The Shameful State of the Union

Here’s one thing everyone should be able to agree upon from George Bush’s State of the Union address: “We have unfinished business before us.”

Apart from that, it’s a little difficult to credit much of what he said.

“So long as we continue to trust the people, our nation will prosper, our liberty will be secure, and the state of our Union will remain strong,” he concluded.

But the state of our Union is anything but strong. Consider these snapshots:

1. The United States is spending more than $700 billion a year on the military.

The 2008 appropriations bills include $506.9 billion for the Department of Defense and the nuclear weapons activities of the Department of Energy, plus an additional $189.4 billion for military operations in Iraq and Afghanistan. Other military funding is located in the Department of Homeland Security and other agencies.

Congress has approved nearly $700 billion to fight the wars in Afghanistan and Iraq. This is the appropriated amount. It doesn’t include costs to society — loss of life, injuries, etc. The amount spent on war-fighting in Afghanistan and Iraq now exceeds the inflation-adjusted amount spent on the Vietnam War.

The United States accounts for roughly half of the world’s military expenditures.

Depending on how you count, more than half of all discretionary federal spending is now directed to the military.

2. Wealth is concentrating in the United States at a startling rate.

So startling, in fact, it is very hard to get your head around the statistics. Notes Sam Pizzigati of the invaluable online newsletter Too Much: In 2004, the richest 1 percent in the United States held over $2.5 trillion more in net worth than the entire bottom 90 percent.

The concentration of wealth and income reflects a major shift over the last three decades in how the United States shares its earnings. In 1976, the top 1 percent of the population received 8.83 percent of national income. In 2005, they grabbed 21.93 percent.

3. Compensation for CEOs and Wall Street financiers is out of control

The average CEO from a Fortune 500 company now makes 364 times an average worker’s pay, reports the Institute of Policy Studies. This is up from a 40-to-1 ratio in 1980.

But the managers of businesses that make things and deliver non-financial services aren’t making the truly big money these days. In the hyper-financialized economy, it’s the finance guys who are getting truly rich.

And they’re getting rich despite the huge losses being wracked up on Wall Street. Bonuses for those toiling on Wall Street totaled $33.2 billion in 2007, down just 2 percent, according to New York state comptroller’s office. Overall compensation and benefits at seven of the Street’s biggest firms totaled $122 billion, up 10 percent since 2006 — even though net overall revenue for these firms fell 6 percent.

But even the traditional investment banks can’t match the outrageous compensation captured by private equity and hedge fund managers, a few of whom manage to pull in more than $1 billion in a single year. Thanks to a tax loophole, these characters pay income tax at a rate less than half of what a dentist making $200,000 a year pays.

4. Corporations are capturing more of the nation’s wealth.

Corporate profits amounted to 8 percent of GDP over the last decade, Business Week reports, up from 6.5 percent in the early 1990s.

5. The housing bubble and the subprime mortgage meltdown are driving millions of families from their homes.

The Center for Responsible Lending estimates that 2.2 million subprime home loans made in recent years have already failed or will end in foreclosure. Homeowners will lose $164 billion from these foreclosures, the Center projects. Overall losses from deflated housing values may top $2 trillion. One in five subprime mortgages originated during the past two years is likely to end in foreclosure.

6. The racial wealth divide remains a chasm with little prospect of being bridged — and is likely growing worse.

At the rate the wealth divide closed between 1982 and 2004, it would take 594 more years for African Americans to achieve parity with whites, according to United for a Fair Economy. But the subprime debacle is hitting minority communities disproportionately hard, causing what United for a Fair Economy believes may be the worst deprivation of people of color’s wealth in modern U.S. history.

7. Women continue to be paid far less than men.

The ratio of the annual averages of women’s and men’s median weekly earnings was 80.8 for full-time workers in 2006, according to the Institute for Women’s Policy Research. Progress in closing the gender wage gap has slowed considerably since 1990. The gender wage ratio for annual earnings increased by 11.4 percentage points from 1980 to 1990, but added only 5.4 percentage points over the next 15 years.

8. More than one in six children live in poverty.

Is there a worse indictment of the richest society in history? The official U.S. poverty rate was 12.3 percent for 2006. The rate for children was 17.4 percent. The official poverty line is absurdly low. As defined by the Office of Management and Budget the average poverty threshold for a family of four in 2006 was $20,614. For an individual, it was $10,294.

