Transcript What is to be Done? - Democratic Socialists of America – Boston

What Is To Be Done
US Capitalism in Crisis and Social Market
Alternatives
2
Know thy enemy, know thyself.
A hundred battles, a hundred victories.
- Sun Tzu, The Art of War
3
Is the Great Recession Over?
 Officially ended June 2009
 In mid 2012 we have:
 A 10 million job shortage
 5.2 million fewer employed than in Dec 2007
 4.7 million jobs not gained
 A $13 trillion loss of housing wealth
 12 million households “underwater” (negative equity)
 $500 billion decline in consumption
 $400 billion decline in home building activity
 Result: A bigger economic shock to private sector than in
1930s
 We have gone from financial crisis to economic
stagnation
4
Was it
just an
accident?
CPEG Economic Crisis
Workshop - Barclay
5
If you remember nothing else
from this workshop today…..
 The financial crisis and economic stagnation were
not unforeseeable accidents.
 They resulted from neoliberal policy choices.
 Neoliberalism assumptions:
 Markets are the most efficient method of allocating resources.
 Markets maximize choice and are therefore desirable from an
ethical perspective.
6
Clashing Explanations:
Knowing Thy Enemy
 The following slides develop a narrative
of what caused the Great Recession.
 However, neoliberalism also has a
narrative of causes.
 Accurately understanding the causes of
the Great Recession is essential to
designing alternatives.
7
The Argument in Brief
 US had three decades of growing
inequality, with huge income growth
to the top 1%.
 This income inequality generated a
rise of speculative financial activity.
 Speculative finance drove a housing
bubble and financial crisis, followed
by economic stagnation.
 We must move the political discussion
towards social market alternatives.
I. Growth of Economic
Inequality in the US
Class Redistribution of Income
9
The Inequality Walk
How much income inequality
is there in the US?
How has it changed over
time?
Used 1979 – 2006 period for
comparison: the cause of 2008
economic collapse
10
Why Did Inequality Increase?
A Neoliberal Explanation
Neoliberals (conservatives) like to
talk about “skill gaps” and need for
more education.
 Often called “skill-biased technological
change” (SBTC).
 Thus, when they acknowledge
increased inequality it is in terms of
gains to the top 10 or 20%.
% of Total Household Income
Growing Inequality:
Top 10% Income Share, 1950 - 2008
11
55
50
45
Top 10% Income
Share
40
35
30
25
05
20
00
20
95
19
90
19
85
19
80
19
75
19
70
19
65
19
60
19
55
19
50
19
But is this the real story – or does it mask a more significant story?
12
The Real Story:
Income Gains in the Top 10%, 1950 - 2007
Perenct of Total Income
25
22.5
20
Growing
apart
17.5
15
12.5
Top 1% Income
Share
Next 4%
Next 5%
10
7.5
5
06
20
02
20
98
19
94
19
90
19
86
19
82
19
78
19
74
19
70
19
66
19
62
19
58
19
54
19
50
19
Threshold for a
top 1% income
in 2007 was
about $350,000.
13
Why Did Inequality Increase?
Another Neoliberal Explanation
 Neoliberals: increased inequality simply
reflects a globalized market.
 The top 1% are global “superstars” and as a
result get much bigger income share.
 If this explanation is true, other wealthy
countries should see similar levels of
inequality as the US.
US Inequality Has Grown Much More
than in Other Rich Countries
14
25%
20%
US
France
Japan
Sweden
UK
Italy
15%
Income
Share - Top
1%
10%
5%
0%
1975
1990
2000s
15
Failed Neoliberal Explanations
for Increased Inequality
 Inequality has grown because an economy based
on advanced technology requires higher skills –
and many people have failed to acquire them.
 The globalization of markets has not created
economic superstars that capture high economic
rewards.
 In both arguments growing inequality is inevitable –
and maybe even good.
 Reality does not support these arguments.
16
Why HAS Inequality Grown So
Much in the US?
 Who are the top 1%? What kind of
income does the top 1% receive?
 What do they do for a living that
results in such high incomes?
17
Composition of Income for Top 1% (2008)
(for bottom 99%, over 95% of income comes from wages and salary)
100%
90%
80%
70%
41.4%
60%
Capital Income*
Labor Income
50%
40%
30%
55.7%
20%
10%
0%
Fitzgerald: The rich are different from us.
Hemingway: Yes, they have more money.
But where they get their money from is different.
*Capital income
includes capital
gains, dividends,
stock options, and
interest.
Who Is in the Top 0.1% of Income?
