Markets seem skittish and almost somewhat schizophrenic about the Fed’s pessimism versus growth in industry giants indicating the economy may move slowly forward after all.

Sputtering economy spreading new fears, Press Democrat.com, July 23, 2010, by Don Lee of The Chicago Tribune, excerpt quoted verbatim:

U.S. unemployment rate expected to remain high

WASHINGTON — Even with the extension of jobless benefits for millions of workers, a growing body of evidence suggests the U.S. is heading toward an economic netherworld, avoiding a slide back into recession but growing so slowly that unemployment will remain high, home prices low and incomes essentially stagnant.

Many Americans may continue to feel much as they did during the worst recession in half a century: Filled with insecurity, financial pressures and fading hopes for a quick return to better times.

“Extended unemployment benefits is helpful but hardly the booster rocket that’s needed to get out of the gravitational pull of this terrible economy,” said Robert Reich, a public policy professor at UC Berkeley.

The former secretary of labor during the Clinton administration painted a grim picture of what the continuing economic weakness will mean for large numbers of people, including those who have lost jobs.

“If they’re over age 55 (and unemployed), it’s unlikely they’ll ever be back in the workforce. Most families that depended on two wage earners will have to substantially tighten their belts for a long time. More young people will be living with their parents, and more families will be doubling up.”

Lonnie Kane, who makes fashionable women’s sportswear, has similar concerns.

“I’m more worried about not getting better than about having a double dip,” said Kane, president of Karen Kane Inc. in Los Angeles. “I see it as just staying flat — and that’s not healthy.”

Although not all economists and business leaders see a gray future, and long-term forecasts often have been wrong, concerns over signs of renewed weakness have intensified in the past few weeks.

Policymakers at the Federal Reserve recently lowered their economic outlook, as have many private economists. Fed Chairman Ben Bernanke chilled markets Wednesday by saying the economic outlook is “unusually uncertain” and predicting unemployment would remain stubbornly high for several years.

The attitude reflects a broad range of indicators that have grown increasingly anemic or negative in recent weeks: Consumer spending is softening. The trade deficit is widening. Housing sales are faltering. And manufacturing is losing steam.

The slowdown prompted Kane last month to cut by half his budget for capital spending this year. He also put off hiring more product-development workers. As for his staff of 165, Kane had intended to give them raises later this year after a two-year wage freeze.

“But now we’re having second thoughts,” said Kane, whose business is in its 31st year. “I just don’t have the confidence to spend the cash.”

Some analysts said the recent economic retreat could be a pause in the economy as it shifts from one supported by government to one buoyed by the private sector. Business spending for equipment and software remains solid. And the $34 billion bill to extend jobless benefits, signed Thursday by President Barack Obama, also would have a positive effect on the broader economy.

Even so, economic growth of less than 3 percent this year is widely forecast because of recent setbacks. And that won’t create enough jobs to make a meaningful dent in the nation’s 9.5 percent unemployment rate, given increases in productivity and the population.

“What it means is that millions of people unemployed or underemployed (and forced to work part time) or too discouraged to look for work won’t find jobs,” said Martin Regalia, chief economist at the U.S. Chamber of Commerce.

He said many of the remaining employed will face smaller wage increases and fewer opportunities to move into new jobs and boost their incomes.

Further economic stimulus by the federal government is one possible way out of the malaise, possibly including zero-interest loans to businesses and more infrastructure projects. But with deficit hawks in Congress and across the nation digging in their heels, the chances of passing major new stimulus programs anytime soon look slim.

Obama pushed through a $787 billion economic stimulus early last year, which many agree helped rescue the economy from recession. But that’s done little for Obama’s standing with the public, and he and his advisers don’t appear interested in fighting for another large-scale stimulus.

“I think they’ve decided it’s less risky to ride it out and presumably things will be better in 2012″ when Obama is up for re-election, said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

It’s not that corporate America doesn’t have the wherewithal either.

Although many small businesses lack funds and credit to invest and expand, larger companies are sitting on mountains of cash earned from sharply rebounding profits in recent quarters. Much of that cash came from layoffs and other cost-cutting moves.

The Federal Reserve tallied companies’ so-called liquid assets at more than $1.8 trillion at the end of March, up nearly $400 billion from a year earlier. That’s money that could be used for more plants, equipment and staff.

But without American consumers spending more freely, many companies are holding back. While some corporations, such as Boeing Co. and Intel Corp., are building new plants or upgrading facilities in the U.S., others are buying rival businesses, which often leads to consolidation and job cuts. Still others are investing more abroad to tap markets in faster-growing economies in Asia and South America.

“It doesn’t seem like there’s going to be any reason to spend (the cash hoard) in the next 12 to 18 months,” said Ken Goldstein, an economist at the Conference Board.

The New York research group is projecting an anemic 1.5 percent to 2 percent growth rate in the second half of this year, a pace that would probably push the unemployment figure even higher.

Coming out of the last two deep recessions, in 1975 and 1982, the American economy gathered powerful steam at this stage of the recovery, and in both of those cases, all of the jobs lost during the downturns were recouped within a year.

By most accounts, the current recovery is already a year old. But apart from a brief burst of growth late last year, the recovery has been so tepid that the nation has recovered just 10 percent of the 8.4 million jobs erased in 2008 and 2009.

In one widely followed gauge, the University of Michigan said last week its index of consumer expectations fell last month to the lowest level since March 2009, when the nation still was mired in the recession.

“People focus on the double dip, but it’s sort of beside the point,” Baker said. “The main issue is we’re looking at a very weak growth. . . . It’s going to feel pretty bad even if it stays positive.”

See Foreclosure activity up across most US metro areas, AP on Yahoo News, July 29, 2010, by Alex Veiga.

See Fed eyes steps to bolster sputtering economy, © Evansville Courier and Press, July 14, 2010, by The Associated Press, excerpt quoted verbatim:

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WASHINGTON (AP) — Federal Reserve officials cut their forecasts for growth this year and signaled they stood ready to take new steps to keep the recovery alive if the economy worsens.

A new document, released Wednesday, revealed a more cautious mood among the Fed policymakers in light of Europe’s debt crisis, a volatile Wall Street, a stalled housing market and high unemployment.

With risks growing, Fed officials at their June 22-23 meeting saw the need to explore new options for bolstering the economy. That’s a turnaround from earlier this year when they were moving to wind down crisis-era supports.

No new specific steps were disclosed or agreed upon at that time.

However, if the recovery were to deteriorate, Fed policymakers have options. They could revive programs to buy mortgage securities or government debt. They could lower the rates banks pay for emergency Fed loans. The Fed also could create a new program to spark more lending to businesses and consumers in a bid to lure them to ratchet up spending and grow the economy.

The economic and political hurdles for taking such action would be high, economists said.

“If the economy takes a nasty spill, then yes, it would take new policy action. But if we continue to see kind of mediocre, ho-hum growth, then that won’t be enough for them to move,” said Michael Feroli, an economist at JPMorgan Chase.

See Hope For Economy In Strong Manufacturing Reports, WSMV Channel 4.com, July 22, 2010, by ALAN ZIBEL, AP Business Writers, excerpt quoted verbatim:

Hope For Economy In Strong Manufacturing Reports

Leading People aren’t spending money like they used to. Unemployment is still flirting with double digits. And the housing market is still shaky. So the future looks bleak for the economy, right?

Not necessarily.

