Friday, September 12, 2008

Economic Suffering Explained

A lot of people are struggling and suffering today in America. It is obviously very important to talk about what needs to happen in the future, but in order to do that we need to look at history and figure out what went wrong, so that it can be avoided going forward. We cannot just move on without reflection, and we must actually assign blame to the people who made things this way. We need truth first, then reconciliation. More specifically, we need truth and accountability out in the open, so that voters can make an informed choice in the upcoming presidential election. I use the word “reconciliation” because, in the last decade, things have gotten so bad for the American people (and the American economy) at large, that a normal reform politics platform is not enough to bring about something that comes close to a reversal of the misfortunes of late.

America’s economic and societal problems are many at the moment. Some of them can be traced back to recent political decisions, or lack thereof, while others can be traced back much further in time because they constitute changes of a systemic nature. The upcoming presidential election seems to be, in large parts, about undecided working class voters, and I will focus my description of economic and societal problems on how these problems relate to them (although these issues obviously affect everyone in society to a very great extent). The problems that we are experiencing now very much constitute a combination of immediate financial problems, and the old structural changes that amplify them.

For instance, a construction worker who loses his job as a result of the current financial and housing crisis now faces a myriad of problems and dangers because the social safety net in America has been almost completely dismantled. A comprehensive social safety net is meant to ease the blows that financial and personal circumstances will almost inevitably deal most of us at some point during our lifetimes. In other words, it creates a floor of the standard of living in society as a whole, and every industrialized country except for the United States has one. Some of the problems that our laid-off construction worker faces in the current climate includes (but are definitely not limited to) the following:

- He has access only to very meager jobless benefits
- He has no health insurance for himself or his family
- He has very limited abilities to send his kids to college
- He has dire prospects for retirement

By contrast, in societies where there is a social safety net, the jobless benefits would usually go on for much longer and pay him at a much higher rate, so that a transition into a new job can be less painful. The remaining three issues would not be issues in the first place because they are completely covered by the safety net (or other government benefits) in almost every other industrialized country.

Some might say that America does have a social safety net, but I argue that the country in fact, does not, in large parts as a consequence of the four issues faced by the construction worker that I mentioned above. The amount of protection given does not measure up to something that could be described as a social safety net.
So, from my example with the construction worker, which describes a typical type of hardship in America today, two questions emerge:

1. Who dismantled the social safety net?

2. Who is responsible for the current (and extremely grave) financial crisis?

1. On the question of who dismantled the social safety net, many detailed policy changes can be pointed to, but a more helpful approach to answering this question would be to talk of a prolonged strategy and ideology on the part of politicians, parties and other actors in politics. I argue that the strategy of “laissez-faire” and “small government” is unequivocally what has led to the gradual dismantling of the social safety net in America.

Prior to the 1970:s, the social safety net was still in the process of being constructed. In the early 1970:s, the republican party took a sharp political right turn during what many refer to as the “conservative backlash”. In terms of tangible economic policy, however, this right turn did not show during the 1970:s, as the social safety net remained largely intact, and was even expanded in some respects during republican rule.

Then came Reagan. Reagan fully immersed the country in the practical application of theories of laissez-faire, small government and supply-side economics. According to these theories, the provision of a social safety net is something that the government should not be involved in, and hence it makes perfect sense that Reagan vigorously tried to dismantle it.

Reagan was shameless in his pursuit of these philosophies, as he, among other things, was the first president in American history to simultaneously increase taxes for the poor and lower taxes for the rich. Reagan’s campaigns to privatize and de-regulate are policies that take a very long time to fully play out in the economy, and the effect of them can last for a very, very long time. The only short-term effect you will see in a privatization campaign is a windfall of cash for the government, which is traditionally used to lower taxes, according to the Reagan economic doctrine. We are seeing enormous effects of the policies of privatization and de-regulation today as vital infrastructure has been transferred into the hands of the top echelons of society and the financial industry is convulsing due in part to a lack of regulation. (I will return to the subject of de-regulation later on). Reagan also severely weakened the Social Security Program, with the help of an important fellow who I will discuss below.

