America Declares Obama-Pelosi-Reid Liberal Economic Experiment A Failure

I have been predicting for weeks that the liberal economic stimulus experiment would fail – and is failing. I also noted the reason why it would and is failing – the lethargic federal government is too damn bloated and slow to ’stimulate’ anything. The liberals shunned the obvious quick solution – tax cuts – and went with liberal fantasies of a government run economy. It was never in doubt what would happen, at least not to me.

Now it is clear to an increasing number of Americans the liberal fantasy is a disastrous failure and action needs to be taken now to turn the unemployment mess around. First, they have come to conclusion the failed experiment needs to be stopped immediately:

    Forty-five percent (45%) of Americans say the rest of the new government spending authorized in the $787-billion economic stimulus plan should now be canceled. A new Rasmussen Reports national telephone survey found that just 36% disagree and 20% are not sure.
And now Americans are saying it is time to go with the tried and true (and conservative) approach of tax cuts:

    Fifty-one percent (51%) of Americans favor an across-the-board tax cut for all Americans to stimulate the U.S. economy, according to a new Rasmussen Reports national telephone survey.
    Thirty-four percent (34%) oppose such a tax cut, and 15% are undecided.

    Fifty-nine percent (59%) of both Republicans and adults not affiliated with either major political party think an across-the-board tax cut is a good idea. Democrats are fairly evenly divided on the wisdom of such a tax cut.

These numbers are not even close, and note where the center lined up  - with the tax cuts (those mushy, squishy traitors – what are they thinking!). As the unemployment picture continues to sink during the rest of this year there will be an increased outcry to end the failure and get it right. The only question is whether the liberal Dems will admit defeat (not likely) or stick in their heals and try and put lipstick on their pig of a plan. If the Dems dig in their heels they will be out of power in 2010 and then possibly in 2012.

This will be very, very interesting to watch play out. Everything is set in motion and nothing can change the direction of the liberal train wreck – except admitting they were wrong.

Are liberals economic idiots?

Liberals have a poor understanding of economics and, thus, should not be entrusted with running the country.

That's the grand conclusion reached by George Mason University economics professor Daniel B. Klein in a recent Wall Street Journal commentary. Too bad the professor reached that conclusion using analytical methods unworthy of a callow undergrad.

One of the most important things I learned 25 years ago while studying for my master's degree in International Relations was to not take statistical analysis on face value. Numbers don't always lie, but they are all too frequently massaged to support the analyst's preconceived notions. Here's what Klein did with the numbers from a Zogby International survey of 4,835 American adults...

Klein presented eight assertions and asked members of the survey group if they agreed or disagreed with them and too what degree. Here are the assertions and the response Klein defined as wrong:
• Restrictions on housing development make housing less affordable (Disagreement is wrong).
• Mandatory licensing of professional services increases the prices of those services (Disagreement is wrong).
• Overall, the standard of living is higher today than it was 30 years ago (Disagreement is wrong).
• Rent control leads to housing shortages (Disagreement is wrong).
• A company with the largest market share is a monopoly (Agreement is wrong).
• Third World workers working for American companies overseas are being exploited (Agreement is wrong).
• Free trade leads to unemployment (Agreement is wrong).
• Minimum wage laws raise unemployment (Disagreement is wrong).
The result? People identifying themselves as libertarians or conservative generally got all but one or two of the questions "right." Liberals and progressives generally got five or more answers "wrong."
From this, Klein deduced that conservatives are "better informed about the policy choices facing the country" and he warned:

Governmental power joined with wrongheadedness is something terrible, but all too common. Realizing that many of our leaders and their constituents are economically unenlightened sheds light on the troubles that surround us.

As the esteemed George Will would say (while sighing deeply), "Well...." Here are a few things about Klein's analysis and conclusion that are misleading.

To begin with, his presumption that all eight assertions are unambiguously true is, shall we say, presumptuous. I will agree with him that anyone who equates a monopoly with market dominance and who still thinks rent control is a great idea probably has not been paying attention. But some of the other statements are more values-laden and, while factual, do not tell the whole story.

