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1. US Capitalism in Crisis And Social Market Alternatives.

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2 US Capitalism in Crisis And Social Market Alternatives

3 What are the common explanations you hear for…  Why people don’t have jobs?  Why there was a housing price bubble and foreclosures?  Why there was a financial crisis?  Why there is so much government debt? 3

4 4 CPEG Economic Crisis Workshop - Barclay 4 All the evils, abuses, and inequities, popularly ascribed to businessmen and to capitalism were not caused by an unregulated economy of by a free market, but by government intervention into the economy. --Ayn Rand These new [financial] technologies lay off all the risk of highly leveraged institutions on stable American and international institutions. - Alan Greenspan Ronald ReaganRobert Rubin

5 Occupy?  What was the issue that Occupy Wall Street raised?  What did you hear about it in this election? 5

6 It’s Time to Talk About Inequality! 6

7 Part I: Class Redistribution of Income The Underlying Cause of Financial Crisis and Economic Stagnation

8 Why did inequality increase? The Neoliberal Explanation  Neoliberals (conservatives) like to talk about “skill gaps” and need for more education.  Often called “skill-biased technological change” (SBTC).  Thus, increased inequality is explained as mismatch between workers’ skills and the skills demanded by the jobs available. 8

9 A Neoliberal Picture of Inequality: Top 10% Income Share, 1950-2008 9

10 The Real Story: Income Gains in the Top 10%, 1950-2007 10 Growing apart Threshold for a top 1% income in 2007 was about $350,000. Growing together

11 If the neoliberal argument is wrong, what does explain increased inequality?  Three Factors:  Decline of unionization  Inequality as social policy: minimum wage and employment security  Corporate model of globalization 11

12 As Unionization Has Declined, Income Concentration at the Top Has Increased 12

13 Inequality as Social Policy: Minimum Wage  By 1970s most new jobs were in the service secto r.  Would these jobs be low wage or high wage?  The minimum wage lagged median and average wage levels.  The attack on unions made organizing service workers more difficult.  The Federal Reserve Board (“Fed”) and Congress abandoned full employment as a policy goal. 13

14 Inequality as Social Policy: Employment (In)security  Decline of unionization has made jobs less secure.  US employment is ”at will.”  Employer can fire a worker for good cause, bad cause – or not cause.  Think about what this job insecurity means for bargaining for higher wages or asserting control over the workplace. 14

15 Why did inequality increase? Globalization as a Neoliberal Explanation  Neoliberals: Increased inequality simply reflects a globalized market.  The top 1% are global “superstars” and as a result get much bigger income share.  If this explanation is true, other wealthy countries should see similar levels of inequality as the US. 15

16 US Inequality Has Grown Much More than in Other Rich Countries 16

17 The Corporate Model of Globalization  Protects copyrights and patents.  Gives owners of finance and technology maximum international mobility.  Prohibits efforts to control mobility of capital. 17

18 Results of Corporate Model of Globalization  Offshoring of manufacturing jobs = job loss  Imports of offshored production = trade deficit  Consumer buying of imports = credit/borrowing  GE’s Jack Welch: “Ideally you’d have every factory you own on a barge.” 18

19 The First Big Question  How much more income was going to the Top 1% by 2000?  The answer: $1,000,000,000,000 (one trillion dollars) – every year. 19

20 “Elevator Speech”: Causes of Increased Inequality  Elevator speeches should be:  Short (2–3 minutes)  Develop an argument  Use evidence  Let’s construct our elevator speech on inequality  What will be our main points?  What evidence will we use? 20

21 Part II: Job Creation or Financial Speculation? The Second Big Question

22 The Neoliberal Argument  Economic growth is driven by the actions of very small group of “job creators.”  Job creators must have sufficient money to invest, to take risks and create jobs. They have.  Job creators must be assured of keeping a significant portion of their profits. 22

23 The Tax Burden Was Shifted – Downward  The top personal income tax rate declined sharply.  70% in 1980 (91% from WWII until 1960s)  35% after Reagan/Bush I and II  This means a $10 million/yr CEO keeps $6.5 million instead of $3.0 million.  Income from capital is taxed at lower rates than income from labor.  Corporations have evaded/avoided/scammed the corporate income tax. 23

24 24 Million-$-income families increased their share of total income 7-fold while their tax rate was cut in half.

