Eugene Linden
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Imagining a Post Pandemic World

How might a post-pandemic world look and feel? Let’s imagine a creative team at a New York City advertising agency pitching a campaign in 2050 for a new perfume (more than most products, perfumes are sold by attaching to the dreams and aspirations of their times).  The Big Apple, ...

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Deep Past
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Winds of Change
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Afterword to the softbound edition.


The Octopus and the Orangutan
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The Future In Plain Sight
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The Parrot's Lament
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Silent Partners
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Affluence and Discontent
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The Alms Race
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Apes, Men, & Language
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Trump, the Toxic Legacy of the Financial Crisis


Sunday November 05, 2017

Today, the Lost Angeles TIMES published my oped as part of a a package on the first anniversary to Trump's election. Space was limited, so I thought I'd put up the more fleshed out version here:


Ten years have passed since the beginning of the great financial meltdown, and perhaps the most toxic legacy of that crisis was the election of Donald Trump as President. I’ll get to that linkage in a moment, but even before Trump’s election there were signs that the crisis was part of a worrisome trajectory. The near meltdown fits within a recurring cycle in American capitalism in which generational forgetting and greed conspire to foster credit bubbles, which inevitably burst, ruining millions, but leaving intact the system and perverse incentives that in turn set the stage for the next turn of the cycle. In recent decades this cycle seems to have a period of eight to ten years – something to keep in mind on this tenth anniversary – but the wildly improbable Trump presidency suggests that wobbles in this cycle are becoming more extreme and spreading beyond the economic to the political. If we do not pay heed to the lessons of the financial crisis, the next phase of this cycle could be the last for America as a functioning democracy.
 
What are those lessons? The biggest, hiding in plain sight, is that the crisis is not over. The U.S. remains in what future economic historians will call a depression. We’ve had ten years of subtrend growth, and even today, the economy remains so fragile that the Federal Reserve is hesitant to raise interest rates from their unprecedented emergency levels. Taking per capita GDP (the most meaningful measure since it adjusts for population growth) from its previous peak in the fourth quarter of 2007, the annual growth rate over the past ten years has been a limp 0.50% per year. It seems that every year since the meltdown economic forecasters have predicted that the economy will break out of its doldrums, only to be disappointed and make the same bright prediction for the following year.
 
A principal reason for the subpar performance has been slack demand – people simply don’t have much money to spend. Trends in automation, globalization, and financial engineering have left the median American household little better off than it was 50 years ago despite the fact that participation by women in the work for has increased by more than 50%.
 
The average non-supervisory worker has actually lost a little ground since 1967, earning $743 a week as of August, versus an inflation-adjusted $792 a week fifty years ago. While the median family’s income has virtually flatlined, in that same interval U.S. real GDP nearly quadrupled.  
 
Consider events of the past few decades. Inflation decimated worker savings in the 1970s, and then the end of the Cold War unleashed forces that suppressed their wages. Outsourcing exposed American workers to competition from a global work force; unions lost their bargaining power; automation steadily worked its way up from blue collar to white collar functions, and the more recent explosion of ecommerce threatens the tattered remains of the bricks and mortar economy, eliminating not just retail jobs but the construction, real estate, and service functions that supported stores and malls.
 
Then 2008 hit, which threw nine million people out of work, put more than 3 million households in default on their mortgages, and ruined the credit of many millions more. Since then, many have gone back to work, but at lower paying jobs with fewer benefits, and no job security. Millions more simply gave up, and, as Alan Krueger of Princeton recently argued, many of those turned to opiods.
 
Against this harsh reality, the average family turns on the news and hears that the economy is at full employment, and that banks are again paying out fat bonuses. They also hear that some of these bonuses were the reward for pursuing predatory practices (such as the fake accounts and unnecessary auto insurance Wells Fargo forced on an estimated 3.5 million of its poorer customers). No wonder people are angry. 

The Trump phenomenon revealed that significant numbers ordinary people sense they are being screwed by the establishment. Millions have concluded that both political parties serve a shadowy nexus of financial and corporate interests. This nexus seems all the more sinister because it has no official status or organization -- which makes it fertile soil for noxious conspiracy theories. The “system” needs no organization because it is a commonly shared set of ideas about free markets, deregulation, the frictionless movement of money, and the role of central banks. To paraphrase the late Charles Reich, the elite don’t run the machine, they tend it.
 
