Dollars and Sense

12 Rules For Spitting on the Poor

Self-help books have no politics. Indeed, in self-help books, there is, to quote Margaret Thatcher out of context, “No such thing as society.”

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Trump's Upside Down Approach to Empire

In the early months of the Trump administration, high-profile White House visits from foreign leaders from Europe, Asia, and the Middle East garnered headlines about the changing role of the United States in the world. In the context of political and economic upheaval around the globe, observers worry that, under Trump, the United States is abandoning the global leadership role it has played for decades. But the Trump administration’s response to various crises—Brexit, North Korea, Syria—paints a chaotic and often incoherent picture. Looking instead to a region long assumed to be firmly in the grasp of U.S. hegemony—Latin America—can help us understand the contours of the changes underway. It’s true that Latin America has generally been a low priority for the new president: he did recently move to roll back Obama-era changes in the relationship with Cuba, but while he made Mexico a central focus of his campaign, promising to build a border wall and tear up NAFTA, there has been little action on either front. Despite the relative disinterest in the region, however, White House visits by three Latin American heads of state—Argentina’s Mauricio Macri, Peru’s Pedro Pablo Kuczynski, and Colombia’s Juan Manuel Santos—reveal three broad ways in which U.S empire is being reconfigured under Trump.

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Even Trump's Infrastructure Plan Is a Thinly Veiled Neo-Fascist Scheme

Infrastructure investment: it’s that economic policy sweet spot that everyone loves to love.

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The Odds That the Beer You Drink Is Actually 'Craft' Are Getting Smaller and Smaller Each Year

When major beer label Budweiser announced they would rename their product “America” through the 2016 U.S. election, it raised droll hackles from a variety of observers. George Will suggested in the conservative National Review that the beer was less than fully American because it was produced by a foreign-owned firm, an irony also observed in the more liberal Washington Post. John Oliver’s HBO staff did what most US media did in 2016, and took the opportunity to give more TV time to the Trump campaign, in this case to mock Trump’s taking credit for the name change. Most commenters counted themselves clever for being aware the Bud label is foreign-owned, but all of them missed the real point: It’s not that “America” is foreign-owned, but that it’s owned by a brand-new global semi-monopoly that perfectly represents the power-mongering of neoliberal capitalism.

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It Can Happen Here

On November 8 the rise of a right-wing nationalist regime in the United States became a realistic possibility, if not now then in the coming years. Such regimes stress nationalist and patriotic themes, play upon and intensify fear of minority ethnicities and/or religions and/or other long-oppressed groups, promise to resolve festering economic problems of ordinary people, and direct the blame for such problems at a convenient scapegoat such as foreigners or immigrants rather than the real causes. Such regimes, if consolidated, invariably restrict long-established individual rights and introduce, or intensify, the use of extra-legal violent methods at home and abroad. This possibility has sent shock waves throughout U.S. society, including in the long-ruling establishment, creating a sense of chaos in which it seems anything can happen.

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Nativism: As American as Rotten Apple Pie

Why should the Palatine Boors be suffered to swarm into our settlements, and by herding together establish their languages and manners to the exclusion of ours? Why should Pennsylvania, founded by the English, become a colony of Aliens, who will shortly be so numerous as to Germanize us instead of our Anglifying them, and will never adopt our language or customs, any more than they can acquire our complexion?
—Benjamin Franklin, “Observations Concerning the Increase of Mankind” (1751)

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Enforcement of Puerto Rico’s Colonial Debt Pushes Out Young Workers

At least 23 of the 49 people killed in the mass shooting that took place at Pulse nightclub in Orlando on June 12 were born in Puerto Rico. While the horrendous hate crime targeted LGBT people of all ethnicities, the large proportion of island-born casualties is not surprising, as the central Florida city has become a preferred destination of Puerto Rican migrants over the past two decades. Steadily growing since the onset of the island’s current “fiscal” crisis in 2006, yearly out-migration from Puerto Rico now surpasses that of the 1950s. The island’s total population has begun to decline for the first time in its history.

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It Pays to Be White

By every socioeconomic measure, there is an undeniable race-based hierarchy in the United States—with black Americans sitting at or near the bottom. In 2014, the share of black adults (at least 25 years old) with bachelor’s or advanced degrees (22 percent) is notably lower than their white counterparts (32 percent). The official unemployment rate for black workers is persistently double that of white workers: in 2015, 9.7 percent vs. 4.3 percent. Also in 2015, the African-American poverty rate (26.2 percent) stood at more than double that among white Americans (10.1 percent). Black Americans account for 38 percent of the prison population, nearly three times their share of the U.S. population. White Americans, in contrast, account for 59 percent of U.S. prisoners, under-representing their 77 percent population share.

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Krugman Attacks on Bernie's Agenda Called 'Highly Misleading' by a Leading Progressive Economist

In his recent New York Times opinion column, "Sanders Over the Edge" (4/8/16), economist Paul Krugman offers his readers a basketful of misinformation on important economic matters about which he should - and probably does - know better. The column contains a large number of snipes and a great deal of innuendo against Bernie Sanders and his supporters, but here I focus on his claims about "Too Big To Fail" (TBTF) banks, their role - non-role, according to Krugman -  in the financial crisis, and Sanders' understanding of the policy tools available to deal with them. Krugman's claims about these issues are misleading, almost certainly wrong, and, in my view, call into question the credibility of his New York Times column as a source of economic information and analysis.

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Here's How 7 of Bernie's Economic Proposals Would Radically Improve the Majority of Americans' Lives

No one should be surprised by the popular support that Sen. Bernie Sanders (I-Vt.) has attracted in his run for president as a democratic socialist. Nor should we be surprised that he has drawn attacks charging that his policies will bankrupt the United States. Sanders’ proposals for infrastructure, early-childhood education, higher education, youth employment, family leave, private pensions, and Social Security would total over $3.8 trillion over 10 years. While this is a large number, it would be barely 6% of federal spending for 2017-2026.

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How Bernie Sanders' Solutions Would Dramatically Improve Wages, Poverty and Inequality

Senator Bernie Sanders has proposed an ambitious program of social reform, including regulatory changes to raise wages and protect workers’ rights, progressive tax reforms, and universal health insurance (Improved Medicare for All). Taken together, these policies would not only dramatically increase employment and national income, but would also raise wages, reduce poverty, and narrow the gap between rich and poor Americans.

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What Is the Worst Place in the U.S. to Be Black?

Xavier Thomas rode the bus to school growing up. He and a handful of other African-American kids from Milwaukee were part of the state’s school desegregation effort, known as the Chapter 220 Program, and would dutifully ride out of the city five days a week to attend the mostly white Wauwatosa East High School in the very white suburb of Wauwatosa, Wisc.

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Why We Should Worry About Big Ag's Privatization of Seeds

For most of history, farmers have had control over their seeds: saving, sharing, and replanting them with freedom. Developments in the course of the 20th century, however, have greatly eroded this autonomy. Legal changes, ranging from the Plant Variety Protection Act (1970) in the United States to the World Trade Organization's Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), have systematically eroded farmers' rights to save seeds for future use. By the end of 2012, Monsanto had sued 410 farmers and 56 small farm businesses in the United States for patent infringement, winning over $23 million in settlements. Here, we describe some of the key developments further intensifying corporate control over the food system. It is not, however, all bleak news. Civil society groups are using everything from grassroots protest to open-source licensing to ensure that the enclosure and privatization of seeds comes to an end.

