Supply-side Socialism

There’s a famous 19th century caricature of  capitalism called  “The Pyramid of Capitalism” that depicts the economic system of Adam Smith as tiered  economic cake.  The  workers on the bottom hold up the pyramid proclaiming “We feed all.”   The well-dressed and well feted rich form the next layer proclaiming “We eat for you.” Then there are the soldiers who “shoot at you” and the priests and ministers who “fool you.”  At the top are the lords and politicians who “rule you.”

All the bailouts and bankruptcies on Wall Street have given  that 19th century image new relevancy, though I’d modify the diagram by moving the rich investment class to the top of the pyramid, supported beneath by the politicians and prophets of pseudo-capitalism.   And I redraw the bottom tier to consist of the faces of middle and working class Americans with the heading: “We take out risky mortgages for you.” Then I’d relabel the diagram “The Pyramid of Supply-side Socialism.”

I’d do so because what has been happening on Wall Street and in Washington for the last thirty years is not Adam’s Smith’s Capitalism.  It’s been Marx meet’s Morgan Stanley.  Thirty years ago Ronald Reagan established the modern Republican credo that the scariest words in the English language are “I’m from the government and I’ve come to help you.” A generation later the subtext of Reagan’s mantra is now apparent.  The gipper apparently meant  that those ten words were scary in so much as they applied to the middle class.  As in the government helping the American middle class—or, better said, the American middle class helping itself.  These ten words were scary because, if the government was spending all that money on the drones of the middle class it wouldn’t have the money to lavish on the investment class.

Now, thirty years later, the Reagan Revolution is revealed to be both an unmitigated sham and an unimaginable success.  Its truth has won out.

Reagaonomics was sold as a plan to cut taxes, spending and regulation.  In return, new capital for investors would be turned into new jobs  (be it by a downwards trickle) for consumers and workers resulting in broad and permanent universal prosperity.

Not quite.

The Reagan revolution cut taxes disproportionately on the investment class, not the working class.  And the Reagan administration began the wholesale dismantling of the New Deal regulatory machine aimed at allowing the investment class to do whatever it wanted with all its new found money. These was by intention.  But the Reaganites had no intention of taking the political heat to cut social spending and had every intention of spending massive amounts of new monies on defense.  The result, as every Reagan insider knew, was going to be massive to be massive deficits.  But they didn’t care. The Reaganites had discovered the glories of supply-side Keynesianism.

Keynesian economics had been based on the government borrowing the monies the investment class was not investing because of uncertainties in the market (read “Depression”) and spending it on the working and middle classes to prime the pump off consumer demand.  Supply-side Keynesianism is a perversion of this doctrine.  Government massively cuts taxes on the investment class and then borrows massive amounts of money right back from the investment class to pay for the tax cuts.  What Government used to be able to take in as revenue by simple taxation it now took in by borrowing from the people it used to simply tax and paying them huge amounts of interest for the privilege.

Or, another way of looking at it, by pushing money

Meanwhile, the shooting of the regulatory watch dog by three successive Republican  administrations (to be fair, Bill Clinton—the darling of Wall Street himself—took more than a few shots at poor protective pooch, too)  basically turned the investment class and their foot soldiers on Wall Street into the financial equivalent of James Bond.  Given massive amounts of new monies with no strings attached, they were now licensed to kill.

And supply-side socialism was born.  The essence of the Reagan revolution has been to privatize profit but to socialize risk.  With so much money crammed into the investment sector, centers of capital—the handful of huge Wall Street Investment and Commercial banks and funding institutions that grew to dominate all aspects of financial life as quasi-monopolies of money management—the investment world became dominated by firms simply “too big to fail.”  No matter what risks they took, no matter how egregiously opaque and obtuse their derivative and hedge fund models became, no matter how outrageously bloated their bonuses and pay packages were, they knew they were golden.   Yea though they walked throught the shadow  of the valley of financial ruin they had no fear for the supply-side socialist state would have to intervene to protect them least they bring us all down into Dark Ages levels of ruin.

