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The First Cause of the Economic Crisis

The First Cause of the Economic Crisis. The Growth of Inequality. The Great Recession. The economic collapse called the Great Recession lasted from Dec. 2007 – June 2009 That’s right – it ended (officially) in June 2009 But the impact on our lives continues:

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The First Cause of the Economic Crisis

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  1. The First Cause of the Economic Crisis The Growth of Inequality

  2. The Great Recession • The economic collapse called the Great Recession lasted from Dec. 2007 – June 2009 • That’s right – it ended (officially) in June 2009 • But the impact on our lives continues: • Let’s talk:What has been the impact of the Great Recession on you/your family/your future? DSA Economic Crisis Workshop 12-2011

  3. The Purpose of this Workshop • To shape the future – where we want out country to go – we need to understand what caused the economic crisis that we know of as the Great Recession • This workshop is designed to give us that understanding DSA Economic Crisis Workshop 12-2011

  4. How Bad Was the Great Recession? • Housing: 1 in 10 home owners may face foreclosure • Household wealth declined 20% • US auto industry faced bankruptcy • GDP fell faster than at any time since 1930s • And then there is unemployment… DSA Economic Crisis Workshop 12-2011

  5. The Great Recession – and “Recovery*”: Unemployment by Race, Ethnicity and Age • The “Great Recession” • officially ended in • June 2009 Unemployment remains high with some groups suffering more than others DSA Economic Crisis Workshop 12-2011

  6. Was it just an accident? CPEG Economic Crisis Workshop - Barclay DSA Economic Crisis Workshop 12-2011

  7. If you remember nothing else from this workshop today… • The economic crisis was not an accident • It was the result of policies and decisions over more than 30 years • To understand what we need to do, we need to understand what those policies and decisions were • The policies and decisions that caused the crisis represent a world view: neoliberalism DSA Economic Crisis Workshop 12-2011

  8. What Is Neoliberalism? • Core tenet: markets are self correcting and provide the best (most efficient in terms of resource use) outcomes if allowed to function • Markets bring together a large number of participants who vote with their dollars • Therefore: • Remove regulatory “restraints” on markets – government-regulated outcomes are always “second best” • Turn activities over to private sector wherever possible • There is no “common good,” only individuals seeking their personal well being 8 DSA Economic Crisis Workshop 12-2011

  9. How Did We Get Here? • Three Causes • Long term growth of inequality • Rise of Finance - Credit/debt/and housing • Changes in US role in world economy • In this session we will talk about inequality DSA Economic Crisis Workshop 12-2011

  10. Do Income Inequality Walk and Income Share Walk before proceeding You will need 6 volunteers See “How to do the Workshop” – “Inequality Walk” Skit Instructions DSA Economic Crisis Workshop 12-2011

  11. Growth of Income Inequality • The inequality walk illustrated how average income levels in US changed 1979 – 2006 • You often hear the argument that inequality has increased because of “educational” differences or “skill based technological change.” (This is a neoliberal argument.) • Thus you may see a chart like the one on the next slide…. DSA Economic Crisis Workshop 12-2011

  12. Growing Inequality: Top 10% Income Share, 1950 - 2008 But is this the real story – or does it mask a more significant story? DSA Economic Crisis Workshop 12-2011

  13. The Real Story:Income Distribution at the Top, 1950 - 2008 DSA Economic Crisis Workshop 12-2011

  14. The Real Story • As we saw in the inequality walk, all income groups lost income share • EXCEPT: • The top 1% • Their income share increased more than 2-1/2 times over the past 35 years • The neoliberal “explanation” of superior education or higher skills fails DSA Economic Crisis Workshop 12-2011

  15. Average Income by Quintiles and Top 1%, 1979 and 2006 (2006 $) “There are some distances that only money can measure.” DSA Economic Crisis Workshop 12-2011

