The Real Economy Strikes Back

So much for the $700 billion bailout of Wall Street. Clearly, once the bailout passed, investors took a good look at the real economy and went to the mattresses. We're headed into a great reckoning. And at the heart of that, as illustrated in the new Institute for America's Future op ad in the New York Times -- "Even the Rope we're Hanging Ourselves with is made in China" -- is this country's unsustainable global strategy. To see the ad and supporting charts go here.

This is a result, as Barack Obama has stated, of a failed economic philosophy -- the "market fundamentalism" that dominated Washington over the last thirty years, the notion that markets are efficient and self-correcting and, as Sarah Palin repeated in the last debate, governments should just get out of the way.

What that meant in practice was the worst forms of crony capitalism. Abroad, global corporations and banks essentially wrote the constitution of the new global economy, protecting property rights but not workers, consumers or the environment. Financial flows were deregulated opening the casino up for business. Banks were favored; the military industries protected; agribusiness subsidized.

At home, Reagan launched the war on unions, and rolled back government and regulation. The minimum wage was frozen for a decade. Undocumented workers exploited to undermine wages and standards. Banks got rid of the protections built during the Great Depression. Companies used globalization as a club against workers. Pensions and health care benefits were rolled back... Over the last eight years, productivity and profits rose, but wages lost ground. We lost one in five manufacturing jobs. Now some 15 million service jobs are at risk of off-shoring.

Yet this global economy depends on American consumers as the buyers of last resort. Sustaining a low wage, high consumption economy is no mean trick. The gulf was bridged by mountains of debt and successive asset bubbles. Household debt soared to unprecedented levels, as Americans loaded up on credit cards and cashed out their homes. And the US is now the world's largest debtor, having added over $4.4 trillion in foreign debt since 2001. We must borrow or sell off assets with $2 billion a day simply to cover our trade deficits. We now run a high tech trade deficit with China. Mexico exports 50% more cars to the US than the US exports to the rest of the world.

What can't go on indefinitely, won't. And with the bursting of the housing bubble, the reckoning is here.

Clearly we need to change course. We need a national economic strategy for a global economy, a strategy for the nation, not for the multinationals that have very different interests.

Yet our political debate is still frozen into a silly spit ball fight about "free trade" and "protectionism." Barack Obama questions NAFTA-type accords and is charged with "protectionism" in editorials across the country. John McCain, a stalwart of the failed policies of the last two decades, still intones the old "free trade" mantras, denouncing critics as lacking "faith in the American worker."

This mindless debate has been going on for three decades, as the country has sunk deeper and deeper in debt. Surely in the wake of the current crisis, it is time for an adult conversation about a strategy that would sustain a prosperous middle class in a global economy.

That means deciding if America will remain a center of innovative manufacture. A concerted drive for energy independence will not only reduce the half of our trade deficits that go to oil, but could capture the green technologies that will drive the markets of the future.

It means deciding if we are going to sustain a broad middle class. That would require forcing business to compete within the framework of a high wage economy -- not by tearing that framework down. Empower workers to organize, raise the minimum wage, and build a public social contract starting with health care and pensions to replace the promises the corporations are shredding.

Then we've got to change our federal priorities from policing the globe and top end tax cuts to making the vital investments here at home -- in education and life long learning, in R and D, in the most efficient infrastructure.

Finally we'll need to dispel the myth that the mercantilist nations like China are playing by the same set of rules. With China now our leading creditor, this won't be easy. But we must find ways to bring our trade with that country into balance -- either by currency adjustment, by managing our trade, or by a surcharge on imports that will force the change.

These aren't the only answers; they may not be the best ones. But surely the question of our national strategy in the global economy can't be put off. That's why McCain's decision to turn his campaign over to the Karl Rove's protégés in character assassination is so dishonorable. We deserve a debate worthy of a great nation in trouble. Brickbats about Bill Ayers or Palin's Alaskan separatist husband are simply insults. Americans deserve better. And McCain and Palin may find out that they just may demand it.

Comments

[twofish]

The problem is that most people don't want or need absolute freedom. They need a steady income so they can raise their children, pay for their homes, etc. They need stability. If someone chooses to risk their money and well-being pushing for a higher income in the Big Casino economy, great. But we're all being forced to spend our lives working too much and negotiating with giant investment companies, health insurance companies, corporations that treat workers like liabilities and keep all productivity gains for themselves. We can't all be experts in all these areas. It's insane.

Why should capital be free to flow where it listeth when labor is not? The idea of workers all over the world chasing jobs around the planet the way Americans are forced to chase them around the country is ludicrous. So is capital swamping countries where someone heard there are easy profits, then pulling out and leaving a wrecked economy in its wake. Enough already.

