March 18, 2008
It is fitting that one of the signal events of what will likely become the second Bush recession has been the Federal Reserve’s propping up of the Wall Street firm Bear Stearns. For years, Wall Street has opposed any such bailouts of old-line manufacturing firms being swept away by the tsunami of free trade, and has applauded as employers have cut back their workforces, the benefits they provide, and even their presence in the United States. The Wall Street mantra has been, layoffs good, outsourcing better. But when the time comes for Wall Street speculators to experience the “magic of the marketplace,” the tune has been different, with Treasury Secretary Henry Paulson saying Sunday that “I really support the Fed’s work here.” Of course, the Federal Reserve’s bailout of Bear Stearns, followed quickly by JP Morgan’s acquisition of the firm, comes hard on the heels of many other federal efforts to prop up a financial sector in trouble as a result of its own avarice, including the federal bailouts for foolish subprime mortgages contained in Bush’s stimulus package.
There is little doubt that the economy is in trouble, and may be heading for even more serious trouble. Martin Feldstein, once Reagan’s chief economic adviser and a very mainstream economic figure, said on Friday that we are in a recession, that this recession could be the worst since World War II, and that “powerful forces will continue to drive inflation higher.” It appears that we may be headed for a return of stagflation, or something even worse. Yet President Bush told the Economic Club of New York Friday that the economic fundamentals remain “solid.” Bush was echoed by John McCain, who, according to the Washington Post, told an audience in Philadelphia (before jetting off to the Mideast and Europe) that economic fundamentals in the U S are strong.
“Strong” is not the word most people would use to describe stagnating wages, a shrunken manufacturing base, a falling dollar, rising oil prices, record trade deficits, and massive debt financed by foreigners, but Bush and McCain have shown no indication that they recognize any of these as problems, or have any idea how to deal with them. Both Bush and McCain are free-trade zealots, even though the decline in the dollar is linked to the massive trade deficits the United States has been running year after year. McCain wants to continue fighting a war that Nobel laureate Joseph Stiglitz estimates has cost the United States three trillion dollars”more than any U S war other than World War II”and appears eager to expand the campaign into Iran. Fighting wars a country cannot afford is a sure road to ruin, as many empires have found out throughout history. McCain also wants to cripple what remains of American manufacturing with burdensome environmental regulations. McCain’s statement to Michigan voters that the good jobs weren”t coming back to their state should be seen not as “straight talk” but as a campaign promise, a promise McCain”in thrall to both free trade ideology and environmentalist zealotry”has every intention of fulfilling.
If Bush and McCain actually want to learn about what is going on in the economy, they would be well advised to pick up the current issue of Chronicles, which is focused on “The Winter of the American Middle Class.” As Scott Richert documents in his article, “The Vanishing Middle (America),” the average hourly wage for American workers, adjusted for inflation, has risen only 36 cents per hour in 33 years, from $16.39 per hour in 1973 to $16.75 in 2006. It is true that all sorts of electronic gadgets are much cheaper today than they were in the 1970s, but such important items as health care and higher education are vastly more expensive. Bread and circuses, anyone?
And our stubborn, ideological commitment to free trade means that Americans who work in sectors of the economy subjected to foreign competition will continue to see downward pressure on their wages, as U S wages in those sectors fall to meet the wages paid by our competitors. Indeed, as Paul Craig Roberts has shown through his analysis of monthly employment figures, the only sectors of the U.S. economy regularly adding jobs are those sheltered from foreign competition. Nor is there any reason to believe that those losing their jobs in manufacturing will be able to get better jobs in the information sector, despite the steady drumbeat of propaganda along those lines Americans have heard for many years now. As Richert notes, former Clinton adviser (and free trade proponent) Alan Blinder estimates that 28-39 million more American jobs are off-shorable in the near future, including many in the information sector.
David Hartman also offers an excellent analysis in Chronicles of the subprime mortgage debacle in “Anatomy of a Meltdown.” Hartman agrees with Steve Sailer that the roots of the crisis are in federal pressure on lenders to give loans to members of minority groups who were disqualified from mortgages not because of their race, but as a result of objective financial criteria. But, as Hartman notes, the crisis has grown to the extent it has because bad mortgages were sold as speculative investments, with the “commercial and industrial bankers fund[ing] the subprime mortgages through “structured investment vehicles” (SIVs), which are clandestine off-balance sheet units with no appreciable reserves.” Under Greenspan and Bernanke, the Fed has allowed SIVs and hedge funds to grow unchecked, which has helped to build up the inflationary pressures that may be about to be unleashed. Nor would Hartman be surprised at the Federal Reserve’s solicitude for Bear Stearns: “Its top priority is the profit of the Wall Street speculators; its last priority is the preservation of the savings and pensions of the disappearing middle class.”
Hartman also notes some ominous parallels to the 1920s: “In the decade leading up to the Depression, individual debt had increased 43 percent relative to disposable income. … Similarly, the decade from 1997 to 2007 saw a 49 percent increase in household debt compared with incomes, as Americans spent their money on imports and unaffordable residences.” Hartman, though, also points a way out of an economy of debts and deficits and a declining currency: “With a bleak outlook for housing, shrinking auto production, and a declining manufacturing sector, more liquidity and deficits will, at best, result in stagflation. What is needed are real remedies”implementing border-adjusted tax reform, reestablishing regulation of all financial institutions, reforming the financing of social insurance, closing trade and fiscal deficits, and restoring the value of the dollar as a store of value, which promotes personal savings.”
It is true, as Bush also told the Economic Club of New York, that the United States has recovered from all prior recessions. We even recovered from the Great Depression. But we emerged from the Depression with what we had going in: in 1946, as in 1929, we were the world’s leader in manufacturing as well as the world’s greatest creditor nation. Today, we are increasingly dependent on foreigners who finance our deficits and who are using their surplus dollars to buy up American assets. Unless the reforms outlined by Hartman are enacted, we will emerge from some future recession as vassals to foreigners, and considerably less free.