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A History of the Great Bust—Still With Us

Richard Du Boff (rbd725 [at] taught economics and history for years at Bryn Mawr College, and at Haverford College, Lincoln University, and the Institute of Social Studies in The Hague. He has written for Monthly Review since 1968 and is currently working on issues of macroeconomics and globalization.

Michael Perelman, The Confiscation of American Prosperity. From Right-Wing Extremism and Economic Ideology to the Next Great Depression (New York: Palgrave Macmillan, 2007), 239 pages, $30.00 hardcover.

Yves Smith, Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism (New York: Palgrave Macmillan, 2010), 362 pages, $30 hardcover.

Some forty years ago, the American business empire viewed itself as under siege as a result of government interventions threatening its freedom of action, demands for annual wage increases in the face of declining corporate profitability, import penetration of its home markets, as well as by loss of global hegemony symbolized by defeat in Vietnam. The empire struck back. A conglomerate of right-wing forces proceeded to declare war on the social reforms and institutions that had taken shape since the 1930s under the wing of an expanding federal government.

As an operation in national politics, that war can be ranked among the most successful in U.S. history, and, in their lucid moments, its proponents must look back on it with some disbelief. The federal regulatory apparatus has been frozen in place, even pared back. Regulations in banking and finance have been abolished, and entire industries, from airlines and natural gas, to trucking and telecommunications, deregulated. The federal judiciary has been subverted, with lifetime appointments of right-wing ideologues, many of them in their thirties and forties; the power and reach of labor unions has been all but destroyed. The corporate income tax has been eroded to the point where several multinationals pay no taxes at all, and personal income taxes have been cut at both federal and state levels. Warren Buffett has expressed alarm over the serial tax cuts, mostly benefiting the rich: “If class warfare is being waged in America, my class is clearly winning.”1

In “How the Right Wing Captured America,” Part Two of The Confiscation of American Prosperity, Michael Perelman shows us how the remaking of the economic and political landscape in the United States was accomplished. The initial spark appears to have been the wave of strikes in the winter of 1945-46 (“nothing less than catastrophic civil war,” in the words of one business writer). It led straight to “the first blow against the New Deal…the passage of the Taft-Hartley Act in June 1947” over the veto of President Truman.2 Business activism continued over the next two decades, mainly in the form of attacks on Keynesian economics and government spending, but for the most part, it was sporadic.

This was the Golden Age of U.S. capitalism; large productivity gains allowed corporations to reap supernormal profits yet accommodate steady wage increases at the same time; export markets for U.S. goods were secure, and government generally minded its own business because “what was good for our country was good for General Motors, and vice-versa,” as GM President Charles E. Wilson announced in 1952. It all made for a quarter century of uninterrupted increases in prosperity, until the “excess of democracy” of the 1960s and the economic slowdown of the 1970s brought an end to the peaceful coexistence.3

For Perelman, “three distinct strands of thought” converged in the 1970s to make up a belligerent right wing: libertarians, cultural conservatives, and big business and its academic and think-tank acolytes. “The Roe v. Wade decision and the flaunting of social mores aroused religious conservatives. Falling profits together with the political successes of Ralph Nader gave conservative class-warriors a sense of urgency in their crusade to turn back the clock on regulation and taxes. The libertarians opposed increased regulation.”4 Each had its victories, but for Perelman, the wins and losses scorecard of this war is less important than its significant outcome—which could not be called a direct goal for any of the radical conservatives or the corporations that threw in their lot with them, even though it was built into nearly every aspect of their endeavors—the massive shifting of income to the rich.

The distribution of income in the United States now rises to a jagged peak of inequality matched only, if ever, by that of the late 1920s, possibly 1860 or 1914, all of them “pinnacles…followed by a major upheaval.”5 Since the 1970s, the share of the nation’s gross pretax income going to the top 10 percent of all households (with incomes above $110,000 in 2007) has risen sharply, from 32.9 percent in 1976 to 49.7 percent in 2007—meaning that the top tenth now gets nearly as much as the bottom 90 percent put together. But the gains are, in turn, concentrated within smaller and smaller segments of the top tenth: the top 5 percent have done better than the next 15, the top 1 percent better than the next 4, and so up the line.6 From 1976 to 2007, the share of total income going to the top 1 percent (incomes at least $398,000 in 2007) rose from 8.9 to 23.5 percent; this percentile alone captured 58 percent of total income growth in the nation between 1976 and 2007. Worse yet: the top 0.01 percent—the top ten-thousandth, amounting to 14,988 households—had 6.04 percent of all income in 2007 compared with 1.7 percent thirty years earlier. Admission to this elite required an $11.5 million income or more in 2007. All these figures show income before individual income taxes are paid, but since 1980, tax rates for top households have fallen more than rates on any other group, and tax avoidance schemes have multiplied.7

