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Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

The country faces a serious crisis in the form of a manufactured crisis over the budget deficit. This is a crisis because concerns over the size of the budget deficit are preventing the government from taking the steps needed to reduce the unemployment rate. This creates the absurd situation where we have millions of people who are unemployed, not because of their own lack of skills or unwillingness to work, but because people like Alan Greenspan and Ben Bernanke mismanaged the economy.

The basic story is very simple and one that we have known since Keynes. We need to create demand in the economy. The problem is that, as a society, we are not spending enough to keep the economy running at capacity. Prior to the collapse of the housing bubble, the economy was driven by booms in both residential and nonresidential construction. It was also driven by a consumption boom that was in turn fueled by the trillions of dollars of ephemeral housing bubble wealth.

With the collapse of the bubbles, both residential and nonresidential construction have collapsed. There is a huge amount of excess supply in both markets, which will leave construction badly depressed for years into the future. Together, we have lost well over $500 billion in annual demand from the construction sector. In addition, the loss of the ephemeral wealth created by the bubble has sent consumption plummeting, leading to the loss of an additional $500 billion a year in annual demand.

The hole from the collapse of construction and the falloff in consumption is more than $1 trillion a year. The government is the only force that can make up this demand. However, this means running large deficits. To boost the economy, the government must spend much more than it taxes.

The stimulus approved by Congress last year was a step in the right direction this way, but it was much too small. After making adjustments for some technical tax fixes and pulling out spending for later years, the stimulus ended up being around $300 billion a year. Even this exaggerates the impact of the government sector, since close to half of the stimulus is being offset by cutbacks and tax increases at the state and local level.

The answer in this situation should be simple: more stimulus. But the deficit hawks have gone on the warpath insisting that we have to start worrying about bringing the deficit down. They have filled the airwaves, print media and cyberspace with solemn pronouncements about how the deficit threatens to impose an ungodly burden on our children.

This is of course complete nonsense. Larger deficits in the current economic environment will only increase output and employment. In other words, larger deficits will put many of our children’s parents back to work. Larger deficits will increase the likelihood that parents can keep their homes and provide their children with the health care, clothing, and other necessities for a decent upbringing. But the deficit hawks would rather see our children suffer so that we can have smaller deficits.

In spite of the deficit hawks’ whining, history and financial markets tell us that the deficit and debt levels that we are currently seeing are not a serious problem. The current projections show that, even ten years out on our current course, the ratio of debt to GDP will be just over 90 percent. The ratio of debt to GDP was over 110 percent after World War II. Instead of impoverishing the children of that era, the three decades following World War II saw the most rapid increase in living standards in the country’s history.

We can also look to Japan, which now has a debt to GDP ratio of more than 180 percent. Investors are not running from Japanese debt. They are willing to hold long-term debt at interest rates close to 1.5 percent. In our own case, the 3.7 percent interest rate on long-term Treasury bonds remains near a historic low.

The story is that we are forcing people to be out of work – unable to properly care for their children – because people like billionaire investment banker Peter Peterson and his followers are able to buy their way into and dominate the public debate. The reality is that we have an unemployment crisis today, not a deficit crisis. The only crisis related to the deficit is that people with vast sums of money (i.e. the people who wrecked the economy) have been able to use that money to make the deficit into a crisis.

***

Dean Baker is author of the new book, “Plunder and Blunder: The Rise and Fall of the Bubble Economy,” PoliPoint Press, LLC. This piece was first published on Truthout. Mr. Baker, a macroeconomist,  previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. He is a member of Truthout’s Board of Advisers.

Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

It is probably best to leave the gods out of discussions of economic policy, but this barrier was breached in November when the CEO of Goldman Sachs, Lloyd Blankfein, told an interviewer that Goldman Sachs was doing God’s work. Most people will never have the opportunity to join Goldman Sachs’s gang of multi-millionaire bankers. However, by Blankfein’s logic, tens of millions of people will have the opportunity to do something at least as heavenly: walk away from their mortgage.

In Blankfein’s assessment, by aggressively taking advantages of profit-making opportunities given to them by the government and the market, Goldman Sachs is accomplishing great good here on earth. That’s a questionable view, especially given the extent to which Goldman has been able to use its political power to tilt the playing field to its advantage, but walking away from an underwater mortgage is one way in which normal homeowners may be able to both help themselves and the economy.

