I am bumping this blog post because I can't get through writing such posts yet in my recovery, but this was originally posted on 13 Mar 2009, and it is rather pertinent to my response to Paul Klugman this morning, 6 May 2013, particularly when it comes to either learning something or not from our history.
As I watched all the talking heads from both sides of the aisle bob and weave through questions more pertinent than they wished to accept I found some interesting ideas and comments from a March 16th, 2009 interview by Matt Renner on Truthout.org of Dr. Ravi Batra (Dr. Ravi Batra: New Thinking on the Economy), Monday 16 March 2009, an economics professor at Maverick Southern Methodist University. Hence, today I will not be talking about the bobbing and weaving but about a week old interview I found to be far more astute than all the hand wringing of Congress and the reports of people rising up in protest of minimal bonuses when they should have risen up years ago in response to an exorbitantly expensive invasion of Iraq that never should have happened.
I have been saying for at least 10 years that our (now) current financial crisis was foreshadowed by policy and regulation changes which preceded the S&L collapse in the late 80s. I've also said that way too many "important" people benefited from the government bailout without any legal ramifications, but I digress.
Not only that but I've directly laid the problem of today at the feet of Ronald Reagan's economic policies. I'm glad to find an economist with a doctorate who actually agrees with me.
Dr. Batra begins: It started off with [President Ronald] Reagan. The wage-productivity gap started to develop in 1981. Reagan's economic policies increased productivity while restraining wages. One example is "free trade," which increased productivity but also reduced the real wage in the United States.
Also, the policy of regressive taxation. Reagan raised every tax that burdens the poor, but sharply reduced the income tax; all this caused a fall in consumer demand. Economic growth fell after Reagan's policies were introduced. Slow economic growth leads to pressure on wages because low growth means low demand for labor relative to labor's supply, so wages fall.
The third reason the wage-productivity gap grew as a result of Reagan was the "merger mania." Big firms were permitted to merge with each other. Each time there was a merger, there were layoffs, which also exerted downward pressure on wages. Mergers also increase productivity, further widening the gap. Reagan's anti-union policies were also responsible for the falling wages.MR: If the wage-productivity gap was widening, how did policy-makers prevent the inevitable overproduction and economic contraction?
RB: Each time the wage-productivity gap goes up, the economy will contract because of overproduction. What they did was come up with a scheme to create debt in the economy because, by creating debt, they could raise demand to the level of supply.
Initially they started off with increased government debt. The deficit went up under Reagan, which raised demand to the level of supply. Then Greenspan took over as Federal Reserve chairman and whenever there was the threat of overproduction, like when the stock market crashed in 1987, he brought interest rates down sharply. By bringing interest rates down, he lured people into borrowing. This began to create private debt on a larger scale.
This really postponed the wage-productivity gap problems for the future because under these policies, productivity rose every year, so debt had to increase every year unless wages were to rise. Since productivity rises exponentially, debt had to rise exponentially as well. In such a situation, it is not hard to imagine a day when the credit system would simply explode. That's what happened starting in 2006 or 2007.
I'd also extend this part of the problem to Health Care and Education, neither of which I've ever believed should be a For Profit private enterprise. These two factors increased the actual class warfare being fought against the middle wage earners since Richard Nixon declared that the HMO was the new health care policy of the United States. This fact and its attendant decision making documentation can be found in the Nixon tapes in a conversation with Chief of Staff Bob Haldeman in 1972 (also presented in toto by Michael Moore in his documentary "Sicko"). The concept of public health care was abhorrent to Nixon, and the Republican disgust in the publicly funded health of the American people has continued to this day. It seems to me that a healthy America is a productive America, and one, by the way, which would be even more inclined to be a part of the overall health of the country.
Education has moved from being a requirement for American citizens to somewhat the same level as laissez-faire economics promoted by economist Milton Friedman and resulted in money management firms becoming lenders for student loans while in-state free college has moved towards $60k per year tuition fees. These fees stop many middle wage earners from being able to pay for college or require them to take on debt loads of a quarter of a million dollars before they even graduate and receive a job offer.
In fact, there is a certain benefit for the more prominent of our citizens to have a workforce that does not have the same level of education, thereby continuing, and even increasing, the disparity between the richest of citizens and those of the lower middle wage earners and even to the poorest of our citizens.
The concept of the middle wage earners using their homes as an ATM, drawing out equity in the dollars of today isn't a cause for the failure of the financial system, but rather a symptom of the inequality of the ability to garner increasing wages. This follows Dr. Batra's observations on increased productivity VS real wages being the main factor in today's financial crisis.