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Meet the African Country That's Throwing Free Land to Foreign Investors at a Staggering Rate

I introduced myself to Luis Sitoe, economic adviser to Mozambique’s minister of agriculture, and explained that I’d spent the last two weeks in his country researching the ProSAVANA project, decried as the largest land grab in Africa. This ambitious Brazil-Japan-Mozambique development project was slated to turn 35 million hectares (over 85 million acres) of Mozambique’s supposedly unoccupied savannah lands into industrial-scale soybean farms modeled on—and with capital from—Brazil’s savannah lands in its own southern Cerrado region.

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Why Corporate Industrial Agriculture Has Made the Quality of Rural Life in America a Lot Worse

Americans are being subjected to an ongoing multimillion-dollar propaganda campaign designed to “increase confidence and trust in today’s agriculture.” Food Dialogues, just one example of this broader trend, is a campaign sponsored by the U.S. Farmers and Ranchers Alliance—an industry organization whose funders and board members include Monsanto, DuPont, and John Deere. The campaign features the “faces of farming and ranching”—articulate, attractive young farmers, obviously chosen to put the best possible face on the increasingly ugly business of industrial agriculture, which dominates our food- production system.

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Why Corporate Pursuit of Power is Even More Dangerous Than Pursuit of Profits

Do corporations seek to maximize profits? Or do they seek to maximize power? The two may be complementary—wealth begets power, power begets wealth—but they’re not the same. One important difference is that profits can come from an expanding economic “pie,” whereas the size of the power pie is fixed. Power is a zero-sum game: more for me means less for you. And for corporations, the pursuit of power sometimes trumps the pursuit of profits.

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Pot Economics: What's the Future of the American Marijuana Market?

In November 2012, voters in Colorado and Washington state made historic decisions to legalize marijuana for recreational sale and use, flying in the face of anti-pot moralists, drug warriors, and a century’s worth of prohibitionist policy. At the start of this year, these policies began to take effect, with pot shops opening for business for the first time on this side of the Atlantic.

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Enough of This McJobs Economy - Low Wages for Fast Food Workers Stink; We're Not Lovin' It

There’s a line in Johnny Paycheck’s 1977 hit song that goes “I’d give the shirt right off my back, if I had the guts to say ... Take this job and shove it, I ain’t working here no more.” In the past year, fast-food, retail, and warehouse workers have shown they do have the guts—but instead of quitting, they’re fighting back. From New York to California they’re taking to the streets. They’re fighting for a living wage, for respect from their bosses, and in some cases, for the right to form a union.

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America Has a Triple-Decker Jobs Crisis

If you hear somebody talking about the U.S. “jobs problem,” ask them which one they mean. Let’s talk about three: First, even as unemployment has inched down, the economy has created barely enough jobs to match population growth. Second, this enormous labor-market “slack” has stifled workers’ bargaining power and kept wages low. Third, even with a “tighter” labor market, workers would still be in a weak bargaining position due to the policies of the last thirty-some years, which have undermined unions, the welfare state, and labor-market regulation.

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Frackonomics: Why the Economics of the Gas Boom Doesn't Add Up

Between 1868 and 1969, Cleveland’s Cuyahoga river caught fire at least ten times, including one blaze that reached the Standard Oil refinery where storage tanks detonated. Ultimately, the seemingly impossible and unnatural phenomenon of burning water came to represent the dangers of unregulated industrial development and generated popular support for the environmental laws of the 1970s, including the Clean Water Act and the Safe Drinking Water Act.

Today the unsettling sight of burning water has returned, from a new industry that is exempt from both these laws. In homes near installations using the drilling technique known as hydraulic fracturing, or “fracking,” the tap water has been known to ignite with the touch of a lighter. The industry is relatively new, so the scientific literature yields only tentative results and provisional research conclusions. But the early research suggests fracking has serious negative consequences for public health and local ecology, from flaming tap water to toxic chemicals to ground tremors. Industry spokesmen insist that the negative side-effects of fracking are insignificant. But there’s one positive side-effect everyone should be able to agree upon: fracking is an ideal vehicle for explaining key economic concepts of market failure and market power, including externalities, asymmetrical information, and regulatory capture, along with brand-new ones, like science capture. Let’s start with the firewater.

Liar Liar, Taps on Fire

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One in Three Americans is Poor - And Getting Little Relief

In 1995, a blue-ribbon panel of poverty experts selected by the National Academy of the Sciences (NAS) told us that the “current U.S. measure of poverty is demonstrably flawed judged by today’s knowledge; it needs to be replaced.” Critics have long pointed out shortcomings including the failure to adequately account for the effects of “safety net” programs and insensitivity to differences in the cost of living between different places.

The Census Bureau, the federal agency charged with publishing the official poverty numbers, has yet to replace the poverty line. However, in the last couple years it has published an alternative, the Supplemental Poverty Measure (SPM). The SPM is the product of over two decades of work to fix problems in the federal poverty line (FPL).

This new measure takes us one step forward, two steps back. On the one hand, it has some genuine improvements: The new measure makes clearer how the social safety net protects people from economic destitution. It adds basic living costs missing from the old measure. On the other hand, it does little to address the most important criticism of the poverty line: it is just too damned low. The fact that the poverty line has only now been subject to revision—50 years after the release of the first official poverty statistic—likely means that the SPM has effectively entrenched this major weakness of the official measure for another 50 years.

The 2011 official poverty rate is 15.1%. The new poverty measure presented—and missed by a wide margin—the opportunity to bring into public view how widespread the problem of poverty is for American families. If what we mean by poverty is the inability to meet one’s basic needs a more reasonable poverty line would tell us that 34% of Americans—more than one in three—are poor.

What’s in a Number?

The unemployment rate illustrates the power of official statistics. In the depths of the Great Recession, a new official statistic—the rate of underemployment, counting people working part time who want full-time work and those who have just given up on looking for work—became part of every conversation about the economy. One in six workers (17%) counted as underemployed in December 2009, a much higher number than the 9.6% unemployment rate. The public had not been confronted with an employment shortage that large in recent memory; it made political leaders stand up and pay attention.

The supplemental poverty measure had the potential to do the same: a more reasonable poverty line—the bottom line level of income a household needs to avoid poverty—would uncover how endemic the problem of economic deprivation is here in the United States. That could shake up policymakers and get them to prioritize anti-poverty policies in their political agendas. Just as important, a more accurate count of the poor would acknowledge the experience of those struggling mightily to put food on the table or to keep the lights on. No one wants to be treated like “just a number,” but not being counted at all is surely worse.

With a couple of years of data now available, the SPM has begun to enter into anti-poverty policy debates. Now is a good time to take a closer look at what this measure is all about. The supplemental measure makes three major improvements to the official poverty line. It accounts for differences in the cost of living between different regions. It changes the way it calculates the standard of living necessary to avoid poverty. And it accounts more fully for benefits from safety net programs.

