What REALLY Caused the American Recession: The One-Dollar Analogy

Posted in General by TBartine on September 7, 2010 No Comments yet

I’d like to paint you a quick, vivid picture of your financial situation…that’s right, YOUR situation.

For decades now, the economic inequalities in America have been gradually increasing, and perhaps the slow, incremental nature of these changes allowed them to slip past the attention of most of our citizenry.  It also didn’t help matters…that anyone drawing attention to the issue was quickly branded a “socialist,” or even a “communist,” by the media apparatus of the wealthiest Americans and the wealthiest American companies.  But now, in evaluating the current financial crisis, some noted economists are getting to the underlying causes of the problem…and why it simply won’t go away, despite large federal spending programs, a giant bailout of our financial institutions, and a whole bunch of wishful thinking.

The “answer” they are arriving at?  MASSIVE wage and wealth inequalities.

Want to listen to what they’re saying?  Robert Reich has a brief, yet fascinating op-ed here, and Timothy Noah even has a slideshow to go with his data here.  I would recommend reading both, but the final analysis is simple: The top 1% in this country has 99% of the nation’s wealth, and gathers 24% of the nation’s income. And as their share of the wealth and income has increased…the rest of the country’s has, of course, stagnated or declined.  The result: A dwindling middle class…a majority of the population one financial event away from destruction…and an economy that produces more than its people can afford to buy.

Sometimes I think the problem seems so big…that people fail to properly visualize it…so here goes:

For every dollar in this country, if we look at 100 people…then one person out of the 100 has 99 cents…

…and the others are splitting the penny.  That’s right, imagine 99 people splitting a penny.

The one guy with 99 cents, despite what some would tell you, cannot and will not create enough industry or purchase enough products to make up for the other 99 people.

Statistics show that he’ll only invest a couple pennies out of his 99…and he’ll invest them wherever they’ll bring the greatest return.  This is often NOT in the United States.

He’ll buy some things with another penny…but again, not enough to make up for everyone else.  He still needs only so much food, so much clothes, so many cars and houses.

The rest of his 99 cents (maybe about 97 left)…he’ll dump into saving accounts and other interest-bearing instruments.

And when “payday” comes…he’s going to get enough to cover his expenses, AND to tuck some more away.

He’ll ride out his final years in comfort, and be able to leave a nice bundle for his kids, giving them the distinct advantage towards staying in the Upper Class.

Then…there’s everyone else…splitting a penny…

The middle class, let’s say about 40 people, they get a decent size slice of the penny…enough to live comfortably, have a few nice things, avert a few disasters.

The working class, about 30 people, they get a smaller slice of the penny.  Enough to subsist, but not buy much in the way of luxury…and one bad event could land them in ruin.

The working poor, about 15 people, get a tiny sliver…and struggle every day to make ends meet.

The final 14 people…get a piece of the penny so small, it’s nearly useless.

When “payday” comes for these 99 people…they’ll mostly get enough to pay bills, with little else left.

As they reach their senior years, most (if not all) of what they had squirreled away will be used up with their post-retirement and healthcare expenses, and little will be left for their children.

After the Great Depression, FDR took measures to address this…resulting in the richest 1% having a few less pennies (while still being filthy rich), the bottom 99% having a few more pennies (allowing more to join the middle class…or even the upper class), and a period of unprecedented growth for America.  However, in the decades to come, as tax priority went to the rich and regulations on various industries were removed, we gradually slid into an untenable economy structure.  Here’s why:

Business growth: As regulation was removed from the investment industry, investment stopped serving as the “engine of industry.“  Instead of investing in companies, providing those companies with the capital to expand their workforce, expand their area of distribution, or to develop new services and products…the wealthy could now invest in “complex instruments” which were, in essence, little more than a form of legalized gambling.  Instead of investing in a company…they invested in bets on how other stocks/loans/investments would perform…they could even “bet against” other investments.  This money benefitted nobody except the investment firms, and potentially, the wealthy investor.

Business creation: Big companies…streamlined or changed business models.  Less manufacturing…more “service-oriented” business.  In short, more businesses that could be performed with fewer workers, lower overhead, more automation.  What manufacturing or other “personnel-intensive” work needed to be done…was outsourced to countries with an abundance of cheap labor.  Middle and Upper Management portions of the workforce…blossomed, as did their salaries, to a  nearly obscene extent while the salaries of the rest of the workforce stagnated, failing to keep up with even basic cost-of-living increases.  Small businesses…one of the largest sectors of employment and financial growth…come largely from the middle-class: A middle-class that was now shrinking, watching their savings and retirement disappear, no longer with access to the credit or the capital required to start new business endeavors.

Consumer base: It does no good to produce more products than people will buy, nor products that they cannot afford.  With the bottom 99% of the population receiving less and less in income, with less credit available to them, and with rising costs in all things, both necessary and luxury…we create an easy-to-understand problem:  Great things to buy…but nobody to buy them.  And as companies continue to feel the pinch of dwindling consumerism they reduce large numbers of their lesser-earning workers (while retaining high-earning management)…thereby creating larger and larger numbers of people who can’t buy enough to support our economy.

So why would 99% of the people allow this situation to persist?  Simple.  They are TRAINED to do so.  As mentioned earlier, anyone who challenges this status quo is quickly branded by the wealth in America as a THREAT to America.  They are said to be “socialists” and to be attacking the “free market system,” and since this system is considered one of the “core principles” of this country, to criticize it is seen as un-American.  People are also trained that criticism of the distribution of wealth is tantamount to an “attack on the rich“…at which point they are told that the rich are responsible for all business creation and job creation…and that if we are too hard on them, they’ll LEAVE the country.  People are also trained to believe that it is important to shield the wealthy, because THEY TOO could one day be wealthy, and they would want to be protected from having their wealth “shared or redistributed.”

Of course…these are convenient myths for the wealthiest Americans to propagate.  This country, as well as all others with free markets, has always had certain socialized programs and measures, and for completely valid and necessary economic reasons…without some of those measures, the economy would be little more than an out-of-control, speeding train.  This country has always regulated its businesses and industries, again, for completely valid and necessary reasons.  Neither socialized programs nor regulation are in any way “un-American” or “bad.”  As discussed in the previous section, the role of the wealthy in creating businesses and jobs is greatly exaggerated; The middle class does as much, if allowed to, to strengthen the economy…and the wealthy have done a number of things to hurt the economy and to eliminate jobs.  And as far as their “tease” that all of us might one day join their ranks…it’s a bit like playing the lottery.  If you look hard enough you can find lottery winners out there, but your odds of being one of them?  Infinitesimally small.

In short: As long as the vast majority of the American population continue to work longer hours and for less pay, while the majority of the wealth is aggregated in the hands of the very few…there will be no “Great-Depression-Style” recovery.  Suggestions?  First, the prosperity must be shared.  As Robert Reich pointed out: “In the 1930s, the American economy was completely restructured. New Deal measures — Social Security, a 40-hour work week with time-and-a-half overtime, unemployment insurance, the right to form unions and bargain collectively, the minimum wage — leveled the playing field.“  Similar measures must be taken now, measures that either increase the “slice of the penny” shared by the 99%…or measures that provide security to the 99%, making them more likely to hold onto the pennies they have.  Secondly:  It’s time to invest in education again…if our children can compete in the high-tech markets of the future, we will succeed, but if they continue to finish school barely able to work an assembly line…then the future looks grim for them, and for us.

But the first thing we must do, is to stop allowing the wealthy, through their political and media instruments, from demonizing anyone who calls into question the flaws in the current economic architecture…we must stop protecting THEIR wealth by attacking EACH OTHER.