Essays on Inequality V – Deepening Recession/Looming Depression

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In a time of universal deceit, telling the truth becomes a revolutionary act.  George Orwell

For nearly two weeks now the movement #Occupy Wall Street, with its thousands of members of “The Other 99%” (aka “the bottom 99%), has taken over Zuccotti Park near Wall Street, demonstrating for an end to corporate rule.  [1]  There has been major discontent bubbling just beneath the surface in America, and it’s now surfacing with real force.

Four days ago Washington Post columnist James Downie asked, quasi-rhetorically, “Why Occupy Wall Street?”  Well, let’s see:

Just as many young people in the ’60s and ’70s feared becoming cannon fodder in Southeast Asia, so, too, do many today fear for their futures. The figures are astounding. Three years after Wall Street crashed the economy, youth unemployment stands at 18 percent, double the national rate, while youth employment is at its lowest level since the end of World War II. And because the graduate who spends a year unemployed will still make 23 percent less than a similar classmate a decade later, the young unemployed will feel these effects for years. The average college graduate now carries over $27,000 in debt at graduation; not surprisingly, then, more than 85 percent of the Class of 2011 moved back into their parents’ homes, the highest number on record. Not to mention, when this long recession is finally over, the young get to face reduced Social Security, Medicare and other benefits, largely (though not entirely, of course) because their parents and grandparents decided to let their descendants pay for their tax cuts, their wars and their bailouts. [2]

America’s young people are indeed in a real tough bind, and it’s hard to imagine without living through it just how devastating these economic conditions really are for America’s youth.  It’s gone well beyond asking whether they can have as good or better lives as their parents or grandparents have had.  Millions, I’m afraid, will never have the educations or careers they might have aspired to back then, and life will be a hand-to-mouth struggle for most of them as the middle class shrinks and slides into poverty.  In fact, the health and well-being of the entire Other 99%, including their parents and grandparents, is in real jeopardy.  That is, if America remains under the control of the top 1%.

Downie unfairly pins a share of the blame for the debt crisis on the Other 99% when he says “the young will suffer largely (though not entirely, of course) because their parents and grandparents decided to let their descendants pay for their tax cuts, their wars and their bailouts.” Neither political party was ever representing parents and grandparents of the Other 99% when they decided to borrow trillions of dollars for massive military buildups, protracted wars in Vietnam and Iraq, and tax breaks for the very rich and corporations.  Those obligations were incurred for the benefit of interests within the top 1%. 

There were few benefits, and great costs, for everyone else.  Most of the protesters in Zuccotti Park would likely agree with this statement by Nobel Prize-winning economist Joseph Stiglitz: The U.S. has “a government of the 1%, by the 1%, and for the 1%.”  [3]

Even Downie’s sobering account, I’m afraid, understates the problem: Downie may have in mind a mainstream, business-cycle perception of recessions – that they come and go as monetary policy adjusts the money supply – when he speaks of “when this long recession is finally over.”  But monetary policy is now useless, as we’ve seen, and things are far worse, I’m afraid, than can be encompassed within the traditional concept of a recession.

Current unemployment, hovering around 9% but in reality qualitatively worse, is deeper and longer lasting than in any previous post-WW II recessions.  The truth, I fear, is that this “long recession” may not be over for a long, long time.

Time turns out to pass more quickly than we expect it will when we’re young.  For example, it seems to me not that long ago that a youthful Henry Winkler played TV’s teen heartthrob Fonzie on “Happy Days.”  Now Henry Winkler advertises reverse mortgages to senior citizens like me (and himself!) on TV.

A lot has happened over the last 30 years to get us in this mess, and unless we start right now to aggressively stimulate the economy, today’s group of young people could spend their entire careers struggling in a seriously degraded economy; and that time could seem to vanish, taken from them before they know it.  Time is precious, people, and there is no time to squander anymore.

This Is No Ordinary Recession

The Great Recession of the past three years has been no ordinary recession.  It’s been the result of a long-term pilferage of America’s wealth by the top 1%, and what most people fail to notice or mention is this: The plundering that brought us to this pass is still going on.  That’s right, nothing has changed; we just keep sinking farther into the hole. 

The inequality of wealth and incomes has not stopped growing.

Here’s what has happened to America:  The long-term growth in inequality of incomes that began in 1980 (Taxing the Rich, a New Start) resulted in the top 1% increasing its income share from about 9% in 1979 to about 24% in 2007. Incomes of the top 1% increased over 280% in those three decades, while the real incomes of the bottom 99% mostly remained flat.