Different Poverty Lines for Cost-of-Living Differences

Everyone knows that $10,000 in a small city like Utica, New York, can stretch a lot farther than in New York City. In Utica, the typical monthly cost of rent for a two-bedroom apartment, including utilities, was about $650 during 2008-2011. The figure for New York City? Nearly double that at $1,100. Despite this, the official poverty line has been the same regardless of geographic location.The supplemental poverty measure adjusts the poverty income threshold by differences in housing costs in metropolitan and rural areas in each state—a step entirely missing in the old measure.

We can see how these adjustments make a real difference by simply comparing the official poverty and SPM rates by region. In 2011, according to the official poverty line, the Northeast had the lowest poverty rate (13.2%), the South had the highest (16.1%), and the Midwest and the West fell in between (14.1% and 15.9%, respectively). With cost-of-living differences factored in, the regions shuffled ranks. The SPM poverty rates of the Northeast and South look a lot more alike (15.0% and 16.0%, respectively). The Midwest’s cheaper living expenses pushed its SPM rate to the lowest among the four regions (12.8%). The West, on the other hand, had an SPM rate of 20.0%, making it the highest-poverty region.

Updating Today’s Living Costs

Obviously, household expenses have changed a lot over the last half-century. The original formula used to construct the official poverty line used a straightforward rule-of-thumb calculation: minimal food expenses time three. It’s been well-documented since then that food makes up a much smaller proportion of households’ budgets, something closer to one-fifth, as new living expenses have been added (e.g., childcare, as women entered the paid workforce in droves) and the costs of other expenses ballooned (e.g., transportation and medical care).

The new poverty measure takes these other critical expenses into account by doing the following. First, the SPM income threshold tallies up necessary spending on food, clothing, shelter and utilities. The other necessary expenses like work-related child care and medical bills are deducted from a household’s resources to meet the SPM income threshold. A household is then called poor if its resources fall below the threshold.

These non-discretionary expenses clearly take a real bite out of family budgets. For example, the “costs of working” cause the SPM poverty rate to rise to nearly doubles that of the official poverty rate among full-time year-round workers from less than 3% to over 5%. Bringing the Social Safety Net into Focus

Today’s largest national anti-poverty programs operate in the blind spot of the official poverty line. These include programs like Supplemental Nutrition Assistance Program (SNAP) and the Earned Income Tax credit (EITC). The supplemental measure does us a major service by showing in no uncertain terms how our current social safety net protects people from economic destitution. The reason for this is that the official poverty measure only counts cash income and pre-tax cash benefits (e.g., Social Security, Unemployment Insurance, and Temporary Assistance to Needy Families (TANF)) towards a household’s resources to get over the poverty line. The supplemental poverty measure, on the other hand, adds to a household’s resources near-cash government subsidies—programs that help families cover their expenditures on food (e.g. SNAP and the National School Lunch program), shelter (housing assistance from HUD) and utilities (Low Income Home Energy Assistance Program (LIHEAP))—as well as after-tax income subsidies (e.g., EITC). This update is long overdue since the 1996 Personal Responsibility and Work Opportunity Reconciliation Act (a.k.a., the Welfare Reform Act) largely replaced the traditional cash assistance program AFDC with after-tax and in-kind assistance.

Here are some figures for 2011 that illustrate the impact of each of twelve different economic assistance programs. Social Security, refundable tax credits (largely EITC but also the Child Tax Credit (CTC)), and SNAP benefits do the most to reduce poverty. In the absence of Social Security, the supplemental poverty rate would be 8.3 percentage points higher, shooting up from 16.1% to over 23.8%. Without refundable tax credits, the supplemental poverty rate would rise 2.8 percentage points, up to nearly 19%, with much of the difference being in child poverty. Finally, SNAP benefits prevent poverty across households from rising 1.5 percentage points. The SPM gives us the statistical ruler by which to measure the impact of the major anti-poverty programs of the day. This is crucial information for current political feuds about falling over fiscal cliffs and hitting debt ceilings.

A Meager Supplement

Unfortunately, the new poverty measure adds all these important details to a fundamentally flawed picture of poverty.

In November 2012, the Census Bureau published, for only the second time, a national poverty rate based on the Supplemental Poverty Measure: it stood at 16.1% (for 2011), just one percentage point higher than the official poverty rate of 15.1%. Why such a small difference? The fundamental problem is that the supplementary poverty measure, in defining the poverty line, builds from basically the same level of extreme economic deprivation as the old measure.

In an apples-to-apples comparison (see sidebar), the new supplemental measure effectively represents a poverty line roughly 30% higher than the official poverty income threshold for a family of four. For 2011, the official four-person poverty line was $22,800, an adjusted SPM income threshold—one that can be directly compared to the FPL—is about $30,500. Unfortunately, the NAS panel of poverty experts appears to have taken an arbitrarily conservative approach to setting poverty income threshold. Reasonably enough, NAS panel uses as their starting point how much households spend on the four essential items: food, clothing, shelter, and utilities. A self-proclaimed “judgment call,” they choose what they call a “reasonable range” of expenditures to mark poverty. What’s odd is that their judgment leans back toward the official poverty line – the measure they referred to as “demonstrably flawed.”

To justify this amount they show how their spending levels fall within the range of two other “expert budgets” (i.e., poverty income thresholds) in the poverty research. What they do not explain is why, among the ten alternative income thresholds they review in detail, they focus on two of the lower ones. In fact, one of these two income thresholds they describe as an “outlier at the low end.” The range of the ten thresholds actually spans between 9% and 53% more than the official poverty line; their recommended range for the threshold falls between 14% and 33% above the official poverty line.

Regardless of the NAS panel’s intention, the Inter-agency Technical Working group (ITWG) tasked with the job of producing the new poverty measure adopted the middle point of this “reasonable range” to establish the initial threshold for the revised poverty line. This conflicts with what we know about the level of economic deprivation that households experience in the range of the federal poverty line. In a 1999 book Hardship in America, researchers Heather Boushey, Chauna Brocht, Bethney Gunderson, and Jared Bernstein examined the rates and levels of economic hardship among officially poor households (with incomes less than the poverty line), near-poor households (with incomes between the poverty line and twice the poverty line), and not poor households (with incomes more than twice the poverty line).

As expected, they found high rates of economic distress among households classified as “officially poor.” For example, in 1996, 29% of poor households experienced one or more “critical” hardships such as missing meals, not getting necessary medical care, and having their utilities disconnected. Near-poor households experienced these types of economic crises only a little less frequently (25%). Only when households achieved incomes above twice the poverty line did the incidence of these economic problems fall substantially—down to 11%. (Unfortunately, the survey data on which the study was based have been discontinued, so more up-to-date figures are unavailable.) This pattern repeats for “serious” hardships that include being worried about having enough food, using the ER for health care due to lack of alternatives, and falling behind on housing payments. So if what we mean by poverty is the inability to meet one’s basic needs, then twice the poverty line—rather than the SPM’s 1.3 times—appears to be an excellent marker.

Let’s consider what the implied new poverty income threshold of $30,500 feels like for a family of four. (This, by the way, is about what a household would take in with two full-time minimum-wage jobs.)

