Inside Job (2 page)

The post-crisis US recession officially ended in June 2009. Yet in the subsequent two years, during the “recovery”, median household income fell by nearly 7 percent. The official
unemployment rate in early 2012 remained over 8 percent in both the US and the UK, while the best estimates of the
real
unemployment rate ranged upwards from 12 percent. Poverty, especially
child poverty, was at record levels.

Since the crisis began, ten million Americans have spent more than six months out of work, and two million have been unemployed for more than two years. Many of the unemployed have exhausted
their benefits, and even more would have done so were it not for temporary extensions—which were agreed to by the Republicans in the US Congress only on the condition that the Democrats agree
to an expensive tax break that mostly benefits the wealthy. And the UK expects more than three million people to be registered as long-term unemployed by 2014.

Forced unemployment is damaging for anyone, but long-term unemployment is morale-breaking. Skills deteriorate, people lose their self-confidence, and many of them just give up. Long-term
unemployment also, of course, contributes to home repossessions and homelessness. There are no reliable numbers, but the homeless population is clearly rising fast.
²
Yet, the upper 1 percent of the population has continued to increase its share of total national income and wealth, to the highest levels since the late 1920s.
³

Corporate balance sheets are just fine; US-based companies, many of them with multinational reach, are sitting on two trillion dollars in cash. But governments are
not
fine. The crisis
and recession, together with the emergency spending needed to prevent a financial holocaust, caused a 50 percent increase in national debt alone. The US national
deficit
remains out of control, and many local governments have cut essential services, including education and public safety, because they are out of money.

Meanwhile, Europe is suffering from a
new,
and chronic, financial crisis driven by European government debt. The European debt problem was greatly worsened by the emergency spending that
had been needed to prevent the crisis of 2008 from causing a twenty-first-century Great Depression.

In the nations most severely affected by the European debt crisis—Greece, Ireland, Portugal, and Spain—living standards have declined sharply. By early 2012 Spain’s official
unemployment rate was 23 percent; Portugal’s unemployment rate was 12 percent; Ireland’s was 14 percent; Greece’s was 22 percent. Greece, whose prior government had hired Goldman
Sachs to help it massage its national accounts and conceal its budget deficits from the European Union, could no longer pay its $300 billion in government debt. Starting in 2011 (and as a condition
for easing the repayment terms on Greece’s debts), the European Union, the European Central Bank, and the International Monetary Fund (IMF) forced Greece to institute new taxes and draconian
cuts in public sector salaries and pensions. Greece has an enormous, hugely expensive patronage system, but it has thus far remained untouched; instead, most of the pain has been borne by the
hardworking and honest. Teachers and university professors have suffered pay cuts of 30 percent or more, unemployment has soared, and GDP declined by 6 percent in 2011. Riots broke out in the UK,
Italy, and Greece, and major protest movements arose in those countries as well as Spain, Germany, and France.
⁴

But in many ways, it is America that has changed the most, and with the widest aftershocks for the rest of the world. For most people, salaries and total household income have been flat or
declining for many years. The financial crisis, recession, and jobless “recovery” are just the latest and worst installment of a process that began many years before and has reached. In
fact, even during the artificial prosperity of
the 2001–2007 financial bubble, the wages of average workers had been flat or declining, while the incomes of the wealthy
were soaring.

No other developed country, even class-conscious Britain, comes remotely close to the extreme income and wealth inequalities of the US in 2012. Between 2001 and 2007, the years of the great
financial bubble, the top 1 percent of US households captured half of the nation’s total income growth. This is not the way it used to be; the change started in the 1980s. The top 1
percent’s share of taxable income, including capital gains, rose from 10 percent in 1980 to 23 percent in 2007. This is the same percentage as it was in 1928, and about three times the share
held by the top 1 percent during the 1950s and 1960s, when the country had far higher economic growth, and no financial crises. With the sharp drop in stock values since the financial crash, the
top 1 percent’s share fell to “only” 17 percent in 2009, but has since risen again to about 20 percent. Wealth is now even more concentrated than income in America—the
wealthiest 1 percent own about a third of the country’s total net worth, and over 40 percent of the country’s total financial wealth. This is more than twice the share held by the
entire bottom 80 percent of the population.
⁵

Consequently, not everyone has suffered over the last decade; American CEOs, the financial sector, the energy sector, lobbyists, and children of the already wealthy did just fine. Since 2000,
America’s four largest oil companies have accumulated more than $300 billion in
excess
profits, defined as profits over and above their profit rate in the prior decade. Investment
banking bonuses were similarly enormous—an estimated $150 billion over the decade. The
average
annual salary of New York bankers, which is now $390,000, stayed approximately constant
even after the sector collapsed in 2008.

The flip side of the growth in inequality is an obscene, morally indefensible decline in the fairness of society—in education, job opportunities, income, wealth, and even health and life
expectancy. With the exception of wealthy families, children today are now less educated than their parents, and will earn less money than their parents. Even
worse, the
opportunities and lives of young people are increasingly determined by how wealthy their parents are, not by their own abilities or efforts.

