I haven't posted much here lately because my personal life has been very busy, but there are a few things I would like to say about the current state of the economy.
If you have read much of the economic material on this website then you should have some idea that the warning signs for the current economic condition were visible long before this so called "down turn" happened.
Despite this, I still have yet to hear a single news story or analyst address the real root causes of the economic crisis in America, and around the world. The root cause is growing economic disparity.
Economic disparity has been growing in developed and developing countries around the world over the past 30 years, but in no developed economy has the growth in disparity been as great as it has been in the United States, which now has economic disparity on par with Mexico.
I have presented plenty of data addressing this issue on this website, so I'm not going to present it here again, but the data is clear that ever since the "Reagan Revolution" economic disparity has been growing in America, and in fact it grew at its fastest pace under the presidency of Bill Clinton, despite the fact that the Clinton years were the only time in the past 30 years in America when median income barely beat out the rate of inflation. While the incomes of average Americans did rise slightly under Clinton, the incomes of the top 1% grew more rapidly than any time in American history, far out pacing the rate of increase for average Americans.
Along with this growing economic disparity there has been a direct correlation of growing personal and public debt as average Americans have been encouraged by corporations to live beyond their means.
Over the past 30 years, up until 2008, as America has operated on the basic economic foundation put in place by the Reagan administration, average Americans have spent more money on their own educations, they have worked longer hours, family incomes have grown slightly because more wives have entered the workforce to try to maintain the family standard of living, the personal savings rate has gone down dramatically, the level of personal debt has risen dramatically, incomes for the bottom 90% of income earners have been stagnant, productivity has risen dramatically, incomes for the top 1% have risen dramatically, corporate profits have risen dramatically, taxes have consistently been reduced (primarily on the wealthy and corporations), corporations have directed the largest off-shoring of American production in the nation's history, and, very importantly, the percentage of capital gains income going to the top 1% of income receivers has risen dramatically, while the portion of capital gains income going to the bottom 90% has gone down.
So, what is the root cause of all of this? Well, quite simply is it "capitalism", i.e. the core structure of an economy where the rights to all newly created value are owned by capital owners. The root cause of America's economic problem is that capital ownership has been both strengthened over the past 30 years by the "Reaganomic" agenda, and capital ownership has been increasingly consolidated into fewer hands.
Now this last part may seem a bit odd, because what about all of these retirement programs setup under the Reagan administration and pursed by following administrations, such as the move from pensions to 401K programs and IRAs? These were claimed by market advocates to be better types of saving systems that would "empower individuals" to make their own decisions and personally own their own retirement accounts, which was supposed to be so much better than pensions and which was supposed to broaden capital ownership. (the rate of return on pensions is higher than most 401Ks or IRAs).
Well it didn't exactly work out that way, and it's not certain that it was ever really intended to. On the one hand yes, the number of Americans who own some stock grew over the past 30 years. More Americans own stock, either directly or indirectly, than at any time in America's history, BUT, and this is a big but, the portion of capital ownership BY VALUE held by the bottom 90% of the American population has gone down!
Why is this?
Well, two things. The first thing is that while more Americans own stocks, either directly or via mutual funds, etc., fewer Americans directly own their own capital than in the past. By this I mean that over the past 30 years there has been a massive loss of small businesses. Now if you only look at the numbers this may not appear to be the case because there are a lot of registered small businesses today and that number has grown over the years, but most of those businesses are not significant. Much of that growth has more to do with paperwork and accounting than anything else, with many of those businesses reporting incomes of under $5,000 a year. These are mostly side businesses and not primary means of income.
So, while the number of Americans owning stock has gone up over the past 30 years, the portion of Americans personally owning their own private, meaningful, capital has gone down. The percentage of Americans working for large corporations has increased over the last 30 years, with now more than 50% of Americans working for a company of 500 employees or more.
So the first thing is that the percentage of Americans owning paper certificates has gone up, but the percentage of Americans owning capital that they personally control, such as their own store or their own farm or their own production facility, has gone down. This loss of personal capital ownership has exceeded the gain of stock ownership, and this is exactly what one would predict would happen in a "free-market" or "free-marketish" capitalist system.
Secondly, while the number of people owning at least some stock has increased in America, the majority of that stock is locked up in retirement accounts. What has actually happened is that the percentage of capital gains income going to the top 1% in America has gone up over the past 30 years while the percentage of capital gains income going to the bottom 90% has gone down. So despite more people owning stock, the percentage of value owned by the bottom 90% has gone down, while the percentage of capital value owned by the top 1% has gone up, and on top of that, the value that is owned by the bottom 90% is mostly locked up in retirement account where it goes unused until after age 65, whereas the top 1% receive on-going income from capital all the time.
So, where does this capital gains income come from? Well, it comes from workers. Workers are the ones who create the value that is owned by capital owners and which is received by executives and share holders. So, as worker productivity has increased over the past 30 years, and as the cost of obtaining an education has gone up, those gains have not been realized by the workers who are responsible for those gains, instead those gains have been taken by executives and share holders.
And that is why we are in the situation that we are in today, despite the fact that over the past 30 years there have been major advances in technology and major increases in worker productivity and major improvements in workforce education. The average American has not benefited from these advances because the average American in a wage earner and does not own a significant amount of capital.
Given that this is the issue, it can be safely said that none of the proposals on how to "fix the economy" being put forward by politicians or even leading economists are going to truly solve the problem. What Barack Obama is proposing is a standard old school approach to fixing an economic down turn, and it probably will have a beneficial effect, but it won't solve the root causes of the problem.
