The Accidental Superpower: The Next Generation of American Preeminence and the Coming Global Disorder
Chapter 1 - The World We Think We Know
Written by Peter Zeihan
On July 1, 1944, 730 delegates from the forty-four Allied nations and their respective colonial outposts convened at the Mount Washington Hotel in the skiing village of Bretton Woods, New Hampshire, with a mission to do nothing less than decide the fate of the postwar world.
The scores of luminaries included high-ranking bankers, economists, government ministers, and the future leaders of Canada, France, Greece, New Zealand, and Peru.
They had trained in overnight from Atlantic City, New Jersey, and were greeted by a sprawling resort in disarray: Many of the rooms lacked running, potable water; there wasn't enough ice or Coca-Cola to go around; staffing was so thin that some nearby Boy Scouts had to be drafted; and the establishment's manager locked himself in his office with a case of whiskey and refused to come out.
This couldn't have been how the conference's organizers and lead delegates-Harry Dexter White of the United States and Lord John Maynard Keynes of the United Kingdom, who'd been discussing and planning the conference for nearly three years-had imagined the opening days. But despite this inauspicious beginning, the delegates set to work on the agenda White and Keynes had laid out and over the next three weeks engaged in multilateral negotiations that were responsible for creating the World Bank, the International Monetary Fund, and the International Bank for Reconstruction and Development: the institutions that helped knit devastated Europe back together and that hammered out the foundations of the free-trade-dominated global economic system that endures to this day.
At least that is how history records it. The banks and the fund-really, the negotiations themselves-were sideshows. The attendees had arrived in Bretton Woods knowing that they had no real leverage to negotiate or bargain with the United States; they had mainly come to hear what White and the other Americans had to say. And what the Americans had to say shocked them all.
On the eve of the conference, White and the American delegation were fully aware that they had the upper hand going in. America was running the Allied side of the war. Everything from Sicily to Saipan was in essence an American effort fought with American equipment and American fuel. Even in terms of manpower the fronts were largely American affairs, with American troops tending to outnumber all other combatants, Allied and Axis combined, by a two-to-one margin. Only grand affairs such as the Normandy landings featured the sort of multinational resolve the propaganda lauded. In the Pacific, the Americans were carrying the war all by themselves.
For the majority of the attendees at the conference, the Americans weren't simply saviors or urgently needed auxiliary forces for ongoing combat missions, they were the war effort. Immensely popular in his third term as president and seen by many as a shoo-in for a fourth, Franklin Delano Roosevelt had indicated that the Americans wanted to discuss the shape the world would take once the war had ended. This in itself raised international eyebrows. Until that point there really hadn't been a "global system" in an economic sense. Instead, various European nations maintained separate trade networks stemming from their earlier imperial ventures, in which their colonies served as resource providers and captive markets while mother countries produced finished goods. What inter-empire trading that occurred was largely limited to goods, whether raw materials or specific manufactures, that could not be sourced within the respective "closed" systems.
Most of this cross-empire trade flowed through enterprising peoples like the Dutch who excelled at brokering deals among imperial leaders. Protecting each empire's trade were its national naval forces, and the use of navies to guard national commerce and raid the commerce of competitors was as old an industry as the use of sail and oar. It was the naval component that signaled to many of the Bretton Woods delegates that the past they'd known was over. Even if (thanks to American help) they were able to win their homes back from the Axis, they had no navies. Building a navy is one of the most expensive and time-consuming projects a nation can undertake in the best of times, and it wasn't something that a country emerging from rubble and occupation could even consider.
The current and future lack of naval power meant that almost all of the delegates at the conference knew full well that their countries wouldn't be able to use trade to bootstrap themselves back to normality, as they usually might. They would, for decades to come, be at the mercy of whoever could offer them security or economic well-being or both.
Keynes and the other delegates knew they were on the verge of momentous and unforeseeable change. But at least one aspect of the brave new world to come seemed both inevitable and imminent: There was about to be only one navy. The Americans' late entry into the war meant that the Nazis had been able to destroy the navy of every country in the world except Britain, France, and Japan. Then, to deny the Germans control of French ships, the British had sunk the remnants of the French fleet while it was in port in Algeria. And no one had any doubt that when the Americans (to say nothing of the Russians) were finished with the Germans and Japanese, they'd be lucky to float merchant marines. As Keynes realized all too clearly, the British could still claim to have a potent navy, but it was a subsidiary force compared to the American fleet-and that was before considering that the Americans now had more troops on the ground in Great Britain than the British did.
The obvious lopsidedness of the playing field may have led Keynes to write that his American counterparts "plainly intend to force their own conceptions through, regardless of the rest of us."
For French delegates such as Vincent Auriol, future president of France (1947-54), and Pierre Mendès France, future prime minister (1954-55), the sense of relief and gratitude they felt toward the Americans for loosening the German stranglehold on their country must've been mixed with equal measures of disbelief and apprehension. Although they were at the mercy of friends rather than enemies, Auriol and Mendès France would be "negotiating" from a position of abject weakness, and they must've been wondering if their eighteenth-century predecessors had not inadvertently helped to create the monster that would now devour them.
The tension in the Mount Washington Hotel was palpable, not simply because the temperature was high and cool beverages scarce. Auriol and Mendès France, along with the Canadians, Australians, Danes, Belgians, Indians, Mexicans, Brazilians, Bolivians, Colombians, Ecuadorians, Cubans, Peruvians, Dominicans, and others in attendance, most certainly expected White and the American team to take a well-worn page from history and unveil the details of a Pax Americana: how the United States would fold all the far-flung European imperial holdings-up to and including the territories of the European states themselves-into a global American imperial system. It was what the Soviets expected the Americans to do, and, given their pasts, likely what various European nations would have done had the roles been reversed.
