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Monday, September 30, 2013

Bank Interests Inflate Global Prices by 35 to 40 Percent

8. Bank Interests Inflate Global Prices by 35 to 40 Percent

A stunning 35 to 40 percent of everything we buy goes to interest. As Ellen Brown reported, “That helps explain how wealth is systematically transferred from Main Street to Wall Street.” In her report, Brown cited the work of Margrit Kennedy, PhD, whose research in Germany documents interest charges ranging from 12 percent for garbage collection, to 38 percent for drinking water, and 77 percent for rent in public housing.  Kennedy found that the bottom 80 percent pay the hidden interest charges that the top 10 percent collect, making interest a strongly regressive tax that the poor pay to the rich.

Drawing on Kennedy’s data, Brown estimated that if we had a financial system that returned the interest collected from the public directly to the public, 35 percent could be lopped off the price of everything we buy.  To this end, she has advocated direct reimbursement. According to Brown, “We could do it by turning the banks into public utilities and their profits into public assets. Profits would return to the public, either reducing taxes or increasing the availability of public services and infrastructure.”
Censored Story #8

Bank Interests Inflate Global Prices by 35 to 40 Percent

Ellen Brown, “It’s the Interest, Stupid! Why Bankers Rule the World,” Global Research, November 8, 2012, http://www.globalresearch.ca/its-the-interest-stupid-why-bankers-rule-the-world/5311030. Originally posted at Web of Debt, November 8, 2012, http://webofdebt.wordpress.com/2012/11/08/its-the-interest-stupid-why-bankers-rule-the-world/.

Student Researcher: Cooper Reynolds (Sonoma State University)

Faculty Evaluator: Peter Phillips (Sonoma State University)

It’s the Interest, Stupid! Why Bankers Rule the World


In the 2012 edition of Occupy Money released last week, Professor Margrit Kennedy writes that a stunning 35% to 40% of everything we buy goes to interest. This interest goes to bankers, financiers, and bondholders, who take a 35% to 40% cut of our GDP. That helps explain how wealth is systematically transferred from Main Street to Wall Street. The rich get progressively richer at the expense of the poor, not just because of “Wall Street greed” but because of the inexorable mathematics of our private banking system.

This hidden tribute to the banks will come as a surprise to most people, who think that if they pay their credit card bills on time and don’t take out loans, they aren’t paying interest. This, says Dr. Kennedy, is not true. Tradesmen, suppliers, wholesalers and retailers all along the chain of production rely on credit to pay their bills. They must pay for labor and materials before they have a product to sell and before the end buyer pays for the product 90 days later. Each supplier in the chain adds interest to its production costs, which are passed on to the ultimate consumer. Dr. Kennedy cites interest charges ranging from 12% for garbage collection, to 38% for drinking water to, 77% for rent in public housing in her native Germany.

Her figures are drawn from the research of economist Helmut Creutz, writing in German and interpreting Bundesbank publications.  They apply to the expenditures of German households for everyday goods and services in 2006; but similar figures are seen in financial sector profits in the United States, where they composed a whopping 40% of U.S. business profits in 2006.  That was five times the 7% made by the banking sector in 1980.  Bank assets, financial profits, interest, and debt have all been growing exponentially.


Exponential growth in financial sector profits has occurred at the expense of the non-financial sectors, where incomes have at best grown linearly.


By 2010, 1% of the population owned 42% of financial wealth, while 80% of the population owned only 5% percent of financial wealth.  Dr. Kennedy observes that the bottom 80% pay the hidden interest charges that the top 10% collect, making interest a strongly regressive tax that the poor pay to the rich.

Exponential growth is unsustainable. In nature, sustainable growth progresses in a logarithmic curve that grows increasingly more slowly until it levels off (the red line in the first chart above). Exponential growth does the reverse: it begins slowly and increases over time, until the curve shoots up vertically (the chart below). Exponential growth is seen in parasites, cancers . . . and compound interest. When the parasite runs out of its food source, the growth curve suddenly collapses.

People generally assume that if they pay their bills on time, they aren’t paying compound interest; but again, this isn’t true.  Compound interest is baked into the formula for most mortgages, which compose 80% of U.S. loans.  And if credit cards aren’t paid within the one-month grace period, interest charges are compounded daily.
Even if you pay within the grace period, you are paying 2% to 3% for the use of the card, since merchants pass their merchant fees on to the consumer.  Debit cards, which are the equivalent of writing checks, also involve fees.  Visa-MasterCard and the banks at both ends of these interchange transactions charge an average fee of 44 cents per transaction—though the cost to them is about four cents.

How to Recapture the Interest: Own the Bank

The implications of all this are stunning. If we had a financial system that returned the interest collected from the public directly to the public, 35% could be lopped off the price of everything we buy. That means we could buy three items for the current price of two, and that our paychecks could go 50% farther than they go today.

