The financial collapse is already making its effects felt in the real economy (also see link two paragraphs down), but much worse economic hardship is coming. I do not believe there’s any stopping it at this point. I might be wrong; Ben Bernanke might have some magic solution he can pull out of his butt, but I really doubt it this time.
None of the candidates – Republican or Democrat – are talking about these financial crises, and the economic onslaught they portend. Hillary brought up the "possibility" of recession in the debate on Saturday evening, but this beast is going to be much worse than a mere recession. Obviously, Bernanke, Bush’s Treasury, and the boys on Wall Street are desperately trying to prevent the beast from slouching into public view before the election this year. They might be able to, but I rather doubt it. The most recent economic data on holiday retail sales, and on credit card delinquencies, indicate a dramatic collapse in what economists call aggregate demand generation – which is what caused the Great Depression in the late 1920s.
The obvious conclusion is that the next president of the United States is going to be dealing with an economic collapse. The extreme level of economic hardship that will likely result is going to make the population more open to radical solutions – Naomi Klein’s shock doctrine – but whether the population will opt for progressive solutions or go the way of Germany in the 1920s and 1930s is, I fear, entirely open to question. It will be a terrifyingly interesting dynamic between the next President and the howls of pain from the mob outside that will determine which way the next president goes in dealing with the economic collapse.
My own view is that this is going to be a fight to the death. Either we demolish the power of Wall Street and dismantle the structure of speculative finance and return to industrial capitalism and a Keynesian goal of full employment and wage growth, or the United States will cease to exist as a free, democratic republic in the next ten to twenty years. I honestly believe the stakes are that high.
One final word before I turn to the candidates. There is NO solution to these financial and economic crises within the presently accepted economic belief structure of U.S. elites. I’m not talking about them being capitalists and what we need being socialism (how anyone can still pine for socialism, after the miserable record of state socialism since the Bolshevik Revolution made Russia the first test lab, is beyond my understanding). You must really understand the difference between Keynesian full employment capitalism, which may be thought of as industrial capitalism, and what professional economists unfortunately (and misleadingly) call "neo-liberal economics", which has given rise to the present system of financial capitalism we hate and deplore. Economist James Crotty has a paper in the 2005 book, Financialization and the World Economy, entitled "The Neoliberal Paradox: The Impact of Destructive Product Market Competition and Impatient Finance on Nonfinancial Corporations in the Neoliberal Era." Crotty explains that the pressures of neo-liberal economics have created a new class of idiots savant -- the professional manager -- who believe that managing a company that produces semi-conductor lithographing equipment is not that much different than managing a chain of brothels in Nevada. The typical American manager with MBA in hand no longer views industrial companies as long-term enterprises in which they must carefully nurture a strong commitment to long-run goals by top management, lower level management, specialized professionals, white- and blue-collar workers, and the firm's traditional suppliers. Rather the professional manager views industrial companies as units or collections of sub-units that are liquid assets which can be sold off to capital markets if they "underperform." That pretty much demolishes any idea of long-term commitments or long-term loyalties.
Hillary Clinton. She may have been the only one to bring up the "possibility" of recession in the debate on Saturday, but the problem with Hillary is crystal clear: she has surrounded herself with stalwarts of "neo-liberal" radical free market economics, including Robert Rubin and Gene Sperling. Remember, former Goldman Sachs chairman Rubin had the Democratic version of "neo-liberal" radical free market economics named after him when he was Bill’s Treasury Secretary: Rubinomics. As Tom Palley wrote in The Nation in May 2007:
Before Democrats can begin to reverse a generation of laissez-faire policy dominance that has put corporations and CEOs ahead of working families, they must debunk Rubinomics, which makes the budget deficit the central focus of economic policy.
If Hillary did end up bucking the wishes of Wall Street, it will be a very slow and painful process as she and her economic advisers blindly stumble their way out of the thicket of neo-liberal radical free market economics in which they have spent their entire lives. I rate the chances of Hillary standing up to Wall Street at around 50 / 50.
