The Occupy Wall Street movement is a helpful reminder that banks were bailed out by taxpayers while households received no significant government help in avoiding foreclosure, lessening debt burdens, or finding work through a serious economic stimulus. But, we might wonder, why is this anger flaring up now, when economists declare that the Great Recession is over? The answer is the economic condition of millions of individuals is either worse or no better than it was at the depth of decline in 2009. It was recently reported that median household income, adjusted for inflation, has fallen 6.7 percent since the official end of the recession. That verified what millions know to be true -- that inequality has gotten out of hand and no abatement is in sight.
The decline of median income does not represent the reversal of a previously upward trend. To the contrary, the standard of living for most Americans has been in a downward trend for a decade. On the eve of the Great Recession, in 2007, median income was lower than it had been in 2000, the eve of the prior recession. Now it has dropped more. In the three decades prior to 2000, household income for 95 percent of Americans was basically stagnant while the top 5 percent of households captured most of the growth of income. In other words, income inequality marched ever upward, approaching its former zenith of the roaring 1920s.
The long-term rise of income inequality was a major cause of the unprecedented and unsustainable increase of household debt that brought on the financial crisis and Great Recession. That overhang of debt is hindering our recovery from the Great Recession. Beginning in the late 1970s households attempted to offset their mostly stagnant incomes with three strategies: greater labor force participation by women, working longer hours and/or more than one job, and borrowing and reducing saving to maintain their consumption. The resort to borrowing at an unusually high rate began in 1995. The period from 1995 to 2007, especially post-2000, can be characterized as a perfect firestorm of household indebtedness, fueled by four factors: 1) stagnant or declining real incomes for most households because of the long-term rise in income inequality; 2) unusually low interest rates after 2000; 3) legal and institutional changes that relaxed borrowing standards of lenders, raised the availability of credit, and made housing a more liquid asset; and 4) the housing price bubble. The end came in 2006-2008 with the bursting of the housing price bubble, rising interest rates, the financial crisis, and the Great Recession. It is widely agreed that the enormous run-up of household debt triggered the financial crisis of 2007 and the Great Recession.
In all that has been written about the financial crisis and the Great Recession, the usual suspects fingered are low interest rates, shockingly easy credit, the housing price bubble, and reckless leveraging by banks. No noted economists have placed income inequality in the lineup of villains. Long ago, Keynes argued that a more equal distribution of income promoted the strong consumption spending required for full employment. Contrary to Keynes, Milton Friedman claimed that income distribution was not relevant for the theory of consumption. Friedman won that argument, so his theory of consumption, which posits no role for the distribution of income, has become the mainstream theory.
One pillar of Friedman's theory is that the rate of saving would be stable in the long run. That assumption, although correct for long periods in the past, was not true for the long period prior to the Great Recession, from 1984 to 2007, when it fell from 10 percent to a low of 2 percent of disposable income. What were consumers doing with all that money they chose not to save and that they borrowed with second mortgages and house refinancing? Federal Reserve data show that they were not purchasing financial assets or paying off other debts. They were spending it. One would think that the drumbeats of a declining saving rate and rising debt leading up to the Great Recession might make mainstream economists question the theory, but that has not happened. Their theory blinded them to the facts.
To develop a strong economic recovery and avoid another decade of stagnant income, we need a more equal distribution of income that would promote the strong consumption spending required for full employment. This means enacting a serious stimulus package, protecting collective bargaining rights, and instituting help for homeowners and the long-term unemployed -- tall orders indeed with the Senate Republicans determined and able to block any such efforts. Occupy Wall Street may lack an agenda, but their actions and our grim situation should move Obama to take bold steps. This agenda would anger the banks and Congress, but Obama would be doing the right thing. And given the current unpopularity of the banks, Obama needs them as enemies going into this election.
Attempting to diagnose the problem with flawed data, leads to mis-diagnosis, and will never result in curing the problem.
www.currentlychicago.com
Activism is a way for useless people to feel important, even if the consequences of their activism are counterproductive for those they claim to be helping and damaging to the fabric of society as a whole.
Despite a voluminous and often fervent literature on "income distribution," the cold fact is that most income is not distributed: It is earned.”
“The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”
The most basic question is not what is best but who shall decide what is best.
