Here’s issue #26 of my Policy and Politics Newsletter, written 3/31/12. The previous two issues examined the 2008 collapse of US financial firms that caused our current recession. This issue looks at the beginning of an economic recovery.

The US economy is beginning to recover from the Great Recession. It grew at an annual rate of 3% in the 4th quarter of 2011. That’s the good news. However, this growth is still too slow to generate the jobs needed to significantly reduce the high levels of unemployment any time soon.

The bad news is that the portion of household income growth going to workers is at a record low. Although the economy is producing more goods and services than before the recession began, it’s doing so with 6 million fewer workers. That reflects increased productivity, which could mean that everyone would be better off. However, due to public policies (including tax rates) and the weakening of unions, the bulk of the growth in incomes is going to managers and investors, and not to workers. [1]

In the current recovery (2009 – 2010), incomes have grown 2.3% (adjusted for inflation). However, the incomes of the top 1% have grown by 11.6% while the incomes of the bottom 99% have only grown 0.2%. In other words, 93% of the income growth of the current recovery has gone to the 1% with the highest incomes. [2]

The recovery has been slow because consumers don’t have the money to buy much. And consumer spending is 70% of our economy. [3] Our economy needs large numbers of middle and lower-income families with the purchasing power to buy more goods and services; the rich are too few in numbers and save more of their income than anyone else, so giving them more money and purchasing power is not nearly as effective a way to stimulate the economy.

Cuts in government spending are undermining the recovery. State and local governments are laying off about 10,000 workers a month because of reduced revenue and resultant deficits. Similarly, reducing the federal deficit at a time of high unemployment will not help the economy because budget cuts do not create jobs; rather they lead to public sector layoffs and reduced purchases of good and services by government. [4]

The federal government’s stimulus spending did create jobs and reduce the severity of the recession. 80% of economists believe the stimulus increased employment. [5] The best estimates are that it created roughly 3 million jobs and kept the unemployment rate 2% lower than it would have been otherwise. [6] [7] In particular, support for low income households appears to have been an extremely effective way to stimulate the economy and create jobs because these individuals are highly likely to spend their money in the short-term in the local economy. Infrastructure projects, such as highway construction projects, appear to have been nearly as effective. [8] The federal stimulus money that went to states helped them reduce their budget cutting and layoffs. However, the stimulus spending is over and additional government spending to stimulate the economy does not appear likely, to say the least, even though the lessons of the Great Depression would seem to strongly indicate that such spending would help the recovery.

[1]       Reich, R., 3/2/12, “Bye bye American pie: The challenge of the productivity revolution,”

[2]       Saez, E., 3/2/12, “Striking it richer: The evolution of top incomes in theUS,”University ofCalifornia,Berkeley, Department of Economics,

[3]       Reich, R., 9/30/11, “America faces a jobs depression,” The Guardian,

[4]       Krugman, P., 1/29/12, “The austerity debacle,” The New York Times

[5]       The American Prospect, 2/21/12, “The balance sheet”

[6]       Atcheson, J., 2/20/12, “US running on myths, lies, deceptions, and distractions,”

[7]       Stiglitz, J., 9/8/11, “How to putAmerica back to work,”

[8]       Feyrer, J., & Sacerdote, B., 1/25/10, “Did the stimulus stimulate? Real time estimates of the American Readjustment and Recovery Act,”DartmouthCollege and the National Bureau of Economic Research



Here’s issue #25 of my Policy and Politics Newsletter, written 3/25/12. The previous issue provided highlights from the movie Inside Job, a documentary on the 2008 collapse of US financial firms that caused our current recession, which I highly recommend. Here’s some context and follow-up on the 2008 financial collapse.

The 2008 collapse was the product of deregulation of the financial industry over the last 30 years that led to three financial crises, each of increasing severity. These three crises were the Savings and Loan (S&L) crisis of the late 1980s, the “dot-com” stock bubble burst of 2000-2001, and the financial collapse of 2008.

