Tuesday, November 1, 2011

The big issues

Got a phone call from Tony tonight.  He's been a busy boy.  He had to do a show in Vermont and managed to fit in stops at Occupy Washington, Boston, and New York.  I hope he will write an account about this soon and it will be considerably more detailed, but the central thrust of what he told me was that while these protests are quite creative and innovative, they really haven't gotten around to economic discussions yet.  He encountered lots of community organizing types—very few with an agenda for banking and monetary reform.

Fortunately, it turns out that it is quite easy to understand the economics from the outside.  Some of those issues are over 5000 years old, after all.  But social movements are also cultural and speaking for myself, I am amazed at how well this part is being handled.  In the end, this might be critical.  But economics will still be the subject both the powerful and powerless will be willing to fight over.

Henry Blodget wrote this back on Oct. 11 when #OWS had moved from being a fringe novelty act to something the Street would worry about.  He couldn't find a list of demands so he formulated this list of what #OWS should be angry about.  It is a very good list.  And if you click on the link, you will see that he has a graph for virtually every point he makes here.

Here's What The Wall Street Protesters Are So Angry About...
Henry Blodget | Oct. 11, 2011 
The "Occupy Wall Street" protests are gaining momentum, having spread from a small park in New York to marches to other cities across the country.

So far, the protests seem fueled by a collective sense that things in our economy are not fair or right. But the protesters have not done a good job of focusing their complaints—and thus have been skewered as malcontents who don't know what they stand for or want.

So, what are the protesters so upset about, really?  Do they have legitimate gripes?

To answer the latter question first, yes, they have very legitimate gripes.

The problem in a nutshell is this: Inequality in this country has hit a level that has been seen only once in the nation's history, and unemployment has reached a level that has been seen only once since the Great Depression. And, at the same time, corporate profits are at a record high.

In other words, in the never-ending tug-of-war between "labor" and "capital," there has rarely—if ever—been a time when "capital" was so clearly winning. 
Click here to see what the protesters are so upset about
  • Let's start with the obvious: Unemployment. Three years after the financial crisis, the unemployment rate is still at the highest level since the Great Depression (except for a brief blip in the early 1980s)
  • Jobs are scarce, so many adults have given up looking for them. Thus, a sharp decline in the "participation ratio."
  • And it's not like unemployment these days is a quick, painful jolt: A record percentage of unemployed people have been unemployed for longer than 6 months.
  • And it's not just construction workers who can't find jobs. The median duration of all unemployment is also near an all-time high.
  • That 9% rate, by the way, equates to 14 million Americans—people who want to work but can't find a job.
  • And that's just people who meet the strict criteria for "unemployed." Include people working part-time who want to work full-time, plus some people who haven't looked for a job in a while, and unemployment's at 17%
  • Put differently, this is the lowest percentage of Americans with jobs since the early 1980s (And the boom prior to that, by the way, was from women entering the workforce).
  • So that's the jobs picture. Not pretty.
  • And now we turn to the other side of this issue... the Americans for whom life has never been better. The OWNERS.
  • Corporate profits just hit another all-time high.
  • Corporate profits as a percent of the economy are near a record all-time high. With the exception of a brief happy period in 2007 (just before the crash), profits are higher than they've been since the 1950s. And they are VASTLY higher than they've been for most of the intervening half-century.
  • CEO pay is now 350X the average worker's, up from 50X from 1960-1985.
  • CEO pay has skyrocketed 300% since 1990. Corporate profits have doubled. Average "production worker" pay has increased 4%. The minimum wage has dropped. (All numbers adjusted for inflation).
  • After adjusting for inflation, average hourly earnings haven't increased in 50 years.
  • In short... while CEOs and shareholders have been cashing in, wages as a percent of the economy have dropped to an all-time low.
  • In other words, in the struggle between "labor" and "capital," capital has basically won. (This man lives in a tent city in Lakewood, New Jersey, about a hundred miles from Wall Street. He would presumably be "labor," except that he lost his job and can't find another one.)
  • Of course, life is great if you're in the top 1% of American wage earners. You're hauling in a bigger percentage of the country's total pre-tax income than you have at any time since the late 1920s. Your share of the national income, in fact, is almost 2X the long-term average!
  • And the top 0.1% in America are doing way better than the top 0.1% in other first-world countries.
  • In fact, income inequality has gotten so extreme here that the US now ranks 93rd in the world in "income equality." China's ahead of us. So is India. So is Iran.
  • And, by the way, few people would have a problem with inequality if the American Dream were still fully intact—if it were easy to work your way into that top 1%. But, unfortunately, social mobility in this country is also near an all-time low.
  • So what does all this mean in terms of net worth? Well, for starters, it means that the top 1% of Americans own 42% of the financial wealth in this country. The top 5%, meanwhile, own nearly 70%.
  • That's about 60% of the net worth of the country held by the top 5% (left chart).
  • And remember that huge debt problem we have—with hundreds of millions of Americans indebted up to their eyeballs? Well, the top 1% doesn't have that problem. They only own 5% of the country's debt.
  • And then there are taxes... It's a great time to make a boatload of money in America, because taxes on the nation's highest-earners are close to the lowest they've ever been.
  • The aggregate tax rate for the top 1% is lower than for the next 9%—and not much higher than it is for pretty much everyone else.
  • As the nation's richest people often point out, they do pay the lion's share of taxes in the country: The richest 20% pay 64% of the total taxes. (Lower bar). Of course, that's because they also make most of the money. (Top bar).
And now we come to the type of American corporation that gets—and deserves—a big share of the blame: The banks. Willie Sutton once explained that the reason he robbed banks was because "that's where the money is." The man knew what he was talking about.