The logic is straightforward. As many as 20 million people owe more than the current value of their homes. In most cases they have little hope of ever accruing equity in their home. There continues to be an enormous glut of housing. Nationwide, vacancy rates are at record highs. Rents are actually falling for the first time since we have reliable data.

Also, temporary government supports in the form of extraordinarily low interest rates and the first time buyers’ tax credit are about to end. It is virtually certain that house prices will soon resume their decline and will remain low for many years to come. This means that people who are underwater today are likely to be even further underwater five or 10 years from now when they plan to sell their homes.

Not only will people end up losing money when they sell their home, but many underwater homeowners are likely to pay far more on their mortgage and other ownership costs than they would to rent the same unit. We did calculations recently that showed that homeowners who bought near the peak in many bubble markets could easily save themselves more than $1,000 a month by renting equivalent units. This means that these underwater homeowners could be throwing out more than $12,000 a year in a desperate effort to keep up on their mortgages. Since most of these homeowners will never have any equity in their home, the mortgage check they send to the bank is money thrown in the garbage.

Many homeowners are concerned about foreclosure damaging their credit record. This is a legitimate concern, but credit issuers want to extend credit. They all know about the growth and collapse of the housing bubble. It is likely that a foreclosure during this period will be treated less harshly than during more normal times.

Not only would it benefit millions of homeowners to send the keys back to the bank, it would also benefit the economy. The money that homeowners save by not paying their mortgage is money that could instead be used to support consumption and boost the economy. If 5 million underwater homeowners saved an average of $10,000 each by becoming renters, this would free up $50bn a year for additional spending. This would have the same impact on the economy as a $50bn tax cut. If we assume a multiplier of 1.5 on these savings, the 5 million walk-aways will generate close to 750,000 jobs.

Unfortunately, the current policy from the Obama administration goes in the opposite direction. Rather than realistically assessing what is best for homeowners, the policy seems intended to do everything possible to persuade people to keep sending checks to the banks, even using taxpayer dollars as an inducement. It would be far better economic policy if they sought to get people out from under their enormous mortgage debt. This could best be accomplished by granting people facing foreclosure the right to rent their home at the market price for a substantial period of time (five-10 years) following a foreclosure. Such a measure would immediately provide housing security to the millions of families facing foreclosure.

This policy requires no new bureaucracy and would cost the taxpayers nothing. Of course, a “right to rent” policy is likely to be costly to the banks. This may explain why it does not appear to be on the agenda at the moment. After all, the money saved by homeowners is money lost to banks, and this figure could easily run as high as $100bn a year.

In short, homeowners who are seriously underwater in their mortgages should check the numbers. Walking away from a home may well be the best economic choice, and in such cases, it is also likely to be the best choice from the standpoint of the economy as a whole. This may not be advancing God’s work, but if millions of people walked away it might educate Goldman Sachs and the rest of Wall Street bankers about what happens when everyone plays by their rules.

***

Dean Baker is author of the new book, “Plunder and Blunder: The Rise and Fall of the Bubble Economy,” PoliPoint Press, LLC. This piece was first published on Huffington Post.

Leo W. Gerard: Economist James K. Galbraith, the Lloyd M. Bentsen Jr. Chair in Government/Business Relations at the University of Texas, recently told Deborah Solomon of the New York Times that you are “the person with the most serious claim” for predicting the onslaught of the current credit disaster.

The promo for your most recent book, Plunder and Blunder: The Rise and Fall of the Bubble Economy (PoliPoint Press, 2009), says the fall of the bubble economy was “completely predictable.” But you were standing nearly alone out there for some time yelling, “The collapse is coming, the collapse is coming.”

When did you get the first inkling that the collapse was impending and what did that feel like?

Dean Baker: I learned from the stock bubble in the 90s that the timing was hard to predict but  I first became convinced that it was starting to burst in the fall of 2006, (house prices had begun to fall) and I wrote a forecast projecting a recession for 2007. It turned out that I was still somewhat premature. I was expecting the price decline to gain speed more quickly and to have a more immediate impact on the economy. However, according to the National Bureau of Economic Research, the official arbiter of recessions, the current recession did begin in 2007, so I was not too far off.