Tax cuts and deregulation gave the investment class the leverage it needed and desired to tip back another result of the New Deal era: the rise of labor.  Massive concentration of capital in huge corporations able to move capital and jobs anywhere in the world without domestic American consequence resulted in a hammering down of the preeminent position labor—and by this I don’t mean simply labor unions but, rather, any American who has the temerity to work for a living as opposed to living off of the accumulated value (capital) from the labor of those who do—enjoyed in the New Deal era as a direct consequence of determined pro-common man government intervention in the economy.

The upshot of all this: twenty years of stagnant household incomes while investment profits soared.  And from this sprang the subprime mortgage debacle.  In backing investors over average workers the Reagan Revolution set up a system where the investment class, having more capital than it knew what to effectively or efficiently do with, would make risky mortgage loans  to the working class which no longer had the capital on its own to afford its piece of the American dream.  Then the investment class bundled up these loans, burying them in derivatives and bond hedge portfolios around the globe, often without others in the investment class even aware that they had inadvertently bet a huge hunk of their supply-side haul on overleveraged, under-capitalized mortgages for unemployed auto workers in Detroit and living-on the-edge seniors seeking to retire in Las Vegas,.

If, for the last thirty years, we had simply continued an economy something akin to what had been the norm during the New Deal period—taxes that took some of the excess wealth (the kind that results in wild speculation in markets) of the investment class in redirected it into wages for everyone else—the American middle class could have afforded to continue buying homes with the same old staid, fixed, thirty year mortgages.  Wall Street profits would have continued to hover in the high single to low double digits (rather than the hyper and unstable double digits ups and downs that have been the case) and the American economy would be far more robust, stable and growing.

And now the full implications of supply-side socialism are apparent.  Having broken the national bank (and credit line)  funding thirty years of investment class tax cuts with massive borrowing, switching back to true demand-side Keynesianism may be well unattainable.  The neither the world’s nor the domestic American credit markets can realistically be called upon to found the trillions of dollars in demand side repair that need be done to salvage our economy.  This, by the way, is the ultimate triumph of the Reagan Revolution. As Reagan insiders admitted in their obligatory “I sat at the foot of Power” post-administration tomes, any one back in the early 1980s with an IQ higher than twelve knew that the supply-side tax cuts were going to result in massive government deficits and debt.  That was the point.  If you borrow all the money Americans can borrow and give it to the investment class, their won’t be any money left to borrow when the need comes to give to the working class.  Lacking government to help and protect them, the working class will be right back where they were before the New Deal: at the mercy of the investment class.  The 1980s meet the 1910s.  Check and mate.

So there we sit in the first decade of the 21st century with an economy poised to reenter the 19th.   And everything old (like the pyramid of capitalism) is new again.

And before knee-jerk supporters of the Reagan Revolution—who might as well be called fellow travelers on the road to supply-side socialism—write in to lambast yet another “Socialist/Communist professor (why is it in Bushian America anyone with a graduate degree is a suspected socialist)  I AM NOT A SOCIALIST.  As I’ve stated ad nausem in previous blogs and columns (for example, click herehere and here)  I am an uber-capitalist. I believe that, over the last three centuries, capitalism as a system of economic organization has done more to advance the material conditions of mankind than has all of the other economic paradigms across the entirety of history and prehistory combined.  But far too many of the people who sing hosannas to the ideal of Capitalist are closet supply-side socialists or financial feudalists who only like the free market in so much as the power of Government is used to rig the game on their behalf.  And these pseudo-capitalists who never read Adam Smith, let alone Keynes, Freidman or even Marx, are going to be the economic death of us all if we let them.

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The War Between the States (of corporate desperation) and a Short History of American Economic Time (and if this title was any longer it could never make it as a bumper sticker.)

If you are a frequent flyers accumulator for any of the airlines you may have gotten this letter in your email inbox.  If not, I’ve linked it here. The letter, signed by all of the major airline CEOs, amounts to a political declaration of war by one side of American corporationality (the producers of goods and services) on another (the producers of finance and speculation.)  In short, the airlines are declaring political war on Wall Street over the issue of oil futures contracts speculation.  And asking you to be their foot soldiers in the assault on Washington.  I find the letter worthy of note as I’ve never seen anything quite like it. But then, the airlines have never been in anything quite like this.

