The Big Washington Consensus Lie
It’s old hat to mock Thomas Friedman. But it’s worth doing again today, if only because today’s Friedman op-ed is a perfect distillation of the Washington Consensus twin lie about what ails our economy.
The first lie is one of commission: namely, that income inequality and the plight of the middle class is an inevitable function of globalization. Friedman:
The merger of globalization and I.T. is driving huge productivity gains, especially in recessionary times, where employers are finding it easier, cheaper and more necessary than ever to replace labor with machines, computers, robots and talented foreign workers. It used to be that only cheap foreign manual labor was easily available; now cheap foreign genius is easily available. This explains why corporations are getting richer and middle-skilled workers poorer. Good jobs do exist, but they require more education or technical skills. Unemployment today still remains relatively low for people with college degrees. But to get one of those degrees and to leverage it for a good job requires everyone to raise their game. It’s hard.
First off, even if Friedman were right, it’s not just hard: it’s impossible. There just aren’t enough jobs even for high-skilled people to go around. The number of Ph.Ds just of my acquaintance whoare hunting for what amount to McJobs is substantial. College grads may be employed in this economy, but they’re very often not employed “well.”
But secondly, Friedman is simply wrong. William Greider identified the problem years ago in the same New York Times, an article which Friedman apparently neglected to read:
The United States’…weakening position in the global trading system is obvious and ominous, yet leaders in politics, business, finance and the news media are not willing to discuss candidly what is happening and why. Instead, they recycle the usual bromides about the benefits of free trade and assurances that everything will work out for the best.
Much like Soviet leaders, the American establishment is enthralled by utopian convictions — the market orthodoxy of free trade globalization….
Reporters and editors typically take cues from the same influential sources and learned experts in business, finance and government. If the news media decided to cast these facts as the story of the world’s only superpower losing ground in global competition and becoming financially dependent on strategic rivals like China, the public would take greater notice. But governing elites would regard such clarity as inflammatory. America’s awesome trade problem is instead portrayed as something else — an esoteric technical dispute about currency values, the dollar versus the Chinese yuan. The context is guaranteed to baffle and benumb citizens.
The possibility that the United States can no longer afford globalization, at least not as it now functions, is what opinion leaders do not wish to discuss….
An authentic debate might start by asking heretical questions: Why is the United States one of the few advanced economies that suffers from perennial trade deficits? Why do new trade agreements, despite official promises, always leave the United States with a deeper deficit hole, with another wave of jobs moving overseas? How do the authorities explain the 30-year stagnation of working-class wages that is peculiar to America? Are we supposed to believe that everyone else is simply more competitive or slyly breaking the rules? In the last three decades, American policymakers have succeeded in closing the trade gap with only one event — a recession….
American political debate is enveloped by the ideology of free trade, but ”free trade” does not actually describe the global economic system. A more accurate description would be ”managed trade” — a dense web of bargaining and deal-making among governments and multinational corporations, all with self-interested objectives that the marketplace doesn’t determine or deliver. Every sovereign nation, the United States included, uses its vast arsenal of policies to pursue its national interest.
But on the crucial question of how policy makers define ”national interest,” Washington stands alone. Western Europe, whatever its problems, manages economic policy to maintain modest trade surpluses. Japan manages to insure far larger surpluses in recessions (its export income subsidizes inefficient domestic employers). China strives to acquire a larger, more advanced industrial base at the expense of worker incomes and bank profits. Germany and Japan, despite vast differences, both manage to keep advanced manufacturing sectors anchored at home and to defend domestic wage levels and social guarantees. When they do disperse production and jobs overseas, as they must, they do so strategically.
By contrast, Washington defines ”national interest” primarily in terms of advancing the global reach of our multinational enterprises. Elites are persuaded by the reigning orthodoxy that subsidiary domestic interests will ultimately benefit too. The distinctive power of America’s globalized companies is reflected in trade patterns. Nearly half of American exports and imports are not traded in open markets — the price auction idealized by neoclassical economics — but within the companies themselves, moving materials and components back and forth among their far-flung factories. A trade deficit does not show on the company’s balance sheet, only on the nation’s. In recent years, much of the trade deficit has reflected the value-added production and jobs that companies moved elsewhere.
The United States is thus especially vulnerable to the downward pressures on working-class wages that exist on both ends of the global system. American producers are generally free — and even encouraged by Washington — to shift production to low-wage locations. Companies regularly use this cost-cutting technique as a competitive weapon without regard to the domestic consequences. The practice works for companies and investors, but not so well for a nation.
The same issues plague the entire Anglo-American universe, although to a lesser extent in Britain and elsewhere than in America. Income inequality is particularly pronounced in the Anglosphere due to more neoliberal economic policies designed to put the “investor” class over the top of everyone else.
Friedman’s second lie is one of omission:
Not only does it take more skill to get a good job, but for those who are unable to raise their games, governments no longer can afford generous welfare support or cheap credit to be used to buy a home for nothing down — which created a lot of manual labor in construction and retail. Alas, for the 50 years after World War II, to be a president, mayor, governor or university president meant, more often than not, giving things away to people. Today, it means taking things away from people.
No word from Friedman about why those governments supposedly can no longer afford those welfare packages. No mention from Friedman of the massive reduction in tax revenue as a percentage of GDP in America, particularly from the Bush tax cuts, or the wars in Afghanistan and Iraq–which Fridman famously supported Friedman Unit by Friedman Unit. Or the fact that the European debt crises were caused by the financial crash, which was a direct result of a plague caused by the deregulated, over-financialized economies of the Anglosphere.
