economics 99 percent for web1

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2012 Summer Institute

If you are interested in a more in-depth, in-person explorationof the issues included in this booklet, come and join us at ourweek-long Summer Institute, Economics for the 99%, July 23-27,Columbia University, NYC.

For more information, please visit our website:http://www.populareconomics.org.


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Economics

for the 99%


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Economics for the 99% has been a collective effort of members of the Center for Popular Economics who

have generously volunteered their time on a demanding schedule. We would like to recognize the hard work

of the whole team that has done the coordination, writing, editing, layout, and production:

James Boyce, James Crotty, Nina Eichacker, David Eisnitz, Gerald Friedman, Heidi Garrett-Peltier, Olivia

Geiger, James Heintz, Thomas Herndon, Sue Holmberg, Emily Kawano, David Kotz, Josh Mason, Michelle

Roseneld, Helen Scharber, Jonathan Teller-Elsberg, Mihnea Tudoreanu, Jeannette Wicks-Lim, and Marty

Wolfson.

We would also like to thank Guy McGuin for research, Tim Simons for the beautiful cover design and

cartoons, and all those who gave us permission to use their graphics.

Production, printing and distribution of this booklet was made possible by a generous grant from one of our

donors, for which we are deeply grateful.

Acknowledgements


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Contents

1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

2 he Inequality Society: W hy Are the 1% So Rich and Powerful? . . . . . . .9

3 How We Got Here: A Brief History of 20th Centur y Capitalism in theUnited States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

4 What Caused the Financial and Economic Disaster? . . . . . . . . . . . . . . . .13

5 Te Great Austerity War Waged by the op 1% Against the Rest of Us . . .15

6 A Brief Histor y of the Federal Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

7 A P lan for Financial Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

8 Housing and the Economic Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

9 Unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

10 Job Creation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25

11 Environmental Policy for the 99% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27

12 Health Care for People or for Profit? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

13 Visions of Economic Alternatives: Progressive Reforms . . . . . . . . . . . . . . 31

14 Visions of Economic Alternatives: Solidarity Economy . . . . . . . . . . . . . . .33

15 Visions of Economic Alternatives: Socialism. . . . . . . . . . . . . . . . . . . . . . . . 35


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ECONOMICS FOR THE 9

1. Introduction

TeOccupy Wall Street (OWS) movement hasbrought about a remarkable change in publicconsciousness. Until the movement began in September

2011, it was rare to hear politicians or the mainstreammedia acknowledge such huge problems as the gap be-tween the rich and the rest o us or growing poverty.OWS has shited the conversation.

Not only has the movement drawn attention tothese long-ignored injustices, it has given all o us newways to talk about them. OWS has turned the 99%and the 1% into household terms.

For decades, we have been told that there is noalternative to an economic system in which hundredso thousands are homeless while millions o housesstand empty, in which truckloads o ood are wastedwhile 20 percent o all children live in poverty, in whichever-increasing resources are devoted to war whileschools and hospitals all apart. But now, in the UnitedStates and all across the world, a new chant has arisen:another world is possible. Tis chant challenges us toimagine a world in which all human beings have accessto a decent education and health care, to a good joband housing. We can imagine a world in which theeconomy is not a orce o nature beyond our control,working or the enrichment o a ew, but something wecreate or the well-being o all.

At this historic moment, there is enormous poten-tial or change. Te current economic system is notdelivering the goodsits inability to meet the needso the vast majority is plain or all to see. Te crisisthat set the stage or the emergence o the OWSmovement has made major change in our economyand society not only desirable but possible.

Tis booklet is intended as a contribution to thegrowth o the OWS movement. It is designed to serve asa resource or anyone working in any o hundreds owaysorganizing, writing, teaching, discussing withwith neighbors, protestingto build a more just and

sustainable economic system. he struggle or anew world requires many things, and one o them is anunderstanding o the current economic system. Howdoes it work? Why does it work the way it does?Why does it produce the problems we see all aroundus? How did it arise? What are the short-term andlong-term alternatives?

Economicsfor the99% was produced by the Centeor Popular Economics (CPE), a collective o economists based in Amherst, Massachusetts. CPE wa

ormed in 1978another time when the economy wain crisisby economists who were actively engagedin the social struggles o the 1960s and 70s. Now, athen, our purpose at CPE is to demystiy the economyso that advocates or justice in all parts o society canbetter understand the context o their struggles, and sobetter organize and target their eorts.

Tis 15-part booklet seeks to present a coherenanalysis that is developed step by step or the readerIt starts by addressing major economic problemsby no means the complete list!and looking at theidimensions and their roots in the economic system. Ithen introduces some economic alternativesvisiono a dierent kind o economy. Te booklet includesan insert with a timeline o the period since 1900 andan accompanying narrative. Te booklet can be usedas a complete resource in itsel or as a source o shorleaets on individual topics. Each numbered sectionwas designed to be usable on its own, to be copied oemailed to those interested in the particular topic; theymay be copied and distributed reely.

Education is a two-way street. We hope we havecreated something useul or the OWS movement

However, we do not have all the answers, and we canbenet rom your suggestions and comments, whichcan be incorporated into later versions.

Economics for the 99% is available in printand electronic form. To get the print version,or to learn more about CPE, go to:

http://www.populareconomics.org

You can contact us in the following ways:

Email: [email protected]: 413-545-0743

Mail: Center for Popular EconomicsP.O. Box 785Amherst, MA 01004


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CENTER FOR POPULAR ECONOMICS

A recent survey of 5,000 Americans, conducted by Michael L. Norton of Harvard Business school and Dan Ariely of

the Duke University Economics department, showed that the actual distribution of wealth is more unequal than mostpeoples estimation, and far more unequal than most peoples ideal. Graph reproduced from data courtesy of Nortonand Ariely.


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ECONOMICS FOR THE 9

2. The Inequality Society:

Why Are the 1% So Rich and Powerful?

Inthe United States, the richest 1% o households

have seized a growing share o the total income.Te richest 0.1% (the richest one tenth o one percent,that is, the top one out o every 1,000 households) haveseen their incomes rise still aster. What is behind thisshit in income distribution and what does it mean ordemocracy? Te Occupy Wall Street movement hasorced these urgent questions o inequality onto thepublic agenda.

How Much Do the Top 1% Get?

In the 1920sa decade o ree-market capitalism muchlike the period since 1980the share o income going

to the richest 1% rose rapidly, reaching 24% in 1928.Ten changes in American capitalism ater the GreatDepression o the 1930s and World War II lowered theshare to 9.9% by 1953. Ater 1980, another period oree-market capitalism led to the share o the rich risingagain. By 2007, inequality in the United States reachedthe level o the late 1920s, with the richest 1% receiv-ing 23.5% o income. Te share o the richest 0.1% roseeven higher than it had been in 1928.

Another measure o inequality is the ratio o the payo CEOs o large corporations to the pay o the average

The series constructed here is based primarily on income tax statistics. Full details on the series, constructedby Thomas Piketty and Manuel Saez, are available at: http://www.econ.berkeley.edu/~saez. Graph byDavid Kotz.

worker. In 1973, the average big corporate CEO was

paid 27 times as much as the average workerby 2005it had risen ten-old to 277 to 1!

Capitalism and Inequality

While the very rich have grabbed a rising share inrecent decades, they have taken a big share ever sincecapitalism arose in the United States in the early 19thcentury. Capitalism necessarily brings a high degreeo inequality. While there are some medical doctorsand star entertainers among the super-rich, businessexecutives make up more than 60 percent o thosein the top 0.1%. A small number o people own the

bigger businesses, while the majority work or themwhich enables the owners to take or themselves a largeshare o what is produced. In addition, clever nancialoperators nd ways to grab a particularly large share owhat is produced by working people, as we have seenin recent times. When capitalism is ree o any con-straints, inequality is high and keeps rising.

Why Does Inequality Get Lower at Certain Times?

Certain institutions can reduce the inequality that cap-italism produces. Tese include strong labor unions


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progressive income taxes; government social programssuch as Social Security, Medicare, and unemploymentcompensation; government regulation o the nancialsector; and government controls over the reedom obig companies to relocate their businesses around theworld so as to play o workers in each country against

one another.Te New Deal that emerged rom the Great

Depression and World War II included all o theabove institutions. Lo and behold, the degree oinequality declined signicantly rom the late 1920sto the 1950s, and it remained at historically low levelsthrough the 1970s.

However, the relatively low degree o inequalityin the 1950s-70s was still not so low. Ater all, at itslowest point, the richest 1% got just under 10 times asmuch as the average household income and the richest0.1% got 30 times as much as the average income.Even the most egalitarian outcome under capitalismleaves the rich very rich and powerul.

Why Did Inequality Rise So Fast After 1980?