The power of this nexus is undeniable. One act that set the stage for the financial crisis was the repeal of the Glass-Steagall act, which had previously prevented banks from risking depositor money in less conservative investments. Banks had been pushing for this for years, and in 1999 Bill Clinton, a Democrat signed its demise.
 
Unfettered, the big banks and other financial institutions plunged into the mortgage business, getting fees for placing loans with unqualified borrowers (remember NINJA loans?), and then stuffing these into securitizations to get them off their books as quickly as possible. For those who worried about the consequences, the revolting mantra of the day was “You won’t be here; I won’t be here.” In those days, volume was the key to riches, and so the lending ran amok, at least until the unqualified borrowers started to default and the entire pyramid collapsed.
 
The durability of this shared set of ideas has been astonishing. Despite the ‘08 near death experience, the paradigm of “getting government out of commerce” survived, just as it has survived the Savings and Loans crisis in the 1980s, when deregulation encouraged owners of these conservative institutions to take on excessive leverage. Now, ten years after deregulation and excessive leverage ruined millions, the Trump administration is again deregulating madly, and risk is creeping back into the financial system as investors embrace risk in the search for returns.
 
If you didn’t tell Trump voters that Thomas Piketty’s thesis was in spirit a Marxist analysis, most would probably agree with his  argument  that in the struggle between capital and labor, capital has emerged the clear winner. Ordinary people see it everyday in their own diminished prospects while the elite grab ever more of the pie. They, correctly, didn’t think Hillary would do anything to change the system, so they bet on a snake oil salesman who lied that he could. Instead, as we’ve seen, he’s busily handing the keys to Wall Street corporations, the wealthy and himself.
 
Trump’s first priority after inauguration, for instance, was to repeal Obamacare. The motivation behind this effort became clear as the GOP-controlled House’s original plan called for the repeal of surtaxes on the wealthy. Since by design, the plan had to be revenue neutral, such cuts could only be achieved by raising taxes on the less wealthy (and by cutting Medicare benefits, which make healthcare affordable for the Trump base). Now, Trump’s big push is to lower corporate tax rates. Over ten years, each percentage point of corporate tax rate reduction costs the Treasury an estimated $100 billion in receipts. If  Trump gets his way, this shortfall would run into the trillions, and the only ways to pay for that would be to raise taxes on individuals, or to cut government spending, over 60% of which currently goes to the poor and middle class in the form of benefits.
 
So, how will these passed-by workers react when they realize Trump is a false prophet? And how will they react when the next crisis hits, and their hard times get even harder? Some will go down the rabbit hole of far right conspiracy theories, while others will decide to take to the barricades to bring down capitalism from the left. In the past in the U.S. the center has held, but can we be sure that will be the case the next time around, particularly if desperation drives more people to the extremes and the center shrinks even further? Years ago, the late diamond magnate Harry Oppenheimer explained his progressive labor policies by saying, “If they don’t eat, we can’t sleep.” The elites of today would do well to heed this warning.
 

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Short Take

Afghanistan: When Losing is Winning

The stunning, but entirely predictable, collapse of the Afghan military marks the latest installment of our failure to understand what wins wars. Short answer: it’s not weaponry; it’s morale. This pattern of failure goes back 60 years to Vietnam, and even further. We load up corrupt autocrats and war lords with weapons, only to see war profiteers siphon off and distribute the bounty, while the other side pursues their goal with patience, and a deep sense of mission – however wrong-headed we might think that is.

There’s a tell in this pattern. When a superpower continues to hew to a failed strategy of counter insurgency after 60 years of failure, someone must be making out, big time. We don’t need to look very far to see who that is. Defense contractors get to sell the weapons  that we hand over to our feckless allies, and then, after tens of billions of dollars in materiel are left behind as we withdraw, they get to sell all over again as we restock. Thus, losing becomes a win-win strategy. In that sense, winning would be a losing strategy because they don’t get to double-dip. So, once again in Afghanistan, Mission Accomplished!



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