Beyond Blame

It seems the purveyors of some brand of blame for the financial crisis just will not go away. In the last month alone some version of "who do we blame" has appeared in major media outlets. First, on April 3, New York Times columnist David Brooks' piece "Greed or Stupidity" asked the question can the financial crisis be blamed on stupid people, or greedy people? (The answer is mostly column A, with a little of column B). Then, on April 9, San Diego Union-Tribune cartoonist Steven Breen won the Pulitzer Prize for political cartoons like "The Seven Deadly Sins" (shown below) where he argues that our economic woes can be attributed to all of us, in some form, falling victim to some moral inadequacy. Finally, picking up the "we're all to blame" version of this story, last week National Public Radio's "Planet Money" team (okay, maybe I'm stretching the idea of a major media outlet here) introduced their call-in financial crisis confession booth where we could absolve ourselves of our seven deadly sins and admit to how we, all of us, somehow contributed to the crisis.



Of course, this barrage of blame is not surprising, and certainly not new. Ever since the financial crisis hit we've been looking for that person whose greed, stupidity, laziness, spinelessness or what have you brought us into this financial morass. Alan Greenspan, Bernie Madoff, the SEC, the Bush Administration, the American consumer--all have been designated potential culprits of moral and intellectual failure. But can we get beyond this way of tracing responsibility for the crisis and, equally important, why should we? I'll provisionally answer "yes" to the first question and say that we need to get beyond this narrative of blame because as long as we remain fixated on the failures of individuals we will never address the broader structural and institutional forces that channel individual behavior down particular paths. In other words, you can throw Bernie Madoff in jail, but if that's all you do then you're just waiting for the next Bernie Madoff to steal Steven Spielberg's money.

This idea that our own behavior may, in fact, be powerfully limited by our social environment is, of course, my bread-and-butter as a sociologist, but highly at odds with a culture that holds up the righteous individual and the responsibility that they take for their own actions. So, to make this point, I'm going to turn to the sociologist's favorite teaching tool: dead German intellectuals.

The person that I am referring to is Max Weber. Weber sits among the upper echelon of founding sociologists, in part for works such as his The Protestant Ethic and the Spirit of Capitalism, which he wrote between 1904 and 1905. Weber was deeply interested in the relationship between religious and economic life and the way in which religious ethics became secular practice.

As the title suggests, Weber was looking at the Protestant faith (and its various sects) and trying to understand why rational profit-seeking, the kind we would associate with modern capitalism, seems to take hold most strongly in Protestant as opposed to Catholic areas. Subscribers to the "it's all about the individual" view of the world would stop here and say that it must be because Protestants were just greedy, or maybe just better at doing business, but Weber tells a much more interesting, deeply sociological story.

He starts by noting a curious feature of the Protestant faith: pre-destination. If you are a Catholic, ascending into heaven is a pretty straight-forward thing to do: lead a good life, turn the other cheek a couple of times, and beg forgiveness of your sins on your death bed. For Catholics, heaven is never too full and anyone (well, any Catholic) can enter. For Protestants, however, the story is quite different. According to Protestant theology everyone is born with their fate in the after life pre-determined for them: no amount of praying, no amount of cheek-turning, will decide where you spend your eternal hereafter. Not only that, but no matter what you do, you can never know if you are pre-destined for heaven or hell.

As you can imagine, this doctrine is highly problematic, both for the individuals that subscribe to it, and to the religious leaders that are trying to hold a religion together. For the followers, this is very stressful; for the leaders, it's difficult to get people to follow your edicts if doing so has no consequence in the afterlife. Thus, as Weber shows, Protestant faiths evolved and diverged in terms of how they deal with the problem of pre-destination. A common solution was to tweak the doctrine so that, while it was still believed that one could never know for sure what their fate was, they could receive "clues" as to their probable fate. One such clue was success in your life on earth, the idea being that if you were successful (read, materially successful) on earth, chances are you were one of God's chosen ones.

Now you can imagine where this is going: the "clue" of success becomes a self-fulfilling prophecy. Weber argues that Protestants begin to organize their life around maximizing their material success, all for the cause of reassuring themselves that, yes, indeed they were pre-destined for heaven. Thus, the Protestant ethic of pre-destination is transformed into a capitalist spirit of the rational calculation of profit and loss.