(Analysis of 2004 tax returns)
Non-Financial Execs, Managers,
etc.
40.8%
Financial Execs, managers, etc.
18.4%
Not Working
6.3%
Lawyers
6.2%
Real Estate
4.7%
Medical
4.4%
Other entrepreneur
3.6%
Arts, media, sports
3.1%
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19
Why Did Inequality Increase?
Decline of unionization
Shift downward in the tax
burden
Inequality as social policy
20
As Union Density Declined,
the Income Share of Top 1% Increased
30.00%
25.00%
20.00%
15.00%
10.00%
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
19
99
20
02
20
05
20
08
5.00%
Union Members as a % of US Working Population
Income Share Top 1%
Collective Bargaining Coverage* and
Gini Index, Various Countries
21
Percent of Labor Force
100.00%
US = .45
90.00%
80.00%
Japan = .38
N. Zealand = .36
Canada = .32
70.00%
60.00%
UK = .34
Australia = .30
Switzerland = .34
Germany = .28
50.00%
40.00%
30.00%
Greece = .33
Norway = .28
U
S
Denmark = .24
Italy = .33
Netherlands = .31
20.00%
10.00%
Spain = .32
Finland = .26
France = .28
Sweden = .23
0.00%
Austria = .26
Union Coverage
* Percentage of labor force covered by collective bargaining. This is not the
same as percentage of labor force who are union members (latter is smaller).
22
Shifting the Tax Burden Downward
 Decline in top personal income tax rate
 70% in 1980 (91% from WWII until 1960s)
 35% after Reagan/Bush I and II
 This means a $10 million/yr CEO keeps $6.5
million instead of $3.0 million
 Income from capital taxed at lower rates
than income from labor
 Corporations have
evaded/avoided/scammed the
corporate income tax
23
Million $ income
families increased
their share of total
income 7-fold
while their tax
rate was cut in half
24
Inequality as Social Policy
 By 1970s most new jobs were in the
service sector.
 Would these jobs be low wage or high wage?
 The minimum wage lagged median and
average wage levels.
 The attack on unions made organizing
service workers more difficult.
 The Federal Reserve Board (“Fed”) and
Congress abandoned full employment
as a policy goal.
25
The Wage Floor: Minimum Wage
as a % of Median Wage, 2010
Min as a % of Median
70%
60%
U
S
France
50%
Netherlands
Portugual
40%
Australia
Belgium
30%
Ireland
Greece
20%
Canada
UK
10%
US
Japan
0%
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The Argument in Brief
 US had three decades of growing
inequality, with huge income growth
to the top 1%.
 This income inequality generated a
rise of speculative financial activity.
 Speculative finance drove a housing
bubble and financial crisis, followed
by economic stagnation.
 We must move the political discussion
towards social market alternatives.
Part II: What Could the
Top 1% Do with Their
Increased Income Share?
28
How could the 1% spend
their extra $1 trillion/year?
Invest and create jobs
Luxury consumption
Seek more income through
financial speculation
29
Have the Top 1% been Job
Creators?
NO
As the share of income going to the
Top 1% has increased, job creation
in the US economy has faltered.
30
Unemployment Has Been
Higher
Period
# of months
# months with unemployment
under 4%
1945-1975 360 months
75 months (21%)
1976-2011 420 months
5 months (1%)
31
Rabble getting on your
nerves? Escape to your
own island: this one is
going for only $24.5 million
– castle included.
One speculator who helped run up oil prices got a huge
bonus paid with our (tax) money: He owns this castle.
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Of course you have to get to your island – and here is the way. Le Grand
Blue: a modestly priced yacht - $90 million . It is the 21st longest yacht in the
world.
33
Where Did the Money Go?
Much of this money went
into finance and financial
speculation
The Real vs. the Financial Economy 34
US $Billions
– or What the Top 1% did with Their Money
$70,200
$65,200
$60,200
$55,200
$50,200
$45,200
$40,200
$35,200
$30,200
$25,200
$20,200
$15,200
$10,200
$5,200
$200
Value of Stock
Trading
US GDP
08
20
07
20
06
20
05
20
02
20
01
20
98
19
95
19
90
19
85
19
80
19
Activity in the Financial Economy has grown many times faster than
production in the Real Economy
35
Markers of Financial Sector
Growth
My favorite: In 2007, we spent
more on brokerage services
and investment counseling
than on new cars. In 1979, we
spent 10 times as much on the
latter as the former.