A figure who was to become very famous and much discussed later on, emerged during the Reagan era - Alan Greenspan. It is VERY important to study Greenspan’s personal philosophical foundations, as they help to describe much of his behavior, and the fate of this country’s economy. Greenspan was a close friend and follower of the philosopher Ayn Rand, and it would not be an exaggeration to say that Rand’s, and hence Greenspan’s, views on economics are close to anarchistic (a more accurate term for what many describe as “libertarian”). In their view, the government should do almost nothing except for provide the country with armed forces (if that even, now that America to some extent relies on private armies such as Blackwater).

During the Reagan administration, Greenspan was put in charge of a commission that was to give recommendations for the future of the Social Security program. The final report that the commission indicated that the program faced serious financial challenges in the future (because of demographic and other concerns), but instead of strengthening the program by investing more money into it, the commission suggested taxing the payments from the program, hence, at the end of the day, decreasing the total amount of money dispensed by the government. The surplus that this decrease in dispensation created was to be put in a fund for the future. However, this fund was instead used to support tax cuts (even though so-called “lockbox” legislation was created), so the final result of the changes made on the recommendation of the commission headed by Greenspan were:

1. a severe weakening of the entire Social Security program, and

2. yet more tax cuts for the wealthy

The combined effect of these two was simply a transfer of wealth from the lower echelons of society to the higher ones, an uninterrupted process that has been going on for almost 30 years in the United States as of the present day.

The destruction of the social safety net was temporarily put on hold during the Clinton years (except for the welfare reform), but not much was done in order to repair it. An interesting comparison can be made between the United States and Great Britain, because Thatcher and Reagan largely had the same agenda, as did Clinton and Blair. The Clinton-Blair years in terms of ideology constituted the destruction of traditional leftist values, as much of the agenda of Reagan and Thatcher was adopted instead. In other words - right-wing influence on the mainstream left was large, which seems like a strange thing, and it was.

With the election of Bush Jr., however, the fight to dismantle what was left of the social safety net was started. Bush turned his attention to the healthcare industry, and was able to pass into law some astonishing policies. Most countries try to keep the prices of drugs low, so that their citizens don’t die because they can’t afford to pay for their treatment. Bush, on the other hand, was able to pass a law that prohibits negotiating with drug companies for lower prices! He vetoed a bill in California for the expansion of a healthcare program covering children. So much for “compassionate conservatism”… It seemed as if Bush were on a pre-emptive campaign against the restoration of social safety in American society. These policies have undoubtedly already led to numerous deaths within the American population. In addition, Bush Jr. has systematically tried to cut funding for just about every other government program that is not related to the promotion of religious fundamentalism within the United States, or the fight against religious fundamentalism abroad.

Privatization, de-regulation, weakening of the social services are policies that all started a slow-moving process of punching huge holes in the social safety net, and the onus lies mainly with Reagan, Greenspan and Bush Jr.. I believe Reagan’s policies created a permanent shift in American policies with respect to social services and government spending in general. The policy of “small government” seems to have been made permanent, and we will continue to see more effects of this within a short time, and these effects will be amplified by the financial crisis.

2. Turning now to the question of who is responsible for the current financial crisis, let me first make one thing clear: even though George W. Bush certainly has not been helpful, he is not responsible for the current financial crisis. Bush has definitely made things worse by being perhaps the most fiscally irresponsible president in history, but the effect that this will have in the end is that the crisis will go on for longer (and it will probably also negatively affect American foreign policy aspirations).

I believe that the reasons behind the financial crisis have a lot to do with the Reagan doctrine of de-regulation and privatization, so in that respect the creation of the crisis is intertwined with the destruction of the social safety net. The question of de-regulation, or regulation for that matter, of the financial markets is extremely complex, especially in a large federation such as the United States. There is no single authority in the area, and even the most experienced scholar, economist or lawyer would be unlikely to say that he or she has sufficient knowledge of the issue. Basically, what Reagan started was a process to make it easier for the financial industry to operate and grow, in the hopes that this would benefit society. He did so by helping to remove a lot of regulation that had been created in the 1930:s after the depression, that was meant to prevent another financial crisis among banks, companies and investors. Regulation such as minimal capital ratios, what business banks can be involved in, consumer protection legislation, food safety regulation and the legislation guaranteeing the ability to organize unions was in large parts gotten rid of. Reagan was not the only one who assisted in this process.

