The Economy and the Big Picture
None of the reporting I’ve seen on the “economic crisis” discloses to the American People what is at the core of the crisis. Also generally missing is an historical perspective that gets deeper than facile references to the Great Depression. This article aims to provide the missing analysis and perspective.
In 1948 George Kennan, one of the chief architects of post-war US foreign policy, famously stated the chief object of US policy in the post-war era: "We have about 50% of the world’s wealth, but only 6.3% of its population. … In this situation, we cannot fail to be the object of envy and resentment. Our real task in the coming period is to devise a pattern of relationships which will permit us to maintain this position of disparity…..” US foreign policy during the last half of the 20th Century conforms closely to Kennan’s statement of that policy’s core object.
Kennan and his colleagues knew that the task of maintaining US control of 50% of the world’s net worth would be neither easy nor permanent. At the end of WW2 productive capacity in Europe, Japan and a good part of the rest of the world was in ruins while US productive capacity – buoyed by wartime government spending – was robust. But Europe and Japan would rebuild and economic aspirations would grow around the world as nation after nation threw off the yoke of European-style colonialism.
Kennan et al knew that eventually Europe, Japan and what were then called “underdeveloped countries” would claim a significant share of the world’s wealth and that this would mean less wealth for the USA. They took their task as delaying this eventuality and minimizing the amount of wealth the US would eventually lose to rebuilding and developing nations. Meanwhile, in order to keep American factories humming, the US government was taking steps to dramatically increase domestic demand, i.e. the affluence of the American People.
The 60s and 70s conditioned Americans to expect a standard of living which Kennen and the ruling class knew could not be maintained over the long haul. They understood that world military dominance could only hope to delay the inevitable time of reckoning.
But military dominance required expenditure of vast sums. The problem became how to make these expenditures and at the same time maintain the consumption level of working Americans. The only solution was massive deficit spending funded by selling bonds overseas. As Europe and Japan reindustrialized we sold them our bonds; more recently emerging economies like China have been persuaded to finance the enterprise. Only by continuing to borrow heavily could the US maintain what was by then called “The American Standards of Living” while America’s share of real wealth was steadily falling. The imperative to hide economic reality from the American People and delay the time of reckoning explains why, rhetoric not withstanding, it is the Republicans who have been the primary deficit spenders in the post-WW2 era.
By the 1980s the chief concern of the ruling elite became making sure that when the reckoning finally came it would be working Americans – not the rich – who would bear the brunt of the adjustment. That required transferring wealth from working people to the rich in advance of the reckoning. This has been the main projects of the ruling class since the election of Ronald Regan.
Meanwhile the rulers have sought ways to minimize world wealth redistribution. The World Bank and IMF play their part but the main tool has been so-called “free trade” deals. If the US and Europe could persuade the rest of the world to allow us to be their banker, we could use banking dominance to maintain a hold on more of the world’s wealth.
This particular project has encountered significant snags. Emerging manufacturing powers lead by Brazil and India have demanded that in exchange for access to their financial markets the US will have to end policies which subsidized agriculture and other industries. These influential industries have resisted an end to subsidies and to date they have been successful for the most part. However, big agriculture believes that the bankers will eventually win and that direct crop subsidies will end. This helps explain why agricultural subsidies are shifting from crops to conservation. But that is another story for another time.
By the first election of Bush 2 the government had a sizable surplus – at least on paper. The rulers had become concerned that the free trade ploy would not work. The drive to assure that the working class – not the rich rulers – would bear the brunt of the income adjustment became urgent. Transforming the federal current accounts surplus into a massive deficit provided a means to this end.
In his February 24th address to Congress President Obama acknowledged that during the Presidency of George W. Bush “a surplus became an excuse to transfer wealth to the wealthy instead of an opportunity to invest in our future.”
Personal income data suggests that the wealth transfer project of the ruling class has been spectacularly successful. According to the non-partisan Congressional Budget Office, income for the bottom half of American households rose six percent since 1979 but, through 2005, the income of the top one percent skyrocketed by 228 percent. The Wall Street Journal reports that the top .01% of the population, or 14,000 families, hold 22.2% of the nation’s wealth while the bottom 90%, or over 133 million families, have just 4%.
While the income and wealth gap between rich rulers and working Americans continued during the Clinton, Bush 1 and Reagan Administration, wealth transfer during the eight years of the Bush 2 presidency has been unprecedented in scope and audacity.
The so-called “mortgage crisis” represents some of the chickens coming home to roost. A good part of the consumption that was maintained by borrowing went into the housing market. The result was massively inflated prices.
The credit crisis which the mortgage crisis triggered is also an aspect of the reckoning. Fortunately for the ruling class, they had already used the two Bush, Clinton and Reagan Presidencies to make sure that the loss of wealth associated with the credit adjustment is born disproportionately by workers as opposed to rulers. True to form, however, the rulers’ greed caused them to overreach. Faced with the ascendancy of a new president whose allegiance to the ruling class was not fully known, they could not refrain from one more session at the public trough.
That feeding is known as the Bank Bailout. According to congressional investigators, the “preferred stock” which the government received from banks was worth only 69% of payments the banks received at the time transactions were finalized. This represents a transfer of $78 billion from taxpayers to rich bank owners. The market value of the preferred stock has since declined further.
That is where we are today.
Many Americans who voted for President Obama expect him to bring real change to America. These voters want economic as well as political justice. Early Obama Administration actions, however, are mixed in this regard. While he has indicated he will raise taxes on the rich, the President has ignored calls for a public audit of banks receiving bailout funds. Even the push for limits on “executive compensation” appears to be largely rhetorical. The bonus system, which encourages speculation by giving managers massive payouts when they take unwise risks, will apparently not be changed. The Obama Administration’s proposal for the continuing bailout is full of loopholes through which one could pilot a fleet of big new yachts.
If the voters had been less mesmerized by Barack Obama’s rhetoric they would have realized that the changes he favors are designed to buoy the existing economic system rather than to fundamentally reform it. The President subscribes to the proposition that these financial institutions are “too big to fail.” A real reformer would have concluded that institutions which are too big to fail need to be broken up.
Teddy Roosevelt harnessed the political tsunami of the Progressive Era to break up the trusts. The ruling class has worked tirelessly since then to build them back – albeit in new forms. We need TDR-type trust busting now while the ruling class is weakened and working Americans are impatient for change.
Will Barack Obama be our Teddy Roosevelt? So far the indications are that he will not.
FELICE PACE holds a BA in Economics from Yale University where observing the behavior of fellow student GW Bush was a major part of what motivated him to return to the working class and to work for radical political and economic reform.