For instance, licensing of professional services probably does raise the cost of those services, but that may be because licensing excludes charlatans who would lure consumers with cheap prices and then deliver poor service. Restrictions on housing development do generally drive up housing costs but may also create value by preserving farmland and wild spaces, which some would consider a good thing.

Technically, many liberals got those wrong, but they may be right that licensing and zoning laws are sound public policy.

Other assertions leave room for reasonable quibbling. Yes, the standard of living by conventional measures is higher now than it was 30 years ago, but a liberal might note that the rise is dependent on two-worker households that have seen their incomes stagnate over the last decade. Free trade may increase employment overall, but some American workers, unquestionably, are dislocated by open competition. Third World workers making products for American companies are probably, as a whole, better off than their countrymen, but there are many examples of awful working conditions at foreign companies that contract for work with U.S. businesses. It's a bit much to contend that anyone who sees a big gray area on this issue is an economic knucklehead.

Klein acknowledges that the eight statements do not "challenge the political sensibilities of conservatives and libertarians" the way they do liberals. Clearly, a number of liberals were answering from their gut, not their brain. But Klein fails to acknowledge that, because the statements reinforce the way conservatives and libertarians see the world, they may also be answering with their gut rather than from superior knowledge of economics.

Klein's survey proves nothing but the obvious fact that many people answer questions based on their pre-conceived notions. It would be easy to create a different set of statements skewed toward liberal views that could make conservatives look uninformed. For instance:
• Iraq had no weapons of mass destruction at the time of the American invasion.
• Saddam Hussein had no connection to the attacks on September 11, 2001.
• Victory, along the lines of the victory over Nazi Germany, cannot be achieved in Afghanistan.
• Fighting terrorists over there does not mean we won't have to fight them here.
• The U.S. banking system would have collapsed in 2008 if government had not stepped in.
• Excluding Social Security and Medicare, the contribution of welfare programs to the federal deficit is tiny compared to the cost of the military.
• If allowed to continue over the next decade, tax cuts for the wealthy will drive up the deficit far more than bank bailouts, stimulus packages and the wars in Iraq and Afghanistan combined.

Following Klein's lead, I could make a strong argument that, if a person disagrees with these assertions, his connection to reality is minimal and he should not be allowed to run the country. And really, don't these issues have far more to do with "the policy choices facing the country," in Klein's words, than the topics in the professor's economics quiz? (Is rent control on anyone's national crisis list?)

Another important rule I learned in grad' school was that something is not true just because you agree with it. I fight that very human tendency ever day. It's easy to latch on to the latest wild revelation flying through cyberspace -- such as Klein's survey -- to reinforce what one wants to believe. This phenomenon contributes to the extreme partisanship that has overtaken political discourse in the country. We no longer just agree to disagree with our fellow citizens, we insist they are fools and dupes, if not subversives and traitors, who want to drive the nation to ruin.

As someone on the center-left, I miss the style of that great conservative, William F. Buckley, who could challenge and change my ideas with his intellectual brilliance and civilized discourse. I even miss Ronald Reagan who stayed friends with his political adversaries, adapted his strong beliefs to new realities and partnered with an "enemy," Mikhail Gorbachev, to make the world a better and safer place.

Those were conservatives with whom I could disagree, yet find common ground. I can't say the same for the many arrogant, rude ideologues who claim to be their heirs. I can easily imagine the depth of their glee at discovering "proof" that liberals are just plain stupid.

An Anarchist response to the British Army Barracks Attack

A member of the Belfast branch of the WSM gives his opinion of the March 2009 attack on Massereene British Army barracks by armed republicans.

The armed and indiscriminate attack on the Massereene British Army barracks in Antrim on Saturday night is futile and counter-productive which only serves to strengthen the status-quo.

These attacks along with the killing of a police officer will only heighten sectarian divisions in times of growing alienation and disillusionment in working-class communities. Especially, in the midst of a global economic recession with an increase in class struggle at home and abroad. Convienently, diverting attention away from the disastrous neo-liberal economic polices pursued by our rulers at Stormont.