9. More than 45 million people in the United States do not have health insurance.

According to the Census Bureau, 47 million were uninsured in 2006, 15.8 percent of the population.

10. The U.S. trade deficit is more than 5 percent of the gross domestic product.

The 2006 U.S. trade deficit totaled $763.6 billion. The trade deficit will eventually have to be balanced — sooner than later, it now seems. As the dollar continues to swoon, expect to see inflation and higher interest rates over the medium term. The real standard of living, in economic terms, will decline as a result.

11. U.S. fuel efficiency is worse now than it was two decades ago.

The average fuel economy of today’s U.S. car and truck fleet is 25.3 miles per gallon, reports the Union of Concerned Scientists, lower than the 25.9 mpg fleet average in 1987. Regulatory standards have not changed (though a modest increase is mandated by the energy bill passed in 2007), and more SUVs and light truck are on the road.

12. The nation’s infrastructure is crumbling.

The American Society of Civil Engineers estimates that $1.6 trillion is needed over a five-year period to bring the nation’s infrastructure to good condition.

13. More than two million people in the United States are locked in prison.

What a colossal waste of human talent. 2,258,983 prisoners were held in Federal or State prisons or in local jails, at the end of 2006, an increase of 2.9 percent from 2005. The prison population has grown 3.4 percent annually since 1995. African-American males are imprisoned at a rate 6.5 times higher than white males, Latino males almost 3 times higher than whites.

Most of these conditions are worse now than at the start of the Bush administration, many dramatically worse. But they have their roots in a bipartisan policy approach over the last three decades, favoring deregulation, handover of government assets to corporations (privatization), corporate globalization, hyper-financialization, lunatic military expenditures, tax cuts for the rich and a slashed social safety net.

If the United States is to see “real change” — and actually strengthen the state of the Union — there will have to be a reversal of these policies.

Reclaiming Economic Freedom

Every year, the Heritage Foundation, in conjunction with the Wall Street Journal, dutifully churns out its annual Index of Economic Freedom, a ratings guide to countries’ relative corporate hospitality.

The book-length report makes a quite modest global media splash every year. A Lexis search shows the 2008 report, issued last week, garnered (mostly quite short) stories in New Zealand, Australia, China, Russia, Thailand, Bahrain, the United Kingdom, India, Ireland, the Philippines, Poland, Singapore, Ukraine, Taiwan, Korea, the United States, Zimbabwe, and various wire services. If past years are any guide, over the course 2008, the report will likely be referenced several times in the Wall Street Journal editorial pages, and in various other publications. Not bad, but not earth-shattering.

The Index of Economic Freedom is significantly more important than this news coverage suggests, however.

For the last several years, the report has been subtitled “The Link Between Economic Opportunity and Prosperity,” and a central thesis of the report is that removing controls on corporations will create economic wealth. When apples are compared to apples — that is, when countries of similar economic development are compared — this claim is revealed to be nonsensical.

But more important than the asserted connection between removing corporate restraints and prosperity is the report’s definitional maneuver. It claims “economic freedom” — and all of the justifiably positive connotations with freedom — as part of the corporate agenda. It equates “economic freedom” with corporate superiority to popular control.

The Index of Economic Freedom is not the only tool to spread this propaganda, but it is among the most influential. The idea has seeped deep into the culture.

The Millennium Challenge Corporation (MCC), which was supposed to be the major Bush administration anti-global poverty innovation (but has in fact failed to distribute more than a tiny fraction of funds allocated to it) by statute selects recipient countries in large part based on measures of their “economic freedom.” The MCC actually relies on the Heritage Foundation’s Index of Economic Freedom for determining a component (countries’ trade openness) of the MCC’s economic freedom rating.

Members of Congress have introduced dozens of bills and resolutions referencing “economic freedom” over the last decade. One small example: Senator Barack Obama, along with Senators Chuck Hagel, R-Nebraska, and Maria Cantwell, D-Washington, in 2007 introduced the Global Poverty Act of 2007. (A version in the House of Representatives, introduced by Adam Smith, D-Washington, has 84 co-sponsors.) The bill would require the President to develop a strategy to meet the Millennium Development Goal of reducing the number of people in the world living in extreme poverty by one half. Although the bill is mainly aspirational — operationally, it doesn’t require anything than development of a strategy — it embraces a noble goal, and the world would be a better place if the legislation became law. But it is noteworthy that a “finding” of the bill is that “Economic growth and poverty reduction are more successful in countries that invest in the people, rule justly, and promote economic freedom.”

