Cycles of Change: Could the 2008 recession herald a progressive revival?

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.