Chapter Summary
Introduction: Failures of Politics
There is a common threat to the widening inequality and insecurity affecting American families and the catastrophic risks afflicting America's financial markets. That is the steady dismantling of the managed form of capitalism that served both opportunity and security-and economic dynamism--in the decades after World War II. The wreckage of the mixed economy reflects the power of conservative ideology and financial elites, who exercise disproportionate influence on both political parties. As a consequence, the instruments of broadly distributed prosperity are largely outside mainstream legislative debate. Instead, too many leaders of both parties are focused on such elite issues as budget balance, the alleged financial crisis of Social Security, further deregulation of finance and trade - policies that will do nothing to relieve the economic stress on ordinary voters. When politics does not deliver for people, the people give up on politics. So, if the Democrats are once again to be champions of regular Americans rather than a second party of Wall Street, they need to again embrace a progressive economics. And for that to occur, the people need to take back our democracy from financial elites.
Chapter One: A Hidden Depression
Although the economy on recent decades has had good economic growth on average, the fruits of that growth have been astonishingly concentrated among the top one percent, and more narrowly, the top one-hundredth of one percent. The median American family, adjusting for hours worked, has suffered a decline in living standards over the past three decades, despite a near doubling of GDP. Among the more subtle and insidious dynamics of the hidden depression are:
Families working longer hours to maintain income levels, which is really a reduction in *living standards.
Higher-than-average price increases in the basics that allow people to join the secure middle class - college tuition, health insurance premiums, homeownership.
Eroding retirement protection, as large corporations shift from real pension plans to tax-sheltered savings devices like 401k plans that are grossly inadequate.
A shifting of risks to workers and families once borne by government and large employers - risks of job loss, of inadequate health coverage, or retirement security.
Chapter Two: The Assault on the Good Society
The period during and after World War II was politically exceptional. The business elite had been discredited by the Great Crash. Government enjoyed broad prestige, having led the economy to a recovery from the Depression and to victory in WWII. Citizens were in a mood of engagement with their democracy. In this climate, government sponsored several successful equalizing institutions - regulation of the excesses of capitalism, progressive taxation, social investment, broadened public education, government guarantee of the rights of collective bargaining, and programs of social insurance such as Social Security and Medicare. As a result, the society became more equal during the period between the 1930s and the 1970s. But as financial elites recovered their usual power, each of these instruments of broad opportunity and security was weakened. Rising inequality has little to do with shifting skills requirements, and everything to do with shifts in political power.
Chapter Three: Wall Street Rules
The dismantling of financial regulation is at the core of the power shift from ordinary citizens to economic elites. As in the 1920s, today's financial economy is rife with both conflicts of interest that enrich insiders, and escalating systemic risks. The very same speculative excesses that lead to the Great Crash of 1929 are repeating themselves. The buying and selling of entire corporations and the stripping of assets for the benefit of middlemen is advertised as a form of corporate accountability. This is a kind of bogus populism, for it merely enriches financial engineers at the expense of ordinary workers and families. The Sarbanes Oxley Act of 2002, enacted in the aftermath of the Enron scandal and the dot-com crash, addresses only minor aspects of the deeper systemic corruption. The repeal of the Glass-Steagall Act, in 1999, invites worse conflicts of interest and deeper risks to the entire economy.
Chapter Four: Financial Engineering and Systemic Risks
Two of the new players increasing risks to the system are hedge funds and private equity. Hedge funds are private pools of capital that now exceed 1.5 trillion dollars. They are exempt from the usual disclosures to investors and to the SEC due to a loophole in the securities laws. They rely heavily on borrowed money, and take large risks. One hedge fund collapse, LTCM, required intervention by the Federal Reserve, which pressured big banks to buy the fund. Private equity can be a source of capital and management expertise, but increasingly "private equity" is actually based on debt and trading profits that extract assets. Private equity deals also are thick with conflicts of interest. This brand of financial engineering is advertised as a way of holding corporate executives accountable, but is a poor substitute for better forms of accountability, such as more independent boards, and more power for shareholders and other stakeholders. Mainly, the new forms of financial engineering, of which the sub-prime collapse is only the latest example, add more risk.
Chapter Five: The Casino Continues
Until the sub-prime crash, the Bush administration and many in Congress were working to further weaken what remains of financial regulation. However, new excesses such as securitized mortgage abuses, conflicts of interest by bond-rating agencies, off-balance sheet affiliates of big banks, exorbitant fees by mutual funds, suggest the need for more regulation, not less. In all of these abuses, the Federal Reserve plays the role of prime enabler. Because of the huge risks of a systemic crash, the Fed has bailed out speculators on several occasions in the past twenty years. It did so in the 1980s, when banks lost fortunes in third world loans; again in the 1990s, when banks and investment banks lost big speculating in currencies. Though Greenspan warned against a stock market bubble, he kept flooding markets with cheap money to repair damage of previous bubbles. Greenspan opposed regulation, on the grounds that markets corrected themselves. But the Fed's own actions proved that markets required government intervention. It would be far better for the Fed to intervene before the damage is done-with regulation-than after the fact with bailouts that only invite new bubbles.
