Transcript U.S. Economy

U.S. Economy
History: The Beginnings
• Jefferson’s concept of the independent
farmer
• Adam Smith: Wealth of Nations
• Faith in the individual; distrust of govt.
• The Puritan work ethic
• Opportunity, but not guarantees
– The U.S. as the promised land
Rapid, unregulated growth
• The rise of industry. The USA’s capacity for
production
- Cheap immigrant labor, capital and machines
• Monopolies were not only the product of
monarchies
– Rockefeller, Carnegie, Morgan, Stanford, Vanderbilt,
Hill.
– Control of the economy falls into the hands of robber
barons
The Growing Division
• Growing gap
– Between the ideal of the free, independent,
self-reliant American and the wage slave—
between the source of plenitude and the
degradation of those producing it.
– Between the rich and the poor.
– The speed, scale and thoroughness to
completely alter American life was except for
the controlling few, undoubtedly a source of
anxiety.
The Rise of Unions
• Industrial capitalism created the labor movement
– Deplorable factory conditions, 12 hour days, and high
accident rates
– The rise of the capitalistic system was seen as
undermining the basic principles of American life:
independence and freedom.
Strikes
• Poor safety condition and general disregard for
the workers’ health led to:
– 72,000 deaths on railroad tracks
– 158,000 deaths in repair shops and roundhouses
– These statistics are for the railroad industry alone.
• 85% of workers were either close to or below
poverty line.—1880’s
• Railway strike of 1877 left 100 dead; Haymarket
Affair, 1886
The Present Situation
• The budget deficit: est. 2011-13 $1trillion
• The National Debt: $14.7 trillion
• The trade deficit 2011 $50,000/month
• Credit card debt per person: ,$15,000
• Savings rate disposable income—2006: 1% to 4% 2011
• Saving is good for the individual to get his finances in order,
but means less consumer spending.
• 70% of U.S. GDP is generated by consumer spending.
Modern Developments
Downsizing
Huge job cuts and job insecurity
Combined with high debt levels gives rise
to anxiety
Unions: 8% memberships and recent declines in
the major union AFL-CIO
Lost 4 million members
Walmart and union bashing
Walmart Syndrome
– Personnel policy
• No unions—organize and get fired.
• ”Lock in”
• Low salaries--$8-10/ hour is average
– Low salaries mean the government pays.
– In Georgia, 100,000 children of Wal-Mart employees are
on state-supported health programs—cost $10 million
per year.
• Competitors have a choice—adapt or
disappear
Working Class Blues
Stagnating wages
Downsizing
Weakened unions
Wage cuts
GM cut wages 50% and set up a two tier system
New employees get $14.40, while current
workers get $28. Many current workers are
laid off and replaced by new, cheaper
workers despite GM running profits
Unemployment rate: 9.1%
Federal minimum wage: $7.25
Debt & its Consequences
• The national debt will soon equal the annual
Servicing the debt could reach 1.7% of the GDP by
2014
• Foreign ownership makes U.S. vulnerable
– Due to fears of a weak $ foreigners (central banks
(66% of foreign held debt), insurance companies and
private investors) may sell off $ = fall and panic
• Italy, Japan, Russia, UAE, Sweden have begun selling U.S.
debt papers
Bubbles
• The bubble pops
– Real estate
– When wages stagnated, a plan was launched to help Americans attain
the American Dream of owning a house
– Low interest rates created a housing bubble
– Refinancing to fuel consumer spending
– If was fine as long as housing prices went up, but then, pop goes the
weasel
– Banks left holding the bag when prices fall
– Insurance companies and Credit Default Swaps
– Construction jobs out the window
The Good News
• Strong academics
– Producing top minds to innovate
• Risk intensive investment plus foreigners
willingness to provide capital
• Dynamic economy
– Continually developing new companies
• A list of the top 25 companies from 25 years ago,
only 6 remain. The other 19 are new on the list
• Compared to Europe where the list is exactly the
same.
The Bad News
• Sub-Prime Loans
– 2 million forclosures in 2009 and 2010
– In Cleveland, Ohio 1/10 of houses abandoned
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Market instability
Oil prices
Housing market
Low GDP and no jobs
The irony
– Workers’ productivity has gone up, but salaries
haven’t. High productivity and low demand = job loss.
The Distribution of Wealth
• Top 1% own 60% of all corporate stock and assets
• 46% of Bush’s tax cut will go to the top 1%
• The amount of the national income that went to the top
1% went from 9% to 16% from 1983 to 2006
• Income increases 1966 -2001: middle income group
(11%), top 10% (58%), top 1% (121%)
• The eroding middle class
– Yet the dream persists: 80% of Americans believe in the “rags to
riches” story, but the reality is that the middle class is shrinking.
– The average salary for execs in major companies: $10.5 million
Working in the U.S.
• Work week: 46.2 hours
• Vacations: average 9 days of paid
vacations per year
– Professionals can get up to 3-4 weeks, but
don’t take them consecutively
– 25% of those in the private sector take no
paid vacations
• No paid maternity leave
Work weeks: A comparison
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USA 46.2 hours
Spain 42.1 hours
Great Britain 40.8 hours
Germany 40.6 hours
Denmark 39.4 hours
Norway 37 hours
Sweden 36 hours
France 35 hours
– Source: Aftenposten, A-Magasinet 3/11/06
Working in the U.S.: Downsizing
• Foreign competition and global markets
– Goods and services can be produced
anywhere.
– The Rustbelt
• Northern industrial areas which are losing jobs to
either the Sunbelt or foreign competitors
• High paying industrial jobs are being replaced, if at
all, but low paying service sector jobs.