Dennis Kucinich. You have to admire the guy’s spunk. But Kucinich would be a repeat of 1860 in the sense that the big money boys would be leaving the United States before he was even sworn in. The big question is: Would he have what it takes to handle the massive international financial instability and economic warfare that would be punitively unleashed? I don’t really know, but his New Age beliefs leave me doubting there is a stern enough core to get the job done. I just don’t seen Kucinich ordering a brigade of the 82nd Airborne onto the Cayman Islands to give prosecutors free access to all those secret bank accounts, which is what might be required if Wall Street gets really vicious in its opposition. I think it is 100 percent certain that Kucinich would tell Wall Street to take a long walk off a short pier, but I think it’s only 50 / 50 that he would actually be mean, tough, and violent enough to actually dismantle the regime of speculative finance.
Barack Obama. There is no longer any doubt the man can inspire. Obama is an orator, in the best traditions of American politics before television ruined it all. Watching the Iowa victory speech, the sheer enthusiasm and passion of everyone in the room was infectious. Shades of JFK and Camelot. It was such a brilliant performance that even Charles Krauthammer on Washington Week in Review admitted Obama was impressive, though he was obviously unhappy admitting it.
But what would Obama do in a confrontation with Wall Street? Obama was a street organizer in some of the worst neighborhoods of Chicago, and his father was from Kenya, so I think Obama has huge empathy for the downtrodden and economically disadvantaged. And, I think Obama was only slightly corrupted by his years in the Ivy League, but this is more wishful thinking than anything else: I really do not know. Unfortunately, I don’t think Obama and the people around him have a clear idea about what’s happening in the economy and the financial markets -- they are paying much more attention to the campaign. I think when push comes to shove there is an excellent chance Obama would tell Wall Street to go screw themselves. But the situation would have to be very dire for Obama and his people to recognize they have to finish off Wall Street once and for all. The good thing about Obama is that he can inspire people, and if this economic beast is going to be as big and bad as I fear, the only thing a lot of people are going to have left is the inspiration Obama can give them.
The big problem with Obama is the same problem Hillary has: his economic advisers are Democratic versions of "neo-liberal" radical free marketeers, so it is going to be the major intellectual breakthrough of their lives to have to admit that most of what they know and believe about economics is wrong. Obama’s most notable economic adviser is Austan Goolsbee, from the University of Chicago – which by itself should be setting off alarm bells since that is the bastion of Milton Friedman’s radical free market economics. In fact, Goolsbee wrote a little homage to Friedman in the New York Times when the latter finally relieved the world of his mortal presence in November 2006.
More recently, Goolsbee told George Will that the threat of free trade and globalization is overblown, because 60 to 70 percent of the economy -- auto mechanics, dentists, doctors, lawyers – do not have to contend with international competition. So, obviously, Goolsbee is overlooking the massive downward pressure on American’s aggregate demand generation (buying power), which is rather surprising, because he has made something of a specialty in studying the distribution of income, especially at the very top. Just take a look through the list of reports and studies he has made available online. Even more surprising, given his research, Goolsbee believes that most of the income inequality results from "radically increased returns to skill" which is the standard movement conservatism excuse for widening income inequality. This completely ignores the unbelievable distribution you find when you focus on just the top ten percent of income earners, which is almost as badly skewed as the national picture – most of the gains have gone to the top one tenth of one percent.
In one of his papers, "What Happens When You Tax the Rich? Evidence from Executive Compensation,"in Journal of Political Economy, April 2000, Goolsbee is worried about "the amount of deadweight loss created by a progressive tax code." He even explicitly points out that a "few thousand executives may account for as much as 21%" of the change in wage and salary income of almost the top one million taxpayers from 1992 to 1993. To his credit, Goolsbee adds that while tax receipts declined dramatically from this group after an increase in tax rates, this was because stock options were exercised, and tax receipts soon recovered in following years. So, the evidence that an extremely small number of extremely rich people have been -- let’s be honest and call it what it is -- looting the United States, is slapping him in the face, but Goolsbee is sticking with the "neo-liberal" radical free market economic theory that higher skills are simply getting paid much more. That misses the whole point of "lifting all boats." If it turns out, as all the evidence now shows, that your pet economic theories are not lifting all boats, well, shouldn’t you begin suspecting that there’s something wrong with the theories? Unless, of course, you really don’t mind -- or are told not to mind, and you obey -- the filthy rich getting ever filthier and ever richer.
