THE TRUTH ABOUT THE ECONOMY IN 2 MINUTES

Robert Reich describes what’s wrong with the economy in 2 minutes. His bullet points (thanks to Stephanie Kelton):

  • The economy doubles since 1980, but wages flat.  Where did the money go…
  • All (or most) of the gains went to the super rich.  And…
  • With money comes political power.  Taxes on super rich slashed, revenues evaporate.  This leads to…
  • Huge budget deficits.  Middle class agitated, fights for scraps…
  • Middle class divided.  Buying and borrowing slow.  Resulting in:
  • Anemic recovery/economy.

 

I would add one very important point that Mr. Reich misses here.  The real destruction has come in the growth of the financialization of the US economy.  Since the 1970′s when the financialization of the USA began we have seen an increasing number of would-be entrepreneurs leave productive positions for Wall Street jobs where they largely help devise ways to help separate the middle class from their savings.  As the country grew more and more wealthy in the 1980′s and 1990′s (thanks to entrepreneurs like Bill Gates) the problem compounded because the demand for Wall Street’s services expanded (higher wealth meant higher demand for protecting that wealth).  Wall Street convinces Main Street that the best way to protect their wealth is by giving it to them (2% at a time) and Main Street doesn’t know any better because they don’t (and still don’t) understand how the monetary system or the economic system in the USA actually works so they give their money to a trusted “expert”.

The result is fewer Bill Gates’s (real job producers) and more Gordon Gekkos (company destroyers).  The wealth gap grows as Wall Street’s incomes explode, Wall Street deregulates and the result is a weak middle class, rising inflation (largely thanks to the wealth disparity), a debt bubble that results from the middle class trying to sustain their standard of living (“keeping up with the Jones’s!), and ultimately a crash that turns what should have been a garden style recession into a near depression as Wall Street takes advantage of the zero collateral laws to leverage themselves up to the hilt in their never ending search for profit maximization and ultimately even greater pay.

Now we all suffer because of this cannibalization of capitalism.

 

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. Ok so the situation as it stands is that the elite (ultra rich) own the puppets in goverment (be under no illussions, they are all puppets!) in one way or another. What do the elite want? 1) Low or no taxes for themselves 2) The ability to take big profits and offload their big losses onto the middle classes (bailouts etc) 3) For the middle and lower classes to get really angry and go to the polls, throught out those useless puppets and elect some new puppets ad finitum.

    The U.S constitution addresses and solves this problem, i.e small limited goverment. It’s a fact of life that the elite will always get their puppets in goverment but as long as that goverment is small and limited then there is no way that the middle and lower classes can be completely cheated to the proportions we currently see.

    As for money, take away the ability of banks to lend out money that they do no have (i.e No fractional reserve banking).

    As for the current debt, it needs restructuring. Taleb’s idea is ok but one way or another, it needs to be purged from the system.

    Do these three things and most of the problems are solved.

    • Do you mean the government (==private sector savings) or the private/corporate debt? Which one needs restructuring?

  2. ya thats corporation driven fashicm, not because corporation hae a choice to be good or bad ones. THey just try to optimize businnes under these environemnt.
    THe end of a comound driven business cycle always ends up in a balance sheet depression. And thats the ground for all sorts of life despising political ideologies. That has always been the case and we are right heading into fashistic regime.
    We cann see this already that media is not supporting truthfinding processes anymore.
    They tell us all governments lies 1:1, instead they should investigate!
    THats the most alerting hint

  3. Productivity did not double since 1980 withen the US.
    Productivity is skewed dramatically by imported goods using the global wage arbitrage model of growth.
    This is dependent on global oil production increasing & increasing as so much energy is burned via transit in the middle of the Pacific and elsewhere.
    The financial sector farms this arbitrage and directs the surplus to New York and London.
    Every time there is a surplus crisis from the banking sectors viewpoint they reduce redundencey withen the system via “structural change”.
    A example of this is deckhands who are now paid food and not wages to maintain the efficiency but not productivity of the system.
    To declare that the States produces more wealth then it did in 1980 is farcical – It farms external wealth but its industrial base has collapsed via malinvestment.
    America could not maintain a will to replicate its precious Apollo achievement of 40 years ago ! – one of the legacy of that era is the J-2x rocket engine.
    This engine is currently being tested with just minor improvements from that era !
    Microsoft just does not cut it as a measure of industrial success – its a brand name.
    If America did not produce 50% of its own oil it would be a economic black hole.
    The MMT era has been a disaster for industrial innovation because if it maintained its hybrid Gold standard of 1971 it would be forced innovate in the pysical world rather then the financial
    Its history is chiming with Ancient Rome which although produced some innovation this could not compete with slave labour / oil equilivent

    • Deficit spending creates economic wealth (GDP) and surpluses destroy economic wealth. The amount of real wealth that is created depends on the efficiency of spending (the efficiency being limited by malinvestment).