Since the implosion of the last three years, the superrich have no longer been getting richer. But the recovery under way, such as it is, appears to be restoring finance-based incomes apace, and even if the share of the topmost fails to return to its 2005-2007 level, income inequality is likely to remain far greater than it was for virtually all of the past century. Among mortals, there is no known distribution of abilities and talents as unequal as the distribution of earnings, but the United States today may be in a realm of its own.

The distribution of wealth—property such as bank accounts and savings accounts, stocks and bonds, rental properties, real estate—has always been more lopsided than income and has followed income on the way up. By 2004, the top 1 percent of wealthholders owned 42 percent of all financial and real assets (excluding principal residences), the most unequal distribution since the 1920s, and down from 47 percent in 1998 due to the slump in the stock market. The top quintile owned 93 percent of such assets in 2004.8

Perelman’s lead chapter deals head on with the distribution of income and wealth in the United States, confirming that for him this is the decisive change in the political economy of the nation over the last four decades. The causes were essentially political rather than economic. Computer-related technologies have not increased the demand for skilled labor over unskilled, or college graduates over the rest of the labor force; globalization—in this instance, the internationalization of production by multinational companies—has cheapened middle management by increasing the flexibility and substitutability of personnel and offshoring white-collar work. Nor does the diversion of incomes to the top of the pyramid involve property incomes (profits and dividends, interest, rents of various kinds), which have always flowed preponderantly to the upper reaches of the distribution.

What has happened is “a dramatic increase in labor income,” an explosion of top salaries and bonuses going to the corporate class.9 It represents the compensation of the top officers and executives of the Fortune 500, maybe 600 or 700, industrial and financial companies, a few dozen hedge funds and private equity funds, and a handful of cinema and sports celebrities thrown in.

The numbers are well known. In 1970, the top ten percent of corporate CEOs received about forty-nine times as much as the average wage earner, counting only direct pay; by 2000 the ratio reached 217 to one. In 2007 the CEOs of the Standard & Poor’s 500 companies averaged $10.5 million, 344 times the pay of a typical worker; this was less than in 2000, when these CEOs took home 525 times as much.10 Rewards of a scale like this are not economically ordained—they have no basis in productivity. They constitute a power grab, an industrial coup d’état. Solid evidence is that the pay of the top five executives in companies in the Standard and Poor’s 500, the Mid-Cap 400, and Small-Cap 600 indexes now takes a 10 percent slice out of company earnings, more than twice as much as in 1993-1995.11 During these years, the performance of top management not only failed to improve but also, by several benchmarks, deteriorated.

The other forces that have been driving the new inequality are the tax cuts for top brackets, the splintering of labor unions, the erosion of the minimum wage, and wage repression above and beyond normal methods of reducing labor costs per unit of output—threats to move production abroad unless wage concessions are forthcoming, hiring new workers at lower wages and fewer benefits than on-the-job workers, and changing job categories from employee, with wages and benefits, to independent contractor, temp, part-timer, and freelancer (an estimated 26 percent of the U.S. workforce had jobs in 2005 that were “nonstandard”).12

So many of the hyperincomes have been generated in the financial sector that it also is hard to believe that deregulation played no part. The Depository Institutions Deregulation and Monetary Control Act of 1980 and the Depository Institutions (Garn-St. Germain) Act of 1982 formed the first wave of the financial deregulation that crested in 1999 with the Financial Services Modernization (Gramm-Leach-Bliley) Act that repealed the Glass-Steagall Act of 1933 by allowing banks, securities companies, and insurance companies to combine. The 1980 and 1982 legislation decontrolled interest rates and the price of bank services, deregulated the savings and loan industry, and allowed mergers of commercial and savings banks across state lines, increasing monopoly power, which always sends the bill to consumers.