The armed and indiscriminate attack on the Massereene British Army barracks in Antrim on Saturday night is futile and counter-productive which only serves to strengthen the status-quo.

These attacks along with the killing of a police officer will only heighten sectarian divisions in times of growing alienation and disillusionment in working-class communities. Especially, in the midst of a global economic recession with an increase in class struggle at home and abroad. Convienently, diverting attention away from the disastrous neo-liberal economic polices pursued by our rulers at Stormont.

The attack has left two off duty soldiers dead, Mark Quinsey, 23, and Patrick Azimkar, 21 as well as four others injured including two pizza delivery workers.

Their use and justification of using two civilian workers as human bait in the assault is disgusting and once again highlights the failures of republican militarism. It should be remembered that in the past this was also the practice of the Provisional IRA and other republican armed groups. For example, the Teebane Massacre in 1992 in which eight protestant construction workers were murdered.

We must also resist attempts by these highly infiltrated authoritarian armed groups to drag working-class communities back to conflict and provoke state repression. Despite carrying out sporadic attacks in recent years they are unable to mount a sustained campaign and have always shown like all paramilitaries they are more of a threat to working-class communities and the building of a viable non-sectarian revolutionary alternative, than the status-quo.

Taken from a section of the WSM position paper on the ‘Partition of Ireland’.

“The tactic of armed struggle, as carried out by the Republicans, was never capable of forcing the withdrawal of the British state because it was incapable of delivering a military victory over the British army. The British ruling class cares little for the deaths of individual soldiers in its army. The 'commercial bombing campaign' caused civilian casualties and heightened sectarian tensions.

The armed struggle was also faulted because it relied on the actions of a few, with the masses left in either a totally inactive role, or one limited to providing intelligence and shelter to the few. It is claimed that it did serve to maintain the gains made in the 60s and early 70s. The mass campaigns (civil disobedience, rent & rates strike, street committees, etc.) would have been a far greater protection for the gains won than the elitist militarism of a few.

The British state is responsible for the long history of armed conflict in Ireland. As long as the British state remains in Ireland there remains the possibility of armed struggle against it, especially when there is no mass movement to demonstrate an alternative to militarism. We have opposed the republican armed struggle because it was an impediment to working class unity. It was based on wrong politics, it was a wrong strategy and it used wrong tactics. However we refused to blame the republicans for the situation in the six counties. Their campaign was the result of a problem and must not be confused with its cause. In the final analysis, the cause lies with the continuing occupation by the British state.”

related link: http://www.wsm.ie/story/804

Following the winding up of ‘Operation Banner’ in July 2007, there are still around 5,000 garrison troops in North based on pre-1969 level. Their role is mainly for training and operations abroad in countries such as Iraq and Afghanistan and additional and technical support to the police if necessary.

This attack comes against the backdrop of the ‘dissident republican threat’ being raised to severe and the MI5 stating that 15% of their resources are geared towards ‘domestic terrorism’. The security agency is now based in a state of the art headquarters at Place Barracks near Hollywood, Co. Down. There are believed to be around 150 military operatives based here.

Last week, also saw fractures begin to emerge at the Policing Board whenever Hugh Orde Chief Constable announced the 're-deployment' of the shadowy Special Reconnaissance Regiment (SRR) to target ‘dissident republicans’. In 2005 the 14th Intelligence Company and the Force Research Unit amalgamated to form the SRR who have a history of collusion with loyalist paramilitaries. His announcement was criticised by mainly nationalist politicians from Sinn Fein and the SDLP for failing to announce this at the board and therefore undermining the accountability and scrutiny function of the Board.

This bickering only demonstrates that the Policing Board the District Policing Partnerships are merely ‘talking shops’, despite token gestures of opposition from opportunist politicians. The fact is Hugh Orde is well within his remit based on operational and national security to evade scrutiny.

As the former British Spy master Martin Ingram revealed to the Irish News on Saturday 7th March anyone who believed that British Army Special Forces were not active in Northern Ireland was “living in cloud-cuckoo land.” Special forces will always been an integral part of states armed forces and no amount of token reforms designed to camouflage there repressive functions will change this.