In the early 1980s, the S&Ls were deregulated and by the end of the 1980s their newly allowed risky investments brought numerous bankruptcies that cost taxpayers $124 billion. 747 out of the 3,234 S&Ls failed, contributing to the 1990–91 economic recession. [1]

Then in 2000-2001, the bubble in stock prices burst resulting in $5 trillion in losses and again contributing to a recession. This “dot-com” bubble was the result of speculation fueled by respected business publications, such as Forbes and the Wall Street Journal, that encouraged the public to invest in risky companies, despite some of the companies’ disregard for basic financial and even legal principles. Not all of the companies involved were actually “dot-com” companies. Enron and WorldCom engaged in illegal accounting practices to exaggerate profits. Several companies and their executives were accused or convicted of fraud and the Securities and Exchange Commission (SEC) fined top investment firms like Citigroup and Merrill Lynch millions of dollars for misleading investors – encouraging them to buy stocks the companies knew were risky at best. In all, large financial firms paid $1.4 billion to settle possible claims and promised not to engage in misleading practices again. [2] Nonetheless, similar misleading practices occurred with mortgage-backed derivatives leading up to the 2008 collapse.

The US Senate’s investigation of the 2008 financial collapse found “that the crisis was not a natural disaster, but the result of high risk, complex financial products; undisclosed conflicts of interest; and the failure of regu-lators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.” [3] As in the S&L crisis, the regulators had been too close to the industry and had ignored problems. Moreover, two years after the 2008 crash, the FBI’s investigation had one-fourth of the resources the agency used during the S&L crisis, despite the fact that the 2008 collapse was 10 times as large. [4] While the S&L debacle led to felony convictions of over 1,000 senior S&L executives, no significant criminal charges have been filed based on the 2008 collapse. [5]

Economist Paul Krugman notes that Canada, despite a similar concentration of its financial industry in five large firms, exhibited remarkable stability while US firms were in crisis. He and others believe that this is because of stricter oversight and regulation. For example, Canada has: [6]

  • An independent Financial Consumer Agency to protect consumers from deceptive lending
  • Strong restrictions on subprime-type lending
  • Limits on the packaging of mortgages and other debt into securities to be sold to investors
  • Limits on the risks banks can take and on the reserves they have to keep to protect against losses

The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 addresses some of the causes of the 2008 collapse, although many analysts believe it is too weak to prevent another crisis. Nonetheless, Wall St. and its allies on Capitol Hill are trying to weaken the law and block its implementation. This is an example, both before and after the fact, of crony capitalism – cozy relationships between our financial corporations and our public officials in Washington, in Congress and in the Executive and Judicial branches of government, blocking meaningful regulation that is necessary to protect citizens and our economy.

[1]       Wikipedia, retrieved 3/21/12, “Savings and loan crisis,”

[2]       Wikipedia, retrieved 3/21/12, “Dot-com bubble,”

[3]       Wikipedia, retrieved 3/21/12, “Late-2000s financial crisis,”

[4]      Willoughby, J., 4/13/09, “The Lessons of the Savings-and-Loan Crisis,” Barron’s

[5]       Black, W. K., 5/4/10, “Wall St. Fraud and Fiduciary Responsibilities: Can Jail Time Serve as an Adequate Deterrent for Willful Violations?” Testimony before US Senate, Committee on the Judiciary, Subcommittee on Crime and Drugs

[6]       Krugman, P., 2/1/10, “Good and boring,” The New York Times


Here’s issue #24 of my Policy and Politics Newsletter, written 3/23/12. Last week, I finally watched the movie Inside Job, a documentary on the 2008 collapse of US financial firms that caused our current recession. I highly recommend it. Here are some highlights.

The movie Inside Job documents how the deregulation of the financial industry over the last 30 years has led to three financial crises, each of increasing severity. These three crises were the Savings and Loan (S&L) crisis of the late 1980s, the Internet stock bubble burst of 2000-2001, and the financial collapse of 2008.

The 2008 collapse was the worst of the crises and was largely caused by risky and fraudulent practices in the mortgage industry and by financial firms’ packaging of mortgages into securities that were sold to investors. These practices had fueled a bubble in the housing market – unwarranted price increases and over-building – that then caused a dramatic decline in house prices. This resulted in millions of mortgage defaults and foreclosures, and an economic recession – often called the Great Recession – that is the worst since the Great Depression of the 1930s. The losses in households’ wealth, primarily in housing and investment assets, exceed $14 trillion. Tens of millions of homeowners, who had significant equity in their homes in 2007, now have little or nothing. It is estimated that homeowners who owe more on their mortgages than their homes are worth – who are “underwater” – owe $700 billion more than their homes are worth. [1]

Inside Job documents that despite warning signs former Federal Reserve Board Chairman Alan Greenspan, Treasury Secretaries Lawrence Summers and Henry Paulson, and SEC Chairman Arthur Levitt (among others) vehemently opposed any regulation of complex financial instruments known as “derivatives” (because they are “derived” from other financial instruments such as mortgages). They blocked efforts of the Commodity Futures Trading Commission under the leadership of Brooksley Born to regulate derivatives. By the late 1990s, the unregulated derivatives market involved $50 trillion of securities and was (and is) described by many as legalized gambling.