Many Americans no doubt still believe in the American dream, and thus “buy in” to the rhetoric and policies put forward by the political parties to nurture it (and them). One wonders
how long they can maintain that illusion, for America is transforming itself into one of the most unfair, most rigid, and least socially mobile of the industrialized countries. In the US, parental
income now has about a 50 percent weight in determining a child’s lifetime economic prospects. Germany, Sweden, and even class-ridden France are now fairer and more upwardly mobile societies
than the US—on average, parental incomes have only about a 30 percent weight in determining the next generation’s outcomes. The truly equitable, high-mobility societies are Canada,
Norway, Denmark, and Finland, where parental income accounts for only about 20 percent of a child’s lifetime earnings. Even many “developing” nations, such as Taiwan and South
Korea, now have levels of opportunity and fairness that exceed America’s. For example, someone born into a poor family in South Korea or Taiwan now has a
much
higher probability of
graduating from school, and exiting poverty, than someone born into a poor family in America. Many of these nations’ citizens also have longer life expectancies than Americans.
⁶

Now, having squandered trillions on mismanaged wars, tax cuts designed especially for the rich, a gigantic property bubble, and massive bailouts for its banks, the US government and its allies
are confronting major fiscal problems. At the same time, America’s fundamental economic competitiveness has declined severely, as its physical infrastructure, broadband services, educational
system, workforce skills, health care, and energy policies have failed to keep pace with the needs of an advanced economy—yet its policies for encouraging free enterprise are inexplicably
held as a standard. However, as we shall see later, this decline is not solely, or even primarily, a matter of money; it is a matter of policy and priorities. In some areas, insufficient government
spending
is indeed an issue. But in many areas, such as health care, the US as a society is spending far
more
than other nations, without obtaining the same
results.

The principal reason for this is that politically powerful interest groups in the US have been able to block reform: the financial services, energy, military, telecommunications, pharmaceutical,
and processed-food industries; the legal, accounting, and medical professions; and to a lesser extent, several unions—these and other groups, including, of course, lobbyists and politicians,
have ferociously resisted efforts to improve our future at their expense.

Meanwhile, both political parties are ignoring, lying about, and/or exploiting the country’s very real economic, social, and educational problems. This process is starting to generate an
additional danger: demagoguery. As America deteriorates, religious and political extremists are beginning to exploit the growing insecurity and discontent of the population. Thus far, this has
principally taken the form of attacks on the government, taxes, and social spending. However, sometimes it is also taking more extreme forms: antiscientific fundamentalist Christianity; attacks on
education, the teaching of evolution, vaccines, and scientific activity; and demonization of various groups such as immigrants, Muslims, and the poor.

Presiding over all this is an impressive, though utterly cynical, innovation on the part of American politicians: the political duopoly. Over the past quarter century, the leaders of
both
the Democratic and the Republican political parties have perfected a remarkable system for remaining in power while serving the new economic oligarchy. Both parties take in huge amounts of money,
in many forms—campaign contributions, lobbying, revolving-door hiring, favours, and special access of various kinds. Politicians in both parties enrich themselves and betray the interests of
the nation, including most of the people who vote for them. Yet both parties are still able to mobilize support because they skilfully exploit America’s cultural polarization. Republicans
warn social conservatives about the dangers of secularism, taxes, abortion, welfare, gay marriage, gun control,
and liberals. Democrats warn social liberals about the dangers
of guns, pollution, global warming, making abortion illegal, and conservatives. Both parties make a public show of how bitter their conflicts are, and how dangerous it would be for the other party
to achieve power, while both prostitute themselves to the financial sector, powerful industries, and the wealthy. Thus, the very intensity of the two parties’ differences on
“values” issues enables them to collaborate when it comes to money.

Since the 2008 financial crisis, US policy has subsidized banks and bankers enormously, while extending the Bush administration’s tax cuts for the wealthy. With their bonuses and their
industry restored, the fake humility of the bankers who begged for government assistance has now been forgotten. So, unfortunately, has the fact that when the banks were desperate and dependent in
2008 and 2009, the US government had an unparalleled opportunity to finally bring them under control—an opportunity that both the Bush and Obama governments completely wasted and ignored.
These same bankers are now among the first to warn about national deficits, to insist on more tax cuts to stay competitive, and to warn darkly that any further regulation will strangle the
“innovation” that made them rich, even as it destroyed the world economy.

But they can be expected to behave that way. Over the last thirty years, the economic interests of the top 1 percent, who now control the country’s wealth, businesses, and politics, have
diverged sharply from the rest of us.

CANOPY ECOSYSTEMS ARE
worlds of flora and fauna that occur at the tops of very tall trees and exist largely apart from the multiple biosystems layered
beneath them. They do this in part by getting the best access to sunlight, but in so doing they block the sun from reaching everything below.

The vast income accumulated by the narrow slice of super-elite at the top of the wealth pyramid has created a kind of global “canopy economy” that has lost its
connections to the nations and people they sprang from. At the very top, the most senior executives, rainmakers, and traders at global banks and corporations routinely pull down eight-figure pay
packages. These are people with four or five mansions around the world, yachts, private jet services anywhere at any time, limousines, servants, access, power. They are able to indulge any little
personal whim—like Blackstone chief Steve Schwarzman’s penchant for having $400 stone crab legs flown to him wherever he’s on holiday.

The economic impact of this inequality is now astonishingly high. The wealth and power of the new super-elite is both a clue to and a cause of our very tepid recovery from the financial crash.
Companies are wallowing in cash, but average workers don’t have money to spend. Labour productivity has improved dramatically, growing in the US by an almost unheard-of 5.4 percent in 2009.
So why won’t companies start to hire, and why are average wages declining?

In part, the answer is that the education and skills of the general population are losing two races—one with technological progress, and another with the skill levels of workers in
lower-wage nations. Education is the critical variable here. In the Internet age, one can be a high-income, full-employment nation only if most of the workforce has education and skills superior to
those available in India, China, and elsewhere at far lower wages.

But another huge reason for the decline of the economy, and of average wages, is the shifting balance of power between the new economic oligarchy, government leaders, and the rest of the
population. Investment decisions, wage rates, and government policies are determined largely by people in the canopy economy. This has two very deep consequences.