Now, so far this is already pretty compelling stuff, but then Weber takes the argument even further. As the spirit of capitalism spreads, it becomes removed from its original Protestant theological foundations, and sweeps across secular society. This happens because competitive market pressures compel even non-believers to adopt Protestant profit-maximizing practices. Imagine, if you will, a Catholic grain farmer. This farmer pursues traditional farming practice and makes enough money selling his grain at market to support his, no doubt large, family. Now, imagine one day this farmer goes to market, and there is another farmer there also selling grain. This other farmer, though, has a lot more grain to sell, and can sell it a lot more cheaply. How can this be? Well, this second farmer is a Protestant farmer, one who has been anxiously searching for signs of God's graces and poring all of his energy into transforming his farm into a lean, mean, grain-churning machine.

So now, here's the punchline: the Catholic farmer, if he wants to be able to keep supporting his family, needs to get on home and transform his farm because otherwise no one will buy his grain. This farmer doesn't even believe that his eternal hereafter is predetermined--he's been counting on his humility, poverty, and last-minute sin forgiveness to get him the good seats--but he is compelled by social circumstance, the fact that the economy is more and more becoming a competitive marketplace, to transform his behavior.

Ultimately, Weber argues, the spirit of capitalism becomes fully divorced from its Protestant roots and emerges as an "iron cage" that binds us all: because markets are competitive, and because we depend upon markets for our livelihoods, we must find a way to be competitive in those markets--regardless of what we think about them. The iron cage binds believer and non-believer alike.

So, back to the here-and-now of our current financial woes. Clearly, we don't want to absolve individuals from the choices that they made--we are not robots following some sort of social programming. But, as Weber's classic suggests, social structures can powerfully shape the way that we confront the choices that we have to make. Bankers are not going to make "responsible" lending choices if all of their competitors are turning in record profits by giving sub-prime home loans to people that can't afford them. Chuck Prince, former CEO of Citigroup, famously described this dynamic by saying "when the music is playing, you've got to get up and dance." Most people jumped on this comment as indicative of the debauchery of the financial sector. I read it as saying that if you want the bankers to stop dancing, change the music.

The big problem, and big opportunity, with autos

The Obama administration was able to get Rick Wagoner to step down from eight years at General Motors, and is ostensibly holding the major companies to tough restructuring standards in exchange for future bailouts. But, as far as I can tell, much of that discussion of "restructuring" focuses on one key issue--telling the industry's workers to give up its pay, and give up its benefits.

Now, just on its own merits, this is pretty ludicrous. Telling workers at one of the few remaining industries with decent salaries and good benefits to give them up at a time when people are struggling to afford their homes is completely backwards. But, more than this, the crisis in the American automobile sector points to a deeper set of problems plaguing the economy. While daunting, these issues present an opportunity to engage in a major overhaul of some basic institutions, creating a new socio-economic structure that will allow us to come out of this crisis with renewed economic vitality.

First, just how bad is the situation with autos? A telling bit of data, shown below, is how much the sector contributes to the overall economy (measured as gross domestic product) relative to some other sector (in this case, computer sales). Now, the thing to notice from the table is that, first, in almost all of the years given, computer sales contributed more to economic growth than autos did and, second, that in many years autos were actually a drag on the economy.



So if we really want to talk about saving the automobile sector, we have to recognize that this is a sector that has been struggling for at least the past three decades. Any simple solution is bound to not only fail in terms of "saving" American autos, but will also create further drags on the rest of the economy. With this in mind, let's reevaluate this issue of the wages and benefits of American auto workers.

The argument goes that, facing not just high wages but, really, high health care costs, auto makers can not afford to compete with their rivals in Europe and Japan. Of course, this issue of health care costs is a real one but the solution is not going to be found in simply telling auto workers (and retirees) to cut their benefits. The real problem is a larger one, and stems from the failure of any presidential administration, since Truman first proposed it in 1947, to pass a national health insurance plan along the European or Canadian model. Why is this the real problem? Because of this failure, health care costs are vastly more expensive for the American economy as a whole, compared to other countries. This is shown in the table below.



Notice two things here. First, while opponents of national health insurance complain about its cost to the tax payer, the fact is that even with our very limited federal programs (Medicare for the elderly and Medicaid for the poor), we still pay about the same in public funds, relative to the size of the economy, as countries with fully national health care systems. Second, the United States spends a great deal of money privately on health--things like copays, deductibles, and other out-of-pocket expenses. In fact, no other country even comes close. Combined the United States spends more on health than other developed economies, despite the fact that we have worse health coverage and worse health outcomes.

