Transcript U.S. Capitalism in Crisis - Democratic Socialists of America – Boston

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US Capitalism in Crisis
And Social Market Alternatives
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What are the common
explanations you hear for…
Why people don’t have jobs?
Why there was a housing price bubble
and foreclosures?
Why there was a financial crisis?
Why there is so much government
debt?
These new [financial] technologies lay
off all the risk of highly leveraged
institutions on stable American and
international institutions.
- Alan Greenspan
Ronald Reagan
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Robert Rubin
All the evils, abuses, and inequities, popularly
ascribed to businessmen and to capitalism
were not caused by an unregulated economy of
by a free market, but by government
intervention into the economy.
--Ayn Rand
CPEG Economic Crisis
Workshop - Barclay
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Occupy?
What was the issue that Occupy Wall
Street raised?
What did you hear about it in this
election?
It’s Time to Talk About
Inequality!
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Part I: Class Redistribution of Income
The Underlying Cause of Financial
Crisis and Economic Stagnation
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Why did inequality increase?
The Neoliberal Explanation
Neoliberals (conservatives) like to talk about
“skill gaps” and need for more education.
 Often called “skill-biased technological change”
(SBTC).
 Thus, increased inequality is explained as mismatch
between workers’ skills and the skills demanded by
the jobs available.
% of Total Household Income
A Neoliberal Picture of Inequality:
Top 10% Income Share, 1950-2008
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55
50
45
Top 10% Income
Share
40
35
30
25
05
20
00
20
95
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90
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85
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80
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75
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70
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65
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The Real Story:
Income Gains in the Top 10%, 1950-2007
Perenct of Total Income
25
22.5
20
Growing
together
Growing
apart
17.5
15
12.5
Top 1% Income
Share
Next 4%
Next 5%
10
7.5
5
06
20
02
20
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Threshold for a
top 1% income
in 2007 was
about $350,000.
If the neoliberal argument is
wrong, what does explain
increased inequality?
Three Factors:
Decline of unionization
Inequality as social policy: minimum wage
and employment security
Corporate model of globalization
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As Unionization Has Declined, Income
Concentration at the Top Has Increased
30.00%
25.00%
20.00%
15.00%
10.00%
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5.00%
Union Members as a % of US Working Population
Income Share Top 1%
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Inequality as Social Policy:
Minimum Wage
 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.
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Inequality as Social Policy:
Employment (In)security
Decline of unionization has made jobs less
secure.
US employment is ”at will.”
 Employer can fire a worker for good cause, bad cause –
or not cause.
Think about what this job insecurity means for
bargaining for higher wages or asserting
control over the workplace.
Why did inequality increase?
Globalization as a 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.
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US Inequality Has Grown Much More
than in Other Rich Countries
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25%
20%
Top 1%
Income Share
US
France
Japan
Sweden
UK
Italy
15%
10%
5%
0%
1975
1990
Mid-2000s
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The Corporate Model of
Globalization
 Protects copyrights and patents.
 Gives owners of finance and technology
maximum international mobility.
 Prohibits efforts to control mobility of capital.
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Results of Corporate Model
of Globalization
Offshoring of manufacturing jobs = job loss
Imports of offshored production = trade
deficit
Consumer buying of imports =
credit/borrowing
GE’s Jack Welch: “Ideally you’d have every
factory you own on a barge.”
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The First Big Question
How much more income was
going to the Top 1% by 2000?
The answer: $1,000,000,000,000
(one trillion dollars) – every year.
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“Elevator Speech”: Causes
of Increased Inequality
Elevator speeches should be:
 Short (2–3 minutes)
 Develop an argument
 Use evidence
Let’s construct our elevator speech
on inequality
 What will be our main points?
 What evidence will we use?
Part II: Job Creation or Financial
Speculation?
The Second Big Question
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The Neoliberal Argument
Economic growth is driven by the actions of
very small group of “job creators.”
