2009: The Year Wall Street Bounced Back and Main Street Got Shafted
SUNDAY, DECEMBER 27, 2009
In September 2008, as the worst of the financial crisis engulfed Wall Street, George W. Bush issued a warning: “This sucker could go down.” Around the same time, as Congress hashed out a bailout bill, New Hampshire Sen. Judd Gregg, the leading Republican negotiator of the bill, warned that “if we do not do this, the trauma, the chaos and the disruption to everyday Americans’ lives will be overwhelming, and that’s a price we can’t afford to risk paying.”
In less than a year, Wall Street was back. The five largest remaining banks are today larger, their executives and traders richer, their strategies of placing large bets with other people’s money no less bold than before the meltdown. The possibility of new regulations emanating from Congress has barely inhibited the Street’s exuberance.
But if Wall Street is back on top, the everyday lives of large numbers of Americans continue to be subject to overwhelming trauma, chaos and disruption.
It is commonplace among policymakers to fervently and sincerely believe that Wall Street’s financial health is not only a precondition for a prosperous real economy but that when the former thrives, the latter will necessarily follow. Few fictions of modern economic life are more assiduously defended than the central importance of the Street to the well-being of the rest of us, as has been proved in 2009.
Inhabitants of the real economy are dependent on the financial economy to borrow money. But their overwhelming reliance on Wall Street is a relatively recent phenomenon. Back when middle-class Americans earned enough to be able to save more of their incomes, they borrowed from one another, largely through local and regional banks. Small businesses also did.
It’s easy to understand economic policymakers being seduced by the great flows of wealth created among Wall Streeters, from whom they invariably seek advice. One of the basic assumptions of capitalism is that anyone paid huge sums of money must be very smart.
But if 2009 has proved anything, it’s that the bailout of Wall Street didn’t trickle down to Main Street. Mortgage delinquencies continue to rise. Small businesses can’t get credit. And people everywhere, it seems, are worried about losing their jobs. Wall Street is the only place where money is flowing and pay is escalating. Top executives and traders on the Street will soon be splitting about $25 billion in bonuses (despite Goldman Sachs’ decision, made with an eye toward public relations, to defer bonuses for its 30 top players).
The real locus of the problem was never the financial economy to begin with, and the bailout of Wall Street was a sideshow. The real problem was on Main Street, in the real economy. Before the crash, much of America had fallen deeply into unsustainable debt because it had no other way to maintain its standard of living. That’s because for so many years almost all the gains of economic growth had been going to a relatively small number of people at the top.
President Obama and his economic team have been telling Americans we’ll have to save more in future years, spend less and borrow less from the rest of the world, especially from China. This is necessary and inevitable, they say, in order to “rebalance” global financial flows. China has saved too much and consumed too little, while we have done the reverse.
In truth, most Americans did not spend too much in recent years, relative to the increasing size of the overall American economy. They spent too much only in relation to their declining portion of its gains. Had their portion kept up — had the people at the top of corporate America, Wall Street banks and hedge funds not taken a disproportionate share — most Americans would not have felt the necessity to borrow so much.
The year 2009 will be remembered as the year when Main Street got hit hard. Don’t expect 2010 to be much better — that is, if you live in the real economy. The administration is telling Americans that jobs will return next year, and we’ll be in a recovery. I hope they’re right. But I doubt it. Too many Americans have lost their jobs, incomes, homes and savings. That means most of us won’t have the purchasing power to buy nearly all the goods and services the economy is capable of producing. And without enough demand, the economy can’t get out of the doldrums.
As long as income and wealth keep concentrating at the top, and the great divide between America’s have-mores and have-lesses continues to widen, the Great Recession won’t end — at least not in the real economy.
Tuesday, January 05, 2010
What the hell is the matter with Kansas...part two
Reducing America's Economic Polarization Will Lead to Political Comity
We frequently hear pundits pontificating about the rising level of political polarization in Congress.
Often the blame is ascribed to plummeting levels of civility among Members. In fact, ten years ago the House actually conducted several "civility retreats" aimed at fostering a more civil atmosphere inside the body. These events featured motivational speakers and smaller "encounter-group-like" seminars - and were widely attended by Members and their families. Needless to say, this approach didn't do much for the actual "civility index" in Congress.
And then there are the "centrists" who think that the partisan divide can best be bridged by proposals that seek to "moderate" the Democratic "change" agenda. Of course, most of these "moderates" want to water down Democratic proposals to change the status quo -- proposals that would reduce the power of the Wall Street gang, the private insurance industry, the energy companies and Chamber of Commerce. This presents a serious problem to most Democrats because the interests of these special interests are generally diametrically opposed to the interests of the American people. But it turns out they are also counterproductive when it comes to ending political polarization as well. Here's why:
Several years ago, a group of political scientists that included Nolan McCarty, Keith Poole and Howard Rosenthal, conducted an important study on the causes of political polarization. Their results were published in a fascinating book, Polarized America: The Dance of Ideology and Unequal Riches. Their study found that there is a direct relationship between economic inequality and polarization in American politics.