So if the problem is competitiveness, than broader reforms need to take place to make the American worker competitive. The usual plan of slashing wages and benefits has just not worked--auto producers have been doing this for decades now, and have only gotten worse.

The crisis in American automobile production requires a response that encompasses the social, political, and economic institutions within which these firms operate. This crisis presents an opportunity to finally undertake these transformations--it would be best to not let it go to waste.

Back to Square One

Maybe you caught the morning news on NPR which featured an interview with Congressman Paul Ryan (R-WI) who sits on the House Budget Committee. No? Well, you can read it or listen to it here: http://www.npr.org/templates/story/story.php?storyId=102410826#commentBlock

The key part of the interview goes as follows:

Ryan has referred to the budget plan as "the third and great final wave of government expansion, building on the Great Society and the New Deal." He says there's "probably truth" to the idea that some Americans might think comparisons to the New Deal are good thing — "because that's what President Obama is saying about his budget — that's what the administration is saying is that this is the most sweeping and transformative budget since the New Deal. They probably believe that that's what people want."

But Ryan says unemployment during the New Deal ranged from 12 to 25 percent. "Henry Morgenthau, FDR's Treasury secretary, came to the Ways and Means Committee at the end of that period and said, 'This was a disaster.' It didn't work. We borrowed so much money; we ran up the debt. We didn't get out of the Depression until World War II came along."

Notice that last line there acknowledging that we didn't get out of the Depression until World War II came along. Now, for a guy who spent the two previous paragraphs questioning the claim that you can tax and spend your way out of a Depression, I'm curious then how he thinks that World War II got us out of the Depression if not by, oh, I don't know, raising taxes (especially on the wealthy) and spending.

If we put in place the same taxing and spending structure that existed during World War II, the Obama administration would need to spend, at minimum, an additional 3 trillion dollars as federal stimulus, and would need to raise the marginal tax rate on those earning one million dollars a year, or more, to 94 percent. Of course there are the other aspects of government policy during World War II, things like price controls, cost-plus contracting, labor-management regulation, and other federal interventions into the private sector that we could get into. But we wont.

Suffice it to say that while Congressman Ryan pitches the World War II example as a challenge to a massive government spending effort, the reality is that it is a great example that can be mobilized to support such an effort. So, either Congressman Ryan is secretly to the left of the President, and has autographed copies of Paul Krugman's books adorning his bookcase, or he needs to work on his analogies.

The Hidden Bonus Benefit

Now, don't get me wrong I love hope as much as the next guy. In fact, some of my best friends are full of hope, but the Obama administration really needs to start changing tack if they are going to be able to maintain any kind of sustained effort to revitalize the economy. The problem is that recovery, thus far, has largely been framed around repairing the financial sector with the express aim of getting credit flowing again.

The problem with this approach, thus far, is that it involves spending trillions of dollars on the nauseating task of righting the balance sheets of the financial sector. The other problem, and the one that has not garnered as much attention or approbation, is that the whole plan rests on an assumption that just may not be tenable: that there are even people out there who want to borrow money.

Outside of the financial sector, the household sector and the corporate sector are the two major private areas of potential borrowing. Now, with unemployment hovering above 8 percent, it is doubtful that households are going to take up the borrowing mantle--not many people are shopping for new homes, cars and plasma televisions right now. So what about the corporate sector? In order to take on new loans, even at historically low interest rates, companies have to believe that the rate of return on their investment is going to exceed the cost of borrowing. As usual, we can turn to some quick data to see how things look in this regard. The first chart shows the value of corporate cash flow (basically the internal funds available to private companies to finance new investment) and the value of investment in nonresidential fixed assets (things like plants, machinery, equipment--the stuff of making new stuff). As we see, from the early 1990s until about the end of the tech boom in early 2000, fixed investment spending exceeded cash flows--the difference of which was made up from borrowing. After the collapse of the tech boom, however, companies began to hoard their cash.



This suggests that opportunities for profitable investment were low since it appears that it was better to hold onto cash rather than put it into some new venture. After 2006, investment once again exceeds cash, but only because cash flow was dropping off--not because investment was picking up. Companies facing declining revenues are probably not too excited about the idea of throwing a bunch of money into buying new plants and equipment.

Further evidence of the reluctance of corporate America to invest in new enterprises is seen in the chart below, which tracks the share of corporate profits going towards paying dividends. Dividends are payments to investors, and thus, while they may make some investors some money, subtract from the pool of funds available for new investment. As we can see, dividend payouts have increased through 2007 and 2008, suggesting that private firms have little faith that their money would be better put towards new investment.



