Seeds of a Catastrophic Depression — new version
I posted an earlier version of this. Here is the latest. Any comments would be appreciated.
The Great Capitalist Restoration: Seeds of a Catastrophic Depression
The best lack all convictions, while the worst
Are full of passionate intensity.
The Second Coming ‑‑ W. B. Yeats
For the last 3 1/2 decades a tiny minority of people has captured the lion’s share of the fruits of economic growth in the United States. A tiny group of wealthy people and powerful corporations are benefitting mightily, while the middle class is disappearing and much of the rest of society is rapidly falling behind, producing a level of inequality that has not been seen since the eve of the Great Depression. Business and political leaders celebrate this new state of affairs, pretending the benefits are certain to trickle down soon to the rest of society.
I will not belabor the obvious injustices of inequality. Instead, I intend to show how the current state of affairs is setting the stage for a catastrophic depression. Leaders in the world of business and government, as well as professional economists, seem oblivious to the dangers ahead. The extreme inequities in society breed a hubris that prevents them from even considering the possibility that they are contributing to a catastrophe.
Unless strong actions are taken, the calamity that currently afflicts the poor is certain to trickle up, engulfing even the very rich. I do not mean that the very rich will become destitute; only that the vast amount of extra wealth and income that they now claim for themselves will not be worth the losses that they will eventually experience.
Despite the dangers ahead, the United States still possesses the most powerful economy the world has ever known. The unique conditions that once made the U.S. economy so effective are already beginning to unravel. People in power commonly realize that the U.S. economy has fallen considerably short of its promise. In terms of traditional measures, such as Gross Domestic Product, the economy has modestly progressed, but the rate of growth is disappointing at best, especially considering the proliferation of new technologies. The quality of life for the majority of society has deteriorated.
In many respects, the gross inequities of United States society are coming to resemble some of the more impoverished countries in the world. Amidst splendid opulence, we find declining industries, unemployment, and even squalor. With so much potential, providing a decent standard of living for everybody should be a simple matter.
Despite these unpleasant symptoms, the deeper problems are not yet obvious. The dangers that I will explore do not appear in the media ‑‑ not even the business press.
This book identifies the problem as what President Eisenhower called the “disastrous rise of misplaced power.” At the time, Eisenhower was referring to the military‑industrial complex. Today the pathology has advanced much further. The complex now includes a vast network of corporate power, political parties, well‑financed think tanks, and religious movements. This network has also enjoyed the support of much of the media, and even a good part of academia. These parties did not have identical goals in mind, but they all shared a distaste for the socio‑political climate of the late 1960s. The result was a conservative revolution.
The US had already been on a steady path to the right. Indeed, since the election of Franklin Roosevelt in 1932, every Democratic administration with the exception of Lyndon Johnson’s has been more conservative ‑‑ often far more conservative ‑‑ than the previous Democratic administration. Similarly, every elected Republican administration, with the single exception of George Herbert Walker Bush’s, has been more conservative than the previous Republican administration.
Given this relentless drift to the right, the policies of Richard Nixon now appear to the left of those of Bill Clinton. Yet by the time Nixon took office, business was distraught. Many business leaders at the time were under the impression that socialism would soon triumph in the United States. The first part of the book will explain this paradox.
In the early 1970s, business successfully launched an aggressive campaign to take a firmer hold on the levers of power. Instead of the gradual drift toward more conservative economic policies, revolutionary changes became the order of the day. Within a couple of decades, a right‑wing revolution had swept aside much of the New Deal.
Although these right‑wing revolutionaries professed conservative ideals, including a more modest role for the state, their willingness to use state power was hardly modest, except insofar as the state might otherwise inconvenience the interests of the corporations and the super rich. Backed up by the strict dogma of economic theory, conservatives categorically promised markets would cure all social ills.
Markets, however, pay attention only to commercial activities, ignoring considerations such as quality of life or environmental degradation. Markets also disempower people from making political choices. Finally, left to their own devices, markets unleash destructive speculative forces, which amplify the natural instability of markets.
Rules and regulations provide a counterweight to market forces, providing a means to keep the harmful effects of markets in check. By this standard, the United States certainly has the most market‑friendly economy in the world. Rules and regulations are not necessarily positive. They can also be used to shore up the corporate power to the detriment of society. The right‑wing revolution has gone a long way toward dismantling the protective regulatory layer, while hardening the pro‑corporate parts.
This reformulation of the ground rules of the system has given birth to a grotesque form of crony capitalism, which has been metastasizing for many decades. Under this crony capitalism, markets lack the capacity to discipline the most powerful players, supposedly one of the greatest benefits of capitalism. A wave of corporate manipulation and government favoritism will eventually wreak havoc on the economy.