The 1990:s was filled with joy over what bountiful fruits the financial markets could bring everyone, and Clinton used this to his advantage. Clinton continued de-regulation. It seemed that the markets could provide the people with great prosperity by growing uninterruptedly, so why would the state have to pay for things like pensions or infrastructure? In addition, the magic of the markets could sometimes kill two birds with one stone - enter the sub prime loans. Through de-regulation, the existence of sub prime loans was enabled. It was a stated goal of the Reagan era to move to an ownership society. By borrowing that philosophy, Clinton thought it would be a good idea to bring minorities out of poverty by making many of them into property owners. Maybe then their inner city areas would stabilize, and the invisible hand would guide them from cradle to a late grave. Banks jumped on board with a new strategy known as “reverse red-lining”, that would aggressively market sub prime loans to poor minority areas.

The great prophet in the background was Alan Greenspan. Regulatory freedom, the abolishment of labor rights, enormous amounts of cash released through privatization, the internet boom, and American global economic, military and cultural hegemony, all created an enormous potential for economic growth in the United States. Pax Americana ruled supreme (until Bush ended it completely). Greenspan decided that the best strategy was to fuel the fire of growth as much as possible, and aggressively cut interest rates again and again. When so many factors contributing to economic growth are present at the same time, this can be a very dangerous strategy. It ultimately led to the tech crash less than a decade ago. However, this was only the beginning, because the underlying philosophy and the altered regulatory and financial structure was still there.

Financial companies soon realized that, as a result of de-regulation and a climate supportive of Wall Street, it could take financial innovation to new heights. By creating a refined web of packaged securities, risk was spread around the world. The financial industry would describe the new situation as a giant insurance system, which would guarantee that losses will no longer be as great in one country or one sector. This is not true, because this system undermines the confidence in financial products in general and is far more detrimental to markets than problems in one isolated sector. Instead, an analogy describing the system of packaged and re-packaged securities as an incurable virus is much more appropriate because nobody knows where the bad assets are, and hence there is not much that can be done about them.

Now, in 2008, the value of private pension plans have been seriously hollowed out, ordinary people’s savings have been diminished, many have lost their jobs and their homes. The situation is the worst for minorities, whose ownership situation is worse now than when the process of trying to make them into property owners started in the 90:s. In addition, the American government is bankrupt, which we will see signs of in years to come (and this is obviously George W. Bush’s fault).

I blame this financial crisis principally on Reagan, Greenspan and Clinton because of their crusades for de-regulation, relentless dedication to market solutions and privatizations and general lack of insight into the eventual results of their actions. The American economy needs to be pushed forward in a wheelchair right now, and George W. Bush’s economic policies amount to slashing the tires and hanging lead weights on the chair.

It is now clear to see that there are two people who have been heavily involved in the creation of both of the problems that our construction worker in the beginning faced: Ronald Reagan and Alan Greenspan. These two have somehow been hailed as heroes for a long time, and in the case of Reagan, this obviously has a lot to do with the end of the Cold War. People are not so sure about Greenspan anymore, and it is my view that anarchists do not belong in the world’s most important governmental positions. As for Reagan, I hope that America will have to re-evaluate his “contributions” to the American economy. It is hard for people to see the connection, but it is my belief that Reagan is behind most of the financial suffering that the American people go through today, and that which lies ahead.

It must become known that these people are responsible for the suffering we see today, because this has a direct link to the presidential election of this year. John McCain describes himself as a former "foot soldier of Reagan", and wants to continue the Reagan and Bush economic legacy. This would simply be absolutely disastrous.

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