Struggles at home
Last week I praised the new President for his rhetorical skills and his extraordinary approach to the divisions that are dividing the nation and the world. This week, I find myself forced to raise some questions about his domestic policies and his medium-term political prospects at home.
During this week, I read a remarkable book, The Predator State, by James K. Galbraith, an economist at the LBJ School of Public Affairs and, I should report, a friend of mine thanks to my frequent visits to Austin during the 1990s and a long-standing connection between our two families. The book, as the author repeatedly and frankly admits, parallels earlier works by his famous father, who indeed in the last weeks of his life in April 2006 jokingly regretted that he was no longer up to the job himself. Analytically Jamie is his father's son, but their personalities closely reflect their generations. Jamie is frequently angry and always combative, as Boomers tend to be; his father, on the Canadian Lost/GI cusp, was always a bit reserved, and more inclined to be amused, rather than enraged, by repeated human folly. The book, in essence, describes what has happened to the American and world economy since his father wrote The New Industrial State in the late 1960s. The story is not an inspiring one.
John Kenneth Galbraith described an economy largely controlled by large corporations, who in turn were run by their bureaucracies, and had to share their profits with powerful unions. Because union voters were Democrats, this economic structure was closely related to the New Deal/Fair Deal/New Frontier/Great Society hegemony of 1933-69--which a good deal of the United States never accepted, and which more Americans repudiated as a result of the civil rights revolution. Jamie shows how the shock of Japanese competition in automobiles and steel in the 1970s was exacerbated, critically, by the Reagan monetary policies of the early 1980s, which destroyed much of American industry and set the rest, as we can now see, on a path of irreversible decline. That not only killed the rust belt economy, but sent millions of Americans heading south, where they swelled the number of electoral votes in the new Republican base. Those monetary policies had, however, another effect--by raising interest rates so high in the US, they strengthened the dollar, re-establishing its threatened position as the leading world currency.
Galbraith (by which henceforth I refer to the son) also gives Reagan credit for Keynesianism. He frankly does not believe in balanced budgets, and indeed argues that they are impossible for a country that runs a chronic trade deficit to finance international liquidity, as the US has been doing since the 1960s. Nor does he regard the Reagan or Bush I deficits as truly harmful, and he regrets the Democrats' emergence as the party of the balanced budget. (I feel a great kinship with him because, thanks to the kinds of families we grew up in, we never forgot much of what we learned about public policy in the early 1960s, even as those ideas went out of fashion around us.) On the other hand, he shows quite clearly how every conservative economic idea--including balanced budgets, supply-side economics in general, and the idea that tax cuts increase savings--has been disproven by data and events. Deficit spending has continued to fuel the American economy for the last thirty years (with private, rather than public, borrowing filling the gap during the brief Clinton surplus period of the 1990s.) What has changed is the distribution of income and the kinds of investments that are made with savings.
Even in the early 1980s, businessmen freely admitted that demand, not supply, fueled investment. When American factories faced increasing demand they built more capacity. Galbraith touches on one of my favorite points here, too: when marginal income tax rates were 91% or even 70%, businessmen had no incentive to pay themselves huge salaries and every incentive to use profits to expand their corporations, creating more employment and increasing wealth. This process reached its climax in the last eight years, when the huge new salaries and bonuses of executives (initially in the financial world) went into mansions and more mansions, most of them built, probably, by illegal immigrant labor. One might indeed define three kinds of investment: investment in public goods like infrastructure (which has been shamefully neglected); investment in private institutions, like corporations, which can also benefit the public; and investment in private consumption, which has the least benefits of all.
It is unfortunate, in a way, that Galbraith turned his manuscript early, it would seem, in 2008, when the subprime crisis had begun but before anyone realized how bad it would be. (The name Barack Obama, interestingly enough, does not appear in his book, although those of Hillary Clinton and Mitt Romney do.) The extent to which new financial instruments could wreck the entire world economy was not yet clear. Looking for something that might force a change in our fundamental economic policies so as to favor society as a whole rather than predatory corporations specializing in finance and raw materials, Galbraith seized upon global warming. Now we have a more immediate problem, the return of double-digit unemployment. Unfortunately, it is not clear that the new Administration is anywhere near coping with the depth of the problem we face.
The financial community, to my untrained eye, seems to have decided to put the best face possible on things in the hope of returning to business as usual as soon as possible. Somehow the stock market has had a substantial rally--could it be in part because more exotic financial instruments have lost their appeal? Some of the banks, although not the very biggest ones, have paid their TARP money back to regain their freedom to trade as they wish and pay themselves huge bonuses again. Yet it is not in the least clear that any of this will be reflected in the broader economy. Indeed, I am begin to wonder whether the financial system, built upon one speculative bubble after another, has not become quite detached from the productive sectors of the economy, which need a different kind of financial institution to service them. In short, we may still need to build a truly new economic structure.
The President obviously cannot do that himself and the personnel to do so may be lacking. His team, to repeat, came of age during the last twenty years and has not shown many signs of wanting to go back to an earlier era. My own great fear at the moment is that the economy will continue to worsen and the Republicans will manage to take advantage of it before we have a chance to get back on track. Yet it is still far too early to know. This week's papers report a revolt among Congressional Democrats on health care, in which Nancy Pelosi and others are insisting that any new plan include a government-run option. Health care, about which Galbraith also has a great many interesting things to say, is a subject for another post, but Obama, like Lincoln and FDR, needs to be pushed from the left, as well as the right, to make the decisions we need. I am hoping that that will begin to happen on economic questions as well.