The challenge is to build a mass movement which not only removes the blight of statism and militarism from our society whether in the form of the police, army or paramilitaries, but also virus of capitalism and various shades of reactionary nationalism.

At the end of the day capitalism is a social relationship played out in our everyday lives, in our communites and workplaces based on exploitation of our labour and leisure. It cant be bombed out of existance. Only working-class mass action can get rid of the system and put something better in its place- revolutionary anarchism.

Krugman Tries to Scare Up More Government Spending with 'Third Depression' Rhetoric

According to liberal economic Paul Krugman, a "third depression" will occur if nations tighten their belts and attempt to balance their budgets.

Forget about the riots in Greece over a social welfare system the government couldn't maintain or a $1.4 trillion annual U.S. budget deficit. Krugman claimed that the threat of deflation supersedes both of those results of runaway government spending - that is higher taxes in the long run and a debt to future generations.

In his June 28 column for The New York Times, Krugman wrote: "We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost - to the world economy and, above all, to the millions of lives blighted by the absence of jobs - will nonetheless be immense."

At the G-20 meeting in Toronto last week, European leaders encouraged fiscal discipline from the United States, while President Barack Obama pushed an opposite approach. That disappointed the Times columnist.

"And this third depression will be primarily a failure of policy," Krugman continued. "Around the world - most recently at last weekend's deeply discouraging G-20 meeting - governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending."

Krugman has rarely been concerned by government debt, unless it was for a war or could be used to bash former President George W. Bush. Maintaining his spendthrift perspective, he insisted the concerns raised over government spending have nothing to do with a genuine concern for the financial insolvency of the government or the threat of runaway inflation, but were part of an irrational "orthodoxy."

"So I don't think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs," Krugman wrote. "It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times. And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again."

For 2010, the federal deficit, as a percentage of U.S. gross domestic product is a whopping 10.64 percent, the highest since 1945 in the midst of World War II - an imbalance that worries many people, just not Krugman.

Over the past couple years, Krugman has been an outspoken advocate of government stimulus spending, criticized a $775 billion stimulus plan for being too small, called for a second stimulus, and even claimed in 2008 that "we probably have $10 trillion of running room" when asked how much the government could spend to turn the economy around.

First official statement from Workers’ Day Ceremony Council

5pm, Saturday May 1st, 2010, Tehran, In front of the Ministry of Labor

Workers, Teachers, Students, Nurses, Working Men!

Men, Women and Freedom-loving Public!

This year, International Labor day on May 1st is the day to combine our democratic and liberal, economic and political demands.

Without collaboration between our economic demands through the power of our class and  liberal and democratic demands, our protests are will only serve as tools to empower other wings of capitalism. The concept of economic equality and social-political equality is meaningless without one another. This year, on International Workers’ Day we are protesting against poverty, inequality, low wages, unpaid salaries, lack of job security, elimination of subsidies, political and social repression and the suppression of human dignity.

On Workers’ Day of of 1389/2010 (Saturday, May 1st), the most important desires and demands of the public and especially those of labor workers as listed below, are included in our slogans. We will put all of our efforts to propose these demands not only on the day of this event, but at any time, anywhere.

1 – We demand the immediate and unconditional release of all political prisoners (including worker prisoners and teachers, students, child rights activists, journalists) and all prisoners of conscience and as well as those imprisoned following recent events. Protest and freedom of expression are among the basic and inalienable rights of the people. All judicial sentences for political-social activists and workers are to be cancelled and prosecution against them ceased.

2 – Freedom of expression,  association and assembly and the freedom to strike.  We will not stop fighting for the freedom to exercise these rights.

3 – The determination of 303 tomans as a minimum wage by the Supreme Council of the labor, when the poverty line as announced by several official institutions is 900 tomans, is a sign of the endless thirst of a capitalist system to exploit more workers and wage earners to maximize profit. We want the minimum wage to be announced by the representatives of independent worker organizations and their independent association based on a dignified and humanitarian life.