A handful of surprisingly good earnings reports Thursday suggested that some of the major U.S. companies that make things and move them around – including Caterpillar, 3M and UPS – could lead the way to an economic recovery.

It would be an unusual path back to better times. Consumer spending and housing usually lead the way.

But all three of those economic bellwether companies, plus AT&T and Union Pacific railroad, indicated business was picking up. And most said they expected it to get even stronger later this year.

Peter Buchanan, a senior economist at CIBC World Markets, said executives have taken pains lately not to raise hopes too high for big profits in future quarters. That spread fear among investors that the economy might stall.

But he says earnings results from UPS and Union Pacific should help ease such worries.

“If you’re moving stuff, it’s a broad indicator covering spending by both businesses and consumers,” Buchanan says. “Companies are erring on the side of caution in their forecasts … but on the ground the real results don’t look so bad.”

See Markets fall down after Fed economic report, AP on Kansas City.com, July 28, 2010, by Associated Press.

See Selfish and Stupid, Dubya’s Nightmare That Has Been Allowed to Continue, Daily Kos, July 28, 2010, by Badabing, excerpt quoted verbatim:

Nothing ever surprises me anymore….I am beyond the pale as they say, when I find out that Goldman Sachs, has gotten away with a bullsh*t $550 million dollar slap on the wrist, when I find out that now, according the MSM, that most ‘Americans’ think that the ‘Wars’ are ‘boring’ (so that they hope we do not pay attention to the new ‘Pentagon Papers’ of our century by WikiLeaks), or more recently, what the MSM has said: The BP Oil is now all ‘underwater’ where it does not ‘show’…you know..it must be………….wow……just ‘gone’ while BP just took $10 Billion of a subsidy paid by our own f**king government to pay off their $20 Billion so called ‘escrow account’……

Both parties, hope that if we can just ‘blame the Tea Baggers and the huge Right Swing’ in our own party’ (aka as the Blue Dogs) as being just another ‘strange beast’ that has shown up out of no where….we will all believe that same sh*t.

So I find it amazing, and hysterical that the Republicans are now calling the new Bio- Dubya’s New Book being called, ‘Selfish and Stupid’…….Let me tell you what ‘Selfish and Stupid’ really is: …

Read BP taking $10 billion tax credit from Gulf spill, a Discussion board over at Democratic Underground.

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SIGTARP REPORT: Taxpayer Support Of Wall St. = $3.7 Trillion, Daily Kos, July 21, 2010, by Bob Swern, used with permission, quoted verbatim:

The next time someone tries to sell you the Wall Street propaganda–you see it in diaries on the Rec List around here, from time to time, as well–that the banks are paying off their bailouts, and our deeply-captured (by the status quo) government is going to, somehow, miraculously make a profit on this ongoing historical fleecing of its citizens, show them this just-published chart from Special Inspector General Neil Barofsky’s office (from the SIGTARP report linked in the LA Times story, below): Incremental Financial System Support By Federal Agency Since 2007.

In fact, just 12 days ago, when it was noted by yours truly that another diary on the Rec List was reprinting a story that falsely claimed that taxpayers were going to make a profit from the Wall Street bailout, a lot of people here were quite dismayed by this inconvenient reality.

The truth is that, as of the end of June (according to the Special Inspector General’s Office), the bailout (ex-housing) has put taxpayers on the hook for over $2 trillion. If you include housing/mortgage industry supports, the number almost doubles to $3.7 trillion.And, if anyone thinks the support of the mortgage industry is providing massive benefits to homeowners, the reality is the primary beneficiaries of those related programs are the large mortgage underwriters, taking their vig these days, and then selling through their mortgages to…us–at last check, the government was the ultimate underwriter of 96.5% of all mortgages in this country. (In another diary posted the day prior to the one linked, above, I pointed out a Federal Reserve white paper that was published in 2004 which discussed the concept of the Fed providing mortgage underwriting services directly to consumers,  bypassing the traditional middlemen/banks, entirely, and saving U.S. homebuyers a significant chunk of cash, as a result of that new effort.)

Also, about that other Wall Street meme that the FDIC is supported by the banks, I would imagine that by sometime around 2030 or 2040, the banks may get around to digging themselves out of their FDIC hole; but, until then, taxpayers are holding those notes, too. (But, that’s just my opinion, right?)

Here’s the truth…and, as we all know, no matter how much some might try, ultimately, you cannot hide from that…

Report: Housing aid boosts total U.S. financial-system support to $3.7 trillion
Tom Petruno
LA Times
July 21, 2010      11:41 am – Despite the winding-down of most of the government’s aid programs for the financial system this year, total federal support for the system now is 23% greater than it was a year ago, the Treasury’s watchdog for bailout plans said in a report to Congress on Wednesday.

Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, said the government was on the hook for $3.7 trillion in support as of June 30, up from $3 trillion a year earlier.

Even as banks have been repaying the money the Treasury invested in them under one of the main TARP programs approved in 2008, U.S. aid to the housing market has ballooned, Barofsky’s report said. The increase has mainly come in the form of more capital for Fannie Mae and Freddie Mac and loan guarantees for various federal mortgage programs such as those of the Federal Housing Administration.

Barofsky “Notwithstanding [the] scaling back of TARP, an examination of the broader context demonstrates that the overall governmental efforts to stabilize the economy have not diminished,” the report said.

Thanks to Bob Swern for permission to republish his articles on an ongoing basis. You can see his blogroll at Daily Kos here. Email Bob Swern here.

See Bernanke Unleashes the Bears: No Fed Plans to Give More Support, Bernanke Says, The New York Times, July 21, 2010, by Sewell Chan:

WASHINGTON — The chairman of the Federal Reserve, in saying that it had no immediate plans to provide additional support to the economy, dashed the hopes of some economists and executives who have been pushing for action to add momentum to the sluggish recovery.

See The Wall St. Bill Doesn’t Protect Us From Banker Abuse: 5 Essential Reforms Are Still Needed, AlterNet, July 21m 2010, by Zach Carter.

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Exposed!: Post 9/11 Privatization & Conservative Failure, Campaign for America’s Future, July 20, 2010, by Terrance Heath, used with permission, quoted verbatim:

Where’s the Tea Party when you really need them? There’s a bit of investigative reporting from the Washington Post that ought to have launched a Tea Party protest, complete with signs, slogans, and speeches (from the likes of Michelle Bachmann, Sarah Palin, and Rand Paul — just to name a few.)

Tax dollars spend on a Mercedes? For someone on the government payroll? It seems right up their alley. Come on people. The placards and impassioned speeches practically write themselves.

So far, though. Nothing. Maybe they’re too busy demanding that the government hold BP accountable for the oil disaster in the Gulf.

Oh. Wait.

Maybe it’s because the wasteful government spending happened not only on the previous conservatives administration’s (and the previous conservative Congress’ watch), but as a result of a right-wing American article of faith: privatization.

The Post’s two-year investigative reporting project focuses on “The top-secret world the government created in response to the terrorist attacks of Sept. 11, 2001,” which it describes as having become “so large, so unwieldy and so secretive that no one knows how much money it costs, how many people it employs, how many programs exist within it or exactly how many agencies do the same work.”

These are some of the findings of a two-year investigation by The Washington Post that discovered what amounts to an alternative geography of the United States, a Top Secret America hidden from public view and lacking in thorough oversight. After nine years of unprecedented spending and growth, the result is that the system put in place to keep the United States safe is so massive that its effectiveness is impossible to determine.