Imperial designs or no, the very fact that the delegates were attending a conference in New Hampshire rather than somewhere outside Novosibirsk spoke volumes about where their hopes rested. White and the American team didn't let the others sweat it out for long, and they presented their two-part plan with all the kindness and amused patience that comes from a position of unassailable strength. The first part alone likely stunned the conference into baffled silence: The Americans had no intention of imposing a Pax. They didn't plan to occupy key trans-shipment or distribution nodes. There would be no imperial tariff on incomes or trade or property. There would be no governors-general stationed in each of the Americans' new imperial outposts. No clearinghouses. No customs restrictions. No quotas. Instead, the Americans said that they would open their markets. Anyone who wanted to export goods into the United States could do so. The Americans acknowledged that devastated Europe was in no condition to compete with American industry, which hadn't been touched by the scourge of war, so this market openness would be largely one-way. The Americans suggested ideas about a new global system to reduce tariffs, but that was to be negotiated separately and later.
As startling and unexpected as part one of the plan was, part two must have rolled the Europeans in particular back on their heels. The Americans offered to use their navy to protect all maritime trade, regardless of who was buying or selling the cargoes. Even trade that had nothing to do with the United States would be guaranteed by the overwhelming strength of the American navy. Far from proposing a Pax that would fill their coffers to overflowing with trade duties, levies, and tariffs, the Americans were instituting the opposite: a global trading system in which they would provide full security for all maritime trade at their own cost, full access to the largest consumer market in human history, and at most a limited and hedged expectation that participants might open their markets to American goods. They were promising to do nothing less than indirectly subsidize the economy of every country represented at the conference.
Either believing the deal too good to be true or that the heat had softened the Americans' brains, the delegates quickly agreed, ratifying the terms via signature in the hotel's Gold Room on July 22, 1944. This, however, was exactly what White and the Americans wanted. For no matter how the plan was regarded by the delegates or the rest of the world, it was firmly rooted in the United States' unique strengths: a singular combination of geography, industry, and technological development that constituted the primary source of American power, and that in turn is the subject of this book.
(It's a frequent)
After the 1929 market crash and during the Great Depression of the 1930s, the most influential economist was John Maynard Keynes. His assessments which had predicted many defects in previous economic theory and practices, very much influenced Franklin Delano Roosevelt's New Deal legislation.
Keynes (The General Theory of Employment, Interest, and Money) said:
1] Economies can and often do suffer from an overall lack of demand, which leads to involuntary unemployment.
2] The economy's automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and painfully.
3] Government policies to increase demand, by contrast, can reduce unemployment quickly.
4] Sometimes increasing the money supply won't be enough to persuade the private sector to spend more, and government spending must step into the breach.
Countering this idea was the Austrian School of Economics (a branch of the neoclassical school, named because many of its advocates... Carl Menger, Eugen von Bohm-Bawerk, Ludwig von Mises were from Austria) later evolving into the Chicago School as some of the prominent Austrians and Milton Friedman lectured at the University of Chicago School of Economics. Objecting to Keynesian Cambridge economics which advocates government spending to stimulate aggregate demand (demand management) using taxes and spending, the Austrians believed in a return to a more laissez faire approach (classical trade cycle theory and supply-side economics) using tax-cutting measures and influencing monetary policy by tightening the money supply.
So we have Keynesian demand management verses Austrian supply-side, also called trickle-down economics because it depends on corporations reinvesting profits to stimulate the economy when they have more money and pay less taxes. Friedrich Hayek (The Road to Serfdom) and Milton Friedman (Capitalism & Freedom) were the most influential economists of the late 20th century and the heroes of conservatives. Friedman believed that the only roles of government are to protect property, guard the borders, and enforce contracts.
In the 1980s, the Reagan Administration ushered in a return to supply-side (with tax relief for corporations and high-income families), monetarism, and no deficit-spending. Public policy was turning toward deregulation, decreased oversight, and privatization. Trickle-down, it was called because if the rich had money they would create new jobs and the advantages would trickle-down to all classes of society. This process accelerated during the Republican majority in Congress from 2001-2006 when corporate lobbyists largely wrote our economic legislation.
And what did oil companies, pharmaceutical companies, airlines, financial, insurance, and media conglomerates, other huge corporate groups, and the wealthy do with all these advantages? Reinvest in the form of research or improvement of the product? Create jobs? Raise salaries? Expand medical benefits? Decrease the prices of their products? If they had, there might be some validity to Milton Friedman's supply-side outlook.
The actual occurrence has been layoffs of staff, merging of companies and divisions, reorganizing, downsizing, and shutting down operations in order to last out the bad times, becoming more selective in research and improvement of infrastructure, and aggressively reducing the size of inventory. The result has been weakened and vilified labor unions (more flexible labor markets is the euphemism conservative economists use), failure of voluntary compliance and self-policing, lobbyists drafting the legislation regulating their clients, fire sale privatization, deficit reduction (when budget considerations are even bothered with) through massive cuts in government services, unprotected pensions and medical plans, the breaking down of regulatory laws that protected the public against abuse, closed factories, tax benefits for jobs sent oversees so cheaper wages could be paid, and the end of rules mitigating huge executive salaries and perks. CEO to worker pay ratio in 1980 was 40:1; now it's 350:1. They are rewarded even when they mismanage a company, lead it to bankruptcy, or lay off employees. With decreased regulation and accountability come more mergers, larger but fewer companies allowing prices paid by the public to be decided not by the market, but by the corporate group. By cutting taxes for corporations and the wealthy, supply-siders cut off revenue and pushed through structural reforms that made it harder for future administrations and congresses to raise funds. Many on the right became unwilling to think creatively about using government to promote prosperity for the middle class and poor.
Not only have financial regulations and oversights been removed, but measures that give us an accurate statistical picture of the economy such as rates of unemployment, inflation, and measures of GDP have been calculated in different ways by every recent president and congress to give a skewered look at the economy. Contributing to other economic dysfunction, many basic metrics within the economy had been ignoring factors within gauges of revenue and profit and reflected by an artificial evaluation of growth, an inflated temporary stock price, and conveying a false indication of the financial reality. The market used to be a fair indication of the state of the economy. Now it's a market of traders, not investors. More speculators using computer generated buy and sell programs want to know what the spread is today and tomorrow; they can make money on the way up or down; they care far less about the long-term health of companies and of the country.