  16. Why the Misdirected Explanation? • What does the education/skills training “explanation” for growing inequality suggest? • Workers should go back to school, get more training and they will find good, well paying jobs • However, the gap between the top 1% and everyone else – including those with college degrees - has increased DSA Economic Crisis Workshop 12-2011

  17. This graph compares the average income of people with a college degree to the average income of people who comprise the top 0.1% of the population. In 1967 a person with a college degree made 10% of what a person in the top 0.1% made. In 2007, it was only 4.2%. College degrees do not explain the growth of inequality DSA Economic Crisis Workshop 12-2011

  18. What Does the Misdirected Explanation Protect? • No need to address the huge concentration of income in the top 1% • But the real question is:Why has the top 1% done so well while the rest of us have been treading water? DSA Economic Crisis Workshop 12-2011

  19. Who Are the Top Income Households? • We can start by asking who are the very top income households? • Are they athletes and entertainment celebrities? • No – the very top income households are the economic elite in the US DSA Economic Crisis Workshop 12-2011

  20. Who Is in the Top 0.1% of Income?(Analysis of 2004 tax returns) DSA Economic Crisis Workshop 12-2011

  21. CEO vs. Average Worker Pay, 2004 American exceptionalism? Source: Multiplier of CEO Pay to Average Worker Pay. Adam Choate , Dana Rowzee, Jerrod Tinsley, CEO Pay Rates: U.S. vs. Foreign Nations. November 17, 2005 DSA Economic Crisis Workshop 12-2011

  22. Is Increased Inequality “Inevitable?” • Neoliberals often argue that increased inequality simply reflects a globalized market • But is that true? • Do other wealthy countries see the same levels of inequality as the US?NO • Also, the growth of inequality in the US is much greater than in other rich societies DSA Economic Crisis Workshop 12-2011

  23. Inequality in the US Has Grown Much More than in Other Wealthy Countries:Top 1%’s Share of Total Income % of Total Income DSA Economic Crisis Workshop 12-2011

  24. Comparing Inequality Between Countries • Gini Index is most common measure • Gini Index range is 0.0 to 1.0 • A Gini Index of 0.0 would mean that all households have the same income • A Gini Index of 1.0 would mean that one household has all the income • Gini index for industrialized countries ranges from about 0.2 – 0.5 DSA Economic Crisis Workshop 12-2011

  25. The Level of Inequality is Much Greater in the US than in Other Wealthy Countries The US is more like Mexico than like Sweden. DSA Economic Crisis Workshop 12-2011

  26. Composition of Income for Top 1% (2008)(for bottom 99%, over 90% of income comes from wages and salary) 41.4% 55.7% *Capital income includes capital gains, dividends, stock options, etc Fitzgerald: The rich are different from us. Hemmingway: Yes, they have more money. But where they get their money from is different. DSA Economic Crisis Workshop 12-2011

  27. How Much Income Would Be Required to Be in Each Income Category in 2008 DSA Economic Crisis Workshop 12-2011

  28. Why Did Inequality Increase? • Decline of unionization • Shift in the tax burden • Policies supported inequality DSA Economic Crisis Workshop 12-2011

  29. As Union Density Declined, the Income Share of Top 1% IncreasedIn the mid-1950s about 36% of US workers were in unions (up from 31% at the end of WWII) DSA Economic Crisis Workshop 12-2011

  30. Impact of Union Decline • Unions were crucial in the “Great Compression” of incomes 1930s – 1950s • Unions pioneered linking health care to employment • Unions pioneered concept that employment should also provide pensions • Unions are essential to the political education of their members DSA Economic Crisis Workshop 12-2011

  31. Credit: Carol Simpson, CartonWork.com DSA Economic Crisis Workshop 12-2011

  32. Shifting the Tax Burden: Individuals • Until the 1980s, the top federal income tax rate had been above 70% since WWII • During the 1980s (Reagan years) the top tax rate was cut in half • And the bottom federal income tax rate actually increased DSA Economic Crisis Workshop 12-2011