 Job creators must have sufficient money to invest, to
take risks and create jobs. They have.
 Job creators must be assured of keeping a
significant portion of their profits.
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The Tax Burden Was Shifted –
Downward
 The top personal income tax rate declined sharply.
 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 $3.0 million.
 Income from capital is taxed at lower rates than
income from labor.
 Corporations have evaded/avoided/scammed the
corporate income tax.
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Million-$-income families increased their share of total
income 7-fold while their tax rate was cut in half.
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Credit: Cartoon Group
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The conditions that neoliberal policies
and politicians say are necessary for
job creation have been fulfilled.
What, then has been the result for job
creation?
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Unemployment
Has Been Higher
Period
1945-1975
# of months
# months with unemployment under 4%
360 months
75 months (21%)
420 months
5 months (1%)
(“Golden Age”)
1976-2011
(“Neoliberal Era”)
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Recovery from Recessions
Has Been Slower
Period
Months to reach pre-recession
# of jobs
1945 – 1980
9 months (average)
1980 - 2007
more than 30 months
2007 - ??
40 months (and counting)
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So, what did the top 1% do
with their extra $1 trillion?
The top 1% have been labeled “job
creators.”
But, we’ve seen that the increased income
grabbed by the top 1% did not generate
better job growth.
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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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What else have they done
with the money?
Trying to buy elections ($1-2 billion is
small change)
Financial speculation – creating a
bubble economy
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The Bubble Economy
oil
Commodity speculation – especially oil
 Where the Koch brothers made most of their
money
Dotcom stock bubble
 Burst in 2000/01
Housing price bubble
gold
Housing
Dot
Com
 The source of the financial crisis because of the
role of debt
All of these bubbles fed the growth of finance
rather than growth in the real economy.
The Real vs. the Financial Economy 33
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
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20
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06
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05
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02
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01
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98
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Activity in the Financial Economy has grown many times faster than
production in the Real Economy
Was the neoliberal growth model
successful?
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Average Annual GDP Growth per Capita
2.5
2
U
S
1.5
1
0.5
0
1979- 2010
Italy
France
Canada
Denmark
Germany
US
Belgium
Sweden
Netherlands
Austria
Australia
UK
Spain
Japan
Finland
Norway
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“Elevator Speech”: Job
Creation
Why we [don’t] need to provide
higher income and lower tax rates
for the “job creators.”
Part III: Bubble, Bubble, Toil and Trouble
The Housing Bubble and Financial Collapse
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The Housing Bubble and Collapse:
The Neoliberal Explanation
Mortgage lenders were forced to make risky
loans because:
 Of the Community Reinvestment Act (CRA)
 Government (Fannie May and Freddie Mac)
pushed risky subprime loans that crashed the
economy.
Therefore, let the foreclosure proceed and
prices will eventually recover.
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Understanding the Housing
Bubble: What Happened?
Let’s think about the skit.
What were the key events/decisions?
Who made them?
The Buying a House Skit:
What Happened – Lending, Debt
and Foreclosure
 2005: Housing borrower is pushed to take out a
risky loan.
 2007: House prices fall. Leverage destroys their
equity and pushes them underwater.
 Bank lending used to be a simple business with
one crucial decision: can the borrower repay
the loan?
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Mortgage Lending Practices
Drove the Housing Bubble and
Leverage in the Financial Sector: I
Selling of mortgages (“securitization”)
eliminated incentive to assess ability of
borrower to repay
 Can we sell the loan?
No-doc loans increased the pool of
borrowers Selling of mortgages.
Lender fraud further expanded borrower
pool.
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Mortgage Lending Practices Drove
the Housing Bubble and Leverage
in the Financial Sector: II
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High leverage increased default risk.
Minority borrowers were targeted for subprime
loans.
Federal Reserve could have intervened, but
Fed Chair Greenspan opposed to regulation.
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Why did lenders push
subprime loans?
