In any wars of words in an election season, truth is often an early casualty. The war of words between Mitt Romney and Newt Gingrich is no exception. The two Republican front-runners are currently telling each other carefully fabricated stories about their own pasts that cover tracks and reinvent reputations.[1] But in the end that is less damaging to the entire democratic process than the accidental and less contrived stories that, in passing, they are also telling us. Right now, as they attack each other with increasing venom, the four remaining Republican presidential candidates are collectively rewriting a critical part of our immediate past – and in the process are seriously misleading us as they battle with each other.

The main rewrite now underway in their twice-weekly televised clashes is a rewrite on housing finance. In Florida, and no doubt soon again in Nevada where the foreclosure crisis is even more severe, the men seeking the Republican nomination persistently blame the housing bubble on public policy and on federally underwritten regulatory agencies: on Fannie Mae and Freddie Mac, and on the evil impact of the Community Reinvestment Act.

They did so in Tampa last Monday in the first of their two Florida debates,[2] and they did so even more starkly in their second debate in Jacksonville on Thursday night.[3]  They said this:

Mitt Romney: [to Newt Gingrich, in Tampa] “You also spoke publicly in favor of these GSEs, these government-sponsored enterprises, at a very time when Freddie Mac was getting America in a position where we would have had a massive housing collapse….Freddie Mac did a lot of bad for a lot of people.” [Then, of Newt Gingrich, in Jacksonville] “Fannie Mae and Freddie Mac were a big part of why we have the housing crisis in the nation that we have….He should have stood up and said, look, these things are a disaster. He should have been anxiously telling the American people that these entities were causing a housing bubble that we’re seeing here in Florida and around the country.”

Rick Santorum [in Tampa] “There were several of us in the United States Senate back in 2005 and 2006 who saw this on the horizon, who saw the problem with Fannie and Freddie, and tried to move forth with a bill…we said, if you don’t constrain these two behemoths from continuing to underwrite this subprime mortgage problem, then we’re going to have a collapse. Unfortunately that proved – proved to be true.” [in Jacksonville] “In 2006…in warning of a meltdown and a bubble in the housing market, I stood out, I stood tall, and tried to get a reform….to gradually decrease the amount of mortgage that can be financed by Freddie – or underwritten by Freddie and Fannie over time, keep reducing that until we get rid of Fannie and Freddie.”

Ron Paul:  [in Tampa] “…in addition to that, it was an insult to injury, because they kept interest rates especially low with Freddie Mac and Fannie Mae, and there was a line of credit there, and it was a guarantee. As a matter of fact, I had introduced legislation 10 years before the bubble burst to eliminate that line of credit. But then the Community Reinvestment Act added more fuel to it, you know, forcing banks to make loans that are risky loans.” [in Jacksonville] “…we know how the bubble came about. It was excessive credit, interest rates held too low, too long, the Federal Reserve responsible for that. Community Reinvestment Act, which is Affirmative Action telling banks that they have to make these risky loans.”

In focusing on Newt Gingrich’s relationship with Freddie Mac in this fashion, his three main challengers offer us an explanation of the housing crisis that puts full responsibility for it (and its consequences) back onto the GSE’s, the Federal Reserve and the CRA; and they are not alone in this. Theirs is a view recently reinforced by the SEC decision to prosecute senior GSE managers for failing to disclose the scale of the subprime loans on their books;[4] by the widely-read newspaper articles of the GSE’s long-time critic, Peter Wallison;[5] and by the extensive coverage of the new book by Gretchen Morgenson and Joshua Rosner, Reckless Endangerment, one that singles out Fannie Mae for particular criticism and censure.[6]

The only problem with that view is that factually it is, in all its essentials, entirely misleading!

• Blaming a Community Reinvestment Act passed in 1979 for a crisis that emerged only three decades later was always a stretch. If the Act was guilty, its guilt certainly took a very long time to kick in; and it is a claim which recent research has entirely discredited. As Levitin and Wachter have reported on the basis of their careful survey of all the relevant research data, “there is little evidence that the CRA contributed directly to the bubble. CRA subject institutions made a disproportionately small share of subprime mortgage loans,” and “relatively few subprime loans even qualified for CRA credit ,either because they were made outside CRA assessment areas or were made to higher income borrowers.”[7] The findings of the Federal Reserve staffers Avery and Brevoort’s were similar: that “areas covered by the CRA experienced lower delinquency rates and less risky lending,”[8] not higher ones. “According to recent Fed data, 75 percent of higher-priced loans made during the peak years of the subprime boom were made by independent mortgage firms and bank affiliates not covered by the act.”[9] “Only 6% of…subprime loans had any connection to the law. Loans made by CRA-regulated lenders in the neighborhoods in which they were required to lend,” the Financial Crisis Inquiry Report noted, “were half as likely to default as similar loans made in the same neighborhoods by independent mortgage originators not subject to the law.” Which is presumably why the Report could definitely conclude, as it did, that “the CRA was not a significant factor in subprime lending or the crisis.”[10]

•  Timing matters too in relation to the GSEs and the development of a housing bubble. There is overwhelming evidence that the role of the GSEs in the explosion of housing prices and the spread of subprime lending was, at most, secondary and late. It was definitely not primary and early. The GSE’s did have an implicit government guarantee of solvency that enabled them to borrow at lower rates; and they did defend that special status with heavy lobbying. They also were the source of the securitization of mortgages that slowly transformed US housing finance from a “lend and hold” model of mortgaging to a “lend and sell on” one. But what they did not do was either initiate the lowering of underwriting standards that fueled the explosion of subprime lending, or spread those toxic assets through the U.S. and then global financial systems. Private lenders were responsible for the first of those two crucial drivers of the housing crisis, and private banks were responsible for the second. As Mark Zandi has recently noted, in 2002 before the housing boom, the two agencies held almost 54% of all mortgage debt. By summer 2006, at the peak of the bubble, their market share was down to 40%; and “it is difficult to see how the agencies could have been responsible for inflating the housing bubble at a time when they were losing a full 14 percentage points of market share.”[11] Only as private lenders ran into difficulties did Fannie and Freddie move in to take up the slack, jumping ‘back into the housing market at precisely the wrong time.”[12] It was in competition with private lenders, and in order to recapture market share, that eventually the GSEs did indeed lower their underwriting standards. But that belated lowering was a consequence of Fannie and Freddie being privately-owned, not of being government-sponsored. It was a lowering driven by shareholder pressure, demanded in order to compete with private-label mortgage backed securities “In contrast, the wholly public FHA/Ginnie Mae maintained their underwriting standards and ceded market share.”[13] It is data like this that led the Financial Crisis Inquiry Commission to report that, in their view, “the two entities contributed to the crisis but were not a primary cause.”[14]

•  In consequence we would do well to discount both the Wallison thesis, and that advanced by Morgenson and Rosner. The Wallison enthusiasm for the SEC decision to prosecute senior GSE managers – his assertion that the prosecution “has made it clear that the two government sponsored enterprises played a major role in creating the demand for low quality mortgages before the 2008 financial crisis”[15] – has been effectively rebutted by Joe Nocera. As Nocera noted recently: the “SEC complaint makes almost no mention of affordable housing mandates. Instead it charges that the executives were motivated to begin buying subprime mortgages – belatedly – because they were trying to reclaim lost market share, and thus maximize their bonuses.”[16] And even the Morgenson-Rosner volume, though widely recognized as a fine piece of reporting on misbehavior by senior figures within and around Fannie Mae in and after the Clinton years, would appear to mislead on the timing issue. To quote Robert Kuttner’s review – one of several to make the point – when Morgenson and Rosner wrote that “Fannie Mae led the way in relaxing loan underwriting standards, a shift that was quickly followed by private lenders,”[17] “they have that backward…. only late in the game did Fannie Mae seriously water down its standards.”[18]  “The GSEs did buy subprime mortgages in the 2000s, but contrary to the impression given by Morgenson and Rosner, their purchases were always a distinct minority of those sold by Wall Street;”[19] a fact that makes Kuttner’s judgment worth citing at length.

” It’s true — and appalling — that Fannie became the largest purchaser of subprime loans from one of the worst mortgage hustlers in the game, Jim Johnson’s pal Angelo Mozilo, the CEO of Countrywide Mortgage. But that was in the period from 2003 to 2005, when Wall Street had already provided the financing and created the securities market for subprime. Fannie was playing catch-up. So in the rogues’ gallery of scoundrels that caused the financial collapse, a fair reckoning would rank Fannie Mae fifth or sixth. Far higher on the list would be: Alan Greenspan’s Federal Reserve…; the Office of Thrift Supervision…; the Wall Street firms that bankrolled subprime lenders and turned their high-risk loans into securities; the credit-rating agencies that blessed toxic subprime securities with Triple-A ratings; the SEC’s failure to police those agencies; and, of course, the subprime lenders themselves.”

• So responsibility for the housing bubble needs to be placed instead squarely where it properly belongs: on the shoulders of inadequately regulated private financial institutions. As Mark Zandi put it “the biggest culprits in the housing fiasco came from the private sector, and more specifically from a mortgage industry that was out of control…lenders who originated home loans, investment bankers who packaged them into securities, rating agencies that misjudged those securities, and global investors who bought them without much, if any, study.”[20] Countrywide Financial was a case in point. Washington Mutual was another.[21] (Countrywide Financial was the largest single provider of mortgages in the United States in 2006. In 2005 it had accounted for 8% of all new asset-backed securities globally.[22]) Add to that list, flippers – real estate investors: recent research suggests that “in states that experienced the largest housing booms and busts, at the peak of the market almost half of purchase mortgage originations were associated with [such] investors.”[23] Moreover, “only one of the top 25 subprime lenders in 2006 was subject to affordable-housing laws. For the most part, private firms such as Countrywide Financial were issuing ‘non-traditional’ mortgages in order to package them off to Wall Street and make money.”[24]  And if you don’t believe that, try the FCIC Report instead: blaming the financial crisis the followed the housing bubble on “an explosion in risky subprime lending and securitization…widespread reports of egregious and predatory lending practices, dramatic increases in household mortgage debt, and exponential growth in financial firms’ trading activities.”[25]. Or the Levin-Coburn Senate Committee Report, “showing how high risk lending by U.S. financial institutions, regulatory failures, inflated credit ratings and high risk, poor quality financial products designed and sold by some investment banks, contributed to the financial crisis.”[26]  It is hard to know how many more blue-ribbon commission of inquiries the Republican presidential front-runners will need before they concede publicly what they must know privately: that blaming the GSEs for the housing bubble may be good politics (playing to their party base’s antipathy to effective public regulation of private markets) but it is bad history – bad because untrue.

