The Global Financial Crisis brought about the single biggest one-time historical transfer of wealth to the financial sector from western taxpayers via the government. This wealth transfer was the culmination of a 30 year period during which the Elite 10% of society gained a near unprecedented share of the economic pie to the detriment of the vast majority because the rules of the economic game have increasingly tilted against the average person. The financial rescues may have been the final scene in an Act with a plotline of unmitigated greed, from the point of view of the average Joe. The system is at risk of disintegrating if it is not reset to reflect fair terms.
According to many measures, personal disposable income for the average Joe has essentially remained flat since the early 1970s and higher living standards were financed by the addition of more two-income households and the mirage of wealth that debt has provided over a 20 year cycle of decreasing interest rates. This joyride is over – interest rates can only go up from present levels and rising rates will pressure consumers. Or, if rates remain low for a protracted time period it probably means the economy remains in tatters and consumers will remain under economic distress all the same. It is an untenable situation.
Debt loads across western nations vary between the share held as personal debt versus government debt, but it is clear that overall debt levels are high and unsustainable, while some countries are in worse circumstances than others. We arrived at the present situation through a combination of individual choices and collective decisions at the ballot box, and so the entire citizenry shares responsibility. However, the elite shared disproportionately in the spoils of economic activity during this period, consolidating its hold on wealth and income, while the median person racked up debt living beyond means. Both benefited by governments’ rescue of the financial system, except the former remains flush and the latter has empty pockets. The average person now wonders in bewilderment at how he got bushwhacked by the system. Looking at the bewildering size of government debt loads he is also wondering whether promises made will be promises kept – the basic Social Compact. There are doubts. Witness Greece.
Every nation has an implied Social Compact between the élite and the average citizen, a sort of grand bargain between plebe and patrician. In western countries, during the post WWII era the general understanding between the parties has been that the plebian classes receive a certain minimum social safety net covering health, education and retirement and a reasonable, fair opportunity to “get ahead in life” (substitute your local version of “life, liberty and the pursuit of happiness” theme). In exchange, the citizenry acknowledges that the élite will have a disproportionate share of control over the levers of political and economic power. The exchange ratio may vary from one country to another based on historical conditions, but the implied contract is there. Except, the average citizen is waking up to the fact that while he wasn’t looking he got jacked.
- in 1973 the richest 1% of Americans received 8% of national income; by 2006 it was 23%, the highest proportion since 1929; separately from the source cited below, the bottom 80% of American earned near 60% of income in 1972 but only about 37% in 2007;
- today the richest 1% earn as much as the bottom 50% combined;
- in 1970 the top 100 CEOs on average earned 45 times as much as the average worker; by 2006 that average CEO earned 1,723 times the average worker wage;
- in constant dollars, real wages slid from a 1973 peak of $746 per week to $612 per week in 2007, an 18% decrease – in essence wages completely unhinged from productivity growth (if wages had kept pace with productivity, an average worker today would earn $1,172 per week, or $60,892 annually compared to the actual current annual wage of $31,824, 91% difference;
- some will argue that non-wage income – worker benefits – has increased significantly to account for the difference; not so: total average compensation in 2007 was $25 per hour, a marginal increase from 1973 and fully $16 per hour below the $41 per hour level had total compensation kept pace with productivity growth;
- the average American made up for the relative declining income share by (1) compensating with the illusion provided by debt – the ratio of household debt to income increased from 55% to 127% and (2) working the longest hours in the world, adding second incomes from spouses and reducing leisure time;
- in aggregate U.S. economy-wide terms, this transfer in the balance of income has left average workers $3 trillion short (annually) in a $14 trillion economy.
Now consider the distribution of wealth (courtesy of Professor William Domhoff, Sociology Department, University of California):
The above chart is a little hard to read as it did not transfer over clearly, but the notable parts are the top right sections labeled for the top 1% of Americans and the red sections for the bottom 80%. The left chart – Net Worth, which includes personal residences indicates that in 2007 the top 1% control 35% compared to the bottom 80% which controls 15%. Since house prices have fallen significantly since 2007, the right hand chart, which includes only financial wealth, is probably more relevant – it indicates the top 1% control 43% of financial wealth compared to 7% for the bottom 80%. Contrary to the doctrine of “Ownership Society“, the average Joe has little at stake in the financial system. (Note: additional statistics are available if anyone wishes to follow the link above).
