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Recession, Recovery and Reform

Corruption takes many forms in different countries and locations. Here in the United States it may not be as common to pay off a judge or a customs official as it is in most low and middle income countries, but we do have quite a bit of legalized bribery, especially in the form of electoral campaign contributions. The most obvious current case is that of health care reform, where the powerful insurance, pharmaceutical and other lobbies are in the process of vetoing some of the most important parts of the health care reform that most Americans want and need. For example, the vast majority of Americans favor a public option – insurance offered by the government, as we have for senior citizens in the Medicare program – yet these powerful interests are blocking it in the Senate. This is despite the modest nature of the reform, which would not provide free or universal insurance, but rather an additional option that employers and individuals could buy into, with some subsidies for those who could not afford it. The insurance companies don’t want competition, and the pharmaceutical corporations don’t want another potentially large buyer that could bargain against their own monopoly power over the prices of patented drugs.

The United States is a rich country, so it seems obvious that our forms of corruption are preferable to those that plague developing countries. And they are, in the sense that it that it is always better to be a rich country and have rich country problems than to be a poor or middle-income country. But if we look at the United States from the point of view of its potential – and I don’t mean utopian dreams but merely what is quite feasible and practical in the immediate or near future – it seems that we have a very limited form of democracy.

One year after the collapse of Lehman Brothers, an anniversary that was marked by numerous retrospectives in the press, and nearly two years into our worst recession since the Great Depression, we have almost nothing to show in the way of reforms that could prevent a recurrence. The financial sector is probably more concentrated than it was before the crisis, and financial firms are still gambling with taxpayer guarantees, and even subsidies. Some are doing remarkably well – Goldman Sachs, a recipient of billions of dollars of taxpayer assistance, is expected to pay bonuses averaging $700,000 each to 30,000 employees. The vastly over-bloated financial industry that brought us this calamity has shrunk by only 7.7 percent in terms of employment, far fewer than the percentage of jobs lost in manufacturing (14.6 percent) or construction (31.6 percent), since the recession began.

One reform that many experts saw as necessary to avoid future financial disasters was to regulate the trading of derivatives – financial instruments that are based on some other assets or values — so that they could be traded and priced on an exchange like stocks, bonds, or commodities. Because many of these often complex derivatives were traded outside of exchanges, financial companies were able to hide enormous losses that only showed up when things fell apart. But off-exchange trading is a highly profitable business – because when there are no market prices, there is limited competition. So Wall Street is pushing this modest but important reform off the table as well.

“Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall,” President Obama announced Monday in a speech on Wall Street. But so far, it looks like that’s exactly what they are doing.

What then are we to make of the prospects for reform under an Obama administration and a Democratic Congress? It is still relatively early in the game, but one thing seems clear: this administration needs a lot more pressure from the progressive end of the political spectrum, especially the people who did the work and made the contributions that elected this president. Most of the pressure is coming from the right, which is to be expected given the historic shift that the 2008 election represented. For nearly four decades the politics of the country had been shifting rightward, including during the Clinton administration. Most importantly, the rules of the game have been steadily re-written in ways that shifted the distribution of income upward.

The latest data that now takes us through the end of the last business cycle (2002-2007) shows that two-thirds of the income gains during these years went to the top one percent of the income distribution. This brought the income share of the top one percent to its highest level since 1928. The bottom 90 percent got only about 12 percent of the income gains. This continued and accelerated a trend that began in the mid 1970s, which was also quite pronounced during the Clinton Administration, when the top 1 percent captured 45 percent of all income gains (as compared to just 11 percent in the 1960s).

The election of 2008 was a turning point, partly because the recession and financial crisis forced swing (mostly white working class) voters to focus on the economic issues and see that they were getting hammered under Republican rule.

The current recession will reverse that upward redistribution temporarily, as happened in the last recession, because a lot of wealth disappears. But whether we get back on track toward a more equitable society when the economy recovers will depend on structural reforms. Health care is one such reform – and the outcome is still undetermined – but we also need reforms that more directly help the majority of Americans to share in the gains from productivity growth. For this reason it is especially unfortunate that the Obama administration has not fought for the Employee Free Choice Act, which would make it easier for workers to recover their lost ability to form unions in the United States. The most important provision in this act is known as “card check,” which would allow employees to form a union as soon as a majority of them had signed cards expressing their desire to join. This, too, is in the process of being derailed.

Income distribution is fundamental, because it is difficult to imagine social and economic progress in most other areas, including democratization, education, poverty and social exclusion, crime, etc. as our society grows increasingly unequal. It remains to be seen whether we will see progress on this front when the economy recovers.

MARK WEISBROT is an economist and co-director of the Center for Economic and Policy Research. He received his Ph.D. in economics from the University of Michigan. He is co-author, with Dean Baker, of Social Security: The Phony Crisis (University of Chicago Press, 2000), and has written numerous research papers on economic policy. He is also president of Just Foreign Policy.

This column was originally published by The Guardian.

 

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Mark Weisbrot is co-director of the Center for Economic and Policy Research, in Washington, D.C. and president of Just Foreign Policy. He is also the author of  Failed: What the “Experts” Got Wrong About the Global Economy (Oxford University Press, 2015).

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