I don’t mean Karl, though of course we here in the land of the free and the home of the brave could stand to be a little less doctrinaire in our patriotic disdain for the sage of the working class. No, I mean Groucho, that esteemed philosopher who masqueraded as a comic actor in the early American film industry.
As ever, his keen wit is vital to understanding the events of the day. For instance, consider his famous utterance, widely attributed to him but actually first said by Sir Ernest Benn, an early 20th century British libertarian, that politics is “the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.”
If one sentence could better sum up our collective response to the economic fallout that has buried most Americans since the housing market collapse in 2008, then its author should receive a Pulitzer. For that is exactly what the U.S. and European response to the crisis has amounted to, and the results have been a veritable catastrophe for millions around the globe as they suffer the consequences of prolonged mass unemployment, increasing economic inequality and the dimming of hope for an entire of generation of young people across the Western world. How did things, that had been going so right for so long, end up so miserably?
The reasons for the misery
In answer to that, we should first understand just what exactly happened in 2008. What our economies experienced was a classic bank run cum financial crisis that had come about as a result of the collapse of the U.S. housing market. When the houses stopped flipping, this created a run on banks and Wall Street financial institutions that had invested deeply in the buying and selling of mortgage-backed securities, and all this came when a massive bubble in housing prices – both here in the U.S. and in Europe – was punctured after cash-strapped consumers, unable to sustain their orgy of spending on housing and other goods in the face of rising prices for nearly everything, quit buying.
America’s bubble economy, in turn, was facilitated prior to the collapse by an easing of credit conditions by U.S. and foreign central banks and the globalization of world financial markets – which led, like all roads to Rome, to investors pumping money into U.S. markets. Like gamblers flocking to the casino with the loosest slots, people from around the world with money to spare parked it in U.S. assets – from homes to bonds to shares – in the hopes of making a greater return than they could elsewhere. Money, therefore, flooded in from everywhere and the American economy effectively became little different from the Las Vegas strip.
What didn’t flow in were jobs of the type most Americans depend upon for entry into the middle class. Instead, these jobs – a vast stretch of middle-income, middle-skill jobs ranging from assembly line worker to network analyst – began to disappear as the American labor market took on an hourglass shape – many low-paying, low-skill jobs and many high-paying, high-skill jobs, but relatively few, and getting fewer by the day, median-income jobs of the type that had built and sustained the U.S. postwar economy. This collapse in work opportunities for huge swathes of the American population – now extending into the core of the White middle-class – is the most important economic trend in the U.S. today and it is not getting better.
Indeed, even when economic recovery in the wake of the 2008 disaster began – the so-called “green shoots” that the Obama administration touted during the President’s first term – the recovery in jobs was nearly wholly lacking. This poor recovery of the labor market, however, is not something limited to this White House.
In 2001, after the recession which took hold after the dotcom crash, joblessness was also a prominent factor in the post-recession, U.S. economic recovery. Indeed, even during the recovery after the recession of the early 1990s, recovery in employment was sluggish by historical standards. The recoveries after the last three U.S. recessions, therefore, were atypical in that a return to full employment and normal patterns of job creation was weak. The question is why.
A very strong candidate for an answer to this mystery is the degree to which our economy has become financialized and, indeed, dominated by the interests of our wealthy elite. Starting in the late 1970s, when finance was caged by regulation and globalization was just a glimmer in the eyes of capitalist reformers, the primary problem bedeviling the U.S. economy was inflation which, in turn, led to sky-high interest rates and weak economic growth.
In many respects, the solution put in place to combat this problem was the correct one – an emphasis on expanding trade, tight monetary policy and a loosening up of economic regulation so as to allow the market to operate more efficiently.
Supply-side economics
The supply-side solution, in other words, was at least partly the answer, and it was instituted here in the U.S. by Reagan conservatives and by Thatcherites in Britain. What should be remembered, however, was how controversial this was at the time and how much of the conservative economic program was actually supported by lucky coincidence in the form of technological innovation and a de facto stealth Keynesianism that emphasized tax cuts, massive military spending, and large, continuing government deficits. (Sound familiar?)
Thus, even though supply-siders took total credit for economic growth during the 1980s, the reality was far more complex and the actual record rather mixed. Politically, however, the seeming success of the supply-side program upended the previous consensus that focused on pure Keynesian demand management and instituted a quiet revolution amongst those constituting the intellectual leadership of professional economics.
This changing of the minds in the ranks of elite economists did not occur in a vacuum. Wall Street and other corporate interests took note and used the new arguments and prestige of the transformed profession to push their low-tax, regulation-gutting, government-shrinking, pro-wealthy agenda.