The investigation’s other findings include:

* Some 1,271 government organizations and 1,931 private companies work on programs related to counterterrorism, homeland security and intelligence in about 10,000 locations across the United States.

* An estimated 854,000 people, nearly 1.5 times as many people as live in Washington, D.C., hold top-secret security clearances.

* In Washington and the surrounding area, 33 building complexes for top-secret intelligence work are under construction or have been built since September 2001. Together they occupy the equivalent of almost three Pentagons or 22 U.S. Capitol buildings – about 17 million square feet of space.

* Many security and intelligence agencies do the same work, creating redundancy and waste. For example, 51 federal organizations and military commands, operating in 15 U.S. cities, track the flow of money to and from terrorist networks.

* Analysts who make sense of documents and conversations obtained by foreign and domestic spying share their judgment by publishing 50,000 intelligence reports each year – a volume so large that many are routinely ignored.

The first article in the series concerns itself with the government’s role in the “expanding enterprise” of national security. Today’s article, focuses on the phenomenon of private contractors working in the homeland security and intelligence industries.

To ensure that the country’s most sensitive duties are carried out only by people loyal above all to the nation’s interest, federal rules say contractors may not perform what are called “inherently government functions.” But they do, all the time and in every intelligence and counterterrorism agency, according to a two-year investigation by The Washington Post.

What started as a temporary fix in response to the terrorist attacks has turned into a dependency that calls into question whether the federal workforce includes too many people obligated to shareholders rather than the public interest — and whether the government is still in control of its most sensitive activities. In interviews last week, both Defense Secretary Robert M. Gates and CIA Director Leon Panetta said they agreed with such concerns.

The Post investigation uncovered what amounts to an alternative geography of the United States, a Top Secret America created since 9/11 that is hidden from public view, lacking in thorough oversight and so unwieldy that its effectiveness is impossible to determine.

In particular it tells the story of SGIS, a company that started in its founder’s living room in 2002, won its first defense contract four months later, and by 2006 had revenues of $30.6 million — some of which it invested in hiring employees specializing in government contracts. To help it land more such contracts of course. The company was selected for Inc. magazine’s 2009 list of the 5000 fastest growing companies, coming in at 1,371.

Near as I can tell, the company’s sole client — and thus its sole source of revenue — is the government. So, some of that $30.6 million in 2006 ($88 million by 2008) was spent on getting more contracts — or rather, invested in making sure the company kept its sole client. That is, some portion of the tax dollars paid to the company was spent to make sure that more tax dollars would come SGIS’s way in the future.

Some of it went towards some rather extravagant compensation for the company’s employees.

Eight years after it began, SGIS was up to revenue of $101 million, 14 offices and 675 employees. Those with top-secret clearances worked for 11 government agencies, according to The Post’s database.The company’s marketing efforts had grown, too, both in size and sophistication. Its Web site, for example, showed an image of Navy sailors lined up on a battleship over the words “Proud to serve” and another image of a Navy helicopter flying near the Statue of Liberty over the words “Preserving freedom.” And if it seemed hard to distinguish SGIS’s work from the government’s, it’s because they were doing so many of the same things. SGIS employees replaced military personnel at the Pentagon’s 24/7 telecommunications center. SGIS employees conducted terrorist threat analysis. SGIS employees provided help-desk support for federal computer systems.

Still, as alike as they seemed, there were crucial differences.

For one, unlike in government, if an SGIS employee did a good job, he might walk into the parking lot one day and be surprised by co-workers clapping at his latest bonus: a leased, dark-blue Mercedes convertible. And he might say, as a video camera recorded him sliding into the soft leather driver’s seat, “Ahhhh . . . this is spectacular.”

OK. Stop. Wait a minute. How did we get here? How did we become a country with a that can hand tax dollars to companies that spend them on Mercedes for employees, but can’t won’t extend unemployment benefits to the jobless, and can increase spending on wars in Afghanistan, but can’t won’t spend money to keep teachers on the job or keep 900,000 state government employees employed?

It’s an old story, of course, that 9/11 led to a “big government boom,” and government actually got bigger.

FactCheck.org calculates that the discretionary sums contained in appropriations bills signed by Bush for the current fiscal year — including the $87 billion supplemental appropriation for Iraq — amount to nearly a 36% increase over Clinton’s last year.

Most of the increase has indeed come from military spending (including wars in Iraq and Afghanistan) and activities that the administration classifies as homeland security. But that still leaves a 16% increase in funding for other discretionary programs.

That 3-year increase in discretionary spending, including a 180% increase for Homeland Security, tells the rest of the story. Bush started a government spending spree that left Clinton in the dust. (The Cato and WND links are for the teabaggers, so they don’t just have to take my word for it.) Not long after, private companies quickly figures out that fear was a profitable business, and beat a path to Washington to cash in on the huge increase in government spending.

After all, it was a conservative president doing the spending — with the relative silence, if not the blessing, of many congressional conservatives. And big government conservatism comes with a healthy (or unhealthy, depending on which end of the deal you’re on) serving of privatization.

Once in line for the government privatization gravy train, companies also found themselves in the enviable position to profit from government spending without government oversight. The Center for Public Integrity did a great job of researching and reporting on how this played out across the country.

This seems to have been, for the private companies that came to Washington looking for an angle on homeland security, the business equivalent of getting dessert without having to eat their vegetables. According to the House Committee on Government and Oversight Reform that’s exactly what happened.

Under the Bush Administration, the “shadow government” of private companies working under federal contract has exploded in size. Between 2000 and 2005, procurement spending increased by over $175 billion dollars, making federal contracts the fastest growing component of federal discretionary spending.

This growth in federal procurement has enriched private contractors. But it has also come at a steep cost for federal taxpayers. Overcharging has been frequent, and billions of dollars of taxpayer money have been squandered.

At the request of Rep. Henry A. Waxman, this report is the first comprehensive assessment of federal contracting under the Bush Administration. The report reaches three primary conclusions:

1. Procurement Spending Is Accelerating Rapidly. Between 2000 and 2005, procurement spending rose by 86% to $377.5 billion annually. Spending on federal contracts grew over twice as fast as other discretionary federal spending. Under President Bush, the federal government is now spending nearly 40 cents of every discretionary dollar on contracts with private companies, a record level.
2. Contract Mismanagement Is Widespread. The growth in federal contracts has been accompanied by pervasive mismanagement. Mistakes have been made in virtually every step of the contracting process: from pre-contract planning through contract award and oversight to recovery of contract overcharges.
3. The Costs to the Taxpayer Are Enormous. The report identifies 118 federal contracts worth $745.5 billion that have been found by government officials to include significant waste, fraud, abuse, or mismanagement. Each of the Bush Administration’s three signature initiatives — homeland security, the war and reconstruction in Iraq, and Hurricane Katrina recovery — has been characterized by wasteful contract spending

Anyone who’s not asking how we got here, and demanding that we change course, either isn’t paying attention or doesn’t care.

That brings me — on the off chance that some of them might read — back to the teabaggers with a simple question: Which is it?

Terrance Heath is the Online Producer at Campaign for America’s Future. Prior to his current position he worked as a Blogging and Social Media Consultant for a number of organizations and agencies, as an outgrowth of his work as Blogmaster for EchoDitto, Inc. He stumbled into blogging and social media after starting his own blog, The Republic of T., but cut his teeth as an activist working on LGBT equality and HIV/AIDS issues. In that capacity he worked for the Human Rights Campaign and the National Minority AIDS Council. Terrance has kindly allowed Evans Liberal Politics to publish his works on an ongoing basis. He sums himself up: Black. Gay. Father. Vegetarian. Buddhist. Liberal.