Direct reimbursement to the people is a hard system to work out, but there is a way we could collectively recover the interest paid to banks. We could do it by turning the banks into public utilities and their profits into public assets. Profits would return to the public, either reducing taxes or increasing the availability of public services and infrastructure.

By borrowing from their own publicly-owned banks, governments could eliminate their interest burden altogether.  This has been demonstrated elsewhere with stellar results, including in CanadaAustralia, and Argentina among other countries.
In 2011, the U.S. federal government paid $454 billion in interest on the federal debt—nearly one-third the total $1,100 billion paid in personal income taxes that year.  If the government had been borrowing directly from the Federal Reserve—which has the power to create credit on its books and now rebates its profits directly to the government—personal income taxes could have been cut by a third.

Borrowing from its own central bank interest-free might even allow a government to eliminate its national debt altogether.  In Money and Sustainability: The Missing Link(at page 126), Bernard Lietaer and Christian Asperger, et al., cite the example of France.  The Treasury borrowed interest-free from the nationalized Banque de France from 1946 to 1973.  The law then changed to forbid this practice, requiring the Treasury to borrow instead from the private sector.  The authors include a chart showing what would have happened if the French government had continued to borrow interest-free versus what did happen.  Rather than dropping from 21% to 8.6% of GDP, the debt shot up from 21% to 78% of GDP.

“No ‘spendthrift government’ can be blamed in this case,” write the authors. “Compound interest explains it all!”

More than Just a Federal Solution

It is not just federal governments that could eliminate their interest charges in this way. State and local governments could do it too.

Consider California.  At the end of 2010, it had general obligation and revenue bond debt of $158 billion.  Of this, $70 billion, or 44%, was owed for interest.  If the state had incurred that debt to its own bank—which then returned the profits to the state—California could be $70 billion richer today.  Instead of slashing services, selling off public assets, and laying off employees, it could be adding services and repairing its decaying infrastructure.

The only U.S. state to own its own depository bank today is North Dakota.  North Dakota is also the only state to have escaped the 2008 banking crisis, sporting a sizable budget surplus every year since then.  It has the lowest unemployment rate in the country, the lowest foreclosure rate, and the lowest default rate on credit card debt.
Globally, 40% of banks are publicly owned, and they are concentrated in countries that also escaped the 2008 banking crisis.  These are the BRIC countries—Brazil, Russia, India, and China—which are home to 40% of the global population.  The BRICs grew economically by 92% in the last decade, while Western economies were floundering.
Cities and counties could also set up their own banks; but in the U.S., this model has yet to be developed. In North Dakota, meanwhile, the Bank of North Dakota underwrites the bond issues of municipal governments, saving them from the vagaries of the “bond vigilantes” and speculators, as well as from the high fees of Wall Street underwriters and the risk of coming out on the wrong side of interest rate swaps required by the underwriters as “insurance.”

One of many cities crushed by this Wall Street “insurance” scheme is Philadelphia, which has lost $500 million on interest swaps alone.  (How the swaps work and their link to the LIBOR scandal was explained in an earlier article here.)  Last week, the Philadelphia City Council held hearings on what to do about these lost revenues.  In an October 30th article titled “Can Public Banks End Wall Street Hegemony?”, Willie Osterweil discussed a solution presented at the hearings in a fiery speech by Mike Krauss, a director of the Public Banking Institute.

Krauss’ solution was to do as Iceland did: just walk away. He proposed “a strategic default until the bank negotiates at better terms.” Osterweil called it “radical,” since the city would lose it favorable credit rating and might have trouble borrowing. But Krauss had a solution to that problem: the city could form its own bank and use it to generate credit for the city from public revenues, just as Wall Street banks generate credit from those revenues now.

A Radical Solution Whose Time Has Come

Public banking may be a radical solution, but it is also an obvious one. This is not rocket science. By developing a public banking system, governments can keep the interest and reinvest it locally. According to Kennedy and Creutz, that means public savings of 35% to 40%. Costs can be reduced across the board; taxes can be cut or services can be increased; and market stability can be created for governments, borrowers and consumers. Banking and credit can become public utilities, feeding the economy rather than feeding off it.

Ellen Brown is an attorney and president of the Public Banking Institute. In Web of Debt, her latest of eleven books, she shows how a private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are http://WebofDebt.com, http://EllenBrown.com, and http://PublicBankingInstitute.org.

The 8 Groups in America That Are the Most Screwed-Over by Predatory Capitalism

  Hard Times USA  


The 8 Groups in America That Are the Most Screwed-Over by Predatory Capitalism

Are political and corporate leaders even remotely aware of the conditions of society beneath the wealthiest 10% or so?