25 25 Credit: Cartoon Group

26 The conditions that neoliberal policies and politicians say are necessary for job creation have been fulfilled. What, then has been the result for job creation? 26

27 Unemployment Has Been Higher Period # of months # months with unemployment under 4% 1945-1975360 months75 months (21%) (“Golden Age”) 1976-2011420 months5 months (1%) (“Neoliberal Era”) 27

28 Recovery from Recessions Has Been Slower Period Months to reach pre-recession # of jobs 1945 – 19809 months (average) 1980 - 2007more than 30 months 2007 - ??40 months (and counting) 28

29 So, what did the top 1% do with their extra $1 trillion?  The top 1% have been labeled “job creators.”  But, we’ve seen that the increased income grabbed by the top 1% did not generate better job growth. 29

30 Rabble getting on your nerves? Escape to your own island: this one is going for only $24.5 million – castle included. One speculator who helped run up oil prices got a huge bonus paid with our (tax) money: He owns this castle. 30

31 What else have they done with the money?  Trying to buy elections ($1-2 billion is small change)  Financial speculation – creating a bubble economy 31

32 The Bubble Economy  Commodity speculation – especially oil  Where the Koch brothers made most of their money  Dotcom stock bubble  Burst in 2000/01  Housing price bubble  The source of the financial crisis because of the role of debt  All of these bubbles fed the growth of finance rather than growth in the real economy. 32 oil Housing Dot Com gold

33 The Real vs. the Financial Economy – or What the Top 1% Did with Their Money 33 Activity in the Financial Economy has grown many times faster than production in the Real Economy

34 Was the neoliberal growth model successful? Average Annual GDP Growth per Capita 34 USUS

35 “Elevator Speech”: Job Creation Why we [don’t] need to provide higher income and lower tax rates for the “job creators.” 35

36 Part III: Bubble, Bubble, Toil and Trouble The Housing Bubble and Financial Collapse

37 The Housing Bubble and Collapse: The Neoliberal Explanation  Mortgage lenders were forced to make risky loans because:  Of the Community Reinvestment Act (CRA)  Government (Fannie May and Freddie Mac) pushed risky subprime loans that crashed the economy.  Therefore, let the foreclosure proceed and prices will eventually recover. 37

38 Understanding the Housing Bubble: What Happened?  Let’s think about the skit.  What were the key events/decisions?  Who made them? 38

39 The Buying a House Skit: What Happened – Lending, Debt and Foreclosure  2005: Housing borrower is pushed to take out a risky loan.  2007: House prices fall. Leverage destroys their equity and pushes them underwater.  Bank lending used to be a simple business with one crucial decision: can the borrower repay the loan? 39

40 Mortgage Lending Practices Drove the Housing Bubble and Leverage in the Financial Sector: I  Selling of mortgages (“securitization”) eliminated incentive to assess ability of borrower to repay  Can we sell the loan?  No-doc loans increased the pool of borrowers Selling of mortgages.  Lender fraud further expanded borrower pool. 40

41 Mortgage Lending Practices Drove the Housing Bubble and Leverage in the Financial Sector: II  High leverage increased default risk.  Minority borrowers were targeted for subprime loans.  Federal Reserve could have intervened, but Fed Chair Greenspan opposed to regulation. 41

42 Why did lenders push subprime loans?  $300,000 mortgage loan:  If conforming (“prime”), Countrywide would have a profit of $2,790; if subprime, the profit would be $10,920.  If conforming, the individual mortgage broker’s commission would be $4,440; if subprime, the commission would be $5,640.  More than half of subprime borrowers actually qualified for conforming mortgage loans.  Any questions? 42

