Rachel's Democracy & Health News #857  [Printer-friendly version]
June 1, 2006


[Rachel's introduction: As we all struggle to create a decent,
peaceable world where everyone has enough of what they need, our work
takes place within contexts that are often invisible. One such
context is the slowed rate of economic growth since the 1970s. It
explains much of what's in the news each day.]

By Peter Montague

In the U.S., what we call "the system" is beset by multiple crises.

** The end of cheap oil is coming.

** Global warming is upon us.

** Water shortages are worsening in the U.S. and globally.

** Rising inequality divides the top 2% from the rest of us.

** The rising cost of medical care and the high cost of medical
insurance weigh on the minds of most people.

** The promise of secure retirement is fading for many aging boomers
(which of course affects their children).

** The social safety net created after the Great Depression is being
shredded bit by bit year after year.

** Families and indeed the nation are deeply in debt.

** Widespread insecurity afflicts large portions of the populace (good
jobs disappearing, debt rising, the children's future uncertain).

** A serious time crunch has beset many families.

** Some ecological limits have appeared on the horizon (no place left
to throw away toxics; cost of some resources critical rising, etc.).

** The political party that controls the White House, the Congress,
and much of the judiciary now owes its electoral success to a large
group of people who believe the world is going to end soon, which may
make earthly problems seem unimportant to many of them. For the first
time in American history, a religious party now controls the

Perhaps the future is bright

Perhaps "the system" will navigate through all these interlocking
crises without encountering any serious economic difficulties, but
perhaps not. It seems possible that as the combined effect of all
these problems grips the nation more tightly, economic growth-rates
may slow down further, dipping below their current levels.

Unfortunately, we are already getting a preview of how "the system"
will respond to slowing growth. The rate of economic growth (measured
by GDP) has been slowing for the past 35 years,[2,3,4,5,6] and the
system's response has not been pretty. Without going into a lot of
detail, I believe much of what passes for "the news" each day can best
be explained as "system responses" to slowed growth.

For the 100 years spanning 1870 to 1970, the U.S. economy (measured by
gross domestic product, or GDP) grew at an average annual rate of 3.4%
per year. Since 1970, the U.S. economy has grown just 2.3% per
year.[5,pg.5] This may seem like a small difference, but it really
isn't because the effects are cumulative, year after year. The
difference between two percent and three percent isn't one percent --
it's fifty percent.[5,pg.7; 6,pgs.63-75]

Here's another way to look at it: if the U.S. economy had grown at
3.4% per year since 1973, instead of 2.3%, the additional wealth
created during the two decades 1973-1993 would have added up to an
extra $12 trillion (adjusted for inflation) -- enough to replace every
factory in the U.S., including all capital equipment, with a modern
new factory; or enough to pay off the entire government debt plus all
home mortgage debt plus all credit card debt.[5,pg.5]

If economic growth had maintained its historical level since 1970, the
average family in 1993 would have had an additional $5,500 to spend
each year. Over the 20 years, 1973-1993, the average family would have
had at least an additional $50,000 of income -- enough for a young
couple to buy a first home, a low-income family to maintain health
insurance, or for someone to go to college. State and local
governments would have collected an additional $900 billion in taxes
during the 20 years -- to support schools, libraries, parks, public
transit, emergency services, police and fire protection, affordable
housing, local economic development, and so on. [5,pgs.10-11]

The U.S. is not unique. The trend of declining growth-rates can be
seen in all the wealthy nations of the world, the 29 members of the
OECD [Organization for Economic Cooperation and Development]. During
each passing decade since 1970, growth in OECD countries has declined,
compared to the previous decade.[6,pg.38] The trend of slowing growth
doesn't affect just the average family. Even more importantly, it
affects the super rich -- in the U.S., the one percent of us who own
50% of all private wealth, or, more broadly, the 5% of us who own
2/3rds of all private wealth.[7]

Understandably, the wealthiest few expect a decent return when they
invest their capital, and slow growth makes decent returns hard to

What is a decent return on investment? Here's one way to answer that
question. When the President's Office of Management and Budget (OMB)
considers a new regulation (for example, to control mercury emitted by
power plants) the agency asks whether the benefits justify the costs.
They say to themselves, "This regulation will cost industry X dollars
per year. How much wealth could those dollars create if they were
invested with a return of Y percent per year? In that equation, OMB
now sets Y equal to 7 percent. OMB assumes a typical business
investment should yield a 7% annual return.[8]

