I gave this talk at a very good conference, New Deal/No Deal, at Berkeley’s Institute for Research on Labor and Employment, on October 29. The panel chair was Michael Reich, who was the main organizer of the conference along with Richard Walker of the geography department. The dual themes were reflecting on the New Deal of the 1930s and how we’re not getting anything remotely comparable in the 2010s. — Doug Henwood
Roots of Crisis
We all know the story of the proximate causes of the economic crisis — a housing bubble enabled by not merely massive applications of credit, but credit packaged in unimaginably complex and obscure forms and a dispersion of responsibility that comes with securitization. There was a synergy of troublemaking here. Mortgage debt, after rising gently through the 1980s and 1990s, exploded after 2000, rising from about 60% of after-tax income to a peak of 100% in 2007. We know that lending standards deteriorated, to where the only requirement for getting a loan was having a pulse — and I bet you could even find some exceptions to that rule. Downpayments became optional. The habit of packaging mortgages into bonds and selling them to distant investors removed any incentive for the original lender to scrutinize the creditworthiness of borrowers — and allowed trouble to proliferate around the world when things went bad. My use of the word “bond” in the last sentence is as quaint as downpayment became, because the finest minds of Wall Street assembled all manner of mortgages into complex derivatives that no one, even some of the people who sold them, could understand. (Ok, “no one” is an exaggeration. I think the actual count of people who understood these derivatives was in the hundreds.) Investors had absolutely no idea what horrors were hidden in the structured products they bought, even though many came with a Aaa rating. Either the rating agencies didn’t know what they were grading or didn’t care — the issuers of the dodgy securities were the one who were paying their fees; as one rater put it in a famous email, they’d rate things put together by cows. Of course they weren’t put together by cows — they were put together by investment bankers, who are far more dangerous.
All this is true. But it’s a mistake to look only at that part of the story. Today’s crisis also has a prehistory going back to the problems of the 1970s and the neoliberal prescription for fixing those problems.
The “problem” of the 1970s was, of course, stagflation. The stag part is actually rather misleading; the expansion of the Carter expansion saw job growth four times as rapid as that of the George W. Bush expansion, and GDP growth half again as high. For the whole decade, GDP growth in the 1970s was also half again as high as so far in the 2000s — but such a comparison for employment is impossible, since job growth in this decade is slightly negative, the only such period in U.S. history for which you can say that. The gap between job and GDP growth is striking, and gives a hint of the contrasting class dynamics of the two eras. By the way, the recovery so far, such as it is, is even more strikingly imbalanced, with profits up about 50% over the last year and wage and salary income up just 1%. A 3-to-1 ratio is average for the first year of a recovery; 50-to-1 is unprecedented and scandalous.
But the inflation part of the 1970s was important. The CPI maxed out at nearly 15% in 1980, and hit an 18% annualized rate in March of that year. Wartime inflations were common in U.S. history, but never this chronic and deteriorating sort of thing.
But inflation wasn’t just about rising prices — it was also about sagging productivity, falling profitability, limp financial markets, and, less quantifiably, a general loss of discipline in the workplace and the erosion of American power in the world. Corporate profitability, which had peaked at 11% in 1966, fell by two-thirds to under 4% in 1980. With high inflation, holding bonds became a losing proposition; Treasury bonds were nicknamed certificates of confiscation. Stocks turned in one of their worst decades ever — not as bad as the 1930s, but close.
But it wasn’t just a matter of numerical indicators. The U.S. lost the Vietnam War, and oil and other commodity exporters were jacking up prices, and the Third World was demanding redistribution on a global scale. Though it’s largely forgotten now, the working class was restive and rebellious. Formal strikes were common (as they were in the 1950s and 1960s), but so were the wildcat kind. Back in 1970, Richard Nixon called out the National Guard to deliver the mail because postal workers went on a self-organized strike (they had no union). The strike prompted the reorganization of the postal service — and, shocking to someone looking back at this in 2010, Nixon authorized postal workers to form unions and bargain collectively. Later in the decade, we heard a lot about the blue-collar blues, and in 1978, the appropriately named country singer Johnny Paycheck scored a hit with “Take This Job and Shove It.”
