The more that I listen to discussions on the American economy in the media the more it becomes clear that no one within range of a microphone has any fundamental understanding of economics. This is partly the fault of news organizations and partly the fault of how economics is understood in American in general.
One example is the on-going truism that gets heard even on NPR and PBS programs, much less channels like FOX, CNBC, and CNN, that one of the problems with the American economy right now is "psychological", that the problem is that "consumers" don't have confidence so they aren't out spending their money like they need to be, and that if we can just "restore confidence" then people will spend more money and the recovery can begin.
Sadly, this passes for "economic wisdom" in America, yet its completely untrue and displays a fundamental lack of economic understanding on multiple levels. It shows a lack of understanding of both economic theory and of the cold hard economic data, which anyone commenting on the American economy should be well versed in, but apparently isn't.
First of all, Americans aren't "not spending" because of "lack of confidence", they are not spending because of lack of money. Secondly, "spending", contrary to popular misconception, is not the basis of economic growth (nor is job creation the goal of an economy). Thirdly, the American economy of the past 30 years has been an illusion built on debt, something which has been pointed out by several people over the past 20 years, though often ignored.
Most economists, at least ones that get into the media, and certainly most pundits, still haven't gotten their heads around the fact that the "normal" economic conditions of the past 30 years were always unsustainable. The American economy has been a house of cards and lies for decades, which is also why the economic predictions of most economists who talk about the recession "bottoming out" this year and the recovery starting in 2009 or early 2010 are baseless.
A lot of this goes back to the state of American economics in general, as it is taught in universities and certainly has it is discussed in the media, even in more serious economic publications like The Wall Street Journal, The Economist, and Forbes, etc.
American economics has become completely devoid of any kind of science, and I believe that this is the case in large part because people don't like the facts that are made clear if you truly understand real economics. The level of delusion in American economics is really astounding, perhaps the greatest academic failure in recent times.
In America economics has become a tool for justification of the status quo, not a means of understanding relationships of productivity and consumption. In America most economics has become completely based on observations of correlation, NOT causation.
Even top economic professionals, some of which currently testify before Congress on matters of the economy, talk about the economy in terms of trends and historical events. These economists have no real predictive ability, which is what science is all about. Their only means of "prediction" is assuming that the future will be like the past, but they have no idea why the past was even like the past. They don't address fundamentals, they just look at graphs and numbers and supply/demand curves, etc.
What is an "economy"? An economy is the production, exchange, and consumption, of goods and services in a population. What is the basis of an economy? Production. Production, production, production.
Historically, from thousands of years ago until the modern industrialized era, production has been the only or primary limiting factor to economic growth. The prosperity of a society was governed by its ability to produce goods and services. What set one standard of living apart from another was the ability of the workers in that society to effectively produce material goods that could be used to improve quality of life.
With industrialization that changed. With industrialization it became possible to produce more material wealth than people could legally acquire. The reason for this was economic disparity. The reason for the economic disparity was that the workers who produced the goods and services were not paid the full value of their contribution in producing those goods and services, with the "surplus value" being siphoned off by executives and stock holders, i.e. capitalists.
When we look at the world economies today we see that there are two things that distinguish one economy from another: the productive capacity of a society and the consumptive capacity of a society.
Today, places like China and India are in the process of building productive capacity. Poverty in India at least is largely due to India not having enough productive capacity to meet the needs of all of the people in India. In China, however, that is largely untrue, there they have tremendous excess productive capacity, but most of that productive capacity has been used to supply goods and services to the West, not their own people. This is somewhat puzzling considering that China is ruled by a so-called Communist regime, but clearly they aren't real Communists, or else this situation wouldn't exist. It remains to be seen what they will do. They should be able to actually increase wages in China and start a transition from being an exporter to becoming an nation of domestic consumption of their vast productive capacity. If that does indeed happen it may be considered one of the first successful transitions to real Socialism, but that remains to be seen and given that they were investing in the US and moving towards more market driven labor markets that may not happen.
