Friday, March 14, 2008
The New Okies
It seemed that every time I sat down to watch the news this week, a picture of former New York governor Eliot Spitzer appeared on the screen. The fall of Spitzer reads like a Greek tragedy. But there is a bigger tragedy unfolding -- and it has been unfolding for sometime now. Despite the media's fixation on Spitzer, what riveted my attention this week was another series of images, broadcast during the BBC's nightly newscast. In Ontario, California -- not far from Los Angeles -- a tent city has sprung up. "Over the last six months," reported The Los Angeles Times, on February 3rd, "more than 250 homeless people have pitched tents near the Ontario airport, creating a burgeoning shantytown that sprawls across vacant lots and spills into side streets." The story continues, "Pregnant women, parolees, alcoholics, the mentally ill, people fallen on hard times: They're all here living on donated food and water." The scene has been repeated in cities throughout North America for over a generation, to the shame of both Canada and the United States.
But, according to the BBC, a new wrinkle has been added to the story. Since the report in The Times, the number of residents in this refugee camp has swollen, because many of the newcomers have lost their homes to the foreclosure crisis which is sweeping the United States. If a home owner loses his or her job, if a relative requires expensive medical care, or if the new monthly payments are out of reach when their mortgages reset, thousands of people are finding themselves in the same position as those in California. It is a scene out of Steinbeck"s The Grapes of Wrath.
While the homeless were taking refuge in tent cities, dismissed investment bankers were testifying before the American Congress. Stanley O'Neil, who used to run Merrill Lynch, walked away with a severance package worth $161 million, even though the organization, under his stewardship, lost $10 billion; Charles Prince of Citigroup walked away with $61 million after staggering losses at his bank; and Angelo Mozelli reportedly pocketed some $115 million, after his nearly bankrupt company, Countrywide Financial, was gobbled up by Bank of America. Angry shareholders, however, forced him to give back $37.5 million of that.
According to salary surveys in the United States, between 1996 and 2006 CEO pay went up 45%, while the pay of the average worker went up 7%. And therein lies the problem. Economic policies of the last generation have led to an unconscionable concentration of wealth in the hands of a few. As Robert Reich (Bill Clinton's former Secretary of Labour) wrote this week,"We're reaping the whirlwind of many years during which Americans have spent beyond their means and most of the benefits of an expanding economy have gone to a relatively small group at the very top."
The story is the same in Canada. As Tom Walkom reported a year ago in The Toronto Star (see my post of March 7, 2007) "the richest 20% of Canadians own 75% of the nation's wealth" and "we allow the country's 100 chief executive officers to make, on average, 240 times more than the typical worker, up from 106 times the average wage in 1998.)"
All this is the consequence of supply side economic policy. The fallacy of that policy, says Reich, is the belief that if you juice the supply side of the economic seesaw, you will (as if by magic) stimulate demand. The problem, however, is that -- because of the concentration of wealth at the top -- there is no money at the bottom to demand anything. And, until recently, the money available was borrowed money. Now even the borrowed money has dried up. To put this situation in perspective, Reich quoted Merriner S. Eccles, who was Franklin Roosevelt's Chairman of the Federal Reserve: "As mass production has to be accompanied by mass consumption, mass consumption in turn implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. Instead of achieving that kind of distribution, a giant suction pump had, by 1929-30, drawn into a few hands an increasing proportion of currently produced wealth."
It is too soon to know whether history will repeat itself. But the parallels are obvious -- and the burgeoning tent city in California underscores them. I have previously quoted George Santayana in this space: "Those who refuse to learn from history are doomed to repeat it." John Kenneth Galbraith chronicled the political folly which spawned the Great Depression in his book, The Great Crash, 1929. The root of the problem, Galbraith wrote, was the inability of policy makers to recognize that "Money differs from an automobile or a mistress in being equally important to those who have it and those who do not."
In their inability to recognize that fact, the policy makers of the 1920's share one characteristic with the policy makers of the last twenty-five years: they had and have (as Galbraith also noted) an extraordinary capacity for self-delusion.