Financial Sector Profits as a
Percent of Total Profits (1980 – 2004)
50%
40%
35%
30%
25%
A
R
M
s
C
D
S
G
L
B
20%
15%
10%
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
% of Profits
45%
s
e
c
u
r
i
t
i
z
a
t
i
o
n
L
e
v
e
r
a
g
e
Finance Sector % of Total Profits
36
37
Leveraging Finance
 2004 GS, MS, ML, BS, and Lehman persuaded the
SEC to:
 Allow them to increase leverage; and
 Assess their risk using their own proprietary models
 Leverage is the ratio between the amount of
money you have put down (your equity) to the
value of the asset you control
 When Bear and Lehman collapsed they were
leveraged at more than 35:1
 Leverage drove asset price inflation (bubbles) via
debt financing
38
Two US Growth Models
 1945 – 1975 growth model:
 Full employment enabled by
 Productivity growth that generated wage growth and
thus
 Aggregate demand sufficient to drive GDP
 Neoliberal growth model:
 Asset price inflation (bubbles) generated
 Growth of debt plus
 Globalization policies that ignored manufacturing and
 Facilitated offshore investment that
 Fueled a trade deficit
39
Growth of Financial Sector in the US Has
Not Produced Faster Growth in the Economy
Average Annual GDP Growth per capita, Neoliberal Period (1979 – 2008)
3.0%
2.5%

2.0%
1.5%
1.0%
0.5%
0.0%
1979 - 2008
France
Italy
Canada
Australia
Germany
Denmark
US
Belgium
Sweden
Japan
Austria
Netherlands
Spain
UK
Norway
40
The Argument in Brief
 US had three decades of growing
inequality, with huge income growth
to the top 1%.
 This income inequality generated a
rise of speculative financial activity.
 The result: A housing bubble and
economic crisis.
 We must move the political discussion
towards social market alternatives.
III. Housing Bubble and
Financial Crisis
Finance and the Collapse of the Neoliberal Growth Model
42
The Housing Skit:
Mortgage Lending in the 2000s
 Although the numbers in the skit are representative
of what happened, it is the practices and patterns
that I want to highlight.
 Mortgage lender made no actual risk assessment of
the loan - Why?
 Mortgage lender encouraged lying on the
application (extra $ from carpentry) – Why?
 Mortgage lender encouraged an interest-only ARM
mortgage to a weak credit – why?
43
The Housing Skit: What
Happened to the Mortgage?
 This was a subprime loan
 The ARM meant that the risk of changes in
interest rates was born by the borrower
 The borrower was highly leveraged at 50:1
 When the loan reset and housing prices dropped
the borrower could not meet the new payments
44
Mortgage Lending Practices Drove the
Housing Bubble and Leverage in the
Financial Sector
 No-doc loans increased the pool of borrowers.
 Selling of mortgages eliminated incentive to
assess ability of borrower to repay.
 Lender fraud further expanded borrower pool.
 High leverage increased default risk.
 My favorite, NINJA loans.
 Fed could have intervened but Federal Reserve
Chair Alan Greenspan opposed to regulation.
45
Mortgage Debt and Financial Sector Debt as a
Percent of GDP, 1978 - 2007
130%
90%
70%
50%
30%
10%
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
% of GDP
110%
Mortgage Debt/GDP Ratio
Financial Sector Debt/GDP
46
Debt and Wealth
 Wealth is the other side of debt.
 You owe me money – it is an asset (wealth) for me.
 Who had the money to lend?
 Securitized mortgages are both debt (for borrowers) and
wealth for lenders.
 Increase in household debt for most meant an increase in
wealth for a few.
 Financial sector converted this debt (securitized
mortgages) into wealth that the top 1% and large
financial institutions could own.
 Hedge funds and other investment vehicles of the top 1%
demanded more and more of these issuances.
 In turn, these positions were leveraged.
47
Finance Responds: Growth of
Subprime and Alt-A* Issuances, 2001–2006
$650
Billions $US
$550
$450
$350
$250
$150
$50
2001
2002
*Alt-A mortgages are riskier
than prime mortgages but
not as risky as subprime.
2003
Subprime
2004
Alt-A
2005
*
2006
48
The Argument in Brief
 US had three decades of growing
inequality, with huge income growth
to the top 1%.
 This income inequality generated a
rise of speculative financial activity.
 The result: A housing bubble and
economic crisis.
 We must move the political discussion
towards social market alternatives.