As a more general matter, I did feel somewhat vindicated, although it was striking to me, that even as the bubble was very much in the process of deflating in late 2007 or even early 2008, most economists were still convinced that it would have little consequence for the economy. I recall repeated pronouncements from former Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke that the problems were contained in the subprime market.

Gerard: What were the clues you saw that others ignored or missed?

Baker: For most economists, the idea that a market would take leave from its senses – that it would be driven by speculation – is almost inconceivable. Given that we had just seen a massive bubble in the stock market, it really should not have surprised people to see one also develop in the housing market.

The main factor that attracted my attention was the sudden spurt in house prices beginning in the mid-90s. For the hundred years from the 1890s to the 1990s, house prices nationwide had just tracked the overall rate of inflation. Yet, from 1995 to 2002 (when I first noticed the bubble), house prices rose by 30 percent in excess of the rate of inflation.

There was no explanation for this sudden jump in prices based on the fundamentals of supply and demand. Income growth had been healthy in the late 90s, but not extraordinary by the standard of the early post-war years. Furthermore, income growth had largely stopped during the 2001 recession.

Population growth was slowing, which should have slowed housing demand. On the supply side, we were building houses at near record rates, so clearly there was no serious supply constraint.

If there is a big run-up in house prices and no obvious force driving it on either the demand or the supply side, then it sure looks like a bubble. Just as additional confirmation, I checked rents, which tend to more or less follow sale prices. Rents had increased only slightly more than the rate of inflation in the late 90s, and by this decade, they were falling behind inflation. There certainly was no evidence of growing demand pressure on the housing market there. 

Finally, I noticed the rise in vacancy rates. This is consistent with people buying homes for speculative purposes. Many investors were willing to gamble on a high price for a new home or condo, betting that it would go up even more in the future. Of course, this is not sustainable. Not many people can afford to keep a unit vacant for a long time, since it means that they are paying the mortgage and getting little or nothing back. The high vacancy rates of this era virtually guaranteed that the bubble would burst.

Gerard: Did you also see problems with subprime mortgages contributing to the bubble?

Baker: The problems in the mortgage market were hardly a secret. The subprime share of the market nearly tripled from 2002 to 2006. The Alt-A share, which are typically mortgages taken out by small business owners with variable income (and often in accurate tax returns), exploded from around 1 percent to 15 percent. This should have set off flashing red lights to any serious economist.

And, the stories about liar loans and phony documents were everywhere. I was getting e-mail from people around the country telling me about friends and relatives employed by mortgage banks who were told to put in fake numbers so that the banks could issue loans. Certainly the regulatory agencies must have known this was going on.

Gerard: But if you noticed those clues, and looking back on it, those clues are actually quite obvious, why did the vast majority of financial analysts and economists and managers for large investment funds including pensions and endowments, fail to see the bubble and its implications?

Baker: The bulk of financial analysts and economists largely repeat the conventional wisdom without ever seriously trying to assess whether it makes sense. They unthinkingly follow the conventional wisdom because of the structure of incentives in their profession. No one is going to get fired because they didn’t see the housing bubble. In fact, few people are likely to even miss a promotion because they didn’t see the bubble.

Economists and financial analysts are not like steelworkers or people in other occupations. They don’t get evaluated based on their performance. They can mess up every day of the week through their whole careers, and this would be just fine, as long as they messed up in the same way as their peers.

On the other hand, the few economists/analysts who spoke up to warn about the bubble were taking huge risks. Of course, we were all ridiculed at the time. If you were an economist working at a major investment bank and tried to tell them that all their big money-making deals were going to get them in trouble, they would probably tell you to shut up and fire you if you didn’t.

If the housing market stayed strong and house prices kept rising or just remained stable, then any economist who had warned of the bubble would be laughed off as a chicken little.

In short, the incentives are such that the overwhelming majority of economists will never challenge conventional wisdom even if they think it is wrong. They are there to hold on to their jobs, not to inform the public about the economy.  

Gerard: Did you know the collapse would be this bad? How bad will it get?

Baker: I knew that it could be very bad. I was trying to be contained in my pessimism (I couldn’t completely ignore the conventional wisdom either), but I did warn that the downturn could develop into a Japan-style financial crisis. This obviously is the case that we are looking at.  Of course, if the Fed and Treasury had moved more quickly, they could have prevented some of the damage that the financial system is now seeing.