• If there is anything that can be salvaged out of the Republican fairy tale on the origins of the housing bubble, it is the Federal Reserve’s low interest rate policy and its failure adequately to see the danger of a bubble and move to regulate it. That much of the Ron Paul case has merit. But what Ron Paul regularly omits to mention, when making that case, was that the Federal Reserve was then under the leadership of Alan Greenspan: the Ayn Rand enthusiast, the deregulation guru, and the advocate of the efficient market hypothesis thesis that so mistakenly reassured the banks amid their speculative frenzy.[27] The housing bubble arose not because the Federal Reserve was dominated by heavy-handed Keynesian interventionists, as the Republican candidates now imply. The housing bubble arose precisely because it was not so led.

The big problem with all this Republican rewriting of the record is that it makes it ever more difficult to design good policy for the future. The rewriting of history serves their immediate political purposes, but not our long-term needs. The Republican presidential candidates need to downplay the causal role of unregulated finance in the immediate past, and to overstate the role of Fannie and Freddie. They need to do both those things in order to justify still more financial deregulation in the future, and to undermine the credibility of GSEs that are now fully in public hands and so available for direct policy use. Santorum would close Fannie and Freddie. Obama might yet use them. Stopping that use is the subtext of the housing bubble story now being concocted in one Republican debate after another.

There was a telling moment in the Florida exchange that went largely unreported on which we would do well to dwell. In the midst of his criticism of Gingrich’s lobbying/consulting relationship with Freddie Mac, Mitt Romney actually agreed with Gingrich’s defensive response: that “there are many different kinds of government-sponsored enterprises, and many of them have done very good things…in the early years, those housing institutions were responsible for a lot of people getting a lot of good housing.”  Maybe that is why Republicans can’t decide between the two leading candidates. Each periodically and inadvertently lets a chink of reality penetrate the otherwise entirely fictional universe within which the Republican Party has chosen currently to organize its choice of standard bearer. There was no such concession to reality in the housing exchange in Jacksonville. It will be intriguing to see if reality creeps in again when the road show moves on to Nevada. Somehow, and sadly, I doubt it will. No ambitious Republican candidate is likely to make the mistake of honesty twice in a campaign as tightly fought and as factually ill-informed as this one would currently appear to be.

This argument is developed more fully in Chapter 10 of David Coates, Answering Back: Liberal Responses to Conservative Arguments (New york, Continuum books, 2010) and in Appendix 1 of his Making the Progressive Case: Towards a Stronger U.S. Economy (New York, Continuum books, 2011)

In Lewis Carroll’s Alice’s Adventures in Wonderland, the world discovered by Alice was one in which every aspect of reality was inverted. Big things were small. Small things grew big. The Cheshire cat faded into a grin.One side of a mushroom made you grow. The other made you shrink. It was also a world in which the Queen of Hearts had a simple solution to everything. “Off with his head!” Likewise in the world currently being created by the incessant chatter of Republican presidential wannabes, small characters want to be large, grinning is a substitute for substance, and all solutions are simple.  In the inverted world of Republican primaries, our present scale of unemployment is entirely Obama’s fault. Through the looking glass on offer from Romney and company, there was no unemployment before Obama shrank the economy by excessive spending, burdensome taxation and intrusive business regulation. Down the rabbit hole into which they would have us fall, a Republican Queen of Hearts can end unemployment at a stroke by taking those three evils away.

Oh that life was that simple, but it is not.

The Obama record on job-creation, spending, taxation and business regulation is not as the Republicans describe it. Nor are the causes of unemployment as straightforwardly remediable as they suppose. The clash on the record is well documented.[1] That on the underlying causes of unemployment is less so.  So instead of judging the job plans of any of the leading Republican candidates against a mythology of their own making, let’s instead examine them against the real causes of American job loss since 2008. Let’s set the tax-cutting, program-pruning, de-regulatory aspirations of Romney, Gingrich, Santorum and Paul against the full story of why this economy is no longer the job-creating machine it was in the 1990s.  That story is multi-layered and interconnected. The Republican policy proposals are not; and in that gap between story and solution lie all the reasons why a Republican victory in November’s general election can only make the unemployment problem in America significantly worse.

1. On the surface and in the most immediate sense, we face an unemployment problem that is cyclical rather than structural. People have lost their jobs and their homes because of a recession triggered by inadequately regulated housing and financial markets.[2] The resulting attempt to slow the recession by public spending added significantly to a federal deficit already large because of earlier tax cuts and an unfunded war; and the depth of the recession was such as to take that federal deficit to a level unprecedented in modern peace-time. If our current political debate engages adequately with any layer of our present difficulties, it does so with this one. Republicans endlessly deny that unregulated markets caused this crisis and are forever attempting to label the recession as Obama’s own, the better to obscure the degree to which the recession began when a Republican was in the White House and was brought on by an ill-regulated financial system. The Democrats have the better of the argument here. It is not difficult to demonstrate that this was a recession inherited by Obama rather than created by him, that it was a recession rooted in deregulation rather than over-regulation, and it was a recession eased rather than deepened by a Keynesian response.[3] Unfortunately for Obama, however, it is also easy to demonstrate that the modesty of his Administration’s policies[4] – his failure to simulate enough or to reform housing policy sufficiently radically – has indeed helped to prolong unemployment and weaken consumer demand.[5] And if that is so, the immediate restoration of American employment would appear to require an increase in the very federal spending and Fed largesse that existing levels of public debt make it ever harder to justify and to finance.[6] Level 1 of a four level conundrum.

 2. What then compounds the continuing weakness of the American labor market is unemployment of a structural kind. The United States faces a global economic order that is undergoing rapid change. The much-vaunted strengths of the Anglo-Saxon model of capitalism – with its low levels of state regulation of business on the one side, and its thin layer of job protection on the other – have left more and more Americans vulnerable to unemployment, and more and more American industries vulnerable to foreign competition. That competition has come from low wage economies in which state direction of industry is more prevalent and from welfare-based capitalisms with established track records on skill enhancement and high value-added manufacturing excellence. American jobs have gone off-shore.[7] American wages have stagnated under the weight of foreign competition; and American living standards have been maintained only by (and to the degree that) America’s overseas competitors have been prepared to reinsert their trade surpluses back into circuits of American finance. The long-term recreation of American prosperity requires, therefore, the regeneration of well-paying manufacturing jobs here in the United States, a recreation made more difficult by the weight of financial interests in the contemporary US economy, and the propensity of US-based corporations to outsource more and more of their basic production to state-guaranteed low wage labor markets overseas. Level 2 of the conundrum.

3. If that were not enough, the search for renewed and sustained American employment has to operate against the backdrop of two previous searches – two previous social compacts between capital and labor – each of which was temporarily successful but both of which have now failed. American prosperity in the immediate post-war period was generated by a compact between highly-productive American manufacturing firms and well-unionized semi-skilled American labor, a compact which raised working class wages in the United States to unprecedented (and globally unmatched) levels for a generation. In that first growth period, generalized prosperity trickled up, not down. The second, triggered by the Reagan Revolution, turned the U.S. economy into a job-creating machine by combining business-sector deregulation with a state-led weakening of American labor. Profits soared, wages stagnated, low-wage work proliferated, and American living standards were protected only by the vast majority of adult Americans working longer hours, regularly refinancing their homes, and relying on the general availability of cheap credit. In that second growth period, generalized prosperity trickled down, not up. Inequalities in the distribution of income and wealth increased. Rates of upward social mobility declined, and eventually the pace of job creation slowed to a trickle.[8] The oil crisis and productivity slowdown of the 1970s ended the first growth period and laid the grounds for the second. The collapse of the housing bubble and the credit-crunch of 2008 ended the second, and made vital the search for a third. Any serious political project to renew American prosperity, therefore, has to do more than generate short-term employment growth. It has to find a way out of the wreckage of the Reagan Revolution, a route to a new social compact between capital and labor in America. Level 3 of the conundrum.

4. Any serious political project to renew American prosperity has also to recognize, and retreat from, the huge costs of empire. We are not simply at the end of a growth period. We are also fast approaching a moment – seen in every major imperial system since at least the Romans – at which imperial overreach generates unacceptable levels of resistance abroad and unacceptable levels of economic and social distress at home. In the last seven decades, the United States has spent vast treasure abroad: wars in Europe, Korea, Vietnam, Iraq and Afghanistan; and bases established and maintained in every area of the global system outside the communist bloc. Policing the capitalist half of the cold war global system cost vast quantities of American resource, human and material.[9] Policing it created spaces in which competitor economies could and did grow. Policing it distorted and weakened the structures of the economy at home. Policing it generated a domestic culture vulnerable to hubris, accustomed to greatness, and prone to self-delusion. The costs of empire are now everywhere visible in post 9/11 America, but cannot yet easily be conceded by the vast bulk of a political class (and an electorate) whose political memory is far shorter than the seven decades of American global leadership. Ron Paul always strikes a chord with his audience when he speaks of this need to draw back troops and commitments, but is just as regularly and immediately dismissed as a serious political contender by the media and the Republican leadership because he does so. Finding a route out of empire into a post-imperial security and prosperity is America’s most basic long-term need.[10] It is also the one that an imperial political system of the kind that has built up in Washington since 1941 is least equipped adequately to address.

Even with a Democrat in the White House, politics in Washington now has the feel of Nero fiddling while Rome burnt.[11] Alienation from the superficiality of the daily political circus, combined with the inability/unwillingness of that circus to address some/all of the layered issues within which we all are obliged to live, is likely – unless Barack Obama lifts his game – to lock America into a series of one term presidents. For in such circumstances of political denial, campaigning is so much easier than governing. As Mario Cuomo once said, the first is poetry, the second is prose.[12] When those in power will not address the totality of the problems which surround them, then those out of power are easily able to point to the surface manifestations of the underlying problems, offer a superficial analysis of their cause, and win easy and brief power themselves: before inevitably falling victim to the next wave of cheap critics set in motion by their own failures to deliver when in office.

The only politics that will eventually sustain itself is one that is willing to go the full nine yards, and tackle all four levels of the conundrum simultaneously. That quality of politics is not on offer anywhere in the Republican Party these days[13] – even Ron Paul hits Level 4 but has nothing sensible to offer on the other three.[14] Maybe on the liberal wing of the Democratic Party, there are stirrings. But we are still waiting, even from them, for a genuine New Deal. We are waiting, and time is running out.

For a fuller outline of this argument, see

David Coates, Making the Progressive Case: Towards a Stronger U.S. Economy.

It is likely that 2012 will be long remembered as a watershed year in America politics. It certainly needs to be. Neither the country nor the world can afford much longer the gridlock that is presently immobilizing Washington. We all know that. Here we are, beset with a string of fundamental problems and bumping along the bottom of the most serious recession since the 1930s, frustratingly becalmed in a stalemate between political opposites, with the federal government unable to address the structural reforms that this economy and society so visibly requires. Currently, the width of the agreement on the seriousness of our problems is matched only by the depth of the disagreement on how best to resolve them. Given the depth of that disagreement, any effective resolution will inevitably take America off in one direction or in quite another, depending on which side of our entrenched political divide eventually prevails. When neither side does, as now, our problems simply intensify. We need therefore to go into 2012 clarifying the genuine choice of direction now before us as a nation, and we need to come out of 2012 with Congress and the White House in lockstep on the direction to take.

