Doug Henwood, _Taking the Measure of Rot

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04.11.10 About MR

Taking the Measure of Rotby Doug Henwood

I gave this talk at a very good conference, New Deal/No Deal, atBerkeley's Institute for Research on Labor and Employment , onOctober 29. The panel chair was Michael Reich, who was the mainorganizer of the conference along with Richard Walker of thegeography department. The dual themes were reflecting on the NewDeal of the 1930s and how we're not getting anything remotelycomparable 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 ofcredit, but credit packaged in unimaginably complex and obscureforms and a dispersion of responsibility that comes withsecuritization. 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 apeak of 100% in 2007. We know that lending standardsdeteriorated, to where the only requirement for getting a loan washaving a pulse -- and I bet you could even find some exceptions tothat rule. Downpayments became optional. The habit of packaging

mortgages into bonds and selling them to distant investors removedany incentive for the original lender to scrutinize the creditworthinessof borrowers -- and allowed trouble to proliferate around the worldwhen things went bad. My use of the word "bond" in the lastsentence is as quaint as downpayment became, because the finestminds of Wall Street assembled all manner of mortgages intocomplex derivatives that no one, even some of the people who soldthem, could understand. (Ok, "no one" is an exaggeration. I thinkthe actual count of people who understood these derivatives was inthe hundreds.) Investors had absolutely no idea what horrors werehidden in the structured products they bought, even though manycame with a Aaa rating. Either the rating agencies didn't know what

they were grading or didn't care -- the issuers of the dodgy securitieswere the one who were paying their fees; as one rater put it in afamous email, they'd rate things put together by cows. Of coursethey weren't put together by cows -- they were put together byinvestment 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 ofthe 1970s and the neoliberal prescription for fixing those problems.

The "problem" of the 1970s was, of course, stagflation. The stagpart is actually rather misleading; the expansion of the Carter

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expansion saw job growth four times as rapid as that of the GeorgeW. Bush expansion, and GDP growth half again as high. For thewhole decade, GDP growth in the 1970s was also half again as highas so far in the 2000s -- but such a comparison for employment isimpossible, since job growth in this decade is slightly negative, theonly such period in U.S. history for which you can say that. The gapbetween job and GDP growth is striking, and gives a hint of thecontrasting class dynamics of the two eras. By the way, therecovery so far, such as it is, is even more strikingly imbalanced,with profits up about 50% over the last year and wage and salaryincome up just 1%. A 3-to-1 ratio is average for the first year of arecovery; 50-to-1 is unprecedented and scandalous.

But the inflation part of the 1970s was important. The CPI maxedout at nearly 15% in 1980, and hit an 18% annualized rate in Marchof that year. Wartime inflations were common in U.S. history, butnever this chronic and deteriorating sort of thing.

But inflation wasn't just about rising prices -- it was also aboutsagging 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. Corporateprofitability, which had peaked at 11% in 1966, fell by two-thirds tounder 4% in 1980. With high inflation, holding bonds became alosing proposition; Treasury bonds were nicknamed certificates ofconfiscation. Stocks turned in one of their worst decades ever -- notas bad as the 1930s, but close.

But it wasn't just a matter of numerical indicators. The U.S. lost theVietnam War, and oil and other commodity exporters were jacking upprices, and the Third World was demanding redistribution on a globalscale. Though it's largely forgotten now, the working class wasrestive 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 mailbecause postal workerswent on a self-organized strike (they hadno union). The strike prompted the reorganization of the postalservice -- and, shocking to someone looking back at this in 2010,Nixon authorized postal workers to form unions and bargaincollectively. Later in the decade, we heard a lot about the blue-collarblues, and in 1978, the appropriately named country singer JohnnyPaycheck scored a hit with "Take This Job and Shove It."

Problem Solved!

