THE US ECONOMIC COLLAPSE IN A NUTSHELL
Note: This blog appeared before in January 2011. It appears here slightly revised and updated from that original period.
Just after last Christmas and the New Year, I stopped into my favorite liquor retailer. The proprietor, Mister Aga Agra is a tiny Indian man who hails from Bombay. He is always pleasant and helpful and on this day he smiled a greeting from the dark corner where he sat quietly waiting patiently for his next customer. His large white teeth, with many prominent gold fillings, transformed and illuminated his dark, craggy face.
“How was the Christmas season for you?” I asked, as I placed a few bottles from the “Specials” selection on a well-worn but neat, counter surface.
He shuffled over . “For me?…You know, I am a Hindu, so we….,” his voice trailed off and he smiled again.
“No no, not you, I mean, for the business. How did it go here in the store. Well or poorly?”
“Ah yes!” He noted and smiled broadly as he happily and quickly tallied up my selections on the side of a thick brown-paper bag.
“Well enough, so you will not want to return to India?” I persisted, with a smile and a wink.
“Oh no..not go back…oh no no no. Now of course I have my family here. There is no return for me.”
“But I hear the economy is very good there,” I pressed on. There was no one else in the store.
“Yes. That is true. They are doing much better in the economy than we are here.”
“Why?”
“The Indians make many things there. They import very little.”
“Only food?”
“Oh yes. Some food, yes,” he agreed, then turned serious, brushing aside my question. Then after neatly folding the top of the paper bag so it would be easy to hold, he added, “But we here in America are not doing so well as we used to. It is simple. Here we make nothing, and we only import from China. And then too we import our energy from the Middle East. He smiled up at me, and while shaking his head left and right gently, he added “We must begin using less oil and making things here too!”
I agreed whole-heartedly with Mr. Agra.
I remember back in the 1950 and 60s when I was growing up, we did make things here---in fact all our clothes, shoes, hardware, autos and just about everything else. They were made right here in the USA. We were also an oil exporting country then too. Then too, many of our parents had good-paying jobs as well. “Made in the USA” was seen on most of the products we bought. But even then, on occasion, you might find some poorly made, inexpensive item, perhaps a copy of some American product or original idea, perhaps a child’s toy or a bit of low-cost hardware that would have the “Made in Japan” (not Made in China then) sticker on it. It was a sure indication that whatever it was--a pocket knife, a camera, a hand tool, ceramics or pottery, etc.,--- it was not up to US standards. But then, there was very little unemployment here at home. Workers had good jobs and paid their bills and their taxes. People were confident that their children would fare even better than they did in the US economy. And for a while we did. But sometime in the 1970s things changed for us.
About that time too we began to import oil…our domestic supply having “peaked”. But our cheap oil was a curse—it made us sloppy and inefficient. We used too much to run our our big cars and heat (or cool) our oversized houses.
I read with great enthusiasm and interest Richard Wolff’s article “The myth of American exceptionalism implodes.” in the guardian.co.uk (January 18, 2011). Prof. Richard Wolff (Economics, University of Massachusetts) clearly lays out the sources of the economic crisis we find ourselves in today. This is a great piece and Wolff and the Guardian should be commended. Unfortunately, we do not get this kind of candor in the US press. It’s too bad, because perhaps with a truly unshackled press might the public to better understand what is happening to their economies and their and their children’s lives--and their paychecks.
Wolff understands that the basic problem of our democracy is that both parties depend on the oligarchs, the barons of Wall Street and the large corporations (i.e. oil companies too) to fund their campaigns and protect their political survival. The workingman has today no powerful advocates in Washington (with a few exceptions such as our outstanding Senate team in Vermont) Wolff also seems to appreciate too, that the economic policy of basing the stimulus and sustenance of our wealth on unfettered domestic consumerism is over. As Mr. Agra the liquor store owner from Bombay says…”We don’t make anything here.”
According to Professor Wolff conditions were fine up to the 1970s. Prior to that time, the rich were getting richer faster than everyone else, but the middle class was prospering as well. According to Wolff “A profitable US capitalism kept running ahead of the labor supply. So, it kept raising wages to attract waves of immigration and to retain employees…….until the 1970s“. After that time, things went down hill for the middle class and real wealth of the working class declined and continued to do so through the end of the 20th century and the early years of this century. But since 2008, rather then helping the working classes, the government has turned on them, to make them pay for the foolish and careless mistakes the government and business made. The bailouts were necessary, but the enormous costs fell on the backs of the middle class in the form of higher taxes and reduced services.