Ater 1980, the above-mentioned institutions thatreduce inequality under capitalism were all weakenedor eliminated. Big business and government togetherattacked labor unions, which declined in membershiprom 35% o the work orce in the early 1950s to 12%today. axes were shited rom the rich and big corpo-rations to the rest o the population. Te top personalincome tax rate in the 1950s was 9192%; it has allento 35% today. Most social programs were cut back. Andar rom least, the banks were turned loose rom gov-ernment regulation, allowing them to engage in an orgyo speculation and raud that enriched their executiveswhile doing nothing useul or the economy. Globaltrade and investment rules were changed to allow bigcompanies to more easily shit production anywherein the world, undercutting hard-won living wages ormillions o U.S. workers in manuacturing. While the99% as a whole lost ground, these changes hit people ocolor and women particularly hard. Te economic crisis

that began in 2008 was the straw that broke the camels

back, bringing even greater economic decline or the99%.

Effects of High and Rising Inequality

Growing concentration o income and wealth leadsto growing concentration o political power. As the

share o income o the top 1% has grown, so has theirability to get their way with government at all levelsrom Congress and the White House to city councilsRegardless o which is in oce, both major politicaparties must get unding rom the rich to get electedand re-elected. Tis makes politicians especially careuto enact policies that avor the rich and protect theirinterests. Large corporations and wealthy individualsare thus able to dominate the world o politics, shapingeverything rom tax codes to regulatory agencies. All othe biggest banks would have gone bankrupt i the tax-payers had not bailed them out in 2008, but ater being

saved by the taxpayers, they emerged as the most politi-cally powerul segment o the rich and powerul. Terest o big business also has enormous political clout.

Research has shown that inequality has negativeeects that reach into all spheres o lie. Higher levelso inequality are associated with higher rates o vio-lent crime, worse health or those with relatively lowerincomes, greater levels o environmental pollution, andincreases in political corruption.

What Can Be Done?

What can be done to reverse the high degree o

inequality? Tere are two options. One is to reormcapitalism along the lines o the reorms enacted inearly post-World War II decades, which would lesseninequality but still leave big business taking the lionsshare o income and holding political power. Optiontwo is to replace capitalism with an egalitarian eco-nomic system in which income is shared equitablyamong those who do the work and those who shouldnot be working because o age or condition. Sucha change would end the concentration o politicapower in the hands o the rich. Te last chapters othis booklet explore possible solutions to inequality o

income and power.


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ECONOMICS FOR THE 9

3. How We Got Here: A Brief History of 20th

Century Capitalism in the United States

automatically cure themselves. Inspired by the ideao the British economist John Maynard Keynes, th

government began to use changes in public spendingtaxes, and interest rates to stabilize the economy, keepthe unemployment rate low, and prevent another GreaDepression.

How Did Regulated Capitalism Work Out?

Many economists call the period 194873 the GoldenAge o capitalism. Te new orm o regulated capitalism or social democracy brought aster growth inthe United States and other capitalist countries thanhad been seen beore or since. Te economic conditions o most o the 99% improved steadily in tha

period. Te American amily in the middle o theincome distribution saw its purchasing power almosdouble between 1947 and 1973. Inequality plummeted: the share o income going to the top 1% elrom a peak o 24 percent in 1928 to about 10 percenin the Golden Age. Public services such as educationexpanded, and public higher education grew rapidly with very low tuition rates. Not all was rosy. Foexample, the incomes o people o color remained welbelow that o whites, and women were paid less than

Source: Economic Policy Institute analysis of U.S. Census BureauIncome, Poverty and Health Insurance Coverage in the United States2010 Historical Income Tables, Table F3: Mean Income Receivedby Each Fifth and Top 5 Percent of Families. 2011 EPI, usedunder a Creative Commons Attribution-ShareAlike license: http://creativecommons.org/licenses/by-sa/3.0/.

Teprevious chapter discussed the huge share oincome and economic and political power

held by the top 1% today. It linked this inequality notonly to the capitalist system as a whole but also tospecic changes in the structure o American capital-ism that began around 1980. How and why did thesechanges take place? An understanding o this historycan help point the way toward an economy that serveseveryone instead o just the ew at the top.

What Came Before Neoliberal Capitalism?

Ater the Great Depression o the 1930s and the

Second World War that ollowed it, capitalism inthe United States and Europe changed in ways thatsubstantially improved conditions or the 99%. Teseimprovements were the result o successul strugglesby working people in the 1930s and 40s. Labor unionsand other popular groups ought or an economicsystem that provided jobs or all at wages that assureda decent living standard, dignity in the workplace, andeconomic security.

Te rich were terried by the economic collapse inthe 1930s and the popular anger that arose against themand the economic institutions that secured their power.Socialist and Communist parties had many supportersin the developed capitalist countries, and suddenly a bigbloc o countries in Eastern Europe and Asia were runby Communist parties. Under intense pressure rom pop-ular uprisings, the rich decided the time had come tocompromise, hoping that by giving up some o theirprivileges, they would be able to preserve most o them.

In the United States, as well as in other countrieswith capitalist economies, a new political compromiseemerged between the 99% and the 1% in the 1930s and1940s. Big corporations began to bargain with labor

unions instead o trying to crush them. Importantsocial programs such as Social Security, unemploymentcompensation, and later Medicare and Medicaid, werecreated and expanded. Te marginal income tax rate onthe rich rose to 92% on the highest incomes in the early1950s. Te ederal government actively regulated keysectors o the economy, including banking, transporta-tion, electric power, and communication.

Not least, the government abandoned the old reemarket belie that recessions and depressions would


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men. But the economic progress o the bulk o the pop-ulation in this period was impressive.

The Crisis of the 1970s

No orm o capitalism works smoothly indenitely.Starting in the late 1960s, problems arose rom theviewpoint o the 1% that eventually adversely aectedmost Americans. Te average rate o prot or businessbegan to all and kept alling through the 1970s, theination-adjusted value o stocks declined substan-tially, and the banking system entered a crisis period inthe late 1970s and early 1980s. Conlict between laborand capital increased starting in the late 1960s, withmany long strikes, as employers, acing heightenedcompetition rom oreign rms, tried to push theirlabor costs down. Ination became a serious problemin the 1970s, partly due to big oil price increases that

led to rising conict between employers and workersover their shares o the income pie. Employers raisedprices to sustain high prots in the ace o ination,while unions demanded wage increases to maintainworkers purchasing power.

Te nation thus aced a choice. It could transormthe system o regulated capitalism so that it wouldeven better serve the needs o the bottom 99% underthe changed economic conditions, or it could see the1% move the nation back toward the unregulated cap-italism o the 1920s.

Neoliberal Capitalism Is Born

At the end o the 1970s, the 1% decided that com-promising with the 99% was over and went on anoensive to destroy all important aspects o the systemo regulated capitalism. Te government and big cor-porations attacked the labor movement, symbolizedby President Reagans ring o thousands o strikingair trac controllers in 1981. Te 1% demanded cut-backs in important government social programs suchas Social Security and Medicare that benetted the99% and in crucial public-sector investment; an end

to the regulation o banking and other industries; adrastic reduction o taxes on corporations and therich; the privatization o public services; the destruc-tion o the union movement; an end to government

policies aimed at securing the low unemployment ratethat strengthen workers in their struggle with big business; and reedom or corporations to shit investmentproduction, and money around the world to maximiztheir prots.

At the dawn o the 21st century, it was clear thathe 1% had achieved all their objectives. Tey hadreplaced regulated capitalism with a system called neoliberalism or neoliberal capitalism. O course, the 1%needed right-wing economic theories to try to convincthe country that what was good or the 1% was goodor everyone. Tus was born trickle down economitheory, which claimed that i the 1% got everythingthey wanted, economic growth would accelerate andthe benets would trickle down to everyone else. Inact, the rate o economic growth slowed substantiallyater 1980s in the United States and other developed

capitalist countries, while income and wealth owed upto the 1% as intended. Te rich grew richer as incomeor most amilies stagnated or declined.

Today: Crisis of Neoliberal Capitalism

Unregulated capitalism is exceptionally unstable. Atethree decades o good times or the 1%, the radicallyderegulated nancial system collapsed in 2008, pullingthe global economy down with it. Tis sequence onancial collapse ollowed by economic implosionwas reminiscent o the process leading to the GreaDepression o the 1930s that ollowed the previouperiod o so-called ree-market capitalism in the 1920sTe next chapter examines the ongoing economic crisisTis crisis is so severe that it will inevitably producundamental changes in our economy and our society.

Te kinds o changes that will take place are nopredetermined. Teir orm will depend on the actiontaken by various groups in society. Resistance to rightwing austerity policies imposed by the 1% has brokenout in various orms across the country and aroundthe world. Energetic, well-organized struggles or aneconomic system dedicated to serving the needs o th

99% in the 1930s and 1940s achieved signicant success during the last crisis o unregulated capitalism. Ithe 99% eectively organize to ght or a better worldnow, we can get one.


