How We Got Here With the Economy and How to Get Out
It’s easy to get fixated with small-bore issues on the economy, even if they don’t seem so small-bore at the time. Stimulus packages. Bailouts. Debt ceilings. Deficit commissions. Payroll tax-cut extensions. They seem like life and death issues while they’re being fought out.
But, in fact, they are distractions from the one real question that dominates all others, which is this: for whom should the economy be run? Should it be operated “to promote the general welfare” of 297 million people, the 99 percent? Or should it be run to benefit 3 million, the one percent?
Right now, the answer is that the economy is a machine, with the government as its operator, for transferring two hundred years of accumulated national wealth to those who are already the most wealthy, the one percent. And we should be clear about two things: this is a choice; and it’s working. The rich are getting much richer while everyone else is being stripped of their incomes, their assets, their retirement security, and all the elements of the social safety net enacted since the Great Depression.
Until we confront the fact that the collective impoverishment of the many for the selective enrichment of the few is a choice — the consequence of an explicit policy regime going back 30 years — nothing will change. But if we can muster the maturity to confront this fact, that we are here by choice, and find the courage to act on it, we might yet be able to save the country. If we do not, then we are surely lost.
To understand how we got here, we need to quickly review the economic history of the last sixty years. Then we can discuss what to do going forward.
At the end of World War II, the U.S. bestrode the world like a colossus. Its only industrial rival, Europe, had blown its brains out 30 years before, in World War I. And it did it again, in World War II, with Japan joining in. In the history of the world, there has never been such asymmetry in power between one country and all the rest.
It was U.S. capital that rebuilt its allies’ economies, through the Marshall Plan in Europe, and through military spending in Asia. U.S. factories boomed, to service not only its own vast and ravenous market, but those of all the rest of the world. All the equipment (and much of the food) to rebuild the industrial world came from America.
It was truly the Golden Age. There was enough wealth so that capital, labor, and government could all drink deeply from the seemingly inexhaustible spring of capitalism.
But by the 1960s something began to go wrong. Our allies’ economies had by then been rebuilt, and with the newest equipment and technologies. Theirs were more efficient than ours. The Volkswagens and Toyotas that would later become a tsunami began to trickle in. Same with the Sonys and Panasonics in consumer electronics. Shipbuilding, steel, machine tools, industrial electronics and other major industries began to migrate out of the U.S. and into the hands of foreign companies.
At the same time, the then-99% began to place serious claims on national resources, and to insist on being a player in major national decisions.
Johnson launched the Great Society program withthe goal of eradicating poverty. The women’s rights movement, the civil rights movement, the anti-Vietnam War movement, and the environmental movement all proved dramatically effective in redirecting national priorities and resources away from those favored by the wealthy elites and toward those of the rest of the people.
In other words, at exactly the time the profits of corporations were under assault by growing international competition, the people began to claim a greater share of society’s fruits. It couldn’t square. There was not enough output from the faltering economy to both satisfy people’s expectations of middle class affluence and economic security and capital’s demands for higher and higher returns. Something had to give.
Equally, the elites who had run the country for decades were indignant at the presumption of a mangy mob of un-bathed, pot-smoking, long-haired, bra-less, draft card-burning, tree-hugging hooligans who didn’t even have a job but wanted a seat at the table of national decision-making (sound familiar?). They were certainly never again going to allow such a scabrous cabal to decide that the country should not fight a major war (Vietnam) that was so enriching to the elites who had lied the country into it.
So the elites decided to take “their” country back.
The election of 1980 was the real watershed in modern American history. Ronald Reagan ran for president promising to cut taxes, increase military spending, and balance the budget — all at the same time. He called it “supply side economics.” His rival for the Republican nomination, George H.W. Bush, called it “voodoo economics” which, of course, it was. But people bought it and Reagan proceeded to rearrange economic power more substantially than at any time since Roosevelt enacted the New Deal.
Reagan cut marginal tax rates on the wealthy from 75% to 35%. At the same time, he dramatically increased military spending. The result was entirely predictable: with less money coming in but more going out, the government began to run massive deficits. Where Jimmy Carter’s worst deficit was $79 billion, Reagan was soon running deficits of $150 billion a year, year after year and increasing.