The new consensus that came out of this unholy union between Wall Street and academia, which applied both at home and abroad once the Cold War was over, was a form of free-market fundamentalism that took it as a matter of faith that government intervention was bad and that markets were naturally efficient and democratic. The interests of business, but especially finance, took on vastly increased importance under this new intellectual regime, and the U.S. government became systematically hobbled in its response to changing economic conditions – mostly imposed from above – that came to increasingly hurt the livelihood of average Americans as a result.
The fruit of this hobbling and hollowing out has not been pretty. The jobless recoveries in the wake of the 2008, 2001 and 1992 recessions are merely one symptom of what has happened and reflect the fact that since the late 1970s – or about the time the new supply-side consensus began to take root – U.S. median income has stagnated. Think about that – for the past 30 years the U.S. economy has chugged merrily away producing more and more wealth, but very little of that has actually trickled down to those residing in the mid and lower levels of the economic pyramid. The 2008 bust, therefore, was completely predictable.
In hindsight, it was the end result of a 30-year project that siphoned more and more wealth out of the hands of average Americans and into the hands of monied interests. As a result, Americans more or less ran out of cash and spending power in 2001, but were nonetheless kept afloat by easy monetary conditions wherein Americans collectively used housing as a giant credit card or get-rich-quick scheme that had the added benefit of enriching Wall Street even more – until it didn’t.
In an alternative reality where neo-liberalism was not the hegemonic economic idea of the day, policy that focused on infrastructure investment, job training and education, research and development and other long-term programs aimed at using government power to make the U.S. economy more productive, competitive and beneficial for average people could have been envisioned and implemented.
Such a program, however, was dead on arrival in the real world where high finance, not voters, calls the shots. It was discarded out of hand because the additional tax burdens it would have represented – not the mention the intellectual challenge to the new, laissez-faire status quo – were deemed unacceptable.
None other than Clinton adviser and Democratic strategist James Carville summed up the new regime way back in 1993 when he famously quipped, “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.” This fear is as prevalent today, especially in Europe where the European debt crisis has destroyed an entire generation, as it was 20 years ago.
Instead, facilitated by a political class now totally in thrall to the ideas of the market fundamentalists, policies were put into effect that moved more and more of U.S. wealth and income into the hands of those at the very top of our society, in the hopes that, like sacrifices made to stone idols, prosperity would come.
What we got instead are levels of inequality not seen since the beginning of the 20th century and a collapse in U.S. economic mobility. Like a giant vacuum, government policy has reinforced a system wherein average Americans have been fleeced by our corporate elites and the ultra-wealthy – people who see themselves not as American so much as global or multinational – part of a larger network of transnational capitalists who view things like nationality as a quaint relic of a bygone era. What’s more, our political and mainstream media system has voiced not one single objection.
Demonstration of just how dominated by transnational capital our political class actually is was on vivid display in Washington, D.C., this past week when Congress speedily put to a vote and President Obama signed into law measures to restore funding to the Federal Aviation Administration so as to avoid flight delays – something intolerable to the country and globe-trotting business travelers who crisscross our skies in search of maximized profits. Left in the lurch was federal support for program like Meals on Wheels, Head Start, and Medicare payments for chemotherapy. Also telling, a hearing held on Capitol Hill on the plight of the long-term unemployed was attended by just four (4!) members of Congress – dramatic proof of a growing body of empirical research that shows that when our elected representatives vote, they ignore altogether the concerns of their working and middle-class constituents.
Neo-liberal house of cards
The tragedy of all this is that even as our political institutions remains totally corrupted by the wealthy, much of the intellectual rationale for neo-liberal economic policy and government austerity measures – always a house of cards to begin with – are unraveling. A widely-cited paper by two pre-eminent economists that argued, for instance, that government indebtedness would greatly inhibit economic growth and recovery was shown to be so shoddily conducted that an easily corrected Excel spreadsheet error, once found, completely invalidated their conclusions.
Similar critical research has found that financial panics and crises, tamed during the post-war golden years, are simply more prevalent today under the regime of unregulated financial markets than they were between 1945 and the late 1970s. Thirty years of middle-class stagnation, like jobless recoveries, are still more evidence that the empirical case for neo-liberal economics is, like that for climate-science denial, increasingly on thin ice.
As an economic and intellectual project, neo-liberalism has simply failed to deliver. It has, to paraphrase Groucho, diagnosed trouble in all the wrong places, everywhere attempted to fix it through inappropriate or counterproductive solutions, and wreaked havoc every place where it has been tried. As a political project, however, it is as strong as ever – a fact predicted by that other Marx, Karl – who theorized that the intellectual and political institutions that govern us and which ultimately shape our world views, must, in the end, reflect the interests and desires of the economic elite. Groucho, though, may have said it better in “Duck Soup”:
“Remember, while you’re out there risking life and limb … we’ll be in here thinking what a sucker you are.”