  33. Federal Income Tax Rates: Highest vs. Lowest Rate, 1969 - 2009 The Big Shift: 1982 - 1988 DSA Economic Crisis Workshop 12-2011

  34. DSA Economic Crisis Workshop 12-2011

  35. Changes in Effective Federal Tax Rate Benefited Top Incomes Much More than the Rest of US DSA Economic Crisis Workshop 12-2011

  36. Shifting the Tax Burden: Corporations • The other big shift in who pays taxes has favored corporations over individuals • The corporate income tax used to be a significant source of federal revenue • About 2/3 of the revenue raised by individual federal income taxes • Now it is less than 20% of individual federal income tax revenue DSA Economic Crisis Workshop 12-2011

  37. Federal Government Revenues as a Percent of GDP Corporations have shifted taxation on to the rest of us. DSA Economic Crisis Workshop 12-2011

  38. Income Redistribution: Policies • By 1970s the service sector was growing much faster than the manufacturing • What kind of employment would people find in the “new economy” • Low wage or high wage? • The minimum wage did not keep up with inflation • The attack on unions made organizing service workers more difficult • Is the US’s large proportion of low wage work inevitable? DSA Economic Crisis Workshop 12-2011

  39. Percent of Population with Income Less than 50% of Median( 2007/08) 1 in 6 workers in the US earn less than half the median income.  In Denmark, only 1 in 16 workers earn less than half the median income. Countries with greater inequality have larger low wage sectors. DSA Economic Crisis Workshop 12-2011

  40. Inequality as Social Policy • US labor markets are “segmented” • This means that the distribution of jobs by gender, ethnicity and race is uneven • The result: women and racial and ethnic minorities are more likely to work in lower wage sectors than white males DSA Economic Crisis Workshop 12-2011

  41. Labor Force Segmentation, 2009: Job Share/Labor Force Share A ratio of 1.0 means job share = labor force share DSA Economic Crisis Workshop 12-2011

  42. Segmented Labor Markets Create Inequality DSA Economic Crisis Workshop 12-2011

  43. Credit: Cartoon Group DSA Economic Crisis Workshop 12-2011

  44. The Fraying of Social Bonds • Economic costs are only part of the curse of inequality • Equally important are the costs to the bonds that link people together in a modern commercial/industrial society DSA Economic Crisis Workshop 12-2011

  45. The Spirit Level – Wilkerson and Pickett • In this book the authors look at national scores on a range of measures of health, social and educational well being • They look only at the rich societies – 23 countries with per capita incomes ranging from $22,000 - $48,000 • No relationship between per capita income level and how well or poorly these countries score DSA Economic Crisis Workshop 12-2011

  46. Inequality and the Spirit Level • However, there is a strong correlation between the extent of inequality and country scores on: • Health • Life expectancy • Infant mortality • Obesity • Education • Scores on international math and literacy tests • Early school leaving • Social well being • Prison population/100,000 • Social mobility DSA Economic Crisis Workshop 12-2011

  47. Inequality and the Spirit Level • Less equal societies perform worse on these measures than more equal societies • US is among the worst on these measures • Racial/ethnic homogeneity does not explain the different results by income inequality • Hear the interview with Richard Wilkerson at http://www.pbs.org/newshour/bb/business/july-dec11/makingsense_09-28.html DSA Economic Crisis Workshop 12-2011

  48. The Fraying of Social Bonds “Do you think that most people can generally be trusted?” DSA Economic Crisis Workshop 12-2011

  49. Rising Inequality, Declining Trust in the US, 1960 – 1998 (the numbers are the years, e.g. 66 = 1966) DSA Economic Crisis Workshop 12-2011

  50. How Has the US Economy Performed During the Past 3 Decades? • Has inequality produced faster rates of growth, benefitting all of us? • Does “A rising tide lifts all boats”? (as neoliberals often argue) • NO • US GDP/capita growth at best middle of the pack • The Top 1% failed to produce growth DSA Economic Crisis Workshop 12-2011

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