      However there is no free lunch even with MMT.
      First commodities (which are finite in supply unlike the supply of fiat currency) will reflect excessive money supply from excessive deficit spending or other malinvestment in their price. On a real (CPI adjusted), aside from oil most are not near their real all time highs but many are greater than pre MMT prices. There are other factors working here which are difficult to separate(keeping price low are improvement from productivity/efficiency/labor which keep costs down much like we see in electronics). And increasing the cost of prices are increasing global population demand, peak resource limits and speculation (and increase money supply).

      Second the forex currency markets (of which gold I consider to be one) prices the value of one currency relative to other currency in part based on any malinvestment/excess deficit spending (money printing). This maybe part of the reason we see exchange weakness in the currency and granted there are other factors impacting the exchange rate (risk on/off trades, low interest rate policy, speculation, diversification etc). A depreciating USD means a US citizen is become poorer relative to other floating currencies even if in USD terms they have more nominal wealth than they did last year.

      There is no “free lunch” to limitless deficit spent (print money) with a fiat currency. The markets will ensure this is the case.

    • Well, mabe they do not realize it, but they have at least implemented a MMT system, haven’t they?

      InvestorX

      • There are two key pillars to MMT, 1) Operations of our current monetary system (reality); 2) Policy options available do to our monetary system (more theoretical).

        Current economists and policy personnel are basically ignorant of 1 and therefore in denial of anything to do with 2.

  4. I’m with you, CR, except for the part where you call Bill Gates an entrepreneur. Rather, he is a predator and a rentier, who has only honed in on the ideas of others to enrich himself while stifling competition–and not raising a finger to better this country. Microsoft has always been a monopolistic extractor of rents–a predator company, if you will.

    There are real entrepreneurs in this country and the world, and part of our problem is confusing people like Bill Gates with them, just because the former has made a lot of money.

    • On the other hand, nobody forced people to buy Microsoft products (alright, that’s not true anymore, with every PC you buy you pay the Windows tax). Maybe Bill Gates isn’t very innovative, but he was nevertheless a good businessman. Just look at how Ballmer runs the ship now that he’s gone…

  5. A lot of brilliant responses here, mostly agreeing with Reich. But almost everyone, in support or against, is well reasoned. Here are a couple more thoughts. First, I strongly recommend reading Comeback America by David M. Walker, former Comptroller of the United States. He provides valuable insights into how we got here and possible solutions for getting out.

    Second, for those who are opposed to Reich, and correctly identify him as a liberal (but incorrectly identify liberals as somehow unworthy), I would direct you to one of the most libertarian of market commentators, Mark Faber. In his 2000 book, Tomorrow’s Gold, he points out the danger of too much concentration of wealth. Without a strong middle class, there is insufficient markets for innovative products which we all, including the rich, like.

    And while this may have been a small point in a 2000 book by an Austrian School guy, Ariana Huffington (on the left) took it and ran hard with it in her book, Third World America.

    As for the impact on government, I suggest checking out Simon Johnston’s blog http://www.baselinescenario.com, and his recent book, Thirteen Bankers.

    All of us, liberal and conservative, are threatened by the decline of the middle class. Deficits and their reduction hurt the middle class the most. It is the middle class who’s benefits (social security, medicare, etc) that is threatened. The super rich don’t care and would like to stop paying for it. It is the middle class who carries a disproportionate share of the tax burden. If someone earning $1 million a year experiences a 4% tax increase, it does not change their life. Someone earning $10 million a year can spend less than the additional $400K they would have to pay in taxes to hire some very talented financial people to help them avoid paying the tax. Someone earning $100K per year is going to have to pay the tax. Their after tax pay is going to decline from $65K to $61K and that is going to result in fewer dinners out, less money spent on vacations, a more modest new car and/or smaller savings.

    Politics aside – the economy is better stimulated by supporting the middle class. Tax cuts help the super wealthy. Spending cuts hurt the middle class. (yes, I know, tax cuts can also help the middle class, but, clearly, this benefit has been more favorable to the super wealthy than the rest of us.)

  6. Imagine if America stayed on the Bretton Woods Gold standard model – it had leeway to multiply money over and above a tradional Gold standard but this hybrid system gave it some discipline.
    Ok 1971 – Nixon goes on Television and says we are importing oil at a increasing rate and we need to break this chain – he says his financiers gave him a easy option of tying the dollar to oil so that we can recycle the Arabian oil wealth throughout the economy but decides this is not the American way – we will remain independent.
    So he increases excise duties on foregin oil………….

    Would Carters liberlisation of the trucking industry which depended on cheap oil and subsequently created the mall monster be successful.
    Would major west and east coast cities be without high speed train service ?
    Would cities in America continue to grow outward in a unsustainable manner.
    Would domestic industry remain to service the extra income not spent on foregin oil or provide a Arab sheik with Concubines and 747 private jets ?

    Global trade is sinking vast amounts of wealth into unsustainable credit/oil farming – which does not transfer this wealth to the base economy – its lost in the ether of trade distances

    Its like a animal that has become too adapted / specialized to a certain way of life and no longer has the ability to forage in a more diverse manner.