Clearly the Social Compact is bust. Three decades of public policy justified under the guise of improving economic competitiveness in the face of globalization progressively weakened worker bargaining power. If that were not enough, workers have been asked to share the burden of rescuing a global financial system in which they have a tenuous stake and the elites hold the lion’s share. Then further, with unmitigated gall a portion of the elite rewarded itself with grand bonuses from real and mirage financial profits derived entirely from unprecedented government largesse in an array of direct cash injection sweetheart deals, cheap money, assumption of debts, guarantees, favorable public policy, and the re-enablement of accounting chicanery.
And while the average Joe is a co-conspirator in arriving at this penultimate financial mess in so far as his voting behavior assented to the irresponsible management of government, blame lies predominantly with those who control the levers of power. The plebeians are the frustrated shareholders of a great company brought to the edge of bankruptcy by bad corporate governance and incompetent management foisted upon it by a cozy, insular Board of Directors, the patricians. You do not have to be a Bolshevik to understand things this way, but merely shake your head of discredited extreme neo-liberal economic doctrine and the hypocritical bastardized manner in which it has been applied in practice and used to justify a stealth fight against the interests of the average person to the benefit of the élite. Neo-liberalism in practice is nothing more than Corporatism – some of the dead standard bearers it claims – like Adam Smith – through the usurping of catchphrases such as laissez-faire and free hand of the market, would stand decidedly against Corporatist doctrine. To find a way out of the current mess, policymakers are better advised to seek solutions not in the ahistorical neo-liberalism that functions as Corporatism today, but in the writings of much denigrated giants of economic thought such as Keynes and John Kenneth Galbraith, who brought historical context into their public policy analysis.
Now that the financial system appears to have been stabilized by massive government spending, the usual bobbleheads have trotted out as the “grown-ups” offering up the same bitter-pill advice Corporatists have been peddling for decades: that government debt is massive, deficit are unsustainable and therefore government spending on social programs must be cut significantly. In short, that the Social Compact must be gutted and the plebeians must sacrifice yet more. Enter stage right the armed black hat bond vigilantes, lining up behind the patricians opposite the facing crowd of plebeians. Well, the show of force is not working on Greeks so far; a plebe must have shouted to his brethren, “let’s rush’em….they don’t have enough guns to shoot all of us.”
The advice of the deficit hawks is frustrating and wrong on so many levels. They are not convincing because they do not have an answer for what happens next. Take the example of Greece where massive government spending cuts are proposed. A lot of economic analysts agree that the massive spending cuts are going to result in shrinking GDP and therefore cause debt/GDP to jump even higher, and that a formal default by Greece has only been postponed. When formal default happens, will Greeks be asked for more cuts? Where would this process end? Does anyone believe that Greeks would accept another round of cuts in a couple of years without complete havoc in the political order? These deficit hawks seem to believe that Greece might somehow grow its way out by deflating wages to become more competitive and exporting more. The preposterous deficit hawk stance is laid bare when you acknowledge that Greece does not exist in a vacuüm – can western countries as a whole, which together with Japan constitute more than 50% of global GDP, massively shrink spending and all hope to somehow still grow their way out of debt? Married with the deficit advice is an “understanding” about exchange rate adjustments. At the advent of the financial crisis it was apparently the U.S. dollar that needed to depreciate. As the crisis has now spread to Euro zone sovereigns, the deficit hawks say that Euro depreciation might help. Japan’s debt situation is upside down and the Won has been strengthening, so does the Won need a significant depreciation? And do they really expect China, and perhaps India or other developing countries, to shoulder the other side of the foreign exchange rate adjustment (and massive western spending cuts) without encountering significant economic trouble of their own?
Another reason the deficit hawks cannot be taken seriously is that they do not have an answer for how the average household in the most indebted western countries is to shoulder significant cuts in government spending and tax increases, which shall surly include a decrease in transfer payments, and still manage to pay down massive personal debt loads. As stated above, government and household debt levels vary from one western country to another and some are in worse shape, but since economies are so connected, further problems in one country can spread quickly – contagion. In the U.S. 25% of households are underwater on their mortgages!, and it is not at all clear that house prices may not fall further, even over shooting on the downside. That’s a serf underclass, one that has increasing numbers of reasons to withdraw from the system.
