturn, Warren Brussee, predicts a worsening of the economy. His book The Second Great Depression, Beginning 2007, Ending 2020, was published in 2005. He has a monthly blog at wordpress.com. which I recommend. Almost all economists failed to see this tidal wave coming, I know of a few: Dean Baker, Jeff Faux, Richard Duncan, Nouriel Roubini, and Robert Schiller, but none of them wrote a detailed book two years prior to the onset. If you know of some other, let me know. Out the tens of thousands of professional economists, Brussee is unique. Naturally I have had his book for several years.
Now, in June, 2009, if the economy continues to shed jobs at half its rate for the last six months, that is at 300,000 jobs a month, we will be above 11% unemployed nationwide by January 2010. The highest unemployment in the 1980s was 9.6%, so we will be in 1930s territory soon for comparison. More women are working than men, and that’s a first. Foreclosures also run at about the same pace, over 300,000 a month.
You can see that we are tracking the Great Depression, see this article, A Tale of Two Depressions at web page: http://www.voxeu.org/index.php?q=node/3421&ref=patrick.net
I suggest that the Progressive Caucus prepare a response that includes (one) a greatly expanded public jobs program; (two) a tax increase on high incomes, either a 2% tax on wealth for only 5 years, or a Eisenhower era income tax rate of 90% on income above $3.2 million; and (three) a Clean Election campaign funding plan. When the bottom 50% of U.S. households own only 2.5% of the national wealth, according to the Federal Reserve report Currents and Undercurrents, 2006, how can real reform compete against all the campaign donations from the wealthy few? (Shame on the Democrats!)
The Democratic Party should recreate their New Deal credentials or pedigree. How bad is the economy today? Consider that 9.4% are unemployed, another 10% are either involuntary part-time workers or are discouraged workers, and 16.2% are working for wages that pay less than the poverty threshold. Add it up, 35.6% --- more than a third of the labor force, over 55 million workers in a workforce of 155 million --- are out of work, working too little, or working for too little. In all, that’s about 1/3 who can’t buy very much stuff, whose low purchasing power is crippling “the economy.” Purchasing power is also called aggregate demand, and it is the driving force of a working economy. (See njfac.org for details on BLS statistics, and see Jeff Madrick’s book Why Economies Grow for an understanding of aggregate demand).
I’ve studied the U.N. Human Development Index and the U.S. ranks down at 75th place among 126 reporting nations in “Inequality of Income and Expenditure” and other inequality measures such as the Gini coefficient. We rank number 15 on the overall composite index, but we are last among developed nations in inequality. This is why I am pessimistic about recovery. “Where will the jobs come from?” ask many economists, without a good answer. Without purchasing power widely distributed there will be no rationale for rehiring workers. It’s not over-production, it’s under-consumption that is dragging down the economy today. I read that one in nine buy their food with food stamps, nationwide, so those are the people who are “under-consuming.” Children in poverty is at 27.3%, up from 17% in just one year; those parents are underconsuming. (data from EPI.org) People don’t have income as before, and they have “blown” their credit. As Marriner Eccles, the Chairman of the Federal Reserve from 1934 to 1948, said, it’s like a poker game, when the losers run out of credit, the game is over. “Game over,” as our Governator likes to say.
My blog is at http://benL8.blogspot.com --- I have cogent and concise essays about economics that argue these points. If you are really interested.
This is my one quote from my latest essay:
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)
One percent own 33.4%, the next 9 percent own 36%, the percentiles 50 to 90 own 28% and the lower 50% of households owns only 2.5% of the net worth or savings of the nation. --- Currents and Undercurrents, Federal Reserve, 2006. This end result of our economic system should be conclusive that something “is rotten in Denmark.”
In 1938 the unemployment held at 19%, and in 1943, ‘44, ‘45, it held below 2%
--- the net result of massive “public jobs.” The effect was the resurgence of widespread purchasing power, aggregate demand, after a transfer of wealth from the rich to the unemployed poor. The lasting effect was several decades of economic vitality instead of a repeat of the 1930s. Our future in 2009 depends on a similar transfer of wealth. You might find that hard to believe. I don’t think it will happen until a certain collective change of heart takes place.
I predict a different reality than recovery. Probably the inertia of ignorance and greed, sorry to say, and political timidity will perpetuate a pitiful economic picture for quite some time. I hate to say. In about 12 months we’ll know, we’ll be able to tell from the unemployment figures.