The same applies to fiscal stimulus. It was painful sitting through the months of the election campaign and then the transition when the government was completely paralyzed. At that point, economists from across the political spectrum all recognized that the economy needed further stimulus, but the politics were such that nothing could move.

As it is, the stimulus package passed by Congress is a good start, but it is nowhere near big enough to turn the economy around. The unemployment rate is virtually certain to shoot past 8.0 percent in the February jobs report and is likely to hit 9.0 percent by summer. If we are lucky, the stimulus will provide enough of a boost to keep the unemployment rate from reaching 10 percent, although I would not take this for granted at this point.

In addition to higher unemployment, house prices will continue to fall at least until summer. The big question in my mind is whether house prices return to their pre-bubble level or they overshoot on the way down. At this point, I would bet on overshooting. This implies an even larger loss of wealth for homeowners, more foreclosures and more big losses for banks.

Gerard: Will the stimulus stop the free fall?

Baker: If we are to turn things around, we really need much more stimulus and we need it quickly. My favorite idea at this point is a tax credit to employers for giving workers paid time off. For example, if employers offer paid parental leave or sick leave, or paid vacation, or increase the days they already offer, then the tax credit would cover the lost work. This can be a quick way to get millions of people back to work.

The arithmetic on this is straightforward. Suppose that employers of 100 million people give their workers an amount of additional paid time off that is equal to 5 percent of their work time. These employers would suddenly have demand for 5 percent more workers, or 5 million workers. I can’t think of a quicker, less bureaucratic way to create jobs at this point, especially now that we have already funded most of the shovel-ready infrastructure projects.

Gerard: What must be done to prevent this from recurring?

Baker: There are two key points. First we must rein in the political and economic power of the financial sector. The financial sector must serve the real economy, not the other way around. There is a long list of reforms that are needed to ensure this outcome, but the main point is that an efficient financial sector is a small financial sector.

One way to keep it small is to tax it. If we had a very modest financial transactions tax, for example 0.25 percent on the purchase or sale of a share of stock, it would have very little impact on people who invest for the long-term. However, it would have a huge impact on people who are buying at 2:00 and selling at 3:00. This sort of tax would discourage such speculation, making the markets friendlier to long-term investors.

It would also reduce the size of the financial sector, since the industry makes much of its profit off this sort of speculation. In addition, such a tax could raise more than $100 billion a year. That’s real money even in Washington.

The other point is that a balanced economy, in which workers share in the gains of growth, is not conducive to financial bubbles. We didn’t have any major bubbles in the three decades following World War II. During this period, productivity gains were passed on in wage gains, which in turn fed consumption, which led firms to invest in expanded capacity. The basis for the bubble economy was created in the 80s when this virtuous circle broke down and workers could no longer count on seeing their wages rise in step with productivity.

In short, if we want to prevent another financial bubble and the sort of economic collapse caused by its bursting, we should support policies that allow workers to share in the gains of growth. That sort of world favors investment in the productive economy rather than financial speculation.

***

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, DC., has written several books. His most recent, Plunder and Blunder: The Rise and Fall of the Bubble Economy (PoliPoint Press, 2009), chronicles the growth and collapse of the stock and housing bubbles and explains how policy blunders and greed led to the catastrophic market meltdowns. 

His analyses have appeared in many major publications, including the Atlantic Monthly, the Washington Post, the London Financial Times, and the New York Daily News. His blog, Beat the Press, features commentary on economic reporting. 

 He is a frequent guest on National Public Radio, Marketplace, CNN, CNBC and other news programs.

Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

We got into the current economic crisis because many very smart people with outstanding credentials were unable to use simple arithmetic. If they knew arithmetic, they would have been able to see an $8 trillion housing bubble that was right in front of their faces.

The basic story was incredibly simple and obvious, at least as far back as 2002. After just following the overall rate of inflation for the hundred years from 1895 to 1995, house prices began to hugely outpace the rate of inflation in the mid-90s. Not coincidentally, this run-up in house prices paralleled the run-up in stock prices.

As was the case with Japan, the United States had a stock bubble and real estate bubble growing side by side. Unlike Japan, where the two bubbles crashed simultaneously, the crash of the stock bubble fed the growth of the real estate bubble in the United States. By 2002, nationwide house prices had increased by almost 30 percent above their trend levels. By their peak in 2006, they had increased by almost 80 percent above their trend level, creating more than $8 trillion in housing bubble wealth.