Of course in recent years, many investors have been looking for 20%
annual returns so 7% may seem puny by comparison. Still, 7% is twice
the long-term historical rate of return on investment (measured as
growth of GDP) and three times the average rate of return since 1973.
So modern owners of capital expect decent returns that far exceed
historical averages. Therefore they are likely to be unhappy if their
return merely meets the historical average, and doubly dissatisfied
with returns 30% below the historical average (e.g., 2.3% instead of
3.4%). They naturally believe they deserve better -- America deserves
better -- the world deserves better -- and they believe government
should help boost their returns one way or another. After all,
capitalism as we know it would stop working if capitalists stopped
investing, so providers of capital deserve a decent rate of return,
they might argue, and they would have a point.

According to the hypothesis I'm describing here, five features of
modern life have caused the downturn in economic growth in the U.S.
(and in the rest of the industrialized world):

(1) Saturation of effective consumer demand; those who can afford to
buy stuff already have about as much stuff as they need or can afford;
indeed, to pump up demand further, U.S. industry now spends $250
billion each year on advertising.

(2) A reduced demand for fixed investment (such as factories) and
working capital (money to meet business expenses and expand
operations).[3; 6,pgs.37-39] It's getting harder to find safe,
productive places to put capital to work these days, partly because of
saturated consumer demand and partly because there's a glut of

(3) The proportion of people in the labor force can't increase much
beyond where it is today;[3] all the able-bodied are pretty much
already working or looking for work; the rest are children, elderly or

(4) The rate of growth of productivity of workers (the rate at which
output per hour grows) has slowed in recent decades;[6,pgs.63-75]

(5) Some ecological limits have come into view -- for example, toxic
industrial chemicals are now found everywhere on earth, from the tops
of the tallest mountains to the bottoms of the deepest oceans and
everywhere in between, including human breast milk. We can no longer
convincingly argue that we can throw away unwanted industrial
byproducts without affecting living things, so our byproducts must now
be managed at considerable expense.[10,11]

The system has responded to these realities in the following ways:

System response No. 1: Easing Credit

No need to belabor this. Credit card debt, home mortgage debt and the
national debt have all skyrocketed in recent years.[12,13] Debt is
beneficial for those with money to lend, especially credit card debt,
which now garners doubt-digit returns. As in no previous generation,
young people now leave college (and even high school) saddled with
debt.[14] As Kevin Phillips has pointed out, we are witnessing the
"financialization" of the U.S. economy. In the year 2000, moving money
around became a larger portion of GDP (20%) than manufacturing
(14.5%).[1,pg.265; and see pgs. 265-346]

System response No. 2: Promoting International Capital Flow

This is what the corporate "globalization" project is about --
removing barriers for people with money to invest in cutting down the
rain forests in Indonesia or setting up a cyanide-leach gold mine on
native land in South America or northern Canada. Globalization is
about clearing the decks for capital to cross borders unimpeded, in
search of a decent return.

System response No. 3: Reduced Restrictions on Financial Firms

Banks, savings and loans, and brokerage firms used to be rigidly
segmented by law; now all their functions have been legally merged.
The savings and loan bailout in the '80s was the first result; the
"dot.com" bubble of the late '90s was the second; the Enron-Worldcom-
etc. debacle was the third. There is no end in sight.[6]

System response No. 4: Disinvest in Public Infrastructure (roads,
bridges, tunnels, airports, wastewater treatment plants).

"Our infrastructure is sliding toward failure and the prospect for any
real improvement is grim," says William Henry, president of the
American Society of Civil Engineers, releasing the society's 2005
Report Card for America's Infrastructure at a news conference in
March.[15] Of course this is a short-sighted policy, but almost by
definition the search for decent return on investment focuses on the
next quarter, not the next decade or two.

System response No. 5: Expand the Defense Budget

Defense is the only national industrial policy that almost everyone
will agree to, or at least acquiesce to, perhaps for fear of being
labeled unpatriotic. Foreign enemies are the ultimate consumers of our
military preparations, so in the face of flagging demand for toasters
and SUVs our economy now arguably requires a growing supply of foreign
enemies.[16] As the President himself said shortly after he committed
the U.S. to a perpetual war against evil-doers world-wide, "Bring 'em
on." War is good business, with future prospects that seem to grow
brighter each passing day.

