Occupy Wall Street protests have spread across the country behind the rallying cry that the “99 percent” have been left behind. There is a sense of outrage that the “system” is not just rigged in favor of the elite – something like the top 1% – but has spun out of control, leading to an accelerating concentration of wealth and power in the hands of the very few.
Wage stagnation, the explosion of health and education costs as the American welfare state shrinks, and above all the financial manipulation of debt has generated extraordinary profits on Wall Street and massive indebtedness and housing foreclosures on Main Street. Losses from outrageous risk-taking by too-big-to-fail financial institutions are made good by the taxpayer, who is told there is no alternative.
This new gilded age political-economic system can be thought of as the interlocking trifecta of a mostly degraded and increasingly dual educational system, a financial system that became mostly unregulated by either law or social norms, and a political system increasingly corrupted by money.
The educational system has promoted a meritocracy of cumulative advantage. The vast majority of American students experience primary and secondary schools during which they fall far behind their peers in much of the rest of the developed (and even less-developed) world, and then face costs of post-secondary education that produce a level of debt that cannot possibly be repaid out of earnings. But the elite reproduces itself with an ability to pay for college and graduate school educations whose superiority has steadily grown, while at the same time feeling entitled since the educational process has also become extraordinarily competitive.
The financial sector was systematically deregulated as free market orthodoxy took off in the 1980s. This deregulation served to extract resources from the “real” economy and concentrated it in the bank accounts of a tiny elite, who are increasingly those same victors of the Darwinian educational competition. As the concentration of income at the very top of the distribution proceeded in the 1990s-2000s, spectacular displays of conspicuous consumption became commonplace. At the same time, a political system corrupted by the absence of meaningful limits to special interest campaign spending could not rein in the financial sector with limits to risk-taking, even after both the magnitude of the crisis and its causes were plain to see.
And in the face of all this, what in the end has been the rallying cry of protest at Occupy Wall Street and beyond? A simple statistic originally generated in a technical article in a leading economics journal by Thomas Piketty and Emmanuel Saez – the after-tax income share of the top 1 percent. Their work told the story of a staggering increase in the share of after-tax income received by those with top incomes since the 1970s. And so: the “99 percent”.
The Congressional Budget Office has just released an update of these figures. The after-tax, after-benefit share of total household income taken by the top 1 percent grew from 8 percent in 1979 to 17 percent in 2007. The shares of each of the bottom four quintiles (together the bottom 80 percent) all fell by 2-3 percentage points. Households in the top quintile but not in the top 1 percent (the 81st-99th percentiles) showed no change, while those in the bottom 20 percent fell from 7 percent to 5 percent. In sum, only the top 1% gained, and the top .01 percent gained even more magnificently.
It is not just that wages and salaries have grown vastly more unequal. Policy decisions have greatly reduced the equalizing effect of taxes and transfers. As the CBO puts it, “In 1979, households in the bottom quintile received more than 50 percent of transfer payments. In 2007, similar households received about 35 percent of transfers.”
Our political-economy trifecta (education-finance-politics) has not just rigged the system to syphon the productivity of the economy into the hands of the top 1 percent. It has also systematically attacked the standard of living of workers in the bottom half (or more) of the workforce.
One source of this attack has been to reduce the legal minimum wage to a level so low it has become largely irrelevant as a wage floor. In another post, I will show that different approaches to the use of a statutory minimum wage can go a long way towards explaining why, for over three decades, about 30 percent of all American workers are paid very low wages (less than 2/3 of the median wage). This compares to a 2009 low wage incidence of less than 10 percent of French workers (whose unemployment rate is almost identical!). “30 percent” should become another Metric of Protest.
There’s no doubt that the lack of “shared benefits” of economic growth have contributed to the protest that has been spreading across the US. As Republicans complain about OWS dividing America with “class warfare,” they (some Democrats included) should look first at policies which have contributed to this inequality in the first place. Under conditions where the benefits of economic growth are shared more equitably, even in the face of inequality, it doesn’t seem likely that there will be the same kind of backlash.