What does this all mean for the Obama administration? It means that they need to stop putting the cart before the horse. If what got us into this mess in the first place is the fact that financial market activity ran ahead of household earnings and real economic growth, it makes little sense to rebuild the mechanisms of borrowing and lending without taking care of the underlying economy first. Otherwise, we will just see a return to speculative, highly leveraged financial market activity.

Clearly the private sector, in the middle of a deep recession, is not going to generate bold, creative, new investments--they'll just hunker down and pay themselves out as dividends. The impetus for growth needs to come from a massive, and sustained spending effort targeted at the real economy. More money for energy projects, infrastructure, research--things that will potentially start a new cycle of innovation and growth.

So, this could be the hidden benefit of the AIG bonus payouts--as more and more Americans and, especially, legislators, jump off the financial market bailout wagon, pressure will be created to find a new, more creative, way of steering the country through this crisis.

* Data source: Bureau for Economic Analysis (Tables 1.12, 1.1.5).

Half Back

The New York Times is reporting today that the beleaguered multinational insurance company, A.I.G., which has already received 175 billion dollars of bail out money, will continue with its pre-bail out plan of paying its various executives a total of 165 million dollars in bonus. While nobody seems to like this (except, of course, the bonus receivers), the problem is that, despite the fact that the federal government now owns about 80% of the company, A.I.G. is contractually obligated to pay out the money.

No doubt this is going to produce a lot of righteous indignation, but what it will not produce is any real discussion about one relatively simple means of preventing speculators from a defunct financial company taking billions of federal dollars and then running off with fat bonuses--sharply raise the marginal income tax rate on the highest earners.

Given that the discussion around taxes for the last twenty five years or so has been exclusively devoted to the problem of lowering taxes, the idea of raising them is not going to get a lot of immediate traction. But let me start by putting our current situation into some historical perspective. First, some quick data on American income tax rates for the highest earners. The table present here shows marginal income tax rate for the top income tax bracket for selected years. While the year selection may look random, I chose them on purpose to point out an important feature of earlier income tax system: in times of crisis (like World War I, the Great Depression, and World War II) the marginal income tax for top earners was increased sharply and a new category of "super rich" was created in the tax code.


Now, notice what happens when we get to the most recent three years of American tax history: the top marginal rate has remain unchanged, and the top bracket has barely budged. In every other major crisis, whether economic or world war, the country has asked its wealthiest individuals to pitch in.

For some reason, however, in the current crisis, we dare not raise the possibility of taxing the rich--instead we just sit around growing frustrated and indignant as billions of dollars are poured into failed business, who then turn around and hand that money their under-performing employees.

The defenders of the bonuses say that they have to pay them, that they are simply victims of the marketplace, because if firms don't pay out bonuses they wont be able to retain top talent. But here, again, is why raising the top marginal tax rate is such a good solution: since everybody getting a bonus would pay the same tax rate on that bonus, there would be no competitive advantage or disadvantage given to any one company in terms of retaining talent.

So what would be a good tax rate? Well, in my world I would like to see those numbers that we saw around World War II, how about 94% for people making over one million dollars a year? Too socialistic? Okay, then how about a return to those free-wheeling days of the early Reagan administration, when people earning just over $85,000 a year faced a 50% marginal tax rate? Adjust that for inflation, and let's conservatively call that 50% on anything over $200,000.

That would be a good start.

Foreclosers and Squatters

The news on the radio this morning was not pretty--despite the fact that many of the country's largest banks had agreed to moratoriums on  foreclosing on people's homes, the foreclosure rate was 30% higher in February of this year than it was in February of last year.  The problem? The very high unemployment rate is making it harder and harder for people to stay in their homes.

The administration is supposed to be releasing its foreclosure-prevention plan in a week or so but, if people were already skeptical that rewriting loans would help that many people, the latest figures only make the plan even more doubtful.  What, then, is the solution to the foreclosure problem?  Or, to put it more precisely, how can you let housing prices fall (which they need to do) while still alleviating the mass disruptions and dislocations of foreclosure?  Enter the squatter.

