An Obama Administration Must Deal with the Underlying Cause of Our Economic Meltdown: The Increasing Concentration of Wealth
Commentators are prone to blame the sub-prime lending crisis for the current meltdown in the American financial system. No doubt it is the proximate cause. But there is a much deeper cancer that underlies the current crisis and the eight year long stagnation of American incomes: a massive increase in the concentration of wealth.
The now famous post bail-out AIG spa retreat has served to focus public outrage over the sense of entitlement that Wall Street's "Masters of the Universe" seem to have when it comes to claiming their "share of the pie." Voters were infuriated that after the taxpayers reached into their jeans and provided an $85 billion bailout, a group of top executives and salesmen saw fit to spend $443,000 of company money being wined, dined and massaged at the expensive St. Regis Monarch Beach resort in California.
The stories about this episode also served to highlight what we really mean by the "increased concentration of wealth." Joseph Cassano AIG's financial products manager -- whose complex investments helped lead to AIG's near collapse -- receives $1 million per month in consulting fees. That's right, Cassano makes more in one month than a normal family making a good income of $100,000 annually brings home in 10 years.
And Cassano's just a piker when it comes to the CEO's of many American Corporations. CEO's of America's largest corporations (The Fortune 100) make an average of $17.6 million per year. That is $67,692 per day or approximately $8,461 per hour.
Before they break for lunch on the first work day next January, these CEO's will earn more than their minimum wage workers will earn all year.
Why does all of this matter to the overall economy? The bottom line is that the top two percent of the population has managed to siphon off all of America's economic growth over the last eight years. Real income for average Americans has dropped while the share of wealth and income controlled by the elite few has exploded.
The problem is that this can't go on forever. All of those average Americans are the customers that have to buy the products and services made by the companies those CEO's manage. For a time, consumers could keep buying -- using their credit cards or borrowing on the inflating equity in their homes that resulted from the real estate bubble. But after while the house of cards had to collapse.
Of course we've been here before. Just before the Great Depression the top 1% of the population owned almost 40% of the nation's wealth. In 1929 the economy collapsed along with it the right wing notion that we should leave the fate of our economy to an "invisible hand" that would "invariably" convert the greed of the few into the public good.
The New York Times' Paul Krugman has chronicled what happened next. After the collapse came 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.
Then came the postwar boom 1947 to 1973. Real wages rose 81% and the income of the richest 1% rose 38%. Growth was widely shared, and 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 and the world economy.
Then came what Krugman calls "the New Gilded Age." Beginning in 1980, there were big gains at the very top. The tax policies of the Reagan administration magnified income redistribution. Between 1980 and 2004, real wages in manufacturing fell 1%, while real income of the richest one percent rose 135%.
According to Federal reports, by 2006 the top 1% of the population once again owned almost 34% of the nation's wealth -- more than all of the Americans in the bottom 90% of the population combined. Together the top 5% controlled almost two thirds of the wealth in America -- including 88% of the nation's business assets and almost 80% of the value of stocks.
The wealthiest Americans often try to justify their disproportionate share of wealth and income by saying that they make a disproportionate contribution to the economy. That, of course, is simply baloney -- particularly when it comes to Wall Street.
Wall Street traders are basically engaged in very sophisticated gambling. They often claim that they are "allocating risk." In fact, of late they have been allowed by the Bush-McCain economic policies to engage in such risky behavior that they have endangered us all. They don't create wealth. Wealth is created through productive activity -- by manipulating the physical world or the world of information to enable people to achieve their goals. The people who create wealth are the people who build houses, or grow food, or craft computer programs, or train young minds, or transport us from Chicago to Kansas City.
The increasing dominance of the financial sector in the American economy has meant that economic decisions have increasingly been guided by the desire of Wall Street types to win speculative games rather than increase productivity and widely shared economic growth. The creation of complex derivatives that sliced and diced mortgage securities was driven by the imperative to sell more and more financial instruments that would generate the "golden crumbs" that Wall Street investment firms shave off every transaction -- and the highly leveraged speculative bonanzas that make them into billionaires.
Their decisions lead to the creation of a speculative bubble that has collapsed and left economic disaster in its wake.