By 1992, the end of George H.W. Bush’s presidency, the annual deficit had reached $292 billion. In only 12 years, the supply side “revolution” had quadrupled the nation’s debt, from $1 trillion to $4 trillion. And this, in a time of peace and prosperity.
But that was always the hidden intention of supply side economics, to bind the nation to massive debts, debts from which it would never be released. Despite their sanctimonious pretenses, Republicans love debt because they are lenders. When there is more demand for debt, as when the government borrows hundred of billions of dollar a year, it commands a higher price, which is interest. This is simply supply and demand. And if you’re a lender, higher interest rates are better. This is why, even though Republicans controlled the White House for 26 of the past 40 years, they never once in any of those years produced a single balanced budget.
Clinton came to power in 1993 but proved an ambiguous leader, at least from standpoint of economics. He once described himself as “an Eisenhower Republican” which seems fair. He did raise marginal tax rates on the rich, but only from 36% to 39%. (They were at 75% under the real Eisenhower.) For this, he was pilloried as a socialist. Worse, after the fall of the Soviet Union he cut military spending as a percent of GDP to the lowest level since before Vietnam.
With lower military spending, slightly higher taxes on the rich, and a technology-driven economic boom, Clinton was able to pay down the deficits left to him by Bush I. By 1997, the government actually produced budgetary surpluses, the first since the 1960s. The consequence was a 40% fall in long term interest rates. Again, it was simply supply and demand. With less demand for borrowed money, rates fell.
This is the real reason Clinton was so relentlessly hounded by the right. It wasn’t because he was being serviced by a stalking intern, though he played into that one with astonishing recklessness. It was because he interfered with the three primary mechanisms for transferring wealth to the already-wealthy: tax cuts, massive military spending, and skyrocketing national debt.
The rest of Clinton’s economic legacy is far less positive. He pushed through NAFTA, pitting blue collar workers from the industrial Midwest against workers in Mexico making $1 an hour. He “ended welfare as we know it,” destroying an essential element of the social safety net. He enacted telecommunications “reform” that ended up as grotesque consolidation in the nation’s media, to where five companies now control more than 80% of the nation’s media.
But by far the most damaging of Clinton’s economic accomplishments was the deregulation of the finance industry. He overturned Glass-Steagall, the Depression-era law that separated commercial and investment banking. Together with his deregulation of derivatives, what Warren Buffet called “financial weapons of mass destruction,” this opened the economy to what would be the financial mad house of the first decade of the twenty-first century.
George W. Bush took office in 2001 and would serve the very wealthy in six important ways. First, he cut their taxes substantially, first in 2001 and again in 2003. Over their life, the Bush Tax Cuts for the top 1% will cost more than it would take to restore Social Security to solvency forever.
Second, he massively increased military spending with his fraudulently-justified and incompetently-prosecuted War in Iraq, and his equally-over-hyped and phony Global War on Terror.
As with Reagan, these two actions produced his third gift to his “base,” as he called the rich: massive deficits. He turned Clinton’s budget surpluses into deficits within one year. He would eventually double the national debt in only eight years, from $5.6 trillion to $12 trillion.
Fourth, he helped major industrial corporations move some seven million high paying manufacturing jobs out of the country, to low-wage countries where they could pay less for labor while putting downward pressure on American wages.
Fifth, he turned a blind eye as the financial industry carried out one of the greatest economic frauds in American history: the housing bubble.
Bush’s ideological soul-mate, Alan Greenspan, Chairman of the Federal Reserve, held interest rates at historically low levels to induce a boom in housing. This created illusory “wealth” that served to distract and pacify the working class as their jobs were being shipped overseas. He turned a blind eye to massive fraud in mortgage lending so that busboys, bartenders, gardeners, and day workers could buy homes they could never hope to afford. And he encouraged the securitzation of mortgages so that banks could offload the toxic sludge to unsuspecting buyers around the world. It was all so carefully engineered.