$300,000 mortgage loan:
 If conforming (“prime”), Countrywide would have a
profit of $2,790; if subprime, the profit would be
$10,920.
 If conforming, the individual mortgage broker’s
commission would be $4,440; if subprime, the
commission would be $5,640.
 More than half of subprime borrowers actually
qualified for conforming mortgage loans.
 Any questions?
Making Subprime Loans
Attractive: How Financial
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Deregulation Changed Mortgage
Lending Practices
Mortgage lending used to be “originate and
hold.”
Neoliberal financial deregulation made
“originate and distribute” model more
attractive.
The key regulatory changes can be tracked
by looking at financial sector profits.
Financial Sector Profits as a Percent44
of Total Profits, 1980-2004
S
50%
40%
35%
30%
25%
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15%
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% of Profits
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v
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a
g
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Finance Sector % of Total Profits
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Financial SuperMall: One Stop Shopping
CPEG Economic Crisis
Workshop - Barclay
45
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Mortgage Debt and Financial Sector
Debt as a Percent of GDP, 1978-2007
130%
90%
70%
50%
30%
10%
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00
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02
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06
% of GDP
110%
Mortgage Debt/GDP Ratio
Financial Sector Debt/GDP
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The Housing Bubble and Collapse:
The Neoliberal Explanation
Mortgage lenders were forced to make risky
loans because:
 Of the Community Reinvestment Act (CRA).
 Government (Fannie May and Freddie Mac)
pushed risky subprime loans that crashed the
economy.
Therefore let the foreclosure proceed and
prices will eventually recover.
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Did the CRA force mortgage
lenders to make risky loans?
Over 75% of subprime mortgage loans
were made by financial sector businesses
NOT subject to the Community
Reinvestment Act requirements.
FHA, Fannie and Freddie lost market share to
private sector lenders, e.g. Bank of America,
Wells Fargo, Washington Mutual, etc.
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Did Fannie and Freddie lead
the way into subprimes?
How can we test this neoliberal claim?
Let’s compare how mortgage securities issued
by Fannie and Freddie performed vs. those
issued by Goldman, Bank of America, Wells
Fargo, etc. (“private label”).
 Which were more likely to default?
% 90 days or More Delinquent
Risk: Default Rates on Mortgage
Originations: GSEs* vs. Private Label Firms*
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2002
2003
2004
2005
Private Label
2006
2007
2008
GSEs
*GSEs are Fannie May and Freddie Mac; “private label” are Bank of
America, Wells Fargo, JPMorgan Chase, etc.
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The Financial Panic of 2008
 Bear Stearns collapses March 2008
 Merrill Lynch on verge of collapse – acquired by Bank of
America Sept. 14, 2008
 Lehman Brothers goes bankrupt Sept. 15, 2008
 Fed rescues AIG Sept. 16, 2008
 Washington Mutual seized by FDIC Sept. 25, 2008
If you owned financial assets – stocks, bonds
– you were really scared.
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Wealth and the Bailout
Our inequality skit demonstrated a huge
income redistribution.
Wealth is the other half of economic well
being.
Two major kinds of wealth in US:
 Housing wealth
 Financial wealth
How important is each to the 1% and the
99%?
Two Types of Wealth by Level of
Family Wealth, 2007
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80.0%
70.0%
60.0%
50.0%
Top 1%
Next 4%
Next 5%
Bottom 90%
40.0%
30.0%
20.0%
10.0%
0.0%
Financial and
Business % of Total
Wealth
Housing % Total
Wealth
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In the Bush/Paulson Bailout
Whose wealth was saved -- and
whose was sacrificed?
Who was rescued by the
Bush/Paulson bailout?
Financial Sector
 Sept. 2008 Treas. Sec.
Paulson asked Congress
for $770 billion to rescue
banks, AIG, etc.
 Fed made record
amount of loans – as
much as $180billion/day
to big banks (Goldman,
CitiGroup, JP Morgan,
Bank of America, Morgan
Stanley).