Photo Credit: Shutterstock.com/Portokalis

We live in a society that allows one man to make $15 million a day while a low-income mother gets $4.50 a day for food, and much of Congress wants to cut the $4.50.

Are political and corporate leaders even remotely aware of the conditions of society beneath the wealthiest 10% or so?

The following are some of the victims of an economic system that has forgotten the majority of its people.


One out of every five American children now lives in poverty, and for black children it's nearly one out of TWO. Almost halfof food stamp recipients are children.

UNICEF places us near the bottom of the developed world in the inequality of children's well-being, and the OECD found that we have more child poverty than all but 3 of 30 developed countries. It's rather embarrassing to view the charts.


Over the last 12 years, according to a New York Times report, the United States has gone from having the highest share of employed 25- to 34-year-olds among large, wealthy economies to having among the lowest. The number of college grads working for minimum wage has doubled in just five years.

Higher education was cut by nearly $17 billion in the years leading up to 2012-13. Through those same years large corporations were avoiding about $14 billion annually in taxes. To make up the difference, students face tuition costs that have risen almost ten times faster than median family income, leading them into their low-wage post-college positions with an average of $26,000 in student loan debt.

The Elderly

Three-quarters of Americans approaching retirement in 2010 had an average of less than $30,000 in their retirement accounts. The percentage of elderly (75 to 84) Americans experiencing poverty for the first time doubled from 2005 to 2009.

The folly of cutting Social Security is reflected in two facts. First, even though Social Security provides only an average benefit of $15,000, it accounts for 55 percent of annual income for the elderly. And second, seniors have spent their working lives paying for their retirement. According to the Urban Institute the average two-earner couple making average wages throughout their lifetimes will receive less in Social Security benefits than they paid in. Same for single males. Almost the same for single females.

Wage Earners

Workers have 30% LESS buying power today than in 1968. If the minimum wage had kept up with employee productivity, it would be $16.54 per hour instead of $7.25.

Almost unimaginably, conditions for workers have gotten even worse since the recession. While 21 percent of job losses since 2008 were considered low-wage positions, 58 percent of jobs added during the recovery were considered low-wage.

As for members of Congress who say "get a job," only one of them was present at the start of a recent unemploymenthearing.

The Sick and Disabled

Over 200 recent studies have confirmed a link between financial stress and sickness. In just 20 years America's ranking among developed countries dropped on nearly every major health measure. Victims suffer both physically and mentally. A recent study found that unemployment, whether voluntary or involuntary, can significantly impact a person's mental health. Even grimmer, from 1999 to 2010 the suicide rate among Americans ages 35 to 64 increased by almost 30 percent.

In the long run, the only Americans to increase their life expectancy have been seniors covered by Medicare.


Recent figures from the Bureau of Labor Statistics reveal that women earn just 80% of men's pay. In Washington, DC and California, Hispanic women make only 44 cents for every dollar made by white men. The only deviation from the norm is that in 47 of 50 large metropolitan areas, well-educated single childless women under 30 earn more than their male counterparts.

But the overall disparities have worsened since the recession, with only about one-fifth of new jobs going to women, and withmedian wealth for single black and Hispanic women falling to a little over $100. And there's no respite with advancing age. The average American woman's retirement account is 38 percent less than a man's, and women over 65 have twice the poverty rate of men.


The Economist states: Before the 1960s...most blacks were poor, few served in public office and almost none were to be found flourishing at the nation's top universities, corporations, law firms and banks. None of that is true today.

Wrong. Much of that is true today. According to the Economic Policy Institute (EPI), median wealth for black families in 2009 was $2,200, compared to $97,900 for white families. (Pew Research reported $5,677 for blacks, $113,149 for whites). EPI said median financial wealth (stocks, etc.) was $200 for blacks, compared to $36,100 for whites.

Since the recession, black and Hispanic wealth has dropped further, by 30 to 40 percent, while white family wealth dropped 11 percent.

Blacks and Hispanics, with 29% of the population, are also severely under-represented on corporate boards and in higher education.

One of the reasons it's so hard for young blacks to be successful is that they're viewed as criminals by many white authority figures. In The New Jim Crow, Michelle Alexander documents the explosion of the prison population for drug offenses, with blacks and Hispanics the main targets even though they use drugs at about the same -- or lesser -- rate as white Americans.

The Homeless

The super-rich want homeless people to get jobs. But they don't want to pay taxes to support job creation. If the richest Americans - the Forbes 400 - had paid a 5% tax on their 2012 investment earnings, enough revenue would have been generated to provide a full-time minimum wage job for every person who was homeless in America on a January night in 2012.

Instead, it keeps getting worse for the homeless. North Carolina made it a crime to feed them. Columbia, South Carolina approved a plan to remove them. Tampa, Florida passed a law that makes it a crime for them to sleep in public.