Almost all new wealth created by the economy over that period went to the top 1%.  From 1979 to 2007, the top 1%’s share of household net worth grew from 20.5% to nearly 35% in 2007.  The increase in the top 1%’s percentage of total wealth amounted to a wealth transfer, from the bottom 99%, of about $8.8 trillion:

The top 1% held 33.8% of the total 2007 net worth of $66 trillion, or $22.3 trillion.  Had its percentage of total wealth still been 20.5%, as it was at the start of the Reagan Revolution in 1979, its total wealth would be $13.5 trillion.  Thus, in increasing its share of total wealth via the Reagan Revolution and its tax cuts, the top 1% gained another $8.8 trillion. [4]

This transfer was gradual, interrupted briefly during the Clinton years and greatly accelerated during the GW Bush years.  Gradually as the bottom 99% lost its wealth, it’s savings rate declined and turned negative.  A booming housing market in the GW Bush years disguised the loss of incomes and financial wealth in the bottom 99%, which became overall a net borrower, relying on its home equity for cash.  The Crash of 2008 and collapse of the housing market ended that.

In 2008, when the real estate bubble burst, incomes were in decline, and the middle class was maxing out on home equity credit (expecting home values to keep rising).  This maximized the damage suffered by the bottom 99%.  This is where the long-term trend of loss of wealth (wealth transfer) to the Top 1% became devastating.  Its loss of financial wealth to the top 1% over the prior three decades left the bottom 99% especially vulnerable to a decline in the value of its real property.

Total U.S. net worth has declined from about $66 trillion just before the crash to about $58 trillion today. That $8 trillion of reduced wealth represents the decline in real estate values resulting from the crash,  i.e., what is left of the total loss of wealth after the stock markets and other securities losses  recovered.  In 2007, the top 1% held about 34% of America’s wealth, and the bottom 99% held about 66% of the wealth, roughly $44 trillion. (See: Growth in Inequality of Wealth.)  So the loss of $8 trillion of home values represents nearly a 20% loss of net worth for the bottom 99%. (8/44 = .18)

Remember, since 1979, due to the shift in the distribution of wealth, by 2007 the bottom 99% had already lost $8.8 trillion to the top 1%, over 28 years.  The value of its main source of wealth (its homes) then suffered a devastating $8 trillion hit – it was a “double whammy.”

Since then (2008-2011), the factors remain in place that caused wealth to transfer to the top 1% from 1979-2007.  Although we have no more recent data on wealth redistribution, we have estimated that approximately $1.2 trillion has been transferred to the top 1% from the bottom 99% since 2007 (associated with the tax rates being reduced below the 1979 tax rates). [5]  There are additional financial wealth transfers, such as Wall Street excesses and Corporate tax welfare, a few of which are noted in the footnote.  A $100 billion/year wealth transfer via such sources can conservatively be included in an estimate of damage to the bottom 99%, so I’ve added a rough estimate of $0.4 trillion for the 2008-2011 period. [6]

As we pointed out, the Other 99% held about $44 trillion of wealth in 2007 just before the 2008 crash.  But for the transfer of $8.8 billion over 28 years to the top 1%, it would have had $52.8 trillion, all else being equal.  It has since lost about $8 trillion of real estate value, bringing its actual wealth down to $36 trillion, and another (conservatively) $1.6 trillion wealth transfer reduces the total wealth of the Other 99% to an estimated $34.4 trillion today.

Here’s the upshot: The bottom 99% of Americans has an estimated net worth of about $34.4 trillion today.  Without the harmful increase in inequality brought about by the Reagan Revolution, and (unrealistically) assuming there would have been no additional growth, the bottom 99% would have had about $52.8 trillion of America’s wealth today, more than 50% more (52.8 ÷ 34.4 = 1.53).  In other words, the bottom 99% has only 2/3 (34.4/52.8 = .65) of the wealth it would and should have had.  One-third of its wealth has been pilfered. 

The lost $18.4 trillion amounts to more than $60,000 for each and every man, woman, and child in the bottom 99%.

This is a breach of the social contract of unimaginable scope, done in the name of a collection of ideas that Ronald Reagan once proudly declared were only “common sense.”  In truth, it’s an act of piracy, perhaps the biggest plundering of a nation’s people in human history.

The Anatomy of Recession/Depression

It’s painful to watch: As people lose their wealth to the top 1%, they borrow more and spend less.  Unemployment grows, and as people lose their jobs they cut spending still more.  Young people go to live in family homes, and try to save for the future.  Income tax and state and local sales tax and even property tax revenues decline.  Government budgets are cut, and more and more jobs are lost as public sector employees are laid off.  As spending declines further in response, more jobs are lost in both the private and public sectors while wages, salaries, and benefits are cut.  On and on, until the “multiplier effect” plays out.

