Charles R. Morris
Could the 2008 recession herald a progressive revival?
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Politics usually runs in cycles. The 2008 financial crash looked like the harbinger of a major cyclical turn. That looks considerably more doubtful now than it did four years ago, but there are still real grounds for hope.

It will be five years this June that the sudden crash of a Bear Stearns hedge fund signaled that all was not well in American finance. And the crashes kept coming, like the slow-motion collapse of giant icebergs—one bank, one fund, one temple of finance after another—for an excruciating year and a half. The American debacle centered around housing, which is still trapped in a mire of bad mortgages, fraudulent foreclosures and lost paperwork.

Now, just as we have been spotting wisps of a recovery in the United States, parts of the Eurozone have fallen back into recession. In Greece a controlled, technical default averted disaster for the time being, but the crisis has merely moved from an acute to a chronic stage. In Ireland, Italy, Spain, Portugal and France, reducing debt requires reducing public spending, which reduces total gross domestic product and employment. Several countries have already experienced serious unrest. If one or the other country chooses to repudiate its debt or leave the Eurozone, it could possibly trigger another 2008-scale global economic thrombosis.

Is this a run of really bad luck, like having your house hit by two successive pieces of space junk?

No; the crises in both America and Europe are symptoms of the hyper-financialization of advanced economies over the past 30 years or so. The crashes and the damage they inflict are toxic backwash from the bloated and rotten carcass of an old regime.

The Era of Hyper-Financialization

For the first 40 years or so after World War II, the financial sector accounted for about 10 percent of G.D.P. and 12 percent to 15 percent of corporate profits. Bankers always got paid somewhat more than the average worker but much the same as other workers with the same education. By 2006, however, finance had grown to about 16 percent of G.D.P. and 40 percent of corporate profits, and finance professionals were being paid far more than anyone else except C.E.O.’s of top companies, rock stars and first-round quarterback draft picks.

Here is an example of how outsized that pay was. From 2003 through 2008, Merrill Lynch generated more than $100 billion in revenue. It paid more than $80 billion of that to its workers, a disproportionately large portion of this to a small elite group at the top. At the same time Merrill cumulatively lost almost $15 billion and left a trail of financial havoc—millions of foreclosures, great swaths of empty houses and huge losses for its investors, like pension funds and endowments, and among its retail customers.

Wall Street claims to earn its high pay for “financial innovation,” but in real life, its innovation is mostly devoted to avoiding regulation and taxes. Regulated entities, like banks, sold off toxic loans and mortgages to the unregulated “shadow banks,” like hedge funds, that dolled them up and painted on lipstick and sold them throughout the world. This was a useless and destructive enterprise, cooked up solely for the purpose of generating fees and bonuses for the very rich.

That insatiable fee-seeking infects all financial markets. More than half of all stock trades are now held for less than 11 seconds. Time was that oil trading was the province of people who were in businesses that depended on oil, so if they bought future oil—which the markets allow you to do—it was because they needed to ensure future supplies. Now almost all such trading is done by bank or hedge fund trading desks solely for speculation. They take much larger positions and can generate violent seesaws in market prices, which often work real economic hardships even as they generate huge trading profits.

New regulations in all the advanced countries are designed to stop such behavior. Yet bankers everywhere are furiously lobbying to stop them and will largely succeed. The good news, however, is that the financial sector is starting to shrink and should continue to do so for the foreseeable future, new regulations or not. Almost all of the sector’s revenue boom in the 2000s came from dangerous junk, like second-lien loans against homes with subprime first mortgages, that sane investors now avoid like the bird flu. Finance profits have fallen sharply, while bankers are mourning the bonuses of old and worrying about staying employed.

The auguries, in short, are that the era of hyperfinancialization is probably ending. The public is now aware of how fraudulent and destructive the boom years were and how much the new Wall Street fortunes were built by sheer pillage. That is the kind of issue that can galvanize ordinary people. Far more than in other countries, Americans have been tolerant of great differences in wealth because they assumed it was fairly earned and that with some luck and talent they could become wealthy themselves.