So who's left after all this? Oh yes, rich white men.
Paul Buchheit is a college teacher, a writer for progressive publications, and the founder and developer of social justice and educational websites (UsAgainstGreed.org, PayUpNow.org, RappingHistory.org).

Life on $2 a Day: US Extreme Poverty on the Rise


Life on $2 a Day: US Extreme Poverty on the Rise

Wealth inequality has never been as great as it is today.


Photo Credit: Shutterstock.com/Lisa S.

A fast-growing group of people in the United States, households with children, are living on $2.00 or less per person per day. This shocking condition in a wealthy country such as the US is formally labeled “extreme poverty” by a World Bank metric that gauges poverty “based on the standards of the world’s poorest countries.” Since poor Americans live in a rich country, they have traditionally been excluded from this official estimate of dire poverty in the world.

In a study for the National Poverty Center, H. Luke Shaefer of the University of Michigan and Kathryn Edin of Harvard University applied the World Bank metric to the US for the first time to show that in mid-2011 and based on cash income, about 1.65 million households, with 3.5 million children, lived in extreme poverty. Since the official poverty level is considered to be $17.00 per person per day, this extent of extreme poverty implies that millions of Americans are subsisting on less than 12 percent of the poverty-line income. Contrary to popular perceptions, the authors further found, based on a measure of cash income, that about one half of the extremely poor heads of households were white and almost one half were married. Children have suffered most: between 1996 and 2011, their numbers in extreme poverty increased by 156 percent.

How did the social safety nets in the US shrink to allow such a catastrophe? The authors single out two main factors: the Clinton administration’s welfare reform of 1996, combined with the Great Recession of 2008. The 1996 welfare reform ended the only cash entitlement program for poor families with children and replaced it with a program that provides only time-limited cash assistance, with a requirement that “able bodied” recipients promptly rejoin the work force. Specifically, the need-based program Aid to Families with Dependent Children (AFDC) was replaced by a restrictive federal program called Temporary Assistance for Needy Families (TANF). Consequently, cash assistance fell from 12 million recipient families per month in 1996 to 4.5 million families by December 2011.  Meanwhile the 2008 recession led the government to expand the Supplemental Nutrition Assistance Program (SNAP, formerly known as the Food Stamp Program) from around 25 million recipients per month in 1996 to 47 million in October 2012. In effect, the working poor were assisted, while those who had become chronically unemployed and desperate were left to fend for themselves. It is astonishing that nearly 50 million Americans — mostly children — currently depend on food stamps to survive.

The poor and the rich experienced differently the collapse of the labor, housing, and stock markets that started in 2007. For example, the stock markets and housing markets are currently undergoing a boom; but this deceptively bubble-like recovery mostly benefits the super-rich as corporations sit on trillions of dollars and hire as few people as possible.

Wealth inequality has long been part of life in the US, but it has never been as great as it is today. Throughout the 18th and 19th centuries, wealth inequality increased, with the sharpest rise occurring during the birth of capitalism in the mid-19th century and the massive industrial revolution in the early 20th century. The concentration of wealth, or share of it owned by the wealthiest one percent, rose sharply over this period to peak at about 40 percent of the total wealth right before the crash of 1929 and onset of the Great Depression. Thereafter, wealth inequality gradually decreased until the late 1970s, but it began to increase again in the 1980s. For example, between 1983 and 1989, the share of wealth held by the wealthiest one percent grew from 33 to about 38 percent. The most pronounced increase in US wealth inequality occurred between 2001 and 2007 when the wealthiest one percent managed to take a phenomenal 43 percent of the country’s total wealth. In 2013, only seven percent of the wealth is left to the bottom 80 percent. The middle class have become poor, and the poor are now destitute.

Current conditions in the US are worse than they were immediately before the Great Depression, but gone are the days of a Franklin Delano Roosevelt, when a US President was not merely a front for corporate interests, and he could persuade his own class to put a brake on its excesses so as to prevent a worker’s revolt. Unconcerned that about 16 percent of all Americans require food stamps to keep from starving, the US House of Representatives proposed, as part of the current Farm Bill deliberations, to reduce SNAP by $40 billion so as to provide subsidies such as free crop insurance mostly to rich farmers.  If such a reduction in SNAP is allowed, yet more families will sink into extreme poverty. Millions more children will go to bed hungry as US politicians run their campaigns around the issues of family values and sanctity of life.

Disaster global corporatism has turned many nations into beggars, but there is a third-world country rapidly growing  at the heart of the empire. When will the Revolution come? How can a nation function with wealth that is so concentrated and misery that is so widespread?  How long will we allow the rich to worm their way through the core of the country even as they present it to the world as an appetizing shiny red apple?

Wall Street Predators Wage Secret War on American Retirements

  Hard Times USA  

Wall Street Predators Wage Secret War on American Retirements

Financiers are lying their way to another giant theft of public money.

