Understanding the Crisis

Once I built a tower up to the sun,
Brick and rivet and lime.
Once I built a tower, now it’s done --
Brother, can you spare a dime?
E.Y. Harburg and Jay Gorney, 1932

Written on September 19, 2008, the week after Fannie Mae, Freddie Mac, Merrill Lynch, AIG, Lehman Brothers failed, coming after the failure of Bear Stearns, IndyMac, and Countrywide Mortgage. Also take into account the $160 billion dollar stimulus rebate tax check of the spring of 2008, and the announcement of a $700 billion bailout of the system, Sept. 20, 2008, and a $200 billion inflow of funds from international central banks! For your info: The Federal Reserve ascribes a value to all assets in the U.S.A. The total net worth is over $50 trillion.
The annual GDP, national yearly product, July, 2008, is $14.2 trillion. The Credit Default Swap market, the AIG bailiwick, is over $62 trillion. That sounds like a Ponzi scheme.
See Why Economies Grow by Jeff Madrick, editor of Challenge Magazine, for a complete description of my argument. Download his summary essay available at Challenge Magazine. I am repeating many of his points in this essay।

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With the top decile (10%) of households in the U.S. owning 70% of all property and earning 50% of yearly national income, the majority of workers cannot generate enough consumer demand to buy the stuff and services they are producing. It’s not too difficult to understand the Crisis. Income and wealth are polarized, and they must be de-polarized or spread around, nationally and to a certain extent globally. Debt, not income, has become a way of life. The Crisis is of low income and wealth for the majority. The shenanigans of the financial market are symptomatic. Fixing the credit markets is not going to plug the hole in the bucket. It will not restore the mortgage market that depends ultimately on good and stable if not rising wages. Capitalism depends on producers and buyers, owners and workers, and, what is now lacking, a fair distribution of money at all levels, not just the profits-go-to-the-top system we have today. The credit market can work perfectly and still the system is going to collapse.

Go to the essay (google) “Striking It Richer” by Emmanuel Saez, professor of economics at University of California. In March, 2008, he described the distribution of income in the U.S. over the past 81 years, especially the past 15. One goes to the graph on page five describing the portion of national income received by the top decile (10%) of earners from 1917 to 2006. One sees a U curve. Between 1942 to 1982 the earnings of this group hovered around 35% of the national total. Needless to say, the economy never did better. Today it has grown to 49.7%. Before 1942 likewise it was higher.

To me this is the key to understanding a vibrant economy, and why we will not have a vibrant economy any time soon. When you take your product or your labor into a marketplace, you’ll get a better price if all the shoppers have much money or discretionary income to spend. When all do better, it self-supports. Look at the graph if you doubt that all are not doing better. Thirty years ago women worked at a rate of 45%, now it’s 60%. Houses cost 2 times the annual median household income, now they cost 4 times. The median income for workers without the wife in the labor force has risen by 0.4% in 25 years. Education, housing, medical care have all gone up. Where’s the income to afford those essentials? The wife has been the savior, but we have run out of wives.

Capitalism has an inherent self-destructive attribute. By seeking to produce lowest unit production cost employers/owners seek to decrease labor expense, thereby decreasing labor’s income. Owners try to lower prices on their products by lowering labor costs, a critical expense output. In a world with third of the human population, 2 billion humans, living on a $2 a day income, productive enterprises are migrating away from high-cost labor markets. So the downward pressure on high-cost labor markets is becoming unbearable. Robert Reich’s book Supercapitalism describes this process. Alan Blinder, professor of economics at Princeton University, has described the likelihood of up to 20 million U.S. jobs going offshore. There are 145 million actively employed in the present labor force, so that would knock off 1 in 7 jobs. Wages are lowering across the board, worldwide, Textile production has moved to China, auto production to Hermosillo, Mexico, Sony produces products in maquiladoras, Satsung builds its mobile phones and Hitashi builds its flat screen TVs and Dell their computers in China at a $0.30 an hour wage rate. Eventually, no one will have income to buy this stuff.