In Canada in the mid 1990s we went through debt/deficit crisis management. Since the 1970s the federal government had been significantly increasing spending financed by large deficits. The early 1990s recession was a tipping point for government finances – the bond rating agencies were threatening the federal government’s Triple A credit. I remember watching on TV news of a first ministers conference (a meeting called by the Prime Minister summoning the leaders of all ten provinces) in the depths of economic crisis. They lined up in front of the cameras as a group and reassured the nation that recovery was imminent. They had ashen looks on their faces and were not convincing. A new Liberal Party government headed by Prime Minister Chretien brought on a decade of significant economic and spending restraint. By 2000, Canada emerged in a significantly better position fiscally and government debt levels continued to decline through the last ten years. But Canada took the deficit slaying pill in a wholly different world environment that does not have much in common with today.
I see today’s deficit hawks and smell fear, for even they seem not quite convinced that they have it figured out in the present circumstances. Let’s call it like it is – the neo-liberal Corporatist deficit hawks have no comprehensive solution for a way out of our current troubles. Foisting upon the economy discredited old policies is a sign of intellectual laziness and dishonesty. Where the dishonesty comes in is that prior to the financial crisis government debt was very manageable in the sense that the crisis was not acute. In the U.S., deficit hawks argued deceitfully that government debt was higher than it actually was – you often saw quoted federal debt figures in the $50 trillion or $75 trillion range counting “unfunded” liabilities such as Social Security; while they counted the present value of the obligations, they did not count the present value of the dedicated and general government tax receipts. What’s more, prior to President Bush’s arrival in the White House trillions in surpluses were expected and could have paid down debt, but instead we ended up with tax cuts for elites and trillions in projected deficits by the time he exited, even before counting the impact of the GFC. We saw few of today’s most ideological deficit hawks lambaste the failure to take the opportunity to recast the fiscal situation by paying down debt when the money was about to flood into government coffers.
The plan to tear up the Social Compact was decades in the making through deregulatory policies that reached beyond reason, the broad-based weakening of worker bargaining power and fundamental changes in tax systems against the interest of the average person. The maroons who lead us here now ask the plebeians to cede yet more so that the patricians can continue feasting. Why should and why would the average Joe agree to this? And that’s just the point, the fear you smell from the élite is not just the stench of foul old square policy prescriptions that do not fit today’s round peg, but a sense that the peasants are restless and may take up pitchforks.
I believe many in positions of power understand that standard deficit hawk policy solutions may not work in present circumstances, that they may only result in postponing a reckoning, à la Greece. But beyond that, we are not in a business as usual world even setting aside the GFC – I cannot take seriously the deficit hawk diatribe and accompanying Corporatist policy prescriptions because they are offered up completely ignorant of the challenge of Peak Oil – the potential collapse of oil supplies deems standard government and economic policy actions recipes for disaster. Out of self-interest alone the élite ought to consider Peak Oil risk as part of the discussion. Laying out the challenge of Peak Oil, under the worst case scenario where oil supply decreases are imminent, persistent and large, the world economy and financial system would quickly succumb to chaos and potential collapse. Discussing a new Social Compact under this scenario is not worthwhile, as all bets would be off.
The moderate Peak Oil scenario for which we should prepare a plan is one where, if we are lucky, oil production plateaus around a peak for a few years before declining gradually, giving us time to transition to a post carbon economy. It is a scenario under which we can face up to our energy challenge and emerge in a couple of decades with a renewed Social Compact. Elites ignore the energy challenge at their own peril, because without a comprehensive and fair transition plan, the moderate Peak Oil scenario will evolve and incorporate elements of the worst case scenario. In other words, the moderate scenario is an open possibility only if it is chosen, otherwise you are left with either (a) hoping that Peak Oil doesn’t happen or (b) letting Peak Oil takes its course and accept that the world will reorder itself after a period of chaos. (For a glimpse at what such a world might look like, review the link Soviet and Cuban collapse Peak Oil collapse and this link discussing how Peak Oil could devolve into a hyperinflationary economic scenario).