[WgS]

Google has a ad showing both candidates and their "IQ's" asking "Are you smarter than him?" Well, Mr. Google (you don't mind if I pretend you are human do ya?) Actually, no. My IQ appears to be about 12 and sinking faster than the stock market, interest rates and consumer confidence combined. I should be in the red by this time tomorrow.

What I do have working for me is a set of eyes and I now recognize when somebody is trying to sell me magic beans in exchange for my cow. I also have a handy hatchet which means I can avoid the whole scene with the giant in the near future because I don't need a golden goose.

"Yet this global economy depends on American consumers as the buyers of last resort."

I take this to mean that I have consumer power in addition to voting power. Until I see the priorities shift (healthcare, education, sustainable, renewable energy) and see steps heading in the right direction: "Equal Justice Under the Law," a total revision of our prison system, growing inequalities, erosion of our civil rights and the de-leveraging of corporate financing of political campaigns - I'm personally holding on to every bit of capital I can get ahold of. I will just sit tight and see who really wants to do business with me. The ones that do will be the ones with fair business practices that reflect the aforementioned priorities.

[shamaniceconomist]

The position that China finds itself in is quite desperate. I can't imagine what they'll do.

[hglassberg]

Americans. We face a common enemy: Platitudes. Until we rid ourselves of blogs which state, restate, re-restate, and re-re-restate the obvious, nothing will change. The article above is as pure an example as one can find of reheated truisms. We're serious. There's nothing worse for a body politic that hearing again and again what it already knows, because then, what it knows becomes nothing but platitudes.

Yours sincerely,

The Playdo Institute
Handel Glassberg, President

[zitlight73]

Was there ever really any doubt that this bailout would help the American People. What in the last eight has come out of Washington eith from the White House or Congress that has helped the average American. Over whelmingly We the People told congress no to handing over $700 billion to the bankster thugs. Well it's time for succession, we need to force Wall Street and Washington to secede from the rest of this union. Come April there should be a nationwide tax revolt it's time to cut off these juvenile deliquents allowances. If we ignore them long enough hopefully they'll go away.

[Paul]

I am voting against all incumbents.

[ld]

Good stuff as always! You and Hale are two of the best.

I just wanted to point out that the market will come back - that's what the $700B was about. But there are so many other issues affect American's well-being. I hope you and other people that write about the economy will keep the focus on the many other issues you list above.

[omop]

Just prior to tonites debate, NBC had its weekly series on "The Biggest Loser". While possibly sounding trite America needs to commit itself and resources in becoming the biggest loser by a} bringing home almost al the US military scattered around the globe. b] invest in alternate energy resources and education. The latter is quite necessary so that in time individuals running for public office in America have a better understanding of what a government by the people, for the people really entails both domestically and in foreign affairs.

America's economy is more than just the few hacks on Wall Street or those who work in banks. America's well being can only be gained by empowering Americans to work, live and prosper in America.

America's future and safety lies within its borders. Not In Iraq, Afghanistan, Iran, syria, Israel, Pakistan or any other stan. Its time the US developed a stance with all other nations where they are treated equally as friends in trade, commerce and cultural exchanges.

Any other approach can only lead down the one way street followed in the last two decades and the real economy will strike back again and again as Mr. Borosage's commentary proposed.

[julianne]

You are right, Mr. Brosage. Yet, millions of Americans have seen exactly what you described transpiring over the past 30 years, with many more over the past 8 years. So , it is not just that the nation and the people have become politically and economically colonized and disempowered, we have also been intellectually, institutionally, and morally corrupted. It's not just the disease, it is the environment. It is system and indemic from West Point to Wall Street. Historically, it only takes one generation to ruin a people under this kind of fascistic, Orwellian system. We had a world war against it. Roosevelt, Eisenhower, and Kennedy knew it. We need more than just a half-stepping President Obama, but real revolutionary leadership to step out throughout the Democratic Party to fill enter throughout all our branches of government and re-empower the higher aspects of our human nature, identify a greater common purpose, and ground us back into reality.

[R.W. Sanders - Huffpost Blogger]

nothing will be better until we deny this culture of greed.

[babyphat4u]

I am thinking that the ceo's golden parachute money should have been placed in ESCROW accounts until a criminal investigation is pursued, fought and won. In the meantime, those same ceo's should try to find a job just like the rest of us. The free market principles have not changed one bit except that free market now relies on deregulated regulation that JM wants.it goes back to the same ideal and principles that we live by today.

