America's Problem with Collective Action

Carl Cusack - Politics & Economics

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June unemployment was reported at a historic high of 11.1%. Just shy of a third of Americans missed their July housing payments, up from 30% in June. By contrast, the S&P 500 has lost less than one per cent in value from an all-time high in February. This begs the question, how can the stock market be largely unaffected while the American economy is burning?

To answer this question it is important to understand who owns the stock market, and how it is regulated. Analyzing the demographics of stock market ownership provides insight into the racial and class divide in America’s economy. According to a 2017 Gallup poll, Non-Hispanic whites have a stock ownership participation rate of 60% versus 36% for Non-Hispanic Blacks and 37% for Hispanics. A 2018 study by the St. Louis Federal Reserve showed that white college grads collectively owned 77% of stock market wealth while comprising only 26% of the total U.S. population. Only 2.4% of stock market wealth is owned by Black and Hispanic college-grad families despite representing 5.5% of all households. The richest 1% of households now own more than half of stock market wealth. The richest 10% of Americans own 92% of stock market wealth. When the stock market gains value, rich white Americans profit disproportionately.

These figures help us understand why the market has not seen massive outflows of capital as working-class Americans struggle to make ends meet. But, why hasn’t the market lost more value? One might assume that the market's value is based on earnings of publicly traded companies that should be equally affected by the economic downturn.

To understand why the market has not lost more value, we can examine the activities of the United States Federal Reserve (Fed). The Fed is an independent government agency that operates with a dual mandate of maintaining stable prices (inflation) and maximizing sustainable levels of employment. Put simply, when the economy contracts the Fed decreases interest rates to stimulate economic activity. When interest rates cannot be lowered any further the Fed engages in asset-buying programs (quantitative easing or QE) that dump trillions of dollars into the market. The money used to engage in quantitative easing is essentially created from thin air. The assets purchased through QE are owned by banks and large corporates, meaning that QE leads to gains in stock market valuation for these publicly traded corporations.

Quantitative easing is a relatively new concept first launched in the wake of the 2008 recession. As the Fed performs quantitative easing its balance sheet (assets) grow. The Fed’s balance sheet currently sits at $7 trillion, a dramatic rise from 2008 levels of less than $1 trillion (see figure 1). To give an idea of the massive scale of this balance sheet, the three largest banks in the US (JP Morgan, Bank of America, Citigroup) collectively hold $8 trillion in assets on their balance sheets. These three banks have 665,726 combined employees meaning that for each employee, about $12 million in assets are held on balance sheets. The Fed has only 22,725 employees meaning that for each employee, $306 million in assets are held on its balance sheet. Even in the world of banking, the Fed’s balance sheet is unusually massive.

Since March 11th $2.6 trillion dollars have been pumped into financial markets through QE, and this number is still growing. The recent CARES Act offered only $1.8 trillion in fiscal aid. Dividing $2.6 trillion by the U.S. population shows that about $8,000 for every American citizen was generated through QE while Americans received a one time check of $1,200.

Figure 1: Fed Balance Sheet

At its inception, there were broad concerns that QE could lead to inflation, or even hyperinflation. What we have actually seen occur is bifurcated inflation, which refers to the rich experiencing dramatic gains of wealth, while the working class realized little to no benefit. American billionaires experienced $434 billion in gains between mid-March and mid-May. Without going into too much detail, this soar in wealth is fueled by record quarters in Markets/Asset Management and performance growth in certain sectors (e.g. eCommerce). Major banks posted record profits for trading in Q2 2020 by successfully trading on market swings.

The combination of QE and swing trading explain how billionaires vastly increased their wealth during this recession, and why the market has lost only 5% of its value. Since billionaires do not spend the vast majority of their wealth, broader inflation is not realized throughout the market. Inflation has consistently lagged below the Fed’s 2% target. Inflation of 2% or higher would trigger a cutback in accommodative monetary policy such as QE. It is in the financial interest of the rich to continue to hoard wealth without improving the broader economy, and therefore trigger inflation.

Many view the stock market as crucial for funding retirement plans. It is true that 56% of American workers have workplace retirement plans (e.g. 401k plans). A market that exports over 90% of its capital to the wealthiest 10% is relied upon by Americans to ensure their basic human rights. Americans’ ability to safely retire should not be tied to billionaires’ main source of wealth. The rich have a financial incentive to defend this neoliberal market structure by which they profit off crises and maintain a tight grip over workers’ livelihoods.

