Arthur MacEwan, one of the founders of Dollars & Sense and our “Ask Dr. Dollar” columnist, wrote an article for our March/April 2009 issue explaining the origins of the financial crisis that was rocking the U.S. and global economies at the time, and that has shaped the subsequent economic recovery. The article has been included in successive editions of several of the textbooks we publish. Arthur recently wrote the following update of his original article as an Afterword to be included in the forthcoming 18th edition of Current Economic Issues. —Eds.
The article “Inequality, Power, and Ideology” was written in early 2009, as the U.S. economy was in the midst of the Great Recession. I argued that the severity of the recession was brought about by a nexus involving three factors:
- A growing concentration of political and social power in the hands of the wealthy;
- The ascendance of a perverse leave-it-to-the-market ideology which was an instrument of that power; and
- Rising economic inequality, which both resulted from and enhanced that power.
Now, in late 2014, there is reason to hope that the perverse ideology, market fundamentalism, has been somewhat weakened. However, income inequality and the concentration power in the hands of the wealthy seem to be firmly in place. Perhaps the most shocking fact about income inequality is the following: Between 2009 and 2012, as the economy grew slowly out of the recession, 116% of the income increase went to the highest income 10% of the population. Yes, that’s right, the income of the top 10% increased more than the income increase for the whole society, which means of course that the income of the rest of society, 90%, declined in this period. This decline shows up in the drop of the inflation-adjusted median household income, down 4.4% between 2009 and 2012, part of a larger picture of a 8.9% decline between just before the recession, 2007, and 2013. (We don’t yet have the figure for 2014 as of this writing.) So, yes, income distribution continues to get more unequal, after the Great Recession as before the Great Recession.
As to the concentration of power, legal developments (the Supreme Court’s decisions in the Citizens United and McCutcheon cases, in particular) have allowed virtually unlimited and often hidden expenditures in elections by wealthy individuals and corporations—as if their expenditures had not already been too large. And recent elections have underscored the importance of these outlays. Then there is the continuing power of financial institutions. While the 2010 Dodd-Frank bill provided some sections that might have curtailed that power, pressure from the financial sector has delayed or weakened the implementation of many of those sections. Indeed, regulators have recently allowed banks to move precisely in the opposite direction from some Dodd-Frank provisions—e.g., allowing mortgages to be issued with low levels of down payment.
The perverse ideology that has justified inequality and buttressed the power of the rich, however, has suffered some setbacks since 2009. This ideology of market fundamentalism has relied on generating the belief that economic inequality is not a problem: that’s just the way markets work, rewarding skills and hard work. And, besides, it isn’t inequality that is important, it’s people’s absolute level of income that matters. At least that’s how the argument went. The Occupy movement that emerged onto the scene in September of 2011, however, was the spark that ignited a growing challenge to this nonsense. The Occupy slogan of “We are the 99%” resonated with a wide spectrum of society. Although the Occupy movement itself has faded, the concern for economic inequality has grown, and, from that, there has developed a widening rejection of the idea that whatever happens through markets is OK.
Nonetheless, government action continues to be severely constrained by the power of the economic elite, which has continued to exploit the zombie-like ideas about the efficacy of markets. No significant steps have been taken that might reverse the trend of rising inequality. Indeed, government policies have both slowed the recovery from the Great Recession and contributed to the rising inequality. By failing to sufficiently use fiscal policy to stimulate the economy, the government was failing to create jobs, and job creation would have at least dampened the rising inequality trend. Without a sufficient fiscal stimulus, the Federal Reserve attempted to stimulate the economy by lowering interest rates. Yet, monetary policy in a severe recession is a weak remedy, and, what’s more, works through providing benefits to financial and other firms. Those benefits are supposed to trickle down to “ordinary people.” Also, from the bailout of the banks in 2008 to the continuing monetary policies of the Fed in late 2014, the government’s approach to aid the financial system has largely ignored any debt relief for the families enmeshed in the housing crisis.
Although the recession came to a formal end by June 2009, when GDP started to grow again, economic conditions have continued to be very poor.
With slow economic growth, unemployment remained high, falling below 8% only in late 2012 and below 6% only in September of 2014; in both 2006 and 2007, the years leading up to the Great Recession, the unemployment rate had been below 5% in every month until December 2007, which was when the Recession was beginning. Moreover, many people simply gave up looking for work, dropped out of the labor force, and were not even counted among the unemployed.
The labor-force participation rate—the percentage of the population 16 years older who are either employed or looking for work—has fallen below 63%, after running above 66% in all years since 1989.
Add to this the high levels of long-term unemployed and people working part-time who would like full-time jobs, and it is clear that the U.S. economy is not generating sufficient jobs and remains weak more than five years after the Great Recession formally ended.
Several factors contribute to an explanation of the weak recovery from the Great Recession. When economic downturns are brought about by financial crises, they tend to be more lasting because the machinery of the credit system and the confidence of lenders have been so severely damaged. Programs to relieve the dreadful damage done to millions of homeowners have been minimal, leaving families in dire straits and leaving the housing market in the doldrums; and people with high debt are reluctant to spend, further restraining economic expansion. Also, while the Great Recession developed in the United States, it spread to much of the rest of the world. Conditions in Europe, especially, have hampered full recovery in the United States.
In late 2014, on the surface, the likelihood of positive change is not auspicious. With the underlying nexus of power-ideology-inequality still in largely in place, economic life is threatened by a new crisis. Moreover, the success of the Republicans in the November 2014 elections would seem to squash possibilities for positive change. Yet, as pointed out above, the ideology of market fundamentalism, which has been both a foundation for that success and a basis for the poor economic conditions that confront the great majority of the populace, is increasingly being rejected. This ideological shift, if it can be maintained, offers a basis for positive developments. The sorts of changes advocated in this article, changes that would improve people’s lives and alter the underlying causes of the economic crisis, continue to be necessary. They also continue to be possible.
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