The First Cause of the Economic Crisis

The First Cause of the Economic Crisis

The Growth of Inequality

DSA Economic Crisis Workshop 12-2011 2

The Great Recession

• The economic collapse called the Great Recession lasted from Dec. 2007 – June 2009

• That’s right – it ended (officially) in June 2009• But the impact on our lives continues:• Let’s talk:

What has been the impact of the Great Recession on you/your family/your future?


The Purpose of this Workshop

• To shape the future – where we want out country to go – we need to understand what caused the economic crisis that we know of as the Great Recession

• This workshop is designed to give us that understanding


How Bad Was the Great Recession?

• Housing: 1 in 10 home owners may face foreclosure

• Household wealth declined 20%• US auto industry faced bankruptcy• GDP fell faster than at any time since 1930s• And then there is unemployment…

The Great Recession – and “Recovery*”: Unemployment by Race, Ethnicity and Age

2%4%6%8%

10%12%14%16%18%20%

2007 2008 2009 2010

African-AmericanHispanicWhiteAge 16 - 24

•The “Great Recession” officially ended in June 2009

5DSA Economic Crisis Workshop 12-2011

Unemployment remains high with some groups suffering more than others

DSA Economic Crisis Workshop 12-2011 6CPEG Economic Crisis Workshop -

Barclay

Was it just an accident?


If you remember nothing else from this workshop today…

• The economic crisis was not an accident• It was the result of policies and decisions over

more than 30 years• To understand what we need to do, we need

to understand what those policies and decisions were

• The policies and decisions that caused the crisis represent a world view: neoliberalism


What Is Neoliberalism?• Core tenet: markets are self correcting and provide

the best (most efficient in terms of resource use) outcomes if allowed to function– Markets bring together a large number of participants who

vote with their dollars• Therefore:

– Remove regulatory “restraints” on markets – government-regulated outcomes are always “second best”

– Turn activities over to private sector wherever possible– There is no “common good,” only individuals seeking their

personal well being


How Did We Get Here?

• Three Causes– Long term growth of inequality– Rise of Finance - Credit/debt/and housing– Changes in US role in world economy

• In this session we will talk about inequality


Do Income Inequality Walk and Income Share Walk before proceeding

You will need 6 volunteers

See “How to do the Workshop” – “Inequality Walk” Skit Instructions


Growth of Income Inequality

• The inequality walk illustrated how average income levels in US changed 1979 – 2006

• You often hear the argument that inequality has increased because of “educational” differences or “skill based technological change.” (This is a neoliberal argument.)

• Thus you may see a chart like the one on the next slide….

Growing Inequality: Top 10% Income Share, 1950 - 2008

25

30

35

40

45

50

55

19501955

19601965

19701975

19801985

19901995

20002005

% o

f Tot

al H

ouse

hold

Inco

me

Top 10% IncomeShare

But is this the real story – or does it mask a more significant story?


The Real Story:Income Distribution at the Top,

1950 - 2008

5

7.5

10

12.5

15

17.5

20

22.5

25

19501954

19581962

19661970

19741978

19821986

19901994

19982002

2006

Pere

nct o

f Tot

al In

com

e

Top 1% IncomeShareNext 4%

Next 5%



The Real Story

• As we saw in the inequality walk, all income groups lost income share

• EXCEPT:• The top 1%• Their income share increased more than 2-1/2

times over the past 35 years• The neoliberal “explanation” of superior

education or higher skills fails

Average Income by Quintiles and Top 1%, 1979 and 2006 (2006 $)

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

Bottom 20%

Next 20%

Middle 20%

Next 20%

80 - 98th percentile

Top 1%

19792006

“There are some distances that only money can measure.”



Why the Misdirected Explanation?

• What does the education/skills training “explanation” for growing inequality suggest?

• Workers should go back to school, get more training and they will find good, well paying jobs

• However, the gap between the top 1% and everyone else – including those with college degrees - has increased


College degrees do not explain the growth of inequality

This graph compares the average incomeof people with a college degree to the average income of people who comprise the top 0.1% of the population.

In 1967 a person with a college degree made 10% of what a person in the top 0.1% made. In 2007, it was only 4.2%.


What Does the Misdirected Explanation Protect?

• No need to address the huge concentration of income in the top 1%

• But the real question is:

Why has the top 1% done so well while the rest of us have been treading water?


Who Are the Top Income Households?

• We can start by asking who are the very top income households?

• Are they athletes and entertainment celebrities?

• No – the very top income households are the economic elite in the US

Who Is in the Top 0.1% of Income?(Analysis of 2004 tax returns)

Non-Financial Execs, Managers, etc.

