How Wall Street runs our politics

Austerity is the word the British use. Smaller government is the phrase we Americans use. The Democratic president who got Congress to go along with his plan for more than $700 billion in emergency economic stimulus spending has now become a deficit hawk. Both the Republican and the Democratic candidates for governor of New York are pledging to reduce government spending and to balance the budget without raising taxes. From London to Manhattan, from Washington to Wisconsin, there is not a candidate in the land who is ready to defend or even explain the role of government in the economy. The rhetoric is all Reagan, all the time.

This drives some economists nuts. Joseph Stiglitz, who won the Nobel Prize in 2001, told a New York audience last week that the American economy desperately needs another round of stimulus spending by the federal government—and a much more robust public works program. “Without a second stimulus, we will have a long recovery period,” he said. State governments need more federal help, not less, because states “were the innocent victims of economic mismanagement at the national level.” Stiglitz made headlines, but not many politician friends, when he called for a “millionaire’s tax” in 2008. Readers of the New York Times are familiar with this approach because Paul Krugman, another Nobel Prize-winning economist, writes a twice-weekly column in which he makes these same points.

The counterpoint is that government spending of any kind is bad. This view is on display every single day of the week in the Wall Street Journal, on Fox News, and in the position papers of every candidate who bothers to write them.

It would sound like a replay of the traditional liberal versus conservative rhetoric, except for one new reality—which is that it’s bipartisan. Meanwhile, there’s a third group of economists, the students of the bubble, who are critical of both the borrow-and-invest liberals and of the cut-and-divest conservatives. These are the folks who are warning that the speculative bubble that former Federal Reserve Board chairman Alan Greenspan created during the George W. Bush presidency, the bubble that started bursting in 2007 with the subprime mortgage crisis and that threw the world into crisis and recession in 2008, was nothing compared to the speculative bubble that is growing in China today. The Chinese bubble will burst as soon as next year, wreaking havoc of the kind the world hasn’t seen since the Great Depression.

And all of our candidates, Democratic and Republican, at every level, are working overtime to outdo one another in driving down the one area of the American economy that might just help avert the next global financial catastrophe—namely, government spending that might get our economy growing again.

No jobs, old sewers, no will

Liberals are complaining much more loudly that Obama blew it. Obama stuck too close to the bankers, they say. Larry Summers, Obama’s chief economic advisor, led the way for deregulation of financial markets, became a rich consultant to bankers, and drank their Kool-Aid. Liberal economists have been complaining at least since Ronald Reagan’s election in 1980 that the rich are getting too rich, the number of poor people is growing to be too large a share of the national population, and the American middle class is too stressed. Conservatives scoff at all that, and remind everybody that even liberals love capitalism. These days, as unemployment lingers at 12 percent in many states, as Food Stamp applications rise in the suburbs, as Rust Belt cities temporarily stop shrinking because their young people can find no Sun Belt jobs to move to, and as the next phase of the foreclosure crisis lurches into public consciousness, every level of government is a piñata, and incumbents are the whipping-boys. We’ll all be rich again, the rhetoric says, if we just get government out of the way of the private sector.

Here’s the problem: The private sector as we know it has changed. One struggles to tell just how greatly things have changed, and that the old rules won’t work, when even a learned professor from Harvard still argues that unemployment benefits should not be extended beyond 26 weeks because back in the 1980s, during our last hard recession, that relatively short time-horizon led job-seekers to find work quickly. What work is there to find today? Thousands of factories have closed since then. They’re all in China now.

Economists who study the bubble talk about how liberals and the conservatives are both wrong. There has been a structural change in the American economy because the financiers have come to rule politics after having succeeded in convincing American politicians to deindustrialize, which eliminated high-wage jobs. At the same time as thousands of factories (except defense factories) closed, there was a vast deregulation, as when Bill Clinton’s team tore down the New Deal wall between regular banks and investment banks, a move that encouraged risky speculation of money that was supposed to be risk-free, and that made the financially rich far, far richer than at any time in history. Meanwhile, to distract the middle class, whose incomes (the liberals relentlessly pointed out) were not keeping pace with inflation, Washington policy-makers of both parties, and especially Greenspan of the Fed, propped up middle-class finances by fabricating the real-estate bubble.