The movie notes that an orchestrated campaign by Wall St. and its lobbyists for deregulation of the financial industry, along with the incestuous revolving door which had formerWall St. executives in senior positions in government, succeeded in creating widespread support for deregulation. Greenspan, Summers, Paulson, and other senior government officials, as well as many in Congress, supported deregulation. This led to:

  • The 1999 repeal of the Glass–Steagall Act of 1933, passed in the aftermath of the Great Recession, which had required the separation of Wall Street investment firms and their risky investments from banks to reduce the risks that banks and their depositors would need a government bailout
  • Staff cuts at the Securities and Exchange Commission (SEC), which oversees our financial markets
  • Financial firms being allowed to decrease their reserves that protect against bankruptcy to as little as 3% of their assets, increasing the risk of the need for a taxpayer bailout
  • Academic economists supporting deregulation and downplaying risks
  • Specific warnings about high levels of risk being ignored
  • Credit rating agencies (e.g. Standard & Poor’s) covering up the risks of mortgage-related derivatives

The mortgage industry pushed unaffordable, sub-prime mortgages on unwitting customers because it received higher fees for them. Then, financial firms packaged these mortgages into derivatives and sold them as safe investments when the firms knew they were risky – and often made side bets that underlying mortgages would go into default and that the derivatives would decline in value.

The next issue of my newsletter will provide more context and some follow-up on the 2008 financial collapse, including steps to take to reduce the likelihood of another financial crisis. Unfortunately, it is not at all clear that Congress and the regulators will take these steps.

[1]       Wikipedia, retrieved 3/21/12, “Late-2000s recession,”


Here’s issue #23 of my Policy and Politics Newsletter, written 3/15/12. This issue examines how corporations influence our government and its policies through lobbying and the “revolving door.”

Corporate influence on government actions and policies occur through campaign contributions (see Newsletters #13 – 17), lobbying, and the “revolving door” where personnel often cycle back and forth between working in government and working for a corporation for which they had an oversight responsibility in their government position.

Lobbying and the revolving door are two key pieces of the puzzle of how corporations have such strong influence. Corporate personnel and their lobbyists build strong personal relationships with Congress people, their staffs, and government agency personnel. Here are examples of how these relationships are built and operate:

  • Corporations, their executives, and their lobbyists:
    • Provide electoral support to Congress people through campaign contributions, solicitation of donors, political action committees (PACs), and Super PAC expenditures.
      • $3.4 billion in campaign contributions between 2007-2010 (see Newsletter #17)
      • $774 million in 2010 from 26,783 wealthy individuals (see Newsletter #14)
    • Provide information and persuasionto Congress people, their staffs, and government agencies, through lobbying, including expertise, position papers, and draft legislation.
      • $3.3 billion in total lobbying expenditures in 2011 with 12,633 registered lobbyists, over 23 lobbyists per member of Congress [1]
      • $476 million spent on lobbying by 30 large corporations between 2008 and 2010 [2]
    • Go to work for Congress or government agencieswhere they have power and influence, which may benefit, directly or indirectly, their previous employer.
      • Obama’s 3 chiefs of staff all previously worked in the financial sector: Jacob Lew at Citigroup, Bill Daley at JPMorgan Chase, and Rahm Emmanuel at Wasserstein Perella [3]
      • Treasury Secretary Tim Geithner is the former head of the Federal Reserve Bank of NY. Hank Paulson, head of Goldman Sachs, was Treasury Secretary under Bush and Robert Rubin, co-chairman of Goldman Sachs, was Secretary under Clinton. Other Treasury Secretaries in these administrations were the CEO of CSX Corp. and the CEO of Alcoa. [4]

On the other side of the revolving door, people leave government positions and go to work for the corporations (or their lobbying firms) that they oversaw or regulated while in government. As a result of all these relationships and interconnections, corporations receive:

  • Friendly legislation from Congress such as laws governing corporate practices, regulation, taxes, competition, trade, etc.
  • Accommodating regulations and oversight from government agencies and even outright support at times, such as the recent bailout of financial firms.
  • Inside information. For example, multiple sources document multiple instances where Treasury Secretary Paulson shared inside government information with his former employer, Goldman Sachs. [5]

There are many, many examples of the results of corporate influence on government actions and policies; a few have been highlighted in previous newsletters:

