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Friday, June 01, 2012

The real crisis

The United States has indeed entered a crisis, one that has been building for decades--really, for the whole of my adult life. At first glance the crisis seems to be largely economic. Not only do we have more long-term unemployment than at any time since the 1930s, but the lower half of our society has been losing ground for about 40 years, and our economy no longer provides adequate jobs. But beneath this, I think, is an even deeper crisis--a crisis of values. A new consensus is indeed forming--one that will be solidified, I suspect, if Mitt Romney and the Republicans win in November. It will be disastrous for decades to come--but it may happen nonetheless.

The single most striking aspect of our values crisis, I would suggest, is our growing obsession with private wealth as a good in itself--indeed, as virtually the only good. The free-market dream of Milton Friedman, that unrestrained private enrichment does the most for the general good, as been decisively proven false over the last four decades. As marginal tax rates have fallen and private fortunes have grown, inequality and structural unemployment have gotten worse. Yet Barack Obama and his campaign are torn, evidently, by the temptation to attack Mitt Romney's record at Bain capital and the need both to respect economic orthodoxy (as their policies have) and to secure their own hefty campaign contributions from Wall Street. The idea that what private equity firms do--reducing work forces and incurring debt to secure greater profits--might be socially destructive, as indeed it is, is too dangerous to discuss out loud. Thanks in part to Citizens United, greed has become politically self-sustaining. Great wealth can buy both political parties and make its own views orthodox.

Thus, virtually no one seems to be asking the obvious questions about the American economy: where will the capacity to put the American people to work come from? Is anyone really trying to put the bulk of the unemployed back to work? Is there the slightest interest in doing what the Germans do, that is, to trade maximum productivity for employment in pursuit of social justice? It was not so long ago that some leading businessmen could make a distinction between their own bank accounts and the national welfare. There do not seem to be any now. Profit maximization has become our new god--sometimes, it seems, the only one.

Corporate America's ability to buy 90% of the Democratic Party, as well as 100% of the Republicans, has of course a great deal to do with this, but sadly, I have realized that the Left bears a lot of the blame too. The Boomer Left has foresaken our parents' interest in the welfare of the nation as a whole in favor of the pursuit of various forms of individual liberty and individual gratification. They have deified minority rights, women's rights, and gay rights--all important causes, but all pursued within an individual framework, rather than as part of a broader attempt to secure justice for all. The emphasis on group entitlement, which seduced Elizabeth Warren in the course of her academic career, is now bidding fair to doom her Senate candidacy. Having failed, in the course of a long interview with a Boston Globe reporter last February about her childhood and early life, to mention anything about native American ancestry, she now insists on claiming that it has always been part of "who I am." The great mass of comments on the controversy are negative, not only in conservative Boston Herald but also in the liberal Globe. The mass of the American people do not share the values of academia, even if they favor minority, women's and gay rights.

Over the last thirty years at least, democracy has become increasingly identified with individual freedom and economic freedom. That is why Francis Fukuyama declared The End of History twenty years ago after the collapse of Communism. But the western world had learned the hard way during the twentieth century that unrestrained economic liberty could destroy democracy and make life almost impossible for millions of citizens. The great adventure of the twentieth century, pursued by leaders and political parties of all stripes, was the attempt to organize relatively just societies. It is ironic that Russia, the scene of the most sweeping and draconian experiment, has now sunk the furthest into an almost medieval rule of economic oligarchs supported by a weak state. But at the same time, the United States, which had to organize itself in the 1930s and 1940s to cope with the threats of economic collapse and totalitarian regimes, seems to be headed down the same road. Republican Superpacs are trying to buy this election as no election has been bought since 1896, and they may succeed. That could mean an unprecedented undoing of government.

I have said again and again that I see no totalitarian threat on the horizon because we live in such an unorganized age. For the time being I still believe that. Yet more weakening of government at every level could produce chaos, and chaos, as in Russia in 1917 and Germany in 1932 (or Egypt in 2012!) can open up opportunities for any well-organized minority. None is on the horizon now, but one could emerge.

I have compared our current crisis many times to the Civil War crisis--not because of its nature but because of its impact. Even though hundreds of thousands of men gave their lives to preserve the union, civic authority never really recovered after that war. But if things get even worse, we may relive another form of the Revolutionary War crisis. That war was relatively small by modern standards, but it bankrupted the authorities, debased the currency, and left the new nation with a hopelessly weak central government. By 1786 the nation was literally sinking into anarchy and the Constitutional convention was the result. The Constitution remains in place and is not the problem. The current paralysis of our government reflects our values today. The question is whether another descent into near anarchy would lead to a rebirth of better values--and I do not know the answer.


Anonymous said...

