The House Built on Sand
In his April 14, 2009, “new foundation” speech on the economy, President Barack Obama said, “It is not sustainable to have an economy where in one year, 40 percent of our corporate profits came from a financial sector that was based on inflated home prices, maxed-out credit cards, over-leveraged banks and overvalued assets.”
Since the Reagan years, the United States has relied less on producing goods than on serially inflating bubbles to sustain false prosperity. While it’s true that trillions of dollars of paper assets create real wealth—the Manhattan investment banker has actual cash to buy houses and pay staff—such prosperity is limited, and ultimately delusional. In 2008, reality popped the bubbles we’d been living in, revealing the absence of a truly productive American economy that works for everyone. Two new books—The Great Financial Crisis: Causes and Consequences by John Bellamy Foster and Fred Magdoff, and Alan Beattie’s False Economy: A Surprising Economic History of the World—try to explain how we got here.
Foster and Magdoff bring to the question a Marxist perspective that differs fundamentally from Beattie’s free-market orientation. For Foster and Magdoff, it’s not just a matter of mistakes being made—deregulating the financial services sector, for example. The more essential problem, in their view, is the long-term stagnation of America’s mature capitalist economy, which provides increasingly fewer options for the investment of excess funds. This thesis, premised on the permanent stagnation of the American economy, puts Foster and Magdoff at odds with most mainstream economists, who treat each fresh crisis with surprise, as though it could not have been anticipated.
Yet the crises have been increasing in both intensity and frequency: the 1981-1982 recession, the 1987 stock market collapse, the 1990-1991 recession, the 2000-2002 collapse of the high-tech bubble, and the mother of them all, the ongoing collapse in the American housing market. It’s no coincidence that during these years the Reagan, Bush, Clinton and Bush II administrations busily promoted one bubble after another as the latest, greatest salvation for capitalism run aground.
In the view of orthodox economists, the economy periodically falls into recession because of underconsumption; it needs only to have the pump primed with monetary and fiscal stimulus. During the American economy’s golden age, from 1945 to 1973, economists could afford such rose-colored thinking. John Maynard Keynes, capitalism’s savior in the 1930s, had a more pessimistic view, believing that capitalist economies tend to fall repeatedly out of equilibrium, reverting to underconsumption and underutilization. Post-war American economists translated Keynes into a set of fine-tuning policy prescriptions, having regressed to abstract conceptualizations of perfect competition in a free market. America’s imperial domination following World War II allowed economists to treat growth and prosperity as permanent features.
Foster and Magdoff argue that the post-war golden age was an anomaly, unlikely to be repeated. Long-term stagnation, they argue, is alleviated only by epochal inventions like the steam engine and the automobile. (American prosperity in the 1950s was driven in part by construction of the interstate highway system.)
In theory, there’s no limit to the number of inventions that might revitalize an otherwise stagnant American economy. But in practical terms, there is. Is the Internet such an invention? That was the argument during the 1990s—remember the immune-from-recession “New Economy,” and Alan Greenspan claiming the old laws of economics no longer apply? In fact, as Foster and Magdoff show, American capitalism during this period was in dire straits.
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After the collapse of the high-tech stock bubble, policymakers made a purposeful decision to inflate the housing bubble by extending generous credit to homebuyers who didn’t qualify, and securitizing the loans to give excess capital a place to invest. Before the collapse, the next big bubble was to have been the green economy. One hears little talk these days of the green bubble, and more about getting used to a lesser standard of living.
Throughout the years 2006, 2007 and 2008 Foster and Magdoff accurately forecasted the recent financial meltdown. (Liberal economist Dean Baker, to his credit, predicted the housing bubble back in 2002.) But the current collapse is not limited to finance—it reflects weaknesses in the overall economy.
Building on the work of economists Paul Baran and Paul Sweezy, Foster and Magdoff focus on the astronomical growth of debt—particularly private debt, often ignored by mainstream economists, whose focus on the considerably smaller public debt understates the problem. They also track the unsustainable volume of mortgage borrowing and the mind-boggling profusion of new financial instruments like collateralized debt obligations and structured investment vehicles.
