It’s Still the Economy

The recession that started in December 2007 was already in its ninth month when a tumultuous ten days in September 2008 shook the world. First the U.S. government nationalized Fannie Mae and Freddie Mac; then the investment banking house Merrill Lynch was forcibly merged into Bank of America; the next day Lehman Brothers crashed, which was quickly followed by the nationalization of the American International Group, the world’s largest insurance company, which, unlike Lehman, was deemed too big to fail. As credit froze, orders for new goods and investment halted, trade plummeted, and unemployment soared. The recession was on its way to becoming the longest and deepest downturn since the Great Depression.

During this recession, the U.S. economy has lost 6.7 million jobs. That is an average of 11,600 jobs lost every day for nineteen months. As the Economic Policy Institute points out, the hole in the labor market is actually much bigger than that. To keep up with population growth the economy needs to add roughly 127,000 jobs a month. For the nineteen months of recession, that adds up to 2.4 million jobs. If you add that to the number of jobs lost (6.7 million) the labor market is 9.1 million jobs below pre-recession employment levels. Next year, it is expected that more than one in three workers (over fifty million!) will experience either a spell of unemployment or underemployment (working part time involuntarily).

The story behind this catastrophe begins in the Reagan years, when finance was accorded a special place in the American economy. Policies promoting the free movement of capital across borders, the deregulation of finance, and the repeal of regulations separating commercial and investment banking became conventional wisdom.

Wall Street took advantage of these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. In this decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

With growing economic wealth came political power. What was striking was not so much the theory that what was good for Wall Street was good for America, or Wall Street’s adherence to it, but the fact that both political parties bought into it. As Lawrence Summers put it when he was Bill Clinton’s treasury secretary: “Financial markets don’t just oil the wheels of economic growth; they are the wheels.” This fairy tale continues to enchant some in Barack Obama’s administration.

Throughout the crisis the administration has provided unprecedented sums—$4.7 trillion and still climbing...