Non-Financial Sector
 Obama provided $84
billion to GM and
Chrysler.
 GM and Chrysler go
through bankruptcy.
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Case-Shiller House Price Index
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Housing Wealth Has Not Recovered
220
210
200
190
180
170
160
150
140
130
120
110
100
Housing Index
The Devastation Wreaked by the
Great Recession: Loss of Wealth
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(median wealth per family)
$140,000
$120,000
$100,000
$80,000
White
African-American
Hispanic
$60,000
$40,000
$20,000
$0
2005
2009
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The Stock Market Has Recovered
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Wealth Inequality has Grown
250
Ratio
200
150
100
50
1962 1983 1989 1992 1995 1998 2001 2004 2007 2009
Top 1% Wealth/Median Household Wealth
Financial Sector Compensation Was (and Still
Is) Divorced from Economic Contribution
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“Elevator Speech”: Housing
Collapse
Who and what caused the housing
bubble and collapse?
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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.
Part IV: Changing the Political
Conversation
Social Market Alternatives
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What happens in markets?
Market exchanges are the buying and selling
of commodities.
Private markets maintain the unequal
distribution of wealth and power.
 I own land, you don’t. You work for me.
 You own Facebook, I’m a programmer. I work
for you.
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Private Markets vs.
Social Markets
Social market policies are designed to
counter the unequal wealth and power
created by private markets.
Social markets are ones that are controlled
by democratic decision making.
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Three Kinds of Social Policy
 A policy may strengthen or expand the role of
private markets as the mechanism through which a
good or service is provided.
 A policy may constrain or provide incentives to
private market participants to change behavior or
access to a good or service.
 A policy may remove the provision of some good or
service from the private market, distributing it
through the social market (usually some level of
government). These are social market alternative
policies.
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The Market for Labor: 1
 How do we create jobs?
 One policy says we must maximize labor market
“flexibility.”
 What does this mean?
 In terms of businesses ability to hire and fire?
 In terms of collective voice/action by employees?
 In terms of who is responsible for solving the unemployment
problem?
 What is the role of private markets in this policy?
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The Market for Labor: 2
 In early 2009 Obama proposed and Congress
passed the American Recovery and
Reinvestment Act (aka “stimulus”).
 It included tax breaks and/or incentives for business to
hire workers.
 What kind of policy is this in terms of the role of
private markets?
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The Market for Labor: 3
CPEG jobs program: 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 direct hires in the public
sector.
 Would pay a living wage ($18/hr).
 Included training and a training level for youth
entering the labor force.
 Include training to being provide skills to workers who
may not usually hold these jobs (e.g., women in
construction).
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The Market for Labor: 4
 Three targeted areas for employment:
 Physical infrastructure (highways, bridges, schools, etc.)
 Social infrastructure (CNAs, caring for very young and very
old, teacher aids, etc)
 Green economy (manufacturing/services with higher
labor content)
 What kind of policy would this be in terms of
the role of markets?
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Thinking about a Jobs
Program at the City Level
DC unemployment is greater that or equal to
the national average.
 DC has a large square footage of public buildings.
 An energy retrofit program would create a
significant number of jobs.
 Could be financed by municipal bond issuance.
 Pay off is less than 5 years.
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Job Security *and Gini Index, 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
U
S
1.5
1
Netherlands = .31
Finland = .26
Austria = .26
Italy = .33
4
5
0.5
Germany = .28
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
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The “Market” for Education: 1
 Groups such as “Stand for Children,” “Children First”
are trying to turn education into a good that you buy.
 This is done in the name of “choice,” similar to your choice of
TV or toothpaste.
 Vouchers are often the tool by which such choice is
to be exercised.
 How are vouchers financed?
 What is happening to public money here?
 What kind of policy is this in terms of the role of private
markets?
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The “Market” for Education: 2
The US public schools system (K-12)
What is the relationship between private
markets and our K-12 educational system?
