Posts Tagged ‘Second Great Depression’

capitalism-a

Thomas Palley does an admirable job summarizing and discussing the implications of four different stories about the relationship between inequality and the financial crash of 2007-08. The only problem is, he completely overlooks a fifth story about that relationship, one that hinges on the existence and use of the surplus.

According to Palley, there are four major stories of the financial crisis and the role they attribute to income inequality. They are identified with (1) Raghuram Rajan (according to whom inequality has not really been a problem per se but the government responded to populist pressures to do something about growing inequality by extending home mortgages to unwarranted buyers), (2) Michael Kumhoff and Romain Rancière (who developed a model in which worsening income distribution, caused by declining union bargaining power, led to a persistent surge in borrowing as workers tried to maintain their living standards, which rendered the economy fragile to a financial sector shock), (3) Gauti B. Eggertsson and Paul Krugman (who leave out inequality entirely and focus instead on the idea that a financial bubble drove excessive borrowing and leverage in the US economy—which, when the bubble burst in 2007-08, led to a financial crisis and a deep recession, which in turn prompted a wave of deleveraging as borrowers shifted to rebuilding their balance sheets and excess saving that reduced aggregate demand), and (4) Palley himself (who , in his “structural Keynesian” account, focuses on the shift from wage-led growth to neoliberal financialization).

Thus, according to Palley,

Income inequality did not cause the financial crisis. The crisis was caused by the implosion of the asset price and credit bubbles which had been off-setting and obscuring the impact of inequality. However, once the financial bubble burst and financial markets ceased filling the demand gap created by income inequality, the demand effects of inequality came to the fore.

Viewed in that light, stagnation is the joint-product of the long-running credit bubble, the financial crisis and income inequality. The credit bubble left behind a large debt over-hang; the financial crisis destroyed the credit-worthiness of millions; and income inequality has created a “structural” demand shortage.

Palley then proceeds to discuss the implications, for economic policy, of each one of these four stories.

The entire essay is worth a good, careful read. But let me focus here just on the causal stories, and leave for another post the implications of the stories for policy.

While I am sympathetic to Palley’s critique of the other three stories, what’s missing from his own account is the role inequality played in the financial crisis itself.

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Consider, for example, what happened to profits and wages in the long run-up to the crash of 2007-08. What we can see, from 1970 onward, is a steady decline in the wage share of national income and an initially halting and then uneven increase in corporate profits (measured here in terms of “net operating surplus”).* The argument is that the decline in the wage share led to increased profits both directly and indirectly: directly, as wage costs for producing enterprises declined; and indirectly, as some of those corporate profits were recycled through financial enterprises to lend to workers, thereby further boosting the profit share of national income. That combination fueled the housing and asset bubbles that eventually burst in 2007-08.

So, on my account—on my structural class account—inequality played an important role in creating the conditions for the most recent financial crash. And now, during the Second Great Depression, the class inequality that was such an important factor before is on the rise again.

Now, I understand, that’s not a complete story about the relationship between inequality and the crash of 2007-08. But it’s a start. It shows that such a story is possible. And, as I will explain in another post, it has implications for economic policy very different from the other four stories out there.

*My chart doesn’t show all of what I consider to be the economic (class) surplus. To get there, we’d have to transfer some of what is included in wages and salaries (e.g., the salaries of CEOs, which put them in the top 1 percent) to “net operating surplus.” I’m still searching for a good way to do that.

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This semester, we’re once again teaching A Tale of Two Depressions. And, as in previous offerings of the course, we often touch on and return to the theme of the American Dream.

The students in the course get the clear sense that the definition of the American Dream changed during the 1920s (during the transition from small-town rural life to factories in the big cities) and that the First Great Depression turned that dream into a nightmare for most Americans. A new American Dream was, of course, created during the New Deals and the postwar period but began to unravel from the mid-1970s onward (as wages stagnated and the distribution of income and wealth became increasingly unequal).

What about now, six years into the Second Great Depression?

Well, a new report from the Pew Charitable Trusts [pdf, ht: ja] documents the fragile financial situation of many U.S. households outside the top 1 percent—and thus how far American workers are from even imagining, let alone achieving, the American Dream.

Consider the following facts:

Household incomes are dramatically volatile: in 2011, about the same percentage of Americans (a bit more than 20 percent) had to endure a 25-percent decrease in income over a two-year period as a similar increase in income. (One of the consequences is that a large percentage—a third, according to one study—who suffered a loss in income still not recovered financially when their income was measured 10 years later.)

Household spending has declined and stayed down: since the start of the recession in 2007, American households have tightened their purse strings, reducing spending by almost 9 percent. Further, the typical rebound in expenditures following recessionary periods has not occurred since the end of the latest recession. (In contrast, during the 22 years before the start of the downturn, household expenditures grew 16 percent, with 69 percent of that growth [11 percent] occurring between 1990 and 2006.)

Household spending is extremely unequal: in 2013, the top quintile’s annual spending on housing alone ($30,901) outpaced what the middle quintile spent on housing, food, and transportation combined. (In turn, the middle quintile spent nearly as much on housing as those at the bottom spent in total across these categories.)

