In this post I'm going to try to identify what's really going on in our economy and how we can fix it.
(originally posted elsewhere last week, with some additional editing)
The most immediate problem, obviously, is the fact that credit markets have frozen up. Banks other investment organizations are looking at an unexpectedly high number of defaults on loans and realizing that their liabilities may be greater than their assets. As a result, they've decided that they need to hold onto cash to pay their debts, and they've decided that they need to get higher interest rates in order to make loans that now appear riskier than they used to be. In order to get the banks loaning again, they need to have an infusion of capital so they have positive equity again, and they need to feel more secure about making loans.
I've posted briefly regarding the bailout plan, and initially it was a shitty one. Buying financial assets at inflated prices just was not a smart way to get capital to the banks and get money moving again. A better way to get the banks loaning again is to simply take them over--put in some government money and make them loan. At first the Bush administration resisted this, but they do seem to be coming around a bit now. The version of the bailout plan approved by Congress somewhat stalthily included a provision to allow this--a provision Democrats and Nobel Prize winning economist Paul Krugman insisted upon. It's likely that many more Republicans in Congress would have voted against the bailout plan if they had known that the government would end up buying significant stakes in the banks, due to their knee-jerk aversion to socialism. If it's done right, this bailout plan may not be too bad (but can we trust this administration to do anything right?).
Getting loans flowing again is critically important to the overall economy because so much of the economy is dependent on debt. If the loans stop flowing, suddenly a bunch of bankruptcies can occur due to simple cash-flow problems in otherwise healthy companies.
Where is the money coming from to take over the banks and make new loans? The government is going to resort to massive new debt issuance, but some portion of the new money may just effectively be newly printed. This is not necessarily a bad thing--sometimes the best solution is to print some more money and make some inflation happen. Check this out for some perspective on monetary policy: http://www.slate.com/...
Japan fell into a long economic downturn in the 1990s, and many economists believe that their problems would have been shorter if the government had been more willing to induce inflation. "Helicopter" Ben Bernanke got his nickname from a statement he made about using a helicopter drop of money to fight deflation--clearly he's willing to do essentially that to avoid falling into Japan's trap. Of course, it's much easier for a government to go along with some inflation if the country is a net debtor rather than a net creditor as Japan was--inflation reduces the cost of paying back debts.
So the government is pouring massive amounts of money into the economy at the moment in order to clear up the monetary constipation and get the banks moving money again. This is a good move, but look out for some more significant inflation when the clog works its way out and the economy begins to turn.
All of this ignores some much more fundamental problems in the economy. What about fixing some of the longer term problems of our political economy?
I am somewhat hopeful that economic ideas that have been percolating in academia over the last 15 years or so are ready to start making a broader impact. It's not a coincidence that Milton Friedman, leading Chicago School market fundamentalist and promoter of certain simplistic economic models, won a Nobel prize in 1976 just as the Reagan era was beginning to change the shape of America's wealth distribution for a generation. It took a while for academia to expose the Chicago School's models as simplistic and fundamentally flawed, but slowly they've been chipping away. Check out the book Freakonomics for an example of how modern economists are thinking--transaction costs can't be ignored and various types of market failures are everywhere, contrary to the Chicago School's ideology. The rational economic actor is [nearly] dead, and behavioral economics and experimental game theory are replacing it. I don't think it's a coincidence now that a leading force in the move away from market fundamentalism, Paul Krugman, has received the Nobel this year.
Looking at history for a moment, consider the strong socialist currents in the US in the 1930s--even Louisiana's governor, Huey Long, was advocating policies promising "an income of 2,000 dollars for every household, a 30 hour workweek, retirement pensions, and free college tuition. It was to be paid for by taxing the rich. A rich man's eighth million of income was taxed at 100%, 7th million at 64%, 6th million at 32%." http://www.itulip.com/...
This was a sensible reaction to the economic problems of the time, and the New Deal borrowed the general principles of wealth redistribution. Then WWII happened and soon after that the Iron Curtain fell, and people became terrified of Communism and along with it any kind of socialistic policies. Communism sucked, but there was an overreaction. The Chicago School was formed in this environment, starting in the 40s.
See here for an important piece of propaganda related to the Chicago School, Friedrich Hayek's Road to Serfdom: http://mises.org/...