Perelman fears dangerous consequences from the great inequality surge.13 Compressing the lower and middle levels of the income distribution weakens aggregate demand: because the rich spend lower proportions of their incomes than everyone else, the economy grows more slowly, reinforcing tendencies for capitalist economies to stagnate. The gap between soaring executive salaries and the earnings of ordinary workers gives rise to resentment and a sense of exploitation, undermining the efficiency of labor at the point of production—the workplace, where personal frustrations and bitterness toward the social order are likely to feed on each another and lead workers to engage in counterproductive behavior, including excessively long lunches and breaks, sick leave abuse, sloppy workmanship, and use of drugs and alcohol on the job. Inequality, the relevant data show, breeds crime.

And it unfailingly leads to disaster. “Each time the United States has increased income inequality disaster has followed….When the powerful grab too much too fast, the system is almost certainly headed for a disaster. Extra pressures build up, usually because the rich and the powerful have pushed their advantage too far. Then, the stage is set. Although the present increase in inequality,” concludes Perelman, “will lead to another calamity, its onset need not be as dramatic as the Civil War, World War I, or the Great Depression.”14

This was written in 2007, before the financial tsunami of 2008 and the Great Recession. The timing could not have been better. But if disaster has followed inequality peaks “each time,” the disasters could hardly be more dissimilar. The inequality peak of 1860 was followed by civil war; the peak of 1914 by world war; 1929 by Great Depression; and 2008 by what appears to be a barely contained version of 1929, except that this time, the worst financial meltdown and the banking insolvencies happened in the first stage rather than a second. It may be overreaching to attribute the Great Recession of 2007-2010 to the income and wealth inequalities of the past thirty to forty years, rather than to the long wave of credit expansion culminating in the real estate bubble of 2004-2007. But maybe not entirely. The tremendous surplus incomes that accrued to the top tier produced a tremendous accumulation of speculative capital that certainly helped give us what we have.

In closing, Perelman addresses “the reasons for the silence of economics on such matters” and the historical record of its practitioners and fellow travelers.15 From the dawn of higher education in the United States, the training of economists has been rooted in laissez-faire: free markets efficiently allocate labor and capital to their most valuable uses, and government intervention in the process is not only unnecessary but also detrimental to the maximization of society’s welfare. In the present age, the sins of economists become “omission and collaboration”—omission of serious analysis of the turbocapitalism of our times; collaboration in bestowing legitimacy, even respectability, on the agents that control production, investment, and finance.

But a Baedeker for the economics profession is supplied by Yves Smith, creator of the Naked Capitalism blogspot ( At the outset, Smith promises to explain to the reader “how the widespread adoption of largely unproved but widely accepted economic theories led to policies that produced the global financial crisis that began in 2007…[and] how ideologies establish and defend themselves even as evidence against them mounts.” Later she adds “orthodox economics is peculiarly silent on the subject of banking and finance…[and] there is no economic theory of how the financial system interacts with the real economy.”16 Nearly three-quarters of Econned is devoted to finance, banking, securities markets, and their deregulation, urged for years by economists, several of them Nobel laureates.

The explosive growth of finance since the 1970s was accompanied, every step of the way, by economic rationales, starting with the “efficient market hypothesis”: prices in free markets adjust quickly to incorporate all relevant supply and demand information, so that investors and traders cannot make profits by counting on late-breaking news. In other words, you can’t beat the market. The corollary is that systematic valuation errors cannot endure, and the prices of financial assets sooner or later settle around the real, underlying values of what they represent. The first generation of financial economists expanded the domain, with models that measure the probabilities of loss in any portfolio of assets, no matter how diverse and risky. Next they added formulas for determining the volatility of the stellar financial innovation of the past quarter-century—derivatives based on any asset imaginable and then some. Soon companies of all sizes were using derivatives not only to hedge long-known risks (commodity prices, interest rates, foreign exchange rates) but also to speculate on them and scores more with new instruments that became increasingly complex, and “exotic.” Could it ever happen that markets for entire classes of finance might be mispriced? And any market might not correct itself? Perish the thought.