Photo Credit: shutterstock.com

Lips are smacking on Wall Street. Today’s tasty treat? The pensions of hard-working people across America. Financial hustlers have been working overtime to convince the population that we are in the midst of an “unfunded liability crisis” in which states and cities can no longer afford to pay pensions to public workers. Here’s the truth: Wall Street predators have had their hands in the pension cookie jar for decades, and now they’re poised to gobble up the retirements of teachers and firefighters in yet another orgy of greed.

Unknown to much of the public, Wall Street has been soaking state and municipal coffers with derivatives schemes and various frauds for years. As Alexander Arapoglou and Jerri-Lynn Scofield have explained, not only have Wall Street banks screwed public finances with fancy credit default swaps and other "innovative" financial products that blow up in the faces of cities and states, they have also been engaged in widespread frauds that squeeze pension yields. This happened in the LIBOR rate-rigging scandal, in which big banks were found to be manipulating interest rates, which has resulted in lower returns on pension fund investments and has caused shortfalls in pension plans. The lack of actions from authorities means this kind of hustling will surely continue.

Rolling Stone’s Matt Taibbi has just published an article outlining how this gigantic heist is going down. While Wall Street has been on its scam-a-licious rampage, no-good politicians have been taking taxpayer money meant for pensions and spending it on whatever they wanted, depleting funds. (This is actually securities fraud, but the nearly toothless SEC has barely lifted a finger to address it.) Even so, pensions were still in fairly decent shape when the crash of 2008 came and wrecked budgets across America. The Wall Street-driven financial crisis crushed state and local revenues, and the financiers decided this was the perfect moment to dive in for yet another helping of public money by seizing control of public pensions.

In Taibbi’s colorful words: “This is the third act in an improbable triple-fucking of ordinary people that Wall Street is seeking to pull off as a shocker epilogue to the crisis era.”

Wall Street has plenty of politicians in its pockets to grease the wheels. Taibbi hones in on the notorious example of Rhode Island treasurer Gina Raimondo, a former venture capitalist who made the war against pensions her raison d’etre and handed over a billion in pension funds to hedge funds that could charge the strapped state boatloads of hidden fees to manage them. Firms like Goldman Sachs and Bain Capital, along with predators like billionaire John Arnolds, formerly of Enron, are overwhelmed with joy and have filled Raimondo’s coffers for a 2014 gubernatorial run. They know a good thing when they see it.

Wall Street’s PR message? The country’s financial woes were the fault of hard-working elementary school teachers and cops. It’s an audacious, shockingly cynical lie, but with enough money thrown behind it, the lie has spread like a cancer through the media and the political world. Rapacious bankers have successfully pitted private sector workers who have been losing their pensions against public sector folks who were still hanging on to theirs—a tried and true divide-and-conquer tactic that means big money for criminal banksters.

The villains who have helped spread this lie include the folks at Pew Charitable Trusts, an organization known for its centrism and number-crunching. Starting in 2007, Pew started rolling out studies suggesting that pensions were unsustainable, and found an eager accomplice in the form of noxious billionaire John Arnold, a right-winger and former Enron commodities trader who, as Taibbi reports, was “helping himself to an $8 million bonus while the company's pension fund was vaporizing.”

Arnold created a foundation named after himself to focus on “reforming” pensions, and got some big-name Republicans and Tea Partiers, like Dick Armey and Orrin Hatch, to get the game going. “Arnold and Pew struck up a relationship,” writes Taibbi, “and both have since been proselytizing pension reform all over America, including California, Florida, Kansas, Arizona, Kentucky and Montana.” Over and over, they cited an “unfunded liability crisis” conveniently overlooking the glaring fact that the financial crisis and various Wall Street investment schemes are the reason states and cities are having a hard time paying workers what they were owed. They pretend the problem is that worker pensions are too expensive—a big fat whopper that blames the victims of Wall Street’s own shenanigans.

Meanwhile, hedge funds continue to take over state pension funds with guarantees that their fees and hustling will be kept hidden from the public, all the while delivering underperforming returns on shitty investments. (Now it becomes clear why Wall Street had a massive freak-out at the idea that Eliot Spitzer, who understands their tricks, was nearly put in charge of managing New York City’s pensions in his recent run for comptroller.)

As Taibbi correctly concludes, the "unfunded liability" is largely a fiction. There are legitimate issues with pensions, “but the idea that these benefit packages are causing the fiscal crises in our states is almost entirely a fabrication crafted by the very people who actually caused the problem.”

And let’s just add a final twist to this tortuous story: Even if you’re not a public sector worker, Wall Street is determined to get its hands on your retirement, too, and it has got politicians in Washington, including President Obama, talking about cuts to Social Security in the name of a phony debt ceiling crisis. It's the wet dream of Wall Street to weaken Social Security and take hold of American retirement money so that scam artists can charge outrageous fees and continue their rampage of thievery against people who work hard serving their communities and simply want to retire with some modicum of dignity.