(How are most of our K-12 systems funded?)
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Removing Education from
the Market
In Finland, education through college is:
Funded through national income tax
Free/low cost to users
What kind of reform would this be in terms of
the role of markets?
Educational Spending as a Percent
of GDP, Total and by Type
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More Spending = Better Outcomes?
Well, not really.
PISA Science Score
F
i
n
.
560
550
540
530
520
510
500
490
480
470
U
S
PISA: Program for International Student Assessment; PISA is given to all
students (at age 15) in country willing to participate.
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Housing: The Market
for Shelter
 2012: 12 million underwater mortgage borrowers.
 Neoliberal policy: Romney: "Don’t try to stop the
foreclosure process. Let it run its course and hit the
bottom.”
 But what if the mortgage lenders engaged in
fraudulent and/or reckless lending practices?
 FDR’s Second Bill of Rights included “The right of
every family to a decent home.”
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Foreclosure Policies to Date
 Foreclosure relief programs – very
limited success.
 Home Affordable Modification Program (HAMP) has
reached about 1.2 million vs. 12 million underwater
borrowers.
 “Hardest Hit Fund” has paid out less than 5% of the
money allocated for unemployed home owners.
 Programs use tax incentives and subsides to
change the behavior of mortgage lenders.
 What is the role of private markets in this
approach?
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We’ve Been Here Before
 1933 FDR/Congress created the
Home Owners Loan Corporation (HOLC).
 HOLC issued tax-exempt debt.
 The debt was swapped for mortgages.
 This debt was guaranteed by the federal government.
 HOLC independently appraised the houses and
issued 30 yr, fixed rate mortgages tied to the house
value.
 This kept many people in their homes.
 HOLC rehabbed foreclosures + rented the houses.
 HOLC ended with a small profit for taxpayers.
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Could we do HOLC II?
The number of underwater home owners is
larger.
The total “underwater” amount is about $700
billion (does this number sound familiar?).
But – 2/3 of underwater mortgage borrowers
are current in their payments.
The borrowing costs for a federally
guaranteed entity are very low.
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Who would be eligible?
 Debt for mortgage swap for any mortgage
borrower with 10% or more negative equity.
 Any household with a long term unemployed
individual would also be eligible.
 Any mortgages tendered under the program that
are not fixed rate mortgages would be
converted into the same.
 HOLC II would also operate a rent-to-own
program for borrowers who could not meet the
terms of the new mortgage.
Part V: A Summing Up
Neoliberal Stagnation or Progressive Prosperity?
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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”).
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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 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)
% of Population
25
20
15
10
D
e
n
m
a
r
k
1 in 6 workers in
the US earn less
than half the
median income.
U
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C
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86
A
v
g
.
In Denmark, only
1 in 16 workers
earn less than half
the median
income.
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
87
Principles underlying Social
Market Alternative Policies
 Humans existed before markets.
 Markets tend to concentrate income and wealth.
 Therefore: A small portion of the population can distort what is
available to the rest of us.
 Thus market outcomes are neither efficient 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 , social market
decisions - that are implemented via the state, workplace
associations and other groups.
 Increase the role of the state as a mechanism for providing
shared goods and services.
88
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
89
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
Part VI: Conclusion
Inequality and the Quality of Our Lives
91
Inequality and the Fraying
of Social Bonds
Economic costs are only part of the curse
of inequality.
Equally important – and inextricably
intertwined – are the costs to the ties that
link us to one another.
More unequal societies are less trusting.
Do you think that, in general, most people
can be trusted?
92
Social Trust and Economic Inequality
Social Trust and Inequality
Trust Score
65.00%
55.00%
45.00%
35.00%
25.00%
U
S
Denmark .24
Sweden .23
Norway .28
Netherlands .31
N. Zealand .36
Japan .38
Germany .28
Australia .30
Canada .32
US .45
UK .34
93
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.