Totalitarian governments are a huge problem, but he's missing the fact that people can be just as enslaved if wealth is highly concentrated among non-government entities. Hayek's ideas are based on an idea that people will be most free if the state withdraws (aside from enforcing property rights), but his conception of freedom is lacking an appreciation for positive liberty. I'll save further discussion of why the libertarian conception of freedom is lacking for another time.
The Chicago School's most fatal error is that it ignores the fact that unfettered markets will concentrate wealth in the hands of a few winners, essentially leading to feudalism. On the one hand, we have totalitarian regimes with too much government control, and on the other hand we have feudalism with too little. [Note that some would argue that both the state and individuals or corporations with high concentrations of wealth can act as "government", broadly defined. If the state ceased to exist, our corporate owners would surely step into the power vacuum as our feudal lords. Additionally, note that the state is more likely to "captured" by wealthy interests as concentration of wealth increases. See Kevin Carson's Iron Fist Behind the Invisible Hand for an anarchist perspective on the relationship between the state and the wealthy (Note that I agree with Carson in many ways but disagree with him on the fundamental point that we're better off with no government--my own perspective is more that it's possible to intelligently use government to increase freedom, and that anarchist ideas can be useful as a direction but not as an endpoint. I prefer Chomsky's perspective: "[A]narchist ideas — challenging authority and insisting that it justify itself — are appropriate at all levels.")]
Anyway, the key point is that the wealth distribution in the US has gotten increasingly concentrated, and it's gotten concentrated as a consequence of the Chicago School ideology that has permeated much of society. We are all enslaved to the few owners. There's plenty to go around, but they're going to keep as much as they can. The top 1% of households own over 40% of the wealth.
In the process of raping and enslaving and destroying the middle class, everything has been outsourced to other countries. The kind of free trade promoted by the Chicago School has hollowed out America's manufacturing--what does America make these days? More and more, economic factors have forced people from productive activities into fundamentally unproductive activities--war, "homeland security", finance, insurance, and other rent-seeking activities (some of this is often referred to as the "FIRE economy" for finance, insurance, and real estate--and financial sector profits reached 40% of all corporate profits during the bubble). I've seen this personally over and over, where my peers have moved from occupations potentially useful to society into more financially rewarding activities that are more of a drain on society.
Here's an example of one guy who nearly earned a Nobel for his research but who is now driving a shuttle at a car dealership for $10/hour. This is how we treat scientists working on important research in our country? http://www.capecodonline.com/...
So, what can we do to fix the economy?
- Stop wasting so much human effort/capital on so many unproductive activities, like war. No wonder people don't think they're getting their money's worth from government. Note that this should include deprivatizing health insurance (what a waste we have now, with so much going to the insurance executives and other overhead), and rethinking the education scam. So much human effort is put into worthless shit like our broken patent system--while it may create jobs, those jobs are about as useful as having a bunch of people digging holes and filling them back in again.
- Invest in actually useful things that will pay off in the long-term, like a new energy infrastructure. See Gore's recent plan for a good option.
- End government policies that protect the elite monopolists at the expense of smaller enterprises. Reducing "intellectual property" is a key component of this (see the Iron Fist article above and The Gridlock Economy for details). Additionally, we need to rethink corporate structures to reduce management's constant screwing over of shareholders and third parties (see Enron etc. and the article below on public vs. private sector).
- Tax wealth, not work. We need to totally change our tax system, keeping in mind the diminishing marginal value of money to individuals as well as the incentives and disincentives that taxes create. Tax the rich, and tax capital gains more. Tax land values. There's plenty of wealth there, it just needs to be distributed better.
Relevant reading material:
http://www.counterpunch.org/... (Exposing the Un-Democratic Face of Capitalism By NOAM CHOMSKY, on capture of government by the wealthy few)
http://www.counterpunch.org/... (Rescue for the Few, Debt Slavery for the Many By MICHAEL HUDSON, on the ownership class keeping us enslaved)
http://www.counterpunch.org/... (The God That Failed By CHRIS FLOYD, on the failure of the Chicago School)
http://www.theartofthepossible.net/... (Kevin Carson on the blurred distinction between public and private and the lack of accountability of corporate management)