Downsizing: An example
• The American automobile workers
– Reducing the number of workers paid $15 by
replacing them with newer workers.
• Early pension to get rid of “high paid” workers.
• ¾ of GM’s workers can be pensioned off during the
next four years to allow for the hiring of new
workers at considerably worse conditions.
• The workers’ pension system will be privatized
making GM no longer responsible for it.
– The money will be invested in GM and other stock
making the fund dependent on the stock market.
Downsizing
• The U.S. automobile industry has reduced the
number of workers from 750,000 workers to
180,000 workers
– 100,000 jobs have disappeared the last four years in
the auto industry.
– GM plans on investing $800 million in a factory in
Shanghai.
– The UAW (union) has accepted a wage freeze for the
next four years.
• 130,000 job cuts in the finance industry in 2007
Outsourcing
• Outsourcing and job loss:
– The wages and rents in Bangalore are less than 1/5
of thoses in western capitals.
– ”Hello, my name is Tracy, how can I help you?”—
international call centers
• Work done in India will be on your desk at 8:00
AM the next day.
– The work day is 24 hours
– Boeing has two shifts in Moscow and one in the U.S.
• Plans can be sent back and forth so that work is being done
24 hours a day.
• Plane production is reduced from 28 days to 3.
Outsourcing’s Consequences
• This takes entry level jobs from western countries
• Globalization squeezes out inefficiencies in the
market, but it takes away job security and community
security.
• In a flat world, one’s economic liberation is another’s
unemployment.
• The unemployment rate may be 9.1%, but when you
are unemployed it is 100%.
• Management and shareholders don’t care who does
the work, only that it be done cheaply and efficiently.
Outsourcing’s Consequences
• The carrousel accelerates
– There are always people who are hungrier and are
willing to work harder and even more creatively.
– Resting on your laurels will mean that the laurels will
be the flowers on your coffin. Upgrade or die.
– Businesses will seek the harder working & cheaper
workforce out no matter where it is.
• Communication technology will link them together.
• Work flow patterns are globalized and each aspect of
production can be outsourced to the cheapest and most
efficient provider. And the result will be on our desk or in our
factory tomorrow.
Outsourcing’s Consequences
• ”If you are still making anything labor
intensive, get out now rather than bleed to
death. Shaving 5% here and there won’t
work.”—Oded Shenkar, Prof. Of Business
at Ohio State U.—advice to western
manufacturers.
• Labor intensive factory jobs at $25/ hour
will be outsourced, leaving $8/ hour WalMart jobs as a replacement.
Politics and the Economy
• Washington: An ideological battlefield.
– The struggle over raising the debt ceiling.
• Bush raised it many times, but when Obama tried
the Republican balked—goal was to embarrass
Obama?
• The Tea Party Movement high jacked the agenda.
• The majority of Americans (82%) are dissatisfied
with Washington politicians.
• The majority supported Obama’s plan which
included abolishing Bush’s tax breaks for the rich
and corporations, but Washington didn’t listen.
Maintaining the American
Dream
• Wages have stagnated over the last 30
years.
• How can the dream that life gets better be
maintained, including having a home?
– Low interest rates and easy access to credit.
– Sub-prime loans and in many cases, no doc.
loans and the illusion of owning the dream.
• Packaging and passing on the risk.
– A scenario for disaster.
The Great Wall St. Rip Off
• Wall St.’s CEOs, managers and brokers
are greedy, cynical, dishonest,
irresponsible & incompetent. M. Lewis
• The Glass-Steagall Act, 1933
– Divided activities of commercial & investment
banks—abolished in 1999.
• Commercial banks could invest & speculate
• Sub-prime loans could be repackaged as CDOs.
• Commercial banks had a leverage ratio of 30:1
The Great Wall St. Rip Off
• Hedge funds—where was the hedge?
– Operate in the unregulated and opaque
shadow market
– Risk taking is the name of the game
– LTCM went bust in the 1990s and almost
brought down the entire financial world.
– Moral hazard—take risk and if you are right
you make billions; if wrong the taxpayers pay.
The Great Wall St. Rip Off: The
Impact
• 5 million homes are on the verge of
foreclosure and 15 million of USA’s 51
million homes are worth less than their
mortgage value. DNL, 7/9/11
• The government is suing 17 major banks
and investment companies for $20 billion
and demanding that they restructure the
loans.
• $179 bn toxic loans sold to F Mae & Mack
What Now?
• Productivity has risen 10% over the last
two years, but wages haven’t.
– Where is profit going?
– What is the best way to generate consumer
spending and who will do it?
• Conclusion
• The economy is not responding to
«Quantitive Easing»: GDP growth for Q 2
1.3% year to year.
What Now?
• «We aren’t facing a double dip recession;
we haven’t got out of the first one»—Paul
Krugman (CNN interview, Aug. 15, 2011).
• The U.S. government spends $1 for every
60 cents it takes in revenue.
• The recession should last between 4 and
5 years.—Ken Rogoff, Harvard
What Now?
• Americans are starting to save: Good
news or bad?
• Inflation is rising: Good news or bad?
• Is the Fed’s toolbox empty?
- Quantitive easing, low interest rates, and
bank bailouts.
• The Michigan Index of Consumer
Confidence at a low point.
A Solution?
• Raise taxes including capital gains tax,
introduce VAT, and abolish Bush’s tax
cuts for the rich.
• What are the chances?
– Like zero.
– It would take a Democrat control of Congress
and the Presidency.
• «The Period of American triumphalism is
over.»--Joseph Stiglitz, Nobel Prize winner