Implicit in the activist conception of government is the assumption that you can take the good things in a complex system for granted, and just improve the things that are not so good. What is lacking in this conception is any sense that a society, an institution, or even a single human being, is an intricate system of fragile inter-relationships, whose complexities are little understood and easily destabilized.
Usually activists have neither practical experience nor economic literacy, so they go around blithely creating huge costs for those who have to work for a living and those who employ them. Not only businesses but Californians as a whole end up paying a staggering price so that a relative handful of people who are a drain on society can feel superior to those who contribute to it.
I agree. The economic neo liberalism, lead to the Great Depression. Then Franklin D. Roosevelt created rules of the game for Wall Street and exercised the Sherman Anti Trust laws to break up the monopolies that were stamping out the growth of the real economy. So, for 70 years the middle class grew with a strong economy. Then in the 1980's we returned to economic neo liberalism, and continued to taken rules off the Wall Street casino in 1999. It’s time to put the rules back on the game. It might take a third party to do it, because the congressmen and Senators wrote into law that it is okay for congressmen to use inside trading. They can also call hedge funds and give them important inside information on things that will affect the market. This is why the OWS sees Wall Street as a rigged market. (This issue was on 60 minutes last Sunday).
Instead of giving a politician the keys to the city, it might be better to change the locks.
Doug Larson
http://www.youtube.com/watch?v=bFxvy9XyUtg
Look at the numbers from the BLS statistics. In the bottom 20% in income, the average household has something like 1.2 adults and 3.7 dependent children, the average education is less than high school, and the average number of hours worked per week is between 15 and 20.
In the top 20%, there are 1.9 adults and 1.6 dependent children per household, the average education is college degree or better, and the number of hours worked per week is greater than 40.
Reading between the lines, the way to get into the top 20% in income is to go to college, get married before having children, and have at least one steady job per household.
They just want to get Re-Elected, shut the Door, where is my share of the PORK ?
Only the Tea Party can or will say NO to the DEBT, DEBT, DEBT Economy !
Then lower Taxes and Honor Freedom and America.
Over recent decades, the distribution of income in China has become steadily less equal; but, at the same time, the average Chinese income has grown sharply and their economy has expanded strongly. The supposedly necessary connection between equal incomes and prosperous economies does not seem to apply generally.
Suppose it was possible to double the income of everyone in the US overnight. You earned $50k before and now you will earn $100k. What about your neighbor across the street who was earning $100k before and will now earn $200k? The inequality gap between the two of you has now ballooned from $50k to $100k; but you are nevertheless much better off than you were before. Growing inequality only involves reduced incomes for some when you assume that there is a fixed pool of total income so that raising one person’s income necessarily involves reducing the income of someone else.
Another way of looking at stagnant incomes for some Americans is that income equality is actually growing - between someone doing a job in China as someone doing that same job in America. The Boston Consulting Group claims: “All over China, wages are climbing at 15 to 20 percent a year because of the supply-and-demand imbalance for skilled labor” www.bcg.com/media/PressReleaseDetails.aspx?id=tcm:12-75973. That rate seems rather high - does anyone have other figures?
Semper fi
$1,200,000 - average in 2010
$30,000 - median income of the lowest 90% in1980
$30,300 - median income in 2010
The trigger was not the private debt, (~%300 of GDP), rather it was the collapse in aggregate demand that was being financed by debt.
Setting that subtle point aside, the author is absolutely correct with respect to the mainstream economists unwillingness to accept their failed ideology.
Without profound steps to once again enact full employment policies, strengthening labor laws, employee rights and increasing the minimum wage a continued fall in real wages, rising unemployment, more poor and a stagnant economy will be the result.
Otherwise, consumers (%70 of GDP) are simply not able to afford the output which the economy is capable of producing. They will not have the capacity in real terms to do so.
For incomes to grow there has to be growth in spending. The US has only 2 sources of spending in the national economy – the private domestic sector (incl net exports, if +tve) and the public sector.
The only chance to avoid another depression / recession is for government to boost spending, to increase aggregate demand, thereby increasing jobs and kick starting the private sector into growth.
That on it's own may well be not enough as the massive amount of private debt needs to be addressed as well.
A University of Michigan study showed how many jobs are lost due to military spending: per billion dollars spent, jobs lost by categories in the fields of health care, education, manufacturing, etc.
Time to cut military spending by 50% and use those $700,000,000,000 to rebuild the crumbling U.S. economy, i.e., no more wars.