Trickle down economics has not been tested in its most intellectual sense. Why wait for it to trickle down to lower-class ppl. Proactive actions should entail taxe breaks on the lower and middle income american, universal healthcare so that businesses wont have to pay for health care for its employess ( if you think about the bailout plan and its costs a universal healthcare would cost 10 billion dollars per year for everyone but an employer and or employees wont have to choose the universal platform so it may cost even less than the bailout plan). Bailout spells waste.

[Indubio]

I was shedding crocodile tears listening to ex-Lehman Brothers CEO Fuld talking about his sleepless nights. What he didn't mention is that in spite of his personal losses, the man remains a very wealthy fellow and he loses sleep in a rather large and well appointed residence. That's more than I can be said for many of the people damaged by this man's all consuming greed and incompetence.

[BillZBubb]

You know the Reagan/Bush/Republican economic philosophy is simplistic and ruinous.
I know the Reagan/Bush/Republican economic philosophy is simplistic and ruinous.

But a majority of Americans do NOT know the Reagan/Bush/Republican economic philosophy is simplistic and ruinous. And a lot of them are still buying the old snake oil from McPalin.

[gypsy508]

That's because it is also the Reagan/Bush/Clinton/Bush economy with widespread support from Democratic members of Congress

[Indubio]

Sadly, you're correct. Until we get an honest media not controlled by the same corporations that pay for Congress, it will be difficult to have honest debate in this country. Until the economic meltdown, anyone even suggesting reregulation and a tax increases wouldn't even be permitted to debate that point of view. What many people don;t seem to realize is that Americans don;t really have free choice: We're given choice within a narrow range of options. Free trade, free markets, low taxes, no-regulation are the givens and as long as debate remains focused on the Washington Consensus we can have "meaningful debate." As soon as anyone moves beyond the consensus, he becomes "fringe."

[BillZBubb]

Baloney. You "party of responsibility" types always try to muddy the waters. Clinton and the Democratic congress in 1993 put in motion the economic program that produced the greatest economic performance in world history. THEY RAISED TAXES--and EVERY REPUBLICAN voted against them. The Republicans screamed: "It will cause a recession!, It will cost jobs!"--the usual right wing baloney. As always, they were wrong.

The voters, off course, bought the right wing spin and voted out the Democrats in 1994, but Clinton didn't relent on his budget or tax positions. He was forced to yield ground on the regulatory front to the Republican congress, but did what he could by executive order.

Reagan/Bush did just the opposite-they compounded the debt, they removed regulations and oversight by executive order or through congress when they had working majorities. Clinton also strengthened the dollar, Reagan and Bush weakened it.

[MatoSka]

A single payer health plan right now would be like a 10% wage increase for Americans. "In 2001"02, an average of 13 million families per year had direct out-of-pocket (OOP) costs equal to or exceeding 10 percent of family income." "Between 1996"97 and 2001"02, the average family's out-of-pocket (OOP) spending rose in direct proportion to total medical spending and nearly twice as fast as did family income. As a result, many more families now face high costs relative to income." http://www.commonwealthfund.org/publications/publications_show.htm?doc_id=347500

[Pdubya]

The great crime is to be sucked into the propoganda that we've suffered from free market principles.

That couldn't be further from the truth. Brenton-Woods intervention. Federal Reserve manipulation. Sarbanes-Oxley, Fannie/Freddie. Lobby, Special Interest, Whoring Congress. The market did speak. It trumps managed economic, keynesian structured centralized banking. Free market principles also allows failure. Let them go to jail (fraud and anti trust laws of free market principles), let the stock take a hit (opening up reinvestment), let the housing prices come down so more people qualified can buy them.

"do nothing" - deep, painful, but short recession

"bailout" - dumping more fiat currency into a defunct keynesian, privately controlled (managed market) defunct system, causing hyperinflation...perhaps even a collapse and a prolongued depression.

It all hinges on having sound money (a gold standard) and only having Congress issue it.

[Indubio]

A problem with the Washington Consensus is that free markets don't exist and the only nation remotely adhering to free trade is America, which is why many nations are able to take advantage. There is nothing wrong with market principles (or Marxism for that matter) except that they're based on unrealistic expectations of human nature and nationalism. If left to its own devices, markets historically have consumed themselves. You suggest this is perfectly reasonable and let the chips fall where they may. That might be reasonable if folks had a say in market economics. Most folks have nothing to say yet you think it perfectly reasonable that people should pay the price for actions totally beyond their control from which they can marginal benefits. You suggest the crooks should go to jail...right. Can you name me a single white collar criminal convicted of million dollar fraud that has ever done serious time or financial paid for his/her crimes? It's never happened because the system is gamed in their favor. Markets will become free the day that all of humanity comes to love their fellows and works together in peace and harmony; which is to say not anytime soon. Government regulation is necessary so that corporations are forced to address the social ramifications of policy not just market ramifications: There is more to life than the profit motive and if you haven't figured that out yet I suggest you are incapable of seeing anything beyond libertarian ideology.