40.8%

Financial Execs, managers, etc.

18.4%

Not Working 6.3%

Lawyers 6.2%

Sports, media, entertainment

3.1%



CEO vs. Average Worker Pay, 2004

Source: Multiplier of CEO Pay to Average Worker Pay. Adam Choate , Dana Rowzee, Jerrod Tinsley, CEO Pay Rates: U.S. vs. Foreign Nations. November 17, 2005

American exceptionalism?

http://defendingthepublicgood.org/wp-content/uploads/2011/04/Multiplier-of-CEO-pay4.png

http://defendingthepublicgood.org/wp-content/uploads/2011/04/Multiplier-of-CEO-pay4.png


Is Increased Inequality “Inevitable?”

• Neoliberals often argue that increased inequality simply reflects a globalized market

• But is that true? • Do other wealthy countries see the same levels

of inequality as the US?

NO• Also, the growth of inequality in the US is much

greater than in other rich societies

Inequality in the US Has Grown Much More than in Other Wealthy Countries:

Top 1%’s Share of Total Income

US Australia France Norway0

2

4

6

8

10

12

14

16

18

20

197519902000s


% of Total Income


Comparing Inequality Between Countries

• Gini Index is most common measure• Gini Index range is 0.0 to 1.0

– A Gini Index of 0.0 would mean that all households have the same income

– A Gini Index of 1.0 would mean that one household has all the income

– Gini index for industrialized countries ranges from about 0.2 – 0.5

The Level of Inequality is Much Greater in the US than in Other Wealthy Countries

Series10

0.1

0.2

0.3

0.4

0.5

0.6

SwedenDenmarkIcelandFinlandAustriaNorwayGermanyFranceAustraliaNetherlandsCanadaSpainGreeceItalySwitzerlandUKN. ZealandJapanUS Mexico

Gini

Inde

x


The US is more like Mexico than like Sweden.

Composition of Income for Top 1% (2008)(for bottom 99%, over 90% of income comes from wages and salary)

0%10%20%30%40%50%60%70%80%90%

100%

InterestCapital Income*Wages/Salary

Fitzgerald: The rich are different from us.Hemmingway: Yes, they have more money.But where they get their money from is different.

55.7%

41.4%


*Capital income includes capital gains, dividends, stock options, etc

How Much Income Would Be Required to Be in Each Income Category in 2008

Top 10% $107,540

Top 1% $341,810

Top 0.1% $1,401,549

Top 0.01% $6,414,011



Why Did Inequality Increase?

• Decline of unionization

• Shift in the tax burden

• Policies supported inequality

As Union Density Declined, the Income Share of Top 1% Increased

In the mid-1950s about 36% of US workers were in unions (up from 31% at the end of WWII)

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

Union Members as a % of US Working PopulationIncome Share Top 1%



Impact of Union Decline

• Unions were crucial in the “Great Compression” of incomes 1930s – 1950s

• Unions pioneered linking health care to employment

• Unions pioneered concept that employment should also provide pensions

• Unions are essential to the political education of their members

DSA Economic Crisis Workshop 12-2011 31Credit: Carol Simpson, CartonWork.com


Shifting the Tax Burden: Individuals

• Until the 1980s, the top federal income tax rate had been above 70% since WWII

• During the 1980s (Reagan years) the top tax rate was cut in half

• And the bottom federal income tax rate actually increased

Federal Income Tax Rates: Highest vs. Lowest Rate, 1969 - 2009

0%10%20%30%40%50%60%70%80%90%

19691970

1971 - 1981

1982 - 1986

19871988 - 1990

1991 - 1992

1993 - 2000

20012002

2003 - 2009

Top RateBottom Rate

33DSA Economic Crisis Workshop 12-2011The Big Shift: 1982 - 1988


http://org2.democracyinaction.org/dia/track.jsp?v=2&c=klwXDvQbQ5j6/W/m6wEIddA6jVfzOBDm


Changes in Effective Federal Tax Rate Benefited Top Incomes Much More than the Rest of US


Shifting the Tax Burden: Corporations

• The other big shift in who pays taxes has favored corporations over individuals

• The corporate income tax used to be a significant source of federal revenue– About 2/3 of the revenue raised by individual

federal income taxes• Now it is less than 20% of individual federal

income tax revenue

Federal Government Revenues as a Percent of GDP

1%

4%

6%

9%

11%

Individual Income Taxe Revenue as a % of GDPCorporate Income Tax Revenue as a % of GDP


Corporations have shifted taxation on to the rest of us.


Income Redistribution: Policies • By 1970s the service sector was growing much faster

than the manufacturing • What kind of employment would people find in the

“new economy”– Low wage or high wage?

