(this is a long post, and not for the faint-hearted, but stick with it, it might be worth it in the end)
There comes a point in the history of all great civilizations when the era of expansion and increasing power and wealth peaks and is replaced by a period of stagnation and then decline. There is no definite path for this downturn, and no clear timescale. Sometimes it will seem to have been halted, or even reversed temporarily. But once it begins, that country will never again regain its preeminence. In Britain, we can date our period of global expansion and influence back as far as the construction of the Royal Navy by Henry VIII (although a more accurate date might be the Battle of Plassey, 1757, which established colonial rule in India). And our decline as a world military and economic power from at least 1914, with the disastrous entry into the Great War (although many historians would argue that British power essentially remained intact until 1939). 1914 was the decisive moment, for me, in which the seeds of the destruction of British power were sown.
Between 1945 and 1971, the United States enjoyed a period of sustained and impressive GDP growth (from $293.7bn in 1950 to $1038.3bn in 1970), as it developed trade with countries all around the world and the Dollar became the global reserve currency (over the objections of Lord Keynes), allowing the US to spend at marginally lower costs than other governments.Some economists also attribute the period of expansion to consistently low oil prices (which certainly played a role in keeping inflation low) and the adoption/continuation of policies for managing the economy and an active fiscal policy (as prescribed by Keynes) to invest in infrastructure and jobs.
But, real median household income has grown only slightly between 1967 and 2010, in a period when GDP growth has increased by a factor of ten. Between 1989 and 2009, median household income in the US increased by only 3.1%, or 0.15% per year over twenty years. In the period 1980 – 2010, compound inflation in the US was 178.52%. In the period 1967 – 2009, the Gini coefficient (showing income inequality) in the US has increased from 0.397 to 0.468.
In other words, not only has the cost of living in the US increased rapidly over the last thirty years, but at the same time real income distribution has changed dramatically in favour of the top earning households. The median figure is better than the mean income distribution which is distorted by the enormous increases in wealth at the top, but it still doesn’t tell the whole story very accurately. In order to see it more clearly you have to look at income distribution among each percentile of the population. Income inequality chart 1967-2003 What this chart clearly shows is how percentiles with annual incomes 2, 3, and 4 times higher than the median have seen a steady increase in their wealth over this period, while those with lower incomes have seen their wealth decline over the same period (relative to the median) or stand still. It’s also worth pointing out that the above chart does not show income growth for the top percentiles, whose worth may be 50-100 times as high as the median. Their wealth has increased at an even greater rate.
Recently, thanks to the introduction of “ill-conceived” tax cuts, which “have conferred the most benefits, by far, on the highest income households”, government revenue has decreased and deficits have continued to rise. President Obama’s new budget proposes $1.1TN spending cuts, which will mean cuts in many social, welfare and education programs, raising comparatively little new revenue, but increasing the pressure on lower and middle-income families. At a time when many Americans are already feeling the painful effects of the 2008 financial crisis and subsequent recession, when foreclosures are at record levels and unemployment touching 10%, these cuts and the widening gap in income distribution is likely to have important political ramifications.
In Wisconsin this week we see a Republican state legislature trying to break public sector unions by removing their collective bargaining rights, callously claiming that, since other people are suffering or working for less pay and worse conditions, so too should teachers and other state employees. But this is not about sharing the pain of other citizens, it is simply a convenient mask to cover up an attempt to destroy one of the very few remaining centres of organised labor in the US. In the private sector, unions have long been disbanded or even made illegal. Wal-Mart, to take one example, forbids its employees from forming unions and even sends a special union-busting squad from its headquarters to any store where managers report employees forming casual associations. I could write a lot about the power of organised labour and its counter-balancing of private capital, but that’s really a whole subject on its own.
The single biggest factor in the growth of US government debt is the healthcare system. Spending on healthcare is approximately 16% of GDP, far higher than any other developed country. And yet there are over 50m Americans, or just over 16.7% of the population, without health insurance. No other developed country has a system which leaves so many people with no coverage or access to treatment. Warren Buffett has compared the cost of health insurance premiums in the US to ‘a tapeworm, eating at our economic body’. We have yet to see whether the reforms introduced by Obama will make a significant reduction in the cost of healthcare in the long run. By the CBO’s own estimates, the bill will save $143bn dollars over ten years. Sounds like a lot, but it is actually peanuts when you compare it to the total annual cost of Medicare, Medicaid and other programmes. And the real issue is not just what the government spends, but the rising cost of insurance premiums across the board, which are responsible for pushing many families into bankruptcy and further widening the gap between rich and middle and poor (medical debt contributed to 46.2% of all personal bankruptcies in the US in 2007).
There is also the small matter of the trade imbalance with China. China has accumulated dollar reserves worth $895bn, but America cannot de-leverage or restore this balance while the price of the Yuan remains artificially low and China’s output surges. This leads to further outsourcing of jobs, artificially low interest rates in the US which may lead to future asset price bubbles, and obviously gives China a huge amount of strategic influence in US fiscal and even foreign policy. The disappearance of jobs overseas is a huge cause of resentment and anger, and it also plays into a narrative of unpatriotic, out-of-touch politicians and big business selling America’s middle class and working families down the river.