Paul Krugman, recipient of the 2008 Nobel Prize in Economics, has written, "...in economics... some ideas work in theory but not in practicethat is, the reasoning that underlies them seems to be right, but experience in the real world tells you that something is wrong." That might be the inconvenient reality of the economic theories of Hayek and Friedman.
One result of recent trends is that we have been trained over the last thirty years to think that government interference is always detrimental when actually:
- No well developed country in the world including those in Asia, the Pacific Rim, Western Europe and the United States, has anything but a mixed economy. A government's usage of stimuli and depressants is essential.
- It is corporate influence and lobbies in America that have mislead us with the result of public support for rule by corporate lawyers (and not the threat of government takeover and decisions by bureaucrats.)
- Factors other than taxes hurt the quality of our lives such as inflation, uncompetitive prices, less choice (monopolies with no recourse to corporate malfeasance, financial subterfuge, unfair and unregulated pricing practices, worsening treatment of labor, and lack of support for the surrounding community and environment.)
- Adam Smith's original concept of political economy and the creation of wealth was not laissez-faire, but more of mixed economy with government balancing other needs when the private sector is creating an imbalance by hurting the public and fair trade.
- Following Milton Friedman's concepts that the only task and responsibility of business is make profits, that there should be no regulations on companies, and all ownership should be in private hands (even armies and jails) is not capitalism but a mutant form of capitalism.
- For the first hundred years of our national history, no corporation could be granted a charter unless it agreed to serve the public interest. A charter's time limit was usually no more than ten years. This changed in the 1886 when the Supreme Court (Santa Clara County v. Southern Pacific Railroad) used the fourteenth amendment to grant to corporations many of the legal rights of individual citizenship (personhood) but without much of the responsibility and accountability of a citizen; a legal entity, in effect, a citizen with less social consideration, fewer responsibilities and fewer repercussions for its debts or for its bad decisions.
- In 1976 (Buckley v. Valeo) was a case in which the Supreme Court upheld a federal law which set limits on campaign contributions, but ruled that spending money to influence elections is a form of constitutionally protected free speech, and struck down portions of the law. The Court further ruled that candidates can give unlimited amounts of money to their own campaigns.
- Then in January 2010 came a ruling (Citizens United v. Federal Election Commission) which built on the classification of the use of money as free speech, granting corporations almost unlimited power to pay for and control elections. Today in 94% of congressional elections, the candidate receiving and spending the most money, wins the election.
- The result is that candidates are permitted to form a super-PAC which can collect unlimited, untraceable amounts of money from individuals, unions, and corporations (who can, for long periods remain anonymous.) The candidate can spend that money on political ads and for personal enrichment, and then they can surrender that super-PAC to close friends or associates while exploring a run for office, while running, and after they withdraw from a campaign.
- So what we have today is corporatism -- which is far from capitalism. Today there is no competitive pricing (when prices do not go down if monopolies do not make decisions based on quality service), no consideration for labor to bargain equally, less honestly reported factors influencing market prices in stocks (when higher stock price, corporate perquisites, and earnings for already highest paid is where profits go, with much less consideration for longer term growth and for the health of the company, workers, or customers.)
SOME ADDITIONAL AVENUES OF INQUIRY:
The Economics of QWERTY
Game Theory - A Beautiful Math - Tom Siegfried
Federal Reserve Board Policy and Business Activity
Primer on Subprime Mortgages
Inflation Tables - Measuring Worth over Time
Next let's ascertain if the array of economic tendencies in 2015 and 2016 can successfully deal with or reverse the deregulated, privatized, supply side, trickle-down, corporate-lobby driven economic environment that has occurred. We'll look at how the economic theories that supported those views have institutionalized tremendous imbalance and inequality over the past thirty years.
(Additional resources to be added: Ferguson, Greider, Tavakoli on investing, Geoghegan on debt and interest rates, Peter Drucker on Schumpeter and Keynes. Questions about how to characterize events and more details and possible solutions.)
It seems that more Americans are aware of and have tired of this no regulation climate. A positive sign is that the Internet allows for more public and accurate budgetary calculations; a departure from a 30-year trend that misrepresented the very numbers we depend on to assess the economic picture. But disappointing is Obama's tendency to appoint some of the very people who (when in the private sector) aggravated the situation. This is not helping to create a very different economic environment from the Bush years.
There are continuing patterns of this occurrence in the private sector: Hiding debt - - Turning debt into derivatives - - Loans described as revenue - - Revenue booked before it is earned.
An implication that is insufficiently taken into account: Derivatives (such as Mortgage Backed Securities, Credit Default Swaps, and Credit Default Options) are leveraged bets; financial bets that something will or will not happen. There is more money at risk in derivatives than stocks and bonds; there is a tendency for them to disgorge (sell out) all at same time and thereby depress markets around the world and this could trigger a global market panic.
Another way to understand this: as economically defined, the price is what you pay, the value is what you get, the cost is what given up instead (opportunity cost), the charge is what is asked. Market price exists... it can be calculated; market value does not exist, but could be a term or factor used in an economic computer model. (Sort of gives a wider dimension to Oscar Wilde's expression about people who know the price of everything and the value of nothing.) This is how derivatives are created. As Janet M. Tavakoli says, "A model can calculate a result to nine decimal points, but cannot tell you if it is correct" or should be factored to assume a quotient.
Bill Fleckenstein writes, "Delusions of infallibility bring me to... quantitative trading. Quantitative analysts have pursued a strategy based on the notion that the money to be made in stocks comes via mathematics rather than from company fundamentals. I believe that this strategy is responsible for much of the pandemonium we see on a regular basis. No market seems to be safe from these maniacal, algorithm-wielding computer beasts. In a way, their systems have made it possible (in the short run) for almost anything to trade at any price, whether foreign exchange, stocks or commodities in general."