In the short term it is critical to staunch the bleeding and protect the pension funds, home values, and jobs of everyday Americans. But to cure the disease we need to return to a bottom up economic policy and encourages higher wages for average Americans and broadly shared economic growth. That will mean enacting tax policies that put money into the hands of the middle class and requires that the wealthy pay their fair share. It will require that we pass the Employee Free Choice Act that will make it easier to workers to organize and bargain with employers. It will require that we relearn the lesson that the "invisible hand" is not infallible -- that markets need rules, regulation and transparency or they inevitably veer into speculative excess. And most of all it will require that we make a national priority of reducing the inequality of wealth and power and recommit our country to fulfilling America's promise of becoming a truly democratic society.
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.
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
The very process of financial innovation changes the probability of default.
http://tak
We should recognize that billionaires are like black holes. They have a tremendous pull, and with this they not only bully the rest of us, but they warp our political system, warp our financial system, and even warp our culture. More people need to understand that concentrations of wealth are unhealthy to our economy and our society and must be avoided to the extent possible.
It is not just the billionaires, but also the financiers swarming around them to help them manage their money wisely; all the while taking a percentage. The business this swarm is in needs to be regulated by us, the government, not the financiers themselves.
Our problem goes back longer than Bush or Reagan and spans both parties.
Our financial problems stem from two distinct causes that allowed wealth to be concentrated in a small percentage of hands. The first was tying our money to petroleum, making petrodollars. Fine as long as we imported a small percentage and dominated the world, but not so fine as we import a majority of our petroleum and are no longer the dominate world currency. The second is favoring the financial sector over the manufacturing sector in our economy. The financiers were wrong, you cannot endlessly create wealth through loaning money and hedging bets. We are feeling the pain of that now. Manufacturing - that is doing things with our raw materials - adding value is the only true way to create wealth. Finance is secondary.
We can have a financial revolution that is bloodless and in the end beneficial for all. The rich will still be the rich, the middle class will stabilize, and unfortunately there will be poverty, but I hope we will be better able to deal with it. We must rewrite the tax code, redistribute the wealth and get back to work. We must consume less, less of the trivial things, we must save our money. And most importantly of all, we must forgive. We must forgive some of the debt. We must allow it to deflate in an economic sense and then start over. "Forgive us our debtors as we forgive ourselves.
Well gosh darn Robert (folksiness is in these days and I'm practicin'), you seem to be hittin' the nail on the head a lot these days. I'm addin' myself to your fan list.
Remember in "It's a Wonderful Life," whenever you hear a bell ring, it means somewhere an angel has gotten his wings?
Well, every time another billionaire is created, somewhere an angel explodes. If you listen carefully you can hear them: poom! poom! poom! Seems like the explosions are getting louder and more frequent these days too.
POOM!
The CEO's financial benefits packages are completely obscene and not justified to say the least. These packages should be agreed upon by the shareholders and should be reasonable compensation. However, I thought that this crisis was caused by the sub-prime mortgage debacle. Didn't Congress through Fannie and Freddie encourage these bad loans to unqualified borrowers? Weren't these bad loans then packaged as invesment instruments and sold throughout the industry? Don't we have a banking committee? What exactly do they do. I know the Chairman of the Ways and Means (Charles Rangel) doesn't understand the tax code himself. Wait, doesn't the Ways and Means write the tax code? I'm sure he'll be asked to step down as chairman by Speaker Pelosi due to his malfeasance and ignorance. This is a clean Congress right?
"Most mortgage loans today are originated by largely unregulated mortgage companies, which are not banks and which have little of their own capital at risk. They are free to devise complicated, far-fetched mortgage products and to lend to people who can't afford the payments, as long as they think they can turn a profit by selling off the paper. Mortgage companies circumvent the entire system of government bank regulation", thanks to legislation sponsored by Phil Grahmm.
"Subprime mortgage securitizations were able to take off because, as Bloomberg reported, in August 2004 Moody's and Standard and Poor's loosened their standards for rating mortgage backed securities", even Tresury Secretary Paulson admitted this.
Paulson was part of the problem in his previous job as CEO of Goldman Sachs. He helped obtain the SEC exemption that allowed brokers to increase their leverage from 12:1 to 60:1.
During the years 205 and 2006 , the mortgage industry pressed Congress to roll back strong state rules that sought to stem the rise of predatory tactics used by lenders and brokers to place homeowners in high-cost mortgages.
.In December 2000, Gramm, while a U.S. Senator, snuck in a 262-page amendment to a government re-authorization bill that created what is now the $62 trillion market for credit default swaps (CDSs). Gramm's "The Commodity Futures Modernization Act" freed financial institutions from oversight of their CDS transactions.