This is what the Progressive Caucus and Pete Stark might do:
I read Dollars and Sense Magazine, and many contributors are professors at University of Massachusetts, Amherst. I think if you were to request from them a plan, they would create one. The Economic Policy Institute also has a list of public jobs that the nation needs to accomplish. Then the Progressive Caucus could show the world a well thought-out, detailed and persuasive alternative. You might then have the pleasure of an “I-told-you-so” moment.
Here are some details I carry around in my head: 7 million jobs have been lost since January, 2008, durable goods orders in the U.S. are down 35% from one year ago, housing prices have fallen 31% and have another 12% more to fall, children’s poverty rate jumped from 17% to 27.3%; international stocks dropped in value 46% in 12 month period, international trade is off by about 17% and industrial output down 12%, tracking the Great Depression. Economists do not agree about “green shoots” in the economy.
I applaud all your efforts, especially the health care reforms. But I think that we, the public, need to hear a realistic alternative to the bland and even obnoxious proposals that centrist Democrats put forth. For instance, there was no excuse for pouring $700 billion into bankrupt banks, and guaranteeing $12 trillion in their absolutely miscalculated loans. There were far cheaper alternatives that Americans by and large, conservative and liberal, did endorse. If you listen to Air America, you can hear people complain, as today I heard, after 55 years of registering Democrat one lady is switching to “Independent.” With over 70% of the population asking for a “single payer” health system, and the Dems are refusing to talk about it --- what do you expect? It’s like the late ‘60s when people just won’t take it any longer. That’s positive.
Finally, I am a believer in God. When I hear you derided for your agnosticism I am amused. You might tell the critics, “By their fruits ye shall know them.”
Keep up your good works.
Yours, Ben Leet
U.S. Ranks 75th in Inequality
The U.S. Ranks 75th out of 126 Nations in Inequality
Does inequality within a nation matter to its economic health? is the question. In the U.S.A. the top one percent of households earns more each year than the bottom 60% of households, and that wealthy one percent owns more wealth (has a greater net worth) than 91% of the households. Does this effect the workers in the U.S.? Does it lower their incomes and the quality of their lives? In June of 2009, 27.3% of the nation's children live in poverty. How is this possible when the annual sum of our productive labor (GDP) is valued at more than $40,000 per human being? How could anyone live in poverty in such a wealthy country? This is a question that too many are willing to evade.
__________________________________________________________________
_____________________________________________________________________
The United Nations’ Human Development Index ranks the United States at 15th place, in 2009, out of 177 nations in its composite of rankings for human development, but in the category of “Income or Expenditure Inequality” the U.S. ranks down at 75th place. The inequality measure compares the incomes of the top 20% of households with the bottom 20% of households. All of the advanced economies rank higher than the U.S. In the top 50 nations only Hong Kong, Singapore, Argentina, Chile, Uruguay, and Costa Rica rank below the U.S. When the comparison is the top 10% vs. the bottom 10% the U.S. ranks at 81st place among 126 nations.
Using the Gini index, used by economists to determine inequality, the U.S. also ranks high on the inequality scale, 40.8, compared to western Europe and Japan, nations that score in the mid 20s. Here is a select listing of scores among a wide group of nations to compare inequality.
Nation --- Gini --- 20% vs 20% --10% vs 10% --GDP/capita
Japan------- २४.9 ------३.4 -----------------६.1 ----------------35,484
Norway -----२५.८----- ३.9 -----------------४.5 -----------------63,918
France ------३२.7 -----५.6 ------------------९.1 -----------------34,936
Germany ----२८.3 ----४.3 ------------------६.9 -----------------26,893
U.S. ---------४०.8 -----८.4 ----------------१५.9 -----------------41,890
Hong Kong -४३.4 -----९.7 ----------------१७.8 -----------------25,592
Singapore --४२.8 -----९.7 ----------------१७.7 -----------------26,893
Mexico ------४६.1 ----१२.8 ---------------२४.6 -------------------7,454
Brazil --------५७.0 ----२१.8 --------------५१.3 -------------------4,271
China --------४६.7 -----१२.2 --------------२१.6 -------------------1,713
Bolivia -------६०.1 -----४२.3 ------------१६८.1 -------------------1,017
Naturally Japan scores high in the HDI, 8th in quality of life score, because it is an advanced economy and the wealth and income are shared more so than all other countries. Comparing Denmark (14th) with Singapore (25th), while their GDP per capita is roughly the same, their Gini scores and inequality scores are widely different. The benefit of high income is not shared in Singapore, it is sequestered by the ownership class and quality of life lags behind Denmark. Perhaps Singapore’s long-term strategy will change that, but perhaps not. (See Robert Kuttner’s article in Foreign Affairs, October 2008 for a review of the Danish economy as an example of economic justice and progress.)
