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What if we had Real Solutions to the Systemic Crisis?

The second edition of The Democracy Collaborative's Index of Systemic Trends is here! index.democracycollaborative

...All in all, the dashboard warning lights are still blinking insistently across much of this second edition of the Index of Systemic Trends, emphasizing the ongoing systemic nature of the crisis we are facing in America – one that has been building over many decades, and has largely continued to do so over the past five years, in spite of welcome but ultimately unsuccessful efforts to change course.

One key lesson from this Index, both in terms of changes over the past five years and the longer-run trends of the past several decades, is the relative fragility and insufficiency of after-the-fact policy “fixes” – whether in terms of tax-and-spend redistribution, or regulatory interventions, or both – as any kind of substitute for deep structural interventions in the core institutions and relationships of the political economy. Absent “pre-distributive” transformations in the basic operations of the U.S. economy, there will always have to be redistribution, and it will likely always remain inadequate (at least over the medium run)....

Systemic Crisis and Systemic Change

One of the signs that a crisis is systemic, rather than purely political or economic, is that key indicators decline or stay the same regardless of changes in political power or business cycles. Since 1970, the United States has experienced seven party changes in the White House, six party changes in control of the Senate, and four in the House of Representatives. It has also experienced eight recessions (and recoveries).

Yet, as our Index demonstrates, on many very important indicators of economic, social, and democratic health there has been little improvement and, in many cases, substantial deterioration over this period. The trends considered include poverty, wealth inequality, racial wealth inequality, income inequality, wage stagnation, the cost of higher education, homeownership, corporate taxation, taxation of the rich, labor union density, incarceration rates, healthcare costs, climate change, and life expectancy, among others. We also examine the increasing financialization of the U.S. economy as a key driver of many of our economic outcomes, especially inequality.

Another way to evaluate whether or not a political-economic system is in crisis is to compare its outcomes against similar systems. Far from being exceptional, the United States’ political-economic system actually compares relatively poorly with many other countries across a variety of important indicators. U.S. performance on these indicators is compared against the 35 other OECD countries, including both advanced contemporaries (including the United Kingdom, Japan, and Germany) as well as less developed countries (such as Turkey, Mexico, and Hungary). Cross-country indicators presented here include poverty (including child poverty), inequality, union membership, healthcare spending, life expectancy, infant mortality, maternal mortality, homicide, violence against women, weapons exports, prison population, and greenhouse gas emissions.

The Index of Systemic Trends is by no means a comprehensive or exhaustive study. Rather it seeks to offer a “snapshot” as to the performance of the U.S. political economy as a whole over time. It is designed purely to be illustrative of what, we believe, is an important observation: that our current political-economic system is consistently failing to deliver improvement and/or competitive results compared to other advanced economies across a variety of different measures; and that this is indicative of a systemic crisis – and of the need to move in the direction of a new system that can and will produce better outcomes.

Section I: U.S. Macroeconomic Environment

Recent years have witnessed a number of big shifts in the macroeconomic environment in the United States and globally that affect how policymakers, economists, and the general public view the U.S. economy. The first has been the dramatic return of inflation after a period in which it had all but disappeared. The preceding extended period of low inflation was in spite of the massive expansion of central bank balance sheets around the world after the 2007-2008 Great Financial Crisis, through government asset purchases in the form of “quantitative easing” (QE). With the reemergence of inflation, central bank interest rates have been increased, including by the Federal Reserve, with consequences for household and consumer debt servicing and for business investment....

racial and wealth ineq]

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Section III: Social Reproduction: Impacts on Women and Children

Societies can, to a large degree, be judged by how they treat their most vulnerable populations – especially children. Similarly, the value given to social labor and to the work of social reproduction as compared to formal employment and economic activity is also telling as to the priorities of any system. Women and children do not fare particularly well, to say the least, under the current system of political economy in the United States....

Section V: Labor vs. Capital: A Fair Share?