    Efficiency in nature can drive a animal to extinction – redundencey is not necessarily more efficient but when the environment changes it becomes the most valuable of assets.
    The banks want to create more efficiency again to drive the smaller surplus back into their hands as they cannot produce wealth themselves.
    This final drive for efficiency is equilivent to a cheetah getting faster to catch a antelope – he may get faster but will then be unable to defend his catch from the Hyena.
    It seems the entire west has become too adapted to a certain way of life – it can become more effecient but this effort will be self defeating.
    It needs internal productivity and subsequent domestic trade.

  7. Producing wealth? Why innovate when you can lobby.

    Some very rich people promote high taxes since they are on Receiving End and have ways to avoid them.

    The more Government transfers money from the productive sector of the economy in to the unproductive and non competitive sector the harder it will gets for the productive labor force.

    Higher taxes should only apply to those that benefited disproportionally from the orgy of Bank bailouts and stimulus paper.

    • The wealth divide is more pronounced in Emerging Markets and the least pronounced in Japan and than Europe. US is in the middle of the pack. Does that mean it is “ok” for american’s to exploit cheap foreign labor but it is untolerable for the elite to exploit american labor?

  8. Winners control 100% of Gold medals at the Olympics.
    Thats not a problem its a motivation.
    The problem is if and when they cheat with the help of the referee “Government”

  9. Well, for once I strongly disagree with the content of your post.

    1. Economy “more than double”, but doesn’t it mean better productivity, therefore with the same salary we can get better?

    2.All gain from the economy go to super rich. Is economic gain only money? Does rich accumulate more flat screens? More corn? Would the economy be better if the government was accumulating the money?!

    3.With money comes political power. Good! Then not only government with showmen at their head have power!

    4.Budget deficit… And you posted that video?!

    5. Middle class divided. Yes, it is because of the rich, not because of monopoly and corruption… (I fled France because of those theories). I hate unions.

    6.Middle class cannot borrow anymore. WTF! You are hammering all the time (and I strongly agree with you) that leverage was the main cause of this crisis!

    7.Isn’t the over regulation and corporation action that discourage people to create new companies? I know that in Europe business is really dirty, one knows a politician, or one is an employee.

    Why don’t people just ask themselves what prevents them from being more productive? Maybe it is so much easier to be part of a big corporation and pretend to work…

  10. Just add money printing by The Fed causing inflation, and he’d have the full set!

  11. nobody is forced to buy microsoft products. nobody is forced to buy investment products. the overwhelming majority are however forced to pay taxes.
    wake up, America.

  12. Percapita real income and family income has grown significantly in real terms since 1980. Reich mentions “wages” which technically can be defined as income for hourly lower-skilled workers but it conviently ignores salaries for knowledge workers, transfer payments and self employment income. Families are smaller with more income-earners and people are healthier and living longer. Anyone who has lived during this time can tell that by looking at the more SUVs and electronic devices used by ordinary people. Today, about half of homeless people have cell phones. If most people were poorer than Disney and the entire travel, resort and entertainment businesses wouldn’t be nearly as large today. Compare this performance with the Soviet-style socialistic economies that Reich extolled back in 1980. Indeed, Reich didn’t sound so pessimistic when he was Secretary of Labor back in the 90′s. Reich’s clever soundbite here is deceptive and is designed to fool those under 30 or those who have lost their memory.

  13. Step four is a big leap and not supported by the preceding steps. Step four is “Huge budget deficits”. In the first step he said the American economy has doubled in size since 1980. He does not mention that government tax revenue has went up 500 percent since 1980 – http://www.usgovernmentrevenue.com/. So how do you get “Huge budget deficits” when revenue has increased 500 percent? It has nothing to do with the top 1% or top 10%. It’s because the government spent all that revenue and then some.

    The dots don’t connect.

  14. Ya know – I’ve stumbled on figures like 80% of the income gains since 1980 have gone to the top 2% of wage earners before. But while income per capita for the middle class may have remained relatively flat over the past 30 years, the middle class population has grown tremendously. 30 million additional people making $33k/person is $1T/year. (not sure if 30MM middle class adds over the past 30 years is accurate)

  15. How much additional revenue would flow into the treasury to help government maintain vital services, provide assistance to the poor, and fund programs to benefit the middle class (families)—if the top 1% of the wealthiest Americans paid 50 % of their income (no exemptions) versus 17% as mentioned in the Reich video (http://www.youtube.com/watch?v=JTzMqm2TwgE) ?

    How can we single out just 1 particular group? I say these are the folks that have benefited the most from our country, and our democracy which ironically they directly threaten because of their extreme wealth, and resulting political influence.

    Let them contribute back…

  16. At the most fundamental level the real problem lies with the education system. Throughout everyone’s lifespan daily decisions are made regarding how to allocate personal capital. And yet, even though this decision making will be critical to our own and our families well being, the public school system doesn’t even provide the most elemental education regarding investing, market operations, or personal finance. Even if you go on to earn a PHD in any number of areas of study, if you don’t enroll in some financial related courses in university the likelihood is you will still be financially illiterate.