The Spectacular, Sudden Crash of the Global Economy

By Joshua Holland, AlterNet. Posted February 24, 2009.

The same hucksters sold a similar bill of goods to the developing world. Look outward, they said, build export economies and turn those peasants into factory line workers. Sign treaties forcing governments to let multinationals move goods and capital freely, keep their regulators out of the way of Big Business’s profits and prosperity will surely follow. Most governments adhered to this pro-corporate orthodoxy, slashing taxes on foreign companies and scrapping various controls on foreign investment. Largely unregulated “free trade” zones proliferated along the world’s significant shipping routes.  

The result was an explosion in international trade and a distinct increase in economic inequality in both poorer and richer countries. 

Among the wealthy countries, nowhere was this truer than in the United States, with its fealty to a mythic “free market” and its elites’ scorn for a robust safety net. After union-busting, global trade deals have done the most damage to workers’ bargaining power. Whereas companies used to negotiate with their employees in relatively good faith, those negotiations are now overshadowed by the threat -- ubiquitous in labor disputes today -- to simply move the whole plant to Mexico or China. 

The result was an illusion of prosperity. Corporate profits rose (in 2004, corporate profits took the largest share of national income since they started tracking the data in 1929 and wages took the smallest), and high earners did very well too. When the oil shock hit in 1973, those in the top one percent of the income ladder took in just over 9 percent of the nation’s income; by 2006, they grabbed almost 23 percent. In the intervening years, their average incomes more than tripled (Excel file).  

The rest of us didn’t do as well. In 1973, the bottom 90 percent of the economic pile -- most of us -- shared two-thirds of the nation’s income; by 2006, we got half. If you take off the top ten percent of the income ladder, the rest of the country in 2006 earned, on average, 2 percent less than they did 30 plus years earlier, despite the fact that the economy as a whole had grown by 160 percent over that time.  

But we continued to buy; it's become almost a cliché to say that American consumerism is the engine of the global economy.

How did we do it with incomes stagnating? First, women entered the workforce in huge numbers, transforming the “typical” single-breadwinner family into a two-earner household. (Between 1955 and 2002, the percentage of working-age women who had jobs outside the home almost doubled.) 

After that, we started financing our lifestyles through debt -- mounds of it. Consumer debt blossomed; trade deficits (which are ultimately financed by debt) exploded and the government started running big budget deficits year in an year out. In the period after World War Two, while wages were rising along with the overall economy, Americans socked away over 10 percent of the nation’s income in savings. But in the 1980s, that began to decline -- the savings rate fell from 11 percent in the 1960s and ‘70s, to 7 percent in the 1980s, and by 2005, it stood at just one percent (household savings that year were actually in negative territory). 

After the collapse of the dot-com bubble and the recession that followed it, the economic “expansion” of the Bush era was the first on record in which median incomes never got back to where they were before the crash. Fortunately for Wal-Mart shoppers, a massive housing bubble was rising. Americans started financing their consumption by taking chunks of equity out of their homes. The result: in 2005, long before the housing bubble crashed, the average amount of equity Americans had in their homes was already the lowest it had ever been. 

We hear a lot of chatter about a “credit crunch” being at the root of our economic woes -- that banks aren’t lending to otherwise qualified individuals and businesses. The truth, however, is that before the housing (and stock) markets crashed, the average American household already had 20 percent more in debt than it earned in a year. 

Already deeply in the hole, when the markets crashed, consumers stopped spending, and that's fueled millions of layoffs, led to a mountain of foreclosures, and left state budgets decimated. The connection between decades of false prosperity, the piles of household debt that resulted, and the degree to which that left American families vulnerable to the bubble’s crash is not difficult to see. 

Global Illusion of Prosperity  

During the “era of globalization," massive increases in trade created a similar illusion of prosperity, masking a long-term decline in real economic growth worldwide. 

See more stories tagged with: china, us, global economy, stimulus package, financial crisis

Joshua Holland is an editor and senior writer at AlterNet.

Liked this story? Get top stories in your inbox each week from AlterNet! Sign up now »