43 Making Subprime Loans Attractive: How Financial Deregulation Changed Mortgage Lending Practices  Mortgage lending used to be “originate and hold.”  Neoliberal financial deregulation made “originate and distribute” model more attractive.  The key regulatory changes can be tracked by looking at financial sector profits. 43

44 Financial Sector Profits as a Percent of Total Profits, 1980-2004 44 ARMsARMs SecuritizationSecuritization CDsCDs GLBGLB LeverageLeverage JPMorgan JPMorgan

45 CPEG Economic Crisis Workshop - Barclay 45 Financial SuperMall: One Stop Shopping 45

46 Mortgage Debt and Financial Sector Debt as a Percent of GDP, 1978-2007 46

47 The Housing Bubble and Collapse: The Neoliberal Explanation  Mortgage lenders were forced to make risky loans because:  Of the Community Reinvestment Act (CRA).  Government (Fannie May and Freddie Mac) pushed risky subprime loans that crashed the economy.  Therefore let the foreclosure proceed and prices will eventually recover. 47

48 Did the CRA force mortgage lenders to make risky loans?  Over 75% of subprime mortgage loans were made by financial sector businesses NOT subject to the Community Reinvestment Act requirements.  FHA, Fannie and Freddie lost market share to private sector lenders, e.g. Bank of America, Wells Fargo, Washington Mutual, etc. 48

49 Did Fannie and Freddie lead the way into subprimes?  How can we test this neoliberal claim?  Let’s compare how mortgage securities issued by Fannie and Freddie performed vs. those issued by Goldman, Bank of America, Wells Fargo, etc. (“private label”).  Which were more likely to default? 49

50 Risk: Default Rates on Mortgage Originations: GSEs* vs. Private Label Firms* 50 *GSEs are Fannie May and Freddie Mac; “private label” are Bank of America, Wells Fargo, JPMorgan Chase, etc.

51 The Financial Panic of 2008  Bear Stearns collapses March 2008  Merrill Lynch on verge of collapse – acquired by Bank of America Sept. 14, 2008  Lehman Brothers goes bankrupt Sept. 15, 2008  Fed rescues AIG Sept. 16, 2008  Washington Mutual seized by FDIC Sept. 25, 2008  If you owned financial assets – stocks, bonds – you were really scared. 51

52 Wealth and the Bailout  Our inequality skit demonstrated a huge income redistribution.  Wealth is the other half of economic well being.  Two major kinds of wealth in US:  Housing wealth  Financial wealth  How important is each to the 1% and the 99%? 52

53 Two Types of Wealth by Level of Family Wealth, 2007 53

54 In the Bush/Paulson Bailout Whose wealth was saved -- and whose was sacrificed? 54

55 Who was rescued by the Bush/Paulson bailout? Financial Sector  Sept. 2008 Treas. Sec. Paulson asked Congress for $770 billion to rescue banks, AIG, etc.  Fed made record amount of loans – as much as $180billion/day to big banks (Goldman, CitiGroup, JP Morgan, Bank of America, Morgan Stanley). Non-Financial Sector  Obama provided $84 billion to GM and Chrysler.  GM and Chrysler go through bankruptcy. 55

56 Housing Wealth Has Not Recovered 56

57 The Devastation Wreaked by the Great Recession: Loss of Wealth (median wealth per family) 57

58 The Stock Market Has Recovered 58

59 Wealth Inequality has Grown 59

60 Financial Sector Compensation Was (and Still Is) Divorced from Economic Contribution 60

61 “Elevator Speech”: Housing Collapse Who and what caused the housing bubble and collapse? 61

62 Summary  US had three decades of growing inequality, with huge income growth to the top 1%.  This income inequality generated a rise of speculative financial activity.  The result: A housing bubble and economic crisis.  We must move the political discussion towards social market alternatives. 62

