The New American Economy

by Tom Suhrbur

Deindustrialization! Globalization! Post-industrial economy! Service economy! These are just a few phases used to describe the radical transformation of the U.S. economy over the last 35 years.

From the earliest days of the Industrial Revolution, manufacturing drove the U.S. economy. Steel, railroad, textiles, automobiles and countless other enterprises made the U.S. the leading industrial power of the world in the 20th Century. Industry also gave rise to labor unions. Following WWII, a third of the workforce mostly in the private sector was unionized. Strong labor unions shifted income from capital to labor. The U.S. working class enjoyed the highest standard of living in the world in the 1960s.

Today, a growing portion of American business profits is derived from financial transactions instead of manufacturing. In 1947, the U.S. financial services industry comprised only 10% of total non-farm business profits. Today more than half of all profits are derived from investment, trading, rent, student loans, mortgages, brokerage, credit cards and other financial transactions.

In 1975, the total value of stock trading in the US was $171 billion – less than 5% of the Gross Domestic Product (GDP); in 2014, it increased to almost $27 trillion (about 1.5 times or GDP). Besides stock market trading, there is a largely unregulated market in over the counter trading (OTC) in equity-based derivatives include forwards, futures, options, swaps, and variations of these such as synthetic collateralized debt obligations. In 2010, the value of the derivative market was estimated at $21 trillion. Speculation, in effect gambling, guides much of this trading activity. Day traders, hedge fund managers and high frequency traders have turn Wall Street into the biggest casino on earth. Managers of private equity firms and hedge funds become mega-millionaires and billionaires almost overnight. Lord Turner, UK’s senior financial regulator, dubbed this speculation as “socially useless.” So powerful is the financial services sector that, when the economy crashed in 2008 as a result of the reckless behavior, no one was prosecuted. Instead, the federal government bailed them out.*

This new economy has winner and losers. The biggest winners, by far, are those who earn much of their income from financial assets. The biggest losers are bottom 80% — the working class as well as many college-educated lower middle class who are deep in debt and stuck in low paying jobs. The bottom 80% relies almost exclusively on earnings from wages and salaries. They own just less than 9% of all stocks. Less than 1% of their income is derived from capital gains and dividends.

A large portion of the income for top earners, on the other hand, comes from investments. The top 10% wealthiest possess 80% of all financial assets. The top 1% own over 35% of all stock. Those in the top 0.1% receive most of their income from their financial assets. Given this situation, it is not surprising that those who own the most financial assets are reaping the greatest benefits in the growing financial services economy. According to a 2014 Organization for Economic Co-operation report, 80% of total income growth went to the top 10% from 1975 to 2007.

The shift in wealth and income to the top earners is intentional. It was guided by conservative economic policies. Tax cuts during the Reagan and Bush II administrations were designed enrich the rich. Sold as “supply side economics,” Reagan cut the top income tax bracket from 70% to 39%. Bush I, and Clinton cut capital gains. Bush II not only cut capital gains but also the income tax and the estate tax. According to a report by the Congressional Research Service, capital gains tax cuts were the single most important contributor to the growing income inequality since 1996.**

Free trade agreements have globalized the labor markets without any meaningful labor or environmental standards. As a result, millions of manufacturing jobs has been transferred overseas. American workers cannot compete with desperately poor and oppressed workers in South America and Asia. Clothing, electronics, appliances and many other consumer products are no longer made in the U.S. Small American flags handed out at 4th of July Parades are made in China.

While cheap foreign labor has enriched the investor class, it has devastated working class wages and unions. Millions of good paying manufacturing jobs have outsourced to low wage nations. Wages in the U.S. have stagnated. Many workers have been forced to work two or more jobs, typically in the service economy, to pay their bills. College education is no longer a guarantee of the good life. Many educated lower middle class students are strapped with huge college loans debts but end up working low paid jobs. The standard of living has fallen for many.

In the private sector, outsourcing jobs to low wage countries has given employers a powerful tool to fight union organizing and to force concessions in bargaining. According to the U.S. Bureau of Labor Statistics, labor unions represent just 6.6% of the workforce. Total union membership has dropped from 17.7 million in 1983 to 14.6 million in 2013. Most of the successful organizing has been in the public sector employment. Unions represent over 35.7% of public employees. Not surprising, the public sector unions are now the chief target of conservatives and the business community.

For the bottom 80%, the further down you go on the income ladder the worse off it gets. The income gap between rich and poor in the U.S. is greater than in any other developed country. According to U.S. Census, half of the U.S. population lives in poverty or are low-income with no real savings and barely able to pay their bills. According to a survey by the Associated Press, four out of five U.S. adults struggle with joblessness, near-poverty or reliance on welfare for at least parts of their lives. In 2013, child poverty reached record highs, with 16.7 million children living in food insecure households, about 35% more than 2007 levels.

The election of President Reagan in 1980 signaled the triumph of conservative, free market economics. The so-called Reagan Revolution did not end when he left office. Every presidential administration that followed enacted free market policies that created the new economy. Despite opposition from Labor Democrats, many so-called “New Democrats” joined Republicans in support of free (but not fair) trade agreements, banking deregulation and tax cutting. Conservative Republicans carried free market policies much further attacking labor union rights, environment regulations, the social safety net and other public policies that infringe upon their free market ideology and corporate prerogatives. The 2016 election could be a watershed in American politics. Will the Republican Party win the White House controlling all three branches of federal power? Will the slide into plutocracy accelerated with a conservative election victory? Will unionism survive? Will the Democratic Party coalesce around a working class agenda?

*See the movie “The Big Short.” It does a good job covering some of the issues raised in this article.

**Supply side is a cute way of saying trickle down economics. It claims that, by supplying them with money through large tax breaks, the rich will create jobs through investments and personal spending thereby creating prosperity for others. Of course, they may use the money to speculate in securities and land, purchase a yacht on the Mediterranean, or buy a chalet in the s Swiss Alps. They may invest the money overseas manufacturing. Nothing guarantees that they will create jobs for Americans. But the lost revenue will restrict governmental investments in research, education, infrastructure and other socially beneficial spending in the home economy.

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Chicago Democratic Socialists of America

The Chicago Chapter of the Democratic Socialists of America, 3411 W. Diversey, Suite 7, Chicago, IL 60647

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