The U.S. also ranks 2nd in GDP per capita but 13 places lower in overall HDI. In contrast Cuba ranks at 93rd in GDP per capita but 42 places higher in HDI, indicating that Cuba does a lot with a little.
Aggregate Demand --------------------------------------------
Turgor pressure we learn in school biology is the opposite of the word “wilting.” In a metaphor, aggregate demand is to an economy what turgor pressure is to a plant. That is the crux of my argument here. An economy with high inequality has low turgor pressure and will not respond quickly to slumps or wilting since a major portion of its population base is bereft, short, and lacking in economic pressure or purchasing power, and the entire system has to depend on the purchasing demand of the small wealthiest portion to keep the least wealthy section employed.
For example, the income of the "typical" worker is about one third the amount of the "average" worker. The U.S. GDP, July 2008, was $14.2 trillion, with 141 million workers actually working each day of the year; each produced on average $100,000 per worker per year. That covers "average." But the median worker or "typical" worker is in the middle of the income gradient. That is, half of the workers were earning less than $33,000 (the median income), and a good portion of the lower half much less than $33,000. This is inequality of income.
Wealth distribution is even more out of balance. The wealth of the bottom 50% of U.S. households, about 58 million households with real people living therein, is a paltry 2.5% of the total national wealth (See 2006 report of the Federal Reserve, Currents and Undercurrents). The wealth of the top one percent is over 33% of the total national wealth. The ratio of the average wealth or net worth of a household below the 50th percentile line is about one 700th of the wealth of a household in the top one percent. The average wealth for that household below the 50th percentile is less than $25,000, while the wealth of the top one percent averages around $15,000,000. That is wealth inequality.
The major portion of the U.S. population that is lacking in purchasing demand is the lower 60% whose combined annual earnings amounts to 20% of the GDP, and whose combined wealth is, approximately, less than 5% of the national wealth. The article “Striking It Richer” by Emmanuel Saez, professor of economics at U.C. Berkeley, indicates that the top ten percent of annual earners now receive about 50% of the total earnings, compared to 28 years ago when they received only 35%. The top 10% also own about 70% of everything that has a price tag.
Consider this:
16.2% of the labor force earns less than the poverty threshold for a four person family (see njfac.org, employment analysis from Bureau of Labor Statistics ),
17.7% of workers will be under-employed (involuntary part-time workers) by 2010 -- predicted by the Economic Policy Institute,
10.2% will be unemployed (predicted by EPI).
Depending on the overlap of low-income and part-time workers, in a matter of months between 28% to 44% (call it 33% for convenience) of the labor force will earn very little. The turgor pressure for the economy will be low, to say the least. Let’s see, out of work, not working enough, earning lousy wages --- what does that equal for 28% to 44% of the population and the U.S. economy? That's between 45 million to 70 million workers in a workforce of 160 million.
I’ve recently read (March 2009) the predictions of Warren Brussee about the stock market, how it depends on the ratio of dividends to prices, and the conclusion is that the value of stocks will continue to languish. (Brussee wrote the book The Second Great Depression, Beginning in 2007, Ending in 2020, published in 2005.) The economic commentator John Mauldin also predicts the same in his newsletter of March 4, 2009, titled “While Rome Burns.” And, also consider that the European banks are facing a blow-up owing to the collapse of the economy in eastern Europe. Multiple signs of a very weak and slow world economy. A few years ago I read in a Charles Schwab Company report that about 53% of China’s economy was devoted to export production, and now massive layoffs are occurring in China. Their export market has stopped buying.