Ever since foreclosures took off early last year activist groups, like Take Back the Land, have been helping the homeless move into abandoned, foreclosed homes.  They break in, change the locks, clean up a bit, jerry-rig some utilities and hand over the keys.  Of course, this is all very illegal and so groups like Take Back the Land have to keep as low a profile as possible which means, among other things, limiting their activities.  While these activities frequently raise ires and eyebrows among law-and-order types, the reality is that, by facilitating the squatting process, Take Back the Land not only provides an important service to families and individuals who need homes, but also provide an important buffer against the broader social and community deterioration that can come from the mass abandonment of housing.

Speaking from experience looking at many foreclosed homes in the cold of a New Hampshire winter, when banks foreclose on homes, properties tend to fall into disrepair.  With no heat and electricity, homes suffer cold and water damage like buckling floor boards, peeling paint, cracked ceilings and, in some cases, burst plumbing.  Snow piles up on roofs and against wall, creating both structural and aesthetic damage.  The result? While foreclosed properties may offer good values for home buyers, they often have to be homebuyers who are willing to deal with the time and expense of repairs.  But even more importantly, mass foreclosure undermines the integrity of broader communities.  Whole neighborhoods become derelict and undesirable, social networks are broken, and the resources of trust and reciprocity that they bring with them are lost.  

There is, therefore, a greater good achieved when homes are occupied and looked after.  Legalizing and regularizing the work currently done by groups like Take Back the Land could go far in cushioning us from the broader impacts of mass foreclosure.  How would this work?

Occupants for foreclosed properties would be found who, in exchange for only having to cover the cost of utilities and provide basic home maintenance (cleaning, painting, property care), would be allowed to live in the house for free.  The house, however, would remain bank owned and stay on the market.  The occupants would have to let the home be shown to other prospective buyers, though they too would be able to purchase the home.  Any sale to a buyer other than the occupant would give three months for the occupant to find a new place to live.

The program would have many benefits.  First, it would provide housing for those who need it while at the same time offering them a chance to generate some savings.  Second, it would maintain the integrity of properties and communities.  Third, it would still allow for over-inflated home prices to fall--something that is sorely needed.

Now of course, banks are not real estate agents or property managers and have little interest in supervising these properties.  But here is where the Obama administration can step in: use some of the money in the proposed foreclosure plan to fund a mix of public and private entities to supervise this process.  

People's mortgages are going to go underwater, foreclosures are going to happen.  And they are going to happen at very high rates.  The current debate is stuck in this back and forth between the "stop it from happening" side and the "let the bubble burst" side.  Regularized squatting offers an alternative to these extremes--it lets the bubble burst, but does so by mitigating its most personally and socially devastating consequences.  

Shame on you, you profligate consumer

I was driving in the car the other day, listening to the latest This American Life show on the financial crisis. If you caught the show, you may remember this scene near the end of the first segment: Alex Bloomberg is talking with an economist who shows him a graph of household debt. The graph shows (we are told) a massive increase in household debt over the last couple of decades. The lesson of this? Well, as our economist friend put it: "the problem is us...we've been living very high on the hog."

So, shame on you, American consumer for getting us into this mess by putting your lavish spending habits on your Amex. When will you learn?

This constant rhetoric about our hyper-consumer culture seems to miss the fact that maybe, just maybe, the reason people are going into so much debt has little to do with our spending habits, our insatiable thirst for gizmos, or our keeping up with the Joneses, but has more to do with the fact that so many people get paid so poorly at their jobs, that they are dependent on credit to maintain any kind of standard of living.

The graph, below, charts real (adjusted for inflation) weekly wages in the United States against the outstanding balance on all the consumer credit owed in the country*. Now, we do see that sharp acceleration in consumer credit, but notice what else we see--a significant drop in real earnings for the last thirty or so years.


So it's not just that people are extending beyond their means, it's that they've seen their means shrink substantially. We have now had a fully generation of workers who, on average, are getting less income out of their jobs than their parents did. So whose fault is this really? Over the last thirty years the country has done everything it can to try to pay people less--freeze the minimum wage, crack down on organized labor, push people into the labor force by removing social welfare benefits--and now we are shocked when we find out that you can't have declining wages and lots of spending without a mountain of debt.

Blame aside, this has created a real dilemma as we think about how to get out of this mess. On the one hand we are told to do our patriotic duty and spend, but on the other hand we are admonished for our debt-driven spending habits.

The solution? Pay people decently and they can spend the money they earn instead of running up a credit card bill.

*The data come from the Federal Reserve Flow of Funds data (for consumer debt) and the Bureau of Labor Statistics (for real wages).