System response No. 6: Cut Taxes for the Wealthy

Cut income taxes, estate taxes, capital gains taxes, and corporate
taxes to benefit the wealthiest Americans, shifting more of the tax
burden onto the middle class and the working poor.[17]

System response No. 7: Tax Evasion and Tax Cheating.

Both are now rampant and have been the subject of several recent books
offering abundant detail. Meanwhile federal authorities turn a blind

System response No. 8: Creation of New Industries:

Space exploration, laser-weapons-in-space, casino gambling, the
pornography industry, the recreational drug industry (and its
conjoined twin, the prison industry) -- all demonstrate America's "can
do" entrepreneurial spirit in the face of slowed growth.

System response No. 9: Diminishing Social Investments

Slowed growth requires that the economic pie be divvied up in new
ways. Therefore, all social investments have been put on the chopping
block -- veterans' benefits, Medicare, Medicaid, Social Security,
education loans, Head Start, public lands, water and air quality,
charity hospitals, Amtrak, the infrastructure of roads, tunnels,
bridges, and entire government agencies (the Internal Revenue Service,
the Department of Education, the Department of Health and Human
Services, among others) and so on and so forth. There is no end to the
proposed cuts. Nothing is sacred except of course Defense (and more
recently its domestic twin, Homeland Security) where the bipartisan
sense of entitlement to insider gains has developed over decades of
exemplary military-industrial cooperation.

Cutting the social safety net has the salutary effect of disciplining
the workforce to accept lower wages, longer hours without overtime
pay, increased workload on the job, reduced vacations, diminished
health, elimination of pensions, and so on. (See System Response No.
12, below.)

As a result of these changes, the main historical difference between
the two political parties disappeared at least two decades ago. The
Democrats now find, for the first time in living memory, that they
have no political agenda of their own. As a result, voter disaffection
has risen to historic proportions. Cynicism spreads like kudzu.
Political apathy then cements the status quo in place.

System response No. 10: Expanding and Discrediting Government

Given the need to distribute the economic pie in new ways,
discrediting government has become a necessary political goal because
government has occasionally intervened on behalf of "the little
people" against "the big people."

Traditionally, government has made modest attempts to level the
playing field for everyone, in keeping with the slogan, "With liberty
and justice for all." Without basic economic security for families and
individuals, neither liberty nor justice is possible.

To his credit, George W. Bush has provided real innovation here.
Previous Republican theorists wanted to shrink government so small you
could drown it in a bathtub. Mr. Bush recognized that a large inept
government was far more useful that a small government, from the
viewpoint of those aiming as a matter of high principle and national
necessity to transfer a larger portion of the pie from working people
and the middle class to the super rich.

The federal response to Katrina was perfect -- a huge bureaucracy that
utterly failed. What better way make people think that government is
hopeless, that taxes are a waste? Who wants more of a corrupt,
bungling bureaucracy that is indifferent to human suffering? Drowning
such a creature in a bathtub seems too kind.

Meanwhile, insiders who know how to work the system -- for example,
Halliburton, Raytheon, and Boeing -- are earning record returns, and
two important public purposes are thereby fulfilled: rates of return
on invested capital are pushed upward, at least for a well-connected
few, at the same time government is disgraced and discredited. Voters,
dismayed, stay home in droves, so the status quo is doubly secured.

Thanks to this President's extraordinary vision and leadership, it may
take decades to restore confidence in government as the leveler of
playing fields, if it can be done at all.

System response No. 11: Cut wages for workers.

Over the past 30 years, this has been accomplished in the U.S. by a
variety of creative techniques, and it must be considered the
centerpiece of the ongoing effort to redistribute the pie, to maintain
investors' portions at fair, historical levels or better.[7]

Techniques for cutting wages now include:

a. As labor productivity has increased in recent decades (meaning,
more output per person-hour of work), modern owners have simply
refused to pass the increased income on to workers in the form of wage
increases. This is a new trend of the past 30 years, but unmistakable.
Productivity has continued to rise during the past 3 decades (though
more slowly than historical average rates), but wages have stagnated
and in many cases declined. The owners are simply keeping more for
themselves.[20] This approach has both simplicity and transparency to
commend it.

b. Keep the minimum wage low, rising at a rate that fails to keep up
with inflation. The minimum wage sets the floor beneath all wages, so
if it fails to rise with inflation, all wages will tend to stagnate or
decline. This has been accomplished through exemplary bipartisan
consensus. Congress last raised the minimum wage in 1997 (to $5.15 an
hour, an annual income of $10,300).