Clearly, Obama should keep Social Security off the table in any budget negotiations. His proposal to change the annual cost-of-living adjustments (COLAs) from the present Consumer Price Index (CPI) to a Chained Consumer Price Index is effectively a cut, and it would represent a betrayal of the American people that should not be tolerated. Americans are facing an oncoming retirement crisis the likes of which has not been seen in living memory, and the idea of further exacerbating it by cutting Social Security payments is both irresponsible and nonsensical. Social Security has very little to do with the federal deficit, as economists not beholden to Wall Street and Washington have explained repeatedly, and poll after poll shows that the American people overwhelmingly reject the idea of cutting it.

While we're on the subject of Washington, let's take a moment to ask what Congress is doing about Wall Street's raid on the security that millions of workers pay into. Here is a list of the people on the Senate banking committe, and here is a list of those on the House financial services committee. Every single one of them should be held accountable for this horrific betrayal of people whose only crime is to work for a living.

Lynn Parramore is an AlterNet senior editor. She is cofounder of Recessionwire, founding editor of New Deal 2.0, and author of 'Reading the Sphinx: Ancient Egypt in Nineteenth-Century Literary Culture.' She received her Ph.d in English and Cultural Theory from NYU, where she has taught essay writing and semiotics. She is the Director of AlterNet's New Economic Dialogue Project. Follow her on Twitter @LynnParramore.

Friday, September 27, 2013

How America’s 401(k) Revolution Rewarded the Rich and Turned the Rest of Us Into Big Losers



How America’s 401(k) Revolution Rewarded the Rich and Turned the Rest of Us Into Big Losers

A failed public policy experiment is tearing the country apart.

Photo Credit: Shutterstock

It was a bad idea from the get-go, but new research shows that America’s 401(k) revolution has left us even worse off than we thought. Here’s a look at how we got into this mess, and where it will take us if we don’t wise up.

The Dumbest Retirement Policy in the World

Thirty years ago, as laissez-faire fanaticism took hold of America, misguided policy-makers decided that do-it-yourself retirement plans, otherwise known as 401(k)s, would magically secure our financial future in the face of gyrating markets, economic crises, unpredictable life events, stagnant wages and rampant job insecurity. It was an extraordinary shift in thinking about public policy: Instead of having predictable streams of income from traditional pensions, ordinary people with little financial expertise would suddenly transform themselves into financial gurus, putting money aside and managing complicated investments in tax-deferred accounts.
There were red flags along the way. 401(k)s were originally supposed to supplement pensions, but clever corporate cost-cutters decided that voluntary individual accounts would replace them. Big difference! Meanwhile, throughout the 1990s, the national savings rate fell. Real wages dropped. As Helaine Olen details in her book Pound Foolish, Americans started borrowing against retirement plans to pay the mortgage or send the kids to college. The media was basically out to lunch, and politicians went on claiming the nonsense that individual retirement accounts would encourage savings and turn us all into professional money managers. The stock market would bring us double-digit returns. Whoopie!
Reality check: In 2007, the financial crisis destroyed America’s retirement fantasy. Jobs evaporated or were downsized. The stock market took a nosedive. Millions of Americans who had worked hard, straining to sock away a portion of their salary for 401(k)s, watched helplessly as a black cloud formed over their golden years. In October 2008, the Congressional Budget Office revealed that Americans had lost $2 trillion in just 15 months — money that will likely never be recovered. Not long after, President Obama betrayed the public by turning away from the jobs crisis to create a deficit commission whose leaders had the stunning lack of foresight to advise cutting Social Security at a time when the retirement train wreck was quickly picking up steam.
Today, the balance in our retirement accounts falls wildly short of what we need to keep us from destitution in old age, much less to secure a comfortable existence. According to the Vanguard Group, in 2012, the average account balance in our 401(k)s was $86,212 — and that number is skewed by high earners at the top. The amount experts say we need? $1 million or more, depending on how much you make now.


