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

[anti-fascist]

Ike built the roads in the USA. .Reagan,Bush ,McCain and the neo-cons built the roads in China

A.F.

[leftLibertarian]

The Bailout will not. In fact, the more money the Federal Government throws, the longer the recession.

The problem is the housing bubble which was started by the Federal Government.

The best solution is to let the housing market deflate.

[paixa3]

The house market will deflate. The sad point is that the holders of the loans just received a guaranteed profit, not the losses. Think BAILOUT.

USA citizens got the short end of the stick, AGAIN.

[BillZBubb]

How exactly was the housing bubble "started" by the Federal government? That is baloney.

It should have been STOPPED by the Republican government but it wasn't. That is the source of the problem.

Letting the housing market deflate was bringing down the rest of the economy with it. No rational person wants to see that happen.

[Pdubya]

Because the Federal Reserve and its foot soldiers (Congress, Lobby and Wall Street) enabled cheap money. If you don't understand what coin vs. fiat is then you won't understand how Fannie/Freddie, dot.com, Sarbanes-Oxley, Brenton Woods breakdown came about.

leftlibertarian - lets have a beer, thanks.

[MajorKong]

Henry Ford had this figured out a century ago: "If I pay a man enough to buy my car, he'll buy my car".

Note to Corporate America: people who don't make any money can't afford to buy your stuff.

[GoCards1978]

Walmart employees can't afford to shop there, even with their company discount. Wake up, CEOs, stop the hemorraging.

[oldfart1]

So far as I can see, there are still a lot of SUV's on the road, and hardly anyone is car-pooling.

Bush has done nothing, McCain would do nothing, and Obama has already admitted there are limits to what can be done. The only real hope is that Obama can inspire Americans to face reality the way he has in his own life.

FDR did it, and it is time for another FDR, not another Hoover.

[rich misty]

GOP America = debtor prison

[MatoSka]

it is a truism that: "The bigger they are the harder they fall." This crash is a validation of this. For years, economic statistics have been juggled to keep the downside off the front page. We have seen the income gap between rich and poor grow as Bill Clinton ends "welfare as we know it". We have seen the trickle down theory turned into a bailout theory.
Most of us have not been able to join in the great celebration of the growth of a paper economy. WE extend our own credit to pay for our credit and necessities. We have watched passively as the Federal Government becomes a passive observer in public education, housing, unemployment compensation, public health care, energy production and banking. Now we watch our retirement funds go up in smoke, our jobs disappear and our financial situation cross the redline.
Tax cuts and low interest rates cannot address this crisis. They are the cause of it. Propping up old investment channels will not increase consumption of goods and services. New investments need to grow from portfolios that are backed soundly with assets that are at the least worth their weight in paper. The transition to a green economy is needed now more than ever.
This is a fundamentally unsound economy and strutural changes need to be made. Pumping blood into a corpse is an exercise in futility.

[jeffrey678]

Bill Clinton also changed the calculation for the reporting the unemployment rate. I read in an economic blog that the unemployment rate now would be 14.7% under the old formula.

[csavage]

Thanks for the article...­..
I was told in 1987 by a stockbroker cousin that the market was overvalued at 1500. Since then I've watched this self-perpetuating bubble with 2 different figures...­a market worth 11000-13000 or an economy that's grown 867% in 20 years. I doubt either figure is realistic. Should the market be worth only 3500 or so? Is this correction he(my cousin) told me about 20 years ago happening now?
I think about what happened in Japan in the early 90's...the­ir market crashed too and resulted in a recession that took 10 years to fully emerge from.....
All very interestin­g....we'll all be a lot poorer on paper when it's done...
Regulation protects US...I'm working hard on getting my "low tax" single issue Repub friends to realize that!

[KOisGod]

Thank you, great post.

We need to get this election behind us so SOMETHING can be done. I just hope its not too late.

[adaugeo]

Where's the indictments for the Failed Policy at FM+FM? - It's too late to save the structure, but the slab will be saved...

[Amazed42]

awesome post, cannot thank you enough for writing what is truly a wonderful piece of work,

that being said, we need to stop out sourcing jobs, used to be "Made in America" meant something, let us return to that creed and really make it worth what it means. if a company wants to outsource then lets put an import tariff on that product so that it would be too exspenxsive to outsource, let us re-think our trade agreements and make them work for us instead of against us. let other countries vye for good trade agreements that are for America and not for them...aga­in we ned to ssput our workforce back to work, then and only then can we pay off those debts and return to a better place within the world society..

[RogueButterfly]

I believe that we keep looking for answers in the wrong places. There really should be a 21st Century Commission similar to the 9/11 Commission made up essentially of our elders with the explicit brief that they should study all of the inputs that have led us to where we are and recommend changes. We keep looking to our CEO president, a C student and non-economist and his political appointees for direction but they will not provide a holistic view, just a self-serving partisan view. I probably would too. The upshot would probably be changes to a lot of agencies, legislation and oversight. We all agree that the 9/11 commission was a success - why wouldn't an economic one be as well.

[BillZBubb]

"We all agree the 9/11 commission was a success"???? We do. I guess I didn't get the memo. The 9/11 commission was a waste of time. And your 21st century commission will be a waste of time if any Republicans are allowed to pollute it.

[USA1776]

Now these are the sort of discussions we need to be having. I heard "retool" in Obama's workmanlike speech in August and I agree. I think American innovation can create the green market products and lead the global economy in this. I feel like Obama is there but the election diatribe is catering to the lowest denominator.

[Looplinker]

Now its Brownie's turn to address Bush: "Nice job Bushie!"

[57basque]

Hey here is a link to a Cooperative that will answer America's troubles. Worker Ownership which is also Democracy in the Workplace. It has capital at the service of labor, not the other way around which is ripping us off.

http://www.justpeace.org/mondragon.htm

And Hemp can also produce Biofuel, along with paper, plastics and cloths. Its evident how that would help Farmers and the rest of America's work force.

[Fedup12]

The bail out of an inflated 950 billion dollars will evaporate in probably less than one year. Let me explain: Americans consumption of oil is 9 million barrels a day, at $93 a barrel that money will be gone in 3.1 years. Now take all the employee salaries and overhead to run the business on Wall Street not to mention the dreaded CEO salary, payoff the bad debt and we’re broke. One year maybe two if we’re lucky. This government is so stupid to think this band aid would work. For 30 years they have been saying energy independence, but because of lawyers, environmentalist, and the fact that our government doesn’t want cheaper fuel because they will loose tax revenue, and you can see why it hasn’t happened. So when you vote this year it doesn’t matter who you pick they will only get one term, because things are only going to get worse. The man with a plan is at http://www.huff4president.org/ but it’s too late.

[TboneP]

America consumes 21 million barrels per day, not 9. We spend 700 billion per year on oil - THAT'S NOT THE PROBLEM. Liquidity is the problem (i.e., a dollar's only really worth 60 cents when compared against GDP and hard assets).

We don't need to get the money out of politics, we need to get politics out of money. Dissolve the Fed, Fannie and Freddie. Keep a small SEC and FDIC. And elect a politician who will commit to pay down the national debt to not more than 40% annual GDP and to trim and fully fund SSI and Medicare.

If not, I hope you have some apples and a crate or own a lot of gold.