4 – We gather against anti-human and barbaric profit based plans and removal of subsidies (to targeted subsidies) that is nothing but complaisance to serve the interests of domestic and global capitalism, and will not stop any strike and protest and are inviting the public to protest against these anti-humanity class actions.

5 – We emphasize the necessity of providing retirees with the basic needs for a dignified life, and want the elimination of all modern slavery and its methods, including the signing of blank contracts and temporary contracts.

6 – We want all members of society to benefit from free education, health and public services.

7 – We are in solidarity with other social movements like women’s and children’s rights movements and the student movement, and consider any offense towards them, an attack towards workers movement and an invasion of human dignity of the majority of our society.

8 – We support migrant workers, including Afghan refugees in Iran, and count ourselves in the international fight in support of the needs and demands of all workers of the world. We also ask that May 1st be recognized as a national holiday without restriction on ceremonies of all kind on this day.

Long live international solidarity of the working class -5/2/89

(1may1389@gmail.com) Cermonial Workers’ Day Council – 89 years

The Ceremonial Worker’s Day Council celebration of 1389/2010 in terms of facilities while inviting other individuals and groups whom had suggested other places due to delay in announcing the program and lack of cohesion for a predetermined program, announces that we workers, independent of any demands and programs affiliated with any political group will come together with our slogans on Saturday, May 1st, and shout our demands.

International Workers’ Day celebration: Tehran, 5 pm,  Freedom Street, in font of the Ministry of Labor, followed by a march towards Revolution Square, (crossing Khosh St., Rudaki St., Navab St., Eskandari St., Jamalzadeh St.) and in other cities in front of work places and at times determined by workers themselves.

PM claims Liberal economic strategy rudderless

The push to gain a foothold in the Dickson electorate has started early, with the party leaders of both sides of federal politics spruiking their party’s virtues during recent visits to the Pine Rivers region.

Less than a week after Opposition Leader Tony Abbott visited Liberal Party faithful at Strathpine, Prime Minister Kevin Rudd was in the area on Monday to trump the benefits of Labor.

Flanked by ALP candidate for Dickson Fiona McNamara, Mr Rudd inspected Moreton Bay Regional Council’s plans to revamp the Strathpine CBD,followed 

by a visit to the Strathpine GP Super Clinic.

While Mr Rudd said he had not yet discussed the Strathpine renewal project with Moreton Bay Mayor Allan Sutherland, he said it would receive his support if it helped improve “the local quality of life”.

But when asked if the Federal Government would lend financial support to the project, Mr Rudd replied: “Let’s have a look at it and see what we can do.”

Mr Rudd challenged Mr Abbott and Federal Member for Dickson Peter Dutton on the future of the government’s ongoing economic stimulus programs, claiming the Liberal Party lacked economic foresight.

He said the Coalition planned to abolish the economic stimulus schemes, including funding for school building projects.

“Mr Abbott and Mr Dutton are intent on abolishing all the economic stimulus programs we have put in place,” he said.

“If he (Mr Dutton) is fair dinkum about this he should list all the school projects in Dickson that he wants to pull the plug on.”

Mr Rudd said the issue of complaints about the schools infrastructure program was largely a “media beat up”, claiming complaints had been received for around  only  100  of  the 26,000 projects undertaken at schools across the country.

When asked how the Federal Budget would be received by families when it is released next week, Mr Rudd declined to discuss the matter further, except to say: “the Budget will speak for itself”.

Mr Rudd said Labor’s financial commitment to Dickson included raising pensions for around 14,000 pensioners in the region, as well as spending $3.6 million on social housing in the area.

“I fully support affordable housing for all Australians, and it takes proper plans to bring things together,” he said.

“That goes for everywhere from Greater Sydney to regional areas and outer urban communities like this.”

Mr Rudd said the government had also spent $2.5 million on local traffic black spot projects and provided almost $45,000 to rehabilitate biodiversity corridors around the South Pine River.