[Pdubya]

Enron. for example. Stocks wiped out, bankcrupt, fraud, jail.

Regulate the Federal Reserve, the Presidential Working Group, and the Currency Trust.

My point is to start addressing the problem at the very top...the real culprit....unless the top is addressed, the good intentions of regulating everything else is moot.

Free markets would never have allowed Fannie/Freddie, Brenton Woods breakdown, the Federal Reserve, dot.com bubbly, etc

Our Constitution demands it. We must too, for our very sovereignty and liberty.

And no, I'm not against regulation. It is how it is got. It has been ill-got by lobby to their favor.

[Pdubya]

"Allow me to issue and control a nation's money and I care not who writes its laws!" Amshell Rothschild

Regulation vs. deregulation (the government kind) is a moot debate when structed w/in a centralized bank on fiat currency. It is akin to arguing over whether the gaping chest wound was caused by the mortar or its shrapnel.

As Nader said "the only difference between dems and repubs on the Hill is the velocity that their knees hit the floor when lobby knocks on their door".

End the Fed. Return to our Constitution and true, Austrian free market principles. It is of the People, for the People, by the People.

Just tell me why I need more credit or another loan? I need savings and production. The New Deal worked for a while because we were still tied to gold and were a production/creditor nation. Since 1971 (Brenton Woods breakdown), we fully became a debtor/consumer nation on fiat currency.

You can't fix inflation with inflation.

There are only two solutions: Return to sound money and take away the Fed's authority to manipulate, or give them more authority and let the engineers structure a "rescue" of our currency with a new one..................care to take a guess what that will do to our liberty and sovereignty?

Progressives should realize that centralized banking on fiat currency is the most regressive to their esoteric goals.

[Indubio]

It wouldn't matter one whit if America returned to what you call Austrian free market principles because such principles have only existed in the minds of economic philosophers. Even in the 19th century at the dawn of capitalism there were no true free markets. What's more even if America could somehow devise a perfect market system, if the rest of the world refused to play by our rules we would find ourselves at a distinct disadvantage. Whether we like it or not today markets are global. Unless and until one world government is establish that has the ability to truly level the playing field for everyone, free market principles, Austrian or otherwise, are a pipe dream.

[Pdubya]

It is obvious you don't understand Austrian free market principles. They provide the most freedom for everyone to operate within a global economy. They also provide the most freedom for failing to perform, whether that be regulatory, market, or legally.

www.vonmises.org

[WorkingClass]

You are correct Pdubya. I would argue however that fiat money is not the problem. Debt money is the problem. I am assuming a fiat money in the hands of an honest, competent government in the service of the people. Absent that, only hard money will provide any security.

It is the combination of debt money and bad (corrupt) government that has brought us to our present calamity. We (the people) have no way forward until we regain our sovereignty. As matters stand, our constitution (and bill of rights) is a dead letter. The only power I know, great enough to break the grip of the global robber barons, is solidarity. Mobilize the working class - call a general strike - take back our democracy. If you have a better idea, that doesn't involve a hundred years of bloody insurgency, let me know.

[Nomccain]

Ronald Reagan said the National Deficit doesn't matter! Well, guess what? It sure as Hell does! The Republicans have always been a borrow and spend party and you can't borrow 8 billion dollars a month for the Iraqi war indefinately and trust wall street to operate with honesty at t he same time. A free market economy cannot function in an environment of greed, corruption, and dishonesty. The Republican philosophy has not worked.

[Indubio]

Actually Dick Cheney said the deficit doesn't matter. At least that's my recollection.
Free markets are inherently based on self interest so it seems rather incongruous to suggest we can have free markets without self interest. Some people will practice enlightened self interest but the great majority won't ever be able to see need beyond their own. In the history of market economics, there has never been a single instance where they willing operate for the benefit of society. In fact, I believe most corporate attorney's would agree that corporate leadership must operate in the best interests of shareholders. When the interests of shareholders and society correspond we have enlightened self interest when they do not corporate leadership must be concerned with corporate interests even if they come at the expense of society. Regulation of markets should be designed to ensure that corporations are not permitted to operate in opposition to the needs of society.