Every time this happens what American leaders do is they implement some policies that temporarily reduce income and wealth disparity, which temporarily masks the issues and lets the economy keep working for a while, but the core problem, as has been understood by economists for over 100 years, is that ownership of capital is not evenly distributed in a "free-marketish" capitalist system, and thus capital owners are always exploiting and stealing value from workers.
The old school socialist approach to solving this problem, by making capital publicly owned, has been shown not to work. Marxist Socialists have correctly identified the problems with capitalism - they have just failed to identify the solutions.
The solution has to be relatively equal, but private, distribution of capital ownership. Instead of having the state own the capital, what the state needs to do is distribute the capital to the individuals, so that individuals directly own the capital and directly receive income from capital ownership.
I've already made several proposals for how to do this on this website, but there are other steps that could be taken as well. What is important to understand is that the spending and taxation proposals of either the Republicans or the Obama administration aren't going to solve this issue. In order to solve this issue a radical change to our economic system has to be made.
Something needs to be done along the lines of the federal government setting up a national investment program where everyone with a Social Security number gets a federal investment account into which shares of full-market index funds are deposited quarterly, and with which everyone can do with as they please. They can sell the shares or save them and collect the dividends, etc. Every citizen in the country, no matter what their age or status, would receive the exact same number of shares every month.
Everyone would still have their normal job from which everyone would receive the same types of income that they do now, but everyone would also accumulate capital ownership and capital income. This would, initially at least, need to be paid for by a progressive tax that is heavily weighted toward the wealthy, because after all, the currently wealthy in this country (I'm taking here about those with incomes in excess of a million dollars a year and net worths in the tens of millions of dollars plus) have gotten that wealth by taking it from the American, and indeed global, working class. It is an absolute fact that their wealth is the product of other people's work, and the economy will never be fixed and will never be stabilized until the small minority stop draining off the value created by the working majority.
The solution here is not to increase wages or to just increase taxes on the rich, the solution here has to be a fundamental shift in capital ownership from 1% of the population owning and controlling most of the capital to broad based capital ownership, where capital gains income is relatively equal across the board. The financial schemes of the Republicans over the past 30 years have clearly failed to do this.
And this is all the more interesting because the claims of the Republicans and so-called market advocates has been all along that "a rising tide lifts all boats" and that the "ownership society" would bring benefits to everyone. Clearly the evidence shows that over the past 30 years income disparity has grown in America. The only thing that we can conclude from this is that either A) this was by design all along, or B) the policies of the Republicans and "market advocates" have failed to achieve their goals and have indeed backfired. I tend to think that the issue is option A, because every time I listen to what these people say, on the one hand they make the case for their policies by saying things like "a rising tide lifts all boats", or that the goal or effect of market economies is to allow the market to create benefits for everyone, that everyone benefits from market systems, etc., but then as soon as you question these claims and start to point at the data they change their tune and begin to justify inequality. It is as if they really know that these systems are unfair and create inequality, they just lie on the outset to try and advocate policies that they know are actually going to help the rich and hurt everyone else, under the guise of claiming that its going to be good for everyone.
People have to understand the role of capital in a capitalist system. Capitalism isn't about "free markets", its not about trade, its not about small businesses, its not about entrepreneurship, it is not about rewarding hard work. What defines capitalism is the role that capital plays in the economy. Capital is "productive property", by definition. In a capitalist system the owner of the productive property retains 100% of the rights to all of the value that is created with that property. Capital ownership in a "free-marketish" capitalist system will always naturally tend towards consolidation where fewer and fewer people own more and more of the capital, and by their ownership of capital the capital owners will receive a larger and larger portion of the value created by society, not value created by them, value created by everyone else. This is how a small number of people in capitalist economies become extremely wealthy, not by working millions or billions of times harder than everyone else, but by owning the rights to the value created by millions or billions of people.
The corporate executives and hedge fund managers and large investors over the past 30 years have not worked millions of times harder than everyone else, they have just received value that was created by everyone else. The only way to fix the economy long term is to stop that process of redistribution of wealth from the working poor and middle class to the capital owning wealthy. Make no mistake about, the American economy today has been demolished by the wealthy, both directly and indirectly. The wealthy have both siphoned off trillions of dollars of value from workers to their own private incomes, and they have directly made the decisions that have further devastated the American economy, such as off-shoring American production to China and other countries in order to take advantage of cheap labor. This loss of productive capacity was very much a short-sighted profit driven move that transferred trillions of dollars from American workers to into the bank accounts of a relatively small wealthy elite in America, at the expense of long-term national economic viability. Not only was this a stupid move for the long-term in general, but it was even more obviously stupid given the obvious implications of the inevitable rise in the cost of fuel. Inevitably the cost of fuel was going to go up, so constructing a manufacturing system where parts and materials are shipped all over the world so they can be assembled by the cheapest labor possible is an obviously bad move when the cost of shipping was inevitably going to go up with both an increasing demand for fuel and decreasing supply of it. And the decisions to do all of this were made by the "captions of industry", by both the heads of corporations and leaders in government who cooperated with them. These people made large one-time gains from selling America out, and there is no doubt that the fingers of blame for our current economic situation must be pointed squarely at many of the wealthiest people in America today, whose gains came at the expense of everyone else and the nation's future.