The US is a totally different story however. In the US our productive capacity currently far exceeds our legal ability to consume the potential products of production, hence this current "economic crisis". Here is the thing to understand: Our society has the ability to create vastly more wealth, i.e. goods and services, than what we are currently doing, and the only reason that we aren't working at creating this wealth right now is that the workers who create the wealth are not legally allowed access to it.
We have car manufacturing plants all over the country that easily could continue pumping out cars. There is nothing stopping us from making cars as fast or faster than we were 2 years go (maybe its best for the environment that we aren't though). The only thing that is preventing this from happening is that, despite the fact that there is a demand for these goods in terms of need, the people who need those goods aren't allowed to have them. The reason that those people aren't allowed to have them is because they don't have enough money to pay for them. The reason that they don't have enough money to pay for them is not because they haven't been working to create comparable wealth themselves in order to exchange that wealth for a car, rather it is because a significant portion of the wealth that most people in America have created over the past 30 years was never given to them, it was instead siphoned off from the pool of collective value that they shared in producing under the legal entity of a corporation and used to give executives millions of dollars a year in unearned income and used to return profits to share holders.
Those shareholder profits and that executive pay was all the product of the value created by the workers. We are talking about trillions of dollars of redistribution over the decades from workers to the wealthiest 1%. Since the workers were never given that value, which they created, a disparity grew in the economy between the productive capacity of the society and the "consumptive capacity".
Over the past 30 years 90% of Americans have been producing more value than what they have been getting paid for. Likewise, the top 1% have been receiving more value than they have been creating.
The reason that this current economic situation is so bad, and why it has manifested itself so rapidly, is not just because of lack of regulatory oversight or the bad lending practices that led to the housing bubble, etc., those thing are symptoms and manifestations of the underlying problem. The reason why we have had this collapse is that this disparity between value creation by workers and compensation for workers has built up over the 30 years, like the swelling of water behind a dam. During those 30 years various "tricks" were used to mask the problem. These "tricks" included more people per household going into the workforce to maintain the same household income, the growing use of debt to make up the gap between value creation and compensation, and the mass importation of goods from developing economies where workers are paid even less .
The housing crisis was just the crack in the dam of tricks which was the catalyst for the collapse of the existing unsustainable situation.
So why was that unsustainable and unfair situation allowed to exist and build up in the first place? Well, largely through right-wing economic propaganda disseminated via the mainstream media, lack of any serious scrutiny of our economic system by the media, lack of tolerance for dissenting and critical voices on economics in the media and in our society, and lack of real economic education in American universities.
Even today, even while the effects of American economic policies are demonstrating clear failure, the mentality of Americans, especially as it is on display in the mainstream media, is still largely that of right-wing delusion.
Republicans and others still act as though the expansion of government spending over the past 30 years has not been a product of Republican policy, yet it is directly a product of the Republican policy of privatization. Basic economic theory says that privatization will lead to higher costs in government, not lower, and indeed the real data from the last 30 years shows this to be a fact.
Private entities work to maximize profits. If government is the source of revenue then maximizing profits is going to mean what? Its going to mean that private industry now has a greater inceptive to manipulate the government, a greater incentive to lobby for contracts and to spread corruption. Government now has to pay the cost of doing the work plus the profits on top of it. The Military Industrial Complex is the perfect example, a very high profit margin industry that makes millionaires and billionaires of some people, all of which comes from tax payer dollars.
As privatization increased the government budget ballooned. The Republicans claimed the privatization was going to be the key to reducing government spending, but in fact it has predictably had the opposite effect. Indeed what privatization did was provide a profit motive for wasteful government spending.In the past wasteful government spending happened due to incompetence, but now with privatization it happens by design and the Republicans are the leaders of agenda that created such a system.
People still talk about all income as having been "earned" or "made" even when it clearly wasn't. A case in point is the reported 20 million dollar income of the Washington Mutual CEO who was officially on the job for 17 days and received $20 million in compensation. Even the stories bemoaning this fact talked about how he "made $20 million" in 17 days, or how he "earned $20 million" in 17 days. That's the point, he DIDN'T make it, he DIDN'T earn it, it was given to him by taking it from other people, it WAS redistribution of wealth.