This annual figure comes out to $585 per week. Consider a family living in a relatively low-cost area like rural Sandusky, Michigan. Based on the basic-family-budget details provided by the Economic Policy Institute, such a family typically needs to spend about $175 on food (this assumes they have a nearby grocery store, a stove at home, and the time to cook all their meals) and another $165 on rent for a two-bedroom apartment each week. This eats up 60% of their budget, leaving only about $245 to cover all other expenses. If they need childcare to work ($180), then this plus the taxes they have to pay on their earnings ($60) pretty much wipes out the rest. In other words, they have nothing left for such basic needs as telephone service, clothes, personal care products like soap and toilet paper, school supplies, out of pocket medical expenses, and transportation they may need to get to work. Would getting above this income threshold seem like escaping poverty to you?

For many federal subsidy programs this doesn’t seem like escaping poverty either. That’s why major anti-poverty programs like that National School Lunch program, Low Income Home Energy Assistance Program (LIHEAP), State Children’s Health Insurance Program (SCHIP) step in to help families with incomes up to twice the poverty line.

If the supplementary poverty measure tackled the fundamental problem of a much-too-low poverty line then it would likely draw an income threshold closer to 200% of the official poverty line (or for an apples-to-apples comparison, about 150% of the SPM income threshold). This would shift the landscape of poverty statistics and produce a poverty rate of an astounding one in three Americans.

Now What?

The Census Bureau’s supplemental measure doesn’t do what the underemployment rate did for the unemployment rate—that is, fill in the gap between the headline number and how many of us are actually falling through the cracks.

The poverty line does a poor job of telling us how many Americans are struggling to meet their basic needs. For those of us who fall into the “not poor” category but get struck with panic from time to time that we may not be able to make ends meet—with one bad medical emergency, one unexpected car repair, one unforeseen cutback in work hours—it makes us wonder, if we’re not poor or even near poor, why are we struggling so much? The official statistics betray this experience. The fact is that so many Americans are struggling because many more of us are poor or near-poor than the official statistics lead us to believe.

The official poverty line has only been changed—supplemented, that is—once since its establishment in 1963. What can we do to turn this potentially once-in-a-century reform into something more meaningful? One possibility: we should simply rename the supplemental poverty rates as the severe poverty rate. Households with economic resources below 150% of the new poverty line then can be counted as “poor.” By doing so, politicians and government officials would start to recognize what Americans have been struggling with: one-third of us are poor.

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Which Way Out of the Greek Nightmare and the Crisis of Europe?

The Greek economy has crashed, and now lies broken on the ground. The causes of the crisis are pretty well understood, but there hasn’t been enough attention to the different possible ways out. Our flight crew has shown us only one emergency exit—one that is just making things worse. But there is more than one way out of the crisis, not just the austerity being pushed by the so-called “Troika” (the International Monetary Fund (IMF), European Commission, and European Central Bank (ECB)). We need to look around a bit more, since—as they say on every flight—the nearest exit may not be right in front of us. Can an alternative catch hold? And, if so, will it be Keynesian or socialist?

The origins of Greece’s economic crisis are manifold: trade imbalances between Germany and Greece, the previous Greek government’s secret debts (hidden with the connivance of Wall Street banks), the 2007 global economic crisis, and the flawed construction of the eurozone. As the crisis has continued to deepen, it has created a social disaster: Drastic declines in public health, a rise in suicides, surging child hunger, a massive exodus of young adults, an intensification of exploitation (longer work hours and more work days per week), and the rise of the far right and its attacks on immigrants and the LGBT community. Each new austerity package brokered between the Greek government and the Troika stipulates still more government spending cuts, tax increases, or “economic reforms”—privatization, increases in the retirement age, layoffs of public-sector workers, and wage cuts for those who remain.

While there are numerous possible paths out of the crisis, the neoliberal orthodoxy has maintained that Greece had no choice but to accept austerity. The country was broke, argued Troika officials, economists, and commentators, and this tough medicine would ultimately help the Greek economy to grow again. As Mark Weisbrot of the Center for Economic and Policy Research (CEPR) put it, “[T]he EU authorities have opted to punish Greece—for various reasons, including the creditors’ own interests in punishment, their ideology, imaginary fears of inflation, and to prevent other countries from also demanding a ‘growth option.’” By focusing on neoliberal solutions, the mainstream press controls the contours of the debate. Keynesian remedies that break with the punishment paradigm are rarely discussed, let alone socialist proposals. These may well gain more attention, however, as the crisis drags on without end.

Causes of Greece’s Deepening Crisis

Trade imbalances. Germany’s wage restraint policies and high productivity made German exports more competitive (cheaper), resulting in trade surpluses for Germany and deficits for Greece. Germany then used its surplus funds to invest in Greece and other southern European countries. As German banks shoveled out loans, Greek real estate boomed, inflation rose, their exports became less competitive, and the wealthy siphoned money abroad.

Hidden debt. To enter the eurozone in 2001, Greece’s budget deficit had to be below the threshold (3% of GDP) set by the Maastricht Treaty. In 2009 the newly elected Panhellenic Socialist Movement (PASOK) government discovered that the outgoing government had been hiding its deficits from the European authorities, with the help of credit default swaps sold to it by Goldman Sachs during 2002-06 (see box, p. 13). The country was actually facing a deficit of 12% of GDP, thanks to extravagant military spending and tax cuts for (and tax evasion by) the rich.

Global crisis. When the 2007 global economic crisis struck, Greece was perhaps the hardest-hit country. Investments soured, banks collapsed, and loans could not be repaid. Debt-financed household consumption could no longer be sustained. Firms cut back on investment spending, closed factories, and laid off workers. Output has fallen 20% since 2007, the unemployment rate is now above 25% (for youth, 58%), household incomes have fallen by more than a third in the last three years, and government debt has surpassed 175% of GDP.

The eurozone trap. Greece’s government could do little on its own to rescue its economy. With eurozone countries all using the same currency, individual countries could no longer use monetary policy to stimulate their economies (e.g., by devaluing the currency to boost exports or stimulating moderate inflation to reduce the real debt burden). Fiscal policy was also weakened by the Maastricht limits on deficits and debt, resulting in tight constraints on fiscal stimulus.

Neoliberal Solutions

Despite the fact that 30 years of neoliberalism resulted in the worst economic crisis since the Great Depression, neoliberals are undaunted and have remained intent on dishing out more of the same medicine. What they offered Greece were bailouts and haircuts (write-downs of the debt). While the country—really, the country’s banks—got bailouts, the money flowed right back to repay lenders in Germany, France, and other countries. Very little actually went to Greek workers who fell into severe poverty. The bailouts invariably came with conditions in the form of austerity, privatization (e.g., water systems, ports, etc.), mass public-sector layoffs, labor-market “flexibilization” (making it easier to fire workers), cutbacks in unemployment insurance, and tax reforms (lowering corporate taxes and raising personal income and sales taxes). In sum, the neoliberal structural- adjustment program for Greece shifted the pain onto ordinary people, rather than those most responsible for causing the crisis in the first place.