Let me explain. Whilst a person's value to a corporation is minimal at the onset of their career, it is incumbent upon that person to make themselves more valuable to the corporation by learning how best to perform their duties, else they would be fired and replaced. The wages should follow the person's learning curve, growing earnings as the person becomes more valuable to the corporation. This has not happened since President Reagan took office. In fact, the opposite is true. As an employee gained more knowledge on how to be more valuable to the corporation they became more of a threat to that very corporation (increased wages, retirement and health care costs).
Thus began the concept of a person never having a single job over their entire career, which kept the cost of the workforce down through competition and through fear of losing one's job (illustrated by right winged political distrust of the longevity of professional government bureaucracy). During this time the concept of a person having a retirement or pension plan was virtually taken away from the workforce due to a little section of tax code in the massive $1.2 Trillion tax cuts of 1981 called Sec. 401(k). A small amount of employee set aside with some level of matching funds from the employer suddenly became the primary method for an employee to have any hope of retirement. This was never the concept behind Sec. 401(k) but was quickly advanced by corporations as the only possible methodology for employees to save towards retirement. This was also a long term strategy for use in moving Social Security from an entitlement program to a private fund circumstance presented by George W. Bush on the day after his second term election. It is amazing just how bad our 401(k) funds have fared today, much less just how bad our retirement outlook would be if Bush43 had succeeded in his efforts.
Another ancillary matter which continues to prove the point is the establishment of the Pension Benefit Guaranty Corporation in 1974 which currently handles the pension funds for more than 44 MILLION Americans because corporations largely abandoned their pension plans in droves, in a surprising number of cases by declaring Chapter 11 bankruptcy reorganization and divesting themselves of the pension responsibilities and placing the administration and maintenance costs on the American taxpayer. Within the past 6 months this public corporation has taken on the responsibility to administer the pension plans of such failed institutions as Lehman Brothers and Bear Sterns.
So now major corporations could abandon any pension funds and switch to a far less costly 401(k) matching funds policy through bankruptcy laws which were conveniently altered by, again, the George W. Bush White House and Republican controlled Congress.
In reference to President Obama's efforts to resuscitate the economy, Dr. Batra continues:
"First of all, they are confusing cause with effect. They think the cause is the financial crisis, but actually that is the effect. The cause is the rise in the wage-productivity gap. The gap between supply and natural demand [as opposed to artificial demand created by easy access to debt] is so vast now. That gap cannot be plugged easily, especially if you're not looking in the right place.
Freeing the credit markets won't end the recession, because why would a bank lend money when it's afraid that it won't come back? When the borrowers are not creditworthy and have no collateral, why would a bank want to lend them money?
The Obama administration should focus on trying to help the economy grow. The stimulus package will help in the sense that it will slow down the bleeding, but it won't stop it. If all the policies that led to the growing wage-production gap remain in place, the stimulus package will not end the recession. Balancing trade - reducing the trade deficit to zero - would be a huge step in the right direction.
Look at the economic policies of the 1950's and 1960's - balanced trade, breaking up monopolies - for example, Exxon-Mobil will have to become Mobil and Exxon; raise taxes on the wealthy and cut them on the poor. Those economic policies will close the wage gap. Those were the decades in which growth was very strong, between four and four and a half percent every year. Since Reagan took over, growth has been three percent or less."
These words are not a construct to be dismissed as revisionist history, but rather an excellent viewpoint to start formulating a plan of recovery that simply disallows manipulation of individual debt as a manner to supply continued growth.
When the robber barons can only make additional money on packaging debt and don't realize that there CAN BE NO MORE MONEY made from money which no longer exists as an asset, then there really isn't very much more to be said.
To many, the concept of living within your means has no actual meaning because they have lived their entire lives within a system where debt equates to having the most toys. Even our advertising suggests that you will be happy with one large flat screen TV, but that you will be happier if you also have one in your bathroom as if electronics and water ever made good sense, not to mention the concept of whether one really gives a good sh*t because the T V is turned on in the bathroom.
Well, I give a good sh*t, and in those private moments I think about whether our country and the world would be in this situation if we had maintained the economic norms of the 50s and 60s. Others have already decided that the burden of America and the world should be born on the backs of those least able to take the time or have the knowledge to think about such lofty questions. And those who do have the time and the knowledge seemingly continue to think about ways to maintain the norm so that the burden won't be theirs to bare.