The core of the problem is the anti-regulatory climate that Republicans have created through the years.
The average CEO in America makes more than 430 times the average production worker. The average Japanese or European CEO makes much, much less. Republicans have largely succeeded in their strategy of busting unions and the minimum wage was not raised in years until recently. Republicans sell the idea that the American dream is getting wealthy. But they seek to impoverish American workes, except for the elite in the executive boardroom.
At the same time, Republicans manipulate the public by playing to Main Street and small town values. They talk the talk of the average American, but walk the walk of the boardroom. As the American economy largely implodes, we can see the results of their policies, which they have been so efficient at implementing. Never has the average guy or woman been so vulnerable. As Obama said, if Republicans want an ownership society they should own their mistakes.
I am not well versed on economics but it's easy to see that we have more billionaires than ever while pensions, job security and corporate-sponsored health insurance are a thing of the past. Greed baffles me. NOTE TO THE WALL STREET RICH: We're all going to die, no matter how much money we take and hoard. I blame our culture and the media that constantly depict the lifestyles of those who can afford to go to luxurious resorts and purchase $6,000 handbags. Enough already with the multiple homes and private planes and couture. Then the middle class want to live beyond their means...lo
P.S. Thank you Mr. Creamer for helping with Social Security.
Excellent article. Until the economy improves for the classes below wealthy, they will not be able to sustain financial institutions, bailout or no.
Milton Friedman is as dead as Karl Marx.
Mr. Creamer is correct, as far as he goes, but what must be acknowledged is the abject failure of the Chicago School.
The philosophies of Friedman and Marx share one vitally important trait: neither has a proper grasp of human nature, hence human behavior. Their philosophies make incorrect assumptions about human behavior in their utopian visions. When these models are put into practice, and humans behave differently than these models assume, a systemic breakdown inevitably follows.
This is what the fall of Soviet Communism and the world's current economic crisis have in common.
Mr. Creamer falls short in his analysis by not offering an unequivocal repudiation of Friedman. Such a repudiation must be followed by a call for an economic approach that has at its root more realistic assumptions about human nature.
The Rich...cau
From a treasury department study: the richest 1% of tax filers will have paid more than 40% of the income tax burden. The top 50% will account for 97% of all federal income taxes, while the bottom 50% will have paid just 3%.
These are the people who have the most flexibility in controlling their earnings - deferring income or taxes, moving offshore, or just deciding not to earn more income if the tax burden gets too high.
While I am in favor of measures to more equally distribute wealth in this country, be very careful about hysterical rants to take it all from the wealthy. They are already carrying you, and the government, on their backs.....
...Well they can afford to can't they. If they control 34% of the nation's wealth--for no other reason than that they value themselves so highly they write their own obscene paychecks and leave the rest of us nothing--they should pay a hell of a lot more than they do.
CEOs making $17+M a year???? Come on, why is that necessary or healthy for the country as a whole?
It's plain old greed. They run companies into the ground, rob pension plans, cut healthcare benefits, and we're all supposed to be grateful to have a job.
Wake up America! Pure Capitalism is a giant pyramid scheme and if you're on the bottom you'll most likely stay at the bottom--where the richest 1% wants you.
If we want to fix this mess we need to start re-distributing the wealth NOW. We need a New Deal with a green energy policy as its centerpiece. If there are any rich people (that 1%) left with a sense of decency they will gladly hand over whatever is asked of them to finance it.
If not, I say take everything they've got--since they stole most of it anyway--and let them work road crew in Alaska. Maybe they can finish that Bridge to Nowhere.
I love hearing this argument.
"The rich might take 40% of the income, but they pay MORE than 40% of the taxes."
To this ripe old canard has been added the priceless "They are already carrying you, and the government, on their backs."
Nonsense. We are carrying them on our backs, like bloodsucking ticks on a patient, loyal, but foolish dog.
Creamer is absolutely right; real wealth is made by manipulation of matter and information. By WORK. Not by gambling. Not by theft. Not by inheritance. Not by confidence games. Not by speculation. Not by political connections. Wealth is created by work, and those who do the work deserve the wealth.
The rich don't deserve 40% of the income, so it is irrelevant whether they pay a higher rate in taxes. That's the point Creamer is making.
Let's see...the people who have 97% of the income pay 43% of the taxes,
and the people who have 3% of the income pay 57% of the taxes....
