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The System in Crisis

In the U.S., what we call “the system” is beset by multiple crises.

** The end of cheap oil is coming.

** Global warming is upon us.

** Water shortages are worsening in the U.S. and globally.

** Rising inequality divides the top 2% from the rest of us.

** The rising cost of medical care and the high cost of medical insurance weigh on the minds of most people.

** The promise of secure retirement is fading for many aging boomers (which of course affects their children).

** The social safety net created after the Great Depression is being shredded bit by bit year after year.

** Families and indeed the nation are deeply in debt.

** Widespread insecurity afflicts large portions of the populace (good jobs disappearing, debt rising, the children’s future uncertain).

** A serious time crunch has beset many families.

** Some ecological limits have appeared on the horizon (no place left to throw away toxics; cost of some resources critical rising, etc.).

** The political party that controls the White House, the Congress, and much of the judiciary now owes its electoral success to a large group of people who believe the world is going to end soon, which may make earthly problems seem unimportant to many of them. For the first time in American history, a religious party now controls the government.[1]

Perhaps the future is bright

Perhaps “the system” will navigate through all these interlocking crises without encountering any serious economic difficulties, but perhaps not. It seems possible that as the combined effect of all these problems grips the nation more tightly, economic growth-rates may slow down further, dipping below their current levels.

Unfortunately, we are already getting a preview of how “the system” will respond to slowing growth. The rate of economic growth (measured by <http://en.wikipedia.org/wiki/Gdp>GDP) has been slowing for the past 35 years,[2,3,4,5,6] and the system’s response has not been pretty. Without going into a lot of detail, I believe much of what passes for “the news” each day can best be explained as “system responses” to slowed growth.

For the 100 years spanning 1870 to 1970, the U.S. economy (measured by gross domestic product, or GDP) grew at an average annual rate of 3.4% per year. Since 1970, the U.S. economy has grown just 2.3% per year.[5,pg.5] This may seem like a small difference, but it really isn’t because the effects are cumulative, year after year. The difference between two percent and three percent isn’t one percent — it’s fifty percent.[5,pg.7; 6,pgs.63-75]

Here’s another way to look at it: if the U.S. economy had grown at 3.4% per year since 1973, instead of 2.3%, the additional wealth created during the two decades 1973-1993 would have added up to an extra $12 trillion (adjusted for inflation) — enough to replace every factory in the U.S., including all capital equipment, with a modern new factory; or enough to pay off the entire government debt plus all home mortgage debt plus all credit card debt.[5,pg.5]

If economic growth had maintained its historical level since 1970, the average family in 1993 would have had an additional $5,500 to spend each year. Over the 20 years, 1973-1993, the average family would have had at least an additional $50,000 of income — enough for a young couple to buy a first home, a low-income family to maintain health insurance, or for someone to go to college. State and local governments would have collected an additional $900 billion in taxes during the 20 years — to support schools, libraries, parks, public transit, emergency services, police and fire protection, affordable housing, local economic development, and so on. [5,pgs.10-11]

The U.S. is not unique. The trend of declining growth-rates can be seen in all the wealthy nations of the world, the 29 members of the OECD [Organization for Economic Cooperation and Development]. During each passing decade since 1970, growth in OECD countries has declined, compared to the previous decade.[6,pg.38] The trend of slowing growth doesn’t affect just the average family. Even more importantly, it affects the super rich — in the U.S., the one percent of us who own 50% of all private wealth, or, more broadly, the 5% of us who own 2/3rds of all private wealth.[7]

Understandably, the wealthiest few expect a decent return when they invest their capital, and slow growth makes decent returns hard to find.

What is a decent return on investment? Here’s one way to answer that question. When the President’s Office of Management and Budget (OMB) considers a new regulation (for example, to control mercury emitted by power plants) the agency asks whether the benefits justify the costs. They say to themselves, “This regulation will cost industry X dollars per year. How much wealth could those dollars create if they were invested with a return of Y percent per year? In that equation, OMB now sets Y equal to 7 percent. OMB assumes a typical business investment should yield a 7% annual return.[8]

Of course in recent years, many investors have been looking for 20% annual returns so 7% may seem puny by comparison. Still, 7% is twice the long-term historical rate of return on investment (measured as growth of GDP) and three times the average rate of return since 1973. So modern owners of capital expect decent returns that far exceed historical averages. Therefore they are likely to be unhappy if their return merely meets the historical average, and doubly dissatisfied with returns 30% below the historical average (e.g., 2.3% instead of 3.4%). They naturally believe they deserve better — America deserves better — the world deserves better — and they believe government should help boost their returns one way or another. After all, capitalism as we know it would stop working if capitalists stopped investing, so providers of capital deserve a decent rate of return, they might argue, and they would have a point.