This use of margin or leverage as speculation is the opposite of value investing; i.e., buying securities whose shares appear under-priced by some form of fundamental analysis. As examples, such securities may be stock in public companies that trade at discounts to book value or tangible book value, have high dividend yields, have low price-to-earning multiples or have low price-to-book ratios.
Market Fundamentalism - the notion that unregulated markets automatically give you full employment and economic stability. (Unchecked capitalism with no regulations in place does not work for the benefit of society. Capitalism, by its nature, does not make choices concerning morality; therefore, we must have protections in place.)
The Theory of Efficient Markets - the doubtful, yet prevalent belief that prices reflect all known information. The validity of this only seems to be as long as most people are acting rationally. John Maynard Keynes stated that "the markets can remain irrational much longer than you can remain solvent."
Background - In 1933, in the wake of the 1929 stock market crash and during a nationwide commercial bank failure and the Great Depression, two members of Congress put their names on what is known today as the Glass-Steagall Act (GSA). This act separated investment and commercial banking activities. At the time, "improper banking activity", or what was considered overzealous commercial bank involvement in stock market investment, was deemed the main culprit of the financial crash. According to that reasoning, commercial banks took on too much risk with depositors' money. Additional and sometimes non-related explanations for the Great Depression evolved over the years, and many questioned whether the GSA hindered the establishment of financial services firms that can equally compete against each other. There are important reasons why the GSA was established and what led up to its final repeal in 1999.
The Glass-Steagall Act of 1933 established the Federal Deposit Insurance Corporation (FDIC) in the United States and included banking reforms, some of which were designed to control speculation. Some provisions such as Regulation Q, which allowed the Federal Reserve to regulate interest rates in savings accounts, were repealed by the Depository Institutions Deregulation and Monetary Control Act of 1980. Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999, by the Gramm-Leach-Bliley Act.
Officially named the Banking Act of 1933, additional legislation introduced the separation of bank types according to their business (commercial and investment banking), and it founded the Federal Deposit Insurance Corporation for insuring bank deposits. Literature in economics usually refers to this simply as the Glass-Steagall Act, since it had a stronger impact on US banking regulation.
The Commodity Futures Modernization Act of 2000 (CFMA) repealed the Shad-Johnson jurisdictional accord, which had banned single stock futures in 1982. The legislation also provided certainty that products offered by banking institutions would not be regulated as futures contracts.
Earlier I posed the question about whether a country had ever had an unregulated economic system. Perhaps the nearest occurrence of unbridled capitalism with no regulation, intervention, or rules, was during the Spanish and Portuguese conquest of Latin America after 1492. It stimulated the wealth of Europe and powered the Industrial Revolution, but it did not advance or assist Spain or Portugal except in the short-run. For the longer term, it seems to have encouraged in the upper classes of Spain, Portugal, and Latin America, an attitude of indolence leading toward atrophied and backward thinking. It destroyed Latin American resources, wealth, development, and the opportunities of most its people to this day. (cf. Eduardo Galeano and Gabriel García Márquez.)
From Mirrors: Stories of Almost Everyone by Eduardo Galeano: "Precursor of Capitalism: England, Holland, France, and other countries owe him a statue. A goodly part of the power of the powerful comes from the gold and silver he stole, from the cities he burned, from the galleons he pillaged, and from the slaves he rounded up. Some fine sculptor ought to carve an effigy of this armed functionary of nascent capitalism: knife between the teeth, patch on one eye, peg leg, hook for a hand, parrot on the shoulder."
A second instance of capitalism without government strictures was the British East India Company. Adam Smith condemned the monopoly and practices of the East India Company. It was the de facto government of sections of India from the time of its incorporation by Queen Elizabeth I to the mid-nineteenth century. The corporation could acquire territory, mint money, command armies, sign treaties, make war and peace, and develop judicial and tax systems. (From For All the Tea in China by Sarah Rose.)
The Founding Fathers of the United States wished for the individual states to establish a time limit on corporations (this becoming the custom and procedure of the states in the first century of the U.S.) so as to avoid the British tendency of allowing a corporation, such as the East India Company, to obtain the power of issuing, creating, and enforcing public policy.
From Glimpses of World History by Jawaharlal Nehru, Prime Minister of India from 1947 to 1964.: "…the East India Company-a trading company-was governing India. There was growing control by the British Parliament, but, in the main, India's destinies were in the hands of a set of merchant adventurers. Government was largely trade, trade was largely plunder. The lines of distinction were thin. Enormous dividends of 100 per cent, and 150 per cent, and over 200 per cent, per year were paid by the Company to its shareholders. And, apart from this, its agents in India picked up tidy little sums… The officials of the Company also took trade monopolies and built up huge fortunes in this way with great rapidity. Such was the Company's regime in India."
Returning to present day United States, the trends and patterns have included deregulation, privatization, the removal of oversight and penalties, and the meltdown of mortgage insurance and bank lending institutions such as Lehman Brothers, AIG, Bear-Stearns, Fannie Mae, and Freddie Mac.
Senator Elizabeth Warren former Harvard law professor and chair of the Congressional Oversight Panel responsible for monitoring bank bailouts (TARP - Troubled Assets Relief Program) said there are three choices for dealing with the crisis in financial institutions: liquidate, subsidize, or take them over and reorganize them. She succinctly sums up what has led to the present situation:
"Starting in 1792 with George Washington's first term, we have a credit freeze and financial panic; then every fifteen to twenty years - bust, panic, crisis all the way up until the Great Depression - worst financial disaster ever. We decided we can do better. Three pillars are put in place: the FDIC (insurance for people's savings) the Glass-Steagall Act (separation of financial institutions; keeping them regulated and in line) and the SEC (Securities and Exchange Commission - strict oversight of stock market trading.) Then we go fifty years without a panic - recessions yes, but no serious financial depression.
