The Political Economy of the Trapped

Andrews: After Such Financial Crises, What?

YEAR ONE of the Obama era has been a disappointment for left-liberals. We are still impressed by the fact that our nation elected an elegant, intelligent, hardworking, and earnest young black man to lead us in these troubled times. We still swoon to his message of hope and justice—to his belief that we can use public power to right the wrongs of the past and prevent future catastrophes. But we are angry with Obama for being, well, a politician. We are upset by the many compromises he has had to make as he tries to help our country recover from a monumental failure of global finance, reform our broken health insurance system, and end two ill-conceived wars against terrorism.

Our disappointment is a sign of the great hopes we vested in him. But it is also a sign that we are still not prepared to see that our current problems cannot be addressed by one man and in one presidential term and by the American political economy in its current form. The American model of hyper-capitalism—with its abandonment of any ideas of the common good and social justice—has not just collapsed but has damaged our capacity for economic and political renewal. In this way, Obama’s election was not a new “New Deal moment” but the opening act in a battle to rebuild our nation before it sinks into long-term decline.

These words are written in the aftermath of the president’s success in pushing a conservative health insurance reform bill through Congress. A powerful sign of our current woes is the spectacle of a mildly liberal president and Democratic majority celebrating the passage of an extremely limited health insurance reform measure over the objections of a hard right libertarian opposition. Oh, how our standards have fallen.

THE MOST important economic fact of Obama’s first year—one that has frozen the wheels of government and that cannot be hidden by the clouds of populist anger—is that the American model of financial capitalism has utterly failed. Our high and sustained joblessness, our deepening poverty, and the collapse of state and local government finances are the result of a thirty-year experiment in radical free-market economics. We need to correct the failures of this experiment. But the commercial and investment banks and the insurance companies still have a significant amount of power in Washington and will do everything they can to prevent Obama from reconstructing American capitalism.

The so-called Tea Party populism of 2010, which swept an embarrassing right-wing state senator from Massachusetts into Edward Kennedy’s seat, is an additional sign that this crisis goes beyond the reach of ordinary politics. Anger over the bailout of financial institutions has overturned the electoral landscape and a predictably ungrateful financial elite has performed the brilliant feat of harnessing middle class rage into a potent weapon to block effective economic reform. The redirection of this anger—toward Democrats and away from capitalism—is dangerous because its right-wing beneficiaries do not have an alternative means to revive employment and the economy, and because they do not care one whit about the well-being of angry and, frankly, economically obsolete white working people.

The Tea Party itself is a curious sign of our society’s economic paralysis, for its ranks are comprised of white working and middle class folks who have been repeatedly used and then abandoned by successive conservative governments. The rhetorical convergence of the Tea Party and corporate capital masks a more fundamental fact: that white working class fears have become a weapon that business is now wielding against Obama but may ultimately wield against the Tea Party’s own.

So is Obama to blame for this mess? Yes and no. The Administration’s insistence on pursuing a middle ground between a left-liberal program of economic reconstruction and the immediate rescue of existing economic interests and institutions has been a perilous trap that has rendered fundamental reform impossible. The stimulus program was much too small, and the fear of public debt has both prevented the government from pursuing a workable “borrow-and-spend” plan and created an enraged public that has rightly interpreted the rescue of the banks as the worst sort of lemon socialism.

In addition, the Obama’s program is “conservative” in the worst way possible: it has helped to conserve current economic and political arrangements by redistributing wealth toward economically irresponsible and incompetent financial elites at the expense of ordinary people. It has sought (yet unsurprisingly failed) to find the “center” of American economic policy—that mythical place where a rational and responsible capitalist leadership joins forces with an equally reasonable government and a fragmented but still living labor movement in order to craft a new social contract that stabilizes markets and enhances the economic security of ordinary people.

But the events of the past year have provided irrefutable evidence that the leaders of American business and finance have absolutely no loyalty to the well being of the American people. There is no “center” to American economic policymaking, no middle place between the demands of efficiency and growth and the claims of fairness, social justice, and economic security.

However, the failure of the Obama government to craft a strong program of economic reconstruction is a symptom of a much deeper problem. The absence of responsible business leadership, combined with the weakened state of the labor movement, has stymied any prospect of defining the common good. Without this definition, no program of left-liberal reform is possible. has stymied any prospect of defining the common good. Without this definition, no program of left-liberal reform is possible. The Obama Administration may hope it can broker a new social contract across racial and class lines, and it also hopes to bridge the divide between financial and non-financial commerce in a way that both enhances productivity and develops more effective forms of redistribution. But even this project has been too much for the banking and insurance sectors to bear—so much so that their brilliant recruitment of white middle class rage has crippled any significant program of economic reform for the foreseeable future.