See Report: Tab for ‘War on terrorism’ tops $1 trillion, CNN Politics, July 20, 2010, by CNN Wire Staff.

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As economy takes toll, mental health budgets shrink, Stateline.org, July 19, 2010, by Christine Vestal, used with permission, quoted verbatim:

Mental health policies in America have changed radically over the past 60 years. A one-time emphasis on caring for patients in large institutions has shifted to treating them in outpatient settings in the community. The ways mental disorders are diagnosed and categorized have changed. And the use of psychotropic medications is more prevalent than it used to be.

But throughout the decades, one thing has remained the same. States have taken the lead role in publicly funded care for the mentally ill, and paid the majority of the expenses. Even through recessions, the states have steadily increased their mental health budgets every year to meet increasing demand.

Now, as states face their biggest fiscal challenge in modern history, the trend has reversed. For the first time in more than three decades, mental health funding is declining. The drop-off is translating into a reduction in the number of psychiatric hospital beds, as well as fewer services for mental health emergencies and longer waiting lists for housing for the chronically mentally ill. The cuts are coming just as some experts say economic pressures are creating an increase in mental illness.

Although no national numbers are available, hospital emergency rooms, juvenile courts, child welfare agencies, local jails and homeless shelters are reporting bulges in the number of mentally ill people who end up on their doorsteps after failing to get help elsewhere.

In addition, a recent national survey showed that the weak economy is taking a toll on the mental health of Americans, with unemployed people four times as likely as those with jobs to report symptoms of severe mental illness.

“States are chipping away at their already very fragile mental health system,” says Michael Fitzpatrick, executive director of National Alliance on Mental Illness, (NAMI) which advocates for improved mental health care. “More people will be unable to find even basic services that allow them to stay out of the hospital or involvement with police. It’s a dire situation that we’ve never seen before.”

Funding fluctuations

Since the 1950s, when states cared for more than 500,000 people in psychiatric hospitals, state mental health programs have included more and more community-based services. Those include a wide array of services, such as suicide prevention and 24-hour crisis centers, treatment for drug and alcohol abuse, housing and work supports, counseling and violence-prevention programs. Although advocates maintain that only half of those in need are receiving public mental health services, states have made progress by serving more people in the community at about half the price of committing them to institutions — and with better outcomes. Today, only 50,000 people reside in state mental hospitals while millions are served on an outpatient basis.

Still, states have had to increase their budgets to keep pace with demand. Despite fluctuations in funding for nearly every other social service, state mental health budgets have increased nationally by about 6 percent per year for the past 30 years.

Now, for the first time, states are pulling back mental health spending. These unprecedented cuts — nearly 4 percent as a national average between 2008 and 2009 — come at a time when other public agencies such as child welfare, law enforcement and housing also are experiencing budget cuts and can ill afford to handle the overflow.

According to the National Association of State Mental Health Program Directors, 2010 spending appears to have fallen nearly 5 percent compared to 2009. Early indications are that 2011 mental health budgets may sink by 8 percent or more.

Exacerbating the mental health budget crisis is uncertainty over whether Congress will decide to extend an increase in the federal match for Medicaid services under the stimulus program, which a majority of states have counted on to stretch their overall health care budgets.

In 2008, states spent $36 billion on mental health services to care for 6.4 million people, about half the number of people advocates say are in need of care. Of the total, about $17 billion came from Medicaid, the federal-state health care program for the poor, $500 million came from federal grants and the balance was funded through state general revenues. Not counted in the total is funding from county and local budgets, much of which also sits on the chopping block.

Where the cuts are

Although a few states have minimized mental health cuts and targeted less essential services, many states are closing psychiatric hospitals, eliminating 24-hour crisis centers and tightening eligibility for subsidized medications and services that affect thousands of adults and children with severe mental illness.

Here are some examples of states that have made big cuts:

To fill a $1 billion hole in its 2011 budget, Arizona slashed this year’s budget for mental health services by $36 million — a 37 percent cut. As a result, advocates say 3,800 people who do not qualify for Medicaid are at risk of losing services such as counseling and employment preparation. In addition, more than 12,000 adults and 2,000 children will no longer receive the name-brand medications they take to keep their illnesses in check. Other services such as supportive housing and transportation to doctor’s appointments also will be eliminated.

Arizona has been considered a progressive state because it provides the vast majority of mental health services through cost-effective outpatient community programs. By slashing these programs, experts say the state will force more people to use emergency rooms or end up in the criminal justice system, which will cost the state more.

In Illinois, where Democratic Governor Pat Quinn is trying to bridge a $13 billion budget gap, a proposed mental-health budget cut of $91 million was reduced to $35 million after patients and practitioners protested at the governor’s mansion earlier this month. Even so, advocates say more than 70,000 people, including 4,200 children, are in danger of losing basic community services, which may result in more instances of hospitalization. The cuts come on the heels of a court settlement requiring the state to transfer 4,500 severely mentally disabled patients out of nursing homes and into community residential facilities following a string of rapes and assaults on elderly residents.

Mississippi has cut its mental health budget by about 8 percent for three consecutive years, resulting in the closure of a residential mental health facility for adolescents, elimination of 184 beds in one of the state’s biggest psychiatric hospitals and consolidation of six crisis centers with existing community mental health centers. In the fiscal year that started July 1, the state plans to further cut funding to localities for mental health services. Prior to the recession, Mississippi lagged far behind most states in funding community services and housed the highest percentage of people with mental illness in state institutions.

—Contact Christine Vestal at cvestal@stateline.org

See related stories:

With Medicaid, states face painful cuts and few choices (5/26/2010)

States make deep cuts to health (8/5/2009)

Watch NAMI Connection: All About The Program, YouTube video – 9:25.

Advice from someone who has been there:

Visit NAMI, the National Alliance for the Mentally Ill. This is the premier connection on the web to get help and access resources. As someone who suffered from mental illness all my adult life, getting better only in recent years, I wish so much that I had accessed NAMI and the support it can provide, when I was much younger. If you think you might be suffering from a mental condition, or if you are the parent of a child who may be mentally ill, PLEASE visit this website. One sixth of Americans at some time during their lifetimes are clinically depressed so that they need medication to overcome it. There is no shame in mental illness any more than there is shame in breast cancer. These are organic and generally genetic conditions. NO, you are in NO WAY inferior if you suspect you are mentally ill. Don’t let anyone tell you that, and don’t you dare think it.

Seek help with NAMI! You’ll be so glad you did. You know and I know that there is a lot of craziness out there on the street. Only about one half of mentally ill people in the United States are getting any real help. Help yourself. Visit NAMI. What can it hurt to explore? Isn’t it better than suffering alone? If you need someone to talk to, email me or call me at 330-202-7661. At the least you will get a friendly voice and the knowledge of someone who has been there and mostly overcome his illness…. I would be glad to talk with you. And I will try to direct you to professional resources in your area. Sometimes it just takes a little caring, and a gentle little push to begin treatment that may save your life. What are you waiting for?