Most households are in a precarious financial situation: Almost 55 percent of households are savings-limited, meaning they cannot replace even one month of their income through liquid savings (money in cash, checking accounts, and savings accounts). Just under half of households are income-constrained, meaning they perceive that their household spending is greater than or equal to their household income. And 8 percent are debt-challenged, which means they report debt-payment obligations that are 41 percent or more of their gross monthly income. As it turns out, seventy percent of U.S. households face at least one of these three challenges, and more than a third face two or even all three at the same time.

Clearly, the current recovery has represented a reversal of fortunes, after a short but dramatic dip, for a small minority at the top. But, for the American working-class, there has been no recovery. They find themselves as far—many of them, even farther—from the American Dream as they were before the crash of 2007-08.

 

*The title is a bit of a private joke. Many years ago, before email existed, I told someone by telephone the title of my upcoming talk at American University on the role of mathematics in economics. I planned to begin my presentation with a discussion of Descartes’ dream. As I walked across campus and saw the posters announcing my talk, I realized the wording of my title had been transformed. So, as we walked into the seminar room, one graduate student turned to me and asked: “Professor, what does Dr. Who have to do with the mathematization of economics?”

part-time

According to CNN Money [ht: ja], the number of people working part-time involuntarily is more than 50 percent higher than when the current economic crises began.

Paige Stevenson is caught in the part-time job trap. She started working six months ago as a legal assistant for 30 hours a week in Annapolis, Maryland, a state where involuntary part-time has doubled since the recession began. She keeps trying to find something full-time.

Stevenson accepted her current position as a “stop-gap” measure because she had been unemployed for a while and wanted to get back into the workforce any way she could. She earns $15 an hour and receives no benefits, but her husband’s technician job provides health care for the family.

After taking into account daycare for her 4-year old son, a home mortgage and the cost of living near Washington D.C., she is in debt.

“When you’re dealing with part-time jobs, they’re basically dead ends,” Stevenson, 32, says, “Employers, at least around here, have been asking for the moon and paying zero.”

Many of those working part-time when they prefer to have full-time employment are being forced to have the freedom to stay as long as possible in dead-end jobs. They are also more likely to live at or below the poverty line, to be laid off and go through extended periods without any job at all, and to work without any benefits (such as paid sick leave, vacation days, job training, or health insurance).

The high number of involuntary part-time workers are a sure sign we’re still in the Second Great Depression.

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The current “recovery” continues to produce and to rely on the existence of a Reserve Army of Labor.

A large part of that reserve army is, of course, unemployed—both short-term and long-term. Another substantial proportion is made up of workers who can only find part-time work, especially in the so-called retail and hospitality sectors.

The chart above shows a decline in the number of those working part-time for economic reasons that is the result of slack business conditions. However, the level of workers who are part-time because they simply can’t find full-time work is actually higher now than it was before the crash.

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Not only are millions of American workers forced to take part-time jobs. Their wages are growing even more slowly than the wages of full-time workers, which themselves have been growing very slowly during the Second Great Depression.

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I’m still recovering from the long weekend driving to and from New Harmony, for the conference on Capitalism & Socialism: Utopia, Globalization, and Revolution, where I presented a plenary talk on “Utopia and the Marxian Critique of Political Economy.”

Here, for those who are interested, is a link [pdf] to the text of my presentation.

lives

The third part of “Children of the Recession,” UNICEF’s report on “the impact of the economic crisis on child well-being in rich countries,” focuses on Gallup Poll data about people’s experiences and perceptions of the most recent crisis of capitalism.*

In 18 of the 41 countries, three or more of these indicators reveal rising feelings of insecurity and stress from 2007 to 2013. The most severely affected countries—including the United States—are clustered at the bottom of the table.

In terms of its impact on personal experiences and perceptions, the Second Great Depression is certainly not over. In 13 countries—again, including the United States—negative responses to three or four questions were still rising between 2011 and 2013, particularly in countries such as Cyprus, Greece, Ireland, Israel, the Netherlands, Spain and Turkey.

 

*Due to data availability, the numbers in the table refer to the population in general, not to families with children. Countries are ranked based on their average score across the four indicators, each of which measures how responses changed between 2007 and 2013. The highest number indicates the sharpest change. Column 5 indicates how many of the responses to the four were negative over the full period.

survey-corps

According to a recent survey commissioned by CNBC/Burson-Marsteller, corporations are facing a global legitimation crisis.

The vast majority of citizens—both the general population and business executives, in the United States and around the world—believe that governments are more on the side of corporations than of average citizens.

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“Greed” is the first thing that comes to mind when the general public think of corporations. And the first thing for business executives? “Big business.”

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What’s interesting is the degree of overlap between the two word clouds.

Clearly, in the midst of the Second Great Depression, corporations are facing negative perceptions on the part of both the general public and business executives in terms of the influence they have over governments and what they stand for.

It’s about time, then, to think of new ways of organizing the enterprises that play such a large role in people’s economic, political, and social lives.