The Republican Party knows the package of structural reforms it would implement. It controls the House of Representatives. It wants to take back the Senate and the White House. The liberal wing of the Democratic Party has a very different, and to my mind, significantly superior package of reforms in its arsenal. They need the House back, and clear leadership from the White House to get it.

But will that leadership come?

It won’t if Obama’s re-election people fall into the trap of thinking, as they appear prone to do, that all they need to possess, in order to win in 2012, is superior organization: nothing about superior politics. They mislead themselves, and possibly us as well, if they think that all they need to do between now and November is to run some supped-up version of their 2008 campaign: putting workers on the ground and adverts on the airwaves in greater volume than their opponents. It won’t be that simple this time round.  Last time, all was promise. Now promise will be measured against performance. Performance has been, to put it mildly, uneven. This time, the Obama people are not fighting the Bush legacy. This time, they are fighting their own legacy. Whatever November 2012 will be, it will not be a shoe-in for the incumbent.

How then can the Obama Administration recapture the hearts and minds of progressive America? How can it demonstrate the superiority of its politics? Not by the President being statesmanlike, standing above the political fray, as The New York Times reported he may still be planning to do on his return from Hawaii.[1] He has already struck that pose too often and too long. Among other things, it cost Democrats the mid-terms. No, the hearts and minds of progressive America will only be recaptured by a President who – in the style of his recent Osawatomie, Kansas speech – is regularly prepared throughout 2012 to:

• put the blame for the current political impasse squarely where it belongs: not on Congress as a whole, but on the ideological intransigence of Tea Party Republicans, especially in the House;
• defend the progressive gains of his first term: access to health care for 30+ million Americans previously denied it, the beginnings of reform of a financial system badly out of control, and the ending of an unnecessary war in Iraq;
• remind Americans of the scale of the economic and military disaster left by the Bush Administration in 2008, and of the way Congressional Republicans have filibustered every progressive attempt to put the resulting recession behind us;
• call on independent voters and Democrats to unite behind an administration committed to using its second term more effectively than its first to create a fairer America, a more prosperous America, and an America progressively free of foreign wars; and so
• return from his Hawaiian Christmas prepared to launch a crusade for peace, jobs and equality.

Will Obama do that? Let us hope so. He certainly mustn’t return to Washington from his brief vacation simply offering business as usual. He must return with something new and dramatic. To save America from the horrors of a right-wing presidency, his administration has just ten months to remind Americans of just how many American households depend on at least one federal program for a key part of their income (maybe as high as one household in every two), and just how important active government is, on everything from food safety and environmental regulations to unemployment insurance and Pell grants.[2] Even more vital, the Administration has just ten months to re-establish Obama’s progressive credentials among independents and Democrats alike, by a burst of executive action and policy proposals designed to lock in key constituencies and to reinforce liberal Congressional candidates.

If the Administration fails to re-establish those credentials there is a genuine danger that, come next November, we will see power in Washington shift back to a Republican majority which will be even more reactionary in its domestic policy, and hawkish in its foreign policy, than were the Bush Republicans defeated by the untested Obama in 2008. If Barack Obama does not present himself in 2012 as a committed liberal, many progressives will simply decline to campaign for his re-election. Many might not even bother to vote for him. Some may even head off in search of a third party candidate, alienated to the point of indifference by the President’s failure to sustain his promised program of radical change.  The Obama Administration needs to recognize, and recognize as a matter of urgency now, that keeping Republicans out of the White House will require, at the very least, serious defensive politics by a broad coalition of the entire American Left throughout 2012. It needs to recognize too that mobilizing such a coalition for purely defensive purposes alone will be extraordinarily hard. Getting out the full progressive vote is invariably more straightforward when liberals can see, and actually like, what is on offer. It is invariably more difficult – much more difficult – when the only choice being canvassed is one between lack-luster alternatives, neither of which appeals, where the main reason for voting is to keep the other side out.

We need something to vote for, not simply something to vote against!

Which is why it would help the progressive cause enormously in 2012 if the Obama administration could start this election year with something akin to a new “100 days”: policies and programs well to the left of any that it has so far chosen to offer, designed to, at the very least:

•  halt the flood of foreclosures by an aggressive write-down of the outstanding debt on underwater mortgages;[3]
• increase the flow of low-cost credit to small and medium-size businesses in return for additions to their labor force;.
• slow the outsourcing of American jobs, strengthening American manufacturing by bringing middle-class jobs back to middle-class America;[4]
• bring employment directly to what otherwise might become a lost generation of Americans now in their 20s, through a public works program modeled on FDR’s New Deal[5] (this time perhaps, including trading the writing-off of student debt for work on urban redevelopment);
•  tax speculative financial transactions and excessive bank bonuses, explicitly to fund the re-employment by cash-strapped states of the teachers, cops and firefighters now being laid off;
• grant amnesty to the children of undocumented workers, and routes to citizenship for their parents;[6]
• bring troops back from Afghanistan at an ever increasing rate – replacing nation building abroad by a new round of nation-building at home.

Is any or all of this just a pipe dream? Sadly, I fear it mainly is, but I still hope it is not. For in truth our options are narrowing rapidly. As a nation, we can spend 2013 returning under Republican leadership to the inequalities and unregulated financial excess that brought us to our present impasse in the years of George W. Bush, or we can spend 2013 beginning to realize a new progressive deal for a resurgent America. The entire future direction of America’s economy and society is at stake this time around. Being wishy-washy in the center will no longer cut it. Which is why now is exactly the right time for the Obama Administration to get off the fence and clarify the choice, and clarify it by the introduction of a slate of progressive policies – so that America can eventually choose, and hopefully choose wisely, next November.

“At many stages in the advance of humanity, this conflict between men who possess more than they have earned and the men who have earned more than they possess is the central condition of progress” (Theodore Roosevelt, 1910)[1]

Economists are the new public intellectuals of the age. In more prosperous times, they rarely enjoy that status or play that role. Economics is, after all, a dismal science. In good times, issues linked to the production of new wealth invariably take a back seat to those triggered by the consumption of wealth already in existence. Prosperity brings into view the expertise of the more hedonistic social sciences: psychology, sociology, marketing and the like. It pushes economics aside.  But in the immediate wake of the Great Recession, with unemployment unacceptably high and the welfare state now under serious assault on both sides of the Atlantic, the views of economists are currently everywhere – particularly the views of conservative economists prepared to link unemployment to welfare itself. These are troubled times and we are in danger, if we are not careful, of slipping into a mindset that gives those conservative views a credibility that the nature of economics as a discipline ought properly to preclude.

The danger is that we might yet find ourselves believing that the choice we face is one between harsh but unavoidable economic realities (established for us by the superior knowledge and training of economics as a discipline), and over-ambitious and ultimately self-indulgent welfare aspirations (sustained by scholarship elsewhere in the humanities and social sciences that is somehow less scientific than that on offer from economists). We are in danger, that is, of being hoodwinked by a well-organized corps of conservative intellectuals into the view that the only solution to persistent unemployment is the widespread and immediate rolling back of the modern welfare state. Nothing could be further from the truth.[2]

The current fault lines within public policy do not lie on the borderline between economics and the other social sciences. They lie firmly within the discipline of economics itself.

There is not one economic view, no matter how often Fox News implies that there is. There are many economic views, each one of them rooted in a distinct school of economic thought. Historically those schools were well represented inside each major department of economics. These days, in universities in the United States at least, many of those departments have slipped dangerously into an orthodoxy of a neo-classical kind.[3] Other sorts of economists (Schumpeterian, Keynesian and adherents to various schools of radical economics) are still to be found, of course. If Paul Krugman is right, they are still more plentiful in universities on each coast of the United States than in the center of contemporary America.[4] But no matter where located, even Keynesian economists these days no longer enjoy the leading position which they occupied in academia a generation ago; and that is to our huge cost.

Economists anchored in those very different schools of thought disagree not simply on the nature of modern economies, though they definitely disagree on that.  They also profoundly disagree with each other on matters as vital to the status of economics as an academic discipline as the appropriate organizing assumptions, methodologies, evidence and associated policy preferences of economics itself.  And they differ too in the social interests that their arguments serve: or – in what is the same thing seen the other way round – in their capacity to direct public policy to the advantage of some sections of the community and to the disadvantage of others. There is nothing policy-neutral about the clash of thought between particular schools of economic thought, and let no one claim that there is. There never has been, and there certainly is not now.

Economics, politics, interests and values necessarily hang and fall together: and economists who claim otherwise – any who offer their expertise as entirely objective and value-free – certainly mislead their audience, and possibly also themselves. In a complex modern capitalist society with powerful divisions of interests between classes, ethnicities and genders, economists (like other intellectuals) cannot avoid their work reinforcing some of their interests more strongly than they do others. As Antonio Gramsci wrote long ago, intellectuals have a vital role to play, articulating and disseminating class interests. Each class has its own organic intellectuals – class warriors in the battle for the hearts and minds of an entire society. The 1% of Americans sitting at the top of the income ladder certainly has its own organic intellectuals. The rich have them in abundance. The 99%, by contrast, are less well-endowed.

• Take, for example, the recent report by the Congressional Budget Office on trends in income inequality in America between 1979 and 2007,[5] or the recent refinement by the Census Bureau of its measurement of the contemporary U.S. poverty level.[6] Both organizations paint a similar picture of intense hardship at the base of American society.[7] So what was the response to those reports from the many economists based in either the Cato Institute or the Heritage Foundation?[8] Was it to concede the existence of unacceptable levels of inequality and poverty, and to urge public policy initiatives to deal with both? No it was not. Instead the Cato Institute’s Alan Reynolds moved quickly to challenge the notion of excess income at the top: claiming its marked diminution after 2007 and the distortion of the pre-2007 data by the CBO’s misunderstanding of how rich people pay taxes.[9] The Heritage Foundation, for its part, issued its own poverty measure, listing the number of cars, televisions, VCRs, microwaves, phones and coffee makers to be found in the average poor household.   All this, as Robert Rector and Rachel Sheffield put it, to correct for “sensationalism, exaggeration and misinformation,” and to demonstrate that “the living standards of the poor have improved steadily for decades.”[10]  No conservative organic intellectuals there!