The Global Poverty Act does not specify what “economic freedom” means, and the sponsors of the bill would almost certainly disagree with some of the detailed definition supplied by the Heritage Foundation. But they have, at least in passing, adopted the framework.

Just what exactly does the Heritage Foundation mean when it says “economic freedom?” The Index of Economic Freedoms contains a preposterously precise formula for measuring and comparing so-called economic freedoms, based on the following 10 factors: business freedom, trade freedom, fiscal freedom, government size, monetary freedom, investment freedom, financial freedom, property rights, freedom from corruption and labor freedom.

OK, that’s not much of an answer to the question. What do these grand phrases mean when Heritage translates them into concrete terms

Here are some examples:

– “Trade freedom” measures not just how low tariff rates are, but the extent to which a country maintains “non-tariff trade barriers,” such as “safety and industrial standards regulations” and “advertising and media regulations.” Heritage considers national restrictions on biotechnology products — which apply equally to domestic and foreign genetically modified foods — as trade restrictions.

– “Fiscal freedom” is simply code for how low tax rates are. This includes corporate tax rates — which the Heritage formula weighs as heavily as taxes on individuals.

– Countries are awarded more points the smaller the size of the government relative to national economic output. The most points are awarded for a government with zero size!

– “Investment freedom” actually has almost nothing to do with the ability of people in a country to make investments. Heritage defines investment freedom as whether there are restrictions on foreign investment, including whether any industrial sectors are off limits for security reasons, and whether expropriation is permitted — even with compensation paid to investors.

– “Financial freedom” means whether banks and high finance are unregulated. The United States is apparently penalized for the various modest Sarbanes-Oxley rules passed after the Enron and related debacles.

– Heritage contorts “labor freedom” to mean the ability of corporations to fire workers without restraint and the absence of any minimum wage rules (with countries penalized the higher their minimum wage relative to average value added per worker).

The successful effort by the Heritage Foundation and its allies to capture the term “economic freedom” is not just a propaganda coup, it is a heist.

Heritage and its collaborators have stolen and debased the grand and noble vision of Franklin Roosevelt. They explicitly state that they are carrying out a project initiated by Milton Friedman (author in 1961 of Capitalism and Freedom, among many other works) to define economic freedom in terms of individual economic actors’ — typically corporations, though they often prefer to glorify individual entrepreneurs — ability to escape public control. This ideal is held out against Roosevelt’s idea of a caring and sharing society, where the crucial economic freedom is freedom from want.

In his famous 1941 “Four Freedoms” speech, Roosevelt offered a vision of a world defined by four freedoms (freedom of speech, freedom of religion, freedom from want, and freedom from fear).

“Translated into world terms,” Roosevelt proclaimed, freedom from want “means economic understandings which will secure to every nation a healthy peacetime life for its inhabitants — everywhere in the world.”

His specific 1941 agenda, unfortunately, remains a suitable elaboration for the present day of this more appealing, democratic and humane concept of economic freedom.

“The basic things expected by our people of their political and economic systems are simple,” Roosevelt declared.

They are:

– Equality of opportunity for youth and for others.

– Jobs for those who can work.

– Security for those who need it.

– The ending of special privilege for the few.

– The preservation of civil liberties for all.

– The enjoyment of the fruits of scientific progress in a wider and constantly rising standard of living.

These are the simple, the basic things that must never be lost sight of in the turmoil and unbelievable complexity of our modern world. The inner and abiding strength of our economic and political systems is dependent upon the degree to which they fulfill these expectations.

Many subjects connected with our social economy call for immediate improvement. As examples:

– We should bring more citizens under the coverage of old-age pensions and unemployment insurance.

– We should widen the opportunities for adequate medical care.

– We should plan a better system by which persons deserving or needing gainful employment may obtain it.

Deregulation and the Financial Crisis

It would be nice to write off the current crisis on Wall Street and global financial markets as something that only matters to the investor class.

