What Is To Be Done

1. 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.

8. 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%.

11. Growing Inequality: Top 10% Income Share, 1950 - 2008 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 Growing apart 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.

14. US Inequality Has Grown Much More than in Other Rich Countries

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) 41.4% 55.7% *Capital income includes capital gains, dividends, stock options, and interest. Fitzgerald: The rich are different from us. Hemingway: Yes, they have more money. But where they get their money from is different.

18. Who Is in the Top 0.1% of Income?(Analysis of 2004 tax returns)

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

21. Collective Bargaining Coverage* and Gini Index, Various Countries US * 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 US

26. 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.

27. 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 unemploymentunder 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.

32. 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

34. The Real vs. the Financial Economy – or What the Top 1% did with Their Money 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.

36. Financial Sector Profits as a Percent of Total Profits (1980 – 2004) Leverage securitization CDS GLB ARMs

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) 

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.

41. 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

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 *Alt-A mortgages are riskier than prime mortgages but not as risky as subprime. *

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.

49. 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