The U.S. will continue to experience declining economic fortunes until it re-achieves the top decile level of income once achieved between 1942 and 1982। In fact, the nation should consider means to achieve both an income distribution curve and a wealth distribution curve। This sounds somewhat anti-capitalistic. But it is the opposite of that. Only by sustaining a moderately high level of income for the majority of workforce participants can the overall economy thrive. (See Jeff Madrick's book Why Ecoonomies Grow)

This therefore begs a nationalistic policy in a world that has been careening away from national controls on any given country’s economy.

As many have pointed out, the minority owner group sequesters the profits of labor and industry. This is called “The Divine Right of Capital.” Owners take your excess labor value and put it in their bank accounts, according to Marx. The majority of workers have no countervailing power to gain those profits. Labor unions once exercised this countervailing power, but no longer. The wealthiest one percent have received over half the economic gains in the past 35 years. And no one has complained.

Consider that under the best historical conditions the top ten percent received a third of the income. Then ask, how much should the next 40 percent receive, and the bottom 50%? It’s not all that academic. It’s a practical problem that provides stability, hope, and a future of reasonable expectation for all, not just the favored top minority.

Unfortunately this type of thinking requires two attributes currently lacking in our modern world. One is an understanding of the necessity of this fair distribution idea, and the other is desire. Simply, there is not the heart quality to wish to achieve it; our culture has a bad case of greed, exclusivity, and disdain. Not to worry, it must and will change. But not without much hue and cry and grief.


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To research this topic thoroughly I suggest:

One
The web site of Nouriel Roubini, professor of economics at NYU, RGEMonitor.com. He predicted the financial meltdown on September 7, 2006.
Also see N.Y. Times article “Dr. Doom”, August 15, 2008.

Two
Robert Kuttner provides an essay in the American Prospect, “The Seven Deadly Sins of Deregulation --- and Three Necessary Reforms,” September 17, 2008.
http://www.prospect.org/cs/articles?article=seven_deadly_sins_of_deregulation_and_three_necessary_reforms

Three
The New York Times article, “The Debt Trap”, July 22, 2008, segment titled
“The American Way of Debt,”.
http://www.nytimes.com/interactive/2008/07/20/business/20debt-trap.html
Between 1920 and 2006, only for four years, 1942 to 1945, did national savings exceed debt spending in the U.S. The ratio of savings to debt in 1950 was -- 1 to 4, in 1960 -- 1 to 7, and in 2006 -- 1 to 341. Debt is King, cash and savings are squeezed out of the picture.

Four
An audio interview with law professor Michael Greenberger on Terry Gross’s NPR radio program Fresh Air, September 17, 2008 http://www.npr.org/templates/story/story.php?storyId=94686428

Five
And for a solution, read the book Understanding Modern Money by L. Randall Wray, professor of economics at University of Missouri, who advocates a national jobs program. The federal government would act as the Employer of Last Resort. This would defy the gravity of unrelenting pressure to lower wages and add more workers to the workforce. For $700 billion you could add a lot of needed jobs. Also read my essays What Government Can Do (a short prescription) and There Are Solutions (a long prescription). (http://benL8.blogspot.com) There you will find plans presented by scholars and organizations to deal with the entrenched low-income, low-wealth problem.


"They used to tell me I was building a dream
And so I followed the mob.
When there was earth to plow or guns to bear,
I was always there, right on the job.
They used to tell me I was building a dream
With peace and glory ahead --
Why should I be standing in line, just waiting for bread?

"Once I built a railroad, I made it run,
Made it race against time.
Once I built a railroad, now it's done --
Brother, can you spare a dime?
"Once I built a tower, up to the sun,
brick and rivet and lime.
Once I built a tower, now it's done --
Brother, can you spare a dime?"

“Buddy Can You Spare A Dime”
By E. Y. Harburg and Jay Gorney, 1932