Achieving an orderly transition to a post-carbon economy from the present starting point requires recognizing that most households, which are already financially overstretched, need to be bolstered for the transition period during which prices of basic necessities will be rising (gasoline, but also food, heating and other items) and unemployment remains high (or is even rising) as increasing oil prices cause businesses to contract. This means that the vast majority of households (perhaps including the bottom four quintiles that include households that make up to about $90,000 per year in the U.S for example) may need tax relief and/or an increase in government transfers. It also means that professional and executive/managerial workers will have to shoulder a higher tax burden, along with the élite and the corporate sector. Besides tax changes, government policy needs to reverse the loss of worker bargaining power.
It will be argued that raising taxes on corporations and high income workers will cause them to flee to more inviting locales. Good luck with that – in a Peak Oil world there will be significant social, economic and political instability most everywhere, more so in relatively poor countries that might otherwise be recipients of outsourcing from western countries, and they will have less means to offer the security of investment and everyday life that now appears inviting and assured. Furthermore, as Jeffrey Rubin has argued, the end of the Age of Cheap Oil can be expected to bring about a period of de-globalization as rising goods transportation costs come to outweigh labor and other cost savings from locating production far afield.
In these circumstances, an increase in taxes of 5%-7.5% of GDP is entirely possible over a period of a few short years. Coupled with spending restraints on discretionary programs and seeking out of efficiency gains in mandatory program spending could provide the resources necessary to bring budget deficits under control over a period of several years and also provide funds for investing in a post-carbon transition. Every western country’s budget also has significant “off-budget” items where governments forego tax receipts or provide subsidies to individuals and businesses in the form of tax credits or deductions, such as the deduction for mortgage interest in the U.S. – these items will have to be reviewed and scaled back keeping in mind the overall goal of tilting back the tax burden away from average households but also improving tax efficiency. These proposed tax changes/redistributions, amounting to about $1 trillion on the highest earners in the context of the U.S. are not crazy; according to the Economic Policy Institute, more than a third is accounted for by just reversing the tax policies introduced by the Bush administration; much of the rest represents a strong suggestion that the top income quintile contribute a big share of its 90% take of the approximate $3 trillion increase in household income during the Bush years – that’s correct, the top 20% of households received about 90% of the $3 trillion increase in market income during the past 10 years. Appropriating 20% of that gain is not revolutionary thought.
Government deficits should generally not go to zero in a Peak Oil scenario, even though this does carry some risks – a portion of new revenues should be used to bring deficits down gradually to where debt levels can come down through economic growth (the end of growth is the risk) and inflation. Besides investing in tilting the tax system towards the bottom quintiles, significant dollars – several hundred billion annually – need to be invested by the government in infrastructure, R&D and other programs that will facilitate the transition to a post-carbon economy. Many of these programs will be job creators, directly by the government or in partnership with business, that hopefully counteract employment losses caused by rising oil prices. There is plenty of low-hanging fruit – I won’t go into it here. There are also other economic issues, like the impact of policy changes and Peak Oil on current account deficits and international money flows – I acknowledge those, but, again, this is not the post to deal with those items.
The neo-liberal Corporatists will scream bloody murder and view the suggestions here as pie in the sky socialism. What are they doing besides sticking their heads in the sand? I believe strongly that markets should be left free to operate relatively unfettered, in general, but government needs to act where there is market failure. Government also needs to intervene in a capitalistic society to ensure that the system’s basic fairness does not get so out of whack that a small minority reaps all the gains, leaving the vast majority to wonder whether it ought instead to simply withdraw from the system. Had we acknowledged the Peak Oil problem and the growing imbalances in our system early, we might have dealt with them through minor adjustments mostly relying on markets. It’s too late for that. The potential imminent onset of Peak Oil requires wide scale government intervention to quickly rebuild the economic and social system. Extraordinary times call for extraordinary measures.
Note: Thanks to Papicek from Daily Kos for his post Deficit Reduction I – Pushing Back on the Myth, which helped extend my thinking re: the bobbleheads.
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Filed under: Bubble Trouble, China, Economy, Featured Posts, Financial Crisis, Outsourcing, peak oil, Political Economy, sustainability Tagged: | adam smith, average joe, bernie sanders, corporatism, debt, deregulation, disposable income, economic growth, economics, energy, financial crisis, financial wealth, fiscal policy, george bush, global financial crisis, government, government debt, government default, household debt, household income, laissez faire, neo-liberal, Obama administration, Oil crash, overconsumption, peak oil, peak oil fraud, socialism, tax cuts, taxes, U.S., united states, wealth and equality, wealth distribution, William Domhoff, worker pay