IV. Social Market Alternatives
50
On Being a Socialist
 “From each according to their ability, to each
according to their need” – socialist principle of
distributive justice
 One person, one vote – in the political economy
 Distributive justice: how the things that we value
should be allocated among members of a
society
 Contrast with how capitalist economies function:
one dollar, one vote in the economic market
place
51
Thinking about Reforms
“Reforms” (steps backward)
 Reforms
 Social Market Alternatives
(non-reformist reforms)
52
Let’s Start with Markets
 What happens in markets?
 Market exchanges are the buying and
selling of commodities.
 Markets are also the mechanism by
which the unequal distribution of wealth
and power are maintained and
reproduced.
53
Reforms and Markets
 Three kinds of reforms:
 The reform may strengthen or expand the role
of markets as the mechanism through which a
good or service is provided.
 The reform may constrain or provide incentives
to market participants to change behavior or
access to a good or service.
 The reform may remove the provision of some
good or service from the market, distributing it
through non-market means (usually some level
of government). These are social market
alternative policies.
54
Health Care: 1
 Voucher systems (e.g., GOP’s Paul Ryan’s
proposal) that would provide $$ to people so
they could “choose” their health care.
 What kind of reform is this – why?
 What is its appeal to many people?
 What would be the outcome in terms of the
scope of markets?
55
Health Care: 2
 Affordable Care Act (aka
“Obamacare”)
 What kind of reform is this?
 Why?
56
Health Care: 3
 Various proposals for/existing versions of
universal health care systems
 What kind of reform is this – why?
 How does it differ from the other two
proposals?
57
Outcomes of Health Care
Policy Choices - Cost
Health Care Expenditure as a % of GDP
20.00%
15.00%
10.00%
5.00%
0.00%
Outcomes of Health Care
Policy Choices –Life Expectancy
Years of Life
(2007 – 2009 data)
84
83
82
81
80
79
78
77
76
75
58
59
Education: 1
 Over the past several years for-profit colleges
have grown significantly.
 Vouchers have become a favorite tool of some.
 What is happening here in terms of the scope of
markets?
 The US public schools system (K-12)
 What is the relationship of this system to markets?
(How are most of our K-12 systems funded?)
60
Education: 2
In Finland, education through
college is funded through national
income tax and is free/low cost to
users.
What kind of reform would this be?
61
Educational Outcomes
PISA Science Score
560
550
540
530
520
510
500
490
480
470
U
S
PISA: Program for
International
Student Assessment
62
Reforming Finance: 1
 New Deal legislation restricted what different
types of financial institutions could do (GlassSteagall Act).
 New Deal also built upon the Federal Home Loan
Bank Act (1932) that used part of the financial
system – savings and loans – to provide
mortgage loans.
 What is the outcome in terms of the scope of
markets?
63
The World of
Glass-Steagall
64
Reforming Finance: 2
 Banks and banksters did not like these restrictions.
 Beginning in the 1980s a series of actions occurred
that:
 Removed interest rate ceilings on deposits and credit
cards
 Allowed S&Ls to enter new areas of business
 Expanded the capability for securitizing loans
 In 1999, Gramm-Leach-Bliley repealed Glass-Steagall’s
3-part division of finance
 What is the outcome in terms of the scope of
markets?
65
After Glass-Steagall Act’s
Repeal  “one-stop shopping”
CPEG Economic Crisis
Workshop - Barclay
65
66
Reforming Finance: 3
 North Dakota has a state bank (BND)
 All public monies in the state are deposited in BND
 BND works with community banks to increase credit
availability to home buyers/owners, small businesses
– and is the largest source of college loans for ND HS
grads
 BND does not compete for deposits – state funds are
primary source of deposits
 How does this differ from the standard
model? What kind of reform is it?
67
Reforming Finance: 4
 In the Basque Country of Spain there are a large
number of worker owned cooperative businesses
– Mondragon Cooperative.
 To meet their credit needs, the Mondragon
Coops established a central bank.
 Mandate is to serve the needs of the more120
worker owned coops
 What is the outcome in terms of the scope of
markets?
68
The Market for Labor: 1
 How do we reduce unemployment?
 One argument is the maximize labor market
“flexibility.”
 What does this mean?
 In terms of who is responsible for solving the
unemployment problem?
 In terms of businesses ability to hire and fire?
 In terms of collective voice/action by employees?
 What is the role of markets in this reform?
69
The Market for Labor: 2
 A large part of the American
Recovery and Reinvestment Act (aka
“stimulus”) was tax breaks and/or
incentives for business to hire workers.
 What kind of reform is this in terms of
the scope of markets?
70
The Market for Labor: 3
 CPEG jobs program – goal: a job for anyone
willing and able to work.
