--Christina Romer, chairwomen of the president's Council of Economic Advisors
"The usual relationship between GDP growth and the unemployment rate has broken down somewhat."
Yet another exaggerated headline? Maybe not.
If the link between economic growth and job creation really is broken, then capitalism as we've known it for the past seventy years may be dead and gone (or, at the very least, transformed into something very different.)
Our entire conception of American capitalism has been based on its ability to produce an ever rising standard of living for most of our people, especially the middle class. That was the fundamental project of our government after the Great Depression and during the Cold War, and it was remarkably successful for more than four decades. Working people became middle class citizens, and they were the envy of the world.
But by the late 1970s, policy makers and economists argued that New Deal/Great Society government programs were stifling the economy. They called for market "liberalization" (meaning the privatization of public services and the reduction of financial regulations and oversight). Steep progressive income taxes on the super-rich supposedly were discouraging investment. Strict financial controls were supposedly holding back "financial innovation." So step by step we dismantled progressive taxation and financial controls to set in motion a new kind of economy based on neo-liberalism - the deregulation of as many markets as possible.
The new régime was remarkably successful in some respects. Investment boomed, especially into financial assets. The process also shifted enormous wealth to the top fraction of the population. But, middle class incomes stalled as Wall Street became the dominant sector of our economy.
The statistics are harsh: Since the mid-1970s the average real wage of non-supervisory production worker has actually declined by 18 percent, while the top earners saw enormous gains. The net result is this: the compensation of the top 100 CEOs compared to the average workers was 45 to 1 in 1970. By 2008 it was 1,081 to one. In 1960, the financial sector accounted for 15 percent of all corporate profits. By 2008 it was 35 percent.
Along the way Wall Street found new ways to mint money without fulfilling its primary mission: providing capital and credit for investment in the real economy. They could do far better creating, selling and trading new financial instruments that supposedly removed risk from risky loans. (This activity turned out to be the most profitable enterprise in the history of Wall Street.) In the new America, the smart money built hybrid financial instruments, not hybrid cars.
Unfortunately, the risk wasn't gone--it was growing ever larger inside the sub-prime derivatives bubble. The economy crashed and we were (and are still) stuck with trillions of dollars of toxic assets.
Just at this critical point, capitalism may have suffered its fatal injury. The financial crash should have dramatically reduced the wealth and incomes of those who gambled and lost on Wall Street. As in the 1930s the distribution of income should have become much more compressed. The pain and suffering should have been shared more equally. Instead, the biggest banks were bailed out, while millions of Americans were thrown out of their jobs and homes. Worse still, the very bankers who caused the crisis took advantage of $12 trillion (not billion, and not just TARP) of taxpayer support to generate record profits and bonuses.
Is it still capitalism when bankers can "earn" a record $150 billion in bonuses during the worst financial year since the Great Depression, even though they caused the crash in the first place?
Is it still capitalism when the major sector of your economy goes on taxpayer welfare and suffers no consequences?
Is it still capitalism when bailed-out banks can use taxpayer money to lobby against new financial regulations?Capitalism is wrong word for what we have become. It confers far too much dignity. It lets bankers who profit from taxpayer welfare hide behind words like freedom, entrepreneurship, innovation and opportunity. But that's a sham. Let's nail this new stage with a more accurate and more pejorative descriptor. It's not capitalism. It's a billionaire bailout society that comes with the following features:
- The income and wealth distribution is extreme and increasingly so.
- The financial sector is the dominant sector with institutions that are far too big and interconnected to fail.
- The financial sector "earns" money without loaning money to the real economy.
- High unemployment is chronic.
- The middle class is under increasing stress.
- The public infrastructure is decaying due to the lack of progressive taxation.
- The political process is gridlocked making financial reform nearly impossible
- And an anti-government, anti-tax populism emerges that further cripples the government's ability to contain Wall Street.
It's not a pretty picture. But if we don't see it and name it, we can't change it.
The new billionaire bailout society has two critical weaknesses. First of all it has no real interest in producing enough jobs for all who need and want them. The latest Economic Report of the President predicts that unemployment will hover near 10 percent for the rest of this year which means that the real jobless rate will be more than 17 percent. And it will stay extremely high for years to come. It is doubtful that we'll see full employment (5 percent and below) before the end of the decade. But at some point, high chronic unemployment could translate into mass grass-roots pressure for significant reforms. This creates the political space for a progressive populists surge, not just the Tea party.
Second, the billionaire bailout society is financially unstable. We've fixed precisely nothing since the crash. Too-big-to-fail financial firms have grown even bigger. (In fact the government has given 19 of them special status as too big to fail.) Breaking them up is not on the Congressional agenda. New regulations are likely to be weak if they are issued at all. That means the financial casino is up and running again, fueled by excessive wealth in the hands of the few.
But we have learned at least one very painful lesson: The free market doesn't work on Wall Street. It can't police itself. Even Alan Greenspan admits to that. Since it's lacks the constraints we need, it's going to crash again and probably before the end of this decade.
What needs to be done?
Jobs must come first, second and third. Prolonged unemployment just isn't acceptable, especially while doling out trillions of dollars to Wall Street. If Keynesian stimulus efforts are unable to induce the private sector to hire millions of new workers, then it's imperative to create millions of public sector jobs to rebuild our decaying infrastructure, weatherize our homes and businesses, and to educate our children. Our people have to work. And these kinds of investments also would make a long-term positive contribution to our society.
Worried about the deficit? Then to pay for these jobs and stimulus programs, we should reinstitute steep progressive taxes on the uber-rich. Also we should place a high windfall tax on Wall Street bonuses for as long as the taxpayers are providing subsidies for the financial sector. More important still is a Tobin tax on speculative financial transactions. That would both generate needed funds while simultaneously tamping down on the kind of economically harmful financial gambling that got us into all this trouble in the first place. Most Americans might find such reforms reasonable and fair.
As for Wall Street, Glass-Steagall needs to make a comeback. The largest banks and investment houses also should be broken up into much smaller pieces. They have to be small enough to fail without taking the rest of us with them.
Frankly, I actually had believed that one or two of these major reforms would have passed by now, given the vast financial carnage caused by Wall Street's crash and the massive bailouts that ensued. The banks were desperate. They had no choice but to accept any and all reforms as we doled out their welfare checks. But we asked for nothing in return. Nada. They got the money. They got their record profits and bonuses. And we got the billionaire bailout society.
Clearly I had greatly overestimated the Administration's resolve, and I had underestimated Wall Street's chutzpah. Unfortunately, the upcoming crash might soon give us another chance. Let's hope I'm wrong about that too.
Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It Chelsea Green Publishing, June 2009.