According to the hypothesis I’m describing here, five features of modern life have caused the downturn in economic growth in the U.S. (and in the rest of the industrialized world):

(1) Saturation of effective consumer demand; those who can afford to buy stuff already have about as much stuff as they need or can afford; indeed, to pump up demand further, U.S. industry now spends $250 billion each year on advertising.

(2) A reduced demand for fixed investment (such as factories) and working capital (money to meet business expenses and expand operations).[3; 6,pgs.37-39] It’s getting harder to find safe, productive places to put capital to work these days, partly because of saturated consumer demand and partly because there’s a glut of capital.[9]

(3) The proportion of people in the labor force can’t increase much beyond where it is today;[3] all the able-bodied are pretty much already working or looking for work; the rest are children, elderly or disabled.

(4) The rate of growth of productivity of workers (the rate at which output per hour grows) has slowed in recent decades;[6,pgs.63-75]

(5) Some ecological limits have come into view — for example, toxic industrial chemicals are now found everywhere on earth, from the tops of the tallest mountains to the bottoms of the deepest oceans and everywhere in between, including human breast milk. We can no longer convincingly argue that we can throw away unwanted industrial byproducts without affecting living things, so our byproducts must now be managed at considerable expense.[10,11]

The system has responded to these realities in the following ways:

System response No. 1: Easing Credit

No need to belabor this. Credit card debt, home mortgage debt and the national debt have all skyrocketed in recent years.[12,13] Debt is beneficial for those with money to lend, especially credit card debt, which now garners doubt-digit returns. As in no previous generation, young people now leave college (end even high school) saddled with debt.[14] As Kevin Phillips has pointed out, we are witnessing the “financialization” of the U.S. economy. In the year 2000, moving money around became a larger portion of GDP (20%) than manufacturing (14.5%).[1,pg.265; and see pgs. 265-346]

System response No. 2: Promoting International Capital Flow

This is what the corporate “globalization” project is about — removing barriers for people with money to invest in cutting down the rain forests in Indonesia or setting up a cyanide-leach gold mine on native land in South America or northern Canada. Globalization is about clearing the decks for capital to cross borders unimpeded, in search of a decent return.

System response No. 3: Reduced Restrictions on Financial Firms

Banks, savings and loans, and brokerage firms used to be rigidly segmented by law; now all their functions have been legally merged. The savings and loan bailout in the ’80s was the first result; the “dot.com” bubble of the late ’90s was the second; the Enron-Worldcom- etc. debacle was the third. There is no end in sight.[6]

System response No. 5: Disinvest in Public Infrastructure (roads, bridges, runnels, airports, wastewater treatment plants).

“Our infrastructure is sliding toward failure and the prospect for any real improvement is grim,” says William Henry, president of the American Society of Civil Engineers, releasing the society’s 2005 Report Card for America’s Infrastructure at a news conference in March.[15] Of course this is a short-sighted policy, but almost by definition the search for decent return on investment focuses on the next quarter, not the next decade or two.

System response No. 6: Expand the Defense Budget

Defense is the only national industrial policy that almost everyone will agree to, or at least acquiesce to, perhaps for fear of being labeled unpatriotic. Foreign enemies are the ultimate consumers of our military preparations, so in the face of flagging demand for toasters and SUVs our economy now arguably requires a growing supply of foreign enemies.[16] As the President himself said shortly after he committed the U.S. to a perpetual war against evil-doers world-wide, “Bring ’em on.” War is good business, with future prospects that seem to grow brighter each passing day.

System response No. 7: Cut Taxes for the Wealthy

Cut income taxes, estate taxes, capital gains taxes, and corporate taxes to benefit the wealthiest Americans, shifting more of the tax burden onto the middle class and the working poor.[17]

System response No. 8: Tax Evasion and Tax Cheating.

