Sunday, October 21, 2012

Jeff Faux on neoliberalism and its grim effects on the US economy

"Books of this genre are expected to have a happy ending. With awareness of what is wrong, the corrective forces of democracy are set in motion."

Those words were the beginning of the ending chapter of John Kenneth Galbraith's The Culture of Contentment (1992), a book in which he looked at some grim trends of the already-dominant neoliberal paradigm for the US economy and American democracy.

But Galbraith refrained from suggesting the happy ending. He didn't see any clear path to changing the dangerous trends already then in motion, no obvious social or political movements with a clear prospect of reversing them. He stuck with the Cassandra mode, pointing out the dangers but without any concrete hope that they would be met in the foreseeable future.

Galbraith would not have been surprised at the condition of things 20 years later than Jeff Faux describes in his new book, The Servant Economy: Where America's Elite Is Sending the Middle Class (2012). Faux describes the decline in opportunities for ordinary Americans, the stagnation of incomes, the business abuses, the crash of 2007-8 and other of the many negative consequences of the neoliberal course adopted by both the Democratic and Republican Parties. At one point he sums up the relatively meager reforms put in place for the financial industry since 2008, even with the Dodd-Frank legislation:

The combination of a Wall Street-owned Republican Party and a Wall Street-rented Democratic party [sic] ensured that the political system would not use the crisis to put in place safeguards against another crash or to curb the financial systems's destructive diversion of the capital necessary for the long-term growth of the economy.
His book is reminiscent of The Culture of Contentment both for its sobering picture of the current state of US political economy and for his depiction of the failures of the political system to adequately address the needs of the majority of people in the US even in the face of the current depression. For Galbraith in 1992, a new depression like the one that began in 2007-8 stood on the horizon as something like a worst-case scenario. He implicitly assumed that such an event would revitalize democratic politics to challenge what we now know as the neoliberal consensus.

Faux is at his best in discussing the failure of "free trade" from NAFTA to Colombia to Chile to provide the promised benefits for the US economy in terms of jobs and prosperity. It's much more difficult today than in 1992 to believe that free trade agreements that allow Wal-Mart to provide a greater variety of cheaper foreign-made goods but erode employment and income among American workers is actually a net benefit for most people. Because the neoliberal trade deals were far more about free movements of capital than of goods:

... the Reagan-Clinton [trade deals] were as much or more about freeing capital as expanding trade. Their purpose was to give U.S. corporations the right to produce offshore and sell to the U.S. market. As the [then-]president of Peru, Alan Garcia, told the U.S. Chamber of Commerce after the 2007 U.S.-Peru fee-trade agreement in December of that year, "Come and open your factories in my country so we can sell your own products back to the U.S."
Faux is also good in describing the limits of education, a near-panacea in the neoliberal model, as a remedy for the negative effects of trade deals and financial deregulation. He cites a 2006 article by economist Alan Blinder, who "stunned the economics profession by concluding that approximately forth-two million U.S. jobs were potentially off-shorable. His focus was not on manufacturing jobs but on the high-tech service occupations that were supposed to compensate Americans for the loss of manufacturing jobs." (my emphasis)

He devotes a full chapter to the state of education, with particular attention to the various for-profit education schemes that have been popping up that are far more effective in making money for top executives than in providing quality, cost-effective education to students.

Faux offers a general sketch of the state of economics and assumptions about the role of government from the end of the Second World to Reagan's election as President in 1980. One aspect that I don't see mentioned often enough that he highlights is the widespread assumption in the late 1970s among Democrats and a number of prominent financial and business executives like Felix Rohatyn and Henry Ford II that some sort of federal industrial policy was a necessity for the US economy to manage optimally in the post-Arab oil boycott world. He sees an important chance as having been lost when that idea faded from the consciousness of the political and media elite:

Had Carter won a second term, industrial policy, manufacturing and energy policy might have been integrated, which could have significantly changed the direction of the U.S. economy for the next thirty-five years. ...