  • Failure to regulate speculation in oil and gasoline markets (see Newsletter #22)
  • Lax regulation and oversight of the financial industry (see Newsletters #21 and #19)
  • Low effective tax rates for many corporations (see Newsletter #2) and low tax rates for high income individuals (see Newsletters #21, #8, and #7)
  • Failure to regulate health threats such as mercury emissions and the use of antibiotics to enhance growth of healthy farm animals (see Newsletter #20)
  • High levels of spending that benefit corporations such as military contractors and that seem impossible to cut (see Newsletter #5)

These are only highlights and examples of corporate influence; future newsletters will highlight others, but the full story takes books to tell and involves many corporations and industries. The outsized influence corporations wield in our democracy was of great concern and impact before the Citizens United decision, which now allows unlimited corporate spending in our election campaigns. With unlimited corporate campaign spending now unleashed, our democracy, and government of, by, and for the people, is truly at risk.

[1]       The Center for Responsive Politics, retrieved 3/7/12, “Lobbying database,”

[2]       Public Campaign, Dec. 2011, “For hire: Lobbyists or the 99%? How corporations pay more for lobbyists than in taxes,”

[3]       Moyers, B., & Winship, M., 1/24/12, “The Washington – Wall Street revolving door just keeps spinning along,”

[4]       Wikipedia, retrieved 3/13/12, “US Secretary of the Treasury,”

[5]       Moyers and Winship, see above


Here’s issue #22 of my Policy and Politics Newsletter, written 3/5/12. This issue takes a look at gasoline prices and why they are so high.

Gasoline prices have been rising and have become an issue in the presidential campaign. So why are prices so high and is there anything that can be done about it?

Current gas prices are NOT driven by supply and demand. Supplies of oil and gas are up and demand in the US is down; so basic economics says that the price should be low. According to the Energy Information Administration, supply is higher than three years ago when gas prices fell (briefly) to around $2.00. And demand is at the lowest level since April 1997. [1] The US is actually producing more oil and gas than we can use, so we are exporting 3 million barrels of oil products per day. [2] All of this suggests that gas prices should be low.

Tension over Iran and concern about the oil it supplies to world markets is putting some upward pressure on oil prices. Financial speculators see this as an opportunity to make money and jump into the market heavily, which drives prices up much more. Wall Street firms and other financial players dominate the buying and selling of oil, even though they have no intention of ever taking possession of the oil they buy. Ten years ago, producers and end users (airlines, oil refiners and retailers, etc.) were responsible for 70% of the trading of oil; now the financial speculators make up 65% – 80% of the market. The only reason they are in the market is to make money and the money they make comes out of our pockets through higher prices. [3]

Estimating how much speculation increases the price of oil and gasoline is difficult; however, many experts, including ones from Exxon Mobil, Delta Airlines, and Goldman Sachs, believe that speculation drives up the price of oil by 40%. This is a “speculators’ tax” that we all pay. There is historical evidence to support this. For example, in the summer of 2008, when speculators were driving the oil market, gas prices spiked to over $4.00 a gallon before declining sharply to $2.00. [4]

Congress and the President tried to reduce the impact of this speculation as part of the Dodd-Frank financial reform legislation. The law directed the Commodity Futures Trading Commission, which regulates this market, to set a cap on how many contracts for oil any one trader or company could control, which would limit the level and impact of speculation. After significant delays, such a cap was proposed in October 2011. However, many supporters of the cap view the proposal as quite weak. Nonetheless, the speculators are suing to block the implementation of even this modest reform. [5]

Through speculation in the oil markets, the Wall Street-based financial industry is making substantial sums of money that are coming out of the pockets of average Americans. The motivation is to make money for the few; however, there’s no added value for society at large, only costs. This is a variation on the theme that also drove the subprime mortgage market – make money regardless of the consequences. Due to campaign contributions, lobbying, and the revolving door between Wall Street and the federal government – in other words, due to crony capitalism – it’s likely that nothing significant will be done and we will all continue to pay this “speculators’ tax.” As a result, the Wall Street speculators will get richer while we get poorer as we pay more for gas than we should.

[1]       Sanders, B., 2/28/12, “Wall street greed fueling higher gas prices,”

[2]       McClatchy Newspapers, 2/21/12, “Once again, speculators behind sharply rising oil and gasoline prices,” The Sacramento Bee

[3]       McClatchy Newspapers, see above

[4]       Sanders, B., see above

[5]       Common Dreams staff, 3/2/12, “Obama’s oil speculation task force missing in action,”