Both are now rampant and have been the subject of several recent books offering abundant detail. Meanwhile federal authorities turn a blind eye.[18,19]

System response No. 9: Creation of New Industries:

Space exploration, laser-weapons-in-space, casino gambling, the pornography industry, the recreational drug industry (and its conjoined twin, the prison industry) — all demonstrate America’s “can do” entrepreneurial spirit in the face of slowed growth.

System response No. 10: Diminishing Social Investments

Slowed growth requires that the economic pie be divvied up in new ways. Therefore, all social investments have been put on the chopping block — veterans’ benefits, Medicare, Medicaid, Social Security, education loans, Head Start, public lands, water and air quality, charity hospitals, Amtrak, the infrastructure of roads, tunnels, bridges, and entire government agencies (the Internal Revenue Service, the Department of Education, the Department of Health and Human Services, among others) and so on and so forth. There is no end to the proposed cuts. Nothing is sacred except of course Defense (and more recently its domestic twin, Homeland Security) where the bipartisan sense of entitlement to insider gains has developed over decades of exemplary military-industrial cooperation.

Cutting the social safety net has the salutary effect of disciplining the workforce to accept lower wages, longer hours without overtime pay, increased workload on the job, reduced vacations, diminished health, elimination of pensions, and so on. (See System Response No. 12, below.)

As a result of these changes, the main historical difference between the two political parties disappeared at least two decades ago. The Democrats now find, for the first time in living memory, that they have no political agenda of their own. As a result, voter disaffection has risen to historic proportions. Cynicism spreads like kudzu. Political apathy then cements the status quo in place.

System response No. 11: Expanding and Discrediting Government

Given the need to distribute the economic pie in new ways, discrediting government has become a necessary political goal because government has occasionally intervened on behalf of “the little people” against “the big people.”

Traditionally, government has made modest attempts to level the playing field for everyone, in keeping with the slogan, “With liberty and justice for all.” Without basic economic security for families and individuals, neither liberty nor justice is possible.

To his credit, George W. Bush has provided real innovation here. Previous Republican theorists wanted to shrink government so small you could drown it in a bathtub. Mr. Bush recognized that a large inept government was far more useful that a small government, from the viewpoint of those aiming as a matter of high principle and national necessity to transfer a larger portion of the pie from working people and the middle class to the super rich.

The federal response to Katrina was perfect — a huge bureaucracy that utterly failed. What better way make people think that government is hopeless, that taxes are a waste? Who wants more of a corrupt, bungling bureaucracy that is indifferent to human suffering? Drowning such a creature in a bathtub seems too kind.

Meanwhile, insiders who know how to work the system — for example, Halliburton, Raytheon, and Boeing — are earning record returns, and two important public purposes are thereby fulfilled: rates of return on invested capital are pushed upward, at least for a well-connected few, at the same time government is disgraced and discredited. Voters, dismayed, stay home in droves, so the status quo is doubly secured.

Thanks to this President’s extraordinary vision and leadership, it may take decades to restore confidence in government as the leveler of playing fields, if it can be done at all.

System response No. 12: Cut wages for workers.

Over the past 30 years, this has been accomplished in the U.S. by a variety of creative techniques, and it must be considered the centerpiece of the ongoing effort to redistribute the pie, to maintain investors’ portions at fair, historical levels or better.[7]

Techniques for cutting wages now include:

a. As labor productivity has increased in recent decades (meaning, more output per person-hour of work), modern owners have simply refused to pass the increased income on to workers in the form of wage increases. This is a new trend of the past 30 years, but unmistakable. Productivity has continued to rise during the past 3 decades (though more slowly than historical average rates), but wages have stagnated and in many cases declined. The owners are simply keeping more for themselves.[20] This approach has both simplicity and transparency to commend it.

b. Keep the minimum wage low, rising at a rate that fails to keep up with inflation. The minimum wage sets the floor beneath all wages, so if it fails to rise with inflation, all wages will tend to stagnate or decline. This has been accomplished through exemplary bipartisan consensus. Congress last raised the minimum wage in 1997 (to $5.15 an hour, an annual income of $10,300).