If that assumption of fairness disappears, American politics will turn with it. Changing attitudes are evident in the way Mitt Romney has had to struggle on the presidential campaign trail to explain his wealth. Americans are starting to understand how much the deck has become stacked in favor of the people at the very top. A hallmark of social mobility is the degree to which your parents’ wealth determines your success. By that measure, the United States now looks much worse than almost all the major countries of Europe, which is embarrassing.

The Cyclical Reset

Arthur M. Schlesinger Sr. proposed that in the United States, conservative/monied and radical/progressive parties alternated in roughly 25- to 30-year cycles. The clock was driven by the internal logic of elections. To win a national office, each party has to pull together its whole constituency, sensible and extremist alike. Over time, because extremists usually care the most, their influence grows and their party becomes an absurd caricature of its original ideas. And so the wheel turns.

The 2008 presidential election looked like such a turn, especially since the fingerprints of the plutocrats and their political lackeys were all over the economic crash. Now that turn is in doubt, in part because the recession has been so severe that people are forgetting how it started. But if Obama squeaks back into office in 2012, a new cycle should take hold.

Despite what one hears, the deficit should not cripple a progressive agenda. Few people realize that federal taxes of all kinds, roughly 15 percent of G.D.P., are the lowest since about 1950. Of the 30 largest industrial countries, the United States consistently ranks near the bottom in taxes, including all state and local taxes, as a share of G.D.P. Merely allowing the Bush tax cuts to expire on schedule would nearly balance the budget. A tad less enthusiasm for endless foreign wars would also help a lot. Taxes have little to do with national competitiveness. Germany’s taxes are about 50 percent higher than ours relative to G.D.P., and Germany is easily out-competing us.

The root of America’s serious competitiveness problem is the dismal educational preparedness of our young people, at least those without the good fortune to be born into upper-middle-class homes. Good jobs are available in business services, like accounting and shipping, computer-related technologies and health care. All of them require education, at least at the community college level. Such programs have been drastically cut back, not just since the crash, but for a couple of decades. They have been replaced by often fly-by-night “technical schools,” which saddle lower and middle-income kids with mountains of debt and do little to keep them in school. Some of the most financially successful and ethically shady of the profit-making schools are owned by—guess who—Goldman Sachs and its ilk.

Investment Strategy

The progressive agenda is very long. Infrastructure spending to rebuild dilapidated highways, commuter trains and airports—and to rectify the shameful inadequacy of U.S. broadband networks—would be good job creators. Much of the spending could be financed with private-sector revenue bonds. We also need to do a much better job readying our young people for the demands of today’s job market. American students consistently rank behind our major competitors in math and science, and the very best jobs are going to people with quantitative competence.

None of this is easy, and it will not happen overnight. In the real world, no matter what happens in the fall election, we are not going to let all the Bush tax cuts expire. Americans are so convinced they are overtaxed that a recovery in state and local educational provision will come slowly. We know that too much Medicare spending goes to highly profitable treatments of dubious benefit, but that will be hard to fix. The wealthy, by definition, have ample resources to defend their privileges. Real change comes through persistent slogging, not by national epiphanies.

The severity of the downturn, bumbling at the White House and scorched-earth Republican opposition clearly derailed the cyclical momentum. The administration’s major accomplishment, health care reform—which had eluded the country for almost 90 years—will be lost unless the president wins another term in office, even if it survives scrutiny by a very right-wing phalanx of Supreme Court justices.

But holding on to the White House now looks much more likely that it did just months ago. With a little luck, aided by the unattractiveness of the Republican hopefuls, we may really be on the verge of a new and comparatively long-term cycle of true progressive, social justice-oriented politics.

Charles R. Morris is a fellow of the Century Foundation. His recent books include The Trillion Dollar Meltdown and The Sages. A new book, The Dawn of Innovation, will be published in the fall.

Comments

2073113 | 6/13/2012 - 4:03pm
To begin: it is comforting to see (from the photo) that there is exactly one OWS protestor in a suit and tie.  (We needn't concern ourselves with the other "99%" who have left their "campsites" a toxic mess.)

One expects a certain bias in a left-leaning magazine, but Morris tends to go overboard.  