We have attempted to make a separate and more comprehensive page for you about Mental Illness Resources and advice that we hope might be helpful. ~ Evans Liberal Politics owner Paul Evans

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GOP Fairy Tales, Mother Jones, July 16, 2010, by Kevin Drum, quoted verbatim:

Back in the day, one of the key Republican arguments against the estate tax was that it forced hardworking, salt-of-the-earth children of small farmers to sell the family plot in order to pay their taxes after dad died. It was a sad story, but with one problem: no one could find even a single small farmer who had been forced to liquidate in order to satisfy Uncle Sam’s voracious maw. Even the American Farm Bureau Federation was eventually forced to admit that it couldn’t come up with a single example, and a few years later the Congressional Budget Office estimated that under the now-current exemption level, only a tiny handful of small farms were likely to owe any estate tax to begin with — and of those, only about a dozen lacked the assets to pay their taxes. And even those dozen had 14 years to pay the bill as long as the kids kept running the farm. In other words, the story was a fraud from beginning to end.

Good times. Today, though, we’re getting a rerun. The subject at hand is the Bush tax cuts, and the question is who exactly will get hurt if we go ahead and keep the cuts intact for middle income earners but let them expire for the rich. The obvious answer is, “the rich,” but it turns out that, just as there are small farmers begging for our sympathy, there are small rich too: namely an alleged army of hardworking, salt-of-the-earth small business owners who would also end up paying higher tax rates. “To those who are pushing the higher marginal rates,” thundered Sen. Chuck Grassley (R–Iowa) earlier this week, “I say the burden is on you to show that you are not harming our primary job creators, small business.”

OK then. Let’s show it. Step 1: The Brookings Tax Policy Center estimates that only 1.9% of small businesses are in the two top brackets that would be affected. That’s a little better than the dozen small farms affected by the estate tax, but not by much.

Step 2: About half of that 1.9% aren’t really small business owners at all. They’re high-income investors who get part of their income from investments in small businesses. So we’re down to about 1% of small businesses that would be affected.

Step 3: The top brackets are just that: brackets. When the top rate goes up, it doesn’t affect your entire income, just the portion in the top bracket. So if the top rate goes back up from 35% to 39.6%, it only affects the portion of income above approximately $400,000. A small business owner making $500,000 would see an increase of about $5,000. This is a fairly modest amount for someone making a half million dollars, and anything higher than that is hardly a “small” business to begin with. And the marginal effect is even smaller for the second highest bracket.

Step 4: The Office of Management and Budget estimates that the 10-year cost of these upper-income tax cuts is $678 billion, the vast majority of which hits wealthy individuals, not small businesses no matter how you define them. That’s a fair chunk of change for anyone concerned about the deficit.

So that’s the case. Letting Bush’s tax cuts for the rich expire affects only a tiny number of small businesses; it doesn’t affect them very much; and it generates revenues of $678 billion. If the only thing you care about is keeping taxes low for rich people, you won’t be convinced. For the rest of us, it’s a no-brainer.

Kevin Drum is a political blogger for Mother Jones. For more of his stories, click here.

See Democrats Avoid Budget Vote, Risk Losing Future Clout, Truthout, July 17, 2010, by Yana Kunichoff, excerpt (newsletter summary) quoted verbatim:

As the federal deficit hits the $1 trillion mark, Democrats are attempting to avoid electoral fallout by approving an enforcement resolution instead of a full budget. By doing so, they disallow the use of budget reconciliation next year. Critics fear that the loss of this key legislative tactic may hammer the final nail into the coffin of a comprehensive jobs bill and other crucial legislative efforts.

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The New Finance Bill: A Mountain of Legislative Paper, a Molehill of Reform, Robert Reich.org, July 16, 2010, by Robert Reich, used with permission, quoted verbatim:

Thursday the President pronounced that “because of this [financial reform] bill the American people will never again be asked to foot the bill for Wall Street’s mistakes.”

As if to prove him wrong, Goldman Sachs simultaneously announced it had struck a deal with federal prosecutors to pay $550 million to settle federal claims it misled investor — a sum representing a mere 15 days profit for the firm based on its 2009 earnings. Goldman’s share price immediately jumped 4.3 percent, and the Street proclaimed its chair and CEO, Lloyd (“Goldman is doing God’s work”) Blankfein, a winner. Financial analysts rushed to affirm a glowing outlook for Goldman stock.

Blankfein, you may recall, was at the meeting in late 2008 when Tim Geithner and Hank Paulson decided to bail out AIG, and thereby deliver through AIG a $13 billion no-strings-attached taxpayer windfall to Goldman. In a world where money is the measure of everything, Blankfein’s power and influence have grown. Presumably, Goldman can expect more windfalls in future years.

Although the financial reform bill may have clipped some of Goldman’s wings — its lucrative derivative business may require Goldman to jettison its status as a bank holding company, and the access to the Fed discount window that comes with it — the main point is that the Goldman settlement reveals everything that’s weakest about the financial reform bill.

The American people will continue to have to foot the bill for the mistakes of Wall Street’s biggest banks because the legislation does nothing to diminish the economic and political power of these giants. It does not cap their size. It does not resurrect the Glass-Steagall Act that once separated commercial (normal) banking from investment (casino) banking. It does not even link the pay of their traders and top executives to long-term performance. In other words, it does nothing to change their basic structure. And for this reason, it gives them an implicit federal insurance policy against failure unavailable to smaller banks — thereby adding to their economic and political power in the future.

The bill contains hortatory language but is precariously weak in the details. The so-called Volcker Rule has been watered down and delayed. Blanche Lincoln’s important proposal that derivatives be traded in separate entities which aren’t subsidized by commercial deposits has been shrunk and compromised. Customized derivatives can remain underground. The consumer protection agency has been lodged in the Fed, whose own consumer division failed miserably to protect consumers last time around.

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On every important issue the legislation merely passes on to regulators decisions about how to oversee the big banks and treat them if they’re behaving badly. But if history proves one lesson it’s that regulators won’t and can’t. They don’t have the resources. They don’t have the knowledge. They are staffed by people in their 30s and 40s who are paid a small fraction of what the lawyers working for the banks are paid. Many want and expect better-paying jobs on Wall Street after they leave government, and so are shrink-wrapped in a basic conflict of interest. And the big banks’ lawyers and accountants can run circles around them by threatening protracted litigation.

Why do you think Goldman got off so easily from such serious charges of fraud?

Reliance on the discretion of regulators rather than structural changes in the banking system plays directly into the hands of the big banks and their executives and traders who contribute mightily to Democratic and Republican campaigns. The flow of money virtually guarantees that regulatory agencies won’t be adequately staffed to enforce the law, that penalties for violations won’t be overly onerous, and that all loopholes (what’s a “derivative”? what has to be listed on exchanges? exactly how much capital must be on hand for which transactions? How are the various forms of predatory lending to be defined?) will be easily stretched in future years. Wall Street lawyers will have a field day. The profit-for-nothing sector of the economy (law, accounting, finance) will continue to grow buoyantly.

Make no mistake: As long as there’s no fundamental change in the structure of Wall Street — as long as the big banks stay as big and are allowed to grow bigger, and have every incentive to invent new financial gimmicks with which to bet other peoples’ money — they will remain too big to fail, and too politically powerful to control.

Goldman’s share price, as well as those of JP Morgan Chase, Citicorps, Morgan Stanley, and Bank of America, will no doubt soar the basis of the final bill because their future profits are almost guaranteed. The pay of their executives and traders, and of the managers of hedge funds and private-equity funds they deal with, will likewise accelerate. In the short term the economy will benefit, at least to the extent financial entrepreneurship is now the apex of American wealth and innovation. But over the longer term we will be much weaker for it.

