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The recent rash of institutional failures plaguing Wall St. has made big headlines and will only serve to reinforce the dominance of economic issues on the campaign trail.  But these high-profile financial diasasters actually obscure a more dramatic development in the economy that is leaving Republicans panicked and speechless with nowhere to turn.  The Republicans would be in deep, existential trouble on the economy even if the major lending institutions were still doing just fine.

The bigger problem for Republicans is that the very way they measure the health of an economy is going the way of the dodo.  What terrifies them (and what should terrify you) is that the economy we live in today (minus recent spectacular failures) is the economy they created by design, partially to win votes.  No, I'm not kidding.

The Republicans are not lying when they say the fundamentals of the economy are strong, and call everyone a nation of whiners in a mental recession, and talk about how everyone is exaggerating their economic concerns.  They're not out of touch: they simply look at the numbers that they think dictates the health of an economy, and they literally can't see what the problem is.

I'm no economic expert, but the basic parameters don't require an econ degree to understand; they're actually pretty simple.  For Republicans (and far, far too many Democrats), there are only three categories that matter:

  • The people who were smart enough to purchase investment vehicles (houses, stocks, etc.) and become part of the "ownership society"
  • The working shlubs who go to a job every day and just try to make ends meet as comfortably as they can
  • The nation as a whole, in terms of overall growth versus inflation

And for each category, there are certain measures of their health:

  • For the "ownership society", its health is measured by stock market indices, housing price evaluations, and other indicators of investment growth
  • For working shlubs without significant investments, the unemployment rate is the universal indicator of economic health
  • For the economy as a whole, the Gross Domestic Product is used to determine whether we're producing more goods and services as a nation or not, coupled with the Core Inflation Rate, which measures inflation (not counting food, oil and other commodities where speculation and other factors can cause "distorting" price swings)

So this is pretty simple, actually.  If the Dow Jones and other investment indicators are doing OK, the "ownership society" is doing OK.  If unemployment is low, the working shlubs are doing OK (if you have a job, what's your problem?).  And if GDP growth is high and core inflation is low, the country is doing OK.  These are the "fundamentals" Republicans talk about when they say the "fundamentals are strong."

What has Republicans panicked and distressed is that, at least until very recently, all these indicators--the indicators by which they judge the basic health of the economy--were actually doing pretty well.  Sure, personal and national debt were at record levels, and commodity prices were spiking, but the "fundamentals" remained strong.  But people were still angry, hurting, and becoming increasingly desperate.  If people's investments aren't going up, or people are out of work, or growth is slow, the GOP has answers for those problems.  Bullshit answers, but answers.  But the GOP has NO answer for an economy where the stock market is doing great, the GDP is growing, and people are working two or three jobs but still can't pay the bills.  They literally have no answer: all they can do is deny the problem even exists.

At least until unemployment recently hit 6.1%, Republicans could claim with much justification that the economy was doing just fine: stocks were up, housing was down slightly but still up by wide margins compared to a decade earlier, unemployment was low on average by historical standards, GDP growth was good, and core inflation was low.  Neoclassical Friedmanist economics dictates that--so long as government largely stays out of economic business--investment growth will expand while finding a perfect equilibrium with labor that keeps unemployment low and inflation practically nonexistent.  For these economic ideologues, it works as predictably as the tides, and as beautifully as the music of the spheres.  We appeared to have approached that Chicago School nirvana.  So what were you all whining about, exactly?

This is an existential crisis for Republicans and rigid neoliberals of all stripes.  Just as surely as the necessity of dealing with global warming creates a major crisis for neoliberal free-market ideology, so too do the failure of the major, accepted economic indicators to adequately measure the health of a nation's economy throw the entire neoclassical economic project into a tailspin.  If Republicans were ever to admit that a nation's economy could even be souring in the face of the accepted "fundamental" indicators, it would create nothing less than revolution--or at least a Keynesian reformation--in economics.

The reasons for the failure of the classical indicators to describe economic well-being are numerous, and tend to get complex.  Suffice it to say that the biggest factor is that wages have not kept pace with even "core" inflation; the wide availability of credit vehicles (most notably credit cards and home equity loans) has allowed many people to have the appearance of economic security when in earlier times they would have faced bankruptcy; core inflation numbers are actually higher than they appear; wild speculation in commodity prices driven by rampant greed has caused "core" inflation to be less relevant when talking about cost of living; the GDP is a terrible measure of a nation's health, as anything, including going to the doctor for a devastating illness or selling an item at a pawn shop, counts as "growth" in goods and services (more enlightened nations use a Gross National Happiness Index instead); the profits of the investor classes are going primarily to the super-rich, leading to a divide even between rich and super-rich such that not even rich investment wealth is distributed in a helpful way even to the luxury sector; and many other reasons besides.  Books like Nickel and Dimed, Strapped and others tell the stories of the millions of people who are hurting and cannot get by in our "fundamentally strong" economy.

Perhaps most tellingly, the GOP-led push to get as many people into the "ownership society" as possible led to huge asset bubbles in housing and other sectors, driving up prices beyond the range of normal affordability and pushing people into investment situations they could not maintain.  This was done as a deliberate strategy: Karl Rove and his minions believed that the more people were "invested" in housing and stocks, the more Republican they would become.  As Naomi Klein points out in The Shock Doctrine, it had worked for Margaret Thatcher in Britain, and there was no reason to believe it shouldn't work here.  As one wealthy Republican told me at a Washington, D.C. luncheon at a big pro-free-trade conference:

We need to get more people invested in the stock market.  If everyone owns a piece of Halliburton, nobody will be complaining about them anymore because they'll all say, "hey, I own part of that.  Leave it alone!"

It was a deliberate strategy to gain votes, and it backfired horribly.  Not enough people got into the ownership society; many who got in were just as unceremoniously kicked out when their ARM mortgage started to adjust; and the rest of America continued to struggle more and more, working longer and longer hours to service higher and higher mountains of personal debt.  And all this, even as every one of their precious economic indicators said that the patient was healthy.

Now, the Republicans have no answers.  They cannot solve a problem they cannot see.  All they have left is denial that there even is a problem.

And that, more than any major bank failure, is what is starting to send shock waves through the neoliberal political and economic world.

Originally posted to thereisnospoon (David Atkins) on Mon Sep 15, 2008 at 11:19 AM PDT.

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