I grew up and spent my early working years in the golden age of capitalism, which was from 1945 to 1976. Almost anybody—as least, any white American man—who was willing to work could get a decent job sufficient to support a family.
Then a lot of things turned bad as once. Worker pay no longer kept pace with productivity, but the pay of CEOs and wealthy investors grew much faster. Manufacturing declined and high finance expanded. Hourly wages declined and debt increased. What went wrong?
He blames America’s current woes on the adoption of what he calls the Better Business Climate model of economic policy.
This model is based on the argument that the key to economic prosperity is economic growth, that economic growth depends on investment, and that investment depends on business profitability, and that the way to increase business profitability is lower taxes, lower social spending and fewer regulations.
We used to call this Reaganomics. Now we call it neoliberalism. Many people thought it was a plausible response to the economic stagnation and high inflation of the late 1970s. I myself thought it was worth a try (more fool I). I wouldn’t have objected to making rich people richer if everybody else had benefitted in the long run.
But this isn’t how things worked out. Instead:
- Wage increases stopped keeping pace with productivity.
- The CEO-worker wage gap took off.
- The financial sector grew at the expense of manufacturing.
- Wall Street profits skyrocketed.
- The income gap between the super-rich and the rest of us widened.
- Corporate debt, consumer debt and government debt rose.
What went wrong?
I now realize I misunderstood how taxes and incentives work. I thought that if corporations and investors could retain more income, they would invest more. But instead the incentive was for executives and investors to draw out more.
If corporate profits and executive salaries are taxed at a high top rate, then the incentive is to shelter profits from taxation by re-investing them. A high marginal tax rate diminishes the value of profit, but also the impact of losses, which can be deducted from taxable income.
Business Climate model instead created incentives for what Leopold called Financial Strip-Mining—that is to say, extracting wealth rather than creating value. Investing in debt became more profitable than investing in production.
One example is the leveraged buy-out. Mitt Romney’s Bain Capital is one of many firms that made its fortune from this. You buy a company with a small amount of your own money and a large amount of borrowed company. You then pay back the loan out of corporate profits, if necessary by selling off assets and increasing cash flow by laying off employees. Ideally the company survives the extra debt burden, but, if not, you have compensated yourself by means of executive salaries and consulting fees.
Another is stock buy-backs. Instead of investing in research, new equipment or employee training, corporate CEO use profits to buy back the company’s own stock. That drives up the stock price, which is typically the basis of the CEO bonus, and benefits the stockholders in the short run. If it hurts the company in the long run, nobody has to give back the money.
The financial crash of 2008 was driven by investment in mortgage debt. First people who couldn’t afford mortgages were encouraged to take them anyway. Then the mortgages were re-packaged as securities and sold to gullible buyers, based on high (but unjustified) credit ratings and insurance by companies such as AIG that were unable to cover the losses. The Obama administration declined to prosecute this fraud, but instead rescued the banks.
With cutbacks in state and local taxes, underfunded governments were not only unable to pay for social services for the needy, but they were unable to pay for basic government services, such as road repair and education. Voters punished governments for poor services by opposing budget and tax increases.
The result was more local government debt. Some city governments went bankrupt in the 2008 financial crash. Others were financially strapped. The solution was to sell off public assets to businesses at bargain prices, or to privatize government services.
Education at state universities was free or affordable when I was a young man. Now people go tens of thousands of dollars into debt, sometimes more, just to get an education. There are people reaching retirement age with their student debt unpaid.
African-Americans were hurt even more than whites in the new economy. The main paths by which black Americans advanced in the 1945-1975 period was through civil service employment and through union jobs in big manufacturing companies. Just as the civil rights revolution made it possible for them to take advantage of these opportunities, the new economic model started to shut them down.
What is the answer? I don’t see there is any one answer.
Leopold advocates, among other things, state-owned public banks, stronger labor unions, minimum wage and benefits laws, a maximum wage law (I doubt this is feasible), a single-payer health system, free public higher education and a government jobs program. You can read his book for details.
I would add prosecution of financial fraud, a breakup of the “too big to fail” banks and enforcement of the anti-trust laws. The important thing is not any specific reform, but a recognition that a low wages, low taxes and low regulation are not the keys to economic growth, and that investment in debt is not the key to economic growth.
Runaway Inequality Is Ripping Us Apart, an interview of Les Leopold by Mark Karlin for Truthout. If you read just one of these linked articles, I recommend this one. (Hat tip to Bill Harvey).
Economic Elites Will Only Give Up Power When Forced to Do So, an excerpt from Runaway Inequality on Truthout.
Why Does America Have More Prisoners Than Any Police State?, an excerpt from Runaway Inequality on AlterNet.
10 Shocking Economic Facts That Power the Sanders Insurgency by Les Leopold for AlterNet.
The Finance Industry Is Gorging Itself on Your Future—The Trend Lines Will Blow You Away by Les Leopold for AlterNet.
How America’s Wealthy Stole the American Dream and Cashed It in at an Offshore Bank by Les Leopold for AlterNet.