c. Eliminate existing labor unions and prevent the formation of new
unions. Unionized workers earn, on average, 21% more per hour than
non-union workers. Perhaps more importantly, organized workers have
come to expect somewhat safe and modestly healthful working
conditions, a modicum of medical benefits, overtime pay, 2-week paid
vacations, and perhaps, in extreme cases, even retirement benefits.
When growth is slow and owners are feeling that their return on
investment is unfairly pinched, unions are seen as standing in the way
of efforts to redistribute the pie upward. So unions must go. It's now
so blatant that Human Rights Watch issued a stinging report in 2000
accusing the U.S. of repeated intentional violation of the
internationally-recognized human rights of its workers.[21]

d. Eliminate defined benefit pensions, and, in an increasing number of
instances, eliminate pensions entirely, as was done recently at United
Airlines with the good help of a Reagan-appointed federal judge.
Efforts to eliminate pensions entirely are gathering steam, as one
would expect if my hypothesis about the bipartisan response to slow
growth is correct.[22]

With the average age of the population rising, the reduction or
elimination of retirement benefits (such as Medicare, Medicaid, Social
Security, and private pensions) may at first blush seem like a
political powder keg.[22] Perhaps the thinking among the leaders of
both parties is that an elderly, destitute population will remain so
frightened and disoriented that it cannot effectively make its
political will felt. In any case, efforts to eliminate retirement
benefits seem to be proceeding apace and working well. As the man who
jumped off the skyscraper said as he fell past the 20th floor, "So far
so good."

e. Increasingly, the U.S. workforce has been put into direct
competition with low-wage workers in Third World countries. Without
strict oversight and enforcement of a kind never yet seen anywhere in
the world, this sort of competition inevitably creates a "race to the
bottom" for wages, working conditions, and environmental standards
simultaneously -- all of which are ways to "externalize" costs of
production and thus to move a larger, fairer portion of the pie into
the domain of the investor class.

f. Reduce the availability of health insurance. In 2003, 45 million
Americans had no health insurance, up 1.4 million from the year before
and up 5.1 million from the year 2000.[23]

System response No. 12: Promote rapid technical innovation

Business and government together are constantly searching for "the
next big thing," hoping to induce rapid technical innovation. It's the
star wars missile defense shield; no, it's biotechnology; no, it's
nanotechnology; no, it's really "synthetic biology" -- the creation of
entirely new life forms never previously known on planet earth. Of
course, by definition, rapid innovation and deployment are
incompatible with thoughtful consideration of likely consequences
prior to deployment. However, ill-considered deployment has been the
norm for 180 years, so it is now thought to be "business as usual" and
is easily justified as the price of progress. Rapid innovation churns
the economy and creates manifold opportunities for decent return on
investment -- particularly during the early stages of a new product or
process. It is only later that trouble becomes apparent and profits
decline, at which point government typically steps in to pick up the
pieces and shield investors from the consequences of their impetuous
zeal. (Think Superfund. Think nuclear power.)

Despite official protestations to the contrary, U.S. government
policies generally encourage industrial enterprises to "externalize"
the costs of their damage to nature and human health, and this trend
has accelerated in recent years as economic growth has slowed. The
truth is, many industrial operations simply cannot afford to
internalize their costs and at the same time provide a decent return,
so they MUST externalize their costs. They don't really have a choice,
given the pressing need for decent return on investment.

[To be continued next week.]


[1] Among other sources, see Kevin Phillips, American Theocracy; The
Peril and Politics of Radical Religion, Oil, and Borrowed Money. New
York: Viking, 2006. ISBN 0-670-03486-X. According to Phillips, roughly
55% of those who voted for Mr. Bush in 2004 believe that the world
will end in the battle of Armageddon, as described in the Book of
Revelation. As Phillips says (pg. vii), "... the last two presidential
elections mark the transformation of the GOP [the Republican Party]
into the first religious party in U.S. history." Phillips is a well-
known Republican.

[2] Bernstein, Michael A., and David E. Adler. Understanding American
Economic Decline. Cambridge: Cambridge University Press, 1994. ISBN

[3] Bjork, Gordon C. The Way It Worked and Why It Won't; Structural
Change and the Slowdown of U.S. Economic Growth. Westport, Conn.:
Praeger, 1999. ISBN 0-275-96532-5.