Obviously something had to give, and what gave was the working class, domestically and internationally. Paul Volcker came into office declaring that the American standard of living had to decline, and he made it happen by driving up interest rates towards 20% and creating the deepest recession since the 1930s. (We just beat that record, but it took 30 years!) To the one-sided class war, Reagan added the ammunition of firing the air traffic controllers — the very opposite of what a Republican president had done with strikers only a decade earlier — and it was open season on organized labor. Wages and social spending were squeezed, and the deregulatory agenda that began under Carter was intensified. Abroad, Latin America was thrown into debt crisis, a crisis that for a while threatened to take down the global banking system — but instead, the problem was solved through the now-familiar neoliberal agenda of privatization and opening up to cross-border trade and financial flows.
The program was very successful. The recession scared the hell out of the working class; people were glad to have a job, and wouldn’t dream of telling anyone to shove it. Business became essentially free to do whatever the hell it wanted to. Profitability recovered strongly, rising throughout the 1980s and 1990s to a peak of over 8% in 1997 — not quite 1966 levels, but still more than twice the trough of 15 years earlier. It took a while, but productivity finally joined in. In the military-political sphere, U.S. power was enhanced, and we kicked the Vietnam Syndrome too. Discipline problems were a thing of the past.
There were a few interruptions — a stock market crash in 1987 that looked scary for a while, a long stagnation and jobless recovery in the early 1990s, the bursting of the dot.com bubble ten years later. But all in all, the system managed to recover from, even thrive on, its troubles, and state managers perfected their bailout techniques. Of course, each bailout laid the groundwork for the next bubble, but Alan Greenspan famously said that one needn’t worry about bubbles because one can always repair the damage after the fact. He lately seems chastened on that topic.
Fly in Ointment
But through those bubbles, busts, and recoveries, one constant persisted. A system dependent on high levels of mass consumption has a hard time living with a prolonged wage squeeze. I mean that not only in the economic sense, but also a political/cultural one. American life is very insecure and volatile, and the ability to buy lots of gadgets assuages that to a considerable degree. Mass consumption staves off what could be a serious legitimation crisis. For the last few decades, the economic and political contradiction has been managed, if not resolved (not that it could ever be), through the liberal use of debt — credit cards at first, and then mortgages from the mid-1990s onward. The explosion in household credit — from 65% of disposable income in 1983 to 135% at the 2007 peak (most of it from mortgages, by the way) — is what made the booms and bubbles of the last three decades possible. This is especially true of the 2001-2007 expansion, which featured the slowest employment and aggregate wage growth of any cycle since numbers the numbers begin in 1929. Without the massive cashing in on appreciating home equity — Americans withdrew several trillion dollars worth of home equity during the decade of boom, and spent a lot of it — consumption would have languished and the home improvement business would have gone under. And since we have almost no domestic savings, much of the cash for that adventure came from abroad, from places like the People’s Bank of China.
But it seems impossible to go back to that old model of doing an economy (though we still haven’t shaken the foreign borrowing habit). The housing market is still busted, as are the consumer credit markets. Retail spending has picked up from the depths of 2008 and 2009, but we’re not going back to the old pace of spending anytime soon. Interesting class point: the pickup in retail spending over the last year has been led by the so-called luxury sector, with discounters in second place. That is, the upper orders are doing well, everyone else is trading down, and the middle is looking rather hollow. And despite being flush with cash, corporations are not investing or hiring; the job market is very weak, and a minor revival in capital spending looks to be sputtering out.
What next? While the encouragement of clean energy and other green technologies would seem to hold great promise for generating fresh growth over the longer term, the political and financial systems seem incapable of getting there — our ruling class, such as it is, seems to have lost the capacity to think beyond the next quarter. New Jersey’s thuggish new governor, Chris Christie, has just cancelled his state’s participation in a rail tunnel across the Hudson, a project that would not only create jobs in itself, but would have long-term productivity payoffs. But he says the state can’t afford it. He’s not alone. A number of Republican candidates are running against the modest high-speed rail projects funded by last year’s stimulus bill. I don’t think it’s only a budgetary thing — I suspect that they also think that trains are for pansies, and real men get around in Escalades.
It’s a historical fact that many major industries in the U.S. got their start through public subsidies, from the railroads in the 19th century through the computer and pharmaceutical industries in the 20th. There would be no Internet without the Pentagon. But today’s political elite will hear little of this. There was a $5 billion fund for clean energy R&D in the StimPak, but it was raided to fund the Cash for Clunkers program, a program with little economic and even less environmental payoff. My good friend Christian Parenti has written about how even something as mundane as a concerted public procurement program — the federal government buying lots of clean vehicles and such — could make a major difference in kickstarting a new industrial revolution, but efforts so far have been rather feeble.
