The GFC, the Great Recession and three structural changes in the US economy

[Rajiv]

The GFC, the Great Recession and three structural changes in the US economy

from Edward Fullbrook
In recent publications three different but related structural changes in the US economy have been identified as primary causes of the Global Financial Collapse and the Great Recession.

In their book The End of Influence, Brad Delong and Stephen Cohen emphasize the importance of the shift from manufacturing to financial services. They write:

the United States has half-consciously re-shaped its economy. The country shifted some 7 percent of its GDP out of manufacturing and added some 7 percent of GDP in the expansion of finance, insurance, and real estate transactions. . . . The communities of engineering practice and innovative technological development do move and emerge elsewhere as you shift labor from real engineering . . . into financial engineering . . . . It also means that you must create more and more debt so that other nations have the dollars to accumulate and not balance their trade—and yours.

In his recent paper in Real-World Economics Review “The triumph – and costs – of greed” Clive Dilnot identifies the change in “the modes of accumulation pursued across the banking industries” including “counter-productive incentive structures” and “structures of irresponsibility” as a primary causal factor. [emphasis added] His paper

looks at the structure of accumulation that developed on Wall St and in the City and it analyses the problems of the operative logic of this ‘temporary growth regime’ and its costs and consequences—cognitive one might add, and moral, as well as economic. In particular it tries to look at this (disastrous) mode of accumulation not in terms of universal ‘laws’ but in terms of forces, of the dynamics of accumulation, coming out of and responding to particular economic and political conditions and resulting in a ‘growth regime’ that is un-precedented in certain of its features and by no means understood, even by its principal actors (and let alone by economists).

Dilnot concludes:

The real problem therefore is . . . our effective shift into a mainstream economy dominated by models of wealth extraction and not wealth-creation and characterized by the pursuit of modes of accumulation focused on dispossession, diversion and extraction.

Last night’s post on this blog by Dean Baker identifies a third structural cause: the program of upward redistribution of income and wealth begun under President Regan. Baker begins: “The roots of this economic crisis are very much centered in the growth in inequality over the past three decades.” He goes on to argue as follows.

In the three decades after World War II, there were no notable bubbles in the economy. Productivity growth translated into wage growth, which in turn led to more consumption. The increased demand led to more investment, productivity growth and wage growth.

This virtuous circle was broken by Reagan-era policies intended to weaken the power of ordinary workers. Wages no longer kept pace with productivity growth, eliminating the automatic link between productivity growth and demand growth. This led to excess capacity in the economy, which was filled in the 1990s with demand generated by the stock bubble and in the 2000s with demand generated by the housing bubble.

I accept all three of these structural changes:

• the shift from manufacturing to financial services,
• the change in the modes of accumulation pursued across the banking industries, and
• the upward redistribution of income and wealth,

as being of primary explanatory importance for the GFC and the GR. But their mutual and obviouisly interdependent existences argue that a larger story of the calamitous effects of structural change in the US and other economies urgently needs to be told.

The Dilnot paper, as well as Dean Baker's article linked above should also be read

Stephen Cohen - What Happens When Other Countries Have the Money

Conversations host Harry Kreisler welcomes Professor Stephen S. Cohen for a discussion of the new book he has written with Professor Brad Delong entitled The End of Influence. Professor Cohen argues that the 2008 economic collapse demonstrates the failure both domestically and internationally of neo-liberal economic policies embraced by both democrats and republicans during the last three decades.

Three videos that show the increasing disparities of wealth, and the impact they have.

[flintlock]

Re: The GFC, the Great Recession and three structural changes in the US economy

Income inequality has been the norm since the beginning of mankind. You always had the peasants and then you had the elite. ( Not saying I approve of this!). This applied to almost the entire world. So the period in America between WWII and 1980 should be seen as an anomaly, not the norm. I think the US had a unique sense of fairness/ethics/integrity towards it's people during that time that allowed it to thrive. It's leaders wanted the US worker to thrive. That situation obviously no longer exists.

It's all about good paying jobs. When the US made the choice to go into the unrestrained global economy, it entered into a battle that the PEOPLE of the US could not win. Whether or not it had a choice to do this is another debate. Anyone with any foresight could see this would not be good in the long run for the individual American worker. Any time you have a situation where foreign workers make cents on the dollar compared to an American, it can't end any other way than bad for the US worker.

Throw in a very liberal welfare system that encouraged the most uneducated and unproductive class to swell, and you have the recipe for the income inequality described in that video.

[cjppjc]

Re: The GFC, the Great Recession and three structural changes in the US economy

Income inequality has been the norm since the beginning of mankind. You always had the peasants and then you had the elite.