This book explains the evolution of this system. It will also analyze the deeper but often less obvious consequences of this deformed economy. I will also show the inevitability of a disaster so extreme that it will devastate even the most affluent who are benefiting the most from the current economy. Finally, I will describe why economists are unable to come to grips with this dangerous slide into disaster.
The first chapter describes how the conservative revolution allowed business to regain much of the power it held almost a century ago by remaking virtually every institution in the country. It details some of the specific victories of this revolution, including unprecedented tax cuts, massive privatization, and the reshaping of the legal system.
In the second chapter, I turn to the economic crisis in the late 1960s that pushed business to go on the offensive. Economists refer to the period following World War II as the “Golden Age” because conditions at the time were so exceptional. During this period, both business and the majority of the economics profession had been under the impression that with proper management, including government intervention in the economy, the good times could last forever.
Unfortunately, this faith was groundless. One of the most important lessons of this chapter is how business, political, and economic leaders were caught unaware of the inevitable unraveling of the Golden Age. No market economy, even with intelligent management, has ever achieved the kind of stability people came to expect during the Golden Age. Instability, even if punctuated by periods of calm, is a natural part of capitalism.
As the Golden Age ended, profits shrunk and business first became despondent. The third chapter looks at how business launched a furious campaign to reshape the social and economic structure of the United States in an effort to restore corporate power to its pre‑Depression level.
This victory was even more impressive because the right wing managed to induce many people to support an agenda that was sure to undermine their own economic welfare. The right succeeded in this effort in large part because the deteriorating economic conditions left many working‑class people confused and angry. Taking advantage of this mood, the right wing electoral machine caused many people to lose sight of their own economic interests by effectively railing about the contentious social conditions of the 1960s.
The fourth chapter looks at the state of class warfare during the Nixon administration. By the time Richard Nixon came to office, everything seemed aligned to allow conservatives to take political power. The Democrats had discredited themselves with an unpopular war and had done little to address the real needs of their political base.
Building upon the grass roots movement begun in the wake of Barry Goldwater’s defeat in 1964, the Nixon administration launched a frontal attack on the New Deal coalition by appealing to the culture war of the day. Now the rich and powerful appeared poised to win support for their agenda.
These divisive machinations seemed to have cleared the way for an economic revolution, except a problem remained. Although part of the working class was antagonized by the upheavals of the 1960s, a growing anti‑war movement and an energized civil rights movement presented serious challenges. The emergence of the environmental movement with the broad sympathy of much of the middle class complicated matters even more. Nixon moved to placate the environmental movement to appear to be more inclusive. Within this contentious political climate, he did not dare to carry out a broad offensive against labor.
Within this context, class warfare took a decisive turn. The fifth chapter tells how a small group of business interests carefully engineered a conservative takeover of the main organs of power in the United States beginning in the 1970s. Using a combination of well‑financed think tanks, racist demagoguery, and sophisticated political maneuvering, business countered the modest progressive successes of the 1960s. These institutions worked to change the political climate of the country by influencing the media. Even more importantly, business used its newfound powers to counter a falling rate of profit by turning back many of the reforms dating back to the New Deal.
In the sixth chapter, I concentrate on how the right‑wing revolution sets in motion the destructive forces that are responsible for many of the difficulties that the U.S. economy already faces and why the future damage will be far more extreme. I will also explain why not just ordinary working‑class people will suffer from its harmful consequences, but even the intended beneficiaries of the right‑wing revolution ‑‑ business and the very wealthy ‑‑ will pay a price.
In some cases, the costs of the right‑wing revolution are already relatively obvious. For example, the obscene military budget crowds out important social and economic programs while military adventurism promises to make even greater demands on the economy in the future. In other cases, such as the undermining of the educational system, the effect is less immediate, but just as devastating.
The right‑wing revolutionaries express vehement hostility toward the government. Indeed, the ability of the government to regulate some of the worst business abuses is now practically non‑existent. Today, public agencies are less capable of protecting the environment, providing education, and promoting science and technology ‑‑ all of which are essential ingredients of a vibrant economy. All the while, business shamelessly wallows in generous government subsidies and other forms of favoritism.
In the seventh and final chapter, I discuss the impotence of the economics profession. This chapter recounts the evolution of the economics profession in the United States, including the long‑standing suppression of critical voices. Despite intense and even acrimonious debate about minor issues, economics evolved into a narrow orthodoxy. I discuss how the largely ideological nature of modern economics has more or less led the discipline into a dead end, leaving it incapable of dealing with the emerging economic catastrophe.