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ECONOMICS FOR THE 9

4. What Caused the Financial and Economic Disaster?

Crises Happen in a Capitalist Economy

Since capitalism arose in the United States in the early19th century, there have been severe economic crisesabout every 20 to 30 years, as well as requent milderones. Te basic reason or capitalist crises is the promotive that is the centerpiece o capitalism. Businesswill not invest or hire people unless they expectenough prot. While capitalism can bring economicgrowth, every period o growth leads to problems thatthreaten continuing high prots or business. Tisthreat can come rom rising costs or lack o demandor what is produced. I business thinks prots arebecoming inadequate, they cut back production andlay o workers.

Major Crises and Economic Change

Te occasional big crisis occurs when a particularorm o capitalism, such as ree-market capitalism orstate-regulated capitalism, stops working eectively tomaintain high prots. Tis causes a severe, long-last-ing economic crisis, and in some cases a nancial crisisas well. Such severe crises have occurred in the UnitedStates in the late 19th century, the 1930s, the 1970sand again today.

Every such severe economic crisis in U.S. history hasbeen ollowed by a major restructuring o the economyTe crisis o the late 19th century brought us the bigWall Street banks and giant corporations that starteddominating the economy. Te Great Depression o

Anancial crisis means that banks and other nan-cial institutions suddenly get into deep trouble.An economic crisis means the so-called real sectorthe production o goods and services by non-nancialbusinesseshas a big decline in output and prots.Along with this goes rising unemployment.

Whopper of a CrisisTe current crisis, which really got going in the allo 2008, has been much more severe than any in theUnited States since the Great Depression o the 1930s,although there was another severe one in the 1970s. Allo the biggest banks suddenly were about to ail. Tegross domestic product (GDP) ell by 5.1 percent at itslow point in 2009, and the recovery has been very slug-gish. Business investment, which is supposed to power arecovery, is still 8 percent below its 2007 level. Ociallymeasured unemployment jumped up rom 4.8 percentin February 2008 to 10.2 percent just 20 months later

in October 2009. oday, 13 million are ocially unem-ployed while uller estimates nd 24 million who wantull-time work but are unable to nd it. More thantwo million homeowners have suered oreclosure,while 22 percent o home mortgages are under water,meaning more money is owed on the home than thehomes market value. As state and local tax revenuesdeclined, 668,000 public employees lost their jobs rommid-2008 through January 2012, which has dispropor-tionately aected Arican-American workers.

From Arthur MacEwan and John A. Miller, Economic Collapse, Economic Change: Gettingto the Roots of the Crisis (Armonk, NY: M.E. Sharpe, 2011), 87. Copyright 2011 by M.E.Sharpe, Inc. Used by permission.


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the 1930s eventually gave rise to a new state-regulatedcapitalism, with government regulation o banking andother industries, government eorts to promote highemployment, social welare programs, high taxes on therich, and strong labor unions. Te economic crisis o the1970s brought us the ree-market, or neoliberal, ormo capitalism we have had since the early 1980s.

So What Caused This Crisis?

Neoliberal capitalism has had three eatures that bothexplain how it promoted 25 years o economic expan-sions and why it led to a massive crisis in 2008. First,inequality grew rapidly, as prots rose while work-ers wages actually ell. From 1979 to 2007, the aver-age ination-corrected hourly wage o non-supervisoryworkers declined by 1 percent, while ination-correct-ed nonnancial corporate prots ater taxes rose by aremarkable 255 percent. While surging prots pleasedthe capitalists, it brought a problem: who could buy

the growing output that comes with economic expan-sion? Te solution was debt. Somehow, people wouldhave to borrow more and more i a orm o capitalismthat brings skyrocketing prots and alling wages wasto unction.

Te second eature o neoliberal capitalism hasbeen a banking sector, now ree o signicant govern-ment regulation, that pursued ever-riskier activities.Banks and other nancial institutions were looking orways to make prots rom lending to ordinary people,while millions o working people, whose wages werealling, had to borrow i they were to pay their bills.

Te banks invented new ways to lend money throughcredit cards and exotic home mortgage loans that werecombined together and sold to investors or a big prot.Te banks made a ortune rom these practices. But allo this lending could not go on unless the borrowersowned something valuable as security or the loan.

Te third eature o neoliberal capitalism was aseries o big asset bubbles, such as the real estate bubbleo the 2000s. An asset bubble occurs when speculativebuying drives the price o some asset, such as real estate,ar above its true economic value. Te 2000s housingbubble created an estimated $8 trillion o bubble-inated real estate value, which was about 40 percento the market value o homes in the United States.Te real estate bubble created ctitious wealth thatenabled people to borrow rom banks to pay their bills,with their home as security.

Tese three eatures enabled neoliberal capitalismto bring 25 years o long economic expansion. However,it created unsustainable trends. Household debt grewand grew, rom a manageable 59 percent o householdincome in 1982 to an unmanageable 126 percent o

household income by 2007.Every asset bubble eventually deates. When the

real estate bubble collapsed starting in 2006, the wholehouse o cards tumbled down. Te banks held trillionso dollars in exotic assets that lost their value whenhome prices plummetedsuddenly they were bank-rupt. Working people suddenly could not borrow more

but had to start repaying their debt in 2008, and sodemand or output ell sharply, leading to a severe eco-nomic collapse. Te big crisis had begun.

Inequality and Debt

Inequality and debt are two sides o the same coin. Iwages had risen as labor productivity rose over timeworking people would not have been orced to borrowto pay their bills. As the rich seized a growing shareo societys income and their tax rates ell, state gov-ernments cut the unding o public universities, so theyraised tuition and ees. Tis accelerated ater 2008, and

students now are saddled with huge educational debtaveraging about $25,000 upon graduation.

Why Is This Crisis So Severe and Persistent?

Te capitalism o the 1920s was much like todays neo-liberal capitalism. As a result, the current crisis has sim-ilarities to the Great Depression o the 1930s. Te bigdierence is that today there is a ederal governmentand active Federal Reserve that have been able to in-tervene. Tey bailed out the banks and passed a stimu-lus bill that stopped the initial reeall in the economyHowever, the government did not do much to solve the

problems o the 99%: high unemployment, low wagesunpayable debt, homelessness, and underwater mort-gages.

Neoliberal capitalism has been discreditedbut itis still with us, and there is no way or the economyto recover without major changes. Business has plentyo unds but will not invest since it sees no increase indemand rom cash-strapped or unemployed consumersGovernment is cutting spending as tax revenues declineTe housing sector lies prostrate.

Possibilities

History teaches that periods such as this will eventuallygive rise to major economic changes. Te big banks andcorporations will push or changes that will secure theirprots. Te 99% have a huge opportunity to demandchanges directed instead at solving their problems andmeeting their needs. While neoliberal capitalism wasworking well on its own terms, it was dicult or the99% to have much impact. I we dont act now, withneoliberal capitalism discredited and change in the airthe 1% may impose on the rest o us something evenworse than neoliberalism.


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ECONOMICS FOR THE 9

5. The Great Austerity War Waged by the Top 1%

Against the Rest of Us

Sincethe beginning o the 2008 economiccrisis, politicians in both major parties,

pundits, and business leaders have been sounding thealarm about the dangers o the government decit.Tey claim that the governments continuing to spendmore than it brings in poses a long-term threat to thecountrys economic well-being, and they call or auster-ity programs that reduce spendingmostly on socialservices. But just how big a problem is the governmentdecit, and are there other ways to solve it?

Background

In the Great Depression, Americans revolted against a

capitalist system in which the richest 1% o the popula-tion captured a quarter o all income and controlled thepolitical system. Te economic policies o the 1% led toa nancial and economic collapse in the early 1930s thatcreated massive poverty and high unemployment in asystem without a government saety net. Te resultingrebellion led to President Roosevelts New Deal. Itregulated the banks, supported the rising union move-ment, raised taxes on the rich, and created a govern-ment support system that eventually included SocialSecurity, unemployment compensation, and Medicareand Medicaid. Tese changes brought the income shareo the top 1% down to 10 percent ater World War II.In response, a right-wing coalition o business inter-ests, wealthy amilies, and conservative politicians ded-icated themselves to the overthrow o the New Deal. Ithad little success until the Reagan Administration inthe 1980s began to replace the New Deal with a mod-ern version o the 1920s economic model called globalneoliberal capitalism. Tis coalition is now pushing ornal victory.

What Caused the Rise of Government Decits?