Myron Scholes and Robert Merton, both of whom received Nobel prizes in economics for their models of options pricing, became the unwitting heralds of the great financial bust: they were directors of the Long-Term Capital Management hedge fund, which collapsed in 1998 and nearly took the whole financial system with it.17 But the LTCM debacle had no impact on the engines of finance; soon it was followed by a “wall of liquidity” built up by Alan Greenspan that fueled the higher stage of speculative borrowing. The capstone chapter of Econned shows, better than anything written to date, how three interrelated types of innovations in a deregulated financial sector—securitization (most dangerously in the form of collateralized debt obligations or CDOs), repurchase agreements (repos), and credit default swaps—created a shadow banking system that led to the credit crisis of 2008 and economic breakdown in 2009.18

Smith questions the traditional concept of the firm in economics, as one that maximizes profits under the constraints of supply and demand conditions in a given market. “Economic theory says that share ownership by employers and managers should lead them to produce the best long-term results for the enterprise.” That model has been altered by a number of economists, but its assumptions, Smith adds, are “as flawed on Wall Street [other industries as well] as they were with Enron, where 62 percent of the 401(k) assets were invested in Enron stock, and senior management also had significant share ownership.” The balance of power has shifted toward finance, and forces that encourage “looting…[and even] going broke at society’s expense….Capturing the maximum amount possible in the current bonus period tallies exactly with the topsy-turvy scheme of ‘maximizing current extractable value.’”19 The tactics run from pilfering a company, piling up levels of debt that can, often will, drive it into bankruptcy, to leaving it badly undercapitalized, with the expectation that it will be folded into a subsidized merger or bailed out, leaving the top executives with umbrellas of platinum. In some cases, the edifice may end up simply crashing (Lehman, Bear Stearns, Enron, the Savings and Loans of the early 1990s), but value is extracted until doomsday, although a few of the robbers may get caught with their hands in the till and go to jail.

Econned comes with a compendium of topics that add real value to this book—on structured finance (the basis of CDOs), neoclassical economics and the incoherence of its demand function, Gaussian distributions (hijacked for false promises of estimating the odds of default in large groups of securities), and shorting subprime bonds in large quantities. Like Perelman, Smith notes how brand-name economists support any kind of income and output generating scheme that “grows” the gross domestic product, even when the rewards flow to the rich and leave everyone else even worse off. While that result may be an extreme, “rising income inequality has been rationalized as an inevitable and acceptable outcome of lower [international] trade barriers and the application of technology that promotes overall growth.”

Income inequality should not be a concern only for economists. One study by public health experts “that was, predictably, not well publicized in the United States,” found that inhabitants of countries with greater income inequality show lower life expectancies, even after adjusting for differences in income levels and diet. But economists who specialize in redistribution of income as an object of public policy are likely to see their proposals denounced by hired guns. “Most of the time,” writes Smith, economists “are working on behalf of a particular interest group or politician….And the conflict shows.”20

Together, these two works, one (Perelman) in the tradition of Marxian political economy, the other (Smith) not, comprise a history of the great boom of 1982-1999 and the great bust still with us.


  1. Quoted in Perelman, 11.
  2. Perelman, 21, 55.
  3. “Some of the problems of governance in the United States today [1975] stem from an excess of democracy.” Harvard political scientist Samuel P. Huntington, quoted by Perelman, 33.
  4. Perelman, 55.
  5. Peter Lindert and Jeffrey Williamson, American Inequality: An Economic History (New York: Academic Press, 1980), 51, cited by Perelman, 13.
  6. On this, see Perelman, 3-8; Anthony Atkinson, Thomas Piketty, and Emmanuel Saez, Top Incomes in the Long Run of History, January 2010, at < >, 4-6 and Figs. 1-3.
  7. In 2005, for example, the top four hundred households earned an average of $214 million and paid 18.2 percent in federal income taxes. “Plutocracy Reborn,” The Nation, June 11, 2008.
  8. Of stocks and mutual funds, the top 1 percent owned 45 percent in 2004; Edward N. Wolff, Recent Trends in Household Wealth in the United States, Levy Institute of Bard College Working Paper 502 (June 2007), Table 2.
  9. Perelman, 5.
  10. Perelman, 4-5; “Behind the Big Paydays,” Washington Post, November 15, 2008.
  11. Lucian Bebchuck and Yaniv Grinstein, “The Growth of Executive Pay,” Cambridge, MA: Harvard Law School Discussion Paper 510 (2005), 1, 31.
  12. “The Disposable Worker,” Business Week, January 18, 2010, 35.
  13. Perelman, 103-31.
  14. Perelman, 13, 104.
  15. Perelman, chs. 12, 13.
  16. Smith, 3, 203, 244.
  17. Smith, chs. 2, 3.
  18. Smith, ch. 9.
  19. Smith, ch. 7, “Looting 2.0” The formula comes from George Akerlof and Paul Romer, “Looting: the Economic Underworld of Bankruptcy for Profit,” Brookings Papers on Economic Activity (24), 1993.
  20. Smith, 22-24.