c. Eliminate existing labor unions and prevent the formation of new unions. Unionized workers earn, on average, 21% more per hour than non-union workers. Perhaps more importantly, organized workers have come to expect somewhat safe and modestly healthful working conditions, a modicum of medical benefits, overtime pay, 2-week paid vacations, and perhaps, in extreme cases, even retirement benefits. When growth is slow and owners are feeling that their return on investment is unfairly pinched, unions are seen as standing in the way of efforts to redistribute the pie upward. So unions must go. It’s now so blatant that Human Rights Watch issued a stinging report in 2000 accusing the U.S. of repeated intentional violation of the internationally-recognized human rights of its workers.[21]

d. Eliminate defined benefit pensions, and, in an increasing number of instances, eliminate pensions entirely, as was done recently at United Airlines with the good help of a Reagan-appointed federal judge. Efforts to eliminate pensions entirely are gathering steam, as one would expect if my hypothesis about the bipartisan response to slow growth is correct.[22]

With the average age of the population rising, the reduction or elimination of retirement benefits (such as Medicare, Medicaid, Social Security, and private pensions) may at first blush seem like a political powder keg.[22] Perhaps the thinking among the leaders of both parties is that an elderly, destitute population will remain so frightened and disoriented that it cannot effectively make its political will felt. In any case, efforts to eliminate retirement benefits seem to be proceeding apace and working well. As the man who jumped off the skyscraper said as he fell past the 20th floor, “So far so good.”

e. Increasingly, the U.S. workforce has been put into direct competition with low-wage workers in Third World countries. Without strict oversight and enforcement of a kind never yet seen anywhere in the world, this sort of competition inevitably creates a “race to the bottom” for wages, working conditions, and environmental standards simultaneously — all of which are ways to “externalize” costs of production and thus to move a larger, fairer portion of the pie into the domain of the investor class.

f. Reduce the availability of health insurance. In 2003, 45 million Americans had no health insurance, up 1.4 million from the year before and up 5.1 million from the year 2000.[23]

System response No. 13: Promote rapid technical innovation

Business and government together are constantly searching for “the next big thing,” hoping to induce rapid technical innovation. It’s the star wars missile defense shield; no, it’s biotechnology; no, it’s nanotechnology; no, it’s really “synthetic biology” — the creation of entirely new life forms never previously known on planet earth. Of course, by definition, rapid innovation and deployment are incompatible with thoughtful consideration of likely consequences prior to deployment. However, ill-considered deployment has been the norm for 180 years, so it is now thought to be “business as usual” and is easily justified as the price of progress. Rapid innovation churns the economy and creates manifold opportunities for decent return on investment — particularly during the early stages of a new product or process. It is only later that trouble becomes apparent and profits decline, at which point government typically steps in to pick up the pieces and shield investors from the consequences of their impetuous zeal. (Think Superfund. Think nuclear power.)

Despite official protestations to the contrary, U.S. government policies generally encourage industrial enterprises to “externalize” the costs of their damage to nature and human health, and this trend has accelerated in recent years as economic growth has slowed. The truth is, many industrial operations simply cannot afford to internalize their costs and at the same time provide a decent return, so they MUST externalize their costs. They don’t really have a choice, given the pressing need for decent return on investment.

[To be continued next week.]

PETER MONTAGUE is editor of the indispensable Rachel’s Health and Democracy, where this essay originally appeared. He can be reached at: peter@rachel.org

Notes

[1] Among other sources, see Kevin Phillips, American Theocracy; The Peril and Politics of Radical Religion, Oil, and Borrowed Money. New York: Viking, 2006. ISBN 0-670-03486-X. According to Phillips, roughly 55% of those who voted for Mr. Bush in 2004 believe that the world will end in the battle of Armageddon, as described in the Book of Revelation. As Phillips says (pg. vii), “… the last two presidential elections mark the transformation of the GOP [the Republican Party] into the first religious party in U.S. history.” Phillips is a well- known Republican.

[2] Bernstein, Michael A., and David E. Adler. Understanding American Economic Decline. Cambridge: Cambridge University Press, 1994. ISBN 0-521-45679-7.

[3] Bjork, Gordon C. The Way It Worked and Why It Won’t; Structural Change and the Slowdown of U.S. Economic Growth. Westport, Conn.: Praeger, 1999. ISBN 0-275-96532-5.

[4] Cohen, Richard and Peter A. Wilson. Superpowers in Economic Decline; U.S. Strategy in the Transcentury Era. N.Y.: Taylor and Francis, 1990. ISBN 0-8448-1625-6.

[5] Mardick, Jeffrey. The End of Affluence; The Causes and Consequences of America’s Economic Dilemma. N.Y.: Random House, 1995. ISBN 0-679-43623-5.