Yes it's true. Nothing changes with man, only the outward form appears different.

[Rajiv]

Re: The GFC, the Great Recession and three structural changes in the US economy

Here was Robert Reich's missive on a similar topic - The Root of Economic Fragility and Political Anger

Missing from almost all discussion of America’s dizzying rate of unemployment is the brute fact that hourly wages of people with jobs have been dropping, adjusted for inflation. Average weekly earnings rose a bit this spring only because the typical worker put in more hours, but June’s decline in average hours pushed weekly paychecks down at an annualized rate of 4.5 percent.

In other words, Americans are keeping their jobs or finding new ones only by accepting lower wages.

Meanwhile, a much smaller group of Americans’ earnings are back in the stratosphere: Wall Street traders and executives, hedge-fund and private-equity fund managers, and top corporate executives. As hiring has picked up on the Street, fat salaries are reappearing. Richard Stein, president of Global Sage, an executive search firm, tells the New York Times corporate clients have offered compensation packages of more than $1 million annually to a dozen candidates in just the last few weeks.

We’re back to the same ominous trend as before the Great Recession: a larger and larger share of total income going to the very top while the vast middle class continues to lose ground.

And as long as this trend continues, we can’t get out of the shadow of the Great Recession. When most of the gains from economic growth go to a small sliver of Americans at the top, the rest don’t have enough purchasing power to buy what the economy is capable of producing.

America’s median wage, adjusted for inflation, has barely budged for decades. Between 2000 and 2007 it actually dropped. Under these circumstances the only way the middle class could boost its purchasing power was to borrow, as it did with gusto. As housing prices rose, Americans turned their homes into ATMs. But such borrowing has its limits. When the debt bubble finally burst, vast numbers of people couldn’t pay their bills, and banks couldn’t collect.

Each of America’s two biggest economic downturns over the last century has followed the same pattern. Consider: in 1928 the richest 1 percent of Americans received 23.9 percent of the nation’s total income. After that, the share going to the richest 1 percent steadily declined. New Deal reforms, followed by World War II, the GI Bill and the Great Society expanded the circle of prosperity. By the late 1970s the top 1 percent raked in only 8 to 9 percent of America’s total annual income. But after that, inequality began to widen again, and income reconcentrated at the top. By 2007 the richest 1 percent were back to where they were in 1928—with 23.5 percent of the total.

We all know what happened in the years immediately following these twin peaks—in 1929 and 2008.

Yes, China, Germany and Japan have contributed to America’s demand-side problem by failing to buy as much from us as we buy from them. But to believe that our continuing economic crisis stems mainly from the trade imbalance—we buy too much and save too little, while they do the reverse—is to miss the biggest imbalance of all. The problem isn’t that typical Americans have spent beyond their means. It’s that their means haven’t kept up with what the growing economy could and should have been able to provide them.

A second parallel links 1929 with 2008: when earnings accumulate at the top, people at the top invest their wealth in whatever assets seem most likely to attract other big investors. This causes the prices of certain assets—commodities, stocks, dot-coms or real estate—to become wildly inflated. Such speculative bubbles eventually burst, leaving behind mountains of near-worthless collateral.

The crash of 2008 didn’t turn into another Great Depression because the government learned the importance of flooding the market with cash, thereby temporarily rescuing some stranded consumers and most big bankers. But the financial rescue didn’t change the economy’s underlying structure — median wages dropping while those at the top are raking in the lion’s share of income.

That’s why America’s middle class still doesn’t have the purchasing power it needs to reboot the economy, and why the so-called recovery will be so tepid—maybe even leading to a double dip. It’s also why America will be vulnerable to even larger speculative booms and deeper busts in the years to come.

The structural problem began in the late 1970s when a wave of new technologies (air cargo, container ships and terminals, satellite communications and, later, the Internet) radically reduced the costs of outsourcing jobs abroad. Other new technologies (automated machinery, computers and ever more sophisticated software applications) took over many other jobs (remember bank tellers? telephone operators? service station attendants?). By the ’80s, any job requiring that the same steps be performed repeatedly was disappearing—going over there or into software. Meanwhile, as the pay of most workers flattened or dropped, the pay of well-connected graduates of prestigious colleges and MBA programs—the so-called “talent” who reached the pinnacles of power in executive suites and on Wall Street—soared.