The Equation Defined

This equation is a work in progress for me.  I have tried an econometric model but it crashed my computer.  Seriously, we are losing sight of the much bigger picture that is playing out across the country.  Our policy makers are distracted by this financial crisis or intentionally ignore the plight of the Middle Class in the U.S.

This equation was derived from reading a debate between Professors Branko Milanovic and Ashok Bardhan: Two Views on the Cause of Global Crisis (Here and Here).  These two professors debated the causes of the global financial crisis.  Milanovic argued that income inequality was the root cause of the financial crisis while Bardhan argued that globalization and financialization were the causes of the financial crisis.  I argue they are both right.  But they highlight a much bigger problem that is being overlooked by this financial crisis.

Most arguments about what caused the global financial crisis ignore a more insidious problem that is being overlooked in all the discussion and policy proposals: the destruction of the Middle Class.  This global financial crisis has negatively impacted the Middle Class more than any other income group.  A report by Bank of American/Merrill Lynch shows that (via LA Times).  Tom Petruno summarizes the BofA Merrill report this way:

The report hammers home what you might already suspect: The consumer debt problem in the economy really is a debt problem for the middle class. The need to work off a chunk of that debt will sap middle-class families’ spending power for perhaps years to come.
It estimates that middle-class families’ debt as a percentage of disposable income was 205% in 2007, a function of the level of trading-up during the housing boom and of the cash people pulled from their houses via home-equity loans.
By contrast, lower-income families’ debt-to-disposable-income ratio was a much less onerous 133%. And for the wealthy the percentage was lower still, at 116%.
What’s more, on the asset side, BofA Merrill says the middle-class has suffered more than the wealthy from the housing crash because middle-class families tended to rely more on their homes to build savings through rising equity. Also, the wealthy naturally had a much larger and more diverse portfolio of assets -- stocks, bonds, etc. -- which have mostly bounced back significantly this year.

I strongly encourage people to click the LA Times link above to read Tom Petruno's story because he raises a very important policy question.  

The negative impact of this financial crisis on the Middle Class is a symptom of a more larger problem or disease.  As Dr. Thomas Palley points out in his report: "American's Exhausted Paradigm", our economic growth model (which he calls a neo-liberal growth model) is terrible flawed.  The equation - Income Inequality + Financialization + Globalization = Destruction of Middle Class is meant to symbolize the flawed model.  It is this flawed neo-liberal model that needs to be corrected if the Middle Class is to survive.

All this talk and policy proposals of re-regulating the financial sector are just treating the symptoms and not the disease.

INCOME INEQUALITY

The first part of the equation.  This is no surprise that there is income inequality in the U.S: a small number of people earn a lot more money than the rest of us.  What is surprising is the magnitude of the inequality.  This magnitude of inequality is not a good thing.

Branko Milanovic summarized income inequality in the U.S. this way:

In the United States, the top 1 percent of the population doubled its share in national income from around 8 percent in the mid-1970s to almost 16 percent in the early 2000s. That eerily replicated the situation that existed just prior to the crash of 1929, when the top 1 percent share reached its previous high watermark American income inequality over the last hundred years thus basically charted a gigantic U, going down from its 1929 peak all the way to the late 1970s, and then rising again for thirty years.

Then we got this stunning graph from Professor Emmanuel Saez's updated report on income inequality in the U.S.:

Notice how income distribution really starts to change right around the early 1980's.  That is the time which Dr. Palley rightfully claims that the neo-liberal economic growth model - our current growth model - began to take hold.  And another thing, this graph only shows incomes as low as $109,600 which means that a very large group of Americans making less money have a very small share of total income.  That is why this graph is so startling.

Some people may say that income inequality is not a big deal.  Oh yeah. Well income inequality creates huge inefficiencies in the economy in terms of allocation of resources.  It also creates the potential for an aristocracy (or financial oligarchy) that will do whatever it can to protect its dominate position in society.  A better description would be the creation of a two-tiered economy - kind of like many Latin American countries - what our economy is starting to look like.