Wealth Tax and Public Jobs -- a solution of sorts
A 2% tax on the wealth of the top 1% of U.S. households would yield (.02 X $17 trillion) $340 billion a year. This could be a temporary tax for five years or until the current recession/depression subsides. The tax could be graduated from 0.5% to 2.5%, meaning it would take from 200 years to 40 years to significantly reduce the total wealth of those taxed. We need to create approximately 15 million jobs, and at $30,000 per job, the total annual expense would be $450 billion yearly. Therefore we could not afford to create all those jobs immediately, but would have to do it in steps as the private economy rehires its unemployed workers.
I believe that capitalism functions this way: aggregate demand --- the wages and savings of consumers that give rise to their expenditures --- determines the number employed and their wage rate. Often news commentators announce that 70% of the economy is "consumer driven." That means that 30% is driven by government (public) demand, and the remainder by private demand. In times of sagging private demand, government has a responsibility to revive consumer demand by maintaining high employment. In World War II the government war bond financed employment. In 1939 the unemployment rate held at 20%, and in 1942 it dropped to 2%. Either the government sells bonds to the wealthy households or it must tax away wealth at the top so that workers at the bottom can stay employed, and in times of recession/depression this is an emphatic demand. We have schools, ports, rivers, sewage systems, water quality systems, energy efficiency work and road improvements. The list is very long.
It's time to use the money that is now idle in private accounts --- through a tax on wealth or by raising the income tax to where it was under President Eisenhower (91% tax on income over $3.2 million) --- to improve the country and rebuild aggregate demand in the economy. This is the intelligent use of our human, natural, and capital resources. Whose picture is shown on the dollar bills? Is my picture, your picture, Bill Gates' picture, or some wealthy person's image gracing the currency? No, the money belongs, ultimately, to the ones who printed it --- that is, to the people. It time to engage that wealth in productive enterprise and labor, and avoid having millions of people sitting idle as they watch their lives break into irreparable pieces.
Does inequality within a nation matter to its economic health? is the question. In the U.S.A. the top one percent of households earns more each year than the bottom 60% of households, and that wealthy one percent owns more wealth (has a greater net worth) than 91% of the households. Does this effect the workers in the U.S.? Does it lower their incomes and the quality of their lives? In June of 2009, 27.3% of the nation's children live in poverty. How is this possible when the annual sum of our productive labor (GDP) is valued at more than $40,000 per human being? How could anyone live in poverty in such a wealthy country? This is a question that too many are willing to evade.
__________________________________________________________________
_____________________________________________________________________
The United Nations’ Human Development Index ranks the United States at 15th place, in 2009, out of 177 nations in its composite of rankings for human development, but in the category of “Income or Expenditure Inequality” the U.S. ranks down at 75th place. The inequality measure compares the incomes of the top 20% of households with the bottom 20% of households. All of the advanced economies rank higher than the U.S. In the top 50 nations only Hong Kong, Singapore, Argentina, Chile, Uruguay, and Costa Rica rank below the U.S. When the comparison is the top 10% vs. the bottom 10% the U.S. ranks at 81st place among 126 nations.
Using the Gini index, used by economists to determine inequality, the U.S. also ranks high on the inequality scale, 40.8, compared to western Europe and Japan, nations that score in the mid 20s. Here is a select listing of scores among a wide group of nations to compare inequality.
Nation --- Gini --- 20% vs 20% --10% vs 10% --GDP/capita
Japan------- २४.9 ------३.4 -----------------६.1 ----------------35,484
Norway -----२५.८----- ३.9 -----------------४.5 -----------------63,918
France ------३२.7 -----५.6 ------------------९.1 -----------------34,936
Germany ----२८.3 ----४.3 ------------------६.9 -----------------26,893
U.S. ---------४०.8 -----८.4 ----------------१५.9 -----------------41,890
Hong Kong -४३.4 -----९.7 ----------------१७.8 -----------------25,592
Singapore --४२.8 -----९.7 ----------------१७.7 -----------------26,893
Mexico ------४६.1 ----१२.8 ---------------२४.6 -------------------7,454
Brazil --------५७.0 ----२१.8 --------------५१.3 -------------------4,271
China --------४६.7 -----१२.2 --------------२१.6 -------------------1,713
Bolivia -------६०.1 -----४२.3 ------------१६८.1 -------------------1,017
Naturally Japan scores high in the HDI, 8th in quality of life score, because it is an advanced economy and the wealth and income are shared more so than all other countries. Comparing Denmark (14th) with Singapore (25th), while their GDP per capita is roughly the same, their Gini scores and inequality scores are widely different. The benefit of high income is not shared in Singapore, it is sequestered by the ownership class and quality of life lags behind Denmark. Perhaps Singapore’s long-term strategy will change that, but perhaps not. (See Robert Kuttner’s article in Foreign Affairs, October 2008 for a review of the Danish economy as an example of economic justice and progress.)