• Or take another example. One consequence of the ending of TARP money – the stimulus package designed by the Bush Administration, continued by Obama and roundly criticized by conservative economists as ineffective – has been a sharp decline in the revenues reaching state treasuries. Public employment is accordingly now falling. Teachers are losing their jobs, and in very large numbers. So what has been the Heritage Foundation response?  To publish a report jointly authored by their own Jason Richwine and Andrew G. Biggs from the American Enterprise Institute, demonstrating that public sector teachers are actually overpaid. Overpaid indeed to the tune of 52 percent of “fair market levels, equivalent to more than $120 billion overcharged to taxpayers each year.”[11] No matter that both the Bureau of Labor Statistics[12] and the Economic Policy Institute[13] have argued convincingly that federal and state employees suffer a wage gap compared to their private sector equivalents. No, the experts at Heritage beg to differ, and chose this moment of public sector retrenchment to publicize their case for teacher compensation reduction.

• Then of course we have the famous Norquist “no new taxes” pledge and the associated lack of enthusiasm in conservative circles for government regulation of private industry – the daily Republican decrying of the entrepreneurial “uncertainty” caused by over-active government.[14] Leave everything to the market, we are told:  unregulated markets know best. All that, of course, in spite of the fact – as President Obama made so clear in his speech in Kansas – that it was inadequately regulated financial markets that alone got us into this recession; and that the theory of trickle-down economics underpinning the insistence on “no new taxes” does not stand up well to empirical testing.[15] Trickle-down economics under George W. Bush, after all, gave us the least amount of job growth in any U.S. business cycle since World War II. There is plenty of evidence out there pointing to the neutral effect on economic growth of well-designed government regulations.[16] There is also plenty of evidence pointing to “certainty” rather than “uncertainty” as being currently the major blockage on new investment: the certainty, that is, of a lack of demand in consumer markets kept impoverished by the very austerity packages so favored by the conservative economists wedded to the Republican cause. There is plenty of evidence – just not evidence that organic intellectuals of the Right choose to consider and concede.

Such intellectuals continue to perplex me: less about their conservatism than about their humanity. I struggle to understand what makes someone get up in the morning, go to work, and spend the day helping to bring down still further the already low salaries of public school teachers. Nor do I understand what kind of well-paid intellectual responds to the depth and ubiquity of U.S. poverty by seeking to minimize its existence.

Maybe the conservatism of so many neo-classically trained economists has something to do with the poverty of the underlying premises of neo-classical economics itself. Certainly the grasp on reality enjoyed by such economists is hardly improved by a propensity to assume in their models a level of individual rationality, and a capacity for short-term interest calculations, that is literally beyond the capacity of ordinary human beings to deliver. Not that the fault lies with general humanity. It does not. Even Francis Fukuyama, the one-time doyen of the neo-cons who famously granted neo-classical economics the capacity to be right “approximately eighty percent of the time,” was adamant that, even so, there was “a missing twenty percent of human behavior about which neoclassical economics can give only a poor account.”[17] Twenty percent was perhaps generous: there is really no hope for adequate social analysis from an approach to economic life that so misunderstands the full complexity of human motivation, and that fails to grasp the remarkable extent to which even short term interests are shaped by the social context and institutional parameters into which individuals find themselves involuntarily inserted.[18]

Or perhaps – more prosaically – conservative economists find themselves able to be so critical of teacher salaries or of official measurements of poverty only because they themselves have no direct experience of either public school teaching or poverty. Certainly it would be fascinating to see how quickly economists based in the Heritage Foundation stopped using the ownership of old and broken-down cars as evidence of affluence if, instead of writing about the American poor from the safe distance of their warm offices, they actually experienced that poverty at first hand. Perhaps they should try living for a prolonged period of time in a North Carolina county with 20 percent unemployment and nothing but minimum wage work as far as the eye can see, without even a school diploma and perhaps a young child to support alone. No poverty? Easy to live the American Dream? Really? Somehow, I doubt it.

So what is it about modern economics that allows conservative forces in the United States to draw so heavily, and with so little public criticism, on the support of certain economists for their egregious policies? Lots of reasons, no doubt, but this one at least: the excessive credibility, given within both the academy and the wider community, to the maxims of the neo-classical school. We have far too many neo-classical economists playing the unchallenged role of public intellectuals these days. We have far too few Schumpeterian, Keynesian and radical economists engaging in a similar and a balancing activity. It is not simply that right-wing economists are well funded and carefully positioned to disseminate their values in the guise of economic truth – though that is clearly part of the problem. It is also that the counter-voice of more progressive economists is not heard in the same volume and with the same confidence and authority; and is not heard because those counter-voices are not raised with a similar degree of determination and regularity.

That situation has to change, and change rapidly. The President cannot do the heavy lifting alone, and one speech in Kansas, however good, will not be enough. Nor can a handful of already active progressive economists (people like Paul Krugman,[19] Robert Reich,[20] Alan Blinder[21] Dean Baker[22]  and Joseph Stiglitz,[23]), important as their writings are, be expected to carry the full burden of this crucial counter-offensive alone. There is too much at stake for that.  There are progressive economic truths that the average American voter needs to hear over and over again before he/she next heads to the polls. Truths about the self-defeating and self-serving consequences of yet more deregulation, tax concessions to the rich and the culling of public services; and truths about the crucial role that greater equality can play in restoring both immediate American prosperity and the long-term realization of the American Dream. These are not truths that we should allow conservatives to dismiss as just the views of a few well-known liberal economists. It is vital that the American electorate know now that many economists hold these views; and the only way to demonstrate that is for those many economists to enter the public square and say very loudly and very often that they do.

This is no time, therefore, for progressive economists to stay silent in the study. With a presidential election looming that might bring a Newt Gingrich or a Mitt Romney into the White House, it is time for the voice of each and every progressive economist to be organized, heard and disseminated widely. Because if it is not, we might well end up not simply with a Republican president but with what would be even worse – every branch of the U.S. government back in the hands of the neo-cons. Do we really want another round of Middle Eastern military adventurism, with the United States this time taking out Iran? I certainly hope not. But here’s the rub. The upcoming election will not be settled on foreign policy questions. It will be settled on issues of unemployment, taxation and economic growth. If progressive economists don’t win the battle for the hearts and minds of the American electorate on the purely economic issues, more than socially-unjust economics will prevail in Washington DC.  No: it falls on progressives to win the economic argument to make sure that conservatism doesn’t sweep the board across the whole policy agenda. As I say, there is much at stake.

The dark forces of reaction are on the march again, supported in their advance by what Paul Krugman once rightly called “the product of the Dark Ages of macroeconomics in which hard-won knowledge has been forgotten.”[24]  Doing nothing, saying nothing, simply lets those dark forces win by default. The OWS movement had created an audience for progressive explanations of, and solutions for, income inequality and bank irresponsibility. If progressive economists do not bring their skills to the table now, that audience will be wasted, and all the American electorate will hear will be the miscalculations and nonsense of the Heritage people. The Heritage Foundation knows well enough the importance of the hour, so why is that lesson lost on so much of the left?  Disappointment with the moderation of the Obama administration may be keeping many former supporters silent on the sidelines: but this is not the moment to allow requirements for perfection to drive out support for the imperfect and the good. It is not the moment for silence from the economic left. It is exactly the opposite. It is the moment for all of us with the requisite skills to make a sustained contribution to the creation of a progressive economic consciousness in contemporary America. If we do not, and if we do not do it quickly, then heaven help us all after November 2012!

We live in troubled and ironic times. The times are certainly troubled. The IMF’s Managing Director has recently spoken with some justification of a looming “lost decade” for the global economy – warning of “dark clouds” blocking the capacity of the world’s leading economies to deliver a renewed bout of economic growth and generalized prosperity.[1] The times are also deeply ironic: since the governing solution to those dark clouds – in countries as substantial as Italy and Greece, and in institutions as powerful as the IMF – would currently appear to be the replacement of elected leaders by appointed technocrats. The solution favored by the powerful is the transfer of state authority from democratically chosen leaders to governors drawn predominantly from the ranks of the very bankers whose inadequate supervision of their own industry darkened the skies in the first place. In this manner, a global financial crisis that initially discredited bankers has incrementally morphed into one to be settled on terms directly specified by bankers themselves.[2] A crisis of economics has been turned into a crisis of democracy. It is an outrage.

The only thing challenging that morphing is the explosion of popular protest which has accompanied it. In key cities in Europe now, the battle lines are being drawn between the technocrats in the ministries and the protesters on the streets. In key cities in the United States, similar lines exist between those who control Wall Street and those who occupy it. If the next decade is not to be lost, it is absolutely vital that, in the clash between money and the people, the people win.

But will they? Only if, inspired by the occupation of Wall Street, a wider political constituency in the United States comes to recognize the force of four truths that the conservative media work endlessly to deny.

1. It was behavior by key privately-owned financial institutions, and not action by federal agencies, that caused the economic crisis of 2007-8, even though leading figures within those financial institutions have yet to be held accountable for that behavior. Wall Street, not Pennsylvania Avenue, made this mess.

• A lot of ink is spilt these days blaming our existing economic problems on excessive government spending and the over-regulation of private industry, particularly private banking. Nothing could be further from the truth. It was a deregulated set of major privately-owned financial institutions, each seeking profit growth by speculating with other people’s money, that triggered the credit bubble of the Bush years and which brought the global banking system to temporary gridlock in September 2008.[3] In the first years of the new millennium, “Goldman envy,” as it was reportedly termed, drove investment banking into a frenzy of risk taking for which later even Goldman Sach’s Lloyd Blankfein publicly apologized.[4] People complain now about anarchist elements in the OWS movement damaging property. They are right to be critical; but if they are to be consistent, they must also recognize the vastly greater scale of damage to property (and to human happiness) inflicted by Wall Street excess prior to 2008. According to later IMF calculations, the toxic assets released into the global banking system by Wall Street institutions cost that system at least $4.1 trillion; and it cost the rest of us maybe 50 million jobs world-wide.[5] Anarchist-inflicted damage on shop windows and parked cars is as nothing compared to the scale of factory closures and community destruction inflicted by a deregulated banking sector.

• Far from being punished for their anarchy, those financial institutions then received huge quantities of public assistance. For all the claims now that government profligacy is our problem, without major injections of public money into the U.S. and European banking systems in 2008-9, the recession would have been deeper and many of those privately-owned financial institutions would have collapsed. Until recently, “the scope of the Fed’s private lending had…only been guessed at, but figures obtained under the Freedom of Information Act….show the nation’s central banker issued loans to more than 30 institutions between August 2007 and April 2010, including over 100 loans of $1 billion or more.”[6] At the peak of the crisis, in December 2008, the Fed had $1.2 trillion of loans outstanding to major U.S. and European financial institutions, and that was just part of “$9 trillion in low-interest overnight loans to banks and other Wall Street companies [made by the Fed] during the crisis.”[7] “The data reveal banks turning to the Fed for help almost daily in the fall of 2008 as the central bank lowered lending standards and extended relief to all kinds of institutions,” with the biggest users of the Fed lending programs being “some of the world’s largest banks, including Citigroup, Bank of America, Swiss-based UBS and Britain’s Barclays.”[8] Action by public authorities saved Wall Street in 2008-9. Bankers were not so quick to label such spending as profligate when they themselves were the recipients of the public money being spent.