However, as had happened in the 1960s, something started to go wrong. Incomes began to fall as jobs were shipped overseas. The Iraq war caused oil prices to jump from $26 a barrel the day Bush took office to over $100 a barrel. It was a massive gain for the oil companies, his family’s business, but the inflationary effect coursed through everything in the economy. The busboys couldn’t make the notes on their houses, so started unloading them. But there were no “greater fools” left to buy them so prices started a downward avalanche which is still under way.
Since the height of the bubble in 2006, more than $8 trillion of housing wealth has been wiped out. Eleven million homes have been lost to foreclosure. More than one in four mortgages are underwater, with more owed on them than the home is worth. The share of home equity owned by homeowners themselves is now at the lowest level it has been since World War II. The balance has been transferred from the owners to the mortgage holders, the banks.
But the banks, in an almost psychotic orgy of greed, had leveraged their equity 30-to-1. They borrowed 30 dollars for every one dollar they held in capital. It makes for prodigious profits when prices are rising. If they go up only 3% (1/30) you double your investment! But if prices fall by 3%, your capital is wiped out. That is what actually happened. Housing prices, inflated far beyond what a rational market could bear, fell for the first time in American history. The banks went bankrupt. That was the financial collapse of late 2008.
Fortunately for the banks, Bush and his Treasury Secretary, Henry Paulson, formerly head of Goldman Sachs, were there to bestow the sixth and greatest gift on the wealthy: they bailed out the banks and their owners.
They arranged for the Treasury and the Federal Reserve to buy the banks’ toxic sludge so they wouldn’t have to take any losses on it. They paid 100 cents on the dollar for crap securities that that couldn’t fetch 20 cents on the dollar in open markets. They gave the banks trillions of dollars of loans at effectively no interest. And they allowed the banks to print trillions of dollars which they then used to inflate commodity and stock markets around the world, greatly enriching their wealthy owners.
What Bush and company didn’t do was require any givebacks from the banks. No equity. No firings. No changes in bonuses. No regulation of explosive derivatives. No restructuring of “too big to fail.” No settlements with consumers for intentionally defective mortgages. No re-investment in the economy they had plundered. And certainly, no prosecutions for any of the willful perpetrators of the Greatest Economic Collapse Since the Great Depression.
By 2009, Obama inherited an economy in free fall, for which he is perhaps owed some sympathy. But his policy responses have been inept at best, complicit at worst. He carried through with Bush’s bailout of the banks, passed phony “financial reform” which changed nothing, and studiously refused to prosecute any wrong-doing. He pushed through a tepid stimulus package where fully one third went to tax cuts for the wealthy. And he groveled to get a payroll tax cut that, in fact, does more to damage Social Security than anything any Republican president has ever managed.
In many other ways, however, he has proven to be Clinton II, or Bush III. He staffed his economic team with the very intellectual lights — Robert Rubin, Larry Summers, Tim Geithner, Ben Bernanke — who had engineered the Collapse, ensuring that capital’s right to pillage would not be qustioned. He went back on his word to fight for a public option that would have lowered the cost of health care insurance. He waved through the Bush tax cuts, not once but twice.
He never attempted anything so ambitious as a Rooseveltian jobs program. He made sure the Copenhagen climate talks failed so as to not burden American industrialists. He more than tripled Bush II’s deficits. And in his most damning assault on the economic security of more than 80 million Americans, he “put Social Security on the table” as part of his budget negotiations. With “friends” like this we should pray for enemies. At least we would know them for what they are.
Which brings us to today.
Over 56 million people are in poverty. The Census Bureau reports that half of all Americans (!) are in or near poverty. Almost 30% of those in the middle class have fallen out of it, and the rate of collapse is accelerating. A smaller share of men have jobs today than at any time since World War II. The past ten year’s wage gains have been the worst for any ten year period in the nation’s history, even worse than during the Great Depression.
The national debt that stood at $1 trillion when Reagan took office now exceeds $15 trillion. Debt as a percent of GDP is higher than it was in 1929, the year before the Great Depression. Meanwhile, corporate profits are at record highs, with corporations sitting on $2 trillion in cash, not investing it in the economy. They have $1.3 trillion parked in offshore tax havens like the Cayman Islands, out of reach of U.S. tax collectors.