Shares of National Income

The modest welfare state put in place in the United States before, during, and after World War II was predicated on a simple premise: allow enterprising American capitalism to produce economic growth and then clean up around the edges using government regulation to prevent corporate excesses and minimal redistribution through ‘after-the-fact’ taxation and public spending to spread the benefits more evenly throughout the population. This essential posture was at the heart of the political-economic settlement that dominated the United States in the so-called ‘Golden Age’ of American capitalism in the postwar period. Corporations would be allowed to flourish and generate profits for their shareholders, and in exchange the state would tax and regulate them to help provide funding for national programs (including defense) and a bare-bones safety net for the elderly, the sick, and the poor.

During the postwar “boom” years, corporate taxation accounted for up to 30% of all federal tax receipts, and during the Eisenhower administration, the top tax rate on corporations was 52%. Many CEOs accepted this arrangement and considered the payment of taxes to be their patriotic national duty. However, starting in the early 1970s, this started to change. Spurred on by right-wing think tanks and conservative politicians, and driven by thinking such as that encapsulated in the infamous “Powell Memorandum” to the U.S. Chamber of Commerce, corporations began to agitate for lower tax rates and utilize loopholes and accounting tricks to hide their profits. This now includes the tactic of corporate inversions, where U.S. companies merge with a foreign competitor and then move their headquarters overseas to avoid U.S. taxes. Between 1970 and the present, as corporate pre-tax profits exploded, federal tax revenue from corporations remained relatively constant. In turn, this lack of revenue allowed (and continues to allow) conservative politicians to demand cuts to social programs and the safety net out of professed concern for a “balanced budget.”

Figures 13 and 14 show the share of labor (earnings plus payroll taxes) and capital (profits) in national income (GNI) from 1960 through 2022. The labor share increases during the 1960s, reaching a high point of 58.4% in 1970. It then declines (somewhat unevenly) over the next 50 years, reaching a low point of 52.2% in 2022....

Section VI: Health and Wellbeing

The American healthcare system is famously the most expensive in the world, yet it delivers generally poor outcomes when compared with other high-income countries. Although a staggering $4.8 trillion was spent on healthcare in 2023 (nearly a fifth of total U.S. GDP), on common indicators of health system functioning, like maternal and infant mortality rates (see Section III above), the United States fared relatively poorly.

The rising cost of healthcare in general – and of pharmaceuticals in particular – has recently become a major political issue. Yet, despite concerted attention from both political parties – from the enactment during the Obama Administration of the Affordable Care Act to the elimination of the individual mandate to the Inflation Reduction Act (IRA) provisions for drug price negotiations by Medicare – total healthcare costs continue to rise. The rising cost of U.S. healthcare has led to tens of thousands of personal bankruptcies as the result of medical debt (disproportionately affecting people of color), and to millions of Americans forgoing or delaying treatment due to cost. It has also led to worsening overall health outcomes and contributed to ongoing health disparities.

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Section VII: Climate Change

Climate change remains one of the most pressing planetary challenges, representing an increasingly existential threat to human civilization and to the future of an organized global community. Without rapid climate mitigation, future generations will inhabit a planet that is far different and far less hospitable than we do.

The required action on climate is by definition international in scope. However, the response of the United States in particular to the climate threat is important for a number of reasons. America is home to many of the fossil fuel corporations responsible for both significant carbon dioxide emissions and for blocking or stalling national and global efforts to address climate change. For decades (until 2005) it was the top global emitter of CO2 and it has previously been reluctant to join international efforts to address climate change. Environmentalist James Gustave Speth has documented half a century of U.S. federal government inaction on the matter in his 2022 book They Knew: The U.S. Federal Government’s Fifty-Year Role in Causing the Climate Crisis – what he calls “the greatest dereliction of civic responsibility in the history of the Republic.”

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Section VIII: Violence and the Carceral State

The United States remains an incredibly violent country, with a high murder rate and a high level of state violence and mass incarceration. Quite apart from the consequences on individuals, families, and communities, there is also a serious impact on democracy, as the passage of more and more people through the prison system, including through racialized policies toward custodial sentences for nonviolent drug offenses, results in high levels of democratic disenfranchisement, especially among minority populations.

The Carceral State

One of the most astonishing international comparisons is the prison population rate (the number of prisoners per 100,000 people). Simply put, the United States has the highest prison population rate in the entire world (not just among other OECD countries).