Te right-wing economic regime that arose in the1980s lowered the rate o economic growth. Slowgrowth and regressive tax cuts slashed tax revenue whilemilitary spending rose, leading to rapidly rising gov-ernment decits. Federal government debt as a per-centage o national income was at a post-World WarII low o 26 percent when Ronald Reagan took oce.When George Bush, Sr., let oce in 1992, it had al-most doubled to 48 percent. It ell to 33 percent underBill Clinton, but slow growth under George Bush, Jr.,along with tax cuts targeted to the wealthy and heavy

The Center on Budget and Policy Priorities calculations, based ondata from the Congressional Budget Ofce, show that the extension

of Bush era tax cuts contribute more to decit projections than

TARP, Fannie, Freddie, and other recovery measures combinedReproduced by permission from CBPP, Economic Downturn andBush Policies Continue to Drive Large Projected Decits, by Kathy A

Rufng and James R. Horney, May 10, 2011.

borrowing to pay or two major wars, raised the ratio to40 percent by 2008. During this time, inequality also

rose to its late-1920s high. Te nancial crisis and eco-nomic collapse ater 2007 orced the government to in-crease spending and cut taxes in an attempt to preventthe outbreak o a depression. As a result, the debt ratiois projected to hit 75 percent in 2012.

Although their policies created the decit problemthe right-wing coalition demands that the problem beresolved by cuts in social spending so large that theythreaten to destroy the oundations o the New DealHowever, with unemployment and under-employmentat post-World War II highs, precisely the opposite poli-cies are needed. We need a sharp increase in productive

government investment and spending on crucial socialprograms to stimulate growth and employment. Telonger-term decit problems can be xed by progres-sive tax increases, cuts in military spending, and urtherreorms to the health care sector.

Republicans Want to Use the Decit Problem toDestroy the New Deal

One part o the attack on the New Deal centers onSocial Security and Medicare. Both o these vital sociasupport programs ace long-term problems, but these


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problems are not as severe as the right-wing coalitionwould like people to believe.

Social Security is unded by payroll taxes and by lawcannot borrow, so it cannot add to the decit. However,long-term projections suggest that payroll tax revenuewill eventually be inadequate to ully und the program.

Conservatives want to use this problem to privatize theprogram, or at least weaken it by raising payroll taxes,increasing the age o Social Security eligibility, and low-ering payments to recipients. Yet 80 percent o benetsgo to amilies whose other income is less than $20,000.Social Security could be adequately nanced over thelong-term by eliminating the current $107,000 cap ontaxable compensation. Tis would pay or 86 percent othe 75-year projected shortall.

Likewise, there is a long-term crisis in health care,but there is only one eective solution to the problemo rising costs and increasingly unequal access. TeUnited States must adopt a system like those used inother rich countries that do not allow private insurancecompanies, drug companies, and hospital conglomer-ates to take a huge share o health care spending. In2009, Canadas health care spending, as a percentageo national income, was 6.9 percent less than that othe United States, yet it enjoyed health care results thatwere at least as good.

Te radical budget bill passed by the Republican-controlled House o Representatives in April 2011demonstrated that the party is committed to the total

destruction o New Deal programs. It called or non-deense spending cuts o $4.5 trillion dollars over tenyears. Cuts in low-income programs would be almosttwo-thirds o the total. I enacted into law, ederalspending other than on Social Security, Medicare,Medicaid, and interest payments would drop rom 12percent o national income in 2010 to 3.5 percent by2050. Tis would have disastrous consequences or low-income workers, children and the elderly, and otherswho rely on these programs.

Te bill also calls or the privatization o Medicareand a sharp reduction in Medicaid. Seniors would

receive a grant to help buy private insurance that by2030 would pay or just one-third o the cost o aMedicare-equivalent private insurance policy. By 2030,ederal unding o Medicaid would be just 51 percento its 2010 level.

Te House bill also shits costs rom the rich to thepoor. It makes the Bush tax cuts permanent at a cost oover $5 trillion in lost revenue over a decade. It cuts thetop tax rate or both individuals and corporations romits current 35% to 25% and drops the tax on capital

gains to zero. Te tax cuts could be so large that thebill would actually add $2.5 trillion to the decit overthe next decade, continuing the pressure or yet morespending cuts. Meanwhile, Republicans have slashedpublic spending at the state and local government levelsand are trying to destroy public-sector unions.

Democrats Agree to Shrink New Deal Programs

When the Republicans threatened to shut down thegovernment in August 2011, President Obama and theDemocrats signed o on a law that will cut at least $2.3trillion in government spending over the next decadebut does not generate a single dollar in new tax reve-nue rom corporations or the rich. Nondeense discre-tionary spending as a percentage o national income isprojected to all rom its current 3.5% level to 1.7% in2021, leaving nondeense spending at its lowest level inover a hal century. A NewYorkimes editorial calledthis law a nearly complete capitulation to the hostage-taking demands o Republican extremists.

How Should We Resolve the Decit Problem?

o resolve the current decit problem over the comingdecade and lower both inequality and unemploymentwe should begin by taking the ollowing ve stepsFirst, we must end the Bush tax cuts by using Clinton-era tax rates; this would raise $5.4 trillion in tax reve-nue over the next decade. Higher rates on top incomeswould generate even greater revenue. Second, we musttax dividends and capital gains at the same rate as wag-

es and salaries to add $1 trillion in revenue. Tird, wemust eliminate business tax loopholes that allow thelarge corporations to pay less than their share. Closingjust three quarters o these loopholes would create $1trillion in new revenues. Fourth, we must institute asmall tax on stock and derivative sales that would gen-erate $1.5 trillion and decrease nancial sector gam-bling. Finally, we should reduce military spending by atleast $1 trillion dollars in the coming decade.

Some o the revenues generated by these changesmust be used to und productive public investmentand essential government services to create jobs in theimmediate uture. Remaining revenues would keepthe decit problem under control over the comingdecade. Removing the cap on Social Security taxesand adopting an alternative health care system wouldresolve long-term decit concerns. What we need mostis the replacement o global neoliberal capitalism witha progressive economic model that can generate ullemployment and rising wages while dramatically low-ering inequality in America.


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ECONOMICS FOR THE 9

6. A Brief History of the Federal Reserve

Whena business wants to expand, a amilywants to buy a house, or a governmentwants to increase public spending, they need to borrow.Te nancial system is supposed to be the plumbing othe economy, letting credit ow where it is needed. Butthis plumbing is deectiveits a source o instabilityand crisis, as the supply o credit is either cut back toa trickle or pours out in oods. And it is also a site opolitical conict: the majority o us, as borrowers, wantcredit to be cheap and abundant, while creditors (thosewe owe money to) want to keep it expensive and scarce.Tus, there is a undamental conict between peoplewho borrow money and people who lend it. Te FederalReserve was set up to adjust the supply o credit to meet

the needs o the real economy and manage this conict,but in practice it serves the interests o creditors.

Debtor Versus Creditor: An Old Conict

Conict over debt is as old as the United States.Shayss Rebellion, an armed uprising against the newgovernment in the 1780s, was a rebellion o debtorsagainst creditors. When banks and moneylenders cuto credit to small armers and demanded repayment,armers who could not pay their debts saw their landseized and sold at auction to pay o their creditors.

Rather than accept the loss o their homes, hundreds oveterans took up arms and marched on courthouses to

halt the oreclosures.One hundred years later, another period o risingdebt burdens gave birth to the Populists, a movemento armers, small business owners, and workers. At thattime, the United States was on the gold standard, sobank lending was strictly linked to the supply o goldMany people thought this was normal and natural. Butit meant that as the economy grew, unless there werelucky gold discoveries, there was no way or the supplyo money to grow with it. When something is scarcethats good news or whoever owns it and bad news orwhoever needs it. Under the gold standard, money was

scarce. Tat was good news or the owners o moneybanks, creditors, and the rich in generaland bad newsor everyone else. So the Populists demanded a gov-ernment-issued peoples currency, elastic and cheapbased on the entire wealth o the country. For that, thecountry needed a central bank.

Enter the Fed

Te central role o a central bankthe Federal Reserveor the Fed, in the United Statesis to control theavailability o credit and the amount o money in

Federal Reserve headquarters in Washington, D.C., 2005 Dan Smith, used under a CreativeCommons Attribution-Share Alike 2.5 Generic license: http://creativecommons.org/licenses/by-sa/2.5/.


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circulation. It does this mainly by buying and sellingshort-term government bonds. Te details o theseopen-market operations arent important; what mattersis that they make it easier or harder or banks to borrowrom other banks. When it is easy or banks to borrow,they should be willing to make more loans to house-

holds and businesses, and to accept lower interest rates.In theory, this allows the Fed to increase lending whenthe economy needs stimulus and to reduce it whendemand is too high.