The last time the bottom fell out of the economy and oil prices hit the sky the airlines will still in the transition from protective government regulation to bare knuckles free markets.  Given that airlines have hardly had stellar profits ever since they left Uncle Sam’s wing to solo on their own, the current economy and out of whack oil markets has been spelling gloom—and doom—for the heirs to the Wright Brothers. Many of the airlines are on the brink of bankruptcy–as many have been for years.  Out of desperation comes acts of desperation.  And this letter smacks of political desperation—and political anger—that comes form seeing ones very survival as an industry on the line.

Politically this may portend that, come November, yet another crack in the Reagan coalition will hurt John McCain and his fellow members of the GOP at the pools.  The RC of big business and heartland American social conservatives (which has always been an odd—and often contradictory—alchemy of Hamiltonian pro-big government, big finance and big business industrialists and Jeffersonian anti-big government, rural populists (giving the GOP the best of both worlds:  access to urban money and rural and suburban votes) is fracturing.  Social conservatives have finally woken up and realized they are the African Americans of the Republican party, being sweet-talked and wooed every election and then seeing every hollow promise hollowed out in between.  Just how many years have  Republicans controlled the Presidency, the Congress or both?  Just when did Roe v. Wade get overturned? (Or  an anti-Gay Marriage, Balanced Budget, Pro-Prayer in Schools, Term Limits, Pro-life amendment get passed?)

Now the façade of corporate America, seeing what is shaping up to be the worst economy since the 1970s—or earlier (which leaves only one other really rough patch to compare with, bucko) is splintering at the money—filled seems.  If corporations don’t pony up the big bucks and unified front as it has done to oppose Democrats (you remember them—pro labor, pro environment, pro progressive taxation, pro pro-consumer government regulation, or at least they used to be back in some primordial pre—Reagan time) historically, John McCain will be standing on a three-legged stool of political support sans two legs.  And the third—moderate GOP voters–aren’t strong enough to hold up the campaign increasingly swollen by its own incompetence.  (Of course, John McCain’s senior economic advisor, Phil “Let Them Eat Weight Watchers” Graham may be right and all of our problems may be reducible to whiny, fat, old people.  But don’t bet on it.)

E.J. Dione, speaking on NPR’s All Things Considered yesterday, said very concisely something I teach in my classes about economics.   He said that, just as the economic problems of the 1970s produced the supplyside Reagan Revolution  of the 1980s, the economic problems of the early double naughts  may produce a shift towards more government intervention in the economy to help average people.  That would be workers and consumers.  That would be demand-side economics, aka Kenyesian economics, aka New Deal economics.

In economics only two things matter:  supply and demand.  Government policy can try to affect one over the other—it can’t really effectively and successfully influence both significantly at the same time.  When one of these paradigms dominates but, then, crashes and burns, government can only—and must—shift to the other.

American economic history can be divided into three great epochs.  From the 19th Century—particularly after the Civil War—to 1932 that policy was Laissez-Faire industrialism.  Laissez –Faire has never meant “hands off” the economy, as many simplistically believe.  Adam Smith never wrote that it did nor believed it should.  Laissez-Faire means government hands of the decisions of supply and demand in the economy but it also, for Smith, meant active government in maintaining an efficient and—most importantly—fair free market.  Smith, a dower, Scottish moral philosopher, understood that people are people and, given the chance, they cheat.  Hence his famous admonition that “People of the same trade seldom
meet together, even for merriment or diversion, but the conversation ends in a conspiracy against the public,or in some contrivance to raise prices.”  The role of government was to prevent such “conspiracy” and “contrivance.”

In practice, however, whenever you hear someone advocating so called Laissez Faire policies for government, they are calling for pro-supplyside policies:  anti-labor, anti-consumer, pro-capital and a pro-producer.  These were the policies of the industrial revolution—and the gilded age. This model crashed and burned in the ravages of the Great Depression, ushering in the Keynesian, demand-side, New Deal model.