Congress has labored mightily to produce a mountain of legislation that can be called financial reform, but it has produced a molehill relative to the wreckage Wall Street wreaked upon the nation.

See Interview: Elizabeth Warren Says Big Banks Must Stop Blocking Reform, Mother Jones, July 16, 2010, by Lynn Parramore: DC’s top bailout cop dishes on Wall Street’s lobbyist culture and how to restore consumer trust after the Great Recession.

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Feingold explains ‘no’ vote: Washington once again caved to Wall Street, The Raw Story, July 15, 2010, by Agence France-Presse, used with permission, quoted verbatim:

Senate passes sweeping bank reform bill

The US Senate voted Thursday to send President Barack Obama the most sweeping rewrite of Wall Street rules since the Great Depression of the 1930s, handing him a historic political win. The bill passed 60-39.

However, a top Democratic senator who voted “no” is arguing that “Washington once again caved to Wall Street.”

Lawmakers voted 60-38 to end a year of often bitter partisan debate on the 2,300-page measure and set the stage for a final passage ballot expected shortly after a last procedural test at 2:00 pm. (1800 GMT Thursday).

The bill, Obama’s top domestic priority, aims to rein in risky investment practices blamed for the 2007-2009 global financial meltdown and give regulators an arsenal of new weapons against shady big-bank dealings.

“We will fundamentally change the way our financial system is regulated, to rein in Wall Street and create a sound foundation to grow our economy and create jobs,” said Senate Banking Committee chairman Christopher Dodd, a Democrat and a key author of the legislation.

It creates a new consumer financial protection agency, an early-warning system to predict and prevent the next crisis, and mechanisms aimed at liquidating rather than saving companies once deemed “too big to fail.”

The legislation also closes loopholes in regulations and requires greater transparency and accountability for hedge funds, mortgage brokers and payday lenders, and arcane financial instruments called derivatives.

It also includes a somewhat diluted version of the so-called “Volcker Rule” — named for former Fed chairman Paul Volcker — curbing commercial banks’ ability to make speculative investments that are not on behalf of clients.

Republicans mostly opposed the bill, charging it gives too much more power to regulators who failed to stem the previous crisis and does nothing to rein in activities by government-backed mortgage giants Freddie Mac and Fannie Mae.

“What we’re going to wind up doing is we’re going to be driving jobs and business overseas with this massive piece of legislation that truly doesn’t address the problem,” Republican Senator Saxby Chambliss charged Thursday.

Dodd said the bill was not “perfect” but underlined: “We must act now. Many of the same risks to our financial sector remain.”

Just three of the Senate’s 41 Republicans — Olympia Snowe and Susan Collins of Maine and Scott Brown of Massachusetts — lined up with 55 Democrats and two independents behind the bill, while Republican Senator Mike Crapo of Idaho did not vote.

Democratic Senator Russell Feingold opposed the measure, which he charged did not go far enough to curtail the dealings that led to the international economic collapse.

“I made clear that my test for this bill would be whether it prevents another economic crisis. Unfortunately, this bill falls short,” he said in a statement after the vote.

Feingold’s statement added,

The reckless practices of Wall Street sent our economy reeling, triggered the worst recession since the Great Depression, and left millions of Americans to foot the bill. Despite these cataclysmic events, Washington once again caved to Wall Street on key issues and produced a bill that fails to protect the American people from the pain of another economic disaster. I will not support a bill that fails to adequately protect the people of Wisconsin from the recklessness of Wall Street.

Amid stubbornly high unemployment near ten percent and deep US public anger at Wall Street four months before November mid-term elections, Obama has led Democrats in painting Republicans as opposed to common-sense reforms.

Republicans have repeatedly denounced key planks of the Democratic platform as “job-killing” and accused the president of not doing enough to fix the crisis he inherited from Republican predecessor George W. Bush.

The US House of Representatives approved the legislation on June 30 in a largely party-line 237-192 vote.

Final passage of the bill would hand Obama a second historic legislative triumph after successfully pushing the US Congress to overhaul the US health care system over fierce Republican objections.

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See Obama Pushes Through Agenda Despite Political Risks, The New York Times, July 15, 2010, by Sheryl Gay Stolberg, excerpt quoted verbatim:

WASHINGTON — If passage of the financial regulatory overhaul on Thursday proves anything about President Obama, it is this: He knows how to push big bills through a balky Congress.

But Mr. Obama’s legislative success poses a paradox: while he may be winning on Capitol Hill, he is losing with voters at a time of economic distress, and soon may be forced to scale back his ambitions.

The financial regulatory bill is the final piece of a legislative hat trick that also included the stimulus bill and the landmark new health care law. Over the last 18 months, Mr. Obama and the Democratic Congress have made considerable inroads in passing what could be the most ambitious agenda in decades.

Mr. Obama has done what he promised when he ran for office in 2008: he has used government as an instrument to try to narrow the gaps between the haves and the have-nots. He has injected $787 billion in tax dollars into the economy, provided health coverage to 32 million uninsured and now, reordered the relationship among Washington, Wall Street, investors and consumers.

But as he has done so, the political context has changed around him. Today, with unemployment remaining persistently near double digits despite the scale of the stimulus program and the BP oil spill having raised questions about his administration’s competence, Mr. Obama’s signature legislation is providing ammunition to conservatives who argue that government is the problem, not the solution.

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How the Sneaky Hands of the Big Banks Are Working Overtime to Rip You off, AlterNet, July 15, 2010, by Zach Carter, quoted verbatim:

The economy is crumbling and consumers are in trouble. So banks are hitting them with $38 billion a year in deceptive fees.

After living through the Great Financial Crash of 2008, just about everybody recognizes that megabanks screwed the economy hard and were rewarded with big bailouts, which further screwed over, well, everybody, in the name of banker bonuses. But Big Finance has been waging its war on the middle class for decades, and many of its most destructive practices don’t actually put the financial system in jeopardy. These tactics work because they are so effectively predatory. Banks gouge consumers and get rich—they don’t create risks for the financial system, because they result in pure, risk-free profit, converting hard-earned middle-class wages into quick and easy bonuses.

One of the most pernicious of these predatory practices is the overdraft fee. It’s one of the biggest revenue streams for banking behemoths today. In 2009, banks reaped over $38 billion in overdraft fees from their own customers, while posting a total combined profit of just $12.5 billion. Without overdrafts, many banks would have scored massive losses last year, and possibly gone under. Instead, they booked epic bonuses.

It can come as a huge shock to get hit with a rash of overdraft fees. You open a bank statement to find that you are not only broke, but deep in the hole thanks to several $30 or $40 charges. Your first reaction is shame. How could I have let this happen? But looking into the ways that banks conduct their overdrafts, you come to realize that you’ve simply been scammed.

“It abuses consumers and sucks money out of the economy that goes beyond any contribution to society that finance provides,” says Rep. Brad Miller, D-N.C. “Overdraft fees are one of the worst abuses. For people living paycheck to paycheck, they have a serious effect on their everyday lives.”

Banks are actively deceiving their own customers. According to an FDIC study, 75 percent of all banks don’t even tell people they’ve been automatically enrolled in “overdraft protection” programs. Many consumers don’t even realize that their accounts are subject to these charges—they assume that anything that puts them past zero will simply be denied.