When the Federal Reserve was established in 1913,its mission was set by law as ensuring an elastic cur-rency, just as the Populists had called or. Te Fed wassupposed to end bank panics and crises, and to regulatethe supply o credit so that it grew steadily in line withthe needs o the economy. Since the big banks couldntstop the creation o the Fed, they did everything theycould to control it. Te Fed is unique among govern-ment agencies in that it is legally accountable to thesame industry it is supposed to regulate: the Board oGovernors that runs the Fed includes members chosenby private banks. And even though the Fed chair isappointed by the President o the United States, thatdoesnt mean our vote matterseach o the last threeFed chairs has been appointed by both Republicanand Democratic administrations. Te result is that theFed is always divided between the interests o the realeconomythe need to ensure sucient credit or theeconomy to expandand the interests o nancethe

desire to keep credit articially scarce. Most o us ben-et rom strong growth and low unemployment, even ithat means moderate ination (that is, rising prices ora alling value o money). But nance wants to preservethe value o money at all costs, even i that means massunemployment and the waste o the economys produc-tive potential.

Unemployment and Ination

For years ater World War II, the Fed seemed to havelearned its lesson and recognized the importance okeeping unemployment low. For three decades, it wascommitted to maintaining a low unemployment rate,even at the risk o ination. As a result, or thirty years,prices rose, but unemployment stayed low and incomesrose aster. Tis period saw steadily rising wages, andsome o the strongest growth in American history.

Unemployment is rightening or people wholive on their labor. But ination is rightening orpeople who live on their money. Te high ination othe 1960s and 1970s convinced the banks and othermoney-owners that things had gone too ar, and theybegan pushing or tighter monetary policy. Tey scored

their rst big victory when, under President CarterPaul Volcker became chairman o the Fed. Volcker wasobsessed with reducing wages. o do this, he raisedinterest rates to unprecedented levels, deliberately pro-voking the deepest recession o postwar history (or atleast the worst until the Great Recession). As historian

William Greider puts it in Secretsoftheemple:HowtheFederalReserveRunstheCountry , Volcker believedthat ination would not be securely deeateduntiworkers and their unions agreed to accept less. I theywere not impressed by words, perhaps the liquidationo several million more jobs would convince them.When a delegation o legislators rom arm states cameto Volcker to plead or easier money, Greider reportsthat he bluntly replied, Look, your constituents areunhappy; mine arent. Volckers constituents were thebanks.

Under Volcker and his successor Alan Greenspanjob insecurity became a goal o Fed policy instead osomething to avoid. Many industries, like steel, neverrecovered. But or Volcker and Greenspan, the impor-tant thing is that loans are no longer paid back incheaper dollars. For lenders, the past quarter centuryhas been the best o times. But or borrowershome-owners, students, people with medical bills or who arein between jobs, small businessesit has been a periodo steadily growing debt burdens.

More Debts, More Problems

In the current recession the Fed seems to be doing

more to support employment, with unconventionapolicy like quantitative easing, in which the Fed triesto stimulate economic growth by injecting more moneyinto circulation. So why hasnt the Fed been able to xthe economy? Some economists think it hasnt reallytriedthat it is still working or its real constituentsin nance, taking advantage o high unemployment topush down wages and prices. Other economists thinkits because the Fed cant control the supply o crediteven when the Fed loosens, banks still wont lend. Stillothers think that even i banks are willing to lendbusinesses dont want to borrow because there is littledemand or their products. For these economists, whilescarce credit has been a disaster or the real economy inthe past, its not the source o our problems today. Tereis controversy over how hard it is currently or house-holds and businesses to get new loans; but whatever theanswer, existing debt remains a huge problem or themajority o us who are debtors. I monetary policy canor wont alleviate that burden, then debtors may have totake a page rom Shayss Rebellion and challenge credi-tors directly.


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banks to make risky proprietary bets or their ownaccounts with ederally-insured deposits. However, itdoes not do what is really needed here: the reinstate-ment o the Glass-Steagall Act, which had separatedcommercial banks that take in insured deposits rominvestment banks that engage in riskier activities sincethe 1930s. Te Glass-Steagall Act was eectively re-pealed by Congress in 1999.

Say on Pay. Dodd-Frank establishes shareholder voteson compensation packages o top executives. However,the votes are non-binding and need to be held only ev-ery three years. Tere seems to be little change in theculture o greed that has contributed to the outrageouswealth o the top 1%.

Resolution Authority. Tis authority would theoreti-cally allow bank regulators the authority to take overrather than simply bail out, any nancial institutionthat posed a systemic risk to the stability o the nanciasystem. But the ailure to do this in the wake o the -nancial crisis allowed the biggest banks to grow so largeand powerul that taking them over in the uture wouldbe dicult. Teir size and power enabled them to inu-ence Dodd-Frank and to pose problems or the utureimplementation o the law. What this presents, thoughis a challenge; it means that we need to continue to beactive and engaged in the process o nancial reorm ithe interests o the 99% are to be addressed.


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ECONOMICS FOR THE 9

8. Housing and the Economic Crisis

Tim Simon

TeUS housing crisis o the mid-2000s is otenidentied as the domino that rst precipi-tated the recession that began in 2008, and a wave

o home oreclosures has been one o the recessionsmost visible consequences. However, the connectionsbetween real estate markets, home oreclosures, andgeneral economic crisis are not always clear. Whatcaused the housing bubble? Why did it burst, andhow did it have such devastating eects? Tis chapterwill provide a brie analysis o the housing crisis andan overview o some o its eects.

Bursting Bubbles

In the early 2000s housing prices began to rise veryrapidly, producing a housing bubble, which means

that home prices rose ar beyond their true economicvalue. By 2006, the average home value, adjusted orination, was nearly double what it had been in 1996.Why did this happen?

Te housing bubble, like the stock market bubbleo the 1990s, was mainly a product o two eatures oneoliberal capitalism. First, the huge amount o wealthgoing to the 1% was more than they could spend onluxuries or use or productive investments. Some othose billions ound their way into speculative realestate investments, which started home prices rising.Second, the giant banks, reed rom government regu-

lation, were looking or high-prot loan opportunities,and they were happy to lend money to speculators inreal estate, which propelled home prices up even urther.Te banks created mortgage-backed securities, whichare nancial instruments that derive their value romhousing prices and mortgage payments. Tese becamethe hottest thing on Wall Street. Te riches oered bytrading mortgage-backed securities prompted a lot opredatory mortgage lending and outright raud.

Every bubble must eventually burst, since the spec-ulators who drive the price spiral will sell as soon as

prices stop risingand they cannot rise orever. Tehousing bubble came to an end in 2006-07. Te ragilestructure on which the housing bubble grewbelie inan ever-growing asset, regulators and bankers turninga blind eye to risky and even criminal behavior on thepart o bankers and hedge unds, predatory lendingpracticesbegan to crumble. It became more dicultto renance mortgages, and so the rate o oreclosuresbegan to increase. Te mortgage-backed securities thathad so enticed the big banks suddenly plummeted invalue, pushing the banks to the edge o bankruptcy.

Private Gain, Public Risk

Te damage caused by the housing crisis enormousAs much as the giant banks such as Goldman Sach

and Bank o America lost, the damage to homeownerwas immeasurably worse. Troughout most o the 20thcentury, most Americans wealth, i they had any at allwas in their homes. When the real estate bubble burstmany Americans saw their primary store o wealthdecline sharply in value or disappear entirely.

Te bursting bubbles shockwaves traveled throughthe economy: construction ell to a raction o its early2000s level, consumption spending declined as peoplesacriced to make house payments, pensions and retirement unds connected with mortgage-backed securitie


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withered. More and more borrowers ound themselvesunable to meet their mortgage payments, and homeoreclosures skyrocketed. All told, Americans are esti-mated to have lost upward o $14 trillion in wealthbetween 2006 and early 2009. As o March 2012, morethan 13 million Americans owed more on their mort-

gage than their homes were worth.Te loss was not borne equally by all segments o

society, however. Wealth inequality, which had beenincreasingly steadily or nearly three decades, grew atan unprecedented rate between 2005 and 2009. Banksand insurance rms were bailed out by the Bush andObama administrationsthe largest such bailout wasthe roubled Asset Relie Program, or ARPto thetune o trillions o dollars lent or pledged by the gov-ernment. Even with repayments, the total direct costto taxpayers is estimated to be several hundred billiondollars. Banks like Citigroup and Goldman Sachs weresoon collecting record prots and awarding their exec-utives antastic pay packages.

Inequality and Dispossession

Workers and people o color, on the other hand, wereamong the hardest hit. In addition to the growinginequality between the 1% and the 99% outlined inchapter 2especially the most vulnerable o the 99%the unequal share o economic hardship also ell alongracial lines. While median net worth or white house-holds ell rom about $135,000 to $113,000 between2005 and 2009, a decline o about 16 percent, or

black households it ell rom about $18,000 to $6,000,a loss o more than 70 percent. In other words, whilethe median white household had about 8 times morewealth than the median black household in 2005, by2009 this gap had grown: white households had some18 times more wealth than black households.