Meanwhile, the Chinese have been building high-speed rail like crazy, and are surging forward in solar and other green technologies. In a piece on the Chinese rail effort a few weeks ago, the Financial Times led with a vignette of Arnold Schwarzenegger shopping for equipment in Shanghai, as the paper put it, “looking for trains, technology and funding for the planned high-speed upgrade to his state’s rail network, much of which was built in the 19th century by Chinese labourers.” The Chinese rail sector, it’s worth pointing out, is dominated by state-owned firms. I was in a crazy TV debate with a Tea Party-stockbroker type recently who was talking up how China is now more capitalist than we are. I don’t want to say that China’s still state-heavy system is socialist exactly, but it is a lot more effective than our haphazard nonsense.
But as I said earlier our ruling class doesn’t want to think this way. And, to be honest, right now they have no incentive to. In my catalog of our economic woes, I forgot to emphasize the fact that the bourgeoisie hardly seems to be suffering. At least until recently, productivity has been rising strongly — not because of a rise in high-tech investment, as it was in the late 1990s, but because employers are working their employees harder and paying them less, delivering a nice fattening of profits. A friend who works for a hedge fund told me the other day that 9% unemployment looks to be good for the stock market — stay long Kapital [spelling in original] and you should do OK, he advised. Of course, not all of us — those with only our labor power to sell — can stay long Kapital. But, as you may have noticed, this is not France. The unemployed do not burn cars, the already employed do not fight austerity, and high school students do not go on strike to defend old-age pensions (and stage enchanting kiss-ins in the process). You can draw lots of parallels between our recent bubble and the Gilded Age of the 19th century, but at least the First Gilded Age was spiced up by troublesome rural populists and urban socialists.
Questions. . .
Michael Reich asked me to conclude with some questions that could serve as topics for discussion and future research. I’m happy to present these as questions, since I don’t really have good answers for them. First, am I missing something in seeing little prospect for serious economic recovery? I’ve long lamented the left habit of seeing no way out of a future of endless stagnation. Capitalism is a resourceful thing, and to paraphrase J.P. Morgan, it’s long been a mistake to sell short the United States of America. Mainstream types love to point to our wondrous flexibility (a nicer way of describing what I earlier characterized as volatility and insecurity) and innovation. But as the U.S. cuts back on R&D spending and public investment and becomes more and more hostile to immigrants, is our time running out? Even the VCs of Sand Hill Road are starting to look more to Asia than their backyard. But it was also common to proclaim the end of the American century back in the 1970s — and that looked premature. Is there some embryo lurking somewhere that will develop into something dynamic, or have we, as George Soros almost said a few years ago before the Council on Foreign Relations before stopping himself, shot our wad?
And what about our ruling class? I said a little while ago that it looks incapable of thinking beyond the next quarter. I’d been thinking of writing a book on our ruling class, some sort of hybrid of C. Wright Mills and Vanity Fair, but I set it aside for personal reasons. But I’d like to turn back to it soon. My working hypothesis was that nothing coherent has replaced the old northeastern WASP elite as a ruling stratum. Though it was often greedy and brutal, it also had a disdain for commerce and an ethic of stewardship that helped it plan the post-World War II order with some degree of actual vision and skill. Its members went to the same schools, belonged to the same clubs, and married from the same small and homogenous pool. But now, to use the jargon of Wall Street, the transaction has replaced the relationship. It’s all about who can make the most money most quickly, and the long term can take care of itself.
Can a complex and hierarchical society really be run by such a depraved social formation? Can the U.S. elite reconstitute itself as it has in the past? For a while, I thought Obama might represent some sort of rationalization of the system, some efforts of repair after the decadence of the Bush years, but it’s not turning out that way. Neither he nor his paymasters seem interested in or capable of such a project. This is another view of our economic problem: I don’t think an elite can stay rich and powerful forever while their society’s foundations rot underneath it. Am I right in this? Or can the oligarchy barrel ahead while everything around them goes to hell? Has it become so globalized that it doesn’t care what happens at home? Will our billionaires take crash courses in Chinese and Kannada and abandon Manhattan and Greenwich for Shanghai and Bangalore?
I hope there’s someone out there who can answer these questions.
Doug Henwood, editor of Left Business Observer, is the author of Wall Street: How It Works and for Whom and After the New Economy. The text above was first published in LBO News on 31 October 2010 under a Creative Commons license. See, also, William K. Carroll, “Tracking the Transnational Capitalist Class: The View From on High” (1-6 May 2007); and Yan Chen, Chunding Li, and John Whalley, “Foreign Affiliate Sales and the Measurement of Trade in Goods and Services” (Vox, 8 October 2010).