Dr. Kaiser you wrote:

The idea that what private equity firms do--
reducing work forces and incurring debt to secure
greater profits--might be socially destructive, as
indeed it is, is too dangerous to discuss out loud.

It is quite clear that you are no fan of private equity,
to say the least.

However, what I would like to know, not being
an expert on private equity myself, is the following:

If private equity hasn't existed/does not exist/ was
not available - what would have been the possible options and outcomes for the companies that Bain was involved with? Which one of those would you
consider preferable? Most preferable?

If you can, please elaborate.

Show us - if those exist - better possible (even
theoretical) solutions for the companies that
Bain was involved with assuming that private
equity was not available/did not exist.

Thank you very much.

David Kaiser said...

Good question. My answer is that some of those companies would still be operating and employing people and making some profits. What many people do not realize is that when a contemporary entrepreneur closes an "unprofitable" company, that does not mean, necessarily, that the company was losing money. It just means they thought they could make more money by closing it. This was true even of some of the steel companies around Pittsburgh that were closed in the 1980s when I was living there. The trouble is that some profit isn't enough any more. The only acceptable strategy is the one that reaps the maximum profit, short term. In my review of Mallaby's hedge fund book, I think I noted that hedge fund types were shocked when they went to Germany and found the Germans totally unwilling to play by the new rules.

James50 said...

I think about putting people to work and expanding our company all the time. The biggest roadblocks are contained in the regulatory apparatus of the government and the uncertainties created by our over-spending and dysfunctional political system. You speak of further government expansion as a way to address the needs of the community. But what I see on the ground every day is that government is the enemy of the expansion of production and the enemy of wealth creation in communities. The large companies hire lobbyists and revolving door regulators to get their way. In medium and small business, we are expected to make our way through a thicket of regulations. There is no way to keep track of all of them. Sometimes I think they are put there by the “big boys” as a way to keep down competition. I know they are a source of constant fear and anxiety for people like me.

Others have pointed out that investment in long term assets (>20 years) is 50% of what it should be and is the main reason our economy continues to suffer such large unemployment. Government creates uncertainty at every level. Can anyone say what tax policy will be in the future? Can anyone know the long term effects of the vast expansion of the money supply in the last 5 years? What will our health care system morph into? You want government to get bigger, but it seems that only increases its dysfunction. The evidence right before our eyes is that more government makes things worse not better.

David, I am not sure what the answers are, but think your analysis is too much rooted in a past that will never return. Government this large and powerful is inherently corrupt and corrupting.

Bozon said...


Many thanks for this post.

Thanks especially for observing that problems facing us, and I would add, 'the West', especially, go back 40 or more years. (I would have said they go back at least to the defeat of Hamiltonianism, but why quibble over little things.)

I have to admit that I don't think the question you have answered is a particularly good one, but we all choose what to discuss.

A great bigger picture post nonetheless.

all the best,

Anonymous said...

You dumped a lot on Russia in this post.

Check out this article:

Mark Zuckerberg’s Alter Ego Makes Trouble in Russia


Russian edition of facebook can stand up to Putin
and FSB.

I wonder if US facebook could stand up to current administration and FBI.

What do you think?

DAngler said...

I agree with your assessment of private equity. Too many people believe that leveraged buyouts only target troubled companies. In truth, many companies that are very healthy are targeted simply because their stock is undervalued, and the private equity sees an opportunity to profit from their undervaluation. It is a ruthless game, where private equity profit is gained at the cost of thousands of jobs. Jobs that would have been secure for years and years, because the company was sound -- just undervalued by the market.

I have maintained for some time that if the American public really understood the overall damage done to America by leveraged buyouts (the central tendency and the sum of all impacts) the upcoming presidential campaign would be a far different campaign.

wmmbb said...

Larger scale farming, changes in transport, along with social disruption created the dynamics for the outflow of population toward rooverseas settlement from Europe. This was followed by the mechanization of agriculture. While deindustrialization, of the kind experienced in Pittsburg and similar cities, is not wholly due to technological change, it is a factor, together with economic policy. The German example is instructive.

Now, I suspect there is nowhere else to go with respect to employment, as the logic of efficiency changes the service industries. The value of hard work has been over-valued, even when irrelevant to context, primarily as a matter of religious dogma, which has systematically castigated idleness. Rational and humane economic policy cannot be easily reconciled with the psychological attraction of scapegoating, the casting out into the wildness and perdition of the powerless evil ones who have allegedly brought trouble to the society.

Thomas said...

I infer that James50 is involved in small-to-medium business, and I respect that from that perspective, regulations may seem onerous. I also respect his view that well funded industry groups and compaanies may well exert an unhealthy influence over the regulations that apply to them, in ways that would give them advantages over less well funded or connected competitors.