The American New Deal model ushered in the greatest period of economic prosperity affecting the broadest segments of a society in human history.  And, before you naively say the New Deal didn’t end the Depression, the War did, please understand that, economically, American policy during WWII amounted to Keynesianism on steroids, on crack, with the government not just stimulating labor and industrial markets but the government becoming the labor and industrial markets. What really drove American economic dominance in the post-war period, however, was a simple fact of geography: we had sent our boys “Over There” to fight, not them sending their boys “Over Here”. As a result, “Over There” got blown to hell in a handbasket and “Over Here” emerged from the war relatively unscathed.  In 1950 the US strode the world as a colossus with no real economic competition.  Britain and France were bankrupt by two successive world wars, so bankrupt that they would be forced to hold going-out-of-the-empire-business sales and dismantle, in a few years, the empires they had spent centuries assembling.  Germany and Russia were bankrupt and burned to the ground.  Japan was bankrupt, burned to the ground and glowed in places at night.  The rest of the world was what it had always been: poor.

In 1950 if you wanted to by a skilled-labor industrial product you had to buy it from us.  That would be U.S.  And the wealth of nations poured into our own.  So much wealth poured in to the U.S. that we could be magnanimous, giving billions of dollars of aid to Europe and the world to rebuild from the war and develop from poverty, confident in the knowledge that much of that money would flow right back into American accounts as the world bought our stuff.  John Maynard Keynes once said that the tailor would gladly lend you ten dollars every Friday if he was confident you would use that money to buy a ten dollar coat from him every Monday.  Such was the relationship between the US and the world (and, currently, is the relationship between China and the US, with China playing the role we once did.)   That prosperity party which today haunts us as the American Dream: the God-given–if historically unique—right if each generation to expect to live markedly better than the generation before.  From the 1941 to 1973 American standard of living doubled and almost doubled again.

Then in 1973,  as Don Mclean sang,  the music died.  The American prosperity party came to a stuporous conclusion.  Done in not by the excesses of government intervention in the marketplace but by global economic realities.  By the 1960s they—Europe and Japan—were back, with industries modernized, more efficient and cost-competitive (in part thanks to US aid) to challenge American producers on a global stage.  By the end of the 1960s the US was sending more money to the world than the world sent to us.  The resulting “Dollar Glut” caused the value of the dollar to tumble and the Bretton Woods dollar-tied to gold based global monetary standard collapse.  Arab oil producing nations, seeing the value of their dollarized-oil fall as a result, used the pretext of the Yom Kippur war in 1973 to inflate oil prices.  The result of all this: the American economic recession known as “stagflation” and, by the end of the 1970s, a global economic downturn.

The traditional Keynesian response to the “Stag” part of stagflation–driven by the loss of jobs in the face of rising energy costs and massive amounts of dollars leaving the economy to purchase said energy overseas–during the Carter years was to bump up social spending.  That, unfortunately only further inflated the “Flation” side of the problem, driven by the impact of high oil input costs on all segments of the society.    It would require massively supply-side monetary policy—the Federal Reserve jacking interest rates to almost twenty percent—to crush inflation and, with it, the American economy. Out of the worst recession since the 1930s supply-side II—Reagonomics with its pro business and capital tax cuts, labor policies, environmental policies and, perhaps most importantly, regulatory policies was born.

The result: three decades of strong to middling economic growth. (The last eight years hardly being the golden age of Reaganomics, hence all the nostalgia for all things Reagan and ‘80s in Republican pundit circles.  All that’s missing is for Dana Farino to start wearing big hair and padded shoulders to White House press conferences…) But also three decades of declining middle class fortunes.  Where the WWII generation saw standards of living double every generation, Baby Boomers and Gen Xers now need wait three generations for the same gain.  Perhaps this is why Baby Boomer attitudes towards the economy is so glum.  Throw in the Enroning of the economy as corporate America and Wall Street, shorn of true regulation and oversight, ran amuck, the Dot.Com bubble and, now, the subprime mortgage meltdown (all foreshadowed by the looting and collapse of the S&L industry in the 1980s, the first great manifestation of Reagonomic ubercapitalism gone astray) and the result is an overleveraged, unstable economy on the brink of the worst economic recession of the last seventy years and the possibility of a global recession to match it.  With all the geopolitical instabilities that would portend.

The Reagan Revolution.  Born: 1980; died: ?  You might start etching that date on the economic tombstone: 2008.  If Barack Obama—or John McCain, for that matter—are actually serious on changing economic course from the one charted by Reagan and followed by his three successors–including Bill Clinton—there is only one direction to tact towards.  Demand-Side II.  The Return of Keynes and Roosevelt.