America, Land of Inequality

The long-term effects of an experiment gone awry are starting to become clear. The Economic Policy Institute has just released a study proving that do-it-yourself retirement is driving economic inequality, leaving regular Americans further behind than ever. Not since the Gilded Age has there been such a gulf between the rich and the rest. EPI’s Retirement Inequality Chartbook offers dozens of charts that examine retirement preparedness and outcomes by income, race and ethnicity, education, gender and marital status.
The report reveals that median retirement savings today stand at a paltry $44,000. But if you start looking at affluent America, the picture changes dramatically. A household at the 90 percentile of the retirement savings distribution had nearly 100 times more socked away for retirement than the median household. And the top 1 percent? Households at that lofty level had stashed more than $1.3 million in retirement account savings.
In a nutshell, the 401(k) revolution created a few big winners and turned most of us into losers.
According to researchers Monique Morrissey and Natalie Sabadis, this went down because higher income workers are much more likely to participate in 401(k)s than ordinary workers who are struggling just to pay the bills. They also have more disposable income, higher tolerance for investment risk, larger tax breaks, and they are more likely to work for employers that provide generous matches. Even if we all participated in do-it-yourself retirement plans at the same rate, growing inequality would still be the result.
The EPI study finds that 401(k) plans have also made regular people more vulnerable to shocks in the stock and housing markets and other economic trends. And if you’re young, a minority, female, or single, you’ve got extra worries. Middle-aged and older households have increased their retirement savings in recent years, but younger Americans have not. White workers are slightly better off when it comes to retirement savings in 2010 than they were two decades earlier, while black or Hispanic workers are worse off. Unmarried people, particularly women, are also falling short on savings.


Looking Ahead

As we approach another round of debt-ceiling drama this fall, Republicans like Eric Cantor of Virginia are howling for cuts to Social Security and Medicare at a time when most Americans are increasingly strapped in their post-work years. That’s not surprising. But unfortunately, many Democrats, including President Obama, have signaled their willingness to further rob Americans of their hard-earned retirement insurance by cutting plans through various schemes like changing the way cost-of-living adjustments are calculated, and means-testing, which Nobel Prize-winning economist Joseph Stiglitz and others point out is no more than a covert strategy to undermine such programs.
Cutting Social Security and Medicare will only further strain American retirements and add fuel to the fire of economic inequality. This is bad for everyone. We know that inequality is divisive and corrosive to society. A whole swath of social problems get worse in societies with bigger income differences between rich and poor: all kinds of diseases and mental illness, violence, low math and literacy scores among youth, drug abuse, lower social mobility and more people behind bars. Trust dissolves and social relationships unravel as stress and anxiety increase. The economy falters.
As Kate Pickett and Richard Wilkinson write in their book, The Spirit Level: Why Greater Equality Makes Societies Stronger, it’s not just lack of money and material resources that weaken a country, it’s the gap between rich and poor itself that makes things fall apart. This explains all kinds of incongruent phenomena, like why babies born in the U.S., a wealthy country that spends more on healthcare than any other, are more likely to die and have a shorter life expectancy than those born in Greece, a much poorer nation. And why murder rates, the number of teenage births, and obesity rates are higher in unequal societies, despite their relative wealth.
Seniors in the U.S. still appear to be relatively well off, but that's because the impact of the 401(k) revolution is just beginning to hit retirees. Pensions are disappearing fast, and many people don’t realize that Social Security benefits were already cut in 1983, leaving those born after 1960 with significantly reduced payments. The horror is coming as baby boomers face retirement without adequate sources of income.
The shiver is already felt in my age group, Generation X. It's going to be bad not just for the aged: A country full of impoverished elderly people is bad for everyone. Young people will have reduced productivity as they are forced to take time off from work to care for aging parents. Disability rolls increase as the retirement age goes up.
Weakened demand for goods and services due to empty pockets stalls the economy.
A train wreck is on the way, and the only way to avoid it is to come up with policy changes that are much bolder than anything coming out of Washington. Economist Theresa Ghilarducci, for one, has proposed a plan to phase out 401(k)s and create a new government-run savings plan that would supplement Social Security (Ghilarducci explains her plan here). The plan would be universal and mandatory, and would provide a guaranteed real 3 percent annual rate of return adjusted for inflation. That's the kind of proposal we need to be considering.
It’s time to say good-bye to the failed 401(k). And don’t let the door hit you on the way out.
Lynn Parramore is an AlterNet senior editor. She is cofounder of Recessionwire, founding editor of New Deal 2.0, and author of 'Reading the Sphinx: Ancient Egypt in Nineteenth-Century Literary Culture.' She received her Ph.d in English and Cultural Theory from NYU, where she has taught essay writing and semiotics. She is the Director of AlterNet's New Economic Dialogue Project. Follow her on Twitter @LynnParramore.

At the Limits of the Market: Why Capitalism Won't Solve Climate Change, Part 1


At the Limits of the Market: Why Capitalism Won't Solve Climate Change, Part 1

Thu, 2013-08-29 09:58
David Ravensbergen
David Ravensbergen's picture


climate change, capitalism, environmental issues in Canada

One of the great mysteries of contemporary capitalism is the fact that as a system it appears absolutely incapable of responding to the crisis of climate change.

Why can’t a system that made the automobile into an accessible mass consumer good provide us with clean and efficient mass transit, or at the very least electric cars? Why are we still burning coal, the energy source that drove the Industrial Revolution over 200 years ago? Where are all the new green enterprises leading the way into a low-carbon future?

