Sunday, October 30, 2011

Cause and effect: 1% vs. 99%

Regular readers of this blog (all 3 of you) can't help but notice that for the last year or even longer, my writing has been almost exclusively about the dismal state of the economy, who's to blame, what can be done, etc. Actually, that pretty accurately reflects the situation and mood of the country as a whole, as time and again polls show that our economic problems are the number one thing on most people's minds. With the growing size and attention paid to the Occupy Wall Street (OWS) movement in recent weeks, there's little to suggest that this will change anytime soon. So let's take another look at this whole situation, if for no other reason than to clarify what "the 99%" want, and try to come to some agreement on how much of that is justified.

Let's start by considering this blog's theme and the quotation from John Kenneth Galbraith: "People 'know' things that simply aren't true, or at least are much more complicated than they realize. John Kenneth Galbraith said: 'Americans are the most prone to misinformation... so much of what they themselves believe is wrong.' More famously, he also said: 'The conventional wisdom serves to protect us from the painful job of thinking.' So is it really that shocking when I suggest that the conventional wisdom - and what most Americans believe - i.e. "it's all the rich people's fault", is not quite true? In fact, and in line with this blog's theme, you can be pretty certain that if people were all up in arms about how the rich and Wall Street were being unfairly blamed because they had done nothing wrong, I'd be writing about how that was crazy talk.

But before you get too upset because I don't completely support "the 99%" and their OWS movement , let me review what I've suggested the rich are responsible for. In other words: saying it's not all the rich people's fault isn't the same thing as saying the OWS folk have got it all wrong.

In fact, my most recent thought on that topic was a comment on Facebook a week or so ago, that the rich, Wall Street, and the big corporations are responsible for perhaps 40% of the economic mess that OWSers are protesting. That's a bit less than half, which is still a pretty big chunk of responsibility! OK - so what have they done, what are they responsible for? In the past year or so, I've suggested in my blogs the following:
* Ridiculous executive salaries and bonuses, way out of line when compared to their employees
* Promoting and profiteering from the nation's obsession with materialism in recent decades.
* Excessive focus on profits, rather than the good of the country, with perhaps a trillion dollars or more being drained from the rest of us and into the pockets of the wealthy over the past 20 years
* Knowingly marketing dangerous "time-bomb" variable rate mortgages to people without advising them of the risk, reaping countless billions for themselves by doing so
* Creating and profiting immensely from bogus financial derivatives that they should have known would ultimately collapse, bringing our financial system to the brink

The last two items especially contributed to the nation's near meltdown in 2008, which set off a chain of negative consequences that we're feeling today, which in turn are the main cause of the OWSers' ire. And regarding those last two items, let me add my anger to that of the OWSers for these guys not being thrown in jail for their illegal actions associated with mortgages and financial derivatives. So to the degree that OWSers want justice and change based on these things, I'm on board!

The real problem, however, comes with the overall message that the 1% have gotten rich at the expense of the 99%. I believe that is, for the most part, a fundamentally flawed claim. It assumes a cause and effect relationship when - again, for the most part - that is not the case. It is certainly true that the rich are richer, while the poor and middle class are no better off; the recent report that the richest Americans are something like 275% richer now than in 1979, while the rest of us are something like 15% richer, is just the latest "evidence" of how the rich have prospered at our expense. But while I'm not aware of much in the way of cold, hard facts to show that we are no better off because of the rich's actions, there is a substantial body of evidence suggesting that is simply not the case. In other words: yes, they've prospered while we mostly have not; but that doesn't mean "it's their fault".

As mentioned in earlier blogs, the case for our failure to prosper NOT being because of what the rich have done is painstakingly documented in my "Income Inequality" essay of 2007, when this question first attracted a lot of mainstream attention. That essay quotes quite a few Nobel Prize winning and highly respected left-leaning economists all saying about the same thing: the rich have gotten richer, we should probably tax them more, but they're not the cause of most of our problems. I understand that some of the more radical of you might consider even left-leaning economists to be untrustworthy sellouts and if that's the case, then God bless you because you're going to believe what you're going to believe. But for everyone else - you can accept my conclusion in that essay with or without reading it, or you can challenge it by questioning specific points of the essay, but don't just say I'm wrong without seriously considering the evidence.

Yet the essay was written in 2007, before the financial meltdown that's brought us to where we are today. So it would be fair to say that such a study, written today, would in fact place more blame on the wealthy, on corporate America. Perhaps, as suggested above, a bit less than half of the total blame. The rest? With changes in global politics, technology, and communications; an underperforming K-12 educational system; a less motivated, more "entitled" American workforce; skyrocketing health care costs; the insane increase in conspicuous consumption and corresponding collapse in savings - these factors more properly explain the rising gap between rich and poor, although we must also recognize the role of tax breaks and other legislative boons accorded the wealthy since the 1980s.