We were rich with fake money. A Florida or California or Boston or Washington house bought for three times your annual salary in 1990 was suddenly worth 10 times your annual salary in 2000. Folks from Buffalo or Cleveland or Indianapolis who got transferred to any of these hot real-estate markets in the 1990s or early 2000s experienced sticker-shock, because back home, the value of a house had by comparison changed but little over the previous decade. Suddenly, folks were taking out home-equity loans because their houses had jumped in value—using their houses like ATMs, in effect, to buy things like college tuition, SUVs, new kitchens, and even vacations. When the bubble started bursting in 2007, homeowners began finding themselves unable to pay on their loans; millions were foreclosed. Somewhere between one-fifth and one-third of all mortgages today are on houses where the amount owed is higher than the market value of the property.

Chinese bubbles

A Chinese professor of economics just in from Beijing attended a seminar on public finance the other day, and, wide-eyed at this description of recent events in America, quietly spoke about how today in China, the house he bought three years ago is now worth 300 percent of what he paid for it. As he described how buyers are rushing to get their cash into real estate, even though the Chinese buyer cannot borrow as much as the American buyer, the unmistakable characteristics of a growing bubble were revealed.

Back home in electoral America, there is not much talk today about raising federal income tax rates on hedge-fund managers or Wall Street bankers, notwithstanding new record-high bonus payments having just been reported. The Ronald Reagan rhetoric of 1980 has become everybody’s article of faith: On tax policy, one cannot distinguish Glenn Beck or Sarah Palin from any Democratic running for any office. A new study of growing poverty in America has not led to a plan, at either the state or federal level, to use public funds to create employment. Report after report is issued about the aging of our 1950s-era infrastructure, especially long-neglected sewer systems in old cities, but 2010 is not 2009, which is the last time anybody in public office spoke about creating a National Infrastructure Bank.

What’s happening now, say the non-liberal, non-conservative economists who study bubble economics, is that the Wall Street speculators have decided that austerity, smaller government, and reduced consumer demand are all just fine with them. And since they fund campaigns, everybody who wants their money sings their tune, Democrat and Republican alike.

James Galbraith calls this new situation the “predatory state.” Michael Hudson calls what’s going on today the consequence of “hitting the wall of indebtedness.” Edward Janszen of itulip.com criticizes the traditional liberals who want the US to go further into debt in order to stimulate new jobs, because he thinks that our new Federal Reserve chairman, Ben Bernanke, is already proposing that America “borrow its way out of debt.” Sound crazy? You betcha.

More unemployment. More poverty. The middle class unable to borrow more, and thus unable to consume as before. Corporations holding onto their earnings. Banks speculating overseas rather than lending here, notwithstanding all the encouragement banks get to make loans here. Housing prices low and declining in many parts of America. State governments having to reduce spending even as the demand for state services goes up. These are all deflationary pressures. Deflation is the opposite of inflation.

On the websites of the bubble economists, ugly scenarios get sketched. Here’s one for a couple of years from now: America’s demand for Chinese-made goods is lower, American economic activity is still anemic, Tea Party rhetoric is hotter, the anti-spending, anti-government craze leads to a full takeover of Congress and the White House by folks who decide that warfare is the only way to spend public money that the angry, unemployed, poorer public will accept, but in order to get some meat on the table, a bubble will have to be created.

Wait, doesn’t that sound familiar? Didn’t we just live through eight years of that? Stay tuned, ladies and gents: The warfare bubble is straight ahead!

Bruce Fisher is visiting professor of economics and finance at Buffalo State College, where he directs the Center for Economic and Policy Studies.