Labor Day, 2010
by Richard C. Leone
In some ways the most severe recession in seventy years, which technically ended with the recent resumption of tepid growth, shared many of the characteristics of previous economic meltdowns: inflated values, pyramiding debt, unreasonable speculation, etc. But some of the factors that made the latest decline so nasty and intractable are unusual. Understanding them required recognizing that the roots of this collapse go deep into the economic, political, and cultural history of the past 35 years.
The watershed year is 1973. Before then, most Americans had enjoyed three decades of rising incomes accompanied by optimism about their own and the nation’s economic future. In the years since, however, income stagnated, in real terms, for most workers. A subsequent growing disparity in wealth and income reflected the fact that the vast majority of Americans were left behind as national income continued to grow, but the gains were concentrated in the top quartile of citizens. Struggling, working families sought ways to maintain not only the standard of living they had enjoyed but also to fulfill their expectations that they would become more prosperous over time. Sadly, the principal strategy available for these workers was finding new ways to borrow.
The financial sector was more than willing to accommodate this enlarged appetite for debt. At the most prosaic level, it is almost forgotten that a generation ago credit cards were virtually unheard of. Second mortgages (so called home equity loans) have also proliferated. And first mortgages and car loans were granted on seemingly easy terms to just about anybody.
Corporations and governments joined in the festival of debt. Companies paid executives up front for actions that might or might not bear fruit in the future. The “transaction” was king –an end in itself. And the rise of Reaganesque anti-tax sentiment combined with increased spending, especially on defense, created an almost permanent condition of unbalanced budgets. States adopted regressive gimmicks like legalized gambling (confined only to Nevada in 1973) and front-ended bonding of long term anticipated revenues – the so-called “cigarette settlement” bonds being a case in point.
Cultural factors are seldom mentioned when we talk about the fix we’re in, but it’s quite reasonable to assume that they played a major role. The shift in values toward self-centeredness and hostility toward government was reinforced by wage stagnation that began in the early 70s and has persisted until today. The waning influence and dying out of the generation that had been schooled in thrift and hard work by the Great Depression and WWII set the stage for this willingness to “live on credit.”
A third factor was intellectual; the triumph of deregulation and the so-called “Washington consensus” in economics. These articles of faith in unfettered markets made possible the financial legerdemain which enriched the few and indentured the many.
Finally, beginning with the Reagan administration, the mask of conservatism made possible the vast accumulation of public debt. The natural opponents of this increase in debt were in fact the sponsors of it. The conservative project under Reagan and the two Bushes added more debt than all previous post-war administrations, and they did so by and large while preaching the gospel of fiscal prudence.
Common sense suggests that the startling concentrations of wealth and income among a relatively tiny group of the population must have ripple effects in other economic areas. The very rich have pulled away from everybody else, even from just the rich, and the numbers back it up. Not only do they have a larger share of the income and wealth in the country, but they pay lower taxes. Indeed the upper income tax rates are the lowest they have been since before WWII. In fact, according to the Center on Budget and Policy Priorities, effective tax rates for the richest 400 households are down to about 15 percent.
Since the rich by definition have a lower propensity to spend and a higher propensity to save, their effect on stimulating the economy, compared to what would happen if some share of their wealth and income were redistributed to people who spend a larger percentage of their resources, must be limited. Moreover the cost of the tax cuts provided to the well off over the last 50 years is measured in trillions, accounting for a substantial fraction of the current national debt.
Now the same conservatives who voted for the giant Reagan-Bush deficits are primly preaching the gospel of prudence: cut the federal debt by reducing the already frayed safety net, including cuts in Social Security and health care. They even resisted efforts to extended unemployment benefits. And yes, they also are rallying behind the retention of the historically low tax rates for the wealthiest Americans.
Where do we go from here? Well if the conservatives have their way, there will be more unpaid “holidays” for workers and more big pay days for the wealthy.