• The minimum wage did not keep up with inflation• The attack on unions made organizing service

workers more difficult• Is the US’s large proportion of low wage work

inevitable?

Percent of Population with Income Less than 50% of Median ( 2007/08)

0

5

10

15

20

25

% o

f Pop

ulat

ion

Denmark Austria Netherlands France Norway Finland SwedenSwitzerland Germany Belgium Ireland Poland New Zealand OECDUnited Kingdom Canada Italy Greece Portugal Spain AustraliaKorea Japan United States Israel Mexico

1 in 6 workers in the US earn less than half the median income.


In Denmark, only 1 in 16 workers earn less than half the median income.

Countries with greater inequality have larger low wage sectors.


Inequality as Social Policy

• US labor markets are “segmented”• This means that the distribution of jobs

by gender, ethnicity and race is uneven• The result: women and racial and ethnic

minorities are more likely to work in lower wage sectors than white males


Labor Force Segmentation, 2009: Job Share/Labor Force Share

00.20.40.60.8

11.21.41.61.8

All Females All African-Americans

All Latinos

Health CareMfg - Durable GoodsMfg - NondurableConstructionEducationWholesale TradeRetail Trade

A ratio of 1.0 means job share = labor force share


Segmented Labor Markets Create Inequality

80%

90%

100%

110%

120%

130%

140%

150%

160%

Med

ian

Wag

e R

atio

White male/whitefemaleWhite male/blackmale White male/HispanicmaleBlack male/blackfemaleHispanicmale/Hispanic female


Credit: Cartoon Group


The Fraying of Social Bonds

• Economic costs are only part of the curse of inequality

• Equally important are the costs to the bonds that link people together in a modern commercial/industrial society


The Spirit Level – Wilkerson and Pickett

• In this book the authors look at national scores on a range of measures of health, social and educational well being

• They look only at the rich societies – 23 countries with per capita incomes ranging from $22,000 - $48,000

• No relationship between per capita income level and how well or poorly these countries score


Inequality and the Spirit Level• However, there is a strong correlation between the

extent of inequality and country scores on:– Health

• Life expectancy• Infant mortality• Obesity

– Education• Scores on international math and literacy tests • Early school leaving

– Social well being• Prison population/100,000• Social mobility


Inequality and the Spirit Level• Less equal societies perform worse on these

measures than more equal societies

• US is among the worst on these measures

• Racial/ethnic homogeneity does not explain the different results by income inequality

• Hear the interview with Richard Wilkerson at http://www.pbs.org/newshour/bb/business/july-dec11/makingsense_09-28.html

http://www.pbs.org/newshour/bb/business/july-dec11/makingsense_09-28.html

http://www.pbs.org/newshour/bb/business/july-dec11/makingsense_09-28.html


The Fraying of Social Bonds

“Do you think that most people can generally be trusted?”


Trust = 1.097 - 1.720 GINIr² = 0.542 RMSE = 0.043 n = 28

Mos

t Peo

ple

Can

Be

Trus

ted

Gini index of inequality.35 .4 .45

.3

.4

.5

.668

66

717473

75

7672

64

78

60

80

7981

83

84

868788

909189

92

95 949693

98

Rising Inequality, Declining Trust in the US, 1960 – 1998 (the numbers are the years, e.g. 66 = 1966)


How Has the US Economy Performed During the Past 3 Decades?

• Has inequality produced faster rates of growth, benefitting all of us?

• Does “A rising tide lifts all boats”? (as neoliberals often argue)

• NO• US GDP/capita growth at best middle of the

pack• The Top 1% failed to produce growth


Average Annual GDP Growth per capita, Neoliberal Period (1979 – 2008)

0%

1%

1%

2%

2%

3%

3%

1979 - 2008

FranceItalyCanadaAustraliaGermanyDenmarkUSBelgiumSwedenJapanAustriaNetherlandsSpainUKNorway

US Growth only middle of the pack – less than Japan


What Happened to the Money?

• The top 1% receives over $1 trillion more income each year than was the case in 1976

• What have they done with this money?• Did they create jobs?

OR• Did they spend it on lavish consumption?• Did they speculate in financial markets?


What Is Neoliberalism?• Core tenet: markets are self correcting and provide

the best (most efficient in terms of resource use) outcomes if allowed to function– Markets bring together a large number of participants who

vote with their dollars• Therefore:

– Remove regulatory “restraints” on markets – government-regulated outcomes are always “second best”

– Turn activities over to private sector wherever possible– There is no “common good,” only individuals seeking their

personal well being

Documents

The First Cause of the Economic Crisis