63 Part IV: Changing the Political Conversation Social Market Alternatives

64 What happens in markets?  Market exchanges are the buying and selling of commodities.  Private markets maintain the unequal distribution of wealth and power.  I own land, you don’t. You work for me.  You own Facebook, I’m a programmer. I work for you. 64

65 Private Markets vs. Social Markets  Social market policies are designed to counter the unequal wealth and power created by private markets.  Social markets are ones that are controlled by democratic decision making. 65

66 Three Kinds of Social Policy  A policy may strengthen or expand the role of private markets as the mechanism through which a good or service is provided.  A policy may constrain or provide incentives to private market participants to change behavior or access to a good or service.  A policy may remove the provision of some good or service from the private market, distributing it through the social market (usually some level of government). These are social market alternative policies. 66

67 The Market for Labor: 1  How do we create jobs?  One policy says we must maximize labor market “flexibility.”  What does this mean?  In terms of businesses ability to hire and fire?  In terms of collective voice/action by employees?  In terms of who is responsible for solving the unemployment problem?  What is the role of private markets in this policy? 67

68 The Market for Labor: 2  In early 2009 Obama proposed and Congress passed the American Recovery and Reinvestment Act (aka “stimulus”).  It included tax breaks and/or incentives for business to hire workers.  What kind of policy is this in terms of the role of private markets? 68

69 The Market for Labor: 3  CPEG jobs program: a job for anyone willing and able to work.  Create 4.5 million new jobs/yr for five years.  Most of those jobs would be direct hires in the public sector.  Would pay a living wage ($18/hr).  Included training and a training level for youth entering the labor force.  Include training to being provide skills to workers who may not usually hold these jobs (e.g., women in construction). 69

70 The Market for Labor: 4  Three targeted areas for employment:  Physical infrastructure (highways, bridges, schools, etc.)  Social infrastructure (CNAs, caring for very young and very old, teacher aids, etc)  Green economy (manufacturing/services with higher labor content)  What kind of policy would this be in terms of the role of markets? 70

71 Thinking about a Jobs Program at the City Level  DC unemployment is greater that or equal to the national average.  DC has a large square footage of public buildings.  An energy retrofit program would create a significant number of jobs.  Could be financed by municipal bond issuance.  Pay off is less than 5 years. 71

72 Job Security *and Gini Index, OECD Countries 72 4545 *Employment protection – high score is more job security for workers: (i) protection of permanent workers against dismissal; (ii) regulation of temporary forms of employment; and (iii)specific requirements for collective dismissal USUS

73 The “Market” for Education: 1  Groups such as “Stand for Children,” “Children First” are trying to turn education into a good that you buy.  This is done in the name of “choice,” similar to your choice of TV or toothpaste.  Vouchers are often the tool by which such choice is to be exercised.  How are vouchers financed?  What is happening to public money here?  What kind of policy is this in terms of the role of private markets? 73

74 The “Market” for Education: 2  The US public schools system (K-12)  What is the relationship between private markets and our K-12 educational system? (How are most of our K-12 systems funded?) 74

75 Removing Education from the Market  In Finland, education through college is:  Funded through national income tax  Free/low cost to users  What kind of reform would this be in terms of the role of markets? 75

76 Educational Spending as a Percent of GDP, Total and by Type 76 USUS FinlandFinland

77 More Spending = Better Outcomes? Well, not really. 77 PISA: Program for International Student Assessment; PISA is given to all students (at age 15) in country willing to participate. USUS Fin.Fin.