"Changing attitudes are evident in the way Mitt Romney has had to struggle on the presidential campaign trail to explain his wealth."

Obama, Pelosi, George Soros, and other Democrats and their supporters, however, need not apologize for theirs.  Theirs is "wealth for good", while Republicans and bankers only have "wealth for evil". 

"A hallmark of social mobility is the degree to which your parents’ wealth determines your success."

Steve Jobs was indeed fortunate in inheriting a great fortune.

"Over time, because extremists usually care the most, their influence grows and their party becomes an absurd caricature of its original ideas. "

That's a surprisingly good characterization of the Democrat Party.

"... the fingerprints of the plutocrats and their political lackeys were all over the economic crash."

The gloves are off - he's going for the jugular.  Those are loaded words.

"But if Obama squeaks back into office in 2012, a new cycle should take hold."

A new cycle, a tailspin into larger and larger deficits, into fewer and fewer people paying for more and more welfare "entitlements". 

"... the deficit should not cripple a progressive agenda."

Kudos for actually identifying your position.  We say "progressive" now because the warm fuzzy feeling of decades ago for "socialism" is wearing a bit thin.

"... scorched-earth Republican opposition..." ... "unattractiveness of the Republican hopefuls"

We'll see, in November.  Let the chips fall where they may.

"The administration’s major accomplishment, health care reform—which had eluded the country for almost 90 years....."

And which the majority of the American people reject.  If that's the best they have to offer - their "major accomplishment", then they, as much as the country, are in bad shape.

Mike Evans: "It was when the mortgage industry departed from these programs and went off the range with no doc...."

They did that because Barney Frank and his minions forced them to.

Kudos to Walter Mattingly for the insights.
 
C Walter Mattingly | 6/3/2012 - 1:03pm
An interesting article that of course is quite selective in its information. For instance, Mr. Morris singles out Germany as an example of how high income tax rates coexist with strong economies. A true enough example, as Germany is simply an export powerhouse. How is it so successful at exporting so many goods, especially relatively low-end manufactured products, when so many Asian countries have taken marketshare from so many other countries?
As Germany's excellent head of government, Angela Merkel, has acknowledged: Germany has no national minimum wage.
This results in keeping wages low enough where they can be competitive. It also, however, results in a surprisingly large segment of the German populace that makes substantially less than that proverbial burger flipper at the corner McDonald's. It is a big part of the reason the average German makes so much less than his average US counterpart. But it keeps those exports coming and citizens employed.
Needless to say, this is not where the German unions are very active. But I'm not certain we should follow Germany's lead and do away with the US minimum wage to improve our export performance as Germany has.
Mr Morris doesn't mention several of those European countries which have even higher top income tax rates than Germany, including Portugal, Greece, and Spain. Out of the 27 European countries highlighted in Eurostat's tables, they rank 25th, 26th, and 27th, respectively, in unemployment rates, ranging from 15% to 24%.
 If we turn from Germany to our neighbors to the north, we find that Canada, since the liberal Trudeau administration cut government spending a full 10% in the mid 90's, has been on a fiscal good government tear. Its top income tax rate is now 29%; its top capital gains tax rate is 14.5% (and at half the income tax rate, far less for the majority of Canadians), and it has cut government spending across the board, incuding defense, unemployment insurance, transportation, business subsidies, aid to provincial governments-basically across the board. The result? Government spending dropped from 26% of GDP in the mid-80's to 17% of GDP currently. The national debt declined by 50%, from 68% to 34% of GDP, and Canada balanced its budget every year from 1998-2008.  In effect, echoing the words of the last US president, Bill Clinton, who was fiscally responsible, Canada has announced, not by words but by deeds, the Era of Big Government over. But unlike Clinton, Trudeau was not followed by two subsequent presidents who by their actions and budgets declared the Era of Big Government back, along with the disastrous deficits and employment statistics we are currently experiencing.
Stanley Kopacz | 6/3/2012 - 8:06am
Re Joe Bliss' comment:  If conservative's want a rejoinder in America, they can buy space as a paid advertisement.  After all, conservatives or those to whom they are lickspittle, are floating in money.  If they don't think it's worth the investment, then they have no problem with the magazine's emphasis.
JIM MCCREA | 6/1/2012 - 6:04pm
Wait until the credit card balance bubble finally breaks. Of course, it is all the fault of the borrowers, and the credit card companies who acted like prostitutes who are paid on volume rather than quality will not be part of the problem. Right?
J BLISS | 5/31/2012 - 12:14am
Printing a political essay in the middle of an election year does no service to your
magazine or its readers.  If you believe this type of article is informative , then please publish an article from a conservative point of view to balance the discussion. There are a number of inaccuracies in the article: no discussion as to how government encouraged these bad mortgages; money is there for infrastructure and it is called fuel taxes used for other purposes by our friends in Washington; no amount of additional money will solve our education problems without emphasis on strong family values and participation in education by parents ;Romney's wealth has become an issue due to class warfare waged by the Obama administration ,the people did not bring up the discussion. Banking and "wall street" has gotten too big.
ed gleason | 5/28/2012 - 3:55pm
The GOPers [JR Cosgrove?] love to blame the housing loan crisis on the lower middle class who had the audacity to borrow money for mortgages. When the trillion dollar student loans hit soon will they blame their own unemployed children who still owe 200k on the graduate degrees they signed up for? No... they will beg for bailouts like WS.
Mike Evans | 5/28/2012 - 1:41am

