Newsletter Number 48
January 2012
How We Got Here With the Economy and How to Get Out
Robert Freeman teaches history and economics
at a public high school in northern California. He is the founder of One Dollar
For Life, a national non-profit that helps American
schools build schools in the developing world with donations of one dollar. He
can be reached at robertfreeman10@yahoo.com.
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.
___________
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