The team measured political polarization in congressional votes over the last century, and found a direct correlation with the percentage of income received by the top 1% of the electorate.
They also compared the Gini Index of Income Inequality with congressional vote polarization of the last half-century and found a comparable relationship.
Why should this be? It doesn't take a political genius to figure out that if people have more in common they are more likely to support similar proposals and perspectives. Political polarization in Congress does not result from some new inability to "communicate" or "empathize." It results from the fact that the major constituencies of the two parties have increasingly divergent economic interests.
To put it simply, Republicans increasingly represent the interests of the wealthiest elements of American society, and Democrats represent everyone else. As the gap between the incomes of these segments of the population grows, so does the gap between their economic interests and the policy proposals they support.
So in other words, if you want to do something about the political polarization of Congress, you have to deal with the underlying cause. You have to reduce the growing level of income inequality in America. Unfortunately, when "Moderate" Democrats attempt to defang Democratic proposals to rein in private insurance companies, Wall Street banks, energy companies, and the Chamber of Commerce they have exactly the opposite effect. The actions of these "Moderates" serve to perpetuate income inequality - and as a direct consequence, the political polarization they are so quick to attack.
We should remember that the level of income inequality is far from being a static feature of American society.
Paul Krugman points out that at the beginning of the Great Depression, income inequality, and inequality in the control of wealth, was very high. Then came the "the great compression" between 1929 and 1947. Real wages for workers in manufacturing rose 67% while real income for the richest 1% of Americans fell 17%. This period marked the birth of the American middle class. Two major forces drove these trends - unionization of major manufacturing sectors, and the public policies of the New Deal that were sparked by the Great Depression.
The growing spending power of everyday Americans spurred the postwar boom from 1947 to 1973. Real wages rose 81% and the income of the richest 1% rose 38%. Growth was widely shared, but income inequality continued to drop.
From 1973 to 1980, everyone lost ground. Real wages fell 3% and income for the richest 1% fell 4%. The oil shocks, and the dramatic slowdown in economic growth in developing nations, took their toll on America's and the world's economies.
Then came what economist Paul Krugman calls "the New Gilded Age." Beginning in 1980, there were big gains at the very top. The tax policies of the Reagan and Bush administrations magnified income redistribution.
In the last 20 years, there has been a massive re-polarization of incomes in America between the wealthiest 1% of the population and everyone else. The Center on Budget and Policy Priorities reports that fully two-thirds of all income gains during the last economic expansion (2002 to 2007) flowed to the top 1% of the population. And that, in turn, is one of the chief reasons why the median income for ordinary Americans actually dropped by $2,197 per year since 2000.
From 1990 to 2004, the income of the top 1% of the population has increased 57%. The richest Americans - the top one-tenth of 1% - have experienced income growth of 85%. Yet the median income of the bottom 90% has increased only 2%
Now the CEO of the average company in the Standard and Poor's Index makes10.9 million. That means that before lunch, on the first workday of the year, he (sometimes she) has made more than the minimum wage workers in his company will make all year. That translates to5,240 per hour - or about 344 times that pay of the typical American worker.
Most people would consider a salary of100,000 per year reasonably good pay. But the average CEO makes that much in the first 20 hours of the work year.
And that's nothing compared to some of the Kings of Wall Street. In 2007, the top 50 hedge and private equity fund managers averaged588 million in compensation each- more than 19,000 times as much as the average U.S. worker. And by the way, the hedge fund managers paid a tax rate on their income of only 15% -- far lower than the rate paid by their secretaries.
So if all the "moderates" who say they want to help end the polarization of Congress are serious, they need to get to work supporting the Democratic agenda to end the stranglehold of the wealthiest, most powerful economic interests, and support measures to once again increase taxes on the wealthiest among us at least to the levels they were back in the Clinton Administration. In other words, if you want to end the polarization of Congress, you have to end the economic polarization of America.
Robert Creamer is a long-time political organizer and strategist, and author of the recent book: "Stand Up Straight: How Progressives Can Win," available on Amazon.com.
Books By Robert Creamer
We frequently hear pundits pontificating about the rising level of political polarization in Congress.
Often the blame is ascribed to plummeting levels of civility among Members. In fact, ten years ago the House actually conducted several "civility retreats" aimed at fostering a more civil atmosphere inside the body. These events featured motivational speakers and smaller "encounter-group-like" seminars - and were widely attended by Members and their families. Needless to say, this approach didn't do much for the actual "civility index" in Congress.