Upstate New York is doing somewhat better than other regions of the state, and the country, so far.  Unemployment in the Capital Region fell from 7.2% in August 2010 to 6.7%  in August of 2011, both lower levels than most metropolitan areas in New York. (The comparable figures for the entire U.S. were 9.5% and 9.1%.)  However:

Most analysts believe it will be several years, at best, before unemployment rates, locally and nationally, return to levels seen before the 2008 financial meltdown and subsequent recession.  “Households continue to reduce debt and save as opposed to buying and spending,” said Hugh Johnson, chairman and chief investment officer at Albany-based Johnson Illington Advisors. “As a result, this has been a long, slow recovery, and employment growth has also been slow.” [7]

The following week, New York State announced that it was laying off 3,496 professional employees, with an expected savings of $80 million. [8]  That same day, the Times Union  indicated that “the Capital Region’s labor market will experience almost no growth over the coming year, according to a new report from economic forecasting firm IHS Global Insight.” [9]

I regard these assessments as “cautiously optimistic.”  There has been a major decline in incomes and professional employment in this region, and many potential workers have left the gloomy job market altogether, causing IHS Global Insight to predict that unemployment might ironically spike when they reenter the market, as things improve.

Robert Reich confirms that it’s not easy to find work once you have been laid off:  “According to research by the Urban Institute, once you’re laid off, your chance of finding another job within a year is 36 percent if you’re under the age of 34. But your odds drop the older you get. If you’re jobless and in your 50s, your chance of landing another job within the year is only 24 percent. Over 62, you’ve got only an 18 percent chance.” [10]  And Reich reports:

Jobs are slowly coming back, but that’s small comfort to more than 13 million Americans who remain unemployed. For every job opening, four people are still looking for a job. Many others have given up even trying to find work.

The American economy is trapped in a vicious cycle. Those who are unemployed can’t afford to buy much more than bare necessities, while people who are working are getting skimpier paychecks.

This means consumers don’t have much purchasing power, which has made companies reluctant to hire more employees or raise the wages of those they have. (Big companies are enjoying high profits, largely from their foreign sales.) [11]

Increasing poverty is also  a serious concern.  The Times Union reacted strongly to the Census Bureau’s report (9/13/11) about a rising poverty rate and a decline in median household income, which it said is “an indictment of a political and corporate culture that has allowed the very rich to prosper at the expense of everyone else”: [12]

Fifteen percent of the country now lives in poverty, as the government defines it. That means 46.2 million people live in households that must make do on just $22,314 for a family of four. Seven percent of the country, some 20.5 million people, lives in such abject poverty that their household income isn’t even $11,000. These, incidentally, are among the people who Republicans in Washington complain don’t pay their fair share in taxes and should have more “skin in the game.”

And what’s left of the middle class?  Median household income is down again, by 2.7 percent from last year, to $49,445 in inflation-adjusted dollars. That’s lower than it’s been in 17 years, just before the booming economy of the 1990s really hit home. Oh, for the pre-recession days of 1999, when median household income reached a high of $53,252.

That’s when America was working, of course, in an economy that had achieved what the experts define as full employment. Now, though, comes fresh evidence of what it means when 25 million Americans are desperate for full-time work and 15 million have no jobs at all.

The status quo is failing. The pervasive thinking in Washington, where the Republicans opposing President Obama have seemingly as much power as they did in the days of George W. Bush, is exposed as incapable of helping anyone but the very rich. [13]

Sixteen percent of New York’s population was below the federal poverty line in 2010, the Times Union reported,  the third straight year that statewide poverty has increased.  The Census Bureau also reported other evidence of economic distress:

The number of New Yorkers without health insurance, for example, climbed from 14.1 percent in 2009 to 15 percent last year, meaning that 2.9 million lacked coverage. Nationally, the percent without health coverage rose from 16.1 percent to 16.3 percent, or 49.9 million people. 

Obama Has Helped

In these circumstances, it’s painful to watch the Tea Party and Republicans oppose jobs legislation, and funding for government programs like Medicaid, and disability or unemployment insurance, that would help people in need and stimulate the economy at the same time.  In the interest of defeating Obama in 2012, Republicans on the campaign trail are shamelessly blaming Obama for the bad economy and shamelessly pressing to make sure the economy stays bad.

They won’t help improve the economy before the election, hoping that voters will turn against Obama again, as they did in 2010.  But the policies they want to follow after they get the White House back are the same stifling, plunderous policies that created this situation – policies designed to reduce government and produce more profits for the top 1%.

So it’s important to note that Obama is not one of them, and that they are lying about Obama’s record.  Those of us who are disappointed with his leadership style so far need to credit him with trying hard to improve the economy for the bottom 99%..

