Economic Update: U.S. Economy and the Market

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[S9 E36]

This week on Economic Update Professor Wolff delivers an analysis of the state of the U.S. economy at summer's end, 2019 and it’s a decidedly mixed picture. 

In the second half of this week’s show, Professor Wolff presents a counter to the imaginary 'free market’ with a critique of the institution that is “the market” focusing on its structure, social effects, and particular beneficiaries.

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Prof. Wolff's latest book "Understanding Marxism"

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Transcript has been edited for clarity


Welcome, friends, to another edition of Economic Update, a weekly program devoted to the economic dimensions of our lives – jobs, incomes, debts – all of that. I'm your host, Richard Wolff, and today I want to begin by dividing our program into two major discussions. The first part will be the condition of the US economy at the end of this summer, 2019. And the second topic will be the market, this institution that gets such a remarkable play in our culture, in our society, but that deserves the kind of critique I hope to offer in the second part of today's program. 

So let's begin with the US economy. Every day we hear from the Trump administration, from Republican leaders and, unfortunately, from quite a few others, that our economy is, quote unquote, "great," or, quote, "in great shape." It isn't. But let's explore why it's even possible to say such a thing. The answer – and it's a very simple answer – is that the unemployment rate is low. That's correct. It's about three to four percent these days, and that is historically a low number. And, without going into the problems with that number, which I've talked about on other programs, let's assume that it's a reasonably good statistic about the economy. No one who has ever studied the economy, and certainly no one with a claim to be an economist, would ever judge the economy by one statistic. It would be as if you went to the doctor, he gave you a thermometer to check your temperature, it was 98.6, and therefore you're done. Isn't that wonderful? You're normal. That would be a doctor you should never visit again. Why? Because you have to look at multiple indices. You have to look at different things to come to some composite judgment about the health of an economy or the health of an individual. So let me give you some more statistics to think about. 

The same government that says the economy is great – last year was the first year, 2018, that we had a brand new, big-fat tax cut for corporations and the rich. Huge! And it was premised on the notion that it would get the economic growth rate of the United States back to three percent – something it hadn't seen for a long time, which would be a great achievement. That achievement was not achieved. We are at two percent, and we're staying around two percent, and three percent is not in the cards. We gave an enormous tax cut to get something which did not materialize. That's not a good sign. That's a bad sign.

Number two: Mr. Trump – in order to look as though he were defending America, making America first, and all of that – has imposed tariffs, virtually on the whole world – especially China, but Europe and Canada and Mexico too. That has disrupted the world economy and brought a recession nearer. Poor Mr. Trump, trying to get votes by being Mr. Tough Guy, protecting, then produces a recession, which will lose him the election if it happens in the next 12 months. So he's trying to lower interest rates. He's trying to keep telling us the economy is great, which, if it were, wouldn't need to lower interest rates. The poor man is caught up in his own chaos. There's really no other way to say it. But this is not good for the economy. Conditions in Europe and Asia are deteriorating, and that will come to the United States in a world economy sooner or later. But we're not done. 

There's a statistic, very nice one. How has the stock market done since Mr. Trump came to office? The answer is, as of mid-August, 2019, that the stock market is up 29 percent. That's very impressive, in two ways. Number one: It's way more of an increase than wages have seen. In other words, the gap between the rich, who own the shares, and the rest of us has grown wider. The inequality has become worse over the last period since he was elected. But here's a number you might also enjoy. Using the same 645 days of Trump, and asking how well did Mr. Obama's administration do in its first 645 days: Whereas under Mr. Trump the stock market is up 29 percent, in the first 645 days of Obama it was up 46 percent. Mr. Obama was even better for corporate America than Mr. Trump.

In the 1960s, the ratio between CEO pay and average-worker pay was in the neighborhood of 30 to 1. By the 1990s, it had become the ratio of a 100 to 1. Since the year 2000 it has gone up to (ready?) 250 to 1. The gap between the people at the top of our corporations. Now, nobody in their right mind thinks they're that much better today as leaders of corporations than they were in the '60s and '70s. I might remind you that in the '60s and '70s, when CEO pay was only 30 times the average worker's, we had a more rapid rate of growth than we've had ever since. So more CEOs hasn't helped the economy, but it sure has helped the CEOs.

And here's another measure of how well we're doing. The Federal Reserve did a study – every year it does this study – on the condition of American households. So the results for 2018 are in, and here's a statistic that jumped out at me: One in four Americans during the year 2018 did without needed medical care because they could not afford it. Twenty-five percent – that includes millions who have medical insurance, but it still didn't cover something they needed, and therefore they did without it. That's not an economy that's doing great, no matter how you slice it. 