For much of the twentieth century, the U.S. incarceration rate – the number of people imprisoned per 100,000 residents of all ages – remained relatively constant, in the 120-200 range. However, beginning in the 1970s incarceration rates began to skyrocket. This was due to a number of policy decisions, including the ramping up of the drug war (and increasing prison time for drug offenders), “three strikes” laws (long prison sentences for repeat offenders), and “truth in sentencing” laws (reductions in early release). These laws continued to be enacted, and the prison population continued to rise, despite reductions in crime rates.

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Democratic Disenfranchisement

One prominent feature of mass incarceration in America is the consequent widespread democratic disenfranchisement. The Sentencing Project has produced a detailed account of the number of U.S. citizens denied voting rights due to felony convictions (current or previous). The key findings from the Sentencing Project’s Locked Out 2022 report include the following:

Note that the estimates from the Sentencing Project do not include effective disenfranchisement for other reasons (e.g. state voter ID rules, restrictions on mail-in ballots, closure of polling stations). They also do not include the impact of gerrymandering (e.g. politically-motivated redrawing of congressional election boundaries) or attempts to overturn elections through violent coercion or other means (as happened after the 2020 presidential election).

Figure 23 shows estimates of the number of people disenfranchised in the United States due to a felony conviction. The total number of disenfranchisements increased from around 1.2 million in 1976 to a peak of 6.1 million in 2016 before falling to 5.2 million in 2020 and 4.4 million in 2022 as some states eased their restrictions....

Section IX: Legitimation Crisis

Since the early 1970s, there has been a slow but steady erosion of public confidence in some of the key institutions of the United States’ democratic system. Significant political challenges emerge when people begin to lose belief in the things that once mattered most – especially the performance of the system with regard to professed historic values such as liberty, equality and democracy that are supposed to have given meaning to American democracy from the beginning.

The United States is clearly in the throes of what political scientists have termed a “legitimation crisis” – an era in which the values it affirms are contradicted by the profound reality of so many important societal trends moving in the opposite direction. Over the last several decades, popular opinion regarding the condition of democracy has shown a dramatic decline amidst decaying trust and faith in U.S. political institutions. Many Americans now feel that their elected officials are more influenced by major campaign contributors than what is best for the country; that they don’t have much say in what the government does; and that members of Congress are more interested in serving special interests than their constituents. Public confidence in specific democratic institutions such as the Supreme Court, the Presidency, and Congress has fallen considerably....

Section X: Military Empire

The United States plays a leading role in exporting violence around the world. Between the end of World War II and the end of the twentieth century, America “intervened” covertly or overtly in dozens of countries (and often the same country multiple times). These include (but are not limited to): Iran, China, Greece, Korea, Vietnam, Guatemala, Lebanon, Panama, Haiti, Congo, Cuba, Laos, Ecuador, Dominican Republic, Cambodia, Chile, El Salvador, Nicaragua, Grenada, Honduras, Libya, Iraq, Somalia, Bosnia, Serbia, Sudan, and Afghanistan.

The twenty-first century has already seen the longest war in American history (Afghanistan), the disastrous invasion of Iraq, interventions in Libya and Syria, extensive drone strikes in Pakistan and Yemen, and many more. Most recently, the United States has been the chief backer of both Ukraine in its war with Russia (following the latter’s 2022 invasion) and Israel in its massively destructive campaign against the Palestinians in Gaza. Recent estimates suggest that the United States now has _around 750 military bases and facilities in 80 foreign countries_ – at least three times as many overseas bases as all other countries combined, a truly globe-spanning military presence.

Famously, the United States spends more on its military than do the next seven countries put together (China, Russia, Saudi Arabia, India, France, the United Kingdom, and Japan). With war in Ukraine and Palestine, and tensions mounting all around the world, there has been renewed attention, at home and abroad, to the United States’ vast military empire. There is also renewed attention to U.S. overseas military aid – particularly ongoing American weapons supplies to Israel against the backdrop of widespread international criticism and credible allegations of breaches of international law, war crimes, and crimes against humanity in Gaza.