And then there are the "centrists" who think that the partisan divide can best be bridged by proposals that seek to "moderate" the Democratic "change" agenda. Of course, most of these "moderates" want to water down Democratic proposals to change the status quo -- proposals that would reduce the power of the Wall Street gang, the private insurance industry, the energy companies and Chamber of Commerce. This presents a serious problem to most Democrats because the interests of these special interests are generally diametrically opposed to the interests of the American people. But it turns out they are also counterproductive when it comes to ending political polarization as well. Here's why:
Several years ago, a group of political scientists that included Nolan McCarty, Keith Poole and Howard Rosenthal, conducted an important study on the causes of political polarization. Their results were published in a fascinating book, Polarized America: The Dance of Ideology and Unequal Riches. Their study found that there is a direct relationship between economic inequality and polarization in American politics.
The team measured political polarization in congressional votes over the last century, and found a direct correlation with the percentage of income received by the top 1% of the electorate.
They also compared the Gini Index of Income Inequality with congressional vote polarization of the last half-century and found a comparable relationship.
Why should this be? It doesn't take a political genius to figure out that if people have more in common they are more likely to support similar proposals and perspectives. Political polarization in Congress does not result from some new inability to "communicate" or "empathize." It results from the fact that the major constituencies of the two parties have increasingly divergent economic interests.
To put it simply, Republicans increasingly represent the interests of the wealthiest elements of American society, and Democrats represent everyone else. As the gap between the incomes of these segments of the population grows, so does the gap between their economic interests and the policy proposals they support.
So in other words, if you want to do something about the political polarization of Congress, you have to deal with the underlying cause. You have to reduce the growing level of income inequality in America. Unfortunately, when "Moderate" Democrats attempt to defang Democratic proposals to rein in private insurance companies, Wall Street banks, energy companies, and the Chamber of Commerce they have exactly the opposite effect. The actions of these "Moderates" serve to perpetuate income inequality - and as a direct consequence, the political polarization they are so quick to attack.
We should remember that the level of income inequality is far from being a static feature of American society.
Paul Krugman points out that at the beginning of the Great Depression, income inequality, and inequality in the control of wealth, was very high. Then came the "the great compression" between 1929 and 1947. Real wages for workers in manufacturing rose 67% while real income for the richest 1% of Americans fell 17%. This period marked the birth of the American middle class. Two major forces drove these trends - unionization of major manufacturing sectors, and the public policies of the New Deal that were sparked by the Great Depression.
The growing spending power of everyday Americans spurred the postwar boom from 1947 to 1973. Real wages rose 81% and the income of the richest 1% rose 38%. Growth was widely shared, but income inequality continued to drop.
From 1973 to 1980, everyone lost ground. Real wages fell 3% and income for the richest 1% fell 4%. The oil shocks, and the dramatic slowdown in economic growth in developing nations, took their toll on America's and the world's economies.
Then came what economist Paul Krugman calls "the New Gilded Age." Beginning in 1980, there were big gains at the very top. The tax policies of the Reagan and Bush administrations magnified income redistribution.
In the last 20 years, there has been a massive re-polarization of incomes in America between the wealthiest 1% of the population and everyone else. The Center on Budget and Policy Priorities reports that fully two-thirds of all income gains during the last economic expansion (2002 to 2007) flowed to the top 1% of the population. And that, in turn, is one of the chief reasons why the median income for ordinary Americans actually dropped by $2,197 per year since 2000.
From 1990 to 2004, the income of the top 1% of the population has increased 57%. The richest Americans - the top one-tenth of 1% - have experienced income growth of 85%. Yet the median income of the bottom 90% has increased only 2%
Now the CEO of the average company in the Standard and Poor's Index makes10.9 million. That means that before lunch, on the first workday of the year, he (sometimes she) has made more than the minimum wage workers in his company will make all year. That translates to5,240 per hour - or about 344 times that pay of the typical American worker.
Most people would consider a salary of100,000 per year reasonably good pay. But the average CEO makes that much in the first 20 hours of the work year.
And that's nothing compared to some of the Kings of Wall Street. In 2007, the top 50 hedge and private equity fund managers averaged588 million in compensation each- more than 19,000 times as much as the average U.S. worker. And by the way, the hedge fund managers paid a tax rate on their income of only 15% -- far lower than the rate paid by their secretaries.
So if all the "moderates" who say they want to help end the polarization of Congress are serious, they need to get to work supporting the Democratic agenda to end the stranglehold of the wealthiest, most powerful economic interests, and support measures to once again increase taxes on the wealthiest among us at least to the levels they were back in the Clinton Administration. In other words, if you want to end the polarization of Congress, you have to end the economic polarization of America.
Robert Creamer is a long-time political organizer and strategist, and author of the recent book: "Stand Up Straight: How Progressives Can Win," available on Amazon.com.
Books By Robert Creamer
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