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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 • • • • • 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 • • • • • • • • 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