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Section XI: Financialization

The vast wealth of the United States’ economy is not experienced as such by many if not most Americans. GDP may increase, the stock market may rise, but for many there is a growing squeeze on incomes and an accumulating consumer debt burden. We see this in the financial fragility of so many American households: in the Federal Reserve’s Economic Well-Being of U.S. Households in 2023 report, 37% of all adults, faced with a hypothetical unanticipated expense of $400 (such as a car repair or a modest medical bill), said they would have paid by borrowing or selling something or said they would not have been able to cover the expense. In her recent book, Wealth Supremacy, Marjorie Kelly points to the condition of asset poverty of the two in three Americans who have next-to-nothing to fall back on in case of an emergency.

There is clearly an explanatory gap between the headline performance of the U.S. economy and the household data, as well as what most Americans report to polling companies regarding their individual economic position and the financial stresses and worries they carry. Part of the explanation for this gap is the somewhat hidden economic process of financialization, by which financial flows are diverted away from production and consumption toward asset markets in the pursuit of capital gains....

Capital Gains and Financialization

In recent decades the gains from financial asset appreciation (equities and bonds) in the U.S. economy have outpaced gains in income (gross national income or gross domestic product) and nonfinancial assets (such as buildings and land) as the financializationof the economy has gathered pace.

Figure 30 shows the total value of financial assets and nonfinancial assets in the United States as a percentage of GDP for each year from 1945 to 2022 using data from the Federal Reserve’s Z1 data release. The data show a huge increase in the total value of financial assets from around 600% of GDP in 1980 to over 1300% of GDP during the COVID-19 pandemic of 2020-21. Meanwhile, the total value of nonfinancial assets as a percentage of GDP was reasonably stable between around 1960 and 1995 at approximately 400% of GDP, then rose in the lead-up to the subprime mortgage crisis of the mid-to-late 2000s, then again in the 2010s to reach over 530% by 2022.

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Conclusion: A Next System?

The data in this second edition of the Index of Systemic Trends present a somewhat bleak prospect for anyone concerned with the civic health of the United States and its performance regarding proclaimed values of liberty, equality, and democracy. Across a range of important indicators the outcomes of the present system for most Americans have largely been failing to improve or getting steadily worse in real terms for an extended period.

As has been evident since the _first edition of the *Index* in 2019_, the United States faces a deep, ongoing, persistent, and multi-faceted crisis of the political economy as a whole – a systemic crisis. Although there have been some significant policy interventions and attempted course corrections over the past five years, they have not been of a scale or magnitude sufficient to change the overall trajectory or course of national development that can be seen in the long-run trends we have assembled.

Broken By Design

A political economy is a system, and our system is programmed not to meet basic needs but to prioritize the generation of corporate profits, the growth and concentration of asset ownership and capital gains, and the projection of national power.

While in some respects these persistent negative outcomes can be considered a failure, a breakdown, a fracturing of previous social and political settlements, from another vantage point it is the perfectly predictable operation of today’s actually existing U.S. political economy – corporate capitalism. A political economy is a system, and our system is programmed not to meet basic needs but to prioritize the generation of corporate profits, the growth and concentration of asset ownership and capital gains, and the projection of national power.

The institutional arrangements at the heart of today’s American capitalism – private ownership, credit creation by banks, global capital markets, giant publicly traded corporations – together form the most powerful engine for the extraction of value the world has ever seen. It is this set of relationships, this basic institutional design, that drives the outcomes we are seeing in terms of crumbling public infrastructure, social atomization, uneven development, environmental destruction and a widespread sense of popular disempowerment.

In today’s U.S. economy, plutocratic power dominates government decision making through lobbying and political contributions. Income and wealth inequality are increasing to levels not seen in decades, as workers and households find their financial position growing ever more precarious. This is an economy of monopoly power, with a small number of big players in each key sector – energy, finance, food, technology – dominating their markets and able to rip off both customers and suppliers with impunity. Everywhere in this economy wealth and power flow not downwards to ordinary people but upwards to economic elites, who make their vast wealth not by producing goods and services that are useful to others but through their ownership and control of assets. This ‘capital gains economy’ is built around extracting wealth from others, rather than the creation of new real wealth. The same logic applies to the unsustainable extraction of natural resources, pushing us ever closer towards ecological ruin.