That said, most Federal regulations don't start out as a conspiracy between allied Governmental and big business interests. Rather, they are made to implement statutes passed by Congress, and are meant to prevent (or respond in the wake of) various excesses and/or unfairnesses, and to protect the public interest.

Probably the best and most salient example of this phenomenon is the Glass- Steagall Act, passed in the aftermath of the 1929 market crash and subsequent depression. While the act was in force (that is, before its key features were eroded and then repealed), it prevented, or at least substantially limited, the kinds of activities on the part of financial institutions that exacerbated the current economic decline. Government is NOT inherently corrupt or dysfunctional. These things happen in ANY organization when the "checks and balances" are inadequate, nonexistent, or circumvented.

I don't read anything of Prof. Kaiser's work as an argument for big (or bigger) government. I do read it as an argument for effective, engaged government. The size should be a function of what we expect it to do for us. Corporations don't control their pollution out of a sense of their "personal" morality; they do so because Government, for the benefit of all citizens, wields the power to require responsible behavior. This is just one example from the spectrum of areas where we need to act for our common good, via an entity that exists for the benefit of all of us and not for the profit of a few.

I don't believe any of Mitt Romney's "job creators" are leaning forward, poised to invest, just waiting on someone to roll back oppressive regulations. More likely, they will invest in enterprises that create jobs when it is apparent that there is a market for the thing to be made. That market is a substantial (and growing) American middle class, people with good jobs that give them the means to consume now AND save for later. Henry Ford "got" that concept when he decided to pay his workers enough so that they could be his customers, too. On the whole, Ford seems a far better and more far-sighted model for a "job creator" than Romney or the private equity moguls in general.

Regulations are not the economic problem that so many, principally from the GOP, make them out to be. Neither is the existence of the Governmental structure. The essential problem is that the American middle class gets ever closer to being tapped out. Those that are tapped out obviously stop being middle class. They buy fewer things and pay fewer taxes; they contribute less to the economy and often demand more from the government. Reversing that trend is NOT simply a matter of reducing taxes and responsibilities of individual and corporate oligarchs.

I suppose my question for David at this point is, what historical precedent is there for arresting the descent BEFORE the anarchic bottom is reached? How have paralyzed (democratic republic)governments become reanimated? Whose experience do we draw on -- or are we re-living a version of the late 1920s - 1930s that are our best example of things to come if we continue to be complacent as a society?

As always, many thanks for a thoughtful and thought-provoking post.

Anonymous said...

You might find the article and
the comments from the Crimson


Jude Hammerle said...

Dear Dr. Kaiser,

The solution to the current crisis is simple but elusive: the American president must belong to the office. In Fukuyama’s terms, the president needs to suppress his/her megalothymia and channel his/her isothymia. In my estimation, Ronald Reagan was the last president who truly belonged to the office, and even he could not sustain his belonging for eight years.

Resolute, counter-cultural belonging to the office by two great presidents was the force that brought about the ends the last two crises (Civil War and GD/WWII). But despite this history, our last four presidents have insisted upon expressing themselves as individuals, pursuing personal recognition--even corporal satisfaction--at the expense of the office.

History is a cyclical contest of belonging vs. rebellion. While numerous social scientists have noted the tension between belonging and rebellion, the most-cited among them have viewed it as a linear progression-- including Tönnies (Gemeinschaft to Gesellschaft), Weber (traditional to rational-legal), Durkheim (mechanical to organic), Popper (Closed to Open) Maine (status to. contract), Spencer (military to industrial), Redfield (folk to urban), and of course Fukuyama. But it is not a linear progression, because the belonging of one powerful individual can end a crisis and trigger the high waiting beyond it.

I don’t believe this is a political problem. Specifically, I don’t believe it matters whom we elect; it only matters that he/she elects to belong to the office. Nobody could have predicted that LBJ would become the champion of The Great Society, but the office changed him, made him belong. Britons just celebrated their throne; Americans need to celebrate the office of the president, because that office has the power to strengthen the frail people we rotate through it.

With affection and respect,
Jude Hammerle

Anonymous said...

Prof Kaiser,
I really enjoyed the article. I think you are right. The American regime has become fascinated, to its detrimnet, by the love of gain. I would say that the Aemerican regime has become debased from its founding principles as a result.

We can fix it by rebuilding our educational systems and learning to manage our own personal finances. The two go together and both can be checked by the average citizen. Are kids educated coming out of school so that they can understand basic financial terms to realize that something for nothing mortgages are impossible to sustain.

I have written an article on this idea, the love of gain and its effect on the American regime.

I would be interested in your comments.

Yours sincerely,

Lawrence Serewicz