[4] Cohen, Richard and Peter A. Wilson. Superpowers in Economic
Decline; U.S. Strategy in the Transcentury Era. N.Y.: Taylor and
Francis, 1990. ISBN 0-8448-1625-6.

[5] Mardick, Jeffrey. The End of Affluence; The Causes and
Consequences of America's Economic Dilemma. N.Y.: Random House, 1995.
ISBN 0-679-43623-5.

[6] Shutt, Harry. The Trouble with Capitalism; An Enquiry into the
Causes of Global Economic Failure. London: Zed Books, 1998. ISBN

[7] Data on our growing inequalities of wealth are available from
several sources, but my current favorite is Gar Alperovitz, America
Beyond Capitalism; Reclaiming Our wealth, Our Liberty and Our
Democracy (Hoboken, N.J.: John Wiley & Sons, Inc., 2005); see pgs.
204-206. See also 6.] Chuck Collins and Felice Yeskel, Economic
Apartheid in America (New York: New Press, 2000) with revised and
corrected data available here. See also, for example, Edward N.
Wolff, Top Heavy; the Increasing Inequality of Wealth in American and
What Can Be Done About It (New York: The New Press, 2002). Another
excellent book is Michael Zweig's, The Working Class Majority;
America's Best Kept Secret (Ithaca, N.Y.: Cornell University Press,
2000); ISBN 0-8014-3637-0.

[8] "EPA Revises Regulatory Reviews To Discount Long-Term Benefits,"
Inside EPA, October 8, 2004.

[9] Floyd Norris, "Too Much Capital: Why It Is Getting Harder to Find
a Good Investment," New York Times March 26, 2005, pg. C1.

[10] Peter M. Vitousek, and others. "Human Appropriation of the
Products of Photosynthesis," Bioscience Vol. 36 No. 6 (June, 1986),
pgs. 368- 373. Available here.

[11] Peter M. Vitousek and others, "Human Domination of Earth's
Ecosystems," Science Vol. 277 (July 25, 1997), pgs. 494-499; available
here. And see Jane Lubchenco, "Entering the Century of the
Environment: A New Social Contract for Science," Science Vol. 279
(Jan. 23, 1998), pgs. 491-497, available here.

[12] Gretchen Morgenson, "After the Debt Feast Comes the Heartburn,"
New York Times Nov. 27, 2005, pg. 3-1.

[13] See Kevin Phillips, American Theocracy; The Peril and Politics of
Radical Religion, Oil, and Borrowed Money. New York: Viking, 2006.
ISBN 0-670-03486-X. See Part III, "Borrowed Prosperity," pgs. 265-387.

[14] http://www.precaution.org/lib/06/prn_generation_of_debtors.06

[15] "Crumbling Infrastructure Erodes Quality of Life in U.S.,"
Environment News Service March 10, 2005.

[16] William Rivers Pitt, "The Thing We Don't Talk About,"
Truthout.org June 23, 2005.

[17] Robert Johnson, "Little Dogs Don't Pay Taxes," New York Times,
August 1, 2004, Sunday Business Section, pg. 2.

[18] Donald Barlett and James B. Steele, America: Who really Pays the
Taxes? (New York: Touchstone, 1994; ISBN 0-671-87157-9).

[19] Donald Barlett and James B. Steele, The Great American Tax Dodge;
How Spiraling Fraud and Avoidance Are Killing Fairness, Destroying the
Income Tax, and Costing You (Berkeley, Calif: University of California
Press, 2002; ISBN 0520236106).

[20] Economic Policy Institute, The State of Working America
2004/2005, September 5, 2004.

[21] Lance Compa, Unfair Advantage; Workers' Freedom of Association in
the United States Under International Human Rights Standards (New
York: Human Rights Watch, August 2000). ISBN 1-56432-251-3.

[22] See, for example, Eduardo Porter and Mary Williams Walsh,
"Benefits Go the Way of Pensions," New York Times February 9, 2006;
and see Mary Williams Walsh, "The Nation: When Your Pension is
Frozen," New York Times January 22, 2006; and Mary Williams Walsh,
"Whoops! There Goes Another Pension Plan" New York Times, September
18, 2005, pg. 3-1; and Mary Williams Walsh, "How Wall Street Wrecked
United's Pension," New York Times July 31, 2005, pg. 3-1.

[23] Robert Pear, "Health Leaders Seek Consensus Over Uninsured," New
York Times May 29, 2005, pg. A1.