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1 US Capitalism in Crisis And Social Market Alternatives 3 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 4 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 4 5 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! 6 Part I: Class Redistribution of Income The Underlying Cause of Financial Crisis and Economic Stagnation 8 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 9 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 10 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 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. 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 11 12 As Unionization Has Declined, Income Concentration at the Top Has 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% 13 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. 14 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. 15 US Inequality Has Grown Much More than in Other Rich Countries 16 25% 20% Top 1% Income Share US France Japan Sweden UK Italy 15% 10% 5% 0% 1975 1990 Mid-2000s 17 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. 18 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.” 19 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. 20 “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 22 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. 23 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 $3.0 million. Income from capital is taxed at lower rates than income from labor. Corporations have evaded/avoided/scammed the corporate income tax. 24 Million-$-income families increased their share of total income 7-fold while their tax rate was cut in half. 25 Credit: Cartoon Group 26 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? 27 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”) 28 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) 29 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. 30 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. 31 What else have they done with the money? Trying to buy elections ($1-2 billion is small change) Financial speculation – creating a bubble economy 32 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 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 Was the neoliberal growth model successful? 34 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 35 “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 37 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. 38 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? 39 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. 40 Mortgage Lending Practices Drove the Housing Bubble and Leverage in the Financial Sector: II 41 High leverage increased default risk. Minority borrowers were targeted for subprime loans. Federal Reserve could have intervened, but Fed Chair Greenspan opposed to regulation. 42 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 43 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% A R M s C D s G L B J P M o r g a n 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% 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 45 Financial SuperMall: One Stop Shopping CPEG Economic Crisis Workshop - Barclay 45 46 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 47 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. 48 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. 49 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. 50 51 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. 52 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 53 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 54 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. 55 Ja n00 Ja n01 Ja n02 Ja n03 Ja n04 Ja n05 Ja n06 Ja n07 Ja n08 Ja n09 Ja n10 Ja n1 Ja 1 n12 Case-Shiller House Price Index 56 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 57 (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 58 The Stock Market Has Recovered 59 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 60 61 “Elevator Speech”: Housing Collapse Who and what caused the housing bubble and collapse? 62 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 64 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. 65 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. 66 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. 67 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? 68 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? 69 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). 70 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? 71 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. 72 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 73 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? 74 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?) 75 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 76 10% F i n l a n d U S 5% 0% y an m Private, % GDP er G lia ra d Public, % GDP n pa t us K Ja A U d n la er itz Sw d ce an nl Fi an Fr da ce a an n la en ea an Fr C .Z S ed Sw N U Total, % GDP 77 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. 78 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.” 79 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? 80 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. 81 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. 82 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? 84 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”). 85 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 O E C D A v g . 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 S 25 86 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.