The U.S. also ranks 2nd in GDP per capita but 13 places lower in overall HDI. In contrast Cuba ranks at 93rd in GDP per capita but 42 places higher in HDI, indicating that Cuba does a lot with a little.
Aggregate Demand --------------------------------------------
Turgor pressure we learn in school biology is the opposite of the word “wilting.” In a metaphor, aggregate demand is to an economy what turgor pressure is to a plant. That is the crux of my argument here. An economy with high inequality has low turgor pressure and will not respond quickly to slumps or wilting since a major portion of its population base is bereft, short, and lacking in economic pressure or purchasing power, and the entire system has to depend on the purchasing demand of the small wealthiest portion to keep the least wealthy section employed.
For example, the income of the "typical" worker is about one third the amount of the "average" worker. The U.S. GDP, July 2008, was $14.2 trillion, with 141 million workers actually working each day of the year; each produced on average $100,000 per worker per year. That covers "average." But the median worker or "typical" worker is in the middle of the income gradient. That is, half of the workers were earning less than $33,000 (the median income), and a good portion of the lower half much less than $33,000. This is inequality of income.
Wealth distribution is even more out of balance. The wealth of the bottom 50% of U.S. households, about 58 million households with real people living therein, is a paltry 2.5% of the total national wealth (See 2006 report of the Federal Reserve, Currents and Undercurrents). The wealth of the top one percent is over 33% of the total national wealth. The ratio of the average wealth or net worth of a household below the 50th percentile line is about one 700th of the wealth of a household in the top one percent. The average wealth for that household below the 50th percentile is less than $25,000, while the wealth of the top one percent averages around $15,000,000. That is wealth inequality.
The major portion of the U.S. population that is lacking in purchasing demand is the lower 60% whose combined annual earnings amounts to 20% of the GDP, and whose combined wealth is, approximately, less than 5% of the national wealth. The article “Striking It Richer” by Emmanuel Saez, professor of economics at U.C. Berkeley, indicates that the top ten percent of annual earners now receive about 50% of the total earnings, compared to 28 years ago when they received only 35%. The top 10% also own about 70% of everything that has a price tag.
Consider this:
16.2% of the labor force earns less than the poverty threshold for a four person family (see njfac.org, employment analysis from Bureau of Labor Statistics ),
17.7% of workers will be under-employed (involuntary part-time workers) by 2010 -- predicted by the Economic Policy Institute,
10.2% will be unemployed (predicted by EPI).
Depending on the overlap of low-income and part-time workers, in a matter of months between 28% to 44% (call it 33% for convenience) of the labor force will earn very little. The turgor pressure for the economy will be low, to say the least. Let’s see, out of work, not working enough, earning lousy wages --- what does that equal for 28% to 44% of the population and the U.S. economy? That's between 45 million to 70 million workers in a workforce of 160 million.
I’ve recently read (March 2009) the predictions of Warren Brussee about the stock market, how it depends on the ratio of dividends to prices, and the conclusion is that the value of stocks will continue to languish. (Brussee wrote the book The Second Great Depression, Beginning in 2007, Ending in 2020, published in 2005.) The economic commentator John Mauldin also predicts the same in his newsletter of March 4, 2009, titled “While Rome Burns.” And, also consider that the European banks are facing a blow-up owing to the collapse of the economy in eastern Europe. Multiple signs of a very weak and slow world economy. A few years ago I read in a Charles Schwab Company report that about 53% of China’s economy was devoted to export production, and now massive layoffs are occurring in China. Their export market has stopped buying.
Wealth Tax and Public Jobs -- a solution of sorts
A 2% tax on the wealth of the top 1% of U.S. households would yield (.02 X $17 trillion) $340 billion a year. This could be a temporary tax for five years or until the current recession/depression subsides. The tax could be graduated from 0.5% to 2.5%, meaning it would take from 200 years to 40 years to significantly reduce the total wealth of those taxed. We need to create approximately 15 million jobs, and at $30,000 per job, the total annual expense would be $450 billion yearly. Therefore we could not afford to create all those jobs immediately, but would have to do it in steps as the private economy rehires its unemployed workers.