Professor Emmauel Saez in his report "Striking it Richer" offers this suggestion for the huge income inequality:

The labor market has been creating much more inequality over the last thirty years, with the very top earners capturing a large fraction of macroeconomic productivity gains. A number of factors may help explain this increase in inequality, not only underlying technological changes but also the retreat of institutions developed during the New Deal and World War II - such as progressive tax policies, powerful unions, corporate provision of health and retirement benefits, and changing social norms regarding pay inequality.

Emphasis is mine.

Interesting, that bold phrase is what Dr. Palley is railing about in his report regarding our flawed neo-liberal economic growth model.

FINANCIALIZATION

Financialization means the increasing position/size of financial assets and the financial sector in the economy.  This financialization was facilitated by de-regulation of the financial sector.  Professor Ashok Bardhan explains financialization:

Over-financialization could be seen in rise in the size of financial assets relative to the real economy as indicated by gross domestic product. Globally, the holdings of financial assets, comprising equities, government and private bonds and bank deposits ballooned way out of proportion to global GDP, the primary underlying measure of real economic activity (see Figure 1). Similarly, the gross market value of outstanding derivative contracts more than doubled between mid-2006 and mid-2008. The share of financial services in GDP has increased dramatically in the US and UK in recent years; in the latter it has doubled in the last decade alone. In many countries, the financial sector grew to a size disproportionate to its primary raison d'etre - to efficiently bring savers and borrowers together, allocate savings to viable investments, and manage diversification of risk. Liquid and deep financial markets are necessary; indeed, they are the lifeblood of economic activity, but to extend the analogy, not if they cause high blood pressure to the economy!

This Financialization was indicative of a much larger problem.  What replaced wage growth was asset price inflation and rising indebtedness.  For example, as the BoA Merrill report points out above, Middle Class families relied heavily on the equity in their homes - this was an important savings vehicle.  Consider this from Dr. Palley's report:

1. Since 1980, each U.S. business cycle has seen successively higher debt/income ratios at end of expansions, and the economy has become increasingly dependent on asset price inflation to spur the growth of aggregate demand.
2. Over the last 20 years, the economy has tended to expand when house price inflation has exceeded CPI (consumer price index) inflation. This was true for the last three years of the Reagan expansion. It was true for the Clinton expansion. And it was true for the Bush-Cheney expansion. The one period of sustained house price stagnation was 1990–95, which was a period of recession and extended jobless recovery.

Financialization is a symptom to the disease that is destroying the Middle Class.

GLOBALIZATION

Globalization can be defined by the free flow of trade and capital from country to country.  The policies implemented since 1980 have precipitated globalization which has forced American workers to compete with much lower-paid foreign workers.  But there is more to it.  Our current, neo-liberal, incredibly flawed, economic growth model depends on CHEAP IMPORTS.  The impact from wage stagnation is covered up by cheap imports - it is a way to pacify Middle Class families.  What better way to make us feel like we have a lot of purchasing power by having access to incredibly cheap consumer goods from a big retailer.

Dr. Palley describes it this way:

The reality is that the structure of U.S. international engagement, with its lack of attention to the trade deficit and manufacturing, contributed to a disastrous acceleration of the contradictions inherent in the neo-liberal growth model. That model always had a problem regarding sustainable generation of demand because of its imposition of wage stagnation and high income inequality. Flawed international economic engagement aggravated this problem by creating a triple hemorrhage that drained consumer spending, manufacturing jobs, and investment and industrial capacity. This in turn compelled even deeper reliance on the unsustainable stopgaps of borrowing and asset price inflation to compensate.

THE EQUATION

Like I said, it is a work in progress but hopeful something that people, especially policy makers, will understand:

Income Inequality + Financialization + Globalization = Destruction of the Middle Class

Together these factors have contributed to the destruction of the Middle Class.  Some economists, like Dr. Palley, argue that our current, neo-liberal, economic growth model is not sustainable.  I would argue that it is not so much that this economic model is not sustainable, because I am sure that the financial oligarchy and corporate aristocracy would keep it going, but it will destroy the most important aspect to any stable economy - the Middle Class.