The full CBO report (vs. the summary of the CBO Report) offered a number of theories to help explain the rise in income for the top 1%. Some of the theories and observations contradict one another; however, they do provide clues and indirectly point to what is happening with other income groups. Some of the factors raised include: the compensation of superstars (actors, athletes and musicians); technological changes; the growth in size and complexity of firms; the growing importance of executive decision making on firms values; weakness in corporate governance that may have allowed excessive compensation; changes in technical aspects of the economy; a shift in the proportion of executive compensation to include larger amounts of stock options; the growth in entrepreneurship; increased complexity and importance of the financial sector; financial deregulation linked with more initial public offerings of stocks and riskier credit arrangements; and an income reporting shift as a number of “C” corporations converted to “S” corporations.
The CBO also deals with the effects of transfer payments and federal taxes. Some or all of these theories and observations may have elements of validity. Others besides the CBO have offered explanations. I think there may be more elemental explanations.
Here are a few of my impressions. For decades, it has become more difficult to construct plants in the United States. In part, this has been due to new regulations and environmental law suits. In the forestry business for instance which I know well, whole communities in the Northwest have been devastated. In addition to job losses in forest, paper and packaging products, there have been significant negative impacts in extracted natural resources and in manufacturing. Many good paying jobs have been lost and the composition of the economy has shifted more towards the financial and service sectors. Job growth has been in smaller businesses, many of which have not paid as well as larger businesses.
There are major concerns about the employment prospects and incomes of most Americans. To some degree, this may be associated with the structure of the economy shifting from natural resource and industrial strengths to an orientation towards finance and services. The label made in the U. S. A. is becoming harder to find Income appreciation (life chances) has been exported, and others elsewhere in the world are benefitting from what the United States has lost. Prior to business moving operations outside of the United States, ‘rust belt” states have lost out to “sun belt” states for a variety of reasons. Foreign businesses locating facilities in the United States tend to prefer Sun Belt states. The reasons go far beyond concerns about right to work states in my opinion.
More recently, the purchasing power of the U. S. dollar has weakened as debt has increased, trade imbalances developed, and dependence on imports (including energy) increased. This is eroding the economic viability of the United States, and the prospective life chances of its citizens. If the other economies of the world were stronger, there might be a rush by foreign companies to acquire U. S. assets.
For decades, we have known that savings rates in the United States have been well below needed levels. Many governments (federal, state, local and foreign), businesses and families have become excessively leveraged (owe more money than they are able to service and/or repay). In the U. S., this became visible as the housing price bubble burst exposing the lack of equity in homes and the inability of many borrowers to pay their mortgages and other debts. Many higher risk home loans are related directly or indirectly to governmental policy initiatives. As loans became riskier, the financial sector invented financial instruments to spread the risk associated with these types of loans, especially subprime, variable rate mortgages. Spreading the financial risks through various forms of derivatives was not able to deal with the deep recession associated rise in unemployment; the inability of people to pay their mortgages; and the widespread collapse of housing values. Most of these securities were bought by sophisticated financial institutions which chose to take risks to gain rewards. They made very bad investments, and the financial sector’s foundations were severely shaken. While governmental interventions helped stabilize the financial institutions, most attempts at addressing this situation have been ineffective.
The underclass (especially in inner cities and rural areas) has existed for decades. It continues to struggle. Most programs to assist the underclass have been in the form of social safety net policies, and little has been done to address the root causes. No meaningful policies have been initiated to change of the economics of inner cities and rural areas. Consequentially, life chances for most members of the underclass remain bleak, even though there are a small number of remarkable success stories associated with people who have escaped and have become successful.
In addition to lower labor rates elsewhere in the world and other inducements, the United States’ complex tax code as it developed may have encouraged companies to locate facilities outside of the United States and not repatriate foreign earnings. At the very least, the United States must have tax rates which are competitive with other world competitors in order to retain and attract new businesses. Trade agreements need to be examined for fairness. Domestically, policies can be developed and initiated to encourage the redevelopment of inner cities and rural areas.
The United States educational system gets the blame for much of what has gone wrong. I suspect that this is a convenient target that takes attention away from the unwillingness to deal with more fundamental economic, cultural, social and personal issues. Social and economic mobility is still possible, but it is becoming increasingly difficult for larger numbers of people. Until and unless we address the fundamental problems challenging the economy, a rigorous recovery is unlikely. Life chances can be enhanced for the vast majority of Americans if the core issues are addressed. In my view, this will help address serious problems including concerns about income inequality