Austerity and internal devaluation. With steep cuts in government spending, neoliberal policy has been contracting the economy just when it needed to be expanded. Pro-austerity policy makers, however, professed their faith in “expansionary austerity.” Harvard economists Alberto Alesina and Silvia Ardagna claimed that austerity (especially spending cuts) could lead to the expectation of increased profits and so stimulate investment. The neoliberals also hoped to boost exports through “internal devaluation” (wage cuts, resulting in lower costs and therefore cheaper exports). An economist with Capital Economics in London claimed that Greece needed a 30–40% decline in real wages to restore competitiveness. A fall in real wages, along with the out-migration of workers, the neoliberals suggested, would allow labor markets to “clear” at a new equilibrium. Of course, they neglected to say how long this would take and how many workers would fall into poverty, get sick, or die in the process.

Meanwhile, international financial capitalists (hedge funds and private-equity firms) have been using the crisis as an opportunity to buy up state assets. The European Commission initially expected to raise €50 billion by 2015 from the privatization of state assets, now being revised downward to just over €25 billion through 2020. The magnitude of the fire sale in Greece is still five to ten times larger than that expected for Spain, Portugal, and Ireland. Domestic private companies on the brink of bankruptcy are also vulnerable. As the crisis drags on, private-equity and hedge-fund “vulture capitalists” are swooping in for cheap deals. The other neoliberal reforms—labor and pension reforms, dismantling of the welfare state, and tax reforms—will also boost private profits at the expense of workers.

Default and exit from the euro. Another possible solution was for Greece to default on its debt, and some individuals and companies actively prepared for such a scenario. A default would lift the onerous burden of debt repayment, and would relieve Greece of complying with all the conditions placed on it by the Troika. However, it would likely make future borrowing by both the public and private sectors more difficult and expensive, and so force the government to engage in some sort of austerity of its own.

Some economists on the left have been supportive of a default, and the exit from the euro and return to the drachma that would likely follow. One such advocate is Mark Weisbrot, who has argued that “a threat by Greece to jettison the euro is long overdue, and it should be prepared to carry it out.” He acknowledges there would be costs in the short term, but argues they would be less onerous “than many years of recession, stagnation, and high unemployment that the European authorities are offering.” A return to the drachma could restore one of the tools to boost export competitiveness—allowing Greece to use currency depreciation to lower the prices of its exports. In this sense, this scenario remains a neoliberal one. (Many IMF “shock therapy” programs have included currency devaluations as part of the strategy for countries to export their way out of debt.)

The process of exit, however, could be quite painful, with capital flight, bank runs, black markets, significant inflation as the cost of imports rises, and the destruction of savings. There had already been some capital flight—an estimated €72 billion left Greek banks between 2009 and 2012. Furthermore, the threat of a Greek exit created fear of contagion, with the possibility of more countries leaving the euro and even the collapse of the eurozone altogether. This might be welcomed by some Americans, who fear the euro as a possible rival to the U.S. dollar as a global reserve currency, threatening all the benefits that the privileged status of the dollar confers. But the collapse of the eurozone would add more chaos to a region already in crisis.

Keynesian Solutions

By late 2012, Keynesian proposals were finally being heard and having some impact on policymakers. Contrary to the neoliberal austerity doctrine, Keynesian solutions typically emphasize running countercyclical policies—especially expansionary fiscal policy (or fiscal “stimulus”), with deficit spending to counter the collapse in private demand. However, the Greek government is already strapped with high deficits and the interest rates demanded by international creditors have spiked to extremely high levels. Additional deficit spending would require that the ECB (or the newly established European Stability Mechanism (ESM)) intervene by directly buying Greek government bonds to bring down rates. (The ECB has been lending to private banks at low rates, to enable the banks to buy public bonds.) In any case, a Keynesian approach ideally would waive the EU’s deficit and debt limits to allow the Greek government more scope for rescuing the economy.

Alternatively, the EU could come forward with more grants and loans, in order to fund social-welfare spending, create employment, and boost demand. This kind of bailout would not go to the banks, but to the people who are suffering from unemployment, cuts in wages and pensions, and poverty. Nor would it come with all the other conditions the neoliberals have demanded (privatization, layoffs, labor-market reforms, etc). The European Investment Bank could also help stimulate new industries, such as alternative energy, and help revive old ones, such as tourism, shipping, and agriculture. In a European Union based on solidarity, the richer regions of Europe would help out poorer ones in a crisis (much as richer states in the United States make transfers to poorer ones, mostly without controversy).

The Role of Goldman Sachs

Greece was able to “hide” its deficits thanks to Goldman Sachs, which had sold financial derivatives called credit-default swaps to Greece between 2002 and 2006. The credit-default swaps operated a bit like subprime loans, enabling Greece to lower its debts on its balance sheets, but at very high borrowing rates. Goldman Sachs had sales teams selling these complicated financial instruments not just to Greece, but to many gullible municipalities and institutions throughout Europe (and the United States), who were told that these deals could lower their borrowing costs. For Greece, the loans blew up in 2008–2009, when interest rates rose and stock markets collapsed. Among those involved in these deals included Mario Draghi (now President of the ECB), who was working at the Greece desk at Goldman Sachs at the time. While these sales generated huge profits for Goldman Sachs, the costs are now being borne by ordinary Greek people in the form of punishing austerity programs. (For more on Goldman Sachs’s role, see part four of the PBS documentary “Money, Power, Wall Street.”)

Even some IMF officials have finally recognized that austerity is not working. An October 2012 IMF report admitted that the organization had underestimated the fiscal policy multiplier—a measure of how much changes in government spending and taxes will affect economic growth—and therefore the negative impact of austerity policies. By April 2013, economists at UMass-Amherst found serious mistakes in research by Harvard economists Carmen Reinhart and Kenneth Rogoff, alleging that debt-to-GDP ratios of 90% or more seriously undermine future economic growth. Reinhart and Rogoff’s claims had been widely cited by supporters of austerity for highly indebted countries. So yet another crack emerged in the pillar supporting austerity policies.

Keynesians have argued, contrary to the “internal devaluation” advocates, that the reduction in real wages just depressed aggregate demand, and made the recession deeper. Economists such as Nobel laureate Paul Krugman proposed that, instead, wages and prices be allowed to rise in the trade-surplus countries of northern Europe (Germany and the Netherlands). This would presumably make these countries’ exports less competitive, at some expense to producers of internationally traded goods, though possibly boosting domestic demand thanks to increased wages. Meanwhile, it would help level the playing field for exporters in the southern countries in crisis, and would be done without the punishing reductions in real wages demanded by the Troika. The Keynesian solution thus emphasized stimulating domestic demand through fiscal expansion in both the northern and southern European countries, as well as allowing wages and prices to rise in the northern countries.

Signs pointing in this direction began to emerge in spring 2013, when some Dutch and German trade unions won significant wage increases. In addition, the Dutch government agreed to scrap its demands for wage restraint in some sectors (such as the public sector and education) and to hold off at least until August on its demands for more austerity. Another €4.5 billion cuts had been scheduled for 2014, after the government spent €3.7 billion in January to rescue (through nationalization) one of the country’s largest banks.