"In the 1980s, we started pulling the threads out of the regulatory fabric and what's the first thing we get? We get the Savings & Loan crisis. Seven hundred financial institutions fail. Ten years later what do we get? Long Term Capital Management, where we learn that when something collapses in one place in the world it collapses everywhere else. Early 2000s, we get Enron which tells us the books are dirty. And what is our repeated response? We just keep pulling the threads out of the regulatory fabric. So we have two choices -- we are going to make a big decision, probably over about the next six months. And the big decision we are going to make is going to go one way or another. We are going decide, basically, Hey, we don't need regulation. You know, it is fine. Boom and bust, boom and bust, boom and bust, and good luck with your 401k. Or alternatively we are going to say, You know, We are going to out with some smart regulation that is going to adapt to the fact that we have new products and what we are going to have going forward is we are going to have some stability and real prosperity for ordinary folks."
The return of Depression Economics - restoration of New Deal style regulations, intervention, and oversight.- New Deal Banking Regulations
Federal Reserve Board Policy and Business Activity
Notes - Causes - Effects:
Causes beginning in the 1980s
These tendencies began in the late 1970s and slowed slightly but continued in the 1990s. It has never ceased during the last thirty years with privatization of aspects of the military, emergency services and services that should not be deregulated and split. Conservative commentators have made it seem like privatization, the weakening of unions, and deregulation have been beneficial to the nation, but it has only opened the door to gross incompetence, negligence, and greed when an industry is allowed to go in this direction. It can hardly be called capitalism. It is corporatism. It is more like socialism... but only for extremely high-income people and large corporations and conglomerates. As a society, we have been tending to socialize the cost and privatize the gain. Corporations are quite in favor of socializing their financial losses.
The privatization of everything has so run amok that even the military and Medicare (and Social Security if Republicans had their way) are becoming privatized with less and less regulation, oversight, and accountability. As part of the Medicare Part D legislation in 2006, there was no allowance for the government to find the best prices for drugs for senior citizens; costs were tied to whatever a few pharmaceutical monopolies were charging. This is hardly free market capitalism. It is a government run by corporations.
Robert Skidelsky writes in Keynes: The Return of the Master, "…I agree with Keynes that ideas matter profoundly,… I therefore believe that the root cause of the present crisis lies in the intellectual failure of economics. It was the wrong ideas of economists which legitimized the deregulation of finance, and it was the deregulation of finance which led to the credit explosion which collapsed into the credit crunch. It is hard to convey the harm done by the recently dominant school of New Classical economics. Rarely in history can such powerful minds have devoted themselves to such strange ideas. The strangest of these is the idea that market participants have correct beliefs on average about what will happen to prices over an infinite future."
Since the late 1970s, we've created a viral form of capitalism. The failure is not capitalism, but a specific kind of capitalism that evolved from economic theories stressing that the only goal of business is to maximize profit, regardless of the social and environmental costs, and popularizing the idea that any government regulation is harmful and all forms of privatization is positive. This mutant predatory form of capitalism, has created an extremely unstable, unsustainable, unjust and very dangerous world.
This led to repealing regulations such as Glass-Steagall and other banking restrictions created during the Great Depression to protect us from other potential deep recessions and depressions. This largely brought about the latest recession in 2008. We need to implement many of those regulations again as well as a new set of laws that encourage businesses to be environmentally and socially responsible.
For the first hundred years of the United States, no corporation was allowed to receive a charter unless it could prove that it served the public interest. Moreover, charters came up for renewal every ten years or so. They did not receive a renewal unless they could prove they served the public interest. This changed with the Supreme Court ruling in 1886 that used the thirteenth amendment to make corporations equivalent to individuals.
We need to return to an understanding that corporations are there to serve us. We used to believe that a good CEO takes care of the long-term interests of the corporation-the employees, the customers, the general economy-not just there to make short-term profits and raise the stock price and dividend temporarily.
The public policy should be to encourage corporations to aim toward creating a sustainable, just, and peaceful world. Those who are controlling these organizations today must be answerable to what is in the best public interest, and not just what is in the interests of a few very wealthy, powerful people.
Sociologist Zygmunt Bauman, in Consuming Life, analyzes how market sovereignty differs from state sovereignty:
"This strange sovereign [the market] has neither legislative nor executive agencies, not to mention courts of law - which are rightly viewed as the indispensable paraphernalia of the bona fide sovereigns explored and described in political science textbooks. In consequence, the market is, so to speak, more sovereign than the much advertised and eagerly self-advertising political sovereigns, since in addition to returning the verdicts of exclusion, the market allows for no appeals procedure. Its sentences are as firm and irrevocable as they are informal, tacit and seldom if ever spelled out in writing. Exemption by the organs of a sovereign state can be objected to and protested against, and so stands a chance of being annulled - but not eviction by the sovereign market, because no presiding judge is named here, no receptionist is in sight to accept appeal papers, while no address has been given to which they could be mailed"
From Democracy Incorporated by Sheldon S. Wolin:
"An economy where power was dispersed among countless actors, and where markets supposedly were dominated by no one, rapidly gave way to forms of concentrated power -- trusts, monopolies, holding companies, and cartels -- able to set (or strongly influence) prices, wages, supplies of materials, and entry into the market itself."
Further Conclusions from:
Empire of Illusion - Chris Hedges
Death of Conservatism - Sam Tanenhaus
Interesting Times - George Packer
Other People's Money - recent review of book by Justice Louis D. Brandeis - U.S. Supreme Court (1916-1939)
Industries need to play by rules established during the Progressive Era and by FDR's New Deal. These measures helped the middle class and unions develop and grow - Sectors now out of control: oil, large farms, banking and credit card companies, pharmaceutical, insurance, media, and defense industries.
Traditional or classical conservatism was represented by Edmund Burke, Benjamin Disraeli, and Karl Popper. The administrations of Eisenhower and Nixon tended to encompass the previous or prevailing liberal era, only moderating or slowing the trend. There was not the call for a rollback encouraged by Movement Conservatism represented by Tea Party conservatives and right-wing radio.