If you're not seeing the problem, think about it. Sure, 1% of the populace pays almost half of the taxes, but that same 1% makes almost 100% of the income--common sense demands they pay nearly 100% of the taxes.
if a nation gives 97% of its money to the 1% of its population group that ONLY pays 43% of the taxes that nation gets back, that means that MORE THAN HALF of the nation's tax income is coming from the people WITH 3% OF THE WEALTH. So, even if those people in the bottom group gave 100% OF THEIR MONEY, the government would be making less from them than an equivalent tax system would permit the government to make by taking ONLY 3% FROM THE TOP GROUP.
Hypothetically, this means that, if we assume a third of the BOTTOM-income group's TOTAL INCOME is taken for taxes, then they are paying the government back ONE DOLLAR FOR EVERY THREE THEY MAKE.
But, those with the MOST INCOME pay ONLY ONE DOLLAR for EVERY NINETY-SEVEN DOLLARS THEY TAkE IN. That means the poor pay ONE DOLLAR for EVERY THREE DOLLARS THEY MAKE, and the rich pay ONE PENNY for EVERY THREE DOLLARS THEY MAKE.
If we were making the wealthy pay the same percentage of their income that the poor pay--in this hypothetical situation, a third--then not only would the wealthy top 1% or so pay 97% of the taxes instead of only 43%, but the government would also make THIRTY-FOUR DOLLARS FOR EVERY TWO DOLLARS IT MAKES NOW.
That's what the math says, and it looks like it's that bottom 99% of us carrying the top 1%, after all. they're not pulling their weight.
They're paying a penny for every dollar we pay, and they're benefitting the most from OUR tax money. It's simple math...if more of our money went to public education, maybe you would realize that your complaint about how high a percentage the richest 1% or so pay in taxes just does not compute when compared against the more than DOUBLE THAT PERCENTAGE they MAKE in income.
Man! Where did you get that math? Try it this way:
To quote the Tax Foundation "roughly 121 million Americans—or 41 percent of the U.S. population—will be completely outside the federal income tax system in 2006. This total includes those who pay no tax, and those who pay some tax upfront and are later refunded the full amount of the tax paid or more."
So...
100 people paid $1000 total in taxes.
One of them paid $400
Forty nine of them paid about $11.63 each equaling $570
Forty one of them paid nothing
Nine of them paid $3.33 each equaling $30
$400+$570+
So the Government said to the $400 guy "Pay us more!" So he said "No problem, I'll just raise my prices to match your tax increases. How much more do you want?"
More than 50% of U.S. corporation pay not a dime in taxes.
This problem is systemic, and permeates so-called economic philosophy, religion, education, entertainment, politics and whatever else you may want to call the way that power is distributed among human beings. It's all about how we have accepted that there are haves and have nots, and as the mice in Babe, say, it's "the way things are". The power brokers of the world have been trying to convince the people that this is not so for thousands of years (divine kings, bloodlines and all that hogwash). In the meantime, they co-operate with each other, and contribute to each others well-being, and sometimes it seems like this is the only reason that government as we know it exists.
Why doesn't this guy wait till after Nov 4 to write this stuff?
People like Laffer (new book out) are already trying to scare voters about what Obama would do about such things,
"Then came what Krugman calls "the New Gilded Age." Beginning in 1980, there were big gains at the very top. The tax policies of the Reagan administration magnified income redistribution. Between 1980 and 2004, real wages in manufacturing fell 1%, while real income of the richest one percent rose 135%."
Folks... the ONLY way to stop the CEO/Excutives greedy salaries is roll back the Reagan tax breaks... I'll say it again... it's the ONLY way. The CEOs, excutives and board of directors are all in it to the max... their and the companies performance is irrelivant.
This post makes a lot of sense to me, but I'm not an economist either.
One other extremely important elephant that nobody is talking about is that the wealth that we need to solve this crisis is in private hands, yet low and middle income taxpayers are also on the hook, line and sucker for this huge burden.
I wish somebody would propose a global watch or limit on private wealth until this crisis is really over. When somebody, lets say a man, hits 100 million, his excess fortune becomes a fortune of interest, subject to oversight, and returned to the public that was so good to him when he dies.
But he feels so entitled, and identifies so passionately with his wealth, and has lobbyists and pundits and politicians in place to protect his interests. Imagine the mobs of low information voters shouting that the government is taking their freedom by claiming an interest in excessive private wealth.
You must be logged in to comment. Log in or connect with