The inability of economists and the financial industry to see this enormous bubble was the basis for the current crisis. Remarkably, most discussions of housing policy still ignore the bubble.

It is often argued that we need to stabilize house prices. In many markets this is a desirable goal. However, in many markets in California, Florida, and the Northeast, where the bubble has not yet fully deflated, it would be counter-productive to try to sustain house prices at bubble-inflated levels.

Prices in these markets will eventually fall to their trend levels; the only question is how fast. Unfortunately, many of the same policy wizards who wanted low and moderate-income families to buy homes at bubble-inflated prices in the years from 2002-2007, would still want them to buy houses at bubble-inflated prices today. They somehow think that the best way to accumulate wealth is to own a home that is falling in value.

Even worse, they want to use lots of taxpayer dollars to keep people in homes in which they have no equity. Representative Barney Frank is one of the key villains in this story. His top priority is to use the TARP money to pay banks for their bad mortgages, so that people can stay in homes with no equity.

This one is really baffling as economic or social policy. Should we pay a bank $20,000 in order to keep a homeowner in a home in which they have zero equity? How about $30,000? How about $50,000?

It costs a bit more than $3,000 a year to pay for a kid’s health care under the State Children’s Health Insurance Program. We can all understand the benefit of health care for kids. Is it worth 17 kid-years of health care to keep someone in a home in which they have no equity?

There is a simple no cost, no bureaucracy alternative to Frank’s plan to hand tens of billions to banks. (Remember, the banks get the checks under Frank’s plan, not the homeowners.) We can simply temporarily change the rules on foreclosure to give people facing foreclosure the right to rent their homes at the market rent.

This is extremely simple and can go into effect the day after Congress passes the rule change. Judges or the court officers handling a foreclosure would be required to ask the homeowner whether they want to stay in their house as a renter. If they say yes, there would be an appraisal of the market rent of the home, and the homeowner would then have the option to stay in the house for a substantial period of time (e.g. 10 years), paying the market rent.

This would immediately give the homeowners facing foreclosure security in their housing. If they like the house, the neighborhood, the schools for their kids, they would have the right to stay there. It would also end the problem for neighborhoods of empty foreclosed houses. And, it would give banks real incentive to negotiate terms that allow people to stay in their homes as owners.

This proposal is very simple and costless. It is also possible to build onto this proposal with mechanisms that facilitate the transition to renters or allow buyback options as Bernard Wasow of the Century Foundation and Daniel Alpert from Westwood Capital have proposed.

But, the key point here is that it is simple to find a way to help homeowners that doesn’t help banks, if we are prepared to give the issue a bit of original thought. Fear of original thought among our top policy experts was the problem that got us into this enormous mess. We should not let the same group of failed experts perpetuate the damage that they caused by their fear of thinking.

Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

The latest mutterings from Congress, especially the Republican leadership, indicate that they still don’t have a clue about the seriousness of the economic downturn we are facing. They are saying that they can’t have a stimulus package ready for when President Obama takes office in two weeks, and that a package probably won’t be ready until well into February.

This delay is inexcusable. Remember when the Wall Street boys needed their TARP bailout in the fall? President Bush and his crew, together with the Democratic congressional leadership, with a huge chorus of media cheerleaders, all told us that the economy would collapse without immediate action. That is almost true now in the case of stimulus.

At this point, there should not be much question about the seriousness of the need for stimulus. The $8 trillion housing bubble that our economic leaders somehow could not see is in full collapse, with house prices falling at more than a 20 percent annual rate in the most recent data. The immediate impact of the collapse was to cut the housing sector in half.

More importantly, the lost housing wealth, combined with the loss of $8 trillion in stock market wealth, is causing consumption to plunge. We are going to see the largest set of bankruptcies and store closing in the retail sector ever. More than 10 percent of the workforce is employed in the retail sector. The layoffs will almost certainly top 1 million and could hit 2 million.

And, when those stores go out of business, they are not going to be sending their rent checks to shopping mall owners. The bubble in commercial real estate, which followed on the bubble in residential real estate, is also collapsing. Look for more surprised economists as hundreds of billons of bad loans on commercial properties suddenly appear on the banks’ books in the next few months.

In addition, we have the cutbacks in state and local governments, all of whom are being squeezed by plunging tax revenues. Since these governments are generally forced to balance their budgets, they have no alternative to making cuts and/or raising taxes. This is exactly the worse course for the economy right now.