• Moreover, major financial institutions have regularly of late made modest settlements with regulatory agencies: trading a degree of repayment of profits acquired by dubious means for freedom from further federally-initiated legal action.[9] “Deferred prosecution” is the euphemism used, as companies make very small financial settlements and very big promises of reformed behavior.  So JPMorgan Chase settled with the SEC for $228 million in July, the same month the Federal Reserve fined Wells Fargo a mere $85 million. (Wells Fargo’s revenues in the last quarter before the fine exceeded $20 billion![10]) Thus far no major financier has been jailed for any wrong-doing during the run-up to the worst financial meltdown the global economy has experienced since 1932, and the Obama administration has not yet sought damages in any way commensurate with the scale of the damage inflicted. Other agencies and individuals are still seeking recompense through litigation, including the Federal Housing Finance Agency and the Attorney Generals of both California and New York – so bigger settlements may yet be made: but even someone as centrally involved in subprime lending as Angelo R. Mozilo of Countrywide Financial currently remains at liberty, the bulk of his personal wealth intact.  So too does Joseph J. Cassano, head of Financial Products at A.I.G.[11]

1. The resulting recession continues to cause widespread economic misery, but it has not prevented key financial institutions from renewed profit-taking and sustained resistance to their tighter regulation. Wall Street has gone on its merry way, declining to help clean up any part of the mess that its excess made.

• Main Street continues to struggle. What economic recovery has occurred remains largely jobless in nature, with companies reluctant to hire and banks reluctant to lend. The money that reconstituted them has yet to be passed on in equal measure to the small and medium size enterprises that are so heavily dependent, for their capacity to function at all, on a regular flow of easily-available bank credit. Currently the top 20 banks in the United States, the very banks bailed out in 2008-9 by taxpayer largesse, “devote only 18 percent of their commercial loan portfolio to small business.”[12] Profit levels and employment levels in the rest of the U.S. economy remain low. Poverty levels remain high, and the distribution of income and wealth remains unusually unequal.[13] All this at the very time when American banks are quietly raising the fees they charge,[14] and when both in the U.S. and in Europe the biggest companies are now excessively cash-rich, poised to engage in a frenzy of mergers and acquisitions that will create ever larger companies without any commensurate increase in employment.[15] Indeed the banking sector has lately made its own contribution to America’s high level of long-term unemployment. It is worth noting that Bank of America’s decision to lay off 30,000 of its employees was the largest single culling of staff by any single private company in the United States in the whole of 2011, and Bank of America is not the only major financial institution currently culling the lower ranks of its staff.[16]

• Senior figures in leading Wall Street institutions, by contrast, have rapidly returned to their old and personally profitable ways.[17] As John Cassidy put it, “on Wall Street, the Great Depression didn’t last very long.”[18] The bonuses of senior figures, curtailed in 2008 and 2009 under a gale of public criticism, quickly returned to pre-recession levels as public attention shifted elsewhere. “In New York City, the average Wall Street salary last year grew 16.1 percent, to $361,330, which [was] more than five times the average salary of a private-sector worker in the city.”[19]  Profit margins in the financial sector have similarly bounced back, as have practices roundly condemned in the immediate wake of the 2008 meltdown as financially destabilizing.[20] The largest financial institutions in particular have flourished well in the wake of the recession that their misjudgments generated: “Since December 31, 2008, the largest banks – those with more than $100 billion in assets – have increased their total combined assets by about 10 percent.”[21] The top four U.S. banks held 32 percent of total bank deposits before the recession. They now hold 40 percent.  Not that most of what large Wall Street institutions do is in any way useful. “Socially useless activity” is how the chairman of the UK’s financial watchdog, the FSA, famously characterized it.[22] But the lesson is clear: being useful is not the way to grow rapidly rich in our crazy casino economy.

• Resistance by financial institutions to tighter regulation under Dodd-Frank and through Basle III has now intensified.[23] Working closely with Republicans in Congress, the banking lobby effectively blocked the appointment of Elizabeth Warren as head of the Consumer Financial Protection Agency created by the new legislation. Together they slowed down the development and introduction of the regulations required by Dodd-Franks: by June 2011, just 24 rules had been completed, out of 385 required.[24]  In spite of the Obama administration’s persistent willingness to moderate the new regulations, Wall Street firms spent $52 million on lobbying in the first quarter of 2011 alone: more than they spent on lobbying when the new financial legislation was being debated and passed in 2010.[25] In September, Jamie Dimon (the chief executive of JPMorgan Chase) even went so far as to condemn the modest new requirements of Basle III for higher capital ratios as “anti-American,”[26] earlier saying that attempts at tighter regulation were the cause of the prolonged recession: that financial reform legislation was, as he put it, “holding us back at this point.”[27]  As Sony Kapoor, managing director of Re-Define, a financial think tank, told the Financial Times in October: “big banks are seeking to moderate progress that has been made, using as an excuse the very crisis they helped trigger.”[28] It is not just Wall Street profits that have rebounded. So too has Wall Street arrogance and self-confidence.

1. The sovereign debt crisis now bedeviling the Eurozone economies is a direct consequence of similar errors of judgment by European financial institutions. It is one compounded by public spending decisions made to counter the effects of a 2008 financial meltdown imported into Europe through trans-Atlantic banking networks. Wall Street institutions helped spread the mess from here to there.

• Arrogance and self-confidence has been evident too in the lending practices of leading European banks. With the establishment of the Eurozone in 1999, money flowed from northern European banks into Mediterranean economies which were then thought to be fully protected by their Eurozone membership. The U.S. investment bank Goldman Sachs proved to be a key player here, helping the Greek government maintain this damaging illusion by obscuring its scale of indebtedness. As The Financial Times reported as early as February 2010, “outright anger” was growing in Europe long before the current crisis: anger “about the role played by western investment banks and hedge funds,” anger about “the role that Wall Street titans such as Goldman Sachs have played in helping Greece and other Eurozone countries to massage their debt data over the past decade to meet European limits, and thus to mask some of the fiscal woes that have now come back to haunt international markets.”[29]

• Government debt may now be the issue in parts of the Eurozone, but even in those troubled economies public debt was not the prime driver of economic growth after 1999. That role was played by private debt – flows of money from northern banks financing private consumption along the Mediterranean coast, particularly the consumption of housing. In 2010, “the ratio of private to public debt in Spain, Portugal and Greece [was] respectively 87:13, 85:15 and 58:42. The bulk of fresh debt created in the course of EMU [was] private, while public debt [fell] proportionately.” It was the recession of 2008-9 which then “boosted public debt, turning it into the pivot of the Eurozone crisis.”[30]  Government debt in the Eurozone as a percentage of GNP declined from 72 percent in 1999 to 67 percent in 2007.[31]  Spain, for example, cut its government debt from 60 to 40 percent in the decade before 2008, and its public finances were in surplus immediately before the 2008 Wall Street implosion.  Pre-2008, Irish public finances were also in solid order – Ireland had a balanced budget – balanced, that is, until the private banking system in Ireland collapsed and the Irish government moved in to bail it out. The Portuguese story is not qualitatively different.[32] Greece alone was the outlier – with a debt ratio of 100 percent of GDP when it joined the euro in 2001 – its sins obscured for a decade with help from Goldman Sachs.[33] So let no one claim that it is the big welfare states of Europe and the big public spenders who are now most in trouble.  They are not. The big welfare spenders are the Scandinavian economies, not the Mediterranean ones: and yet it is with the viability of Greece, Italy, Portugal and Spain that foreign investors are now the most concerned.

• The problem of sovereign debt is currently being compounded by the terms which financial institutions inside and outside the Eurozone are now demanding as proof of the ultimate reliability of the loans they have made/are making. The terms are austerity terms – demands for huge and immediate cuts in public spending of the sort normally only inflicted on third world economies in receipt of an IMF bailout. The casualties of those requirements are not bankers. They are European workers and the European poor. By hitting both, so lowering consumer demand, the terms set as new loan guarantees will inevitably push economy after economy into stagnation/recession, lowering the level of GDP and perversely increasing the debt burden.[34] As Martin Wolf put it, “the Eurozone has decided that the losses of private sector creditors should be socialized and the ultimate burden fall on the taxpayers of deficit countries. The latter will then suffer first a slump and then years of fiscal austerity.”[35] How then can we be surprised that Eurozone unemployment is now at record heights – some 15.7 million people were out of work across the zone as a whole in September – and that sane voices, in the European labor movement and beyond, are now arguing strongly for a jobs and growth strategy rather than an austerity one,[36] begging European leaders not to compound a banking crisis with a self-inflicted recession. It is a call that major European political leaders – particularly those in Berlin and Frankfurt – are not yet heeding, to their immediate discredit and to our future discomfort.[37]

1. Financial institutions were the conduit through which the original U.S. crisis crossed into Europe; and they may yet be the conduit by which the resulting Eurozone crisis flows back into the U.S. We are still living with the consequences of one banking crisis and may yet have to endure the consequences of another. This banking crisis might yet return to bite us a second time.

• It is a mistake to think that the adverse consequences of the 2008 meltdown have now been entirely washed out of the global financial system. They have not. Major European banks remain dangerously exposed to the long-term consequences of the U.S. housing crisis, many of them still sitting on large quantities of “credit-market assets dating back to the first round of the financial crisis in addition to sovereign debt from struggling Eurozone countries.”[38] The Wall Street Journal reported the Royal Bank of Scotland with €79.6 billion of credit-market assets currently on its books but only €10.4 billion of sovereign debt. The reported ratios were similar for HSBC: 54.3:14.6; Deutsche Bank 51.9:12.8; and ING 36.0:11.2. It is true that some European banks are ratioed the other way, heavily over-exposed to sovereign debt. The ratio of credit-based assets to sovereign debt for the Italian bank UniCredit, for example, is 7.2:51.8; and Dexia, the Franco-Belgian finance house that came close to collapse in October, reportedly had 21 billion euros of Greek, Italian, Spanish and Portuguese bonds on its books when its flow of credit dried up.[39] But whichever way the ratio goes, one thing is abundantly clear. Major European banks have toxic assets on their books that straddle the Atlantic and leave them vulnerable to meltdown in the event of a sovereign debt default by any major Eurozone economy.[40] Even the kind of settlement proposed for the Greek economy – a voluntary mark-down of 50 percent of the value of existing Greek debt – is bound to establish so powerful a precedent, and to give European banks so severe a “haircut,” as to seriously threaten their capacity ever to grow a full scalp again.[41]