It follows that, if we are serious about addressing the challenges we face, we need to address the nature and basic operations of the system itself. We need to move to a different set of institutions and core economic arrangements capable of producing sustainable, lasting, and more democratic outcomes – a new paradigm, a democratic economy in support of a democratic polity.

Changing the System?

A new political settlement will require reparation for past harm, without relying on growth, and without causing a fascist backlash through vast redistribution, but with majority democratic support for the program. The landing zone for accomplishing all of this at once is somewhat narrow and circumscribed.

What would a systemic response to the crisis even look like? In analytical terms, we might look to identify the hard constraints of our overlapping crises such that the “landing zone” for effective remedial action becomes clear. In broad-brush terms, it should be possible to delineate the magnitude of the required transition. Focusing on Janet Yellen’s longer-run triple crisis of economic inequality, environmental collapse, and racial injustice, there is a very severe challenge if we are to strike simultaneously at all three of them together:

The intersection of these challenges presents a wicked problem in political economy terms. A new political settlement would require reparation for past harm, without relying on growth, and without causing a fascist backlash through vast redistribution, but with majority democratic support for the program. The landing zone for accomplishing all of this at once is narrow and circumscribed. It will likely require a shift in the ownership and control of capital that dwarfs even such radical previous episodes in history as the industrial revolution or the upheavals of the twentieth century, whilst seeking to do so peaceably, and on the basis of a rebuilding and reconstruction of community in democratic public life.

A Democratic Economy?

There are things being done everywhere around the country, which, if you brought them together, add up to a mosaic that looks like a different system, building on what we know works already in this country.

— Gar Alperovitz

This is clearly a heavy lift. But however daunting the scale of the challenge, we cannot allow ourselves to become seduced by the consolations of despair or resigned to fatalism and inaction. As Dee Ward Hock once said, “It’s far too late and things are far too bad for pessimism.”

Despite the adverse trends documented in this report, there are practical solutions to these systemic problems, if only we know how and where to look. A new and more democratic economy is _already in the making_, in communities all across America and around the world – most notably in the global south and in Black and Brown communities that have been serially excluded from conventional economic activity and growth in the United States. Driven by pain, and by the failure of conventional policies, such communities have been experimenting with mechanisms for local democratic economic self-determination and Community Wealth Building for generations.

This democratic economy in the making contrasts starkly with the present extractive economy designed to generate maximum financial returns and distribute them upwards. Instead, it comes from a pattern of popular exploration and experimentation, the result of an explosion of local innovation in response to the ravages of generations of extraction. “There are things being done everywhere around the country [vid],”\_Gar Alperovitz points out\_, “which, if you brought them together, add up to a mosaic that looks like a different system, building on what we know works already in this country.”

This vision of a democratic economy suggests the contours of a system capable of producing radically different outcomes by striking at the sources of America’s long-run failing trends. In important areas, the institutions and relationships are the polar opposite to those of today’s decaying system.

Principles of a New Political Economy

Making a democratic economy is about consciously redesigning and rebuilding basic economic institutions and processes... so that their core functioning is designed to serve the common good.

We need a new economic paradigm – a next system – beyond predatory, extractive corporate capitalism. This means a redesign of economic institutions and processes built around new core values. Making a democratic economy is about consciously redesigning and rebuilding basic economic institutions and processes – enterprises, investments, economic development, employment, purchasing, banking, resource use – so that their core functioning is designed to serve the common good.

To begin with, finance in the democratic economy is put back in the service of people, communities, and the planet. In this economy, labor comes before capital, and good decent work is a core social aim and source of individual development. Ownership is not concentrated but broad-based and widely shared – and stewardship is the basis of ownership, not exploitation. This is a real and not a financialized economy: all economic activity occurs in real places, and communities are able to take control of their own destinies. It is a collaborative economy, in which human flourishing occurs in healthy communities and a livable planet. This economy recognizes that we have only one planet, on which all life is interdependent and real ecological boundaries require limits to growth. Human development is the real face of freedom, requiring removal of unfreedoms such as poverty and the lack of opportunity. Government plays a big role in this economy, in a democratic and decentralized fashion – and it is recognized that our collective ability to govern ourselves is the bedrock of the good society.