This is the area that Congress could most easily address right now. Both red states and blue states are subject to budget squeezes. There must be a package of aid to state and local governments that President Bush and the Democrats on right now. President Obama can always add to such a package after he takes office.

This stimulus package should have been approved two months ago, but for whatever reason no action has been taken. As a result, we are seeing painful layoffs and cutbacks in state and local governments that are completely unnecessary.

There is no justification for further delay. Congress should immediately approve whatever assistance President Bush will agree to now, there is no reason that the public should be forced to wait until mid-February for Congress to pass the crisis.

If there is not interest in Congress today for serious action, perhaps the loss of more than 500,000 jobs that the Labor Department will report on Friday will help to focus its attention.

Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

The Detroit automakers have made many mistaken business decisions that have been important factors contributing to their current crisis. However, they are not responsible for some of the factors that have brought them to the brink of bankruptcy.

Most obviously, they are not responsible for the collapse of the housing bubble and the subsequent loss of more than $15 trillion in housing and stock wealth. This falloff in wealth has sent consumption plummeting. The auto industry has been especially hard hit, with sales falling by more than 30 percent year over year in the last two months.

The Big Three are also not responsible for the broken U.S. health care system. If we paid the same amount for health care as Canada, G.M. would have accumulated an additional $22 billion in profits over the last decade.

That would be the savings if we assumed that General Motor’s health care expenditures were reduced by roughly 48 percent to be in line with expenses in Canada. Of course, not all the savings in this counterfactual would have gone to profits. Some of it would have gone to workers in the form of higher wages or to consumers in the form of lower car prices.

On the other hand, G.M. is also picking up the tab for many spouses and dependent children. It would not have to pay these health care expenses in a Canadian type system. So the $22 billion figure is probably not a bad first approximation of the additional money that G.M. might have today if the United States had a more efficient health care system.

Even with these additional profits G.M. and the other domestic manufacturers would still face serious problems. They have made some bad choices in betting their future on SUVs and other low-mileage vehicles. They also have lagged foreign manufacturers in producing high quality, reliable cars.

But the real reason that Big Three are on their deathbeds right now is the economic crisis created by the Wall Street crew and their friends in Washington. It will be tragic if the people of the Michigan, Indiana, and Ohio are made to suffer through a depression because of the failed financial dealings of the Wall Street crew.

This situation is made even worse by virtue of the fact that most of the Wall Street executives who are directly responsible for this disaster are still quite wealthy, in large part because of the generosity of Congress and the Bush administration. While they demanded that the auto manufacturers produce plans for returning to profitability in exchange for providing loans, no similar conditions were imposed on Citigroup and the rest of the Wall Street gang.

As the autoworkers at the Big Three look at their last paychecks before an indeterminate period of unemployment, they should think about the portion deducted for income taxes. With this money, they have helped to ensure that Robert Rubin and other Wall Street types continue to enjoy pay packages in the millions or even tens of millions of dollars.

Happy Holidays!

Leo W. Gerard

 

 

By Leo W. Gerard

International President

From sea to shining sea, America is suffering.

She is, however, afflicted with an avoidable condition she brought on herself, like a hangover. Only this one’s interminable and internationally contagious.

She did it by choosing over the past 30 years to establish an economy that worshiped avarice. That decision has destroyed her financial system and taken down with it much of the world’s.

Now America must decide whether to be swayed by the greedy urging her to continue basing her economy on the destructive policies of deregulation, de-unionization, globalization and privatization or to construct a new financial system focused on industry and profit shared by the workers who produce it.

Over much of the  20^th century, the nation created real wealth by manufacturing – taking raw materials from the ground, using machines, energy and labor to convert them into products and selling those here and overseas. That process, to make steel or tires or washing machines, was the engine of the economy. In 1947, 32 percent of the workforce engaged in it belonged to unions, which meant workers received good wages and benefits. This enabled them to churn real money throughout the economy by buying homes and cars and television sets and sending their children to college. And it enabled them to save 7.5 percent of their earnings.

Then, in the 1980s, a new narrative for the economy emerged. In this story, greed was good. Self-interest was supposed to lead to the best outcomes for business. To accommodate this concept, Government de-regulated and, in fact, passed laws favoring big corporations and the nation’s wealthiest citizens. The idea was that some of the prosperity they created as a result of the abolished protections for workers and the environment would trickle down.