The Obama administration, as advertised, probably did prevent an immediate collapse into a depression in 2009.  When he took office, the monthly job losses had been steadily increasing under GW Bush for the better part of a year.  Obama’s stimulus plan turned that around, and monthly job losses began immediately to decline.  As the above graph shows, there have been 17 consecutive months of job growth, since March 2010. [15]

Unfortunately, the stimulus expired in July of 2011.  Obama, along with some billionaire businessmen like Starbucks CEO Howard Schultz, are trying to cajole businesses into creating more jobs.  Meanwhile, Ben Bernanke is running out of gimmicky ways to expand the money supply, and as we have discussed at length, that wouldn’t help much anyway; the investors in the top 1% already have lots of money and are waiting for demand to materialize.

And remember, always remember, this: The wealth of the bottom 99% continues to drift to the top 1%, increasing the inequality that caused this distress and is pushing us into a depression.  The inequality engine is turned on, and billions of dollars continue to be sucked up to the top each year.   The Other 99% is in decline or stagnation — decline in incomes, in healthcare coverage, and so on — and it decays in a stagnant unemployment situation that is unlikely to improve for years.  Meanwhile, Republicans continue to insist on even more sacrifice from the Other 99%, ostensibly to try to balance the federal budget. (More on that in my next post in this series.)

The pirates are going to have to start returning their plunder.  We must start taxing the rich now, substantially.  The economy cannot be revived without government intervention, and beyond that it won’t be enough to make sure that billionaires pay taxes at a higher rate than their secretaries and people in poverty.  Much more than that will be needed to correct the inequality imbalance, and to start reducing the poverty this inequality has caused.

Is this class warfare?  Of course it is.  To the brave protesters in Zuccotti Park in New York, and in Madison, Wisconsin, and wherever else the battles rage, I salute you.  You represent our potential freedom.  So persevere!

We didn’t start this war, but let’s finish it.

JMH – 9/30/11         

_____

[1] I fervently hope soon to be able to join them.

[2]  Why Occupy Wall Street?, by James Downie,  The Washington Post, Post Partisan, September 26, 2011.

[3] Stiglitz: We have a government ‘Of the 1%, by the 1%, and for the 1%’  America Blog, April 6, 2011.

[4] Growth of Inequality of Wealth: 1979-2007. The $8.8 trillion is in 2007 dollars.

[5] Growth of Inequality of Wealth: After 2007.  We calculated that the top 1%, by virtue of the paying at the current top tax rate (35%) has avoided an additional $1.2 trillion of taxes which would have been incurred at the 1979 tax rate (70%) from 2008-2011; this amount effectively represents a wealth transfer, as the responsibility for that $1.2 trillion falls upon the bottom 99%.  This estimate, of course, excludes consideration of the changes in other factors, such as the capital gains tax and corporate taxes.  The estimate implies a loss of wealth to the top 1% of about $300 billion/year via the operation of regressive taxes.

[6] Other vehicles for wealth redistribution are created by financial deregulation; as noted elsewhere, in 2010 the top 25 hedge fund managers on Wall Street took over $22 billion all by themselves!  According to the Cato Institute, the U.S. federal government spent $92 billion on corporate welfare during fiscal year 2006. Recipients included Boeing, Xerox, IBM, Motorola, Dow Chemical, and General Electric.[6] Alan Peters and Peter Fisher have estimated that state and local governments provide $40-50 billion annually in economic development incentives.  Corporate Welfare, Wikipedia.

This discussion ignores the broader issue of wealth transfers through corporate tax loopholes and avoidance.  The corporations take in billions from the Other 99% each year.  As their tax liability declines, whenever they keep retained earnings or distribute dividends, wealth transfers are taking place. New inequality data is needed for a more complete assessment of wealth transfers and the current level of inequality.

[7] Jobs hit higher note, by Chris Churchill, Business Writer, Albany Times Union, September 21, 2011.

[8] State issues layoff notes, by Rick Karlin, Capital Bureau, Albany Times Union, September 29, 2011.

[9] Static jobless rate expected in region, by Eric Anderson, Business editor, Albany Times Union, September 29, 2011.

[10] No jobs, and no clout, either, by Robert B. Reich, Albany Times Union, June 7, 2011.

[11] Id.

[12] A Nation Rich in Shame, Albany Times Union, editorial, September 15, 2011.

[13] Id.  See also an article about the Census Bureau report, Poverty deepens, ‘suffering lingers’ by Chris Churchill, Business writer, Albany Times Union, September 14, 2011; Albany Poverty Widens, by Chris Churchill, Business writer, Albany Times Union, September 23, 2011.

[14] Poverty deepens, ‘suffering lingers’ by Chris Churchill, Business writer, Albany Times Union, September 14, 2011.

[15] See politicalcorrection.org.

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One Response to Essays on Inequality V – Deepening Recession/Looming Depression

  1. Pingback: Essays on Inequality XI – Taxes and Inequality |

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