The money had to come from somewhere, and he obviously didn't create $20 million in value in 17 days on the job as the bank imploded into failure, so where did that money come from? It had to have come from the workers, investors, and customers of WaMu. It was stolen from them and given to him. He never created any value, but was handed $20 million. The only way to describe that is redistribution. That is just an extreme example, but that has been the status quo for execute pay in America for the past 20 years.
Every multi-millionaire and billionaire in the world today is a recipient of collectively created wealth. There isn't a single individual in the world who has single handedly created billions of dollars worth of value. Every single billionaire and multi-millionaire has received their income by being part of a system of collectively created wealth, whereby collectively created wealth is transfered to them.
And yet, here in the midst of this economic collapse brought on by the wealthy, the dominant narrative in the mainstream media is that any form of tax increase on the wealthy is "punishment of success and hard work".
A recent segment on the Colbert Report that showed news pundits bemoaning a so-called "war on success". You can view the segment via this link: The Word - Rand Illusion
That people could even get on television and make these claims at all shows a deep level of delusion in American society, where even the majority of the people who are getting ripped off by the wealthy believe that they are the ones dragging the wealthy down.
Yes, there are people who don't work and receive welfare. These can be called freeloaders, that's fine, whether it is or isn't their fault, the fact is that they are receiving value that they didn't create. True. But do these people really think that a hedge fund manager with an income of $3 billion in 2008 really worked that much harder and contributed that much more to the economy and society than a school teacher with an income of $30 thousands? To believe that you have to be delusional. You have to have no grasp of reality, no concept at all of what an economy even is or what value creation is. Do these pundits really think that Rush Limbaugh spouting hot air on a radio every day is creating more value than an engineer developing medical technology devices? Do they really think that a basketball player is creating more value than a construction worker who builds homes every day? Do they really think that an executive at a large corporation is personally creating $30 million a year in value for the economy and that the workers doing the actual work to produce the products that the corporation sells are really only creating $30 thousand worth of value a year? Do they really not understand that the executive pay is a redistribution of the value produced by each of the workers to the executives? Do these people really not understand that all capital gains are a tax on worker compensation? Do they really not understand the implications of an economy where over the past 30 years an increasing portion of national income has gone to capital gains, where the the portion of capital gains income going to the top 1% has increased dramatically, and worker pay hasn't beaten inflation in three decades (aside from one brief period where it barely beat it)? Do these people really and truly believe that 95% of the population is holding back the top 1%? Do they really think that the top 1% would be better off without everyone else? I can tell you, the fact of the matter is, is that they would be much, much, much worse off. Their wealth and lifestyles are only made possible by the work of millions of people. It takes millions of people to create the wealth that they personally own. They haven't created it by themselves.
These issues are not addressed in the American mainstream media because when you start to get into them it leads to very challenging questions for the core principles of our entire economic model. The entire economic narrative in America is based on a completely flawed assumption, which is that all income in America is completely fair and exactly compensates the recipient for value that they created. But that fundamental assumption is not true, which is why there can be no meaningful discussion of taxes or redistribution, or anything else. Until you acknowledge that the 30 million dollar incomes of executives for the past few decades have been unearned income that was a redistribution of wealth from the workers to the executives then you can't discuss taxation. Until you acknowledge that capital gains are a tax on labor then you can't discuss taxation. Until you acknowledge that the incomes of rock stars and basketball players and actors and news pundits are a luxury provided by redistributing value created by productive workers to entertainers then you can't discuss taxes. All of those tertiary professions depend upon a base foundation of core productivity. All of those incomes are a tax on the base production of essential goods and services. All of those incomes are only made possible by the work of other people, other people who have less income, not because they don't work as hard and not because they aren't contributing, but because of an unfair economic system that allows technology and the legal system to redistribute wealth from the productive working majority of the poor, middle class, and modestly wealthy to an undeserving super rich. Yes some of the rich have made contributions and do deserve high levels of wealth, but even they have received more than their fair share, more than they themselves have contributed. A part of their wealth is earned, but an even greater part is unearned, it comes for redistribution.
Until that fact is confronted in America no meaningful economic discussion can take place, and likely no real resultion to America's economic problems will occure.