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.
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 here, here 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.