It is not that American finance has an alternative program of economic reform that enhances economic performance in ways that rely less on the public sector or that it has renewed its commitment to the discipline of markets. Instead, the American business class—particularly the leadership of investment banking and insurance sectors—will do what it must to maintain control of the mechanisms for allocating capital and pricing risk, even if that means permanently crippling the capacity of the American people to reform the economy in the name of fairness and security.

IT IS for this reason that we must be clear about the consequences of the radical economic experiment initiated by the Reagan Administration, pursued under Clinton and Bush, and endorsed by almost all sectors of political and intellectual opinion, most disgracefully by the economics profession (with some notable exceptions including but not limited to Stiglitz, Krugman, James Galbraith, and Dean Baker). Not only did the experiment fail, but it emboldened an already savage monster—finance—that now has the power and the will to thwart necessary economic change.

Begun under the Reagan Administration, and pursued with varying degrees of enthusiasm by all sectors of American political and business leadership since then, the free market experiment was based on the belief that lightly regulated and lightly taxed capital markets were essential to the long-term prosperity of capitalist societies. This belief—based more on free market zeal than on economic theory or evidence—assigned commercial and investment banks, insurance companies, hedge funds, and an emerging elite of financial mathematicians, computer programmers, and risk theorists the task of allocating capital between people and businesses.

In addition, the marketplace was assigned the perilous task of regulating itself—of somehow using its presumed capacity to transform risky ventures into safe bets. Of course, this mechanism—based as it is on profit—means that people and ventures whose risk outweigh any likely return (the very sick poor, for example, or regions like Florida facing the risks caused by hurricanes) were left to either fend for themselves or seek government help. But this new risk society was also seen as an ultimately flawed device for enhancing the well-being of the same downwardly mobile masses to buy homes, televisions, and cars that they could not otherwise afford.

It is not, however, enough to say that the incredible hubris and rank stupidity of financial deregulation has been revealed by the present crisis as a fraud and a permanent danger. There is also the deeper problem that our national experiment with radical free-market economics has created a regime of “bourgeois anarchism,” in Eric Hobsbawm’s telling phrase. But the debacle we have just passed through is due not just to insufficient regulation, or corruption, or an embarrassing degree of incompetence, though all of these things were involved; it is also because the American right constructed an economic regime based on the idea that markets could somehow perfectly price and handle risks without government oversight.

There is also another serious problem: millions of now bankrupt families do not understand that they are going to be in straightened circumstances for a very long time. While the Obama stimulus program was much too small, and its bailout of the banks both ridiculous and fatally timid, it is nonetheless true that the United States is broke and must be more fiscally conservative than it has been in the past. We can afford to borrow to pursue a program of old-fashioned Keynesian deficit spending, but only if we borrow to rebuild our roads, bridges, sewer, transport, power, educational, health care systems (not just health insurance systems), and other systems to make our society competent again.

In addition to this borrowing, we must at the same time permanently cripple finance, thereby ending the bond markets’ de facto control of government policy. In truth, any big deficit program to lift the system out of the current slump would have to be followed by a program of not just deficit reduction but actual long-term surpluses. The United States would need to reverse the fiscal policy of the last thirty years not only by boosting tax rates to pay for rebuilding our society but also by creating a more progressive system of taxation that would force those who benefitted most from the debt finance splurge to pay the costs.

This program of economic reconstruction would also have to tell the American people a very hard truth: the wages of the working majority in this country are stagnant or declining because our skills are obsolete, our school are awful, our best minds are obsessed with making money instead of finding new ways to make industries work better and create permanent, enduring jobs. Our business culture is mesmerized by the prospect of short-term reward at the cost of long-term gain. Worst of all, our commercial republic is run by a business elite that has no loyalty to the United States and no longer sees itself as a essential agent of the common good.

Our financial class is fighting against the Obama government not so much because that government is willing or able to pursue a genuine program of left-liberal reconstruction through redistribution and development, but because this program would spell the end of finance’s control of American politics. Faced with political extinction, Wall Street—along with the Tea Party movement—is using all of its weapons to bring the Obama era to a rapid close. This campaign is likely to succeed enough to cripple needed radical reforms–the limited health insurance reform is a frustrating example of this dynamic–and we will then face another round of popular discontent as an ever-more confused, disgruntled, and increasingly impoverished middle class descends from the remembered heights glimpsed just before the debt crisis.

One can imagine a time, perhaps soon, when middle- and working-class Americans become so angry that they abandon the stale menu of liberals and conservatives for other parties or party factions. But there is still hope for a different future, one in which a strong left-liberal party and movement help establish a place for itself by fighting for economic and social justice and slowly building its base. This imagined left-liberal alternative, however, will not emerge from the Democratic Party as it is today, and I suspect that we will remember the administration of Barack Obama as the painful beginning of a better America.

Marcellus Andrews teaches economics at Barnard College, Columbia University.

Photo: A “Project Funded by The American Recovery and Reinvestment Act” (The Navigators/ Wikimedia Commons/ Creative Commons 3.0)