A Very Short Course in the U.S. Economy 

Often while talking on the phone to a friend I realize that he or she has a very sketchy concept of the economy and how to solve its problems. So I have put together some quick graphics, about 7 of them from web pages, with a short narrative connecting the story, plus some solutions. The reader can flip through the pages and graphs, and come out with an improved vista._________________________________

Photo originates here: New Deal 2.0, a good source. 
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(Note: On October 15, 2011 my friend sent me a link to an article that is better than my summary here. 
The title is "Here's What the Wall Street Protesters Are So Angry About . . ." Be sure to also read that article.) 
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The general picture is that we've gone through several decades of growing income and wealth disparity while at the same time degrading the structure of the economy. We may never recover --- I would not joke about it --- and if we do we'll have to make some big changes. It's all here in a flash. 

1.) Income disparity

What has been the economy's problem? A look at three graphs explains the inequality problem. The first and second show changes in income distribution 1979 to 2007; the third shows changes in wealth distribution, 1983 to 2009. 

This comes from the Economic Policy Institute, a report by Lawrence Mishel and Josh Bivens, Oct 26, 2011. See the entire article here. 

The next graph on income gains comes from Jared Bernstein's blog, titled ""The Policy Backdrop of Inequality and It Implications for 'Class Warfare'". His source is the Congressional Budget Office.

Imagine a pie cut into five pieces each representing the amount of income distributed to the five groups of 20% households. Over time the pieces get bigger and/or smaller.  The top 20% piece is sub-divided. The top-earning 1% fared well over the past decades, their piece of pie grew from 7.5% to 17.1% (post-tax). The sizes of all four lower-earning 20% groups, representing 80% of the population, shrunk. That is the gist of this graph. It fails to show the relative sizes before or after the comparison, showing only the changes. According to the Tax Policy Center, the sizes (of the "income pie") per each 20 percentile household group in 2006 was 2.5%, 6.4%, 11.4%, 19.8% and 60.3% for the incomes of the five quintiles of households. This is pre-tax income. The top 20% received 60.3%. See my other essay previous to this one for similar comparisons. The income to the top 1% was approximately equal to the combined incomes of the lower-earning 60% of households.
See the Tax Policy Center for actual figures.

2. Wealth Disparity
Top 20% = yellow
Bottom 20% = not visible or 0.1%
20% to 40% = not visible or 0.2%
40% to 60% = 4%
60% to 80% = 11%                               (Source PBS News Hour)

For a full report on wealth see State of Working America's Wealth. 
The graph on household wealth gains, 1983 to 2007, shows the same picture. It derives from Lawrence Mishel at the Economic Policy Intitute, September 15, 2011. The bottom 60% of households have lost savings since 1983. This is consistent with U.C. Berkeley professor Sylvia Allegretto's study that showed the bottom 80% of households on average lost 40% of their savings between 2007-2009. 

Once again, the pie chart showing wealth distribution is missing. But here are some aids. State of Working America's Wealth, a 2011 report by U.C. Berkeley professor Sylvia Allegretto, pages 4 and 5, shows the relative sizes. The lower-wealth-holding 60% own a mere 2.2% of the total wealth. 
Mother Jones magazine ran an article, "It's the Inequality, Stupid" in March/April 2011. Check out the graphs. 

Combine this with the knowledge that the GDP/capita (the economic output per citizen) in the nation has more than doubled (an increase of 100%) since 1963, while the typical family or household's income has increased by 22% from 1967 to 2003. The economy more than doubled, the typical household saw income rising by a quarter. The St. Louis Federal Reserve Bank provides the first graph showing an amazing increase in output per human being. The next graph, from the U.S. Census, shows a less amazing  distribution of output where the median household barely grows its income. 

Real GDP per Capita in the United States (USARGDPC)

Edit Graph    Print    PDF    Save

 The majority of Americans did not experience the full benefits of a growing economy, in fact in our present decline, a majority are seeing declines in wealth back to levels of 1983, while income has not budged for individuals since the mid 1970s.

Now, if you are interested in learning about the recent recession, you can catch many graphs at this site, "The Legacy of the Great Recession" at Center for Budget and Policy Priorities. But you might skip that to avoid overload. But if you crave overload, look at Inequality.org, part of Demos.org. 

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What is the solution:

Public Employment

Public employment worked in the 1930s and '40s, it may be our last hope to end the epidemic of unemployment and underemployment. About 30% of workers, or 45 million, are either out of work (9.2%), under-employed (5.8%), discouraged and dropped out (4.2%), or working full-time year-round for below poverty level wages (10.9%). It is a sick economy. 

There are plans to create public jobs, professor Philip Harvey, Rutgers University, published on at Demos.org in January 2011, "Back to Work". 

On page 11, Table 3, you'll see Harvey's plan would create 1,000,000 jobs plus 414,000 additional private sector jobs for a net cost of $28.6 billion. Harvey states, page 12, "We currently need about 8.2 million more jobs to reduce the nation's unemployment rate to 4.5%. Creating that many jobs in a program like the one described in Table 3 would require a net increase in federal spending of about $235 billion during the first year of the JLRS initiative. If the Bush-era tax cuts had been allowed to expire at the end of 2010, the federal government would have collected about $295 billion in additional revenue during 2011." I recommend readers look at the graph on page 2 and the table on page 11. 