A student protested, in response to my earlier blog "Occupy America": A carpenter who has worked hard his whole life with a wife and two kids gets fired, not because he refuses to work, or because he has been behaving inappropriately at work, but because the company he is on contract with cannot get a loan from any bank for a housing project that they have in mind. So the housing company lays off a bunch of their carpenters because they can’t make all that many houses right now, one of which is our man. That’s supposed to be his fault?

Of course, that's not his fault. I suspect that there are millions of Americans in somewhat the same situation as this guy, and have always acknowledged that to be the case. In an earlier blog, when writing that Americans themselves were largely to blame for the financial woes that had befallen them, I also suggested that this was the case for perhaps 80% of the people, with apologies and sympathy to the others who had done everything right.

But wait - let's test my hypothesis. Let's put all the fault-less guys like my student's unemployed carpenter in one long line. Now let's start another line. Into that line let's put everybody who didn't do their best in school and just figured that society would have a job for them anyway, or who majored in something easy rather than a field that would always keep them working.  Add those who took their job for granted, didn't put in their best effort every day, and didn't constantly upgrade their skills to make themselves indispensable to employers. Put into that line all the folks who bought a 2500 sq. ft. $700,000 house and an 8-passenger $40,000 SUV that gets 14 mpg, for their family of three, on a $400,000 home, $17,000 Kia salary. Then find the people who hit Starbucks every day for a $4 mocha instead of fixing a cup of coffee at home, who spent $150 a month on their cell so they could have unlimited texting, and ate out every other meal because they're "too busy" to cook, and as a result had big credit card debt and no savings; let them cut into the line. Finally, round up all the people who voted for the politicians who refused to cut government spending and refused to raise taxes year after year, and add them to the end of the line.

Who knows: maybe even the carpenter and a few of his friends will start thinking they really belong in that second line. But, regardless: guess which line is bigger? I'm thinking that second line is four, five times longer - maybe more. And without the kinds of actions people in that line committed, they and the country wouldn't be in nearly as big of a pickle and, chances are, the OWS movement might not exist at all.

So I'm going to stay with the idea that most Americans have themselves to blame as much or more than anyone else. Joel Stein took a break from his normally humorous mode, writing this in TIME magazine's October 31st edition: "I don't know a lot about banking. But I do not believe that the worldwide recession was caused by financial derivatives created by the 1% who tricked the 99%. I believe it was created by the great wide middle class who took out loans to live out the techno-bling dream we deified in rap songs and reality TV. Credit-card debt went up 75% from 1997 to 2007. We're now a nation of really poor people with a lot of frequent-flier miles."

I don't know, but it's good to see that I (and most respected economists) am not alone in questioning the idea that it's all Wall Street's, the rich's, the corporations' fault. The OWS movement, needs to provide more evidence than just "they're rich and powerful, I'm not - therefore it's their fault". If it can. At least for those of us willing to do what Galbraith calls the painful job of thinking, they've got to protest less and convince more if they want to be taken more seriously.


Davis Permann said...

This was a very well written piece of work, Strebler. Too much of the current talk is people parroting biased news and gossip, and really just trying to find a scapegoat for the current situation, and no one wants to admit that they made mistakes. You ask for people to be less ignorant and to simply see both sides of the situation, two ignored ideas that really put us in this entire mess.

You make good points and aren't afraid to challenge the popular opinion.

Brandon Matticks said...

Brandon Matticks
First of all the rich already pay more money to the government through higher taxes, on the other hand they’re paying less percent of their total income which for some of the rich people who don’t work very hard for their money isn’t fair. I know many rich families who work very hard for their money, to the point where you would think they even deserve a little more and to penalize them for working harder then the average individual to make up for others less fortunate is right for who?

Samir Senner said...

After reading the article about the 1% vs. the 99% I found it very interesting and eye opening on the whole situation, because as much as I’d like to believe it’s all the rich people’s fault, it really isn’t. Although they are somewhat responsible for the whole situation they can’t take all the blame as you mentioned in your blog entry.

Unknown said...

Although I agree that it would be unjustified to blame the 1% entirely for the plight of the 99%, I completely agree that the people responsible for the blatant illegal actions associated with mortgages and financial derivatives should definitely be held accountable. This would be the best method to avoid setting a precedent. For those dissatisfied with the 40% estimate of blame, it should be noted that 40% responsibility pinned on 1% of the population is still a huge proportion of blame. Frankly, I believe that the 99% are doing themselves a disservice by completely blaming the 1%, after all it seems that they have more control over the economy than they may think.

Sarah Hardimon said...

The hypothetical American mentioned in the article who buys a $700,000 house and $40,000 car should indeed purchase the $400,000 house and $17,000 car that he can afford, however this hypothetical American is still clearly middle class and able to maintain a reasonable lifestyle within her means. Many Americans, however, live below the poverty line and are unable to afford even a $400,00 house or $17,000 car. I don’t believe that the biggest victims of the financial crisis are the middle class who purchased luxury cars that they could not afford, but the families who are unable to afford even the basic things needed to live their lives. It is not the government’s job, nor the job of Wall Street and the 1% to make luxury lifestyles available to everyone, however it is the job of the government and the wealthy to make sure that all members of the workforce, as well as those who cannot work (children, elderly, disabled) are able to survive with adequate shelter, food and comfort. The article is correct in claiming that Wall Street and the 1% are responsible for about half of the crisis, and those that were just lazy and overspent are responsible for the other half of the crisis, but it ignores those who are outside of both the 1% and the middle class.