Socialist Solutions

For most of the socialist parties in Greece and elsewhere in Europe, the neoliberal solution was clearly wrong-headed, as it worsened the recession to the detriment of workers while industrial and finance capitalists made out like bandits. Greece’s Panhellenic Socialist Movement (PASOK) was an exception, going along with austerity, structural reforms, and privatization. (Its acceptance of austerity lost it significant support in the 2012 elections.) Other socialists supported anything that alleviated the recession, including Keynesian prescriptions for more deficit spending, higher wages, and other policies to boost aggregate demand and improve the position of workers. Greece’s SYRIZA (a coalition of 16 left-wing parties, whose support surged in the 2012 elections) called for stopping austerity, renegotiating loan agreements, halting wage and pension cuts, restoring the minimum wage, and implementing a type of Marshall Plan-like investment drive. In many ways, these proposale resemble standard Keynesian policies—which have historically served to rescue the capitalist system, without challenging its inherent exploitative structure or vulnerability to recurrent crisis.

While Keynesian deficit-spending could alleviate the crisis in the short-term, who would ultimately bear the costs—ordinary taxpayers? Workers could end up paying for the corruption of the Greek capitalist class, who pushed through tax cuts, spent government funds in ways that mainly benefited themselves, and hid money abroad. Many socialists argued that the Greek capitalists should pay for the crisis, through increased taxes on wealth, corporate profits, and financial transactions, and the abolition of tax loopholes and havens. As SYRIZA leader Alexis Tsipras put it, “It is common knowledge among progressive politicians and activists, but also among the Troika and the Greek government, that the burden of the crisis has been carried exclusively by public and private sector workers and pensioners. This has to stop. It is time for the rich to contribute their share... .”

Slowly, the right-wing government began making gestures in this direction. In 2010, French finance minister Christine Lagarde had given a list of more than 2,000 Greeks with money in Swiss bank accounts to her Greek counterpart George Papaconstantinou, of the PASOK government. Papaconstantinou sat on it and did nothing. But in the fall of 2012 the so-called “Lagarde list” was published by the magazine Hot Doc, leading to fury among ordinary Greeks against establishment political leaders (including the PASOK “socialists”) who had failed to go after the tax dodgers. Another list of about 400 Greeks who had bought and sold property in London since 2009 was compiled by British financial authorities at the request of the current Greek government. In total, the economist Friedrich Schneider has estimated that about €120 billion of Greek assets (about 65% of GDP) were outside the country, mostly in Switzerland and Britain, but also in the United States, Singapore, and the Cayman Islands. The government also started a clamp down on corruption in past government expenditures. In the Spring of 2013, two politicians (a former defense minister and a former mayor of Thessaloniki, the country’s second-largest city) were convicted on corruption charges.

Socialists have also opposed dismantling the public sector, selling off state assets, and selling Greek firms to international private-equity firms. Instead of bailouts, many socialists have called for nationalization of the banking sector. “The banking system we envision,” SYRIZA leader Alexis Tsipras announced, “will support environmentally viable public investment and cooperative initiatives... . What we need is a banking system devoted to the public interest—not one bowing to capitalist profit. A banking system at the service of society, a banking system that serves as a pillar for growth.” While SYRIZA called for renegotiating the Greece’s public debt, it favored staying in the euro.

Cooperatives Around the World

Efforts at transforming capitalist firms into cooperatives or worker-directed enterprises can draw upon successes in the Basque Country (Spain), Argentina, Venezuela, and elsewhere. The Mondragón Cooperative Corporation, centered in the Basque country, has grown since its founding, in the 1950s, to 85,000 members working in over 300 enterprises. In Venezuela, the Chávez government promoted the development of cooperatives. The total number surged more than 100-fold, to over 100,000, between 1998 and 2006, the last year for which data are available. In Argentina, after 2001, failing enterprises were taken over (or “recovered”) by workers and turned into cooperatives. The recovered enterprises boasted a survival rate of about 93%. By 2010, 205 of these cooperatives employed a total of almost 10,000 workers.

Other socialist parties have put forth their own programs that go beyond Keynesian fiscal expansion, a more equitable tax system, and even beyond nationalizing the banks. For instance, the Alliance of the Anti-Capitalist Left (ANTARSYA) called for nationalizing banks and corporations, worker takeovers of closed factories, canceling the debt, and exiting the euro. The Communist Party of Greece (KKE) proposed a fairly traditional Marxist-Leninist program, with socialization of all the means of production and central planning for the satisfaction of social needs, but also called for disengagement from the EU and abandoning the euro. The Trotskyist Xekinima party called for nationalizing not just the largest banks, but also the largest corporations, and putting them under democratic worker control.

Those within the Marxist and libertarian left, meanwhile, have focused on turning firms, especially those facing bankruptcy, into cooperatives or worker self-directed enterprises. Firms whose boards of directors are composed of worker-representatives and whose workers participate in democratic decision-making would be less likely to distribute surpluses to overpaid CEOs or corrupt politicians and lobbyists, or to pick up and relocate to other places with lower labor costs. While worker self-directed enterprises could decide to forego wage increases or to boost productivity, in order to promote exports, such decisions would be made democratically by the workers themselves, not by capitalist employers or their representatives in government. And it would be the workers themselves who would democratically decide what to do with any increased profits that might arise from those decisions.

One Greek company that is trying to survive as a transformed worker cooperative is Vio.Me, a building materials factory in Thessaloniki. In May 2011 when the owners could no longer pay their bills and walked away, the workers decided to occupy the factory. By February 2013, after raising enough funds and community support, the workers started democratically running the company on their own. (They do not intend to buy out the owners, since the company owed the workers a significant amount of money when it abandoned the factory.) They established a worker board, controlled by workers’ general assemblies and subject to recall, to manage the factory. They also changed the business model, shifting to different suppliers, improving environmental practices, and finding new markets. Greek law currently does not allow factory occupations, so the workers are seeking the creation of a legal framework for the recuperated factory, which may enable more such efforts in the future. Vio.Me has received support from SYRIZA and the Greek Green party, from workers at recuperated factories in Argentina (see box), as well as from academics and political activists worldwide.

Whither Europe and the Euro?

As Europe faces this ongoing crisis, it is also grappling with its identity. On the right are the neoliberal attempts to dismantle the welfare state and create a Europe that works for corporations and the wealthy—a capitalist Europe more like the United States. In the center are Keynesian calls to keep the EU intact, with stronger Europe-wide governance and institutions. These involve greater fiscal integration, with a European Treasury, eurobonds (rather than separate bonds for each country), European-wide banking regulations, etc. Keynesians also call for softening the austerity policies on Greece and other countries.

Proposals for European consolidation have inspired criticism and apprehension on both the far right and far left. Some on the far right are calling for exiting the euro, trumpeting nationalism and a return to the nation state. The left, meanwhile, voices concern about the emerging power of the European parliament in Brussels, with its highly paid politicians, bureaucrats, lobbyists, etc. who are able to pass legislation favoring corporations at the expense of workers. Unlike the far right however, the left has proposed a vision for another possible united Europe—one based on social cohesion and inclusion, cooperation and solidarity, rather than on competition and corporate dominance. In particular, socialists call for replacing the capitalist structure of Europe with one that is democratic, participatory, and embodies a socialist economy, with worker protections and participation at all levels of economic and political decision-making. This may very well be the best hope for Europe to escape its current death spiral, which has it living in terror of what the next stage may bring.