Marshall Auerback at New Deal 2.0 writes (in The Real Lesson from the Great Depression) that the "Roosevelt administration reduced unemployment from 25 per cent in 1933 to 9.6% per cent in 1936, up to 13 per cent in 1938 (due largely to a reversal of the fiscal activism which had characterized FDR’s first term in office), back to less than 1 per cent by the time the U.S. was plunged into the Second World War at the end of 1941."

There is no reason to review Auerback's essay in a very "short course", but you will be interested to know that the public jobs program built real structures, "It also built or renovated 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and a thousand airfields. And it employed 50,000 teachers, rebuilt the country’s entire rural school system, and hired 3,000 writers, musicians, sculptors and painters, including Willem de Kooning and Jackson Pollock. So much for the notion that government jobs are not “real jobs”, as we hear persistently from critics of the New Deal!"

Restore Manufacturing

And finally look at Ron Baiman's essay of September 7, 2011, "What We Need to Do to Revive the Economy". He states that government spending is not enough to revive the economy, it needs restructuring. "In the absence of restructuring there is no magic date in the future after which point the economy will be able to grow without public or private deficits.5

The need for fundamental restructuring to revive our economy makes our current downturn more like a "Depression" than a "Recession".  . . . The U.S. economy suffers from major macroeconomic imbalances and a three decade loss of productive capacity that cannot be corrected by a decade long spree of public infrastructure spending (though this would certainly help in the short-term and the long- term)."  

He further states, 

"We don't need to "shrink the size of the public sector" ([which is] what the real underlying "deficit" debate is all about about). Rather, we need to dramatically increase it. We need to vastly expand our taxing and spending in order to reorient our economy away from a rentier [finance dominated] and back to a productive [manufacturing] and balanced advanced economy configuration by enacting a massive federal jobs program that will expand public and private sector employment in: a) social services, b) infrastructure, c) new green technologies (CPEG 2009, 2011). We desperately need a new New Deal."

The graphs on unemployment, page 3, and the conclusion beginning on page 5 are very instructive. 

Also look at the articles at New Deal 2.0 by William Lazonick and John Rynn dealing with restoring manufacturing industry to the U.S. 

At this point you might try my essay, February 2011, in which I try to offer 6 or 7 indispensable changes needed. It's a "basic solutions" essay. 

In Short

There is no happy ending. It is a royal mess. 

The economy should not serve only those who seek fabulous fortune. Greed has perverted the society. What if the GDP/capita graph (from the St. Louis FRB) that showed 100% growth between 1963 and 2007 had matched the median household income graph? And what if the other wealth and income graphs had even growth for all income sectors? And why shouldn't they? Between 1947 and 1979 those graphs did match; there was even growth for all income sectors. 



In Contrast, the years since 1979 are starkly different:

Source: U.S. Census Bureau, Historical Income Tables: Families, Table F-3 (for income changes) and Table F-1 (for income ranges in 2009 dollars).

These two graphs come from Inequality.org, and originate at the  Economic Policy Institute. The EPI created a web page called State of Working America.

See this interactive graph at State of Working America, and compare the share for the bottom 90% before and after 1969. You will notice as you swing the pointer pre-1969 that the blue sector is visible, indicating the 90% of households made income gains. What do you see when you swing the pointer post-1969?  We had growth for all sectors 1947 - 1979, but the top earners still captured half or more the growth. The income tax bracket was over 90% on income above $200,000 from 1951 to 1964. (See this table.) Or we could just establish a maximum wage set at 20 times the median household income. There are plenty of solutions for curbing inequality. 

Ben Leet  

You finished this session. Now go to the next:
THIS BLOG: My February 2011 essay, the Six Point Program, is a comprehensive proposal to restore prosperity. I recommend it. Go the the column at the right, click-on February, 2011. Look for the Contents page also, December of 2010. We can do two major things in this nation: we can make sure all jobs pay a decent wage -- they don't, believe me --- and democratically we can create jobs for everyone.
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I left this comment to the article I cited above, "Here's What the Wall Street Protesters Are So Angry About . . ." Here it is:

Excellent. Add this: 40% of the savings of the typical family (the median household) were lost between 2007-2009, their savings dropped from $105,000 to $65,000, down to savings level below 1983 levels. This is according to Sylvia Allegretto, U.C. Berkeley professor, writing in State of Working America's Wealth. The wealthiest 1% own 225 times more than the "typical" or median family. 1 in 4 households have "zero or negative" net worth (savings) and another 1/8 have less than $12,500. Our economy generates over $47,000 per year yet 15% of the population lives in poverty. The St. Louis Fed also has a chart showing that the average worker contributes over $100,000 yearly in output to the economy, but the median income is around $30,000.  And the National Bureau of Economic Research conducted a survey and half the adults said they would not be able to handle a $2,000 emergency within 30 days without borrowing or selling something. And add that about 30% of the young people below 18 years old get their food from the Food Stamp program. The economy is a mess. The Labor Department reports that manufacturing workers in China earn $1.36 an hour, and in the U.S. $34 an hour or about $70,000 a year. This is why 1/3rd of U.S. manufacturing jobs were lost in the past ten years. In fact, in the year 2000 the economy had more private sector employment, 110 million workers, than today in 2011, 109 million workers. Protest or lose what little you have. Excellent report. See my blog, http://benL8.blogspot.com for more. Excellent report here. 

This photo credits: http://www.socialistproject.ca/bullet/553.php -- a good source of socialist thought.

If 80% earned $1 dollar, what would the top 1% earn?

A New Look at Inequality of Income

Data comes from U.C. Professor Emmanuel Saez, "Striking It Richer". Year is 2008.