So, unless Goolsbee is pulling off some kind of undercover stunt, inflitrating the economics establishment as a mole, there really is no excuse for turning to a guy like Goolsbee for economic advice. George Will even approves of Goolsbee:
Economics is the only academic discipline that in recent decades has moved in the direction that America and much of the world has moved, to the right. Goolsbee no doubt has lots of dubious ideas -- he is, after all, a Democrat -- about how government can creatively fiddle with the market's allocation of wealth and opportunity. But he seems to be the sort of person -- amiable, empirical and reasonable -- you would want at the elbow of a Democratic president, if such there must be.
John Edwards. Personally, Edwards is my choice for the next President. He made his millions as a trial lawyer, meaning he never gave in to the corporate interests, but actually took from them, and, against their will. From personal experience in court, Edwards knows how dirty and underhandedly vicious they can be. As practicing attorney BenGoshi explained in a hard-hitting diary on Sunday asking Obama supporters to show Obama has what it takes to confront the coporatista:
I'm an attorney. I've compromised and settled many more cases than I've had to try. But I also know, from about 17 years of experience in taking on the worst of offenders, that no large corporation or insurance company has, or will, EVER come to the bargaining table unless their made to: appeals to "reason" and "doing the right thing" are taken as weakness by the corporate behemoths. Mind you, they can be brought to the negotiating table: when you've got their balls in a vice.
There would be the same capital flight and punitive financial retaliation as with Kucinich, but I think Edwards would revel in the challenge, and personally savor using the instruments of state to hunt the bastards down and bring them to justice.
A possible problem with Edwards is that he has turned for economics advice to Leo Hindery, a former chairman of the National Cable Television Association, who made $247 million as head of Global Center, which he merged with Exodus Communications. In 2004, Hindery was the money bags behind the Obama ads featuring Osama bin Laden which helped derail the Howard Dean campaign. There is a good bio of Hindery in the dKospedia. To be fair, Hindery is not a born and bred rich prick, and really seems to have thrown himself into political activism. He lent his voice to the outrage over the big tax break given to hedge fund managers last year.
Offsetting the possible problems of having Hindery as an economics adviser, is the fact that a number of leading progressive economists recently endorsed Edwards. Among them is Thomas I. Palley, formerly Assistant Director of Public Policy at the AFL-CIO. He is now working on his own project, Economics for Democratic & Open Societies, to stimulate public discussion about what kinds of economic arrangements and conditions are needed to promote democracy and open society. In 1998, his book, Plenty of Nothing: The Downsizing of the American Dream and the Case for Structural Keynesianism, was published by Princeton University Press.
In the autumn of 2002, Palley published a paper in the Journal of Post Keynesian Economics entitled, "Economic contradictions coming home to roost? does the U.S. economy face a long-term aggregate demand generation problem?" in which he
argues that the
U.S. economy confronts deeper seated problems concerning the aggregate demand generation process. For two decades, these problems have been obscured by a range of demand compensation mechanisms -- rising consumer debt, a stock market boom, and rising profit rates. Now, these mechanisms are exhausted. Fiscal policy adjustments and dollar depreciation are the only stable exits from this impasse, but they must be accompanied by measures rectifying the income distribution imbalances at the root of the problem. Absent this, deficient demand will reassert itself.
Clearly, Palley is an economist who actually gets the picture. In another paper in March 2006, Palley impressively and quite accurately forecast the bursting of the U.S. housing bubble as part of a larger effort to address the increasingly dangerous imbalances in the world financial system. In that paper, which is entitled "The Fallacy of the Revised Bretton Woods Hypothesis: Why Today’s System is Unsustainable and Suggestions for a Replacement," Palley blames these imbalances directly on the ill effects of "neo-liberal" economics. This paper is also an excellent introduction to why "neo-liberal" radical free market economics will always result in disaster.
Another of the economists who endorsed Edwards and who explicitly rejects "neo-liberal" radical free market economics is Gerald Epstein, who edited the excellent 2005 book, Financialization and the World Economy, which I referenced near the beginning. You can read Epstein’s introduction to the book here. Take the time to read it, especially if you are going to vote tomorrow in New Hampshire.
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