But I don't want to leave you with the notion that there's all bad news here. I just want to correct the absurd notion that we have a great economy that is the envy of the world. It isn't. Every one of the things I just went through with you isn't the envy of the world; it's something the rest of the world is happy it has avoided.

But here's a bit of good news: The American Medical Association, a very conservative organization representing this country's doctors, recently pulled out of a coalition. The coalition is called the Partnership for America's Health Care Future. This is a coalition that is a lobbying group. It represents drug companies, medical-insurance companies, doctors, and hospitals. Or it did represent the doctors. But the doctors pulled out. You know, that coalition was very strong. By acting together, the insurance companies, the drug companies, the doctors, and the hospitals were able to drive up the price of medical care in this country so it is far more expensive than in every other country in the world – any other developed country – even though the medical results we get, the outcomes, are mediocre. Many countries do better than us who spend a fraction of what we do, which, if there were real competition in the world, would have disappeared long ago. Why not? Because that coalition – drug companies, medical insurers, doctors, and hospitals – is powerful enough to get the laws changed and the regulations controlled to make them monopolists in selling medical care. That's really what we've got.

But the American Medical Association pulled out. Why? Because at this year's annual meeting of the American Medical Association, to everyone's surprise, the demand for a Medicare-for-all solution – sometimes called single-payer insurance system, a little bit like Canada's – was voted down, but only by a 53 to 47 percent majority. For the first time, half the doctors in America want what the right-wing calls "socialized medicine." And the AMA, recognizing which way the wind is blowing, pulled out of the coalition because they're going to support, or at least be neutral in, this struggle to get Medicare for all – a proper medical insurance for every American citizen, the way the French or the Swedish or the British or the Italians have had for decades. It's an interesting comment. It's a crack among the capitalists as some of them see which way the wind is blowing, and it is blowing against them and in favor of something much friendlier to the average American citizen.

We've come to the end of the first part of this program. Please remember to subscribe to our YouTube channel. It's an important support for everything that we do. Make use of our websites, democracyatwork.info or rdwolff(with two F's).com. You can communicate with us directly through those websites, and/or you can follow us on Facebook, Twitter and Instagram. And finally, a special thanks to the Patreon community. To support us at patreon.com, Democracy At work, this is an important encouragement, as well as support, and we thank you for it. Stay with us. We'll be right back.

Welcome back, friends, to the second half, for the second part, of Economic Update. I want to spend this part talking about an institution that gets an extraordinary amount of praise, adulation – a kind of fawning, almost fetishistic notion of it being some kind of superb institution. I'm referring to "the market." I want to talk to you about the market – not because there aren't some things about it that are useful and helpful, but because there are lots of other things that are terrible. And those have to be part of the equation if you're going to come to any kind of reasonable judgment about this particular human institution, the way you would look at a balanced assessment of any other human institution. So let's begin.

Some people seem to use the word "capitalism" and the word "market," or "free market," as synonymous. This is a mistake. It's not a question of interpretation; that's just wrong, and let me explain. Capitalism is a system of producing things, goods and services. So we distinguish it, for example, from feudalism, and slavery, which are alternative ways of organizing production. You know, in slavery there's a master and a slave, and they have a relationship that produces goods and services. In feudalism, there's a lord and a serf, and they have a different relationship. For example, in slavery a person can be the property of another person. The slave is the property of the master. In feudalism, it's not like that. The serf is not the property of the lord. The lord can't buy and sell serfs the way a master can buy and sell slaves. And capitalism is different from both of them because we organized that into the employer/employee, and the employer can't buy and sell employees, and the employee, unlike a serf, doesn't go with the land or is stuck to that particular employer. He's free, or she's free, to go, etc. So these are different ways of organizing production. 

Market is something else. A market is a system of distribution – that is, what do we do with the product after it's produced? How do we distribute the shirts from the maker of shirts to everybody who wears one? How do we distribute the product of the farmer to everybody who needs to eat a meal, etc., etc.? And the market does that by what we call a "quid pro quo" exchange. I take shirts, if that's what I produce, and I go to a market, and I bargain. I'll give you two shirts, you give me a bushel of potatoes, or two bushels, or – that's the way it's done. Okay, so a market is a system of distribution. 

To show you the ignorance of equating that with capitalism, let me remind you – you probably know, but let me remind you – that markets have coexisted with slavery, feudalism, and capitalism. They're not peculiar to capitalism. For example, in slavery, there's a market in – you guessed it – slaves. You buy and sell slaves. That's what masters did, so of course there was a market where slaves were distributed from whoever brought them from Africa against their will, to whoever bought them when they arrived here, from whoever had brought them over, etc, etc. Okay.