Contrast this with the figures from the Citizens for Tax Justice report "All Americans Pay Taxes".

Top 1% received average (pre-tax) income of $1,328,000 in 2009. 

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If Income Were Distributed at 1970 Ratios, 

Instead of 2007 Ratios: 

80% of households would have $15,000 more income. 

The Tax Policy Center lists the percentage of income received by different percentiles of households.

In 1970 the highest ten percent of households received 30.5%, in 2007 it received 42.0%. 63.6%  of the all income increase went to the top 10% (see the graph below). The figures from the E. Saez report show an increase, 1980 to 2007, of the top 10% households from 35% to almost 50%. Using the Tax Policy Center figures, the annual incomes of all of the lower 80% of households, about 90 million households, would rise by around $15,000, the median rising from $49,000 to $64,000, with the same distribution as in 1970.  The lowest-earning 20% of households would average not $12,000 but $27,000 a year; the next income quintile's income would be not $25,000 but $40,000 a year on average. And so on.  This is using the averages from the Citizens for Tax Justice report, cited above. The total incomes for the Citizens for Tax Justice report are confusingly low. The median household income from the U.S. Census is around $50,000 a year. But the distribution ratio change is not confusing. 

The Economic Policy Institute would disagree with my figure of $15,000 more for every family. Their chart shows an increase of $9,220 for the median, instead of my $15,000. I took the ratio of distribution from 1970 and applied it to 2011. Assume that the ratio had not changed since 1970, and you can also assume that the growth rate would have increased. But then you have to understand how inequality drags on growth by suppressing aggregate demand.

Or check out State of Working America, their section on income inequality. This is their graph:

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Comparing the 1% to other earnings' groups 

A nutshell explanation:
If the lowest-earning 60% of U.S. households (almost 68 million households) in 2006 earned on average $1, then the next 39% of higher-earning households earned on average $4.65, and the top 1% earned over $54.40.

Or the lower-earning 80% (92 million households) earned on average $1, the next 19% earned on average $4.38, and the top 1% earned $36.80.

Or the lower-earning 99% (113 million households) earned on average $1 while the top 1% earned $22.32.

Where did I get these figures? See Citizens for Tax Justice, All Americans Pay Taxes, April 2010.

See also their report from 2009, Is Tax Day Too Burdensome for the Rich. Only recently did I find the more recent 2010 report. These pages show the effective overall tax burdens for all income sectors, that is, the total taxes paid to all government agencies (not just federal income tax) and the real rate as a percentage of actual income. The wealthiest pay 30%, the lower-earning 80% pay 24%, roughly. The higher-earning 1/5th who receive almost $6 dollars of income to every $1 dollar of income for the lower 80%, pay a rate of 30%, while the lower 80% pay an "effective overall" rate of 24%.

The income distribution data matches data from the Tax Policy Center, and from the Tax Foundation (see Table 5), if you are really curious. In 2008 the Tax Foundation reports that 67.38% of all pre-tax income went to the top 25%. The Tax Policy Center reports in 2006 that the top 20% received 60.3%. Roughly the same ratios as the Citizens for Tax Justice.

Since the We Are the 99% and Occupy Wall Street have become movements they might show that while each household in the bottom 99% get $1 dollar of income --- the top 1% get almost $24. The average income for the bottom 99% is $56,200, the top 1% average is $1,328,000. This is a ratio of $1 to $23.62.

The Math of Comparing

If 60 receive $1 each, or 20.3% of the total, their share of total income is $60.

Then 39 receives $4.65 each, this is 61.3% of the total, or $181.35.

Then 1 receives $54.44, or 18.4% of the total, or $54.44.

There are 100 participants, they receive 100% of all income, and total income amounts to $295.79. The average income ratio is 1 to 4.65 to 54.44.

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If 80 receive $1 each, or 40% of the total income, their share of the total income is $80.

Then 19 receive $4.38 each, this is 41.6% of the total, or $83.20 total income.

Then 1 receives $36.80, equal to 18.4% of the total, or $36.80 total income.

There are therefore 100 participants, they receive 100% of all income, and total income amounts to $200. The average income ratio is 1 to 4.38 to 36.80.

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Tax Policy Center
The lower-earning 80% of households received 28.2% of the nation's income from wages and salaries.

A part of the Brookings-Urban Institute, the Tax Policy Center is deep into the numbers. This report was subsequently published in State of Working America, 2006-2007, page 79. The note on page 79 states, "Source: Author's analysis of Urban-Brookings Tax Policy Center Microsimulation Model (version 0305-3A)." See these reports from the Tax Policy Center.

The distribution amounts for all 5 quintiles, from lowest to top, are 2.5%, 6.4%, 11.4%, 19.8%, and 60.3%. This is pre-tax income. The top one percent received 18.4% of total income (a portion of the 60.3%), an amount almost equal to the bottom 60% which received 20.3%. Professor Emmanuel Saez of U.C. Berkeley publishes a similar description in his report "Striking It Richer" and the Citizens for Tax Justice also publish a similar distribution, and if one were to look at the Joint Committee on Taxation or at the Tax Foundation one would find two other similar descriptions.

A disproportionate distribution amounts to leakage, a hole, in the economy. What escapes? Aggregate demand that would circulate and create jobs and incomes.