Remember when we bailed out the banks? Yes, and remember the REASON we were told we had to bail out the banks? We had to bail out the banks, we were told, so that the banks could keep lending to American businesses. Without that lending, we were told, society would collapse...

So, did the banks keep lending? Um, no. Bank lending dropped sharply, and it has yet to recover.

So, what have banks been doing since 2007 if not lending money to American companies? Lending money to America's government! By buying risk-free Treasury bonds and other government-guaranteed securities.

And, remarkably, they've also been collecting interest on money they are NOT lending—the "excess reserves" they have at the Fed. Back in the financial crisis, the Fed decided to help bail out the banks by paying them interest on this money that they're not lending. And they're happily still collecting it. (It's AWESOME to be a bank.)

Meanwhile, of course, the banks are able to borrow money FOR FREE. Because the Fed has slashed rates to basically zero. And the banks have slashed the rates they pay on deposits to basically zero. So they can have all the money they want—for nearly free!

When you can borrow money for nothing, and lend it back to the government risk-free for a few percentage points, you can COIN MONEY. And the banks are doing that. According to IRA, the "net interest margin" made by US banks in the first six months of this year is $211 Billion. Nice!

And that has helped produce $58 billion of profit in the first six months of the year.

And it has helped generate near-record financial sector profits—while the rest of the country struggles with its 9% unemployment rate.

And these profits are getting back toward a record as a percentage of all corporate profits.

And those profits, of course, are AFTER the banks have paid their bankers. And it's still great to be a banker. The average banker in New York City made $361,330 in 2010. Not bad!

This average Wall Street salary was 6X the average private-sector salary (which, in turn, is actually lower than the average government salary, but that's a different issue).

So it REALLY doesn't suck to be a banker.

And so, in conclusion, we'll end with another look at the "money shot"—the one overarching reason the Wall Street protesters are so upset: Wages as a percent of the economy. Again, it's basically the lowest it has ever been.