If we accept the thesis of mature capitalist stagnation and an economy always in search of bubbles to blow up, a new policy prescription presents itself. It would seek economic bedrock—equalization of incomes, investment in human capital and physical infrastructure, and extension of real opportunity to ignored segments of society, in President Obama’s vision. In other words, a sort of Americanized socialism.
Although Beattie doesn’t have much to say about the current economic crisis, his book provides a sweeping historical overlook from which to view the situation. Beattie’s prism is individual choice, rather than Marxism’s material destiny. Even so, he recognizes that given enough poor choices by policymakers, a country could find itself permanently derailed into diminished economic growth. One case in point is Argentina, which at the end of the 19th century resembled few countries so much as the United States.
Some thought Argentina would become a world power. From there, the two nations’ paths diverged radically. The Argentinian state was captured by rentiers who preferred to live off the land rather than invest in the infrastructure crucial to development and growth, as the U.S. went on to do.
Given the current crisis, the question confronting America is whether it has already proceeded so far along the path of financialization that return is impossible. After all, great discrepancies in wealth distribution and access to opportunity have already skewed from the norms of American capitalism (sometimes exceeding even the distortions of the Gilded Age). Beattie’s answer is that a return to a real economy is possible, though increasingly difficult as time passes and players like Europe and Asia bring their competitive creativity to market. For Foster and Magdoff, the very question is wrongheaded; capitalism’s recurrent “crises” are just the tips of the iceberg representing capitalism’s inability, if left to itself, to invest in people.
Beattie’s investigations into why certain countries prosper despite apparent material disadvantages, while others languish despite material advantages, are relevant to the current crisis. Natural resource endowments such as oil and diamonds can be more trouble than they’re worth, since they can inhibit entrepreneurial creativity. We import our asparagus from as far away as Peru because farmers there have obtained unequal access to markets. Special interests get fat on state largesse and move entire economies in unproductive directions. Something similar has happened with the financialization of the American economy.
Yet Beattie’s main thrust is to show that the economic fate of nations is not inevitable. Given the right policy choices—which in Beattie’s view amount to trusting the market and limiting government intervention—any country can liberate itself from economic tyranny.
Indeed, policies giving more rein to the market are often effective. But it’s all too easy to ascribe causation in retrospect, justifying the free-market perspective in hindsight. American development in the late 19th century had as much to do with control of the state by industrial, rather than agricultural, elites. Heavy import tariffs of precisely the kind that Beattie derides among today’s developing countries were common to both camps.
During the last 30 years, the American economy has been managed according to the needs of an increasingly frenzied financial sector, as manufacturing declined. Why would financial interests give up their virtual monopoly? Beattie also fails to address the fact that America grew so phenomenally in the 20th century in large measure because of war-making, the ultimate Keynesian stimulus, of which we’ve taken repetitive advantage during the post-World War II period. Our wars have fueled bursts of “economic growth,” but have we reached a limit there, too? Kevin Phillips’ prescient 2008 book Bad Money, a necessary supplement to Beattie, connects the financialization of the American economy, very much as Foster and Magdoff describe it, with the demands of American empire.
What, then, are the prospects for recovery? According to Foster and Magdoff, the reckoning has arrived. Debt has been too grossly inflated to fuel another recovery, and America has no choice but to deleverage its economy and return to those forms of real productivity still open to it. A decision must be taken to pursue greater equality, which would require lessened reliance on asset bubbles, else the foreseeable decline will be all the more painful.
Beattie doesn’t believe in the permanent stagnation of mature capitalist economies. Yet his thesis converges with that of Foster and Magdoff in that departure from the norms established by narrowly interested elites becomes more difficult over time. The pragmatic realism so far displayed by President Obama, and very much in evidence in the books discussed here, is still sorely lacking in mainstream media accounts. These continue to harp on subprime lending and irresponsible borrowing as the wrecking balls that brought down the house. At best they advocate re-regulation of the financial sector as a means of preventing a recurrence, rather than asking why the house was built on sand to begin with.
Anis Shivani is a fiction writer, poet, and critic in Houston. His collection Anatolia and Other Stories will be published by Black Lawrence Press in October.