This was the new economy.

This was a scam to move wealth from the middle class to the affluent. And it worked. In 1976, the richest 10 percent in this country possessed 49 percent of the wealth. In 2007, it was 73 percent.

During this time of bowing to corporate demands, the government actually gave multinational corporations tax benefits to offshore their U.S. manufacturing facilities. Sometimes they shut down, throwing hundreds of Americans out of work, then packed the factory pieces into crates, numbered piece by numbered piece, and shipped them to China or Indonesia or whatever country would allow blatant violation of its own labor and environmental regulations. Sometimes they closed American factories and built brand new ones overseas with breaks from foreign governments. As U.S. companies closed, union membership dropped to below 12 percent. And America found herself importing toxic lead coated toys, paper made from trees illegally harvested in Indonesian national forests and untested pharmaceuticals.

Companies that remained here threatened to leave if workers didn’t accept wage and benefit concessions. American workers were vilified for seeking a living wage while CEOs pulled millions out of corporations in annual bonuses.

The American economy began to depend less on manufacturing and more on the “financial sector,” where profit was made moving money around, betting on stock trades, and participating in asset bubbles. Remember the tech bubble? That was manufactured value – not manufactured goods – and that’s why it disappeared when the bubble burst.

The same has now happened with the housing bubble. Those smart guys on Wall Street, among the brilliant ones who sold America on the idea that greed was good, bet on housing prices never falling. A decline in home values never entered their calculations.

Then they fell. And they took down with them a couple of Wall Street banks and the largest insurance company in the world and Fannie Mae and Freddie Mac, credit markets and then the economy of the nation and the world.

Now workers are really in trouble.

They were struggling before the crash as manufacturing jobs disappeared and wages stagnated. Personal savings declined so that the average family now owes $8,000 to credit card companies. Without sufficient wage increases to sustain their lifestyle, families borrowed against their major asset, their homes. Now, because the housing bubble burst, a quarter of mortgage holders owe more than their homes are worth and 2.5 million have lost theirs to foreclosure.

All of this is because America failed to give greed the wide berth warranted by one of the seven deadly sins.

Alan Greenspan, who served as steward over the rise of the culture of avarice for nearly two decades as chairman of the Federal Reserve, admitted to Congress in October that his opposition to federal regulation was a blunder:

“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.”

In the song, America the Beautiful,” from which the lines “from sea to shining sea, come, lyricist Katharine Lee Bates counseled in the second verse, “America! America! God mend thine every flaw.”

Clearly, this greed-based economy is a flaw. It was created by covetous humans. It must be mended by Americans of better grace, people Katharine Lee Bates described as those, “Who more than self their country loved.”

America’s workers must seize back control of their country and wrest back determination of its priorities. They must re-regulate the financial markets and remove the onerous restrictions placed on unions to prevent organization of new workplaces and bargaining of new contracts to raise worker salaries and benefits.

But, most immediately, America’s workers must insist Congress immediately pass an economic renewal package that will reinvigorate Main Streets across the nation. This is essential to prevent a prolonged and excessively painful deep recession resulting from the housing bubble collapsing.

This public investment has two purposes. It will stimulate the economy by providing jobs. In addition, it will strengthen America’s manufacturing competitiveness in the international marketplace.

The Institute for America’s Future has developed a plan called A Main Street Recovery Program calling for investment of $900 billion over two years.

The money would be targeted to areas that would create sustained, long-term, shared economic growth. This includes investing in green technologies to reduce the nation’s dependence on foreign oil and the threat of global warming. Another focus is repair and modernization of the country’s physical infrastructure, such as roads and bridges, and intellectual infrastructure – its education system. And finally, the third targeted area is assistance to workers most in need, which would include moves toward universal affordable health insurance, a middle class tax cut and expanded unemployment insurance.

More than 250 organizations and economists have endorsed this program. President-elect Barack Obama’s recovery plan outlined last weekend includes many of its aspects. Its passage would signal the beginning of conversion to an economy that values production and workers, something the self-interested greed-mongers will oppose.

But let’s work for realization of Katharine Lee Bates’ final verses:

“America! America”

God shed his grace on thee

Till selfish gain no longer stain

The banner of the free!”