The puzzle is why so little was done to counteract these forces. Government could have given employees more bargaining power to get higher wages, especially in industries sheltered from global competition and requiring personal service: big-box retail stores, restaurants and hotel chains, and child- and eldercare, for instance. Safety nets could have been enlarged to compensate for increasing anxieties about job loss: unemployment insurance covering part-time work, wage insurance if pay drops, transition assistance to move to new jobs in new locations, insurance for communities that lose a major employer so they can lure other employers. With the gains from economic growth the nation could have provided Medicare for all, better schools, early childhood education, more affordable public universities, more extensive public transportation. And if more money was needed, taxes could have been raised on the rich.

Big, profitable companies could have been barred from laying off a large number of workers all at once, and could have been required to pay severance—say, a year of wages—to anyone they let go. Corporations whose research was subsidized by taxpayers could have been required to create jobs in the United States. The minimum wage could have been linked to inflation. And America’s trading partners could have been pushed to establish minimum wages pegged to half their countries’ median wages—thereby ensuring that all citizens shared in gains from trade and creating a new global middle class that would buy more of our exports.

But starting in the late 1970s, and with increasing fervor over the next three decades, government did just the opposite. It deregulated and privatized. It increased the cost of public higher education and cut public transportation. It shredded safety nets. It halved the top income tax rate from the range of 70–90 percent that prevailed during the 1950s and ’60s to 28–40 percent; it allowed many of the nation’s rich to treat their income as capital gains subject to no more than 15 percent tax and escape inheritance taxes altogether. At the same time, America boosted sales and payroll taxes, both of which have taken a bigger chunk out of the pay of the middle class and the poor than of the well-off.

Companies were allowed to slash jobs and wages, cut benefits and shift risks to employees (from you-can-count-on-it pensions to do-it-yourself 401(k)s, from good health coverage to soaring premiums and deductibles). They busted unions and threatened employees who tried to organize. The biggest companies went global with no more loyalty or connection to the United States than a GPS device. Washington deregulated Wall Street while insuring it against major losses, turning finance—which until recently had been the servant of American industry—into its master, demanding short-term profits over long-term growth and raking in an ever larger portion of the nation’s profits. And nothing was done to impede CEO salaries from skyrocketing to more than 300 times that of the typical worker (from thirty times during the Great Prosperity of the 1950s and ’60s), while the pay of financial executives and traders rose into the stratosphere.

It’s too facile to blame Ronald Reagan and his Republican ilk. Democrats have been almost as reluctant to attack inequality or even to recognize it as the central economic and social problem of our age. (As Bill Clinton’s labor secretary, I should know.) The reason is simple. As money has risen to the top, so has political power. Politicians are more dependent than ever on big money for their campaigns. Modern Washington is far removed from the Gilded Age, when, it’s been said, the lackeys of robber barons literally deposited sacks of cash on the desks of friendly legislators. Today’s cash comes in the form of ever increasing campaign donations from corporate executives and Wall Street, their ever larger platoons of lobbyists and their hordes of PR flacks.

The Great Recession could have spawned another era of fundamental reform, just as the Great Depression did. But the financial rescue reduced immediate demands for broader reform.

Obama might still have succeeded had he framed the challenge accurately. Yet in reassuring the public that the economy will return to normal he has missed a key opportunity to expose the longer-term scourge of widening inequality and its dangers. Containing the immediate financial crisis and then claiming the economy is on the mend has left the public with a diffuse set of economic problems that seem unrelated and inexplicable, as if a town’s fire chief deals with a conflagration by protecting the biggest office buildings but leaving smaller fires simmering all over town: housing foreclosures, job losses, lower earnings, less economic security, soaring pay on Wall Street and in executive suites.

Much the same has occurred with efforts to reform the financial system. The White House and Democratic leaders could have described the overarching goal as overhauling economic institutions that bestow outsize rewards on a relative few while imposing extraordinary costs and risks on almost everyone else. Instead, they have defined the goal narrowly: reducing risks to the financial system caused by particular practices on Wall Street. The solution has thereby shriveled to a set of technical fixes for how the Street should conduct its business.

What we get from widening inequality is not only a more fragile economy but also an angrier politics. When virtually all the gains from growth go to a small minority at the top — and the broad middle class can no longer pretend it’s richer than it is by using homes as collateral for deepening indebtedness — the result is deep-seated anxiety and frustration. This is an open invitation to demagogues who misconnect the dots and direct the anger toward immigrants, the poor, foreign nations, big government, “socialists,” “intellectual elites,” or even big business and Wall Street. The major fault line in American politics is no longer between Democrats and Republicans, liberals and conservatives, but between the “establishment” and an increasingly mad-as-hell populace determined to “take back America” from it.

When they understand where this is heading, powerful interests that have so far resisted fundamental reform may come to see that the alternative is far worse.