What follows may be too much extraneous or redundant information; perhaps to be included in separate articles:
Some ambiguities not initially obvious: There are significant shared characteristics of economic (though not political) philosophy through the following people, trends, concepts and parties: mercantilism, Hamilton, Federalists, a central bank, Clay, Whigs, Lincoln, Republicans, high tariffs, von Mises, Hayek, Friedman, corporate capitalism, and government subsidy of corporations.
Insurance conglomerates not honestly identifying PR firms such as 'APCO World Wide' or 'Healthcare America' which reframe debate by masquerading as consumer groups or concerned citizens.
Dodd-Frank legislation establishing the Consumer Protection Bureau is encouraging, but compared to 1930s, which gave 50 years, generations of protection and security, which split banks, it is tame. Republicans have fought Dodd-Frank Wall Street reform and have blocked the stimulus for repair of infrastructure.
CEOs of the largest American companies earned an average of 42 times as much as the average worker in 1980, but 531 times as much in 2001. The richest one percent of Americans now take home almost 24 percent of income, up from almost nine percent in 1976.
This challenges the deceptive idea that unfettered markets solve everything and that this is our heritage and Adam Smith.
Derivatives are side bets on ethereal inventions of a computer; paper loans divorced from reality Securitizations of bad paper allowed less responsibility of banks / Savings and Loans in 1980s: first warning Paul O'Neil - 7 percent bank responsibility should be 20 percent / mortgage standards / laughed out of town Glass-Steagall (1930) repeal eliminated all firewalls / islands of safety that used to be commercial banks were now vulnerable too.
"Wall Street lobbyists were ferociously batting proposed reforms of the financial system that would clip the banks' wings and forestall another bailout. Out, for the most part, were seven and eight figure bonuses. In were complicated 'stock options' and 'deferred compensation' that promised equally big returns down the road. - Winner-Take-All-Politics by Jacob S. Hacker
Economic models sometime use a form of game theory. In theory this can predict the social and economic consistencies or contingencies or action. But the world's problem's cannot always be predicted or solved since it only works when people act rationally.
The central aim of The Divine Right of Capital by Marjorie Kelly is to show that the structure and legal base of the modern American corporation bears a great deal of resemblance to the feudal estates of the Middle Ages.
The Economics and Politics of Elizabeth Warren - Simon Johnson, The Baseline Scenario: "Congressional Republicans are apparently intent on a big showdown with Elizabeth Warren, who is currently building up the new Consumer Financial Protection Bureau (CFPB). This is very good news for the White House, if they use this opportunity wisely. Some Republicans seem to think that Ms. Warren is about 'big government' or 'intrusive regulation."
" Unless you become more watchful in your states and check the spirit of monopoly and thirst for exclusive privileges, you will in the end find that...the control over your dearest interests has passed into the hands of these corporations." - Andrew Jackson
Austrian School economists conclude that, if the interest rate is artificially low, then the demand for loans will be higher than the actual supply of willing lenders, and if the interest rate is artificially high, the opposite situation will occur. This misinformation leads investors to misallocate capital, borrowing and investing either too much or too little in long-term projects. Periodic recessions, then, are seen as necessary "corrections" following periods of fiat credit expansion, when unprofitable investments are liquidated, freeing capital for new investment. Friedrich von Hayek was a proponent of aspects of the business cycle theory, but the theory is not universally accepted. Paul Krugman considered it unworthy of serious study. A few Austrian School economists, such as Pascal Salin, also suggest that a full-reserve banking system should not be enforced and rather simply root for free banking.
A solution to the present crisis may be found in a study of New Deal economics. As an antidote to what is incorrectly termed free trade, strategic trade policy or New Trade Theory should be explored. What might more successfully come into focus, as an economic direction, could be found by learning about new Keynesian macroeconomics.
The criticisms of such plans are disingenuous as are critics of tax policies
More on the usage of laissez-faire and the invisible hand:
Laissez-faire is a French phrase literally meaning let do ("allow to do"). Though used earlier by Frenchmen M. Le Gendre, P.S. de Boisguilbert, and Vincent de Gournay, an early appearance of the motto in an English text was in the writings of the London merchant Charles Bosanquet in 1808. It was originally introduced in the English language world in 1774, by George Whatley, in the book Principles of Trade, which was co-authored with Benjamin Franklin. Classical economists, such as Adam Smith, Thomas Malthus, and David Ricardo did not use the term. Probably James Mill's reference to the 'laissez-faire' maxim (together with 'pas trop gouverner') in an 1824 entry for Encyclopedia Britannica is what really brought the term into wide English usage.
Though it seems far afield, I'd like in this report to deal with an aspect of critical thinking and the misuse of logic - the use of the undistributed middle in syllogistic sequence. The logical fallacy of false dilemma, also known as the fallacy of the excluded middle, false dichotomy, either/or dilemma or bifurcation, involving a situation in which two alternative points of view are held to be the only options, when in reality there exist one or more alternate options which have not been considered. In this case it takes the form that the choice we must make is between capitalism and socialism.
The first incorrect assumption is that capitalism must be defined as did the Austrian economists or as Milton Friedman's concept of laissez-faire, which as I have shown, successful economies have never had. Second is numerous examples of greatly successful government led systems within our economy which have helped us all such as Social Security, Medicare, and veterans benefits which were assaulted during the Republican congresses between 2001-2006. More specific examples:
Between 1935 and 1943, the WPA provided almost 8 million jobs. Anyone who needed a job could become eligible for most of its jobs. Hourly wages were the prevailing wages in the area; the rules said workers could not work more than 30 hours a week but many projects included months in the field, with workers eating and sleeping on worksites. Before 1940, there was some training involved in teaching new skills and the project's original legislation went forward with a strong emphasis on family, training and building people up.
