These days, the doom and gloom about the American Economy seems to lie just beneath the surface. Many people are talking about the events that are shaking our sense of stability, however the implications of these events is largely kept silent. The “R word†has come up lightly here and there, yet most media outlets are remaining largely silent. They’re afraid to cry “fire†in the movie theatre, while the projection room slowly burns. Especially since a recession is not really a possibility at this point, it’s an inevitability, and it might get much worse.
I tend to stay away from economic stories here on Soapblox. It is very easy for one to get carried away with the tide of news, so I waited till the writing was on the wall, and boy is it ever on the wall now. Last week, Federal Reserve Chairmen Bernake announced that the economy was slowing, and what’s worse, he couldn’t lower interest rates any longer, as inflation is rearing it’s ugly head. Essentially that’s like George Bush telling Americans we’re losing the Iraq War. Sure we all know where this is going, it’s just easier for the powers that be to pretend that everything is going their way. Unfortunately for them, and us, reality is a bitch!
It is clear, that another economic cycle in this country is coming to an end. So-called laziez faire capitalism has proven, once again, that it does not work. The conservative, de-regulation crowd has led this country into a dead end, and with it, an entire philosophy of selfish, wasteful, rugged individualism has accelerated our nation’s decent toward the inevitable end.
In a recent interview, economist and author Robert Kuttner, spoke of America’s deviation from managed capitalism. Despite the fact that the Great Depression proved that laziez faire only gave Corporate America the rope to hang itself and World War II proved that the government was better at serving the interest of the American people, growing frustration in the 70s was exploited by pro-corporate shills like Reagan to shift the country toward pro-corporate deregulation. The system is obviously not true laziez faire, since American businesses benefit greatly from government services to broker trade and large juicy government contracts to keep the gravy train rolling. So in other words, the government spends tax dollars to make business more profitable, and lowers taxes, regulation and accountability for our nation’s most powerful and wealthy. All around it’s not fair to the average tax-paying individual and enormously beneficial to the wealthy elite. So no wonder the powers that be, Democrat or Republican, love it, they’re cut from the same cloth.
Today, however, as Kuttner clearly spells out, this system is coming to an end. A return to managed capitalism is certainly in the future, as there are so many signs that we are heading for failure. With our financial institutions posting record losses, a weak dollar, oil at $100 a barrel and a prolonged decline in housing values, Kuttner says that it is highly unlikely that America will avoid a recession.
So how did we get here? Simple. Not enough regulation allowed major industries to make poor choices. Large investments in exotic risky ventures, such as sub-prime mortgages, have led to record numbers of foreclosures. This has driven the price down of all property, as there is an abundant supply of homes, decreased demand and left the banks holding large holdings of property that is worth less than what they paid for it.
The down side of managed capitalism is that it’s harder for the average joe to get a loan. The banks have a greater responsibility to not play roulette with the investors cash, so they look at potential borrowers with greater scrutiny. The upside is that the banks don’t go broke, money is not lent to people who can’t pay it back, and the taxpayer doesn’t pick up the tab.
Another issue is the Reagan backed destruction of the Progressive tax structure. The idea that the most wealthy pay more for taxes is not to single out the rich for more wealth, it’s to keep money flowing in the economy. Rich people tend to hoard their money and invest it. This, in turn continues to put more money into the hands of the few. When a rich man buys 1000 shares of Halliburton, you could argue that it is good for jobs. Unfortunately, that argument falls flat. Corporations are obligated by law to earn the maximum profit for their share-holders. That means paying your employees as little as you can get away with, even shipping the jobs overseas, just so you can tell Wall St. that your earnings have shown growth. In other words, if you asked me who’d I rather have spending money in my interest, it’s clearly the government. They may not be good at spending money, but they have a greater reason to serve the people: they need them in November to keep their jobs. A corporation, on the other hand, only fears consumer backlash, which isn’t enough. Why would they even fear investor backlash, when guys like tan O’Neil brought Merrill Lnych’s it’s largest quarterly loss in history (this is a company that didn’t lose money in the Great Depression) he still got a $210 Million good bye kiss.
So under the rationale against a progressive tax system, O’Neil is better off with the money he squandered from the investors because now he will reinvest that money into our economy and make the world a better place. Really? Hmmm, seems a bit unlikely.
Conservatives are quick to point out that this is good as it encourages people to get richer. Honestly, we’re all afraid of bumping up to the next tax bracket, but would it scare you enough to live in a ditch? Besides, you have to be making A LOT of money to be paying the highest bracket in a progressive system. Most people try to get rich regardless of taxes, and in the end, most middle-class families fail, largely remaining exactly where they started after a life-time of work and toil. Is it because they just can’t figure out how to get rich like many suggest? Or is it more that the ultra-wealthy in this country are just lucky. Maybe it’s a little bit of both but certainly, luck is a major player.
Now, however, it is bad luck that is rocking the upper echelons of power. With companies like Merrill Lynch making monumental mistakes, this is a clear sign that the system is running out of momentum. If these guys didn’t even lose money in the Great Depression, what does that say about our economy today?
The war in Iraq too, the largest and most expensive privatized war in history is proving to be an enormous blunder, not just politically, but economically it is lousy investment. A weak dollar is not proving very healthy for our economy as some had thought, and the Fed has found out that there are limits to lowering interest rates.
As Kuttner spells out, the Fed has two choices, one is to determine interest rates, the other is to regulate the financial institutions. Greenspan and Bernake chose not to regulate, citing the wonderful ability of the marketplace to self-regulate its problems. They claimed everything would even out as market forces worked against each other to level the playing field. This has proven to be false.
Imagine any sport without a referee. It would be as chaotic as the market is now, with people making up rules as they go along, then breaking them a week later. Letting guys like Enron, Halliburton, Worldcom, Global Crossing, Tyco, etc. regulate themselves is like allowing the fox to guard the hen-house.
Furthermore, the market is conscious of what the market wants. The millions of power-players that determine financial decisions have many like-minded goals. This drives the machine further to squeeze more money out of its exploits, even at the expense of the market’s stability.
It’s a juggernaut of a machine taking over this country, digging itself in deeper, making us more reliant on screwing over our own interest. All the machine cares about is making money. It cares not for waste; disposable items are on the upswing. It cares not for the land it rests on; it destroys it in the name of profit. It cares not for sustainability or the future, it cares only of today, right now and how much money it can squeeze out of what surrounds it. This machine is a virus and sooner or later it will destroy itself, especially since it has no loyalty to nation or individual. Many corporations have economies larger that most small countries. They are not American, they pack up and leave when it hits the fan like Halliburton did when it moved to Dubai.
If capitalism is allowed to flow unbridled, it will destroy itself, creating an international elite aristocracy that will exploit cheap labor for as long as they are permitted. Can managed capitalism return us to sanity? Or will it only prolong the inevitable?