... having a Democratic Party conscious of the importance of a healthy domestic industrial base could have prevented the Clinton administration from making two decisions that undermined the long-term health of the U.S. economy: the deregulation of finance, which shifted the engine of growth away from production toward overleveraged consumer debt, and the abandonment of U.S. industry to unwinnable competition with countries where wages are suppressed (Mexico), where government runs effective industrial policies (Germany), or both (China).
Faux also discusses the corruption and regulatory irresponsibility leading up to the financial crisis of 2008, as well as the destructive effects of austerity policy. Those stories have been told more extensively elsewhere, but his has the virtue of providing an accessible description of how those disasters fit into a longer arc of neoliberal policies. (He does use the term "neoliberal.") And there's lots of stories to tell about the financial crisis and the efforts to deal with its aftermath.

For instance, right at this moment in the Presidential election campaign, both the progressive and neoliberal wings of the Democratic Party are happy to be able to point to Obama's successful rescue of General Motors and Chrysler, a policy that had particularly salutary effects in the crucial swing state of Ohio. But he reminds us that there were downsides to the policy. And that the man Obama selected to head the project was Steve Rattner, "a Wall Street leveraged buyout artist, who had no background in manufacturing, much less automobiles. Rattner could define the task only in the short-term, deal-making transactional mode," as a opposed to a longer-term transformational moment.

I like that Faux uses the term "leveraged buyout" (LBO) to describe what its practictioners have rebranded as "private equity operations." The LBO concept became pretty notorious during the financial scandals of the late 1980s. But private equity firms like, say, Bain Capital operate on the basis of LBOs. He gives a good summary of how that works:

In a leveraged buyout, investors and specialized private equity investment firms buy controlling interests in a well-run company with little debt and a healthy cash flow. They pay for the company not with their own money but with loans, such as junk bonds, that put up the company's assets as collateral, burdening the firm with debt. They then typically make the firm more "efficient" in the short run by selling off assets, laying off workers, and lowering wages. In the long run, this often makes the firm less able to compete, but before that happens, the private equity fund has sold out at a profit, blessed further with a special tax break.
Like Galbraith 20 years ago, Faux doesn't find the signs of effective popular resistance to destructive neoliberal policies especially encouraging. But since his book focuses on defining the economic results of those policies, he probably should have ended the book in Cassandra mode, too. Instead, he suggests a campaign for a Constitutional Amendment to overturn the Citizens United decision as a way to begin breaking the strangle-hold of what Democrats in the Jacksonian Age called the Money Power.

The problem is that after describing the depth and breadth of the problems, it seems like a pretty pitiful prescription. Don't get me wrong, I support a Constitutional Amendment to get rid of that awful Supreme Court decision and clarify that corporations are not persons with equal rights to human individuals. Obama was right when he said after the decision that it was a threat to democracy.

It's just that unless there are groups and movements that are actively demanding more constructive policies, overturning Citizens United won't solve the problem. After all, the deadly cycle of Big Money in politics creating policies that further undermine economic well-being and at the same time weaken democratic institutions and popular power was in motion well before the Citizens United decision in 2010.

Lots of people forgot a lot about depressions since the 1930s. And one of the things widely forgotten is that depressions can cause some pretty big political changes. Faux actually makes a good case that the vote for Obama in 2008 was a statement of public desire for widespread change in many of the very policies he criticizes. Obama's basic conservatism - despite the howls from FOX News and the Republicans - prevented him from actually leading such a movement.

Faux also understands that both Obama and the Republican Party are wanting to deliver a heavy new dose of austerity policies to the American economy. Such a course has a high risk of reversing the encouraging gains we've seen in economic recovery and prolong the depression for the United States. We're likely to see more strong signs of public desire for change. But as we also should remember from the Great Depression, not all the political repercussions of depressions are constructive ones.

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