These are pre-tax income percentages. Looking at the overall effective tax rates for all income deciles, available at Citizens for Tax Justice (see link above), a subsidiary of the Institute on Taxation and Economic Policy (http://www.ctj.org/pdf/taxday2009.pdf) we note that the top one percent paid 30.9% in taxes, the 80th to the 99th percentiles paid from 31.5% to 32.2% in taxes, and the bottom 80% paid on average 24.5% in taxes. (Overall means "to all government agencies, federal, state and local" and effective means "as a percentage of income")  Post-tax distribution ratios are roughly similar to pre-tax distribution ratios. From the report: "The total federal, state and local effective tax rate for the richest one percent of Americans (30.9 percent) is only slightly higher than the average effective tax rate for the remaining 99 percent of Americans (29.4 percent)."

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Looking at the Citizens for Tax Justice figures (2009) for average income, the average income for the bottom 99% of households is 4% for the average of the top 1% ($55,600 to $1,445,000). That's a ratio of 1 to 25. When I plug in the ratios from the Brookings-Urban Institute, 99 receive $1, and 1% receives $22.32. It's sixth grade math, and I won't explain how I did it. I was a fifth grade teacher, and that's why I haven't forgotten my arithmetic.

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If we use the pre-tax income percentages reported by U.C. Berkeley professor Emmanuel Saez for 2007, the top one percent received 23.7% of total income, not the 18.4% reported by the Tax Policy Center.
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This graph comes from Inequality.org, see "income -- inequality".


Source: Congressional Budget Office, Average Federal Taxes by Income Group, “Average After-Tax Household Income,” June, 2010._______________________________________________________________

Want to see it again? This time it's better. The source is an article at New Deal 2.0.

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The United Nations Human Development Report lists the Gini coefficient for the U.S. at 40.8 in 2010. This measure of inequality places the U.S. last among developed nations.
Among the top 50 nations in human development the U.S. ranks 44th in "Income Gini coefficient."
Among the top 30 the U.S. ranks 28th.
(UNHDI, 2010, page 152  ---  http://hdr.undp.org/en/media/HDR_2010_EN_Complete_reprint.pdf  )

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Only recently the director of Economic Policy Institute, Lawrence Mishel, published a report titled "Huge disparity in share of total wealth gain since 1983", September 15, 2011.
http://www.epi.org/publication/large-disparity-share-total-wealth-gain/
In the 26 year period 1983 to 2009 the top five percentiles received 81.7% of wealth gain. The lower 80% of households had a net loss in wealth. See the report. The top 1% gained $4.5 million per household, the next 4% gained $1.2 million per household, the bottom 60% lost wealth. This is also consistent with Sylvia Allegretto's report, State of Working America's Wealth, May 2011. This is indicative of the distribution of annual income over time.

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See the article in Dollars and Sense magazine, July-August 2011, by James Cypher "Nearly $2 Trillion Purloined from U.S. Workers in 2009". The top earning households "pocketed . . . an estimated $1.91 trillion that 40 years ago would have collectively gone to non-supervisory and production workers in the form of higher wages and benefits." Some 88 million workers would share $1.91 trillion or on average $23,875 per household. This would raise the median among the lower-earning 80% of  households by 66%, from $36,000 a year to $60,000. See http://www.dollarsandsense.org/archives/2011/0711cypher.html

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I left this comment on an article at New Deal 2.0 October 18, 2011.

Our economy generates over $47,000 of output per human being, all 312 million Americans, per year, but the median income for all workers, over 150 million (including part-time workers), is around $30,000/year. Half make less than $30,000. U.S. income distribution Gini coefficient is the lowest among the developed (industrial) nations, maybe it's #73 worldwide. The average personal income I think is around $82,000 a year. The St. Louis Fed Reserve has a graph showing average output per worker is $100,000 per year. Recently the share of income going to wages has dropped. 30% of the workforce is either out of work (9.2%), working part-time involuntarily or discouraged (8%), or working full-time for below poverty level wages (10%). And if you include the drop in labor force participation since 2000, it's even worse. I got those figure from njfac.org, the unemployment numbers. I might mention, 28.2% of all personal income is the amount received by the lower-earning 80% as wages and salaries, see State of Working America, 2006/2007, page 79. About 20 miles south of San Diego, California, the minimum wage is $4.50 a day, and 60% of Mexican workers earn less than 3 times $4.50, or $13.50 a day. In China the manufacturing workers get $1.36 an hour, or under $3,000 a year. In the U.S. manufacturing jobs pay about $34 an hour, almost $70,000 a year. The rules of the economy, the laws, should serve the majority who live under those rules. The top one percent earn almost the same as the lower-earning 60%, see http://www.ctj.org/pdf/taxday2010.pdf. Beth Shulman and Paul Osterman deserve our attention. 

Finance's Debacle, a nutshell explanation

THIS BLOG: My February 2011 essay, the Six Point Program, is a comprehensive proposal to restore prosperity. I recommend it. Go the the column at the right, click-on February, 2011. Look for the Contents page also, December of 2010. We can do two major things in this nation: we can make sure all jobs pay a decent wage -- they don't, believe me --- and democratically we can create jobs for everyone.

The Financial Collapse in a Nutshell

Here is a quantitative analysis of the destruction of the banking system. On September 5 I left this comment on an article by Jack Rasmus at www.jackrasmus.com -----

On page 220 of Epic Recession you list the Federal Reserve Flow of Funds report showing increases of debt, 1978 – 2008, from four sectors,

government debt up 8.0 times,

Consumer debt up 10.3 times,

non-financial corporations up 9.4 times,

and financial corporations up 47 times.