Chapter Six: Budget Anxiety and Rubinomics
Rather than addressing the very real risks generated by deregulation and financial engineering, financial elites and ideological conservatives exaggerate bogus risks, such as the federal budget deficit, Social Security, and Medicare. This is a rightwing agenda of even more radical privatization disguised as concern for the common good. In fact, Social Security's accounts are very close to 75-year balance, and can be balanced with modest adjustments. Medicare's financial problems are a function of our failure to get the waste and middleman profit out of the larger healthcare system-via universal health insurance. Rubinomics - the claim that budget balance was the key to prosperity in the 1990s-is mostly wrong. The prosperity of the 1990s was the fruit of rising productivity, and the Fed's cheap money policy, which ended in a stock market bubble. More public investment would have produced even more economic benefit. Yet Robert Rubin continues to be a voice of fiscal conservatism and financial deregulation, epitomizing the unsavory influence of Wall Street on both parties. In the case of the Democrats, these policies distance the party from the interests of its potential base, and weaken the Democrats' electoral appeal.
Chapter Seven: Equality, Efficiency, and Globalism
Globalization of commerce undercuts the model of managed capitalism in multiple ways. Corporations set up global production chains, and locate in areas with relatively weak labor and regulatory standards, as well as low taxes. This undercuts the ability of mixed economies to deliver for citizens, and triggers a race to the bottom. Moreover, the rules of the trading system, written largely by and for financial elites, facilitates this undercutting of managed capitalism. For example, trade rules protect property rights, but not labor rights. However, some nations in Europe are trying to reconcile relatively open trade with a dynamic welfare state, through very significant investments in their workforces. Yet the deregulation of global money markets threatens to destabilize the ability of nations that want to be free traders to have both their trade and their social investments. The US version of this balance involves such meager sums for trade adjustment and investment in workers that the model isn't given a real test and is not politically serious. It remains to be seen whether deregulated global commerce is consistent with a mixed economy at home, and the broader challenge is the regulation of a market system on a global scale.
Chapter Eight: Trade and the National Interest
The U.S. government has behaved perversely when it comes to defending the national interest in trade negotiations. Successive trade rounds have used the trading system to undermine the domestic system of managed capitalism. The government has not made it a priority to challenge the mercantilism of other nations, and military objectives have often crowded out economic ones. This seemingly perverse behavior is easily explained once we grasp that the government is pursuing corporate interests, not national ones. Thus, it is in the interest of financial firms to set up shop worldwide, and in the interest of manufacturing firms to outsource production. U.S. trade policy facilitates both of these goals, even if it results in a massive trade imbalance, a dangerously weak dollar, dependence on foreign banks, and the loss of good jobs. The emerging economies of East Asia, most notable Japan, Korea, and China, have been particularly adroit at exploiting lour government's failure to defend the domestic economy. What's needed is a trade policy that serves national interests, not corporate ones; this is how most other nations define their goals for the trading system.
Chapter Nine: The Return of Speculative Global Finance
In the years after World War II, the international financial system was tightly regulated so that national economies could pursue domestic policies of full employment, and money movements would not be the plaything of speculators. This system was built deliberately to prevent another great depression. In the past three decades, just as the domestic economy has become more speculative, so has the international economy. As banks become global and as they are permitted to engage in ever more speculative behavior, they outrun the reach of nation-bound regulators. This is a potential hazard for the stability of the system. At the same time, speculation in currencies both allows the US to run a chronic trade deficit, but also sets the dollar up for a crash and leads to a dangerous financial dependence on nations like China, whose economic and geopolitical interests are not identical to our own. This international borrowing to maintain prosperity can not continue indefinitely. Even a "soft landing," in which the dollar lost substantial value over time, would contribute to a severe reduction in U.S. living standards.
Chapter Ten: The Squandering of Democracy
There is a dramatically different economic path than the one that America is on, a path that would allow most ordinary people much greater economic opportunity and security, and a fairer sharing of prosperity. This is the path of managed capitalism. For the most part, the elements of this approach are beyond mainstream political debate, even though polls show that large majorities of Americans support such policies as national health insurance, more investment in better jobs, work and family policies, better financial regulation. This whole approach is of the table because out democracy has been weakened, and there are fewer countervailing popular institutions to offset the immense political power of economic elites to set agendas. On the Republican side, supposed conservatives have abandoned their traditional sense of noblesse oblige, or of concern for financial solvency. The Democrats' appeal to ordinary people has been weakened by their alliance with Wall Street. The dependence of both parties on political fundraising from very wealthy people and business interest groups is one major part of the problem. Yet the success of Democrats who do run as pocketbook progressives shows the immense appeal of a different path. The victories of progressive House and Senate candidates in 2006 suggest a hopeful trend.
Epilogue: Redeeming America
All of the threats outlined in this book have solutions. They simply require a different politics. There is nothing about the internet economy that prevents us from devising a new set of equalizing institutions for a new era-if we can reclaim our democracy.
http://www.obamaschallenge.com/
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