Here's another way that markets are not the same as capitalism. In every socialist country that we've had so far – Russia, China, Eastern Europe, Cuba, Vietnam, whichever one you want to pick – there were, throughout their history, markets. Lots of stuff was distributed by means of market exchanges. If you study any of those economies, the notion that actually existing socialism was not market is just ignorance. It comes out of a Cold War, kind of crazy exaggeration that needed to make complete opposites of whoever it is we didn't like at the given moment. It was not a reasoned thing.

Lastly, the people who talk about markets like to often use the word "free." What they seem to mean, when they've thought about it or explain themselves, is it's a market that isn't regulated by some political authority. A market with no rules, no regulations, where buyers and sellers confront one another and bargain, and reach a mutually agreeable rate of exchange, each for whatever it is they have, and each for whatever it is they want. I get that idea. But here I'm going to be an economic historian – something I have taught all my adult life as a professor in the United States, and something I share with other professors of economic history. The free market that I just described has never existed. It is a figment of the imagination of people. It is also a wildly utopian image. We don't have that. Every market that I have ever studied – whether it's ancient Greece right up to the present – is full of regulations. The notion that we can have a market without regulations is refuted by the fact that every time a market has been created as the way to distribute goods, it has immediately had so many bad effects that regulations had to be brought in to counter them.

For example – and it's really important to understand this – in a free market, wages can be very low. A capitalist pays as little as he can get away with. And if they're desperate people who need to survive, they will work for next to nothing. This creates a vast population of very poor people often in capitalism. And guess what. We bring in a regulation, it's called a minimum wage, so you can't do that. Here's another example: Some companies get into a position where they're the only company producing something, and they can jack up the prices because you've got nowhere else to go. Think of your local utility. You don't have six utility companies to choose from. You don't have six etc., etc. So those companies jack up the prices. You know what we have as a result? The Antitrust Division of the Justice Department to break up the monopolies. Because if you let the market go, the competition among many becomes a few, and then they do what they always do, and in come the regulations. There's a good reason why we have regulations: because markets have undesirable effects. So let's talk a little bit about them. 

First, let's remember what a market is. A market says that there are goods that people want. Let's suppose ice-cream cones, for lack of a better example. Ice-cream cones. Let's suppose there are 20 ice-cream cones that are available for sale. And let's suppose that there are 50 people who want an ice-cream cone. So the supply of ice-cream cones 20, and the demand for ice-cream cones 50. What happens? Very easy to understand. Let's suppose the sellers of ice-cream cones are ready to sell them at 20 cents a pop. Well, the richest people out of the 50 immediately realize there's only 20 cones and there's 50 of us. But I've got a lot of money, so I'm going to offer 25 cents. Oh no, says another rich person. I'm not going to stand by while he gets it for 25; I can afford 30. And another rich one says, well I can afford 50. You see what happens? The price gets bid up. As we teach in economics, the demand being greater than the supply, the price goes up. The idea being those with the most money can keep raising the price because they can afford to pay. But as the price goes up, the poorer people have to drop out of the race because they can't afford $2.18 for a cone. Guess what happens. When the dust settles, the 20 cones go to the people willing to spend the most money, to bid up the price, because they don't care, because they're rich – they'll pay $5 a cone.

In other words, what markets do is distribute whatever is scarce to the people with the money. The most money wins. Well, if the market is a game in which those with the most money win, then it's a game that favors the people with the most money. This is not rocket science, friends. The market is a system that favors the rich, which is why the rich love markets. 

What would be an alternative to the market? Well, here's one: We would distribute whatever is scarce according to some other rule. Not the rule who's got the most money to bid up the price. Here's an alternative rule: Who's got the greatest need? If I substituted milk for the ice cream in my example, and I said to you, of the 50 people who want milk, there's a dozen rich people who want it for their cats, and then the rest of the people want it for their babies. Well, suppose the rich people bid up the price so those with the babies can't afford it. Their babies go without so that the pets of the rich have the milk. Are you okay with that? Because that's the market solution. But if you had a different idea – that human being's children are of more importance than rich people's cats – you would have to distribute the scarce milk in some other way, by some other rule. But, folks, you already do that.