Financial corp. debt from 1998 – 2008 rose from $6.3 trillion to $19.5 trillion, tripling in ten years. (These are Flow of Funds Report figures from the Federal Reserve, 2009)

The book The Great Financial Crisis by Foster and Magdoff shows a chart, page 121, that financial firm debt rose from

10% of GDP in 1970,

to 22% in 1980,

to 45% in 1990,

to 83% in 2000,

to 123% in 2007.

Relative to GDP the financial sector grew by 12 times since 1970.

During 1998 to 2008 the inflation adjusted GDP rose 28% or so, while the financial corporation debt burden tripled in nominal dollars, and inflation adjusted increased by 127%. Financial sector debt very much out-shot economic growth, over-extended. And, financial corporation profits also tripled, there’s a graph in Foster and Magdoff, page 123.

After the crash, banks in the U.S. were "originally committed" $11.5 trillion, were "currently provided" $3.5 trillion in government funded bailout according to Zandi and Blinder report (page 3), of which all but $1.6 trillion will be recovered, they said, but the final amount is yet determined. Another accounting from the New York Times reports that "Through April 30 [2011], the government has made commitments of about $12.2 trillion and spent $2.5 trillion --- but also has collected more than $10 billion in dividends and fees." (Trillions/billion -- the government has collected 0.4% of what it spent.) And many of the large banks are still insolvent. Europe's banks suffer similar weakness but are not insolvent, but they face tremendous losses according to Rasmus' article. The U.S. public is stuck with paying for the bailouts, which raises the national debt. A greater price is paid in terms of low employment, foreclosures, stagnant wages, and reduced government. And hysteria over government debt. Since the lender dictates the terms of any loan, and has more knowledge of the risks, he should take his share of the loss. There was a Plan B in 2008, government taking over the banks, it never was discussed. Be sure to read the section at the bottom of this essay that purports that 30% of mortgage loans were "liar's loans" and over-stated borrower income by 50% during the year 2006. 

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Inequality as the Original Cause

The problem here is inequality of income and wealth over decades, though at first glance it appears to be exuberant loan making. My conclusion is that all that surplus wealth was mis-allocated in the first place into the hands of a wealthy minority. (See U.C. Berkeley Professor Saez report "Striking It Richer" showing the major upward shift of income since 1980.) With a balanced distribution of income real human needs are taken care of, the entire society rises together, and the top-heavy wealthy are deprived of funds to create this monster of a financial system that knows only one law, "more". If economic surplus was distributed in a balanced ratio, more of the wealth would reach the accounts of more households, and more households would spend on real needs such as health, education, housing, city development. And the spending would spill over to inefficient use, but mostly it would produce security and intelligently planned lives for a majority.

This is about the end of this essay. Read on only if you like details.

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See Robin Hahnel's article at Z Communications, Financial Reform, July 2010, for a breakdown on needed reform.
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The surplus from production accumulates in the hands of too few. The top 5% of households own 60% of all assets and about 70% to 75% of all financial assets (see Allegretto, State of Working America's Wealth, page 11). What do they do with their liquid assets? Do they build more businesses and employ more? Yes and no. When there's more surplus than they can use productively or make a profit from, they create a monster of finance. And the record of the financial industry is that it is willing to self-destruct if it brings personal profit. Someone has to police finance, and that means reducing it's size to 1970 levels, 10% to 25% of GDP. Leo Panitch, a Canadian economist, seriously proposes a government take-over of the banking system. It is a utility after all. (See link at bottom, Public Banking)

There are several avenues, apart from take-over, to curtail the financial industry, and I'll mention seven steps below. But more important is to reform the ratios of distribution so that all can participate in economic security. As noted earlier, in 2011 the National Bureau of Economic Research conducted a survey asking adults in the U.S. if they could deal with an emergency expense of $2,000 within 30 days. Half of respondents said "No". Our economy generates over $47,000 per human being each year, and on average over $100,000 per worker (including all the part-time workers). The St. Louis Federal Reserve has a graph showing average value of all workers, and it's over $100,000. Half of all workers receive less than $30,000 a year. When the average value of each worker is over $100,000, how is it that only a mere half of adults can come up with $2,000 in an emergency? Distribution is flawed. Unbalanced. Incomes must rise for the majority.

Granted that loans do drive economic growth, but healthy loans still need a base of income earners to realistically generate future earnings to repay the loans. We do not have future earnings for enough workers. The next decades present a future of out-sourced jobs in the millions through advanced tele-communications, and continued off-shoring of manufacturing jobs. Since 2000 about 6 million jobs were lost in manufacturing, a third of total, and it's almost impossible to compete with Chinese manufacturing labor that pays $1.36 an hour versus $34 an hour in the U.S. (that's $2,800 a year versus $70,000 a year) -- (see Monthly Labor Review, March 2011, Department of Labor). High paying manufacturing has been the backbone of a middle class that produced the expansion of the past 70 years. Growing the financial system is no way to grow the economy.

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L. Randal Wray posted this article "Bye-bye to Bernanke's 'Insidious Banks': End 'Too Big to Fail' in 2 Easy Steps", published at New Deal 2.0, March 22, 2010.

http://www.newdeal20.org/2010/03/22/bye-bye-to-bernankes-insidious-banks-end-too-big-to-fail-in-2-easy-steps-9120/

Clearly there was a dramatic concentration of banking over the 1990s and early 2000s. Not coincidentally, this coincided with the explosion of innovations that changed the focus of the biggest banks away from making and holding loans in the case of commercial banks, or from underwriting and placing corporate equities and bonds in the case of investment banks, to trading. In 1999 Washington eliminated any separation between investment and commercial banking, allowing all of the big institutions to focus more of their business on marketing risk — earning fee income by selling products (largely derivatives, including asset-backed securities) to money managers, as well as trading for their own account. . . .