[6] Shutt, Harry. The Trouble with Capitalism; An Enquiry into the Causes of Global Economic Failure. London: Zed Books, 1998. ISBN 1-85649-566-3.

[7] Data on our growing inequalities of wealth are available from several sources, but my current favorite is Gar Alperovitz, America Beyond Capitalism; Reclaiming Our wealth, Our Liberty and Our Democracy (Hoboken, N.J.: John Wiley & Sons, Inc., 2005); see pgs. 204-206. See also 6.] Chuck Collins and Felice Yeskel, Economic Apartheid in America (New York: New Press, 2000) with revised and corrected data <http://www.ufenet.org/research/Economic_Apartheid_Data.html#p55>available here. See also, for example, Edward N. Wolff, Top Heavy; the Increasing Inequality of Wealth in American and What Can Be Done About It (New York: The New Press, 2002). Another excellent book is Michael Zweig’s, The Working Class Majority; America’s Best Kept Secret (Ithaca, N.Y.: Cornell University Press, 2000); ISBN 0-8014-3637-0.

[8] “EPA Revises Regulatory Reviews To Discount Long-Term Benefits,” Inside EPA, October 8, 2004.

[9] Floyd Norris, “Too Much Capital: Why It Is Getting Harder to Find a Good Investment,” New York Times March 26, 2005, pg. C1.

[10] Peter M. Vitousek, and others. “Human Appropriation of the Products of Photosynthesis,” Bioscience Vol. 36 No. 6 (June, 1986), pgs. 368- 373. Available here.

[11] Peter M. Vitousek and others, “Human Domination of Earth’s Ecosystems,” Science Vol. 277 (July 25, 1997), pgs. 494-499; available <http://www.rachel.org/library/getfile.cfm?ID=200>here. And see Jane Lubchenco, “Entering the Century of the Environment: A New Social Contract for Science,” Science Vol. 279 (Jan. 23, 1998), pgs. 491-497, available here.

[12] Gretchen Morgenson, “After the Debt Feast Comes the Heartburn,” New York Times Nov. 27, 2005, pg. 3-1.

[13] See Kevin Phillips, American Theocracy; The Peril and Politics of Radical Religion, Oil, and Borrowed Money. New York: Viking, 2006. ISBN 0-670-03486-X. See Part III, “Borrowed Prosperity,” pgs. 265-387.

[14] www.precaution.org/lib/06/prn_generation_of_debtors.060523.htm

[15] “Crumbling Infrastructure Erodes Quality of Life in U.S.,” Environment News Service March 10, 2005.

[16] William Rivers Pitt, “The Thing We Don’t Talk About,” Truthout.org June 23, 2005.

[17] Robert Johnson, “Little Dogs Don’t Pay Taxes,” New York Times, August 1, 2004, Sunday Business Section, pg. 2.

[18] Donald Barlett and James B. Steele, America: Who really Pays the Taxes? (New York: Touchstone, 1994; ISBN 0-671-87157-9).

[19] Donald Barlett and James B. Steele, The Great American Tax Dodge; How Spiraling Fraud and Avoidance Are Killing Fairness, Destroying the Income Tax, and Costing You (Berkeley, Calif: University of California Press, 2002; ISBN 0520236106).

[20] Economic Policy Institute, The State of Working America 2004/2005, September 5, 2004.

[21] Lance Compa, Unfair Advantage; Workers’ Freedom of Association in the United States Under International Human Rights Standards (New York: Human Rights Watch, August 2000). ISBN 1-56432-251-3.

[22] See, for example, Eduardo Porter and Mary Williams Walsh, “Benefits Go the Way of Pensions,” New York Times February 9, 2006; and see Mary Williams Walsh, “The Nation: When Your Pension is Frozen,” New York Times January 22, 2006; and Mary Williams Walsh, “Whoops! There Goes Another Pension Plan” New York Times, September 18, 2005, pg. 3-1; and Mary Williams Walsh, “How Wall Street Wrecked United’s Pension,” New York Times July 31, 2005, pg. 3-1.

[23] Robert Pear, “Health Leaders Seek Consensus Over Uninsured,” New York Times May 29, 2005, pg. A1.

 

 

 

 

 

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Peter Montague is a fellow with the Science & Environmental Health Network, living in New Jersey.

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