Let me give you another example: It's Thanksgiving. You're all sitting around the table, gobbling up that turkey. And you know who produced the turkey? Your mother. She roasted it, and then perhaps your father carved it up. And now you've got pieces of turkey. How are they distributed? Do Mother and Father sit at the head of the table and say to the assembled family, "Okay, what am I bid? Who's going to offer me for this drumstick? for this breast meat? for this wing?" You don't do that, do you? You don't distribute the fruits of the labor of your mother and father by a market mechanism, because you would think it's immoral, unethical, outrageous. Instead, your mother and father distribute because they love you. They distribute to everybody. They don't, they don't discriminate. They let everybody choose. What do you prefer – the leg, or the wing, or what? You understand? It's a different rule that you use in your home. And if you did have a member of your family who brought, say, whipped sweet potatoes to Thanksgiving and said, "Okay, I've got these. Who's going to offer me how much for this little scoop of . . .?". There would be a lecture given to that person. "We are a family," that person would be told. "We love each other. We produce food for one another because it's part of how we hang together as a family. It's how we show we care for each other. Bringing the market into this household is against the love we want there to be." To which I always like to add the thought, gee, if bringing the market into the household destroys love there, I've got news for you. It may have the same effect outside the household too. Hmm. Think about it.

Well, then there's another way that the market helps rich people. They use their money to get scarce things that help them be rich into the future, that help their children be rich. If you ever look at rich people, you find out very quickly they spend a lot of money on tutors, on special programs for their children, on special schools for their children, on all the best medical care, and on nice trips for them to learn about interesting – you get the picture? They're taking care that their children will be rich in turn by spending money which poor people don't have.

Here's another thing rich people do: They hire very expensive tax lawyers and accountants. You know what for? To get out of paying taxes, which those people specialize in. But they're very expensive, so you have to have a lot of money to pay the person who's going to get you out of having to pay taxes on your lot of money. In other words, wealth, in a market, can reproduce itself. It's an institution that not only favors the rich, but favors the rich staying the rich. Which is why they do it so carefully. 

Well, then there's another defense. Well, it's said, yes, okay, the market, but that when the price goes up and rich people bid up the price, it's a signal, we are told, to producers: Hey, make more of that because the price is high. It's a very sweet idea. Here's why it doesn't work: Because rich people long ago figured out that if they're the only ones producing something, if the price goes up, they don't want other people to come in because that'll drive the price down. So they erect what we call, in economics, "barriers to entry." You can't come in. A new car company can't break in because everybody's used to the same five names for what a car is. And a new car – let's call it a "Fafufnik" – isn't going to have an easy time being sold because nobody ever heard of a Fafufnik. It hasn't got 100 years of learning names like Ford and Chevrolet and Toyota and all the rest. So you create a barrier. You know how you do that? By plastering every corner of the universe with pictures of your car, with that name over and over. Car is this. Car is this. Other people can't come in, and that allows them to jack up the price, because you're not going to go to somebody else. 

In other words, corporations play the market. They know exactly how markets work, and they intervene to make them work in their favor. Only in the minds of libertarians is there the notion that someday, somehow, somewhere we're going to have a "free market" whose effects are not going to be shaped by rich people wanting to use it for their ends, or by the government stepping in because the mass of people are getting so angry about what's going on that they demand some accommodation. 

Someday, if you have time, go back and read a little Plato and Aristotle. Both of those great fathers of modern Western Civilization talked about markets, and both of them didn't like them. They were critical of markets. Why? They had the same argument: Markets destroy community. That was their argument. Markets disrupt and destroy society. They set people against each other. Because in a market, you're always in this situation: I want to get more and give less, I want to get the best price I can for whatever it is I have to sell, I want to pay the least possible for whatever it is I want to buy. We're always adversaries. We're not working together; we're trying to figure out how to get one over on the next person. This is not a way to build community. This is not a way to build solidarity. It's not a way to distribute goods and services, which is why your mother and father don't do it that way at Thanksgiving. 

Even here in the United States, we got rid of markets in World War II. You know why? Because we were fighting a war with the Germans and the Japanese. And we needed all our resources in America to fight that war. And we said okay, we're going to use resources for military – produce bombs, and bullets, and planes, and tanks – and that means those resources are not available to produce consumer goods. Now, we could let the market deal with the reduced supply of consumer goods, because we're doing all this military work. But then only the richest people could afford what remains of the consumer goods, and that would make the mass of people very angry. And we can't have that and have a solidary society to fight a war. So we're not going to let the market distribute the consumer goods that are available after military production. We had a ration system. The government issued little cards and distributed them here in America for years. And you had to have a ration card to buy milk, or sugar, or gasoline for your car, and many other things. We didn't let the market distribute because it is socially divisive. And you know how the United States government distributed ration cards? To each according to their need. If you had a lot of kids, you got more ration for milk. If you didn't, you got less. They used a different, non-market rule to distribute.

Markets have bad effects. They always have. They're dangerous for society, and their negative dimensions deserve the kind of analysis that conservatives want to keep from us, for reasons that should make you deeply suspicious. I hope this critique of markets has been interesting. Thank you for being part of this program, and I look forward to speaking with you again next week


Transcript by Marilou Baughman
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