From Joseph Schumpeter’s description of “creative destruction” to the fabled entrepreneurial powers of innovators like Steve Jobs, we’re accustomed to thinking that capitalism provides the social and economic framework that best nurtures human creativity and fosters technological innovation.

But with atmospheric concentrations of CO2 sailing past 400ppm and scientists warning of a global environmental catastrophe caused by the breaching of the nine planetary boundaries, the forces of the market are curiously silent.

To be fair, there is no shortage of innovation in green technology. Just recently, Australian scientists developed a printer capable of printing out sheets of thin, flexible solar panels that can be integrated directly into building construction materials. But while it sounds cool, the prospect of such technology rapidly scaling up and replacing fossil fuel use is limited by one overwhelming problem: profitability is the guiding force behind investment and production, even when the long-term costs massively outweigh the short-term gains. 

No longer are the long-term costs of climate change some abstract threat to be dealt with in the distant future. Earlier this year, the IMF released a report calculating that the damages incurred by climate change will cost $25 per ton of CO2 emissions. Other researchers put that number as high as $85. To put that into perspective, all of the bitumen in the Alberta tar sands amounts to an estimated total of 240 billion tons of CO2. While the oil companies are posting record profits now, we’re all going to be picking up an enormous tab later. 
It’s not that capitalism as a system makes us oblivious to the consequences of our actions. Quite the opposite: from market research to insurance to financial management, legions of people are employed in fields devoted to predicting and measuring the future.

Nor is the problem that corporations and investment banks are staffed exclusively by climate deniers—you’d be hard pressed to find a risk analyst at Goldman Sachs who doesn’t accept the science on climate change. Plus every major oil company has a climate change division devoted to calculating risk and making business plans for a warming planet.

Is it greed? It’s a tempting conclusion, particularly when we look at the spectacular excesses of Wall Street in an era of stagnant wages, precarious employment and rising living costs. But since capitalism is by definition a system of competitive profit maximization, what looks like greed from the outside is actually rational behavior; if one firm doesn’t pursue a profitable opportunity their competitors will, driving the first company out of business.
As with all complex systems, effects rarely have a single cause. But there is one explanation that’s increasingly difficult to ignore: capitalism cannot respond to the climate crisis because it is a system that seeks to commodify everything, including the negative consequences of the system itself.

Take derivatives as an example. In the United States, derivatives were originally developed as a hedging instrument to shelter farmers from the financial risks of a bad harvest. But derivatives have since evolved into a massive global market for managing all kinds of risk, with a total value between $600 and $700 trillion, according to the Bank for International Settlements. Other estimates put that value closer to $1.2 quadrillion, or more than 20 times global GDP.

The derivatives market is like a massive network of countless, interlocking insurance policies against risk, loss and negative outcomes of all stripes. Derivatives also double as a high-yield financial instrument for speculative investors.

But where we once thought of the careful calculation of risk as being at the core of capitalism, derivatives function to take uncertainty itself and turn it into a highly profitable commodity. With so many different companies purchasing derivatives as insurance policies, and banks and hedge funds then investing in the success or failure of those policies, the global derivatives market has become an incomprehensibly complex, high-stakes casino.

Even as extreme weather wreaks havoc on crop yields and threatens coastlines, new custom-made financial instruments offer the savvy investor the chance to profit from destruction. Weather derivatives offer both a profitable investment today and an insurance policy against future damages by flooding or drought. While the estimated costs of climate change continue to climb, the profits to be made by betting on those costs keep growing faster.
In effect, what we have is a situation in which investors are busy betting on what’s going to happen with the climate. Depending on how they invest, they can make money if things get worse or if they get better. If they pick the wrong horse, their bad investments can also be insured by purchasing still more derivatives.

When too many bets start going bad at the same time, as happened during the subprime mortgage crisis, the entire financial system is at risk. But the game is rigged: the now-familiar principle of “too big to fail” holds that governments will bail out megabanks and businesses when they go broke, and impose austerity policies on their own populations in order to pay for it.

Ultimately, this means that ordinary people bear the costs when the casino falls apart, but the financial players get all their bad bets reimbursed. If the costs of financial crises and climate change can be socialized while maintaining private profits, why bother with green energy and reducing emissions?

Developing new green technology, hiring workers and investing in new productive facilities involves a real risk: it may not be as profitable as purely speculative investments. With derivatives and the implicit backing of government removing the fear of failure for the world’s biggest corporations, there simply isn’t an economic incentive to make investment decisions that would help to avert climate catastrophe.

In the second installment of this post, we’ll look at a policy proposal that aims to make CO2 emissions too expensive to be profitable. By changing the structure of the market, can capitalism produce the solutions to the climate crisis?

Art by Will Brown. All Rights Reserved.