The truth is that Thomas Friedman’s “analysis” is utterly bogus. Anyone seeking a serious explanation for the world’s crisis need look no further than Keven Phillips in 2009:
Today’s disaster stage of American financialization – the bursting of the huge 25-year, almost $50 trillion debt bubble that helped underwrite the hijacking of the U.S. economy by a rabid financial sector — won’t be nearly so kind. It is already ushering in the reverse: a global realignment in which the United States loses the global economic leadership won in World War Two. The ignominy deserved by Wall Street after 1929-1933 is peanuts compared with the opprobrium the U.S. financial sector and its political and regulatory allies deserve this time.
My 2002 book, Wealth and Democracy, in its section on the “Financialization of America” noted that the “finance, insurance and real estate (FIRE) sector overtook manufacturing during the 1990s, moving ahead in the national income and GDP charts by 1995. By the first years of the next decade, it had taken a clear lead in actual profits. Back in 1960, parenthetically, manufacturing profits had been four times as big, and in 1980, twice as big.” Hardly anyone was paying attention. By 2006, the FIRE sector, its components mixed together like linguine by the 1999 repeal of the old New Deal restraints against mergers of commercial banks, investment firms and insurance, had ballooned to 20.6% of U.S. GDP versus just 12% for manufacturing. The FIRE Sector, now calling itself the Financial Services Sector, lopsidedly dominated the private economy. A detailed chart appears on page 31 of Bad Money. Some New York publications and politicians try to insist that finance per se is only 8%, but the post-1999 commingling makes that absurd.
This represented a staggering transformation of the U.S. economy – doubly staggering now because of the crushing burden of its collapse. You would think that that opinion molders and the national media would have been probing its every aperture and orifice. Not at all.
Thus, it was pleasing to read MIT economics professor Simon Johnson’s piece in the April Atlantic fingering financial “elites” who captured the government for the latterday financial debacle. This is broadly true, and judging from my e.mail, even some conservatives accept Johnson’s analysis and indictment. After the furor over the AIG bonuses, the public and some politicians may be ready to start identifying and blaming culprits. This would be useful. Having an elite to blame is a often prerequisite of serious reform.
Nevertheless, the extremes of financialization, together with the havoc we now know it to have wrought, represent a much more complicated historical and economic genesis, one which U.S. leaders must be obliged to confront if not fully acknowledge. Elite avarice and culpability has multiple and longstanding dimensions. It has been fifteen years since Graef Crystal, a wellknown employment compensation expert, brought out his incendiary In Search of Excess: the Overcompensation of American Executives. The data was blistering. Over the last decade, New York Times reporter David Cay Johnston has published two books – Perfectly Legal and Free Lunch – describing how the U.S. tax code, in particular, has been turned into a feeding trough for the richest one percent of Americans (especially the richest one tenth of one percent).
This is the story that is not being told by the leaders of either the Democratic or Republican parties, or by most opinion columnists not named Krugman, Rich or Kristoff (pundits who are utterly ignored in the D.C. Village.) It’s a the real story of why the world, and America in particular, faces such a severe crisis. More Phillips, because it’s just too good:
To try to put 20-30 pages into a nutshell, the financial sector hyped consumer demand – from teen-ager credit cards to mortgages for the unqualified – to make credit into one of the nation’s biggest industries; nearly $15 trillion was borrowed over two decades to leverage de facto gambling at 20:1 and 30:1 ratios; banks, investment firms, mortgage lenders, insurers et al were all merged together to do almost anything they wanted; exotic securities and instruments that even investment chiefs couldn’t understand were marketed by the trillions. To achieve fat financial-sector profits, the housing and mortgage markets might as well have been merged with Las Vegas.
The principal inventors, hustlers , borrowers and culprits were the nation’s 15-20 largest and best known financial institutions – including the ones that keep making headlines by demanding more bail-out money from Washington and giving huge bonuses. These same institutions got much of the early bail-out money and as of December 2008 they accounted for over half of the bad assets written off. The reason these needed so much money is that they government had let them merge, speculate, expand and experiment on dimensions beyond all logic. That is why the complicit politicians and regulators have to talk about $100 billion here and $1 trillion there even while they pretend that it’s all under control and that the run-amok financial sector remains sound.
This is a much grander-scale disaster than anything that happened in 1929-33. Worse, it dwarfs the abuses of debt, finance and financialization that brought down previous leading world economic powers like Britain and Holland (back when New York was New Amsterdam). I will return to these little-mentioned precedents in another post this week.
But for the moment, let me underscore: the average American knows little of the dimensions of the financial sector aggrandizement and misbehavior involved. Until this is remedied, there probably will not be enough informed, focused indignation to achieve far-reaching reform in the teeth of financial sector money and influence. Equivocation will triumph. This will not displease politicians and regulators leery of offending their contributors and backers.
Phillips wrote this back in early 2009, and it remains just as true today as it was then. The overgrowth of financialization and its subsequent collapse not only in the U.S. and the Anglosphere but worldwide, combined with misguided austerity reactions worldwide in response to that financialized collapse, combined with trade policies in the U.S. designed to favor corporate expansion over middle-class interests, combined with supply-side tax cuts in the United States, are almost entirely to blame for the sorry state of affairs in the United States and the world.
Friedman’s explanations are bogus lies. But they are the taken as gospel by the members of both the Democratic and Republican parties at the highest levels in Washington, D.C. Many Democrats in Congress and local Democratic activists nationwide know better, but ultimately have little voice in the final process of creating national economic policy.
We have a political system that is bought and sold by the financial industry and designed to produce pabulum lies like the idea that the solution to our economic problems is college education for all, as if that would help much of anything (it wouldn’t.) It will take men and women of courage with the power and credibility to speak out against the parasitic industry that has robbed the world of its peace and prosperity on behalf of the ultra-rich who let their money work for them instead of the sweat of their brow, and take the necessary steps to bring that industry to heel, whatever they may be.