It gets much worse. Once banks realized that overdraft fees could be a real cash cow, they developed “fee-harvesting” software, which reorganizes the order of your checking transactions to maximize the number of overdraft fees for the bank. In other lines of financial business, this is called “backdating,” and it’s considered “fraud.”

How the Scam Works

Say you’ve got $100 in your checking account, and you decide to pay some bills and run some errands. You spend $30 on gas and another $20 on your water bill. Later, you head to the grocery store and spend $81—oops!—on groceries. Banks, of course, could notify you that your $81 purchase was going to send you over the edge and result in an overdraft fee. They don’t, because they don’t want to risk that you’ll deny the purchase and reject the fee.

But in addition to neglecting this safeguard, the bank automatically processes your $81 purchase ahead of your previous charges. As a result, you do not get hit with one unwanted overdraft fee for your groceries—you get hit with three, because your costliest purchase was processed before the others—even though you made the cheaper purchases first.

“Overdrafts are a classic example of a potentially useful idea where the industry ends up going totally overboard,” says Raj Date, a former Deutsche Bank executive who currently heads the Cambridge Winter Center for Financial Institutions Policy. “When you step back and ask, as a reasonable business person, would any customer want their fees to be itemized such that their fees would be maximized? No. No customer would ever want it.”

This is not how banks are supposed to operate. They’re supposed to fuel sustainable, healthy economic activity. That was, in fact, the rationale behind bailing them out. As President Obama said in April 2009: “The truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses.”

Needless to say, that lending didn’t happen. In a series of monthly reports, the U.S. Treasury Department noted that bank lending to small businesses fell dramatically from April 2009 through January 2010. After months of bad stats, Treasury simply stopped keeping track of the numbers altogether. The FDIC still tracks those numbers, and they don’t look good. As Shahien Nasiripour has noted, the latest figures show small business lending down 4 percent from last year’s already dismal levels, putting it lower even than early 2009, before the stimulus package kicked in.

Instead of supporting the economy, banks are making their money with cheap-shot fees, risky proprietary trading and secretive derivatives deals. It’s worked, in a sense. By “earning” their way back to health, the nation’s largest banks are at a much lower risk of collapse now than when Obama took office. But those earnings have not been good for the economy, as we were promised they would be.

“It’s not good from a societal sense, but from a banking industry perspective, it’s just a recognition of reality,” says banking analyst Nancy Bush of NAB Research. Bush is a Wall Street veteran who supports overdraft programs, but acknowledges they indicate economic trouble. Banks have discovered a way to make money off of people without any money. When everybody’s broke, that’s a much less risky enterprise than lending to businesses that could use the funds to create jobs, but might default due to bad economic conditions. Banking analysts like Bush are charged with holding management teams accountable to their shareholders, and these fees are good for profits, which mean shareholders are getting what they want.

But this is the exact opposite of what anybody but a shareholder would want a bank to be doing. We don’t want banks to be kicking society when it’s down, we want banks to be helping us get back on our feet.

Setting The Banks Straight

Agencies have been voicing concerns about overdraft fees for years. The FDIC published a damning study on the practice in 2008, and the Federal Reserve began issuing warnings to the banking industry about unfair overdraft programs in 2004. But up until 2004, overdrafts were generally viewed as a form of short-term credit—the bank is basically lending the consumer money that is paid back with interest. But the interest rates are so egregiously predatory — the average overdraft fee amounts to 1,067 to 3,520 percent (PDF), according to the FDIC — that they simply would not be tolerated if regulators had to think of them as loans.

So the banking lobby scored a tremendous coup in 2004 when it convinced the Fed that these were not “loans” but “fees,” and therefore not subject to traditional consumer protections. The Fed warned that banks needed to change their marketing so that consumers wouldn’t think of overdrafts as loans, but didn’t require any changes in the way the programs actually operated.

Even this reclassification scheme wasn’t enough for Wall Street, which managed to violate even the much weaker consumer protection rules on fees 335 times a year, according to a report by the Government Accountability Office. The GAO also found that consumers who went to an actual bank branch were unlikely to be able to obtain information about basic overdraft terms and conditions, much less comprehensive information about how their checking accounts could be gamed.

The Fed is offering another weak response to the overdraft insanity today. By mid-August, the Fed will require consumers to “opt-in” to overdraft programs, instead of being automatically enrolled without their consent. It’s a step forward that will likely limit some of the overdraft profits banks currently enjoy. But it will not require that the programs be fundamentally changed. It will not cap the amount of the fees charged, or the number of fees charged, nor will it require consumers to be notified when a purchase or withdrawal will result in a fee. Banks will take a modest hit from the new rules as consumers choose to back out of the program—but the fundamentally obscene business model will remain.

A more promising development comes from the Wall Street reform bill. A new Consumer Financial Protection Bureau (CFPB) will take over nearly all of the consumer protection rules currently written and enforced by the Fed and the OCC (Rep. Miller was instrumental in getting strong consumer protection through the House). An aggressive director could write strong rules prohibiting abuses, so there is a great deal riding — $38 billion a year, in fact– on who President Obama appoints to the post. Right now the front-runner is Harvard University Law School professor Elizabeth Warren. Warren came up with the idea for a CFPB years ago, and has proven herself to be a strong reformist voice of reason as chair of the Congressional Oversight Panel for the Troubled Asset Relief Program. She deserves the post.

But without strong leadership, the banking swindles will continue. If recent history is any guide, there are few others in Washington, D.C. willing to take a stand for citizens when the banking industry comes to pillage our pocketbooks.

Zach Carter is an economics editor at AlterNet. He writes a weekly blog on the economy for the Media Consortium and his work has appeared in the Nation, Mother Jones, the American Prospect and Salon.

See Tell Your Story: Bad Banks – PNC A Pattern of Systematic Fraud?, Evans Liberal Politics, June 16, 2010, by Paul Evans, for my own horror story about just how badly one liberal politics website owner got ripped off, partly with overdraft fees (16 in a one week period), and horror stories from around the web about just how badly former National City customers with PNC bank have been hurt.

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The Root of Economic Fragility and Political Anger, Robert Reich.org, July 13, 2010, by Robert Reich, used with permission, quoted verbatim:

Missing from almost all discussion of America’s dizzying rate of unemployment is the brute fact that hourly wages of people with jobs have been dropping, adjusted for inflation. Average weekly earnings rose a bit this spring only because the typical worker put in more hours, but June’s decline in average hours pushed weekly paychecks down at an annualized rate of 4.5 percent.

In other words, Americans are keeping their jobs or finding new ones only by accepting lower wages.

Meanwhile, a much smaller group of Americans’ earnings are back in the stratosphere: Wall Street traders and executives, hedge-fund and private-equity fund managers, and top corporate executives. As hiring has picked up on the Street, fat salaries are reappearing. Richard Stein, president of Global Sage, an executive search firm, tells the New York Times corporate clients have offered compensation packages of more than $1 million annually to a dozen candidates in just the last few weeks.

We’re back to the same ominous trend as before the Great Recession: a larger and larger share of total income going to the very top while the vast middle class continues to lose ground.

And as long as this trend continues, we can’t get out of the shadow of the Great Recession. When most of the gains from economic growth go to a small sliver of Americans at the top, the rest don’t have enough purchasing power to buy what the economy is capable of producing.

America’s median wage, adjusted for inflation, has barely budged for decades. Between 2000 and 2007 it actually dropped. Under these circumstances the only way the middle class could boost its purchasing power was to borrow, as it did with gusto. As housing prices rose, Americans turned their homes into ATMs. But such borrowing has its limits. When the debt bubble finally burst, vast numbers of people couldn’t pay their bills, and banks couldn’t collect.