So while hedge unds, insurance rms, and bankswere quickly rescued by the government, ordinarypeople were let to ace unemployment, reduced socialservices, and crushing debt. Perhaps the most visibleand most poignant symbol o the crisiss unequal eectson the 1% and the 99% has been the wave o homeoreclosures. Banks oreclosed on and seized an averageo about 1 million homes per year between 2007 and2010, with an additional 1 to 2 million subject to ore-closure lings, deault notices, and other legal action.Many o these actions by banks and creditors are illegal.Many states permit banks to oreclose on homes withno judicial oversight, and the enormous resources at

many banks disposal makes enorcement o properoreclosure procedures dicult. Audits across thecountry conducted by consumer advocacy groups, andcity and state governments, have ound a large majorityo oreclosures clearly illegal, with many more dis-playing irregularities. A recent report released by the

city o San Francisco, or example, ound that approxi-mately 80% o all oreclosures in the city were illegal.

We in the United States now nd ourselves in theperverse situation in which hundreds o thousands oamilies have been illegally turned out rom their homeswhile the government swings into action to protectgigantic nancial corporations rom bankruptcy.

Next Steps

At a national level, it is important to advocate or thebroader policy changes discussed in the nancial reormsection so that we can build a stable nancial system

More specically, ghting or principal reductioncut-ting back mortgage payments to more accurately reecta propertys current valuecould make an enormousdierence. Principal reduction is a way to make bankspay or some o the mess they helped cause and stop thedramatic looting o wealth rom communities o colorand the working class. At a grassroots level, ghtingoreclosures and evictions has also been a powerumethod or Occupy activists to get involved in com-munity organizing and movement-building. Tis kindo organizing has taken many orms across the country

A oreclosure and eviction deense model devel-

oped by City Lie/Vida Urbana in Massachusetts iscalled Te Sword and the Shield. Tis strategy com-bines legal deense o amilies and individuals at risko evictionthe shieldand direct action and resis-tancethe sword. Te shield can consist o inormingtenants o their rights and working with progressivelawyers to orce banks to reconsider oreclosure evic-tions or even pay settlements. Te sword takes the ormo encouraging residents to stay in their homes andmake their stories public, organizing eviction block-ades, vigils, and other actions to exert public pressureon the banks.

Legal challenges and direct action to prevent theoten-illegal eviction o amilies is just the beginningTe momentum built by actions like these and OWSmay lead to more undamental changeit is entirelypossible to create or the 99% the kinds o basic securitythat have so ar been reserved or the 1%.


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ECONOMICS FOR THE 9

9. Unemployment

Share of total jobs represents the number of jobs in the country as a

percentage of the total number of jobs at the start of the recession. Source

Economic Policy Institute analysis of Bureau of Labor Statistics data, Curren

Employment Statistics, public data series (data current as of March 9, 2012)

2012 EPI, used under a Creative Commons Attribution-ShareAlike license

http://creativecommons.org/licenses/by-sa/3.0

Whenthe recent economic crisis exploded in2008, the unemployment rate increaseddramatically to levels last seen three decades ago, in

the early 1980s. Unlike the sharp downturn at the be-ginning o the 1980s, unemployment caused by therecent nancial debacle has remained high, at around9 percent, or several years. Persistently high levels ounemployment represent one o the most costly con-sequences o Wall Streets excesses in economic andhuman terms. However, it is important to keep in mindthat even in relatively good times, the U.S. economy hasrequently ailed to generate enough jobs or everyonewho needs paid work.

What Is Unemployment and How Is It Measured?

Ocial statistics only consider someone to be unem-ployed i he or she (1) is economically active and (2)lacks employment. Only those who are able to work andhave or are looking or work are considered economi-cally active. Under the ocial denition, an individualis considered to be actively looking or work i he or shehas taken concrete steps to nd a job over the past ourweeks. Te unemployment rate is the number o unem-ployed divided by the economically active population.

Te ocial unemployment rate does not reect othersignicant employment problems. For the employed,part-time work and temporary employment count thesame as having a ull-time, relatively permanent job.Tereore, the unemployment rate ails to capture shitsrom high-quality to precarious or temporary jobs. ogive a concrete example, the number o individuals inpart-time work due to economic conditions increasedby over 3 million rom August 2008 (beore the ullimpact o the crisis became clear) to October 2011,but this increase in part-time work is not reected inthe unemployment rate. Discouraged workersindi-viduals who have given up looking or work becauseemployment prospects in their area are dismalrep-

resent another challenge to measuring unemployment.Discouraged workers are not included in unemploy-ment rate calculations, leading to an underestimationo the true level o unemployment.

For these reasons, many argue that statistics onunderemployment and discouraged workers should beused to present a more complete picture o the employ-ment situation. Te U.S. Bureau o Labor Statisticsgenerates indicators that take these actors into account.For example, while the ocial unemployment rate hashovered around 9 percent in recent years, indicators o

labor underutilization, which make allowance or dis-couraged and part-time workers, averaged about 16percent.

What Causes Unemployment?

A number o actors contribute to sustained unem-ployment. Te overall level o demandthe amoun

consumers are willing and able to spend on goods andservicesin an economy directly inuences the leveo employment. When demand rom consumers, busi-nesses, and other countries is weak, rms cannot selall that they produce. Inventories start piling up andcompanies cut back on production, laying o workersA vicious cycle develops with growing unemploymenreducing demand urther and leading to still higherlevels o unemployment. Insucient demand is a majorcause o the high levels o unemployment experiencedater the nancial collapse o 2008. Falling housingprices, declining retirement accounts, high levels o

indebtedness, shrinking investment among non-nan-cial rms, and rapidly increasing unemployment alcontributed to a dramatic decrease in overall demand.

Slack economic conditions are not the only causeo unemployment. Unemployment requently persisteven when the economy is growing. When unemploy-ment is low, the ability o workers to demand higherwages improves. However, higher wages squeeze protsBusinesses respond to prot squeezes by looking orways to cut labor costs or reduce the number o worker


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they employ. Employers may adopt a number o di-erent strategies: they may implement labor-savingtechnologies, subcontract production to overseas pro-ducers, pursue strategies to get the existing labor orceto work harder and longer or the same pay (instead ohiring more employees), and lobby to reduce govern-

ment saety nets that soten the economic blow romlosing a job (thereby weakening workers bargainingpower). Many o these strategies result in ewer jobsbeing created and they contribute to ongoing unem-ployment, even when the economy is recovering orotherwise perorming well.

Macroeconomic Policy and Unemployment

Government policies also aect the level o unemploy-ment. In some cases, the policies chosen have a built-inbiases against ull employment. Macroeconomic poli-ciesthat is, the governments role in the economy as awholerepresent an indispensable tool or getting outo an unemployment trap.

ake the example o the policies pursued by theFederal Reserve. Te Federal Reserve, also called theFed, is responsible or U.S. monetary policy and has adual mandate: to maintain the maximum possible levelo employment while also keeping ination low. Teweight given to these two goalsination and employ-mentaects unemployment. In recent decades,beore the nancial crisis, the Fed has narrowly ocusedon controlling ination. Ination reers to increases in

the average level o prices in the economy. When theFed deems that ination is getting too high, it takessteps to raise interest rates and reduce the availability ocreditmaneuvers that tend to slow economic activity.Demand in the economy grows more slowly, unemploy-ment rises, and, as a result, pressures to increase pricesand wages become weaker. Tese eorts to controlination oten come at the expense o employmenttheres an anti-employment bias to monetary policiesthat ocus primarily on ination.

Alternative approaches to macroeconomic policiescan encourage uller employment rather than sustaining

Underemployment includes the unemployed, those not workingas many hours as theyd like (total employed part time foreconomic reasons) and those who have given up looking forwork (discouraged workers). Source: Economic Policy Instituteanalysis of Bureau of Labor Statistics data (data current as of

March 20, 2012). 2012 EPI, used under a Creative CommonsAttribution-ShareAlike license: http://creativecommons.org/licenses/by-sa/3.0/.

unemployment. For example, when private demand isweak, leading to high rates o unemployment, govern-ment spending can step in to bolster total demand inthe economy. Tis is the idea behind a scal stimulus(such as the American Recovery and Reinvestment Acto 2009). o give a second example, the bailout o thenancial sector during the recent crisis stopped at thecorporate level and did not reach out to help home-

owners. However, high levels o mortgage debt andlow housing prices have been signicant contributorsto weak demand and high unemployment. In this situ-ation, a rescue package or low- and middle-incomehomeowners represents another example o howeconomic policy could help address the problem owidespread joblessness. Te broader challenge is toshit the ocus o economic policy away rom the needso the nancial sector and towards the goal o creatingand maintaining decent employment opportunitiesor all.


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ECONOMICS FOR THE 9

10. Job Creation

Oneo the most obvious and damaging aspects o

the economic crisis that began in 2008 isthe growth in unemploymentmillions o people whoare unable to nd adequate work to support themselvesand their amilies. Te long-term consequences o thisunemployment, however, may not be so obvious. Whatcan be done to create decent jobs or those who wantthem?