Obviously something had to give, and what gave was the workingclass, domestically and internationally. Paul Volcker came into officedeclaring that the American standard of living had to decline, and hemade it happen by driving up interest rates towards 20% andcreating the deepest recession since the 1930s. (We just beat thatrecord, but it took 30 years!) To the one-sided class war, Reaganadded the ammunition of firing the air traffic controllers -- the veryopposite of what a Republican president had done with strikers onlya decade earlier -- and it was open season on organized labor.Wages and social spending were squeezed, and the deregulatoryagenda that began under Carter was intensified. Abroad, LatinAmerica was thrown into debt crisis, a crisis that for a while

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threatened to take down the global banking system -- but instead,the problem was solved through the now-familiar neoliberal agendaof privatization and opening up to cross-border trade and financialflows.

The program was very successful. The recession scared the hell outof the working class; people were glad to have a job, and wouldn'tdream of telling anyone to shove it. Business became essentiallyfree to do whatever the hell it wanted to. Profitabilityrecovered

strongly, rising throughout the 1980s and 1990s to a peak of over8% in 1997 -- not quite 1966 levels, but still more than twice thetrough of 15 years earlier. It took a while, but productivity finallyjoined in. In the military-political sphere, U.S. power was enhanced,and we kicked the Vietnam Syndrome too. Discipline problems werea thing of the past.

There were a few interruptions -- a stock market crash in 1987 thatlooked scary for a while, a long stagnation and jobless recovery inthe 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, butAlan Greenspan famously said that one needn't worry about bubblesbecause one can always repair the damage after the fact. He latelyseems chastened on that topic.

Fly in Ointment

But through those bubbles, busts, and recoveries, one constantpersisted. A system dependent on high levels of mass consumptionhas a hard time living with a prolonged wage squeeze. I mean thatnot 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. Massconsumption staves off what could be a serious legitimation crisis.For the last few decades, the economic and political contradictionhas been managed, if not resolved (not that it could ever be),through the liberal use of debt-- credit cards at first, and thenmortgages from the mid-1990s onward. The explosion in householdcredit -- from 65% of disposable income in 1983 to 135% at the2007 peak (most of it from mortgages, by the way) -- is what madethe booms and bubbles of the last three decades possible. This isespecially true of the 2001-2007 expansion, which featured theslowest employment and aggregate wage growth of any cycle sincenumbers the numbers begin in 1929. Without the massive cashing

in on appreciating home equity -- Americans withdrew several trilliondollars worth of home equity during the decade of boom, and spent alot of it -- consumption would have languished and the homeimprovement business would have gone under. And since we havealmost no domestic savings, much of the cash for that adventurecame from abroad, from places like the People's Bank of China.

But it seems impossible to go back to that old model of doing aneconomy (though we still haven't shaken the foreign borrowinghabit). The housing market is still busted, as are the consumer creditmarkets. Retail spending has picked up from the depths of 2008and 2009, but we're not going back to the old pace of spending

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anytime soon. Interesting class point: the pickup in retail spendingover the last year has been led by the so-called luxury sector, withdiscounters in second place. That is, the upper orders are doingwell, everyone else is trading down, and the middle is looking ratherhollow. And despite being flush with cash, corporations are notinvesting or hiring; the job market is very weak, and a minor revivalin capital spending looks to be sputtering out.

Looking Ahead

What next? While the encouragement of clean energy and othergreen technologies would seem to hold great promise for generatingfresh growth over the longer term, the political and financial systemsseem 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 justcancelled his state's participation in a rail tunnel across the Hudson,a project that would not only create jobs in itself, but would havelong-term productivity payoffs. But he says the state can't afford it.He's not alone. A number of Republican candidates are runningagainst the modest high-speed railprojects funded by last year's

stimulus bill. I don't think it's only a budgetary thing -- I suspect thatthey also think that trains are for pansies, and real men get around inEscalades.

It's a historical fact that many major industries in the U.S. got theirstart through public subsidies, from the railroads in the 19th centurythrough the computer and pharmaceutical industries in the 20th.There would be no Internet without the Pentagon. But today'spolitical elite will hear little of this. There was a $5 billion fund forclean energy R&D in the StimPak, but it was raided to fund the Cashfor Clunkers program, a program with little economic and even lessenvironmental payoff. My good friend Christian Parentihas written

about how even something as mundane as a concerted publicprocurement program -- the federal government buying lots of cleanvehicles and such -- could make a major difference in kickstarting anew industrial revolution, but efforts so far have been rather feeble.