The WPA built 650,000 miles of roads, 78,000 bridges, 125,000 buildings, and 875 miles of airport runways. Only 7% of the budget was allocated to arts projects, presenting 225,000 concerts and 475,000 artworks -which was the mostly widely criticized of the New Deal agencies, but it did succeed at getting money into the hands of the unemployed. Until closed down by Congress and the war boom in 1943, the various programs of the WPA added up to the largest employment base in most states.
As of 2013, Thom Hartmann says, "We're actually in this crash. It really started in 2006 when the housing market started falling apart, just like in 1927 when the housing market fell apart. And that crash lasted for quite some time, as Hoover did nothing. Now we have a situation where it's not just do nothing. Obama was successful in the first few months of his administration at putting enough of a band-aid on it that they're holding it back with baling wire and bubble gum. But Bush had hoped-he saw this coming. The Bush administration had hoped that they could wait until November of 2008, so it would be after the elections, so it wouldn't hurt the Republican candidates. He was unsuccessful. The Obama administration is now-because they're not doing the real structural change necessary, they're hoping they can push it off to 2016. And that's why we chose that date. There's an enormous amount of effort in our government and in the Fed to try to hold this off until after the elections of 2016. Whether they're going to be successful or not, I don't know. It literally could happen next week. We are seeing a repeat of what we saw in the 1920s, what we saw in the 1850s, what we saw in the 1760s and 1770s, which is, basically, very wealthy, very powerful interests rising up and-you know, they're anti-fundamentally anti-democratic. They're trying to create an oligarchic form of government, and in many cases succeeding. It's the war of the rich against the poor and the working-the working people, the middle class, in short summary.
"In this generation, we see the Kochs and the Adelsons, and they're the more visible ones. There are many more who are far less visible. Last year on Wall Street alone, you had 10 people who took over $2 billion in income. You've got the president of United Healthcare has taken over a billion dollars in income, Stephen Hemsley; before him, Bill McGuire, took over a billion and a half dollars in income. There are a number of people, since the rules got changed during the Reagan administration. It was a real-a genuine revolution that set this up, and then the big changes at the end of the Clinton administration that Phil Gramm pushed through, the Gramm-Leach-Bliley and the Commodity Futures Modernization Act. Since then, these people have basically been unleashed. In the 1920s, it was the DuPonts and the Morgans and the Rockefellers, and now it's this new bunch. But it's always the same group.
"And how did they gain by the recession? Some of the biggest fortunes in America over the last century were made during the last Great Depression. If you're cash rich and everybody is desperately selling everything they have for almost nothing, because they're facing tax liens and they're going out of business and it's an enormous opportunity to get even richer. They're benefiting-they are and will benefit from all this.
"On the one hand, the Occupy movement, and in some ways the tea party movement, at least at the grassroots where people don't realize who's pulling the strings, are all signs of this growing populist rage of a nation that is pregnant with, to paraphrase Jefferson, revolution-I'm not talking violent revolution; as I said, the Reagan revolution was a revolution, the FDR revolution, you know-that there is so much pressure right now to-you know, for something to happen. And we're seeing this in the rise of suicides all across the United States. We're seeing it in the rise of homelessness.
"In 1933, when Franklin Roosevelt came into office, there was an Occupy movement; it was called the Bonus Army. And literally, from the edge of the White House all the way down to the Potomac River was a sea of people. FDR confronted this enormous occupation. It was the consequence, of course, of three years of the crash not being addressed. I would guess, had he not been able to get this very small stimulus, that stopped us from losing 700,000 jobs a month and took us to kind of a flat level-flat painful, but flat-that there would-you know, that the Occupy movement would have been 10 times larger now, and we'd be looking at something like that.
"Let's go back to FDR's inaugural address in 1933. He said: 'Our greatest primary task is to put people to work. This is no unsolvable problem if we face it wisely and courageously. It can be accomplished in part by direct recruiting by the government itself, treating the task as we would treat the emergency of a war, but at the same time, through this employment, accomplishing greatly needed projects to stimulate and reorganize the use of our great natural resources.'
"President Obama may have missed the FDR moment he might have had that during the first few months of his presidency. And before Scott Brown was put in the Senate, he had about 13 weeks with a filibuster-proof Senate and had an opportunity. Basically-in all probability, he got the same speech Bill Clinton got from Rubin and Greenspan, when he was installed after running on his "New Covenant" speech, which was a very FDR speech, and then governing as an Eisenhower Republican.
"On the one hand, it's fairly easy to blame Obama for that. On the other hand, I don't think that any president in a long, long time has faced such an implacable wall of opposition. And now, because of Citizens United, Buckley v. Valeo, First National Bank, because of Supreme Court decisions, these politicians on the right-the Republicans, by and large-are funded massively by these billionaires. And so, much like in the 1930s, much like in the 1850s, much like in the 1770s, it's going to take a major economic crisis to produce the political will necessary to create the fundamental changes, structural changes in our political and economic system that can make this country work again.
"We can correlate crashes in the economy with war. Arnold Toynbee-it may be an apocryphal quote, but it's often attributed to him-said that when the last man who remembers the horrors of the last great war dies, the next great war becomes inevitable, that we remember the glories but not the horrors. And you could say the same of economic disasters, when, we've forgotten not only the horrors of the Great Depression, in many ways, but also the lessons that we learned out of them. Every one of these economic disasters has been followed by a war-the Revolutionary War, the Civil War, World War II. Whether this one-and each war has been horribly more destructive, because technology improves- is going to depend probably a lot on what is going on around the rest of the world.
"President Dwight Eisenhower said in his famous farewell speech to the nation, January 17th, 1961: 'My fellow Americans, this evening I come to you with a message of leave-taking and farewell and to share a few final thoughts with you, my countrymen. We have been compelled to create a permanent armaments industry of vast proportions. Three-and-a-half million men and women are directly engaged in the defense establishment. The total influence-economic, political, even spiritual-is felt in every city, every statehouse, every office of the federal government. We recognize the imperative need for this development, yet we must not fail to comprehend its grave implications. In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.'