• This is not just Europe’s problem. It is also ours. U.S. banks remain similarly exposed to both the on-going U.S. housing crisis and the Eurozone debt crisis. Bank of America’s share price fell dramatically in August because of the Bank’s need to take additional write-offs on bad mortgages acquired with its 2008 purchase of Countrywide Financial;[42] and the U.S. banking system as a whole is currently holding in total “about $700 billion of government debt from the five shakiest Eurozone economies.”[43]  “Among Dexia’s biggest trading partners [were] several large United States institutions, including Morgan Stanley and Goldman Sachs;”[44] and the CBO recently estimated that U.S. bank exposures to “German and French banks are in excess of $1.2 trillion, equivalent to about 10 percent of total commercial bank assets in the United States.”[45] The Geneva-based Bank for International Settlements similarly reported that “at mid-year banks in the United States had $757 billion in derivatives contracts and $650 billion in credit commitments from European banks.”[46] In the second quarter of 2011, if the Financial Times data is correct, that included a gross[47] exposure to French banks by the big American Five of nearly $180 billion: Goldman Sachs $108.5 billion, Morgan Stanley $28.1 billion, JPMorgan Chase $22.8 billion, Citigroup $8.9billion and  Bank of America/Merrill Lynch also $8.9 billion.[48]

• That should not surprise us because it is hard to overstate the degree of integration of the two regional economic blocs. “The European Union and United States economies are the two biggest in the world and their financial institutions are deeply intertwined. They have the single largest bilateral trade relationship in the global system, together accounting for nearly a third of global trade flows.”[49] The danger of contagion from the Eurozone crisis back into the United States is now unavoidably real. The cumulative effect is an already visible tightening of U.S. lending volumes and terms.  As Roger Altman noted: ‘for the American and western European economies to decline again, when unemployment levels are already so high, would be disastrous.”[50] And yet the danger signs are thickening daily: that the European banking crisis might creep back into the U.S. through Wall Street institutions, just as once the U.S. crisis crept out into the Eurozone through a similar set of relationships.

We are now in the fourth year of an ongoing financial crisis. It is one characterized by bank failures at the beginning (the crisis of toxic assets), bank failures in the middle (the failure to release investment funds), and now, more than likely, bank failures at the end (this time, slipped in from Europe).  If a second recession is in our future, it is important that we learn the lessons of the first. If once more these grotesquely over-large and over- arrogant financial institutions begin to fail, they should not be bailed out with endless tax dollars. They should be taken directly into public ownership, so that their investment decisions can be dictated by long-term reconstruction needs rather than short-term profit-taking, and so that their senior figures can be paid public-sector wages. And then, if these wayward financial institutions are ever returned to private ownership, they should first be broken down and sold in smaller units, with their future size capped and their functions separated by a modern version of the Glass-Steagall Act.[51]

The only force keeping this case for financial control alive and well in the United States is the Occupy Wall Street protest movement. Bernie Sanders is quite right: “the Occupy Wall Street protests are shining a national spotlight on the most powerful, dangerous and secretive economic and political force in America.”[52] In the wake of the Citizens United Supreme Court ruling, the bulk of the American political class has been bought. In the wake of the Eurozone crisis, the Greek and Italian political classes have been dismissed. On both continents the people doing the buying and the dismissing are ultimately senior bankers. “Why are so many people protesting against Wall Street?” John Wells asked. “Because it has become stronger than our democratic state and if unrestrained will take us down the dark road to political dictatorship to join the economic tyranny it currently enjoys.”[53] Republicans are quick to tell us these days that when we protest against Wall Street excess, we introduce class warfare into American politics. But if this long financial crisis tells us anything, it is that class warfare was fully embedded in the American political system long before any of us decided to protest.[54] As Dean Baker said: “When Wall Street rules, we get Wall Street rules.”[55] Politics in a class-ridden society is always ultimately a zero-sum game. It is time therefore – in contemporary America – for class warfare by the economic elite to be superseded by class warfare by the working people: and not just time, but time that is long overdue.

The current wave of mass protest against Wall Street excess has completely reframed the public conversation in the United States.  The “deficit problem” with which Washington was consumed in the first half of 2011 has not vanished from the political agenda, but its resolution will now have to be achieved against the background of a growing understanding of the sheer scale of current income and wealth inequality. If the Republicans in Congress have their way, the politicians may yet cut entitlements programs for the poor while declining to raise taxes on the rich. But if that is how the deficit problem is eventually resolved, that resolution will be more extensively recognized as class-biased in its character and impact than would have been the case before the OWS protests began. The super-rich are invisible no more, and are now being held to account.

Even the Congressional Budget Office has recently joined the fray, publishing last week Trends in the Distribution of Household Income Between 1979 and 2007. The CBO reported rises in the average real after-tax household income of the top one percent of the U.S. population of 275% between the two dates, as against a rise of 65 percent for the top 20 percent of income earners, just under 40% for the top 60 percent of income earners, and a tawdry 18 percent rise for the bottom 20 percent.[1] All the resulting headlines focused in on that top one percent and its staggering 275 percent gain in income.  “Top Earners Doubled Share of Nation’s Income, Study Finds,” was the ruling headline in The Washington Post in the immediate wake of the report.[2]  “Incomes rising fastest at the top” was the headline on October 19’s EPI Economic Snapshot.[3] “Another word for what’s been happening might be theft” was the way Eugene Robinson put it in his opinion piece in that same Washington Post.[4]

All that is true of course, but even so a word of caution is in order. Though fully justified by the data in the report, those headlines help frame the public conversation in ways that might yet leave progressive forces vulnerable to rapid pushback. For by focusing on the super-rich, such headlines leave their authors (and us) open to the counter-argument that since 2007 trends have been reversed – that the rich are no longer as excessively rich as they once were, and so are correspondingly less in need of punitive taxation than was originally the case. By focusing on the CBO Report, the headlines also open us to the argument that even the bottom 20 percent of American income earners are becoming steadily better off – so why make a fuss if their entitlements programs are now marginally eroded in the name of a wider American need for fiscal restraint?

We can expect both responses. Indeed both are already underway. The Cato Institute’s Michael Tanner recently argued that in the wake of the 2008 recession “the rich are earning a smaller proportion of U.S. income” than before, and that “interestingly, the decline in earnings by the rich has corresponded with higher unemployment and rising poverty overall. We are all poorer,” Tanner said, “but at least we are more equally poor. Hooray.”[5] That response should not surprise us.  Commentators on the Right have long argued that tax data fails to accurately measure income and wealth inequality in the United States, and invariably overstates the riches of those at the top of income and wealth tables.[6] Some have also long argued that the American poor are not really poor. They are not as poor as the income data would suggest, because fiscal transfers (earned income tax credits and the like) offset much of that poverty.[7] They are not poor by historical standards – they live better now than many middle class families did two/three generations ago. They are not poor when compared to the genuinely poor in the global economy: the American poor have cars, fridges, televisions, cell-phones and often generous living space – things that are still not available to the emerging middle class in many developing societies even now, let alone to the third world poor.[8] And if some Americans are poor when measured against official U.S. poverty standards, then much of that poverty is self-induced. Had the young single mothers now trapped on welfare only stayed at school, got a job and delayed having children until they were financially secure, they could easily have slipped into the bottom rungs of the American middle class.[9] So at least many conservatives regularly argue!

If that dismissal of American poverty is not to hold sway, we need to go beyond the statistics in the CBO Report, to say other things about the American rich and the American poor. One thing we need to say is that – as the CBO Report indicates – both the rich and the poor are still with us. The poor have not gone away, and their conditions of life remain seriously impaired when compared to those enjoyed by the rich. Another thing we need to say – following Eugene Robinson – is that there are poor Americans primarily because there are also rich Americans. The rich and the poor in contemporary America are not separate categories of people, unconnected and dissimilar. Instead the two categories are organically linked: linked because the rich and the poor are ultimately just people sharing a common country and economy; and linked because in a world of scarce resources, the excessive claims of the privileged deny full access to those resources by the less privileged. In a very real sense, the pursuit of rising incomes in contemporary America is a zero-sum game – if the man in the big office takes a big salary hike, that hike leaves less in the salary pool for those working in the smaller offices behind – and like all games, this one only works if everyone follows the rules. Right now, the rules in America’s zero-sum income game are heavily stacked in favor of the excessively wealthy and against the excessively poor; and because they are, they are rules that we need to change.

No matter how often some conservative commentators deny it, there is still massive poverty in the contemporary United States, the bulk of which is involuntarily acquired. Of course, if we are crazy enough to only measure poverty against some absolute and timeless scale, then there is no real poverty now because everyone in the contemporary United States lives so much better than did people in the past, since technological progress here has been so great over the last century as a whole. But to measure poverty in that way is to trivialize the issue.  Better therefore to define poverty either against a basket of goods representing a minimum acceptable standard of life (as we do here in the United States when calculating the official poverty rate), or against a percentage of median income (say 60 percent, as do the Europeans); and if we do, we must see overwhelming evidence of the persistence of genuine poverty in the midst of all our contemporary affluence: evidence such as this.[10]

l. The official poverty level is currently 15.1 percent, and the twice poor (those living within one income tranche of the poverty level for their scale of family) currently make up nearly one American in three. New data from the Census Bureau actually points to an increase in the scale of U.S. poverty – poverty is currently on the rise in America, back in percentage terms in 2010 to the level last seen in 1998: and in absolute numbers – at 46.2 million people – greater than at any time since poverty figures were first calculated in the 1960s. We also have new data on the number of children in poverty – that number increased in 2010 for the fourth year in a row – to reach nearly one child in four (22%). The figure for child poverty has not been that high since 1993, and stands in stark contrast to the scale of child poverty elsewhere in the industrialized world: 3.7% in Denmark according to the OECD, 8.3% in Germany, and 9.3% in France.[11]

2. We also have data on the scale of hunger and food insecurity currently prevalent among the ranks of the American poor. In 2009 15.6 million children received food stamps each month, a 65% increase on the number a decade ago.[12] As the recent CAP report put it, the recession and tepid recovery together “swelled the ranks of American households confronting hunger and food insecurity by 30%. In 2010 48.8 million Americans lived in food insecure households….12 million more people than faced hunger in 2007.” That number – 48.8 million – represents 16.1% of the total US population: nearly one American in six currently facing tough choices on a daily basis about what they can and cannot afford to spend. “In 2010 nearly half of the households seeking emergency food assistance reported having to choose between paying for utilities or heating fuel and food. Nearly 40 percent said they had to choose between paying for rent or a mortgage and food. More than a third reported having to choose between their medical bills and food.”[13]

3. We also have solid data on the level of involuntary unemployment. Fourteen million Americans are currently without work in an economy that created only 103,000 jobs in September and actually lost 34,000 in the public sector. Local government payrolls are at their lowest since 2005, white collar unemployment has now run at twice its pre-recession level for 29 consecutive months, the number of long-term unemployed is now 6.2 million, and the under-employment rate is 16.5%: 25.8 million workers either unemployed or trapped in involuntary part-time employment. There are currently four unemployed workers for everyone one job opening. Unemployment among Hispanic workers is currently 11.3% and among African Americans 16.0%, among whites 8.0%, and overall 9.1% ‘The U.S. economy is currently generating 6.6 million fewer jobs than it did before the 2008-9 recession.”[14] Herman Cain may blame the unemployed for their condition, but it seems fairer to point the finger of responsibility at the recession itself.