78 Housing: The Market for Shelter  2012: 12 million underwater mortgage borrowers.  Neoliberal policy: Romney: "Don’t try to stop the foreclosure process. Let it run its course and hit the bottom.”  But what if the mortgage lenders engaged in fraudulent and/or reckless lending practices?  FDR’s Second Bill of Rights included “The right of every family to a decent home.” 78

79 Foreclosure Policies to Date  Foreclosure relief programs – very limited success.  Home Affordable Modification Program (HAMP) has reached about 1.2 million vs. 12 million underwater borrowers.  “Hardest Hit Fund” has paid out less than 5% of the money allocated for unemployed home owners.  Programs use tax incentives and subsides to change the behavior of mortgage lenders.  What is the role of private markets in this approach? 79

80 We’ve Been Here Before  1933 FDR/Congress created the Home Owners Loan Corporation (HOLC).  HOLC issued tax-exempt debt.  The debt was swapped for mortgages.  This debt was guaranteed by the federal government.  HOLC independently appraised the houses and issued 30 yr, fixed rate mortgages tied to the house value.  This kept many people in their homes.  HOLC rehabbed foreclosures + rented the houses.  HOLC ended with a small profit for taxpayers. 80

81 Could we do HOLC II?  The number of underwater home owners is larger.  The total “underwater” amount is about $700 billion (does this number sound familiar?).  But – 2/3 of underwater mortgage borrowers are current in their payments.  The borrowing costs for a federally guaranteed entity are very low. 81

82 Who would be eligible?  Debt for mortgage swap for any mortgage borrower with 10% or more negative equity.  Any household with a long term unemployed individual would also be eligible.  Any mortgages tendered under the program that are not fixed rate mortgages would be converted into the same.  HOLC II would also operate a rent-to-own program for borrowers who could not meet the terms of the new mortgage. 82

83 Part V: A Summing Up Neoliberal Stagnation or Progressive Prosperity?

84 Principles of Neoliberal Capitalist Ideology  Markets are the fundamental mechanism for societies.  Markets maximize efficiency.  Government intervention is always second best.  Therefore: Expand scope of markets. (This is called “deregulation.”)  Therefore: Reduce size of government (cut spending for social goods).  Markets maximize individual freedom,  Therefore: Favor choices made by individuals over collective action (individualism).  Therefore: Promote globalization (“free trade”). 84

85 Outcomes of Neoliberal Policies  Commodification (privatization) of services.  Reduced public sector and thus public employment.  Declining percent of labor force in unions/covered by collective bargaining.  The free development of each lies in the hands of the individual and is achieved by freeing oneself from the constraints of the collective. All of which leads to  Growing Economic and Social Inequality 85

86 Percent of Population with Incomes Less Than 50% of the Median (2007/2008) 86 1 in 6 workers in the US earn less than half the median income. In Denmark, only 1 in 16 workers earn less than half the median income. USUS DenmarkDenmark OECD Avg.OECD Avg.

87 Principles underlying Social Market Alternative Policies  Humans existed before markets.  Markets tend to concentrate income and wealth.  Therefore: A small portion of the population can distort what is available to the rest of us.  Thus market outcomes are neither efficient nor morally good.  Therefore: Reduce the role of the market for production of shared goods and services (de-commodification).  Therefore: Favor choices made by collectivities, social market decisions - that are implemented via the state, workplace associations and other groups.  Increase the role of the state as a mechanism for providing shared goods and services. 87

88 Outcomes of Social Market Policies  Socialized provision of shared goods and services.  A larger public sector.  Greater portion of labor force covered by collective bargaining agreements.  More women in government.  The free development of each is bound together with the free development of all. All of which leads to:  Greater Economic and Social Equality 88

89 Social Spending* % of GDP and Gini Index, OECD Countries 89 4545 USUS *Pensions, working age income support, health care and other

90 Part VI: Conclusion Inequality and the Quality of Our Lives

91 91 Inequality and the Fraying of Social Bonds  Economic costs are only part of the curse of inequality.  Equally important – and inextricably intertwined – are the costs to the ties that link us to one another.  More unequal societies are less trusting.  Do you think that, in general, most people can be trusted?

92 Social Trust and Economic Inequality 92 USUS

93 Summary  US had three decades of growing inequality, with huge income growth to the top 1%.  This income inequality generated a rise of speculative financial activity.  The result: A housing bubble and economic crisis.  We must move the political discussion towards social market alternatives. 93


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