How did we get here in the economic crisis as we are today? After 1970 real wages stopped rising as US businesses redirected their investments and found means to increase profits in the wider global market. Prosperous local companies saw a way to be even more profitable. They began eliminating well-paying manufacturing jobs here and moving their production and assembly aspects of their business out of the country. They began “off-shoring jobs” and whole factories to Mexico, Taiwan, India, and elsewhere. The thinking of a typical small-company owner was this: why should I maintain a high-paid 5000 person workforce here in the US, when I could eliminate these costs (and the worker’s jobs) by moving the production and manufacturing parts of my business offshore and just keep a skeleton administrative and executive office here in the US? That way I can increase my profits and contend with my competitors more effectively. Thus, a former, well-run functioning American enterprise here in the USA which provided employment to say 5000 workers and executives, all of whom paid taxes, and who bought refrigerators and shoes and automobiles--and houses (on time payments) overnight became a US company in name only, with perhaps a 50-person executive cadre ensconced in fancy offices in some major US city with a well-used telephone line to somewhere in Mexico, India or elsewhere. The forty-five hundred workers of whose jobs were “offshored” were out of work and had to seek employment elsewhere--but in an increasingly tight job market.
To add to the effect, about this time too, the US was undergoing a massive technological revolution in which computers and computerized machinery began to replace human labor. Fewer men and women were needed in these modern manufacturing and other facilities. Then, as well, the women’s liberation movement as well-meaning and as necessary as it is…it simply provided business with more cheap labor, as more and more women entered the work force. For US business there was no end of cheap labor and no need to respond to labor’s demands for a fair wage. And when seasonal or holiday patterns caused a business spurt of growth, executives used part time help to fill the gap and limit hiring of more expensive full-time employees. These were not only sales personnel, but accountants, attorneys and other professionals.
As these events developed workers responded by working harder (for rightly they felt insecure), increasing their productivity, and working longer hours--to try to keep their uncertain jobs. To maintain their lifestyles in face of deceasing income, many families had to send “mother” out to work as well, and become a “two-wage-earner” family. Often, in real dollars, the two-earner family was earning not very much more than a single earner family of decades earlier. These families were simply maintaining their lifestyle, but at a heavy cost to family health and happiness. With no one home for very young children, grandparents had to fill the gap and take over mother‘s duties (where such relatives were available) or additional expenses had to be incurred--and perhaps more debt--when the services of a child care center were needed. When the financial burden became too great, many families turned to their credit cards then increased their indebtedness perhaps by leveraging money from their homes or raising their mortgages.
Then the system broke down in 2007 when oil costs peaked and the housing bubble burst.
While all of this was happening the rich and super-rich just got richer still. It’s simple, as Wolff explains it: if workers salaries were flat and their productivity was rising…there were increased profits for businesses. “While workers delivered more and more value to employers, those employers paid workers no more. The employers reaped all the benefits of rising productivity: rising profits, rising salaries and bonuses to managers, rising dividends to shareholders, and rising payments to the professionals who serve employers (lawyers, architects, consultants, etc. “
The result of the growth of wealth of the business class since the 1970s simply increased the existing top-heavy distribution of wealth in the US. In the 1970s, the top 1% of wage earners held about nine (9%) percent of the nation’s wealth, but in the next three decades their percent of the GDP increased nearly three-fold to a whopping 23% of the nation’s wealth. That figure is the highest in the industrialized western world--even monarchial England and Sweden do not have such a distribution of wealth. In fact, such unequal wealth distribution rates are more typical of tin-pot dictatorships and banana republics than modern western democracies.
Recall such countries as Ecuador and pre-Castro Cuba. What do these wealth distribution figures (known as Gini values) mean? That the top 1% of earners glean nearly a quarter (23% )of all wealth…leaving the lower 99% to scramble and compete for a smaller and smaller portion (67%) of the nation’s wealth. That is not a sound economic situation since the high wage earners spend their wealth very differently than middle income people do. It is the middle-class person who buys stoves, appliances, furniture, and pays school taxes and purchases local services, and supports the mechanisms which generate a healthy economy from the bottom up. The high-wage and high income earners do not.
As a result of this inequality more and more wealth has been concentrated in high places…and how was that wealth used?
According to Wolff the rich cashed in on their windfall “by speculating wildly and unsuccessfully in all sorts of new financial instruments (asset-backed securities, credit default swaps, etc). The richest also contributed to the crisis by using their money to shift US politics to the right, rendering government regulation and oversight inadequate to anticipate or moderate the crisis or even to react properly once it hit. “ The result of these investments and financial skullduggery was the financial crisis we faced in 2007 and continue to suffer from.
But these same super-wealthy also used their money to shift government policies to the right. To encourage less and less regulation---policies which only exacerbated the financial crisis. Then too they used their wealth politically to widen the gulf between the haves and have-nots through government action (or inaction). As Wolff puts it “First, they utilized both parties' dependence on their financial support to make sure there would be no mass federal hiring programme for the unemployed (as FDR used between 1934 and 1940). The absence of such a programme guaranteed that real wages would not rise and, with job benefits, would likely fall – as they indeed have done. Second, the rich made sure that the prime focus of government response to the crisis would benefit banks, large corporations and the stock markets. These have more or less "recovered".
There you have it in a nut shell. But what can we do to make it better? Perhaps it is as simple as using less of the expensive foreign oil and somehow bringing our jobs back home, as Mr. Agra suggested.
Get the picture?
rjk
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