Unemployment Hurts

As o November 2011, 13.3 million people were unem-ployed by the narrowest denition o the term.Unemployment has negative consequences both or

the individuals who wish to work but cannot, as wellas or society more broadly. Individuals who cant nda job may have diculty paying their bills and otenexperience physical and psychological stress. Societysuers as crime rates rise along with unemployment.Te economy drags as its resourcespeopleare letidle. Furthermore, unemployment can create a viciouscycle, as unemployed workers have less money to spend,reducing demand or goods and services throughoutsociety, which then causes businesses to lay o workersresulting in more unemployed people with less moneyto spend. And so the cycle continues.

Fiscal Policy Can Interrupt the Cycle of

Unemployment

Fiscal policy is the governments ability to use taxesand spending to change the level o economic activity.Te ederal government has many tools it can use toincrease demand or goods and services and thus toincrease employment, including direct spending and taxincentives or individuals and businesses. When unem-ployment is high and consumer spending alls, these

scal policy tools can increase the level o employment

by increasing overall spending in the economy, whichin turn leads businesses to expand and to hire moreworkers. Te ederal government can directly purchasegoods such as vehicles or can purchase services such asweatherization o public buildings. It can also stimulateprivate spending by oering tax incentives to individ-uals and businesses, or example, by oering a tax rebateto home owners who install energy-ecient windowsDirect government spending and incentives to increaseprivate spending lead to job creation as demand growseconomy-wide.

Te ederal government can engage in so-called

decit spending during a recession to lit theeconomy out o a slump and put people back to workI the government increases its spending without alsotaking in more tax revenues, the budget decit growsHowever, increased employment means that govern-ment spending on unemployment insurance will alland tax revenue rom income taxes on newly employedworkers will rise, in turn reducing the decit.

Theres a Precedent: The New Deal

Te economic crisis that began in 2008 is not uniquein our history. During the Great Depression, the

unemployment rate in the United States rose to 25%Franklin D. Roosevelt was inaugurated President in1933 and shortly thereater he and the Congress insti-tuted a series o reorms known as the New Deal. TeNew Deal included regulation o the nancial sectorenactment o certain labor standards and minimumwages, and policies to increase employment. Variousorganizations and agencies were established to directlyput people to work, such as the Civilian ConservationCorps (CCC) and the Public Works Administration

More than three times as many jobs can be created by investing $1 million in cleanenergy (building retrots, smart grid, solar, wind, etc.) rather than in fossil fuels. Source:Input-Output tables of U.S. Commerce Department. Reproduced by permission fromPollin, Heintz, and Garrett-Peltier, The Economic Benets of Investing in Clean Energy,Political Economy Research Institute, 2009, 30.


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(PWA). Te CCC directly hired young men to work onrural conservation projects while the PWA built majorpublic works projects such as dams and bridges usingprivate contractors. Te New Deal included many typeso direct public spending that eectively created mil-lions o jobs or unemployed workers.

Creating Jobs with Social Benets

Increasing employment is not an end in itsel, but ameans to an end. Individuals benet as employmentopportunities increase and they have an easier timending a job and paying their bills. Workers as a wholebenet as they gain bargaining power and are able todemand better working conditions and higher wages.Te eects on society, however, depend on what typeo employment is created. Pursuing strategies to createemployment in targeted areas such as clean energy,education, health care, or inrastructure can have socialpayos that go beyond the employment itsel.

Greenhouse gas emissions are at damaging levelswithin the United States and globally. Reducing theseemissions will require a variety o strategies, includingincreasing the energy eciency o our buildings andvehicles and shiting rom an energy system dominatedby ossil uels to one that relies on renewable sourcessuch as wind, water, and solar power. Te ederal gov-ernment can promote employment in the clean energysector both directly and indirectly, including by pur-chasing uel-ecient vehicles, weatherizing buildings,

putting solar panels on schools, and oering discountloans or tax incentives to people buying renewableenergy technologies such as solar panels or geothermalheat pumps.

Employment in the clean energy sector encom-passes a wide variety o educational backgrounds andlevels o experience, and it spans a range o occupa-tions and wages. Engineers and architects with collegedegrees are needed to design buildings and technologies.

Production workers with credentials ranging rom lessthan a high school education to a college degree willbe needed in the manuacturing sector. Constructionworkers ranging rom electricians with some collegeeducation to insulation workers with less than a highschool education will be needed to install the renewable

technologies and energy-ecient materials. By stimu-lating spending in the clean energy sector, the ederalgovernment can create a wide variety o employmentopportunities in sectors that have been hit hard by thiseconomic crisis, including construction and manuac-turing, at the same time that it addresses environmentaneeds.

Likewise, there are other priority areas or chan-neling public spending and stimulating private spendingthat can both create decent jobs and meet social needsTese include, but are not limited to, health care, edu-cation, and inrastructure. For example, the ederalgovernment could expand health insurance or low-income children (the CHIP program), could channelmore education unds to cities and towns to preventteacher layos, and could directly invest in inrastruc-ture projects to update our electrical grid and expandpublic transportation. argeting spending in these areaswill address social priorities and at the same time wilexpand employment or medical proessionals, teachersconstruction workers, and all o the occupations thatin some way support these industriestextbook man-uacturing, editing, medical equipment design and

manuacturing, accounting and administrative servicesand so on.Creating job opportunities is one o the roles o

our ederal government, as codied by the 1978 FullEmployment and Balanced Growth Act. By increasingpublic spending on clean energy, health care, educationand inrastructure, the ederal government can create awide range o employment opportunities or the mil-lions o people who are ready to go back to work.


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ECONOMICS FOR THE 9

11. Environmental Policy for the 99%

heimminent threat o climate change and per-vasive toxins threatening our health andwell-being are orcing people to become more aware

o our vast environmental problems. But in order totake a hard look at the challenges we ace and deviseways to ensure the uture o our planet and the healtho our communities, we need to look beyond the usualenvironmental debates and begin asking new questions:who benets rom environmental degradation and whobears the costs? Te Occupy movements emphasis oneconomic and political inequality in the global econo-my has created the unique opportunity to put these twoquestions ront and center in key debates about how tosolve our current environmental challenges.

New Environmental Questions

Most economists and policymakers think o eco-nomic activities that harm the environment in termso whether they reap an overall net gain. Te identitieso the people who either benet rom these activitiesor who pay the cost are rarely considered in this basiccalculus. It will, o course, come as no surprise to theOccupy movement that those with the most wealthand political power are usually the beneciaries o eco-nomic activities that pollute peoples environments.

And who bears the highest cost o environmental

degradation? While we all suer rom the presence otoxic substances in our air, soil, water, and the mate-rials that surround us, a large body o research shows

that low-income communities and people o color livein the midst o the greatest environmental hazards. Forexample:

Te poorest, who have contributed the leastto its causes, will suer the most rom cli-mate change, specically rom impacts likewater shortages, desertication, rising sealevels, and extreme weather.

Urban residents most exposed to toxic airpollution tend to be people o color.

Children o color who live in poor areasare more likely to attend schools lled withasbestos, live in homes with peeling leadpaint, and play in contaminated parks.

Without understanding and changing how these stan-dard socioeconomic ault lines distribute environmentatoxins to the already disadvantaged, we cannot go aboutsolving our environmental problems. Tere will alwaysbe the opportunity and incentive to orce less powerulpeople and communities to bear the majority o theenvironmental costs o economic activity.

2012 Jakub Pavlinec, used under license from Shutterstock.com.


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Identifying Problems

One place to begin making these changes is the envi-ronmental policy arena. Te Reagan administrationmandated that cost-benet analysis would be the pri-mary tool or making environmental policy decisions,like allowable use o pesticides and levels o resource

extraction. Te belie was, and still is, that cost-benetanalysis is always the most objective, transparent, andecient method or making these kinds o decisions.

What is cost-benet analysis? Te basic idea isthat it measures the impact o government regulationby imitating the workings o markets. In other words,i the total costs o a potential decision outweigh thebenets, then it is not a desirable decision (just as itwould not be or a private business). In the abstract, theidea o weighing a policy decisions costs and benetssounds like a reasonable endeavor, but in practice, itsairly problematic. Heres why:

Te ways in which economists measure costs andbenets are oten inaccurate and implausible.Tere are a wide variety o technical problems inmeasuring, or example, the impact o preventinga childs brain impairment rom lead poisoning.We simply do not have a solid monetary metricor measuring the value o protecting human lie,health, and the environment, which renders theresults o cost-benet analysis inherently unreliable.