SOURCES: Amitabh Pal, “Austerity is Killing Europe,” Common Dreams, April 27, 2012 (; Niki Kitsantonis, “Greece Resumes Talks With Creditors,” New York Times, April 4, 2013 (; Mark Weisbrot, “Where I Part from Paul Krugman on Greece and the Euro,” The Guardian, May 13, 2011 (; Alberto F. Alesina and Silvia Ardagna, “Large Changes in Fiscal Policy: Taxes Versus Spending,” National Bureau of Economic Research (NBER), October 2009 (; Geert Reuten, “From a false to a ‘genuine’ EMU,” Globalinfo, Oct. 22, 2012 (; David Jolly, “Greek Economy Shrank 6.2% in Second Quarter,” New York Times, Aug. 13, 2012; Joseph Zacune, “Privatizing Europe: Using the Crisis to Entrench Neoliberalism,” Transnational Institute, March 2013 (; Mark Weisbrot, “Why Greece Should Reject the Euro,” New York Times, May 9, 2011; Ronald Jannsen, “Blame It on the Multiplier,” Social Europe Journal, Oct. 16, 2012 (; Landon Thomas, Jr., and David Jolly, “Despite Push for Austerity, European Debt Has Soared,” New York Times, Oct. 22, 2012; “German Public sector workers win above-inflation pay rise,” Reuters, March 9, 2013 (; Liz Alderman, “Greek Businesses Fear Possible Return to Drachma,” New York Times, May 22, 2012; Landon Thomas, Jr., “In Greece, Taking Aim at Wealthy Tax Dodgers,” New York Times, Nov. 11, 2012; Rachel Donadio and Liz Alderman, “List of Swiss Accounts Turns Up the Heat in Greece,” New York Times, Oct. 27, 2012; Landon Thomas, Jr., “Greece Seeks Taxes From Wealthy With Cash Havens in London,” New York Times, Sept. 27, 2012; Niki Kitsantonis, “Ex-Mayor in Greece Gets Life in Prison for Embezzlement,” New York Times, Feb. 27, 2013; Sam Bollier, “A guide to Greece’s political parties,” Al Jazeera, May 1, 2012 (; Alexis Tsipras, “Syriza London: Public talk,” March 16, 2013 (; Amalia Loizidou, “What way out for Greece and the working class in Europe,” Committee for a Workers’ International (CWI), March 19, 2013 (; Richard Wolff, “Yes, there is an alternative to capitalism: Mondragón shows the way,” The Guardian, June 24, 2012 (; Peter Ranis, “Occupy Wall Street: An Opening to Worker-Occupation of Factories and Enterprises in the U.S.,” MRzine, Sept. 11, 2011 (; solidarity website (


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Rising Productivity, Wages, and Consumption

From 1820 to around 1970, 150 years, the average productivity of American workers went up each year. The average workers produced more stuff every year than they did the year before. They were trained better, they had more machines, and they had better machines. So productivity went up every year.

And, over this period of time, the wages of American workers rose every decade. Every decade, real wages—the amount of money you get in relation to the prices you pay for the things you use your money for—were higher than the decade before. Profits also went up.

The American working class enjoyed 150 years of rising consumption, so it’s not surprising that it would choose to define its own self-worth, measure its own success in life, according to the standard of consumption. Americans began to think of themselves as successful if they lived in the right neighborhood, drove the right car, wore the right outfit, went on the right vacation.

Wages and Productivity Diverge

But in the 1970s, the world changed for the American working class in ways that it hasn’t come to terms with—at all. Real wages stopped going up. As U.S. corporations moved operations abroad to take advantage of lower wages and higher profits and as they replaced workers with machines (and especially computers), those who lost their jobs were soon willing to work even if their wages stopped rising. So real wages trended down a little bit. The real hourly wage of a worker in the 1970s was higher than what it is today. What you get for an hour of work, in goods and services, is less now that what your parents got.

Meanwhile, productivity kept going up. If what the employer gets from each worker keeps going up, but what you give to each worker does not, then the difference becomes bigger, and bigger, and bigger. Employers’ profits have gone wild, and all the people who get their fingers on employers profits—the professionals who sing the songs they like to hear, the shareholders who get a piece of the action on each company’s profits—have enjoyed a bonanza over the last thirty years.

The only thing more profitable than simply making the money off the worker is handling this exploding bundle of profits—packaging and repackaging it, lending it and borrowing it, and inventing new mechanisms for doing all that. That’s called the finance industry, and they have stumbled all over themselves to get a hold of a piece of this immense pot of profit.

The Working-Class Borrowing Binge

What did the working class do? What happens to a population committed to measuring people’s success by the amount of consumption they could afford when the means they had always had to achieve it, rising wages, stop? They can go through a trauma right then and there: “We can’t anymore—it’s over.” Most people didn’t do that. They found other ways.

Americans undertook more work. People took a second or third job. The number of hours per year worked by the average American worker has risen by about 20 percent since the 1970s. By comparison, in Germany, France, and Italy, the number of hours worked per year per worker has dropped 20 percent. American workers began to work to a level of exhaustion. They sent more family members—and especially women—out to work. This enlarged supply of workers meant that employers could find plenty of employees without having to offer higher pay. Yet, with more family members out working, new kinds of costs and problems hit American families. The woman who goes out to work needs new outfits. In our society, she probably needs another car. With women exhausted from jobs outside and continued work demands inside households, with families stressed by exhaustion and mounting bills, interpersonal tensions mounted and brought new costs: daycare, psychotherapy, drugs. Such extra costs neutralized the extra income, so it did not solve the problem.

The American working class had to do a second thing to keep its consumption levels rising. It went on the greatest binge of borrowing in the history of any working class in any country at any time. Members of the business community began to realize that they had a fantastic double opportunity. They could get the profits from flat wages and rising productivity, and then they could turn to the working class traumatized by the inability to have rising consumption, and give them the means to consume more. So instead of paying your workers a wage, you’re going to lend them the money—so they have to pay it back to you! With interest!

That solved the problem. For a while, employers could pay the workers the same or less, and instead of creating the usual problems for capitalism—workers without enough income to buy all the output their increased productivity yields—rising worker debt seemed magical. Workers could consume ever more; profits exploding in every category. Underneath the magic, however, there were workers who were completely exhausted, whose families were falling apart, and who were now ridden with anxiety because their rising debts were unsustainable. This was a system built to fail, to reach its end when the combination of physical exhaustion and emotional anxiety from the debt made people unable to continue. Those people are, by the millions, walking away from those obligations, and the house of cards comes down.

If you put together (a) the desperation of the American working class and (b) the efforts of the finance industry to scrounge out every conceivable borrower, the idea that the banks would end up lending money to people who couldn’t pay it back is not a tough call. The system, however, was premised on the idea that that would not happen, and when it happened nobody was prepared.