Many people believe, because they have been so ruthlessly propagandized and exploited, that government spending and tax increases are to blame for their lack of prosperity. In fact, their wealth has been destroyed not by spending on government programmes, but by the corruption of the financial system and its political overseers, who have colluded to turn the great engine of growth and prosperity into a charity for the rich, by an unfair tax system which takes from the middle and the bottom and gives to the top, and by the invention of a banking system which has given astronomical rewards to people who have taken the biggest, stupidest risks and, when they lost, bailed them out with taxpayers’ money. It is not even ‘trickle-down’ economics, it is ‘trickle-up’.
Anybody, no matter how greedy he or she is, must be able to see that this is an unsustainable way of running the economy. Marx said the capitalist should worry about revolutions. I simply say that the capitalist should worry about capital, about the destruction of capital on an almighty scale. 2008 was the clearest example of a crisis caused by runaway greed that you can imagine. In retrospect, in the light of day, it is hard even to comprehend the stupidity, arrogance and venality of the bankers and speculators, politicians, academics and regulators who caused it and let it happen. There are already some excellent accounts of the crisis – for beginners I recommend John Lanchester’s ‘Whoops’, and for those a little more confident in their grasp of economic fundamentals there’s Joseph Stiglitz’s magisterial ‘Freefall’. Charles Ferguson’s excellent new film ‘Inside Job’ also gives a very good (if slightly polemical) insight into the mindsets and lifestyles of those who caused the crash and the corruption of the system that allowed them to do it and get away with it.
When you see that Goldman Sachs, for instance, hedged its exposure to CDOs (mortgages and other personal debts) by shorting them (even the debts that it sold on to other banks) there are two questions that occur to you. One: how the fuck did we ever get into this position in the first place where the people who sell you something know that it is a shit product and are betting against you even as they ink the deal? And two: how did we ever get into a position where the global OTC derivatives market was worth as much as $500 Trillion? Yes, that’s right. 500 trillion dollars.
Well, the story is actually quite well rehearsed. It begins with the repeal of the most important elements of the Glass-Steagall Act, put in place during the New Deal, to prevent deposit banks and investment banks merging, by the Gramm-Leach-Billey Act in 1999. And it also includes, importantly, the relaxation by the SEC of the net capital rule in 2004, allowing banks to borrow much more than they had been permitted to do before, which led to an explosion in ‘mortgage backed securities’ (CDOs, etc…) a primary ingredient of the 2008 crisis. Both of these pieces of regulation were designed to prevent the kind of risk-taking and the concentration of risk that occurred in the years leading up to the crisis. Both were removed as a result of intense political pressure brought to bear by the financial sector on the White House, Treasury and SEC and members of Congress.
Bankers will always argue that they operate within the law, and that all they do is to follow their own rational self interest (i.e. generate as much profit as they can), which, they claim, is their social function and patriotic duty. Just how disingenuous and misleading this argument is can be seen from the history of the Financial Services Roundtable and its members’ attempts to have the law changed in favour of their own preferred business practice, and in how little tax (proportionally) they contribute to the countries they owe their very existence and operations to. Barclays in the UK was forced to acknowledge that it had only paid £113m in tax in 2009, a year in which group profits rose to £11.6bn and the company paid a total of £2.6bn in bonuses to its staff. When unemployment is rising rapidly and most households are faced with declining incomes and potentially devastating changes to their employment and means, is it surprising that people feel hatred and loathing towards the banks and the people who carelessly, and recklessly, threw their money away and still got paid?
It is clear that money has corroded the whole constitutional basis of the government. Campaign contributions, lobbying and appointments to key government positions have allowed Wall Street and financial institutions to dictate government policy and undermine the basis of democracy. Neither of the ruling political parties can operate without the support of these companies. This sounds ridiculously hyperbolic, I know. But there’s no other way of putting it. Just read Matt Taibbi’s article for Rolling Stone and see what I mean.
The US constitution was designed explicitly to separate Executive, Legislative and Judicial powers, but it has failed to separate those powers effectively from the corrupting influence of vast amounts of money. The genetic signature of American decline might be seen (symbolically at least) in the conflicts between Hamilton and Jefferson in the early days of the republic, in the tussle between New York and Washington, the world of business and politics (to be fair, their disputes were mainly over the importance of a central bank, the terms on which the Federal Government might assume the debts of states, etc… not about regulation and fiscal or monetary policy). But neither of the Founding Fathers could have seen how completely, one day, the financiers would come to control their politicians, and how the dark genie of decadent capitalism would poison their bold new institutions. You have to go back to a much older wisdom and a much earlier chapter in the history of the New World for that: “One day, Spaniard, you will learn that you cannot eat gold.”