At a fundamental economic level, the center of both political parties in America are variants of neoliberalism which defend existing market structures. We do not have a detailed breakdown of the political party affiliation of America’s ~630 billionaires due to campaign donation disclosure rules, but it is clear that they are made up of both Republicans and Democrats. As early as December 2019, 44 billionaires donated to Joe Biden’s presidential campaign. A 2014 Pew Research Center study depicts a remarkably even breakdown of political party affiliation among annual household incomes of over $100k.

Empowering Americans by ensuring basic human rights is essential in dismantling the classist structure that precludes a mass mobilisation against climate change. According to the Bureau of Labor Statistics, 82.3 million workers (58.1% of all workers) in the U.S. currently make the minimum wage, often working two jobs and 80 hour weeks to make end’s meet. How can we realistically ask workers getting six hours of sleep per night while working two jobs to actively participate in issues like climate change? All the establishment can offer these workers is the ability to vote for a Democratic candidate who will marginally improve their lives without addressing the structural inequality underpinning America’s current economic system. From the perspective of billionaires, it is wildly profitable to fund the campaigns of centrist Democrats that will not threaten their control over the American worker.

Establishing basic human rights to healthcare, housing, and education are essential in dismantling these systematic inequalities. These rights ensure all Americans have the necessary resources to actively participate in discourses related to climate change, civil rights, and other crucial issues. It is not in the interest of the rich or their two-party political machine to secure these rights for Americans.

The Sanders campaign had Medicare for All at its core.

Notable differences between the more moderate Biden campaign and that of avowed socialist Bernie Sanders was the latter’s insistence on universal and free public college, cancellation of student debt, housing for all, and, of course, Medicare for all. If Americans are secure in their access to health, education, and housing they have a much wider range of freedom to make demands of the corporations that currently control their livelihoods and health insurance. The prerequisite for collective action is collective access.

Though united in neoliberalism, the Republican and Democratic parties are not the same. A variety of ideological differences exist on issues such as abortion, gun control, LGBTQ+ rights, climate change, and many others. The problem with the two-party system is that it provides a template of beliefs that Americans can buy into based on one or two issues they are passionate about. E.g. 29% of Democrats and 75% of Republicans are pro-life. If someone is staunchly pro-life, they are likely to vote Republican and vice versa for Democrats. Buying into an entire belief system based on select policies is dangerous because it undermines Americans’ ability to think critically about individual issues, and allows for things like climate change and civil rights to become highly politicized. Forcing Americans to choose between two parties funded and influenced by billionaires is suppressive of alternative ideas and inherently benefits the rich ruling class.

On November 6th, 2012 Donald Trump famously tweeted: “The concept of global warming was created by and for the Chinese in order to make U.S. manufacturing non-competitive.” Throughout his presidency, Trump has undermined American and global efforts to battle climate change, most notably withdrawing the U.S. from the Paris climate agreement.

A 2020 Pew research poll found that 85% of Democrats think protecting the environment should be a top priority for the President and Congress, versus only 39% of Republicans. The two-party system’s politicization of issues like climate change, wearing face masks, and the Black Lives Matter movement is detrimental to America’s ability to have productive discourse surrounding these issues. This culture war between Democrats and Republicans serves as a buffer that occupies the minds of the general population and acts as a distraction from material structural change. Thus, the current status quo pits Americans against themselves in an effort to enforce the existing economic system.

To effectively battle climate change and other structural issues, we must ensure basic human rights for all Americans and shift the balance of power in America away from the rich. While the working class bear the brunt of climate change, the rich have the resources to negate any effects from reaching them personally. It is on us to question the platforms of the political parties we choose to align with, and demand that they align with our economic, social and environmental rights.

We have already seen some promising results come out of the Biden campaign through a unity task force with Sanders and a $2 trillion plan for climate change and environmental justice. Democratic centrists feel the heat of public dissatisfaction, they feel the fear of losing another Presidential election, and they are attempting to meet popular demands without alienating the billionaires that line their coffers. It is our responsibility to continue to demand policy is pushed in the right direction without naively buying into the benevolence of the Democratic center.

Yes, we should still vote, but choosing between two hollow reimaginings of neoliberalism every four years has proven to be an ineffective strategy for providing basic human rights to Americans. We are facing emergencies related to climate change, civil rights, and many other issues. We must exercise an understanding that all struggles are connected to the wealth and power hoarded by the rich. Civil rights are related to the same systemic inequality that underpins America’s inability to fight climate change. To effectively address climate change we must dismantle systemic inequality at every turn. We must demand basic human rights and civil liberties. This will not be given freely by the ruling class, whose wealth is derived from controlling the health and economic security of workers.

Carl Cusack graduated from Cornell University with a dual degree in Applied Economics and Management & Information Science. He lives and works in New York City.

The views and opinions expressed in this article are those of the author's. They do not necessarily represent the views of any entity to which the author is affiliated with.

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