Anonymous said...

I feel that this issue of the 99% vs. the 1% is bitterness. The 99% want what they can't have and it sucks. At the same time, both sides need to be seen and the 99% could possibly have a reason to complain. when it's one vs. ten in an argument, the one is usually the wrong person, the same could be argued here. I reall did enjoy this article and it was a great piece of writing.

- Eddie

Anonymous said...

When I was browsing through your blog to decide which essay I would be most interested to read, the first thing I noticed was your essay on education, I skimmed it a little bit, to confirm that the subject matter was indeed what the tittle of the essay suggested, and when I learned that it was, I was quite happy. The issue of education in the United States of America is one that is very important to me, and one that I am very interested in, so I am happy that we now have a chance to discuss it academically. One thing that I’d like to address in my comment from my essay is what you say in your essay about the theories of Bill Gates who has spent 5 Billion dollars of his own money trying to improve education. He “estimates that if black students had a top-quartile teacher rather than a bottom-quartile teacher four years in a row, that would be enough to close the black white test-score gap”. Perhaps this is true. But this is what I wonder: would a typical student at “Shanghai High” let a mediocre teacher stand in his or her way of getting that A? I really don’t think so. Sure better teachers will help black kids. Better teachers would help any race. But it has nothing to do with race at all, it has to do with societal values, and the education is not one in the United States.

Saul said...

I really liked this essay Mr. Strebler. It was very informative. I knew some of the situation about the rich people paying less than the middle and poor class. The other day in class, you talked to us about it and showed us how much money the rich people paid at the end of the year. We used Kim Kardashian and a regular middle class and compared how much money they paid in taxes. It turned out that Kim Kardashian paid a grand more that a regular middle class family. That was pretty shocking.

Alex Tam said...

When people start to claim rumors or gossips as a fact (hence occupy wallstreet), I suddenly feel unfortunate for them. They would persuade the "big man" to enforce higher taxes against the rich, which makes a "lose-lose" situation. The poors will fall out eventually, and so does the riches with their own increase of taxes. All I can say that the poors are just too exagerated over money equality, and it's their own fault for having low motivation to work hard and earn the profit.

America really needs to do some "reforging" on their minds (tsk,tsk, unecessary riots)

Anonymous said...

It was a well written piece/ blog, but I was a bit confused when you'd add in parts from other blogs, because I feel like Im not getting the whole story and need to go read those as well to understand your point. I honestly feel that everyones to blame and no one wants to take it. They are all so quick to blame it on others and with little to no evidence others will easily agree just by having the bigger number and being part of that group. 99% to 1%

Nico Gomez said...

This essay has very many interesting points, as everyone that has posted has said. For the most part Strebler, your right. You cannot put all of the blame on the rich people. There is enough blame to be put on the 'poor' people, even though that isn't the right thing to say for most people. But it is true, the 99% made the 1% richer than ever, giving the 99% some of the blame.

Jorge Saldana said...

I agree with Brandon Matticks. People are not working as hard and yet want to live the same life of a person who has worked countless hours to reach that top 1%. I am sorry but taking the easy path in life is not always the best path. It is time to stop pointing fingers and perhaps take the road less traveled by. Just my two cents.

Natalie E said...

Although I support the Occupy Wall Street movement and what it stands for, I do not necessarily agree with their opinions that the 1% is responsible for all of their misfortune. Not all rich people are out to “get” those who are less fortunate than they are, and they aren’t even nearly responsible for all of the problems in the United States.

Angelique Rousset said...

I thought this article was interesting because it not only placed blame on the rich, but also branched out to bring focus to the 99% that fell into debt by their own accord. In reading the article it made me think about how hard it is to pinpoint reasons for economic instability, and how delicate an economic situation can be when tampered with by individuals with ill intentions.

Elizabeth Kenyon said...

Overall, after reading your essay, I do have a better understanding of the rational behind the Occupy Wall Street movement. I feel as though the people conducting the movement simply can't take responsibility for their actions and just want to put the blame on something broad like the rich and continue their entitled lives. It may sound hypocritical, but Americans need think about what's really important and focus less a materialistic things like huge houses or really nice cars.

Elise Polk said...

There are a lot of points that I agree with in this essay. I agree with the overall statement that the “1%” is not all to blame. Those part of the "99%" have just as much blame considering the point you made about the middle class spending money that they can't afford to spend. With some exceptions, many wealthy people worked hard for their money, and I do not believe they are at fault for being rich and the poor being poor, this is just something that can't easily be changed.