The continuing mantra about government forcing lenders to make loans to the poor is a horrible myth. FHA, VA, and FHMA loans over the entire post war period made home ownership attainable for working class families with a superb record of success. It was when the mortgage industry departed from these programs and went off the range with no doc, liar loans to speculators and fraudulent borrowers that the destruction of home values began. First values were artificially inflated and then in the resulting crash the banksters made every effort to abandon ship and their responsibilities. Thus our current financial meltdown and desperation worldwide to rebuild our economies.

J Cosgrove | 5/26/2012 - 9:44pm
Mr. Morris is a very angry man.  If I were Mr. Morris, I would not be proposing more progressive remedies for the economy or for the US society.  We have had those and what have we gotten for them; hollowed out inner cities, 70% rate of children born out of marriage in the African American community with a 30% rate amongst white Americans, several states and municipalities that cannot afford to pay for basic services as pension funds come due.  


The current financial crisis started with progressives changing the mortgage lending criteria in order to increase home ownership for the poor.  A noble objective but the one thing that progressives never consider is the unintended consequences just as the Great Society and the War on Poverty had noble objectives but disastrous results because these programs had consequences no one dreamed of.  It is time that progressives took responsibility for their misguided adventures at changing society.  They have certainly changed a lot but not in any way they wanted.
Gary Nicolosi | 5/25/2012 - 9:49am
I am surprised that Charles Morris, whose book The Trillion Dollar Meltdown, was a superb analysis of the recent economic turbulence, should write such a one-sided article, lacking in any nuance and clearly partisan in its support for the Obama Adminstration. There is blame on both sides of the political aisle, to be sure, but President Obama's stewardship of the economy and his non-leadership in working with Congress, has been a disaster for the country. Mr. Romney offers a competent and capable alternative, moderate, balanced and fully able to tackle the tough economic issues ahead for the country. It would be good for the Editors of America to have more balanced writers on the economy who are able to deal with the complexity of issues without endorsing a clearly failed presidency. 
Mike Evans | 5/25/2012 - 9:45am
Unfortunately for all Charles' hopeful thinking, the negativity of the GOP and tea baggers backed by the full faith and money of the entrenched ownership of the world's assets will likely prevail. If Obama squeeks through in November, he will be extremely crippled and unable to accomplish anything in the second term. Meanwhile, the destruction of any governmentally sponsored stimulus or programs to aid those crushed by the economy will be mightily opposed, world wide. Austerity is likely to become rampant and there will be new cries for selective pretty little wars. Unemployment above 10% will be the new normal here and 25% abroad. Education will be even more underfunded and the continued WalMartization of commerce will continue unchecked. Sic transit unions, pensions, benefits, and probably health care.