So now you know what the protesters are upset about! more
One subject the comes up often at these protests is the fact that kids have been sold into debt peonage for an "education" that is usually an insult to the very idea of an education.
The $1 Trillion Student Loan Rip-Off: How an Entire Generation Was Tricked into Taking on Crushing Debt That Just Enriches Banks
Alex Pareene 
Young people accepted a home mortgage worth of debt before they ever even had a regular income based on phony promises. 
USA Today says that at some point this year, student loan debt will exceed $1 trillion, surpassing even credit card debt. Felix Salmon says the number is closer to $550 billion. Either way total student loan debt is rising as other debts have tailed off. Delinquency has increased, too, since the height of the financial crisis. 
Some people have noticed that “student loan debt” comes up a lot among the Wall Street Occupiers and the members of the 99 percent movement. Often, older people, who either attended school when tuition was reasonable, or who didn’t attend college at all in an era when a high school diploma was enough of a qualification for a stable, middle-class career, tend to think this is all the entitled whining of spoiled kids. They don’t understand that these kids accepted a home mortgage worth of debt before they ever even had a regular income, based on phony promises, and that the debt is inescapable, regardless of life circumstances or ability to pay. 
Thanks to the horrific 2005 bankruptcy bill, one of the most nakedly venal modern examples of Congress serving the interests of the rentiers and creditors over the vast majority, debtors cannot discharge student loans through bankruptcy. The government is shielded from the risk, and creditors are licensed to collect by almost any means they deem necessary, giving no one in charge any real incentive (beyond basic human decency) to fix the situation. 
In other words, this is unprecedentedly awful for an entire generation of young people just entering adulthood. 
“It’s going to create a generation of wage slavery,” says Nick Pardini, a Villanova University graduate student in finance who has warned on a blog for investors that student loans are the next credit bubble — with borrowers, rather than lenders, as the losers. more
And then there is the possibility of a "Freikorps" problem.  When the German armies returned from WW I, they found a shattered economy.  Even if there were jobs to be had, slogging it out in trench warfare had not prepared them to do much but kill people.  So after causing trouble for a while, the German ruling classes hired these men to essentially destroy the Left.  Of course, becoming goons for the aristocracy was just one outcome.  Men with military training in Russia came home from the Great War to start a revolution.

In USA, we are seeing military types coming home from Iraq, etc. to an economy that has very few jobs for them.  The 1% have already hired plenty of goons so we probably won't see our own Freikorps problem but we could see our discarded soldiers joining forces with the various #OWS movements.
New Veterans Hit Hard by Economic Crisis
Published: November 17, 2008

After a mortar sent Andrew Spurlock hurtling off a roof in Iraq, ending his Army career in 2006, the seasoned infantryman set aside bitterness over his back injury and began to chart his life in storybook fashion: a new house, a job as a police officer and more children. 
“We had a budget and a plan,” said Mr. Spurlock, 29, a father of three, who with his wife, Michelle, hoped to avoid the pitfalls of his transition from Ramadi, Iraq, to Apopka, Fla. 
But the move proved treacherous, as it often does for veterans. The job with the Orange County Sheriff’s Office fell through after officials there told Mr. Spurlock that he needed to “decompress” after two combat tours, a judgment that took him by surprise. Scrambling, he settled for a job delivering pizzas. 
Mr. Spurlock’s disability claim for his back injury took 18 months to process, a year longer than expected. With little choice, the couple began putting mortgage payments on credit cards. The family debt climbed to $60,000, a chunk of it for medical bills, including for his wife and child. Foreclosure seemed certain. 
While few Americans are sheltered from the jolt of the recent economic crisis, the nation’s newest veterans, particularly the wounded, are being hit especially hard. The triple-whammy of injury, unemployment and waiting for disability claims to be processed has forced many veterans into foreclosure, or sent them teetering on its edge, according to veterans’ organizations. 
The problem is hard to quantify because there are no foreclosure statistics singling out veterans and service members. Congress recently asked the Veterans Affairs Department to find out how badly veterans were being affected, particularly by foreclosures. The Army, too, began tracking requests for help on foreclosure issues for the first time. Service organizations report that requests for help from military personnel and new veterans, especially those who were wounded, mentally or physically, and are struggling to keep their houses and pay their bills, has jumped sharply. more
Here we see a fascinating debate between an economist with an agenda debate a community organizer type.  I tend to side with Tarpley on the specifics but can understand (but not sympathize with) the community organizer who wants to rely on inclusive processes and isn't at all concerned about formulating an agenda.
Last Tuesday, Occupy Wall Street Endorsed the 1% Wall Street Sales Tax and Became a Real Threat to Financier Power. That Same Day, Big-Time Police Repression Started. Learn the Lesson: Escalate Programmatic Demands Now!

Webster G. Tarpley, Ph.D.   October 27, 2011

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