Lowenstein also rightly argues that the Wall Street institutions no longer serve any public purpose: “At Goldman, trading and investing for the firm’s account produced 76 percent of revenue last year. Investment banking, which raises capital for productive enterprise, accounted for a mere 11 percent.” And what kinds of trades and investments does Goldman pursue? It helps Greece and other clients hide debt, and then it bets they will default. These firms act against the public purpose, as Blankfein uncannily admitted to the Financial Crisis Inquiry Commission when he said that “we represent the other side of what people want to do.” You want to buy a house, build a factory, or provide government services to your citizens? Goldman wants to bet that you will fail. . . .

So how do we get to the elimination of Bernanke’s “insidious” too-big-to-fail institutions? We will not get there through increased regulation or supervision; we will not get there by improving system “resilience”; and we will not get there by propping them up with trillions of bail-out funds whilst waiting for them to fail so that we can resolve them.

So let’s try a much simpler, two-pronged approach.

1. After January 1, 2011 the FDIC will no longer provide deposit insurance to any financial institution that holds more than a one percent share of insured deposits. For the purposes of calculating market share, a bank holding company must include deposits of all subsidiaries — with the one percent share restriction applying to the aggregate total.

2. After January 1, 2011, institutions that issue FDIC-insured deposits are restricted to holding cash, reserves at the Fed, whole loans and corporate and government bonds. They may not hold any securitized products or derivatives; they may not move anything off-balance sheet; and they may not hold interest in any subsidiaries that are not subject to the same rules.

These two measures will eliminate most of the advantages to bigness.

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The Federal Reserve Bank in St. Louis has a FAQ section with this question

Why is the government reluctant to let large financial firms file for bankruptcy protection?

Federal Reserve and Treasury officials believe that bankruptcy is not a viable option for resolving very large financial firms because, under current law, bankruptcy proceedings can be protracted and entail considerable uncertainty, which would tend to exacerbate a financial crisis. FDIC Chairman Sheila Bair recently argued that "the legal features of a bankruptcy filing itself triggered asset fire sales and destroyed the liquidity of a large share of claims against Lehman ... The liquidity and asset fire sale shock from the Lehman bankruptcy caused a market-wide liquidity shortage."* Federal Reserve and Treasury officials have asked Congress to enact legislation for new authority and procedures for resolving failures of large financial institutions.

*Congressional testimony, May 6, 2009. Seehttp://www.fdic.gov/news/news/speeches/chairman/spmay0609.html.

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William Tabb, author of The Amoral Elephant (2001Monthly Review Press), warns of the enormous global capital flow that washes into to various pools of profit opportunity. It takes capital resoures, the fruit of economic surplus, and feeds on more profit. The allocation of resources is determined by only one criterium, profit.

Tabb, page 205, The Amoral Elephant,

"The basic ideas are simple enough. Citizens could demand structural changes in economic relations to comply, as I've suggested, with the principles of the Universal Declaration of Human Rights. Written in a postwar period of great energy devoted to seeing that humans would be wiser in the future and avoid the causes of war, it declared that everyone has the right to work, to free choice of employment, to just and favorable conditions of work, and to protection against unemployment. That is all in Article 23. 'Everyone who works has the right to just and favorable remuneration ensuring for himself [which we now understand can be read as himself or herself] and his [or her[ family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection.'"

Tabb continues, "In an age in which capital's audacity seems boundless in its efforts to impose a new feudalism, in which the masters of the universe can use an internationalized state and its local subsidiaries to remake the world in their image, it does not seem amiss to celebrate the fiftieth anniversary of the Universal Declaration of Human Rights, to remind ourselves what the global financial institutions, the transnational corporations, and the governments that do their bidding are attempting to steal. People's rights come before capital's. . . . It is the organization of class-conscious political movements that know what they want and are willing to struggle to achieve their goals [that can make a difference]."

The world's richest 20 percent now receive 86 percent of the world's gross domestic product, the poorest 20 percent have only 1 percent, and the middle 60 percent just 13 percent [year 2000]. . . . The world's richest three people have assets greater than the combined output of the forty-eight poorest countries. . . . Consider: the 1999 United Nations World Development Report says that for $40 billion, basic health and nutrition, basic education, water sanitation, reproductive health, and family planning could be extended to the entire world's population. . . . A Tobin Tax on all international financial transaction would raise $45 billion a month [$540 billion a year], and then there are those military budgets. Finding the money hardly seems a problem. Getting those who have it now to give it up, ah, there's a problem."

From his last paragraph,

"I would conclude then, as I began, by reasserting that in the current situation of increased globalization, the universalization of capital is a long-standing process, but one that takes on specific meanings in our time. Rank-and-file citizens of the world must have a position not simply on trade issues and collective bargaining, but a political position on capital controls and other legislation that empowers progressive politics by limiting the power of finance capital. We are being forced by history to learn to think in systemic terms. Were we to do so with any consistency, we would be drawn to a return as well to our more radical social traditions."