It systematically trivializes and downgrades theuture. Economists utilize a technique borrowedrom investment accounting called discounting.Costs that occur in the uture are considered lessimportant than costs occurring today and are dis-countedassigned lower valuesin the analysis.Why? Discounting reects the assumption thatpeople value things more today than in the uture,because were impatient and because well be richerthen. Tis philosophy may make sense when weretalking about a short-term monetary investment,but when were talking about the lives o our chil-dren and grandchildren, discounting becomes

ethically questionable. While objective in theory, cost-benet analysis isoten perormed with pre-determined results inmind. Te coalbed methane debate in the AmericanWest is one example o this. Te MontanaDepartment o Environmental Quality promoteda cost-benet analysis on their website that was

commissioned by the Montana Coalbed NaturaGas Alliance. Te report provided elaborate andspecic quantitative estimates o the benets to theregion but included no costs. It was more o a benet analysis than a cost-benet analysis. Tere aremany examples o these kinds o arbitrary studies

that have a real impact on policy decisions. It exacerbates inequality. Tis returns us to ou

questions about who wins and who loses in harmueconomic activity. Cost-benet analysis adds up thetotal costs and the total benets, with no questionabout equity and distribution o resources. Benetare oten valued by the willingness to pay orenvironmental improvements. When surveyed, therich say they are willing to pay more than the pooor keeping a landll incinerator out o their communities. Tus, despite the act that common senstells us impoverished and disempowered communities would just as much like to live in a clean andsae environment as the more wealthy and powerulcost-benet analyses typically say otherwise.

Finding Solutions

What, then, is the alternative to cost-benet analysis aa policy tool? One alternative is to choose our environmental objectives democratically (in the political arenaand then proceed with a cost-eectiveness analysis tohelp determine the least-cost way to achieve those goalsTis method would allow the people who typically armost impacted by environmental degradation to have avoice in how these decisions are made. O course, withthe vast inuence o corporate unds in politics, thiis not a perect solution. However, measuring peopleopinions by their vote rather than their earnings is amajor step in the right direction.

Our environmental problems are vast, and they mayeel overwhelming. But in devising solutions to climatechange and the presence o toxic substances in our airwater, and soil, we cannot orget to ask the questionthat are too oten ignored: who benets the most romenvironmental degradation and who is most harmed

Te smartest environmental policy we can design ione that is ramed with those questions in mind. I thepoorest and most disadvantaged among us come toenjoy a clean and healthy environment, that is the besindicator that all 99% o us are on the right path to asustainable uture.


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ECONOMICS FOR THE 9

12. HealthCareforPeopleorforProt?

Americashealth care system is broken.Despite spending ar moreper person on health care than any other country, the

United States rates below most afuent countries inmost aspects o health. No one spends as much as wedo but there are 49 countries whose population has alonger lie expectancy at birth and 48 with lower rateso inant mortality. Among those enjoying better healththan the people o the United States are not only theafuent European countries and Japan, but also Cuba(lower inant mortality) and Jordan (lie expectancytwo years longer than the United States). We mightquestion why, i we are only to have a lie expectancyequal to Portugals, we should spend over $4,000 moreper person. Or i we are to spend so much, we might ask

why our lie expectancy is not our years greater.Te problems in our health care system are based

on two inseparable problems: rising costs and lack ohealth insurance coverage. Americas health care costsare rising astronomically because o the ineciencyo our private health care system. Te share o incomeallocated to health care has increased rom 7 percent oour Gross Domestic Product in 1970 to over 17 percenttoday. Tese rising health care costs take unds awayrom other social needs such as education and inra-structure. Spending is increasing even while growingnumbers o Americans are being denied basic care.Even beore the crisis o 2008, the share o non-elderlyadults without adequate health insurance rose rom35 percent to 42 percent, reaching 75 million in 2007.As the crisis worsened, unemployment rose and thenumber o Americans without adequate health insur-ance rose along with it. Tose without adequate healthinsurance are signicantly less likely to receive medicalcare, are less likely to be immunized against inection,and are less likely to receive treatment or both acuteand chronic medical conditions.

Costs in a Private, For-Prot Health Insurance System

When it comes to our health care system, the UnitedStates is exceptional. Annually, we spend about $8,000per person on health care, nearly twice as much as incountries like France, Germany, Norway, or Canada (allcountries where people live longer than in the UnitedStates). Alone among afuent countries, we leave thenancing o health care to the private sector with publichealth insurance restricted to the elderly and some othe indigent. Tis is a system designed to create prots,not health, and it works very well. Private unding

makes health care a great prot center or Americancapitalists while, at the same time, the drive or privateprot denies needed care or the sick.

We have high costs with poor health outcomesbecause administrative waste permeates our privatehealth care system. Provider oces are lled withemployees responsible or billing and dealing withinsurance companies whose own oces are lled withmore employees responsible or managing the pro-viders and nding ways to deny services and coverage

to the sick and needy. Te excess burden o paying orall o these administrators contributes to the incrediblecost o health care in the United States while reducingthe resources, including health care providers time andenergy, available to care or patients.

Te extra cost o health care in the United Statescan be directly associated with private health insuranceAs late as 1971, spending on health care, lie expec-tancy, and morbidity rates in the United States wereall comparable to those o other afuent countries likeCanada, France, and the United Kingdom. Since then

however, universal coverage systems in these othercountries have led to dramatic improvements in healthat relatively low cost. Since 1971, or example, Canadassingle-payer health care system has helped raise lieexpectancy by nearly seven years while the share onational income devoted to health care has risen byabout three percentage points. In the United States, bycontrast, the share o income devoted to health care hasrisen by over twice as much, seven percentage pointswith a gain o only our years o lie expectancy. Hadwe behaved like Canada, we either would have gained

Source: OECD, Facts and Figures, 2006-7.


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an extra nine years o lie expectancy or our expendi-tures or we would have saved ve percentage points oincome or our shorter lie expectancy. Furthermore, allo this greater expense can be directly tied to our systemo private health insurance. Medicare costs per enrolleehave risen at almost the same rate as in Canada

leading to dramatic savings. Unlike in the private healthcare system, however, lie expectancy has soared orthe elderly and health has dramatically improved orthose ortunate enough to enjoy Americas age-limitedsystem o socialized medicine.

Universal Health Care

Te smartest way to lower health care costs and ensurethat people get the care they need is to move to asingle-payer health insurance program with universalcoverage. A single-payer system would dramaticallylower administrative costs not only in private insurance

companies, where 15 percent or more o premium dol-lars are spent on administration and prots, but also inprovider oces where the multiplicity o insurers hasdriven up billing and insurance-related expenses. Byreducing administrative waste, a single-payer systemcould save money while improving care by osteringbetter coordination o care among dierent providersand by providing a continuity o care that is impos-sible in a system o competing insurance plans. InMassachusetts, or example, a state with a airly e-cient health-insurance system, a single-payer systemwould lower the cost o health care by 19 percent; inMaryland, health care costs would all by 23 percent.Projecting these savings onto the nation as a whole, asingle payer system might save $500 billion, or $1,700per person.

By reducing administrative waste, a single payersystem would save resources that could be used toextend coverage to the uninsured and improve coverageor the underinsured. It would also allow the long-term

investments in coordinating care and health promotionthat have restrained health care costs in other countriesHere again, the United States stands out or its inabilityto control health-care ination. Health care costs haverisen throughout the developing world because moreafuent populations buy greater longevity by spending

on health care. Nowhere, however, has spending risenas quickly as in the private health-care system in theUnited States. (Our single-payer system or the elderlyMedicare, has controlled costs about as eectively ashave other countries.)

In other advanced economies, national and uni-versal health care systems have controlled costs so thateach year o increased lie expectancy has come at a costo about $450 per capita. In the United States, by con-trast, costs have risen almost three-times as ast, by over$1,200 per capita per year o lie expectancy gained. Iwe bought increases in lie expectancy as eciently asdid other advanced economies, such as Canada, FranceGermany, or the United Kingdom, then we would bespending barely hal as much on health care, savingover $4,400 per person. Measured in this way, hal oour health expenditures are wasted due to the admin-istrative ineciencies o our private health care system

We can do better, and we must. Te rising cost ohealth care is a burden on our economy, eclipsing anygains in wages and orcing unions and working peopleinto desperate struggles even to maintain oten inad-equate health insurance. Only in the United States

have private companies gained control over health carebecause only the United States government has allowedthem to. But what politics has given private companiespolitics and social action can take away. Te alternativesare clear: we can let private companies use health careas a prot center, or we can transorm health care intoa social right to be provided to all. Teir prots; ourchoice.


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ECONOMICS FOR THE 9

13. Visions of Economic Alternatives:

Progressive Reforms

A Starting Point

As the Occupy movement has so dramatically em-phasized, the distribution o income and wealthin this country is grossly unequal. Te top 1% are ableto amass so much income and wealth because o theircontrol over the nations corporations and banksastop executives, nancial traders, hedge und managers,members o boards o directors, stockholders, and soon. Tey use this control over resources to maximizetheir private gain, not the welare o the broad majority.Tey also use their economic power to achieve political

power through lobbyists, campaign contributions, andt

economics 99 percent for web1

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