My Talk With Bob Reich: Only Democrats Can Save Globalization from Republican-Generated Backlash

Robert Reich was U.S. secretary of labor under President Bill Clinton. His most recent book is Supercapitalism. He spoke with me about the economic crisis.

Nathan Gardels: Now FNMA (the Federal National Mortgage Association) -- one of the pillars of the post-depression American economic order -- is in trouble. What does this say about the depth of the U.S. economic crisis resulting from the housing bubble?

Robert Reich: The crisis is worse than most economists assumed, and it all goes back to the early years of this decade when real interest rates were below zero. When real interest rates are less than zero, it's crazy not to borrow, and that's what everyone did -- not only homeowners getting mortgages but every financial institution and millions of investors.

Gardels: Nobel laureate for economics Ed Phelps says the current financial crisis has given capitalism a "black eye." It turns out that the neo-liberal model that says capitalism is self-correcting is wrong. Is the U.S. headed back toward New Deal-type regulation after the long embrace of ever-freer markets?

Reich: Capitalism is not self-correcting. It has never been. Capitalism has always required regulation in order to ensure against fraud and excessive speculation, especially when money is so cheap. Alan Greenspan, the former Fed chief, allowed the current crisis to happen because he did, indeed, believe that capitalism was self-correcting.

George W. Bush and others in the Bush administration have also assumed, wrongly, that regulation is unnecessary. Time and again, we've learned that markets don't work without regulation.

At bottom, markets depend on trust. But trust doesn't happen automatically, simply because individual players in the market often can get away with behavior that breeds distrust. They don't bear the full cost of imposing fraud or excessive speculation on others. The cost is spread over all players. This is what we're now witnessing. Because of the excesses of the last few years, lenders and investors no longer trust that the people with whom they're dealing will fulfill their commitments. As a result, credit is drying up.

Gardels: No matter how much Barack Obama hews to the center in the campaign, won't he be forced by social circumstances, if president, to pursue government intervention of a kind unseen (in terms of re-regulation, if not new institutions) since the Great Depression? What kind of intervention do you deem necessary?

Reich: Obama is a pragmatist. He'll do what's necessary, and no more. We need smart regulation of financial markets, including mortgages and consumer credit, and many such regulations will need to be international because financial markets are now global.

Gardels: Obamania has not hit Asia, which tends to be more focused on interests than values, as much as it has Europe. In general, Japan, China and the rest prefer Republicans and free trade. They fear protectionism from Democrats.

Reich: They're wrong to fear protectionism. Democrats have led the way to internationalism and global trade -- starting with the Kennedy Round in the 1960s and continuing through NAFTA and China's entry into the World Trade Organization under Clinton.

Backlashes against globalism occur under Republicans, as they did under Herbert Hoover in the early 1930s and now under George W. Bush. The reason is simple. America's huge middle class doesn't do as well under Republicans. Their jobs are more threatened. As a result, they fear trade and other global commitments.

Under Democratic administrations, on the other hand, the middle class does better -- their wages rise, their jobs are more stable. As a result, they're more willing to embrace the advantages of trade and globalization. I expect the same pattern to hold under an Obama administration.

Universal health care, relief for those who can't pay their mortgages or can't afford college tuition, investments in infrastructure and in education -- all these, which Obama will champion, make Americans more willing to accept the changes that globalization inevitably brings.

Without these sources of security, Americans fear change. Right now, the largest percentage of Americans since the 1960s are against further trade-opening agreements. Why? Largely because they've done so badly under George W. Bush. The median wage, adjusted for inflation, is lower than it was when Bush came to office.

Comments

[bgregs]

But we must also be willing to admit that so-called free trade doesn't work between two economies which don't match. For example, a country which has a strong middle class and a high cost of living will lose out in a free trade agreement to a country with no middle class and a very low cost of living.

[DrPaulProteus]

What??? Nuance? Subtleties?
You terrorist!

[Herrington]

Well the bottom line is simple isn't it? Trade that benefits the public, increases employment, productivity or standard of living, is good trade. Trade that benefits the bottom line of multinationals, e.g. stock valuations of a corporation to the detriment of the broader public concern is bad trade. On this basis the arguments are made. Trickle Down theory was the particular peice of voodoo that no sensible government representative foresaw.

Too bad. Now we are in a hole. I suggest we stop digging.

[bgregs]

That makes WAAAYYYYY too much sense!

[Chavez08]

Trickle down theory was intended only as empty rhetoric, lip service to pacify a working-class that was in the cross-hairs of Conservative snipers.

Since the 60s, so-called Conservatives were bitching about the economic and political power of the middle-class leading to societal moral corruption. They invoked a plan to strip the middle-class of wealth, hence power and this undeclared war on the middle-class has been their main priority. Iraq, 9/11 were thrown in as a distraction to keep the middle-class from realizing we are being economically castrated.

Don't be confused. Our economic circumstances were by no "mistake", this was carefully orchestrated over several decades by privileged elitists that wouldn't know what a full day of real work looks like if it jumped in their brandy-sniffer.

[Herrington]

Chavez is an American hero. That having been said, is there is a conspiracy to castrate the middle class it is a conspiracy of sentiment and little more. The fact that the rich uniformly view the wrking class as inferior and probable socialists is far from new. We are replaying the same old political game of eons, rich vs. poor. Democracy sticks in the craw of the wealthy, they do not trust it and most even fear it. What is of greatest concern to me is that this country that harbored them from global communism is, in having vanquished communism, now expendable.

If the world's uber wealthy succeed in destroying the U.S.A. by exanguination, humanity will have to start over again. On the up side, without the scale of super economines that high worker compensation provides, global wealth and perforce all personal wealth will diminish and no super class of wealthy will be able to defend thier status for long even against pitchforks.

It is an historic watershed. Will we as a culture make the right choices, for instance, set aside our personal greed for the benefit of the country? Remains to be seen. On the other hand, there are still a lot of communists in Russia.

[lisakaz2]

I always said the only thing that "trickles down" is waste product, which is worse than crumbs. It was worse than empty rhetoric, imo.