Meanwhile, the Chinese have been building high-speed rail likecrazy, and are surging forward in solar and other green technologies.In a piece on the Chinese rail effort a few weeks ago, the FinancialTimes led with a vignette of Arnold Schwarzenegger shopping forequipment in Shanghai, as the paper put it, "looking for trains,technology and funding for the planned high-speed upgrade to hisstate'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 witha Tea Party-stockbroker typerecently who was talking up howChina is now more capitalist than we are. I don't want to say thatChina's still state-heavy system is socialist exactly, but it is a lotmore 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 mycatalog of our economic woes, I forgot to emphasize the fact that thebourgeoisie hardly seems to be suffering. At least until recently,productivity has been rising strongly -- not because of a rise in

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high-tech investment, as it was in the late 1990s, but becauseemployers are working their employees harder and paying themless, delivering a nice fattening of profits. A friend who works for ahedge fund told me the other day that 9% unemployment looks to begood for the stock market -- stay long Kapital [spelling in original]and you should do OK, he advised. Of course, not all of us -- thosewith only our labor power to sell -- can stay long Kapital. But, as youmay have noticed, this is not France. The unemployed do not burncars, the already employed do not fight austerity, and high schoolstudentsdo not go on strike to defend old-age pensions (and stageenchanting kiss-insin the process). You can draw lots of parallelsbetween our recent bubble and the Gilded Age of the 19th century,but at least the First Gilded Age was spiced up by troublesome ruralpopulists and urban socialists.

Questions. . .

Michael Reich asked me to conclude with some questions that couldserve as topics for discussion and future research. I'm happy topresent these as questions, since I don't really have good answersfor them. First, am I missing something in seeing little prospect for

serious economic recovery? I've long lamented the left habit ofseeing no way out of a future of endless stagnation. Capitalism is aresourceful thing, and to paraphrase J.P. Morgan, it's long been amistake to sell short the United States of America. Mainstreamtypes love to point to our wondrous flexibility (a nicer way ofdescribing what I earlier characterized as volatility and insecurity)and innovation. But as the U.S. cuts back on R&D spending andpublic investment and becomes more and more hostile toimmigrants, is our time running out? Even the VCs of Sand HillRoad are starting to look more to Asia than their backyard. But itwas also common to proclaim the end of the American century backin the 1970s -- and that looked premature. Is there some embryo

lurking somewhere that will develop into something dynamic, or havewe, as George Soros almost said a few years ago before the Councilon Foreign Relations before stopping himself, shot our wad?

And what about our ruling class? I said a little while ago that it looksincapable of thinking beyond the next quarter. I'd been thinking ofwriting a book on our ruling class, some sort of hybrid of C. WrightMills and Vanity Fair, but I set it aside for personal reasons. But I'dlike to turn back to it soon. My working hypothesis was that nothingcoherent has replaced the old northeastern WASP elite as a rulingstratum. Though it was often greedy and brutal, it also had a disdainfor 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 therelationship. It's all about who can make the most money mostquickly, and the long term can take care of itself.

Can a complex and hierarchical society really be run by such adepraved social formation? Can the U.S. elite reconstitute itself as ithas in the past? For a while, I thought Obama might represent somesort of rationalization of the system, some efforts of repair after thedecadence of the Bush years, but it's not turning out that way.

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Neither he nor his paymasters seem interested in or capable ofsuch a project. This is another view of our economic problem: I don'tthink an elite can stay rich and powerful forever while their society'sfoundations rot underneath it. Am I right in this? Or can theoligarchy barrel ahead while everything around them goes to hell?Has it become so globalized that it doesn't care what happens athome? Will our billionaires take crash courses in Chinese andKannada and abandon Manhattan and Greenwich for Shanghai andBangalore?

I hope there's someone out there who can answer these questions.

Doug Henwood, editor of Left Business Observer, is the author ofWall Street: How It Works and for Whom andAf ter the NewEconomy. The text above was first published in LBO Newson 31October 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, ChundingLi, and John Whalley, "Foreign Affil iate Sales and theMeasurement of Trade in Goods and Services" (Vox, 8 October2010).

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