Each of America’s two biggest economic downturns over the last century has followed the same pattern. Consider: in 1928 the richest 1 percent of Americans received 23.9 percent of the nation’s total income. After that, the share going to the richest 1 percent steadily declined. New Deal reforms, followed by World War II, the GI Bill and the Great Society expanded the circle of prosperity. By the late 1970s the top 1 percent raked in only 8 to 9 percent of America’s total annual income. But after that, inequality began to widen again, and income reconcentrated at the top. By 2007 the richest 1 percent were back to where they were in 1928—with 23.5 percent of the total.

We all know what happened in the years immediately following these twin peaks—in 1929 and 2008.

Yes, China, Germany and Japan have contributed to America’s demand-side problem by failing to buy as much from us as we buy from them. But to believe that our continuing economic crisis stems mainly from the trade imbalance—we buy too much and save too little, while they do the reverse—is to miss the biggest imbalance of all. The problem isn’t that typical Americans have spent beyond their means. It’s that their means haven’t kept up with what the growing economy could and should have been able to provide them.

A second parallel links 1929 with 2008: when earnings accumulate at the top, people at the top invest their wealth in whatever assets seem most likely to attract other big investors. This causes the prices of certain assets—commodities, stocks, dot-coms or real estate—to become wildly inflated. Such speculative bubbles eventually burst, leaving behind mountains of near-worthless collateral.

The crash of 2008 didn’t turn into another Great Depression because the government learned the importance of flooding the market with cash, thereby temporarily rescuing some stranded consumers and most big bankers. But the financial rescue didn’t change the economy’s underlying structure — median wages dropping while those at the top are raking in the lion’s share of income.

That’s why America’s middle class still doesn’t have the purchasing power it needs to reboot the economy, and why the so-called recovery will be so tepid—maybe even leading to a double dip. It’s also why America will be vulnerable to even larger speculative booms and deeper busts in the years to come.

2

The structural problem began in the late 1970s when a wave of new technologies (air cargo, container ships and terminals, satellite communications and, later, the Internet) radically reduced the costs of outsourcing jobs abroad. Other new technologies (automated machinery, computers and ever more sophisticated software applications) took over many other jobs (remember bank tellers? telephone operators? service station attendants?). By the ’80s, any job requiring that the same steps be performed repeatedly was disappearing—going over there or into software. Meanwhile, as the pay of most workers flattened or dropped, the pay of well-connected graduates of prestigious colleges and MBA programs—the so-called “talent” who reached the pinnacles of power in executive suites and on Wall Street—soared.

The puzzle is why so little was done to counteract these forces. Government could have given employees more bargaining power to get higher wages, especially in industries sheltered from global competition and requiring personal service: big-box retail stores, restaurants and hotel chains, and child- and eldercare, for instance. Safety nets could have been enlarged to compensate for increasing anxieties about job loss: unemployment insurance covering part-time work, wage insurance if pay drops, transition assistance to move to new jobs in new locations, insurance for communities that lose a major employer so they can lure other employers. With the gains from economic growth the nation could have provided Medicare for all, better schools, early childhood education, more affordable public universities, more extensive public transportation. And if more money was needed, taxes could have been raised on the rich.

Big, profitable companies could have been barred from laying off a large number of workers all at once, and could have been required to pay severance—say, a year of wages—to anyone they let go. Corporations whose research was subsidized by taxpayers could have been required to create jobs in the United States. The minimum wage could have been linked to inflation. And America’s trading partners could have been pushed to establish minimum wages pegged to half their countries’ median wages—thereby ensuring that all citizens shared in gains from trade and creating a new global middle class that would buy more of our exports.

But starting in the late 1970s, and with increasing fervor over the next three decades, government did just the opposite. It deregulated and privatized. It increased the cost of public higher education and cut public transportation. It shredded safety nets. It halved the top income tax rate from the range of 70–90 percent that prevailed during the 1950s and ’60s to 28–40 percent; it allowed many of the nation’s rich to treat their income as capital gains subject to no more than 15 percent tax and escape inheritance taxes altogether. At the same time, America boosted sales and payroll taxes, both of which have taken a bigger chunk out of the pay of the middle class and the poor than of the well-off.

Companies were allowed to slash jobs and wages, cut benefits and shift risks to employees (from you-can-count-on-it pensions to do-it-yourself 401(k)s, from good health coverage to soaring premiums and deductibles). They busted unions and threatened employees who tried to organize. The biggest companies went global with no more loyalty or connection to the United States than a GPS device. Washington deregulated Wall Street while insuring it against major losses, turning finance—which until recently had been the servant of American industry—into its master, demanding short-term profits over long-term growth and raking in an ever larger portion of the nation’s profits. And nothing was done to impede CEO salaries from skyrocketing to more than 300 times that of the typical worker (from thirty times during the Great Prosperity of the 1950s and ’60s), while the pay of financial executives and traders rose into the stratosphere.

It’s too facile to blame Ronald Reagan and his Republican ilk. Democrats have been almost as reluctant to attack inequality or even to recognize it as the central economic and social problem of our age. (As Bill Clinton’s labor secretary, I should know.) The reason is simple. As money has risen to the top, so has political power. Politicians are more dependent than ever on big money for their campaigns. Modern Washington is far removed from the Gilded Age, when, it’s been said, the lackeys of robber barons literally deposited sacks of cash on the desks of friendly legislators. Today’s cash comes in the form of ever increasing campaign donations from corporate executives and Wall Street, their ever larger platoons of lobbyists and their hordes of PR flacks.

3

The Great Recession could have spawned another era of fundamental reform, just as the Great Depression did. But the financial rescue reduced immediate demands for broader reform.

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Obama might still have succeeded had he framed the challenge accurately. Yet in reassuring the public that the economy will return to normal he has missed a key opportunity to expose the longer-term scourge of widening inequality and its dangers. Containing the immediate financial crisis and then claiming the economy is on the mend has left the public with a diffuse set of economic problems that seem unrelated and inexplicable, as if a town’s fire chief deals with a conflagration by protecting the biggest office buildings but leaving smaller fires simmering all over town: housing foreclosures, job losses, lower earnings, less economic security, soaring pay on Wall Street and in executive suites.

Much the same has occurred with efforts to reform the financial system. The White House and Democratic leaders could have described the overarching goal as overhauling economic institutions that bestow outsize rewards on a relative few while imposing extraordinary costs and risks on almost everyone else. Instead, they have defined the goal narrowly: reducing risks to the financial system caused by particular practices on Wall Street. The solution has thereby shriveled to a set of technical fixes for how the Street should conduct its business.

What we get from widening inequality is not only a more fragile economy but also an angrier politics. When virtually all the gains from growth go to a small minority at the top — and the broad middle class can no longer pretend it’s richer than it is by using homes as collateral for deepening indebtedness — the result is deep-seated anxiety and frustration. This is an open invitation to demagogues who misconnect the dots and direct the anger toward immigrants, the poor, foreign nations, big government, “socialists,” “intellectual elites,” or even big business and Wall Street. The major fault line in American politics is no longer between Democrats and Republicans, liberals and conservatives, but between the “establishment” and an increasingly mad-as-hell populace determined to “take back America” from it.

When they understand where this is heading, powerful interests that have so far resisted fundamental reform may come to see that the alternative is far worse.

*****

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