Should Chinese labor have independent democratic unions? Should we allow the products of slave or near slave labor to enter onto our merchants' shelves? If Disney pays 16 cents an hour in Haiti, and Nike pays 25 cents an hour in Indonesia, and Apple pays $1 an hour in China, and Sony pays 80 cents an hour and Ford $1.20 an hour in Hermosillo Mexico -- should those products be for sale in the U.S. market? Should finance be free to jump into and out of national markets instantly without penalty? Is there a place for a more severe short-term capital gains penalty? Can we afford or is it morally neutral not to have an opinion?

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Here are six short suggestions about limiting finance:

1. Banks that fail should be declared bankrupt and dissolved. No more bail-outs. Let shareholders and management be aware. In the U.S. companies that run their business into the ground go out of business. Government's role is to take over management temporarily, settle debts, run the corporation until private investment bids to buy out government, as we did with Chrysler in the 1990s. As Sweden's government did when their banks failed.

2. A short-term capital gains tax penalty. Presently capital gains on assets held for less than one year are taxed at normal income rates, and assets held longer are taxed at 20% (or is it 15%?). This should change to normal tax rate for assets held more than 3 years, an additional 15% tax on assets held one to three years, and an additional 30% on assets held less than one year.

Investment not speculation is the rewarded behavior. Where to explore ideas about capital gains rates? I do not know.

3. A Tobin tax on financial transactions. The Chicago Political Economic Group claims that over $800 billion a year could be raised in the U.S. alone. (See this essay.) In France there is a group Attac, the Association for the Taxation of Financial Transactions for the Aid of Citizens. Many economists have advocated this tax since Tobin first introduced the idea. See Widipedia.

4. Jan Shakowsky presented an alternative federal budget proposal in February 2011 in which $77 billion of tax-expenditure would be eliminated (a net revenue increase of $77 billion annually). The expenditure allows financial corporations to deduct the interest payments on their loans. This is a government subsidy to an industry that needs no subsidy.

5. The foreign derivative market is immense and needs regulating if such derivatives are sold in the U.S. But Treasury Secretary Geithner will not support transparency or regulation of such derivatives. The entire derivative market needs a progressive response and re-ordering.

6. Shadow banking, Special Investment Vehicles, should be legislatively eliminated. Regulated banking now is less than half of the financial market. I'm not an expert, and I do not know where to seek out progressive proposals.

7. Futures trading should be managed and restricted to participants who have a distributive function in the market. Speculative participants should be eliminated from the destructive playing and manipulation of these markets. Speculation in grain prices raised the price of tortillas in Mexico touching off large protests.

I wrote a long essay about the original problem, the finance industry. What follows is my case against them. A further essay should explain how to cut it back to size. And a further should explain how to increase income for the majority, but the February 2011 is my standard answer thus far.

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The Consequences of the Financial Crash

Chairman Greenspan said in 2004, "Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient." And in 2008 Senator Christopher Dodd said, "we're literally days away from a complete meltdown of our financial system, with all the implications here at home and globally." (Quotes from Foster and Magdoff, pages 125 and 112)

In the report State of Working America's Wealth, University of California at Berkeley professor Sylvia Allegretto reports "The destruction of wealth that resulted from the Great Recession was widespread but not uniform. From 2007 to 2009, average annualized household declines in wealth were 16% for the richest fifth of Americans and 25% for the remaining four-fifths." I will explain it this way: In 1998 the average wealth index is at 0, nine year's later in 2007 it's at 56, and in 2009 it drops back to 11. So we saw that the GDP had grown by 28% (1998-2008), but wealth grew by 56% (1998 - 2007). That's double the rate of growth for GDP. And then wealth dropped off in a crash. So wealth grew by 11% 1998 - 2009. But it went up as high as 56% before the drop-off. The wealth pie got bigger, then smaller. The output (GDP) pie got bigger, and then shrunk by 5.1% for 18 months till the end of the recession, and then recovered it's pre-recession shape (GDP) in July 2011.

Remember that 87% of the assets are held by 20% of the households, and that banks own 61% of all housing equity. The net worth of the country, between 2007 - 2009, dropped by 16%. But for the household in the middle, the median or typical household, net worth 2007 - 2009 dropped by 41%, from $106K to 62.2K, to levels below the 1983 level. Since 1962, 47 years ago, the wealth of the typical (median) household has increased by 22%, from $52.2K to $62.2K. The economy's economic output per capita expanded by 64%, I think, close to 64%. The lower 40% of households own 0.3% of the nation's net worth, their net worth on average is $2,200. (I don't think anyone can take in all those numbers, so don't worry. I can't just state something uncomplicated, you have to stretch a little.) I sometimes cite a 2011 study from the National Bureau of Economic Research: half of adults in the U.S. could not deal with a $2,000 emergency within 30 days without borrowing or selling something. They asked about 1,500 people, "If you had an unexpected expense of $2,000, could you handle it from savings within 30 days?" No, said half.

This sort of number description may drive you crazy or bore you to death. It does bore most people, but not me. It means that the wealthy households actually got richer relative to others during this crash period and the middle level households lost a lot of savings, about $40,000 for the middle family. To me, my interpretation, the financial industry created the method of deceiving millions and millions of home owners that their residences, their houses, were worth far more money than they really were. This deception lasted about 8 years before it crashed. When the artificial bubble burst, the people who lost money were the poorer borrowers, and the richer lenders did well, made money. Here's a source with a cool graph: http://designandgeography.com/2011/05/17/inflation-adjusted-housing-prices-by-state-1991-2010/housing/

Was it deceit or incompetence? If bankers did not understand what was going on, they were incompetent, if they did understand they were thieves. What do you make of Greenspan's statement above? I'm putting Greenspan, Bernanke, the Ph.D.s working for the Fed and mutual funds, securities traders, and most heads of major banks into this rogues gallery of unflattering masterminds. The latter may have been too busy making millions to analyze what societal effects they were having, but any rational person would have noticed the major risk facing all of society.