This economy is harder to imagine, perhaps because we’ve forgotten how to hope, how to demand. We’ve impoverished our imaginations, and as a result it is harder to imagine an economy in which, when we wake up each day, we can know that in and of itself the economy will produce better outcomes: greater equality, more democracy, healthier people and communities, a cleaner environment. It is harder to imagine – but not impossible. And more and more people are actively doing it.

An Explosion of Institutional Innovation

Only certain pathways forward will deliver the fundamental changes in outcomes that are necessary. These must become the de facto contours of a possible, practicable, and desirable next system capable in and of itself of producing the better outcomes that we want as a result of its everyday operations.

The fundamentals of this new direction are already emerging in an array of alternative models of ownership and control over capital. Over ten thousand American businesses are now owned in whole or part by their employees, involving more than 10 million workers – more than are members of private sector unions. More than one in three Americans – 130 million – are members of urban, agricultural, and financial cooperatives. Credit unions – one-member, one-vote democratic banks – collectively serve 90 million Americans, while holding around $1 trillion in assets, making them as large, taken together, as one of the biggest Wall Street banks.

There are also 2,000 publicly-owned utilities that – together with cooperatives – provide some 25 percent of America’s electricity. More and more U.S. cities and states are looking into the creation of public banking systems along the lines of the long-standing public Bank of North Dakota. Over 500 communities have established full or partial public telecommunications networks – for example, cable or fiber optic lines operated through public utilities or by local governments, with more than 230 communities in 33 states even providing ultrafast, one-gigabyte services.

City and local government economic development programs increasingly lend to – or make direct investments in – local businesses and employee-owned cooperatives. Economically targeted investments channel public pension assets into job creation and community economic development. Venture capital funds give public authorities an equity stake in local investments. Municipal enterprises build infrastructure and provide services, raising revenue and promoting employment and economic stability, diversifying the base of locally controlled capital. New experiments with participatory budgeting allow for direct citizen engagement in the allocation of public funds.

Commons management systems cover everything from the internet to public libraries, parks, and blood banks. Large-scale public trusts receive revenues from timber and mineral rights to grazing and oil production, in turn providing funding streams that underwrite public spending or issue a citizen dividend. And new and clean versions of these sovereign wealth funds are increasingly economically feasible.

These alternative models are proliferating and growing in sophistication and impact. They illuminate how new democratic economy principles and approaches can work in practice and generate new solutions to political and economic challenges. It is becoming possible to see how, by projecting and extending these practical experiments, the underlying structural building blocks of a new political-economic system based on the democratization of capital might be assembled. Taken together, these various activities and elements within what could be considered the nascent democratic economy sector of any given locality represents a very significant base – sometimes reaching as much as a third or more of local economic activity – from which to begin the work of bottom-up systemic transformation and community-driven change.

But the long-run trends documented in this report are unforgiving, and have proved impervious to the vanities of policy change in Washington. Deeper, more institutional and structural interventions are now required if we are to alter the overall course. Only certain pathways forward will deliver the fundamental changes in outcomes that are necessary. These must become the de facto contours of a possible, practicable, and desirable next system capable in and of itself of producing the desirable outcomes that we want as a result of its everyday operations. There will also be a challenge (as has already been evidenced by much of the climate change debate) in framing what are in effect real hard constraints on solutions in a manner that is expansive rather than restrictive of future possibilities and potentialities.

Developing the politics and strategy that can pull this off is the fundamental epochal challenge of our age – and must become the central mission of transformative political action in the years ahead. We hope you will join us in this work that our time in history demands.

*The Democracy Collaborative

September 2024*

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...Systemic Crisis?](https://nextsystem.gmu.edu/events/16353)

The second edition of The Democracy Collaborative's Index of Systemic Trends is here!