Two Responses to the Crisis: Conservative and Liberal

The conservatives these days are in a tough spot. The story about how markets and private enterprise interact to produce wonderful outcomes is, even for them these days, a cause for gagging. Of course, ever resourceful, there are conservatives who will rise to the occasion, sort of like dead fish. They rattle off twenty things the government did over the last twenty years, which indeed it did, and draw a line from those things the government did and this disaster now, to reach the conclusion that the reason we have this problem now is too much government intervention. These days they get nowhere. Even the mainstream press has a hard time with this stuff.

What about the liberals and many leftists too? They seem to favor regulation. They think the problem was that the banks weren’t regulated, that credit-rating companies weren’t regulated, that the Federal Reserve didn’t regulate better, or differently, or more, or something. Salaries should be regulated to not be so high. Greed should be regulated. I find this astonishing and depressing.

In the 1930s, the last time we had capitalism hitting the fan in this way, we produced a lot of regulation. Social Security didn’t exist before then. Unemployment insurance didn’t exist before then. Banks were told: you can do this, but you can’t do that. Insurance companies were told: you can do that, but you can’t do this. They limited what the board of directors of a corporation could do ten ways to Sunday. They taxed them. They did all sorts of things that annoyed, bothered, and troubled boards of directors because the regulations impeded the boards’ efforts to grow their companies and make money for the shareholders who elected them.

The Self-Destruct Button on Liberal Regulation

You don’t need to be a great genius to understand that the boards of directors encumbered by all these regulations would have a very strong incentive to evade them, to undermine them, and, if possible, to get rid of them. Indeed, the boards went to work on that project as soon as the regulations were passed. The crucial fact about the regulations imposed on business in the 1930s is that they did not take away from the boards of directors the freedom or the incentives or the opportunities to undo all the regulations and reforms. The regulations left in place an institution devoted to their undoing. But that wasn’t the worst of it. They also left in place boards of directors who, as the first appropriators of all the profits, had the resources to undo the regulations. This peculiar system of regulation had a built-in self-destruct button.

Over the last thirty years, the boards of directors of the United States’ larger corporations have used their profits to buy the President and the Congress, to buy the public media, and to wage a systematic campaign, from 1945 to 1975, to evade the regulations, and, after 1975, to get rid of them. And it worked. That’s why we’re here now. And if you impose another set of regulations along the lines liberals propose, not only are you going to have the same history, but you’re going to have the same history faster. The right wing in America, the business community, has spent the last fifty years perfecting every technique that is known to turn the population against regulation. And they’re going to go right to work to do it again, and they’ll do it better, and they’ll do it faster.

A Socialist Alternative

So what do we do? Let’s regulate, by all means. Let’s try to make a reasonable economic system that doesn’t allow the grotesque abuses we’ve seen in recent decades. But let’s not reproduce the self-destruct button. This time the change has to include the following: The people in every enterprise who do the work of that enterprise, will become collectively their own board of directors. For the first time in American history, the people who depend on the survival of those regulations will be in the position of receiving the profits of their own work and using them to make the regulations succeed rather than sabotaging them.

This proposal for workers to collectively become their own board of directors also democratizes the enterprise. The people who work in an enterprise, the front line of those who have to live with what it does, where it goes, how it uses its wealth, they should be the people who have influence over the decisions it makes. That’s democracy.

Maybe we could even extend this argument to democracy in our political life, which leaves a little to be desired—some people call it a “formal” democracy, that isn’t real. Maybe the problem all along has been that you can’t have a real democracy politically if you don’t have a real democracy underpinning it economically. If the workers are not in charge of their work situations, five days a week, 9 to 5, the major time of their adult lives, then how much aptitude and how much appetite are they going to have to control their political life? Maybe we need the democracy of economics, not just to prevent the regulations from being undone, but also to realize the political objectives of democracy.

The Bailout Has to Come With Regulation

Dear Dr. Dollar:
Isn't the "bailout" of Wall Street like having a rotten tooth extracted? The extraction is very unpleasant, but it beats the alternative. Even if the dentist charges an unreasonably high fee, I am still going to pay and have the job done. Later I will worry about taking better care of my teeth. So shouldn't people quit complaining about the bailout, suck it up, and get the job done? -- Peter Wagner, Weston, Mass.

I do like thinking about the mess in the financial markets as a "rotten tooth," for something is certainly "rotten" in the current situation. And there is a way in which the analogy is useful: just as we are heavily dependent on the dentist to deal with our teeth, we are heavily dependent on the banks and other financial institutions for the operation of our economy. But if we are going to use the dentist-finance analogy, we need to take it a bit further.

In particular, if the dentist who tells me I need my tooth yanked out in an emergency extraction is the same dentist who for years has been telling me that my teeth are fine, then I get suspicious. This dentist has been making money from me all along, and now, when the crisis of a rotten tooth emerges, the dentist stands to make more money while I incur the pain. The situation is similar to the bailout of the financial system: the banks keep their profits in good times, but the losses are imposed on the rest of us in bad times. At the very least, when the people responsible for a problem -- dentists or bankers -- tell me to solve the problem in a way that benefits them, I want to get a second opinion, figure out the options, and proceed with caution.

As we have been learning in recent weeks, there is more than one option for dealing with the "rotten tooth." In part because of public pressure (i.e., complaining), the Treasury shifted away from its initial plan to buy up the bad assets in the financial system and is now taking partial ownership of the banks by providing them with capital. Not only is the second plan more likely to work (in the sense of preventing a breakdown of the financial system), but it is also more likely to cost the rest of us less over the long run (because as the banks recover and start to earn profits, the government will share in those profits).

There are other options that the U.S. government might follow as well. For example, the main reason we care about what happens to the banks is that their failures could spread to the rest of us, causing a severe depression. But instead of working simply from the top down, the U.S. government would do well to work from the bottom up -- by focusing on the problems of people losing their homes due to foreclosures and by providing a large economic stimulus program through spending on schools, infrastructure, health care, and other real economic needs.

And, just as with my tooth, if the problem really did arise because of the bad practices of those who were supposed to take care of the situation (wasn't this the dentist who had been telling me all was well?), then we should give some immediate attention to proper regulation. The current financial crisis could have been avoided but for the deregulation craze of recent decades. Fixing the deregulation disaster should not be put off to the distant future.

Regulation is not a panacea. There can certainly be bad regulations, sometimes brought about by the firms themselves in an effort to use regulation to secure their power and profits. Establishing good regulations is a constant battle, as the large firms devote huge amounts of their resources to get deregulation or to shape regulation in their favor. Yet without regulation, markets -- especially financial markets -- are prone to instability, and at times that instability can have severe impacts on the rest of us.

While the dentist analogy may be incomplete, it does bring out a very important point. Because we are excessively dependent on the operations of a relatively small number of very large firms, when they get in trouble, we can be forced to bail them out. Not a good situation. Indeed, the situation is made worse as the current crisis is leading to more consolidation of the banking industry; with the encouragement of the Federal Reserve and the Treasury, big banks are being taken over by even bigger banks. At the very least, if we are going to allow some firms to become "too big to fail," then we would do well to watch them pretty carefully -- that is, to regulate them and thus do all we can to prevent them from operating in ways that put us all at risk.

[Full disclosure: Last month I had a tooth extracted and it wasn't all that bad -- certainly not as painful as the current Wall Street bailout! -- A.M.]