"More than 50 years later, that speech, the arguments of the military-industrial complex are more relevant than ever. And there's what's referred to in economics as a perverse incentive built into this, just like we see with the private prison industry arguing for longer drug sentences and laws because they want to fill up more beds. Ed Snowden worked for a company, Booz Allen, which was owned at one point in time by the Carlyle Group, which was in part owned at one time, ironically, by the bin Laden family. I mean, figure this one out. And we find that, you know, roughly 70 percent, apparently, of the intelligence budget of the United States has been outsourced. Massive chunks of the Pentagon have been outsourced.
"So it's not just, a matter of if there's going to be a war or military conflict-intra-country stuff, but we have an industry in the United States that is so powerful and that the Supreme Court has empowered to behave as if they were citizen lobbyists in ways that were unthinkable in-well, actually, has happened in past, but during Eisenhower's day would have been much more difficult, and certainly after Nixon, that-for example, the wealthiest zip code in the United States is no longer Beverly Hills. It's just north of Washington, D.C., where all the mansions of these defense contractors are.
"There's an enormous pressure to do something. And I was surprised that we didn't go to war with Syria. I think the country has been so badly burned by George Bush's lies and wars that-that it gives me some hope that this depression, this crash, might not be followed by a war. But we're going to have to wait and see what happens in the Middle East and with Taiwan and China."
A description of the role of central banks from, The Evolution of Central Banking by J. Bradford DeLong:
"For more than 170 years, it has been accepted doctrine that the market is not to be trusted in a liquidity squeeze. When the prices of even safe assets fall and interest rates reach sky-high levels because the traders and financiers in the markets collectively want more liquid assets than exist, it is simply not safe to let the market sort it out. The central bank must step in: it must set the price of liquidity at a reasonable levelmake it a centrally-planned and administered pricerather than let it swing free in response to private-sector supply and demand. This is the doctrine of the lender-of-last-resort.
"For more than half that timesay, 85 yearsit has been accepted doctrine that the market is not to be trusted even in normal times lest it lead to a liquidity squeeze or to an inflationary bubble. The central bank must make the price of liquidity in the market a centrally-planned, administered price day in and day out. It must keep the market rate of interest near the natural rate of interest, said the followers of Knut Wicksell; it must offset swings in business animal spirits in order to stabilize aggregate demand, said the followers of John Maynard Keynes; it must keep the velocity-adjusted rate of growth of the money stock stable, said the followers of Milton Friedman-but if you do any one of these things you have done them all, for they are three ways of describing what is at bottom the same task and the same reality.
"Thus as social democracy, government guideposts, and centralized planning waxed and waned elsewhere in the economy, social democracy in short-term finance went from strength to strength. First central banks suspended the rules of the free market in liquidity squeezes. Then central banks set the price of liquidity as an administered price in normal times. Then central bankers freed themselves of all but the lightest contact with their political masters: they became independent technocrats, a monetary priesthood that spoke in Delphic terms obscure to mere mortals. The justification for this system was that it seemed to work wellor at least to work less badly than central banking that blindly adhered to the gold standard or than no central banking as well."
A description of the role of the Federal Reserve System:
1. Over time, money has become less tied to anything real or practical, but it has always ultimately been based on agreement between people about value. For example, when money was cattle, people agreed that the value of a service or whatever was so many cattle and not more or less.
2. The gold standard did not guarantee price or economic stability. The value of gold and silver always fluctuated based on how much of each was being mined, and while their value in comparison to each other was supposed to be stable based on this ancient alchemical relationship, in reality that changed a lot too.
3. During the Civil War, Lincoln issued "greenbacks" for the first time in US history. This was money not based on gold, backed solely by government promise. This caused a boom, because there was more money available for people to start or expand businesses. After the war, government went back to the gold standard, causing massive deflation, hitting farmers hard. Also, because the gold standard limited the amount of money available, frontier banks did not always have enough cash reserves to back loans farmers asked for seasonally, as well as their deposits. This caused 'bank runs" - when rumors flew that a bank was running out of cash, people raced to withdraw their money so they wouldn't lose it when the bank failed. Farmers organized the Populist movement, which wanted government to go back to greenbacks and abandon the gold standard. They called for an "elastic currency," which would make credit available when it was needed, rather than being tied to gold markets. They demanded democratic control of money, thru elected government. They were scorned as hicks by the East Coast banking industry, who saw a threat to their control over money. William. Jennings Bryan was kind of Populist, but watered down.
4. The Federal Reserve System started because of the problems the Populists identified. It wasn't born from their movement, but government and East Coast bankers eventually figured out that an elastic currency was necessary to create more stability in the economy (because credit demands are seasonal). The big NY banks used to cooperate (under JP Morgan's leadership) to bail out failing banks, but around the 1900s, this happened a lot and they even had to bail out the government. Eventually they realized they needed elastic currency. The Fed was a compromise between private banking interests and public democratic interests. The privates made out way better. The Fed is highly anti-democratic - its structure is based on distrusting public opinion about monetary policy. Its culture tries to maintain the "mystique of central banking," the attitude that these things are too complicated for normal people to understand. The Fed is not "privately owned," though part of its governance comes from private banking. It is protected from government oversight by the length of its governors' terms and by the freedom they have to determine monetary policy. Basically, it's like the government said, "We appoint you to do this job, but we won't tell you how to do it or hold you accountable for how you do it."
5. The Fed controls how much money/credit there is by adjusting interest rates and by buying and selling government securities. Money is created and destroyed simply by entering and erasing numbers in an electronic ledger. One Fed chairman described the Fed's role as "leaning against the wind" -- the Fed should moderate growth and contraction in the economy by adjusting monetary policy to slow speculative investing or to boost flagging investment. An important question that doesn't get addressed directly is who benefits? The US has two classes - creditors and debtors. Inflation actually aids debtors, as long as wages rise at the same or higher rate, because loans they take out during an inflationary period, they pay back in depreciated dollars.
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