Who could have imagined we could have fallen so far, and so quickly? Actually, in retrospect, it all makes sense. As wealth was steadily transferred upward and incomes were undermined, the damaging effects were masked by increased recourse to debt, both public and private. And the debt itself served to both accelerate and consolidate the transfer. But eventually the burden of payments became too much for an enfeebled workforce to carry and the whole thing came crashing down.
Any meaningful recovery will require a major investment by the federal government. The combination of lost incomes and lost consumer wealth have undercut the ability of consumers to generate demand, leaving the government as the only agent in the economy with the capacity to do the job. Clearly, private markets are not going to do it. Indeed, corporations have learned how to prosper mightily by crushing their American workers, a truly dysfunctional state of affairs that cannot stand.
The government should invest in the nation’s infrastructure which the American Society of Civil Engineers rates a “D”, down from “D+” only three years ago. This would employ potentially millions of now-unemployed workers, turning unemployment checks into tax payments to the Treasury. It would also bring the platform on which all the rest of the economy operates up to twenty-first century standards. Fortunately, the government can borrow long term at 2%, a fraction of the payback from such investments.
I’ve written elsewhere about a Manhattan Project-like investment in a green economy. Such an investment would revive employment, restore American competitiveness, help pay down the national debt, reduce our crippling dependency on middle east oil, and reduce carbon emissions into the environment. In all of these ways, it would be a win for virtually everybody in the economy, everybody in the nation, and for much of the planet.
I say “virtually” because it would not benefit those who have wrecked the economy and profited so mightily in the process: the money lenders, who would see less demand for borrowed money; the weapons makers, who would face a less hostile world; and the oil companies, whose crippling grip on the economy would be reduced. And we shouldn’t have any illusions about how hard these forces will fight to ensure that nothing changes. They will, and unless we fight back, well, nothing will change.
It is important to state once again that virtually all of the predation, all of the plunder of the last thirty years has been a policy choice, primarily enacted by Republicans, but more and more abetted by Democrats who have thrown in for a piece of the action. It’s also important to understand that nothing has changed in carrying out the agenda. Obama is as much about true “Hope” and “Change” as Bush was about “Compassionate Conservatism.” In fact, he and his wealthy masters are accelerating the looting.
Military spending is still growing at almost double digit rates after a decade of such increases. He is clearly going to put the knife into Social Security and Medicare when re-elected. He clearly has no plan, no “grand narrative” to restore the nation to prosperity. He clearly will not, can not, go after the banking industry, his biggest underwriter. And he gives all the signals of starting a war with Iran, which will make Iraq look like a silly child’s board-game gone awry.
The wealthy elites, fronted by Obama, have effectively abandoned the U.S. economy and the American people who are trapped inside. What this means is that the elections of 2012 are the last chance for the American people to reclaim their economic security, to fight off the neo-feudal servitude that is being foisted on them, and reclaim their political self-determination. As you can see from the above, most of the damage to the economy is the result of political decisions made to carry out nefarious economic ends. And they’ve worked.
We desperately need to elect a reliably progressive Congress to serve as an effective counterweight to the hopelessly corrupt, craven, and cowardly Obama and company. We need to demonstrate that it is people, not money, and not rigged voting machines, that still matter most in American elections. We need every man, woman, and child on deck with a sense of existential urgency that if we do not reclaim our country now, it will be lost forever. For it will.
In the American Revolution, Thomas Paine declared, “We have the chance to make the world anew.” He was thinking of the escape from the European world of economic feudalism, social privilege, and political autocracy. Today, we have one last chance to save that “new world” from the retrograde civilization it pulled itself out of, but whose claim on it has never been renounced.
If we can muster a Paine-like courage to fight and win this new Revolution, the Revolution to Save the Country, we shall be worthy of respect equal to that which we reserve for Paine and his fellow Founders. If we do not, we will get what we deserve. As with so much of the past thirty years, it’s our choice.