Unfortunately, the effects are already being felt in lower-income communities around the United States. Worst-case scenarios for what spins out from the U.S. mortgage meltdown are truly frightening — a severe world recession is a distinct possibility.

Whether such worst-case scenarios can be averted, or softened — and preventing the recurrence of similar crises in the future — depends on abandoning the laissez-faire financial regulatory regime entrenched over the last decade.

The current crisis is the predictable (and predicted) result of a massive U.S. housing bubble, which itself can be traced in part to global economic imbalances that could have been prevented.

At least five distinct regulatory failures led to the current crisis.

Regulatory Failure Number One: Failure to Manage the U.S. Trade Deficit. The housing bubble (as well as the surge in leveraged buyouts of publicly traded companies (“private equity”)) was fueled by cheap credit — low interest rates. One reason for the cheap credit was an influx of capital into the United States from China. China’s capital surplus was the mirror image of the U.S. trade deficit — U.S. corporations were sending lots of dollars to China in exchange for the cheap stuff sold to U.S. consumers.

Regulatory Failure Number Two: Failure to Intervene to Pop the Housing Bubble. Along with an influx of capital, Federal Reserve policy kept interest rates very low. There were good reasons for the Fed Policy, but that did not mean the Fed was helpless to prevent the housing bubble. As economists Dean Baker and Mark Weisbrot of the Center for Economic and Policy Research insisted at the time, Federal Reserve Chair Alan Greenspan simply by identifying the bubble — and adjusting public perception of the future of the housing market — could have prevented or at least contained the bubble. He declined, and even denied the existence of a bubble.

Regulatory Failure Number Three: Financial Deregulation and Unchecked Financial “Innovation.” A key reason that mortgages were made available so widely and with such little review of recipients’ qualifications was a shift in which institutions hold the mortgages. Traditionally, banks made mortgages and held them. In the new era, banks and non-bank mortgage lenders made loans, but then sold the loans to others. Investment banks packaged lots of mortgage loans into “Collateralized Debt Obligations” (CDOs) and then sold them on Wall Street, with a promise of a steady stream of revenue from interest payments. These operations were pretty much unregulated. Despite the supposed sophistication of the investors involved, no one took account of how shoddy the loans were or — more fundamentally — the certainty that huge numbers would go bad if and when the housing bubble popped.

Regulatory Failure Number Four: Private Regulatory Failure. It was the job of ratings agencies (like Standard and Poor’s, and Moody’s) to assess the CDOs and give investors guidance on how risky they were. They failed totally, likely in part because they wanted to maintain good relations with the investment banks issuing the CDOs.

Regulatory Failure Number Five: No Controls Over Predatory Lenders. The toxic stew of financial deregulation and the housing bubble created the circumstances in which aggressive lenders were nearly certain to abuse vulnerable borrowers. The terms of your loan don’t matter, they effectively purred to borrowers, so long as the value of your house is going up. Lenders duped borrowers into conditions they could not possibly satisfy, making the current rash of foreclosures on subprime loans inevitable. Effective regulation of lending practices could have prevented the abusive loans, but none was to be found.

Unfortunately, the consequences of the mortgage meltdown go far beyond the foreclosure epidemic, as horrible a toll as that is taking. The entanglement of the financial sector with mortgage instruments, and the ripple effects of the housing bubble, has made lenders uncertain of who even among large corporations and financial institutions is credit worthy. The resulting credit crunch endangers the functioning of the global economy. Financial markets are guessing wildly about the prospects of banks, insurers and other financial corporations, and the plunging value of stocks poses immediate dangers to the real global economy.

Less acute, but probably more profoundly, the popping of the housing bubble is driving down home prices. U.S. consumer demand over the last five years has been driven by consumers borrowing against the increased value of their homes; with housing values falling, that process is working in reverse. The depressed housing market is also ravaging the construction sector, a nontrivial portion of the U.S. economy. A serious recession looms as a real possibility.

Mitigating these harms and preventing the worst now depends on active and interventionist government — a government stimulus plan, and aggressive efforts to force lenders to adjust mortgage terms and let people stay in their homes. Preventing financial panics of the kind now underway require new standards of transparency and regulation for high finance. The coming days and months will tell whether any lessons have been learned.