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Sanjay Sanghoee

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Why the American Economy Is a House of Cards

Posted: 09/19/2013 1:54 pm

The American economy today is a house of cards, wherein each added layer of cards at the top increases the pressure on the lower tiers and threatens the stability of the entire structure. The higher the edifice goes, in fact, the more likely it becomes that the whole thing will come crumbling down at some point.

The reason for this is not the expansion of our economy itself but the inequality, exploitation, corruption, and injustice that are accompanying this expansion at every step. The economy may be growing, but it is doing so at the expense of its foundation -- the working class Americans who make all economic activity possible.

Here are the hard facts:

  • Unemployment in the United States, at 7.3 percent, is declining but only because people are giving up and leaving the work force completely.
  • Income inequality in our nation is the worst it has been since the 1920s and almost double that of other developed nations.
  • The average income of those in the top 1 percent is $717,000 compared to $51,000 for everyone else.
  • The same top 1 percent also owns 42 percent of America's wealth, with the next 4 percent claiming another 30 percent.
  • The financial crisis of 2008 wiped out 39 percent of the wealth in the United States, but the top 1 percent have reaped 95 percent of all income gains since that time.
  • The average CEO of an S&P 500 company makes 204 times the income of rank-and-file employee and this ratio has increased by 20 percent since 2009.
  • Two-thirds of minimum-wage earners in America live below the poverty line.
  • Major companies like Walmart refuse to pay a living wage to most employees, make it impossible for workers to unionize, and deny them benefits by labeling full time workers as contractors (even as healthcare costs rise).
  • Our Treasury loses $150 billion in revenues every year because of offshore tax shelters and $200 billion because of other loopholes that disproportionately benefit the wealthy, which then necessitates cutting public services and welfare.
  • Social Security and Medicare, which low-income Americans and seniors rely on heavily for financial support, are projected to run out of money by 2033 and 2026 respectively, which will trigger a sharp reduction in benefits for both programs.

Put all this together and it is clear that while those at the top of our society are getting richer everyday, those at the bottom are actually getting poorer, both in relative and absolute terms, due to a severely lopsided allocation of gains and resources.

The culture of gaming the system for personal gain, which lies behind this, is bound to be destructive since for someone to win, someone must lose. The perfect example of this was the subprime mortgage debacle, in which banks, ratings agencies, and debt packagers created a massive asset bubble in the housing market by lending to unsound borrowers and then packaging and selling those dubious loans on to others, all of which was wildly profitable for them but caused suffering for everyone else when the bubble burst...

So is Wall Street or in a broader sense Corporate America to blame for our current scenario?

There are two parts to the answer. The first involves the brazen exploitation of our economic system by our largest corporations. We need look no further than the energy market manipulation at JPMorgan Chase (despite Enron!), the rigged IPO of Facebook, the insider trading at Galleon, the questionable business practices of Walmart and McDonalds, the tax dodging by Apple, Starbucks, Google, and Microsoft, and the shocking indifference by American and European retailers to the safety of the workers who manufacture garments for them in Bangladesh, to recognize how morally bankrupt and reckless our economic system has become.

It is not so much that these companies do not innovate or add value to our economy but that they add a fraction of the value that they should be adding because of corporate greed. Wall Street, in particular, has gone from being the financial engine of our economy to a money machine whose sole purpose is to feed itself. It is not hard to see how such trends adversely impact the nation.

The second part to the answer involves the exploding influence of money in politics. I use the word 'exploding' because anything less fails to describe the dramatic increase in spending by banks, corporations and wealthy individuals to shape the direction of our political future and to control our government. The 2010 midterm elections and then the 2012 presidential elections illustrated the extent of this unsavory influence vividly, with Republican Super PACs funded by the individual and corporate rich virtually hijacking both Washington and the elections to move us towards a government of the rich, by the rich, and for the rich. As long as this situation continues (and grows worse), it is hard to see how the average American's interests will not be compromised.

This last Labor Day was marked by protests all over the country by workers who are sick of being short-changed and exploited by employers whose only concern is short-term profits and more wealth for senior management. It is precisely those rank and file workers who form the backbone of our manufacturing, retail, food, and consumer industries, and without whose participation our economy would grind to a complete halt, and yet our biggest companies pay them abominably low wages, cut their benefits, and treat them with less than human dignity.

It is time for America to wake up and take a stand against corporate greed or risk a terrible reckoning in the not-too-distant future. This includes:

  • Reforming Wall Street
  • Increasing Penalties for Corporate Fraud
  • Raising the Minimum Wage
  • Protecting Worker Safety
  • Closing Tax Loopholes for the Wealthy
  • Limiting Political Contributions

Otherwise, our economy may continue to grow, but in such a stilted manner that the whole house of cards that American capitalism has built over the past few decades will come crashing down, and destroy any value that may have been generated in the process -- for everyone.

SANJAY SANGHOEE is a political and business commentator. He has worked at leading investment banks and hedge funds, has appeared on CNBC's 'Closing Bell', Arise TV, and HuffPost Live on business topics, and is the author of two thriller novels, including "Killing Wall Street". For more information, please visit www.killingwallstreet.com

 

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