Through the decade of the 1920’s there was roughly the same level of income inequality that we have today. Then during the Great Depression (what economist like to call the Great Compression) the value of financial assets (stocks and bonds) plummeted, ending the wide disparity between the upper and lower income levels. Following World War II we had policies in place that were largely supportive of unions, and there was strict enforcement of the labor laws that protected worker’s rights and enforced the collective bargaining laws. Other progressive measures like the G.I. Bill helped to educate a whole generation of returning war vets, and provided cheap no-down-payment loans to help them buy homes. The result was that by the 1960’s this country had a strong and vibrant middle-class that was the envy of the whole rest of the developed world. It was this middle-class that provided the strong surge of consumer spending that drove the growth and expansion of corporate America, producing the economic “miracle” that we look back on today.
Starting in the early 1980’s (the era of corporate ascendancy) our public policy approach changed. Unions came under sharp attack, and union membership went from a high of 39% of the work force in the mid-sixties to less than 13% today. Worker protections and collective bargaining rights (the bulwark of a highly unionized middle class) were degraded to the point where they have been almost eradicated. And there have been other telling changes. Over the last three decades we’ve consistently under spent (as a % of GDP) on education and research, infrastructure building and improvements. The money instead has mostly gone into increased defense spending and corporate welfare
Also starting in the early 80’s a new ethos evolved where corporations managed for short-term profits instead of long-term growth. Cost-cutting (inspired by GE’s Jack Welch ) became the corporate watch-word, and companies started laying off what were termed marginal employees (usually older and more experienced, more expensive workers). Leveraged buy-outs, corporate take-overs and industry consolidations brought about a new era of further lay-offs and cost-cutting initiatives.
Later a decade of out-sourcing and corporate downsizing further exacerbated the loss of good, high-paying jobs. This increased capital’s share of the pie at the expense of labor, driving down wages while at the same time increasing the return on invested capital. And that’s what has produced the stunning income inequality that we see today. The result: not surprisingly, we are left with too many people making too little money — with no prospects for a brighter future.
If nothing else, it should have become apparent by now that you can’t impoverish the middle-class and expect to have a vibrant and flourishing domestic economy of the type that will provide people meaningful long-term employment at a livable wage, the type of economy that can promote the kind of strong consumer based spending necessary to get businesses to make the needed investments in new plant and equipment that add to payrolls and productivity — what economists like to think of as the “virtuous cycle” of consumption and growth.
Our free-market system has produced some notable achievements of which we can be proud. We’ve created an inordinate amount of wealth, and with it (sadly) the modern “cult of the CEO”. These so-called “Captains of Industry”, champions of free-enterprise see themselves as the flesh and blood embodiments of a virtuous, hard-driving capitalist ethic that, through the sheer “magic” of the marketplace, delivers bounty — not to everyone, but a small wealthy elite who consider themselves to be the most deserving. The reality though is that the focus becomes exclusively the bottom line and not the broader good of the economy and the society. Only in America could someone as staid and conspicuously ordinary as a corporate CEO become a cultural icon. We’ve also demonstrated that our American brand of capitalism can make a small, minute sliver of the population (the top 1–2%)extravagantly wealthy. Good for them I say! Now let’s see if we can find a way to make it serve the broader society.
It used to be that we actually produced things — real products like T.V’s and precision machine tools that we sold and exported around the world. Today our principle exports are bad consumer loans, bad manners and credit derivatives. In the sixties the industrial sector was over 40% of the U.S. economy (a time when we still had a trade surplus) and finance was less than 14%. Today we run a persistent trade deficit, and the numbers are exactly reversed, finance today is over 40% of total output and manufacturing (the industrial sector, the real economy) is under 13%. We are dependent on the largesse of our trading partners to fund our deficits — buy our debt with the money we send them — and have become a nation of bank fraudsters and insurance men, hamburger flippers, Wall Street money moguls and high-frequency traders.
( to be continued)
The Money Trader