4. The data also shows a persistent racial dimension to poverty (as well as to the distribution of income and wealth) in the contemporary United States. The poverty rate among Hispanic Americans is currently 26.6% and among African Americans 27.4%. The equivalent figure for Asian Americans is 12.1% and for white Americans just 9.9%. A third of Hispanic children in the U.S. live in poverty. More than a third of African-American children do. The wealth gap between Whites, Black and Hispanics is at a record high. The median net worth of white households in 2009 was $113,149; of Hispanic households $6,325; and of black households $5,677 – “lopsided wealth ratios [which] are the largest since the government began publishing such data a quarter of a century ago and roughly twice the size of the ratios that had prevailed between these two groups for the two decades prior to the great recession that ended in 2009.”[15] The White-Black wealth ratio is currently close to 20:1.

5. We have solid evidence too of an increase in the number of Americans without health care coverage – 900,000 more in 2010 than in 2009, and nearly 50 million in total. As the Kaiser Foundation report, The Uninsured: a Primer recorded in December 2010, “the steady decline in employer-sponsored health coverage since 2000 and the current weak job market largely explain the growing numbers of uninsured.” Affecting Americans of “all ages, races and ethnicities and income levels,” and in spite of the link between work and benefits in our current welfare system, “more than three-quarters of the uninsured, “ the Primer said, “come from working families – four in ten of the uninsured are individuals and families who are poor.”[16]

6. Finally, we have data on the limits on social mobility in contemporary America. Even before the financial meltdown and resulting recession, the best evidence we have suggests “that children from low-income families have only a 1% chance of reaching the top 5% of the income distribution, versus children of the rich who have about a 22% chance”; that African-American children born into the bottom quartile are twice as likely to stay there as white children born to parents with similar income; and – perhaps most shocking of all – that U.S. rates of intergenerational mobility are now lower than those in France, Germany, Sweden, Canada, Finland, Norway and Denmark.[17]

All this adds up to one clear truth: most Americans are not poor because they made bad choices in relation to education, work and the timing of children. Most Americans are poor because they can’t find work in an economy now beset with both recession-created and structurally-induced unemployment. People are without work because the financial crisis of 2008 generated a recession that destroyed jobs. People are without work because whole industries have been outsourced to cheaper labor markets overseas. Textile and furniture employment in my state – North Carolina – has now largely relocated to South Asia and China. Under those conditions, people without work are victims, not architects, of their condition – and need to be honored as such. And if there is a cycle of deprivation – if the children of the poor have a greater propensity than others to stay poor – then those children are themselves innocent recipients of the consequences of the one involuntary decision we all make: namely our choice of parents. People may, by their own actions, move themselves around on the ladder of inequality: but for that movement to leave those at the bottom of the ladder mired in poverty, there have to be badly resourced lower rungs on that income ladder. If we want all Americans to escape poverty, we as a society have to stop creating poverty slots at the bottom of the ladder. We will get rid of poverty by shortening the ladder and by raising its base. We will not get rid of poverty by urging the poor to climb harder, leaving others behind to fill the poverty slots they have at least temporarily vacated.[18]

Given the severity of the deprivation at the bottom of the contemporary U.S. income ladder, it is hard to find much sympathy for the problems of the American super-rich, now (according to their defenders) suffering diminutions in their wealth because of poor returns on the stocks they hold. Maybe 2008 and 2009 were marginally difficult years for the top one percent of American income earners, but any sympathy for them would still be largely misplaced. For when all the data is in,  2010 and 2011 will no doubt have seen the re-establishment of the upward trajectory of their income and wealth;[19] and even if it has not, the super-rich will still hold 40 percent of our entire wealth and monopolize a quarter of the total American income bill.[20] The fact that the top one percent takes so much of our collective income and wealth means that there is less for the rest of us. So unless the rich can prove that their disproportionate claim on income and wealth stimulates investment and job creation from which the rest of us benefit – unless they can prove that trickle-down economics works – we will have to keep on saying, as the OWS protesters do, that income and wealth inequality on the scale we are experiencing now is best understood as theft.

Wealth creation is, after all, a collective endeavor. As Elizabeth Warren said, no one in America gets rich alone. The rules governing income and wealth distribution are socially determined, and for the last three decades in the United States, those rules have been stacked in the rich’s favor. With the scale of poverty and unemployment now around us, it is time for those rules to be reset. There are more than statistics at play here; and in truth the detail of the income and wealth statistics matters less than we might think. For no matter how the income numbers vary month by month or year by year, they consistently demonstrate that levels of inequality in contemporary America run remarkably deep. Because they do, they necessarily raise for all of us basic issues of morality. It is simply not right that children should be denied a level playing field on which to begin their pursuit of the American Dream; and it is indefensible that people of color should be denied the right to participate fully in the society than their forebears did so much to create. In the end, setting the detailed statistics aside, it is vital that we ask more fundamental questions. To what degree are we all fellow-citizens in this society, and to what degree are we not?  Are we one America or are we two? If we are one America – or at least if we want to be one America, united and at social peace – it is surely time to make the alleviation of poverty our number one priority. Inside the 99 percent, it is surely time to focus hard on the needs of the bottom fifth.

Bipartisanship in Washington is rare these days, but it does occasionally surface. It did this week, when the Senate passed the “Currency Exchange Rate Oversight Reform Act”(S.1619) – the one sponsored by Democratic Senator Sherrod Brown and co-sponsored by 22 other Senators, including five Republicans.[1] If ever passed by the House – the Senate vote in favor was 65 to 35, with 16 Republicans in support – the Act would allow affected American companies and workers to petition the Department of Commerce for countervailing import duties, to offset injury caused to them by the undervalued currency of a trading partner. It would also ease the criteria that the Treasury Department uses when adjudicating such petitions, with plaintiffs no longer obliged to demonstrate that any currency misalignment was the product of deliberate exchange rate manipulation.

The main target of legislation of this kind is, of course, China; and the main currency that is currently under-valued is the Chinese yuan/renminbi.[2] The Chinese stand condemned not simply for their lower labor costs, less stringent environmental controls and cavalier attitude to intellectual property rights. They also stand condemned for deliberately undervaluing their currency, so cheapening still further the price of their products when sold in overseas markets. “China’s already eating our lunch,” was how Sherrod Brown labeled the practice when briefing his local Ohio constituents.[3] “It was mistake for nations to think that their path to prosperity is paved simply with exports to the United States,” was the President’s more diplomatic presentation of the same basic argument at the Seoul G-20 summit last November. “Precisely because of China’s success,” he said, “it is important that they act in a responsible fashion.”[4]  And well might such responsibility be urged, because even the pro-free trade Petersen Institute currently calculates the Chinese currency to be undervalued by 28.5%.[5] Such an undervaluation helps Chinese goods out-compete American ones in shared export markets.[6] It also helps fuel a trade surplus for China with the United States that has exploded recently: going from a modest $84 billion in 2001 (when China entered the WTO) to a staggering $278 billion in 2010.[7]

Yet at the very time that the Senate was voting on S.1619 and the President was campaigning for The American Jobs Act, his administration was also pressing Congress to pass free trade agreements with South Korea, Colombia and Panama. These are trade deals first negotiated by the Bush Administration and opposed at the time by the then junior Senator from Illinois. Understandably the AFL-CIO, among others, has charged the White House with sending contradictory signals: simultaneously advocating spending programs that will create jobs in America while opening American markets to further competition (and hence job loss) from cheaper labor-based production elsewhere. The advocates of free trade deals always insist that on balance they are job creators. They invariably claim that such deals stimulate more employment in the U.S. export-sector than they lower employment in industries adversely affected by imports. But even those pressing for ever greater free trade are normally obliged to concede that, in parts of the U.S. economy at least, free trade deals of this kind do cost jobs. Indeed that is why the Obama Administration twin-tracked the push for the three trade agreements with the renewal of legislation to compensate workers adversely affected by them. It was this second strand of the Administration’s trade policy – compensation through the Trade Adjustment Assistance Program for workers adversely affected by new trade deals – that held up passage of trade legislation for months, with progress blocked by Republican unwillingness to direct tax payer dollars to the aid of the innocent victims of free market economics. But suitably scaled down to overcome that unwillingness,[8] the TAA Program (and the three trade deals) were pushed through the House of Representatives this evening and on to the Senate, just in time to be signed into law before the South Korean President’s joint address to Congress on Thursday.

So after a long period of inactivity on the trade front, we are now witnessing a new burst of action – symbolic action on currency manipulation, real action on free trade agreements, and modest action on worker compensation. But as always, the political theater in Washington helps obscure deeper processes and more structurally rooted problems that neither new trade agreements nor even effective currency reform can directly solve. The two deeper processes are those of domestic deindustrialization linked to outsourcing, and the globally-induced erosion of American wages. The deep-rooted problem not yet on the Washington radar is the inappropriateness of free trade as a solution to the current global competitive weakness of the U.S. economy. Reindustrialization, rising wages and fair trade are our contemporary needs. Out-sourcing, engaging in a wage race to the bottom, and opening our domestic markets to all and sundry, most definitely are not. Major figures on both sides of the Washington political divide continue to believe that free trade and market-determined currency rates are the route to American reindustrialization. It is a faith in free markets which is singularly misplaced.