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Sources for information:

I recommend essays at New Deal 2.0 and Robert Kuttner's analysis at American Prospect for understanding society's role in managing banks and the financial sector.

A graph of this same data I used in this essay can be found in a recent magazine article by Allan Sloan in Fortune Magazine, September 2011, and his source, the St. Louis Federal Reserve Bank.

http://finance.fortune.cnn.com/2011/08/18/how-washington-is-destroying-the-economy/

http://research.stlouisfed.org/fred2/series/GFDEBTN

And a series of graphs from the Center for Budget and Policy Priorities

shows the course of the economy through the recession:

http://www.cbpp.org/cms/index.cfm?fa=view&id=3252

And the Economic Policy Center has many graphs and studies.

I like this one about the labor market.

http://www.epi.org/publication/labor-day-by-the-numbers-2011/

And State of Working America also has a long series of graphs

to help simplify this complex phenomenon, the economy:

http://www.stateofworkingamerica.org/

The Chicago Political Economy Group
Eisenhower Era Income Tax Rates on the Upper 10% of Families Would Immediately Erase the Federal Deficit, this paper states, "Though media pundits and political leaders have incessantly claimed that we cannot solve the federal budget deficit simply by taxing the rich so that the middle class "must accept some pain," estimates shown in this paper demonstrate that this is not true (see Section 4 below). In fact, as Section 2 below shows, the bottom 90% of families (or everyone except what can only be called the "upper class") have been "accepting pain" for 35 years while the highest income and especially the very highest income, families have been reaping massive and ever increasing rewards for the same period of time."

http://www.cpegonline.org/workingpapers/CPEGWP2011-2.pdf

The St. Louis Federal Reserve Bank has a series of charts and graphs.

I don't find them very helpful, but they are official. Take a look.

Increase of monetary base:

http://research.stlouisfed.org/fred2/series/BASE

Public debt

http://research.stlouisfed.org/fred2/series/GFDEBTN

http://research.stlouisfed.org/fred2/series/USAEPRNA?cid=32267

http://www.cpegonline.org/workingpapers/CPEGWP2011-2.pdfhttp://www.cpegonline.org/workingpapers/CPEGWP2011-2.pdf

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This post deserves a few more references for readers:

Here is an article that spells out how the ten largest banks issue half the mortgages in the nation, and the largest five banks own 95 percent of the derivative market, and together the large banks own the industry (and Congress). 

The article fails to spell out that banking corporations are a minority in the world of finance and debt creation. Hedge funds and other institutions that fall outside the regulatory purview control more assets. From Epic Recession by Jack Rasmus, page 217, "The summary showed that the shadow banking sector in late 2007 was even larger than the commercial sector (disregarding the latter's participation in the shadow sector). Shadow banking assets were worth $10.5 trillion compared to commercial banking's $10.0 trillion."

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Public banking is an alternative to the commercial stranglehold of the largest banks. This web page has an educational video explaining it.

Yet public banking does nothing to alleviate the greater problem of extreme concentration of wealth. 
See inequality.org --- http://www.inequality.org

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This 2011 article by William K. Black in Dollars and Sense magazine sums up the harm the banks have wreaked. 

• Made the systemically dangerous megabanks even more dangerous
• Made our financial system even more parasitic, harming the real economy

Here's a sample from Black's essay:

"According to Credit Suisse, for instance, 49% of all mortgage originations in 2006 were stated-income loans, meaning loans based on applicants’ self-reported incomes with no verification."

From the Mortgage Bankers Association:

One of MARI’s customers recently reviewed a sample of 100 stated income loans upon which they had IRS Forms 4506. When the stated incomes were compared to the IRS figures, the resulting differences were dramatic. Ninety percent of the stated incomes were exaggerated by 5% or more. More disturbingly, almost 60% of the stated amounts were exaggerated by more than 50%. These results suggest that the stated income loan deserves the nickname used by many in the industry, the “liar’s loan.”

(My note: 30% of all mortgage loans in 2006 were "exaggerated by more than 50%." The "sample was only "100 stated income loans", but doesn't this indicate the need for an investigation? Jack Rasmus states that $17 trillion of mortgage loans were issued 2000-2007, so about $2 trillion mortgage loans were issued in 2006. 30% of that amount is $600 billion. If they were clearly fraudulent, if the sample's pattern holds, then a $600 billion major fraud was perpetrated in just one year, and no one is in jail.)

Black asks: 

Why would scores of lenders specialize in making liar’s loans after being warned by their own experts and even by the FBI that such loans led to endemic fraud? (Not that they needed any warnings. Bankers have known for centuries that underwriting is essential to survival in mortgage lending. Even the label “liar’s loan,” widely used in the industry, shows that bankers knew such loans were commonly fraudulent.) How could these fraudulent loans be sold to purportedly the most sophisticated underwriters in the history of the world at grossly inflated values blessed by the world’s top audit firms? How could hundreds of thousands of fraudulent loans be pooled into securities, the now-infamous collateralized debt obligations (CDOs), and receive “AAA” ratings from the top rating agencies? How could markets that are supposed to exclude all fraud instead accommodate millions of fraudulent loans that hyper-inflated the largest financial bubble in history and triggered the Great Recession?