I believe that capitalism functions this way: aggregate demand --- the wages and savings of consumers that give rise to their expenditures --- determines the number employed and their wage rate. Often news commentators announce that 70% of the economy is "consumer driven." That means that 30% is driven by government (public) demand, and the remainder by private demand. In times of sagging private demand, government has a responsibility to revive consumer demand by maintaining high employment. In World War II the government war bond financed employment. In 1939 the unemployment rate held at 20%, and in 1942 it dropped to 2%. Either the government sells bonds to the wealthy households or it must tax away wealth at the top so that workers at the bottom can stay employed, and in times of recession/depression this is an emphatic demand. We have schools, ports, rivers, sewage systems, water quality systems, energy efficiency work and road improvements. The list is very long.
It's time to use the money that is now idle in private accounts --- through a tax on wealth or by raising the income tax to where it was under President Eisenhower (91% tax on income over $3.2 million) --- to improve the country and rebuild aggregate demand in the economy. This is the intelligent use of our human, natural, and capital resources. Whose picture is shown on the dollar bills? Is my picture, your picture, Bill Gates' picture, or some wealthy person's image gracing the currency? No, the money belongs, ultimately, to the ones who printed it --- that is, to the people. It time to engage that wealth in productive enterprise and labor, and avoid having millions of people sitting idle as they watch their lives break into irreparable pieces.
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
http://www.epi.org/resources/3098/
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.” (Truthout.org/3.16.09)
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 truthout.org. 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.
http://www.truthout.org/031609A
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.
http://mrzine.monthlyreview.org/foster270209.html
Peter Morici predicts a depression, see his article in Counter Punch, Girding for a Depression, http://www.counterpunch.org/morici04032009.html
“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 http://wbrussee.wordpress.com/2009/03/31/april-2009-update-of-%e2%80%9cthe-great-depression-of-debt%e2%80%9d/#comments
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.
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Footnotes
1. See Ben Leet, this blog, http://benL8.blogspot.com, 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 toomuch.com, 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, Truthout.com, 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 njfac.org, 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 EPI.org, sharedprosperity.org, and njfac.org (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 http://benL8.blogspot.com, 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 toomuch.org, 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, ips.org, 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 toomuch.org, March 17, 2009, reporting on the preliminary Survey of Consumer Finances, 2009
19. same as footnote 18
20. See Jack Rasmus, KyklosProduction.com, Epic Recession Revisited. And essay of the progress of the recession, January, 2009
21. Hear Lawrence Mitchell on Against the Grain, kpfa.org, archives for
Hear Frank Partnoy on Fresh Air with Terry Gross, archives for
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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 EPI.org, njfac, and note the proposals by Senator Edward Kennedy and Representative Lynne Wolsey.
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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. . . .
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
http://www.epi.org/resources/3098/
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.” (Truthout.org/3.16.09)
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 truthout.org. 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.
http://www.truthout.org/031609A
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.
http://mrzine.monthlyreview.org/foster270209.html
Peter Morici predicts a depression, see his article in Counter Punch, Girding for a Depression, http://www.counterpunch.org/morici04032009.html
“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 http://wbrussee.wordpress.com/2009/03/31/april-2009-update-of-%e2%80%9cthe-great-depression-of-debt%e2%80%9d/#comments
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.
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Footnotes
1. See Ben Leet, this blog, http://benL8.blogspot.com, 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 toomuch.com, 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, Truthout.com, 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 njfac.org, 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 EPI.org, sharedprosperity.org, and njfac.org (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 http://benL8.blogspot.com, 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 toomuch.org, 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, ips.org, 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 toomuch.org, March 17, 2009, reporting on the preliminary Survey of Consumer Finances, 2009
19. same as footnote 18
20. See Jack Rasmus, KyklosProduction.com, Epic Recession Revisited. And essay of the progress of the recession, January, 2009
21. Hear Lawrence Mitchell on Against the Grain, kpfa.org, archives for
Hear Frank Partnoy on Fresh Air with Terry Gross, archives for
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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 EPI.org, njfac, and note the proposals by Senator Edward Kennedy and Representative Lynne Wolsey.
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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.
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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
Prosperity.”
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.
Contents of this web site:
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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.
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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.
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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
Prosperity.”
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.
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