 Create 4.5 million new jobs/yr for five years
 Most of those jobs would be hires in the public sector
 Would pay a living wage ($18/hr)
 Included training for youth entering the labor force
 What kind of reform would this be in terms of the
scope of markets?
Employment Protection* and Gini Index,71
OECD Countries
Level of Employment Protection
3.5
US = .45
Canada = .32
UK = .34
3
N. Zealand = .36
Australia = .30
2.5
Japan = .38
Switzerland = .34
Denmark = .24
2
Sweden = .23
Iceland = .25
1.5
U
S
1
Netherlands = .31
Finland = .26
Austria = .26
Italy = .33
Germany = .28
4
0.55
Norway = .28
Greece = .33
France = .28
0
Spain = .32
*Employment protection – high score is more job security for workers: (i)
protection of permanent workers against dismissal; (ii) regulation of
temporary forms of employment; and (iii)specific requirements for collective
dismissal
72
Principles of Neoliberal
Capitalist Ideology
 Markets are the fundamental mechanism for societies.
 Markets maximize efficiency.
 Government intervention is always second best.
 Therefore: Expand scope of markets. (This is called
“deregulation.”)
 Therefore: Reduce size of government (cut spending for
social goods).
 Markets maximize individual freedom,
 Therefore: Favor choices made by individuals over collective
action (individualism).
 Therefore: Promote globalization (“free trade”).
73
Outcomes of Neoliberal
Policies
 Commodification (privatization) of services
 Reduced public sector and thus public employment
 Declining percent of labor force in unions/covered by
collective bargaining
 The free development of each individual lies in the
hands of the individual and is achieved by freeing
oneself from the constraints of the collective
All of which leads to
 Growing Economic and Social Inequality
Percent of Population with Incomes Less
Than 50% of the Median (2007/2008)
1 in 6 workers in
the US earn less
than half the
median income.
25

% of Population
74
20
15
In Denmark, only
1 in 16 workers
earn less than half
the median
income.
10
5
0
Denm ark
Austria
Netherlands
France
Norw ay
Finland
Sw eden
Sw itzerland
Germ any
Belgium
Ireland
Poland
New Zealand
OECD
United Kingdom
Canada
Italy
Greece
Portugal
Spain
Australia
Korea
Japan
United States
Israel
Mexico
75
Principles underlying Social
Market Alternative Policies
 Humans exist prior to and outside of markets.
 Markets tend to concentrate income and wealth.
 Therefore: The aggregate structure of demand is skewed in
favor of the consumption desires of a small portion of the
population.
 Thus market outcomes are neither distributionally optimal nor
morally good
 Therefore: Reduce the role of the market for production of
shared goods and services (de-commodification).
 Therefore: Favor choices made by collectivities via the state,
workplace associations and other groups.
 Increase the role of the state as a mechanism for providing
shared goods and services.
76
Outcomes of Social Market
Policies
 Socialized provision of shared goods and services
 A larger public sector
 Greater portion of labor force covered by
collective bargaining agreements
 More women in government
 The free development of each is bound together
with the free development of all
All of which leads to:
 Greater Economic and Social Equality
Social Spending* % of GDP and
Gini Index, OECD Countries
35
77
US = .45
Canada = .32
Iceland = .25
Public Sector % GDP
30
Australia = .30
N. Zealand = .36
Japan = .38
25
U
S
20
Greece = .33
Netherlands = .31
Spain = .32
UK = .34
15
10
Switzerland = .34
Norway = .28
4
5
Italy = .33
Finland = .26
Germany = .28
Denmark = .24
5
Austria = .26
France = .28
Sweden = .23
0
OECD Total
*Pensions, working age income support, health care and other
78
Summary
 US had three decades of growing
inequality, with huge income growth
to the top 1%.
 This income inequality generated a
rise of speculative financial activity.
 The result: A housing bubble and
economic crisis.
 We must move the political discussion
towards social market alternatives.
79
Some Suggestions for
Reading
 Kevin Phillips - Bad Money: Reckless Finance, Failed Politics,
and the Global Crisis of American Capitalism
 Mark Zandi – Financial Shock: A 360º Look at the Subprime
Mortgage Implosion
 Michael Hudson - The Monster: How a Gang of Predatory
Lenders and Wall Street Bankers Fleeced America and
Spawned a Global Crisis
 Bill Barclay, “The Financial Crisis: Roots and Remedies,”
Democratic Left, Fall 2008
 CPEG: “A Permanent Jobs Program for the U.S.: Economic
Restructuring to Meet Human Needs” at
http://www.cpegonline.org/reports/jobs.pdf.