• Deindustrialization is well and truly underway. The Commerce Department released figures in April showing that U. S. multinationals – the companies responsible for 23% of private sector output, 48% of U.S. exports, and the employment of one American worker in five – have spent the last decade reducing their U.S. work force by 2.9 million while increasing employment abroad by 2.4 million.[9] The 1990s practice, of U.S. companies generated two jobs at home for every one created abroad, no longer applies for companies whose sales are ever more dependent on overseas markets. Gone are the days too when advocates of free trade could argue convincingly that only low-skilled employment was moving overseas: that American companies could be relied upon to keep high-skilled work at home and offer expanding employment in new high-tech industries inaccessible to Third World labor. Robert Scott has long argued that trade with China costs America jobs, and costs jobs all the way up the managerial hierarchy. His latest estimates put the numbers at 2.8 million American jobs lost in a decade, most in manufacturing and almost half of those in high-tech industries like computers and electronics.[10]  Scott is now no longer alone. More mainstream economists like David Autor, David Dorn and Gordon Hanson have recently reached similar conclusions: namely that, on a conservative estimate, “rising Chinese import competition between 1990 and 2007…explains one-quarter of the contemporaneous aggregate decline in U.S. manufacturing employment.”[11] Autor, Dorn and Hanson additionally argue that ‘transfer benefit payments for unemployment, disability, retirement and healthcare also rise sharply in exposed labor markets. The deadweight loss of financing these transfers,” their data suggests, ‘is one to two-thirds as large as U.S. gains from trade with China.”[12] The pattern now emerging, they report, is one “with areas where factories were most exposed to Chinese import growth faring worse than areas that were less exposed.”[13]

• The global race to the bottom is steadily eroding average American wages. There was a time when U.S. manufacturing industry was little exposed to competition from low-income economies: but no longer. “In 1991, low-income countries accounted for just 2.9% of U.S. manufacturing imports. However, largely owing to China’s spectacular growth, the situation has changed markedly:” to 5.9% in 2000 and 11.7% in 2007, “with China accounting for 91.5% of this import growth over the period.”[14] Many American companies have been core drivers of this exposure, with its consequent negative impact on average American wages: not least among them, Walmart. To meet the low price requirements of major consuming outlets of which Walmart is the largest, more and more American manufacturing firms are currently impelled to outsource their basic production to cheaper labor markets. In the process, American firms remain profitable, but American workers lose out. They lose employment, and they lose wage growth: the first through direct out-sourcing, the second through the fear of it in wage negotiations. Big Box retailers like Walmart essentially act as an export conduit for the Chinese economy, importing vast quantities of Chinese-made goods whose sale here triggers a shift in employment from one side of the Pacific to the other. The result is the Walmart effect: low wages because of foreign competition sustaining a flow of cheap imports bought by workers too poorly paid to buy further up the value-chain.[15] Contrary to the claim that everyone benefits as consumers as imports bring prices down, it would be more accurate to say that free trade and the impoverishment of the average American family are currently going hand-in-hand; and are doing so because of the disproportionately adverse effect on the wages of those same consumers; the wages of those directly affected by competition from cheap imports, the wages of those closest to import-displaced workers in skills, and the wages of the rest of us as general levels of earnings experience the gravitational pull of their diminished pay. It cannot be emphasized too strongly that the limited gains to American consumers brought by cheap imports are more than offset by the adverse impact of those imports on general wage levels.

• The case for free trade is systematically over-stated while the case for fair trade is rarely heard. The picture presented by free trade advocates is invariably one of generalized gains to living standards by the opening of markets to the ever easier entry of overseas-based producers, with competition within and between economies producing a cumulative race to the top – bringing cheaper goods to consumers in developed economies and ever greater employment opportunities to producers in less developed ones. The counter-argument, normally given far less air time, is that in the context of uneven global economic development inherited from both a colonial and a Cold War past, the lowering of tariff barriers and the resulting inflow of cheaply produced goods from previously second/third world economies can only produce a generalized race to the bottom that will ultimately destabilize the entire system and undermine social settlements in high wage economies. Quite properly, free trade was not the governing philosophy in Washington when the 19^thcentury U.S. economy struggled to industrialize in the face of UK manufacturing dominance. It only became the governing philosophy there when UK manufacturing dominance had been replaced by our own. Unalloyed free trade no longer automatically addresses the long term development needs of American-based producers in a global economy whose growth points have shifted east and south: away from high-wage economies in Western Europe and North America towards the low wage ones of the former communist bloc and the southern cone. When U.S. capital and U.S. industry were one and the same, trade policy that favored the profit margins of big corporations helped develop the U.S. manufacturing base, including its small- and medium-size sector. But with U.S. capital globally footloose, that overlap of interests no longer applies. If the United States is to reindustrialize its way back to decent middle-class wages again, the propensity of large U.S. corporations and mighty U.S. finance to go offshore will need to be restrained. Free trade between economies of broadly similar wage levels will need to be supplemented by fair trade between economies within which wage levels differ significantly. A blanket commitment to free trade can no longer be the policy stance of progressives committed to the generalized restoration of the American Dream.

Our current trade imbalance with China will not be fixed by currency manipulation alone, because American economic vulnerability is not rooted simply in the relative strength of the dollar. It is rooted in America’s changing position in the global economic order.  The United States began the post-World War II period as the capitalist system’s major exporter and supplier of investment funds, as well as its major military protector. The military role remains and the dollar is still for the moment the global system’s major reserve currency; but U.S. export domination has entirely vanished and it is American debt, not American largesse, which now helps to sustain global economic growth. In 2010, we exported (as our second largest source of export earnings in China) $8.5 billion worth of “scrap and second-hand goods” – more than we exported to China in any other category of goods except “agriculture, forestry and fisheries.”[16] These days, China sends us manufactured consumer goods, suitably packaged; and we export back the packaging!  In the space of a decade, existing policy has allowed the United States to slip into a trading relationship with China in which we send to our single largest export market agricultural produce and scrap/waste, and receive in return manufactured goods and money loans. More policy of the same kind can only intensify this drift towards a third-world style dependency on more successful economies elsewhere.

Now is not the time for more trade deals. Now is the time for less: which is why the advocacy of three new trade deals by the Obama Administration when also pursuing the American Jobs Act is singularly ill-advised.[17] The one with Colombia is opposed by nearly every major American trade union and the Sierra Club: its labor-protection clauses being seen by them as entirely unenforceable in a country in which at least 3000 trade unionists have been murdered in the last 25 years. The agreement with South Korea – an agreement which if passed will be the largest since NAFTA and the first since NAFTA with an already-industrialized economy – puts employment at risk in the US-based textile, electronics and computer industries – to the tune of maybe 159,000 jobs over the first seven years of the agreement.[18] The gross average employment income in South Korea in 2005 was $26,152. The equivalent U.S. figure was $42,028.[19] It hardly requires a degree in rocket science to see that competition between economies with earning imbalances of that scale can only serve to pull American wages down further still.[20]

We are already in a trade war, whether we like it or not. Even the pro-free trade New York Times has recently conceded that “since the financial crisis began in 2008, G-20 countries have imposed 550 measures to restrict or potentially distort trade.”[21] If they can, so too can we. Free trade and free currencies are only two of the policy weapons available to us as we struggle to restore American employment and wages, and they are not necessarily two of the best. Because we need policies that bring American jobs home, and bring them home now, we should say “yes” to currency retaliation and to the devaluation of the America dollar; “yes” to the taxing of outsourcing, to the fierce defense of intellectual property rights,[22] and to the policing and implementation of international labor standards; and “yes” to public-private funding of high-tech R&D[23] and to interventionist industrial policy geared to strengthening the U.S. manufacturing base.[24] We should welcome open trading between economies with similar labor rights/costs, and fair trading between economies with dissimilar ones. But to those who would advocate untrammeled free trade with all and sundry, regardless of differences in the internal political and social settlements within which their economies sit, we should say definitely “no.”  “No,” not now; and “no,” not ever.

These arguments are developed more fully in

Making the Progressive Case: Towards a Stronger U.S. Economy

David Coates speaks about Making the Progressive Case Towards a Stronger U.S. Economy on the Kathleen Dunn Show. Click the link above to open the media player.

One the great pleasures, and indeed privileges, of being a guest on the Kathleen Dunn Show is the quality of the questions that Kathleen asks and the seriousness and intelligence of the people phoning in. When people elsewhere decry the “dumbing down” of American political discourse, they are clearly forgetting Wisconsin.  This is the other America – the one Ruth Limbaugh does not speak for (or to). What I hear on this superb NPR show is the voice of a concerned, compassionate  America – one as patriotic as the America that listens to Fox News – but an America prepared to meet the complexity of our circumstances with policies that are more than sound-bites. “Go Brewers” was the slogan that day – it was the baseball post-season after all, and the Brewers were battling the Cardinals. So yes, “go brewers”. Let the progressive intelligence be heard.

Thus far 2011 has not been a good year for progressives. The daily sight of the White House seeking elusive accommodations with Tea Party-inspired Congressional Republicans has not been an edifying one. Prior to and during the debt ceiling crisis, all the drive, all the issue framing, all the assertiveness in the pursuit of solutions, seemed to come from just one side of the aisle. In the process the stature of the White House (and that of its occupant) visibly wilted. A President full of confidence prior to the mid-term elections seemed to have entirely lost his footing.

So it was a huge relief to see Barack Obama feisty in defense of his Jobs Bill when addressing a joint session of Congress on September 8. It was an even greater relief to see him throwing down the gauntlet to John Boehner when introducing his deficit package later; and there was more reassurance last weekend when the President campaigned vigorously in California in the manner of the old Obama. It was good to see him openly condemning those who booed a gay soldier from the floor of the Florida debate as “not reflective of who we are.” It was good to see him insisting that the Republican vision of government would “fundamentally cripple America in meeting the challenges of the 21^st century;” and it was good to see him treating the 2012 election as “a contest of values.” The California Obama was more like the Obama for whom many of us campaigned so enthusiastically in 2008: so maybe, at long last and not a day too soon, the President is beginning to get back his progressive groove. Let us hope so.

If he is, the issue before us is how to make sure that the groove is maintained and indeed improved. It is not that the Obama message these last weeks has been perfect. It has not. His jobs package is too small,[1] his long-term deficit reduction program too sweeping,[2] and his reticence on the housing crisis too crushing to the hopes of so many.[3] But the campaigning tone is returning, and with it the possibility of calling Obama back from his dalliance with conservative Republicanism.

How exactly can we maintain this new progressive momentum in the rhetoric and practice of the White House?  This way, perhaps.

l. By reminding ourselves just our enormous the stakes are, this time round. If Barack Obama loses the White House to a Rick Perry, or to a Chris Christie, or even to a Mitt Romney obliged to balance his ticket with some right-wing crazy, we will enter a new dark age for American welfare, for the American poor, and for those Americans now without work or poised soon to seek it for the first time. The current crop of Republican candidates are currently engaged in an insane dance of uber-conservatism, each seeking to outdo the other in the economic and social vandalism they enthusiastically promise to debate-audiences who are visibly high on libertarianism and low on compassion. Their would-be leaders are all for shutting the Department of Education at the very moment that American school scores are slipping down every international performance table. They are all for eliminating the Environmental Protection Agency (because it bans dust, according to Herman Cain in the televised Florida debate – of course it bans dust: dust that gives so many Americans serious breathing difficulties). They repeatedly call for limits on unemployment insurance, as though unemployment was a voluntary choice in an economy in which currently there are four times more job-seekers than jobs: and they are adamant that federal spending should be cut immediately and cut ruthlessly, even though such august bodies as the IMF are currently warning that too rapid a deficit reduction might yet tip us into a double-dip recession. Put Republicans of this ilk in full control in Washington in 2012, and the prospects for a decent life for an entire generation of young Americans will entirely vanish.[4] 2012 will therefore be no ordinary election, and we cannot afford to approach it as though it was.

2, By not running a progressive candidate against Obama in any party primary, or entertaining any fantasies about a third party success. The stakes in the 2012 election  are simply too high for any indiscipline on the Left in the campaign which precedes it. Any kind of primary challenge to Obama can only give free and effective political ammunition to our opponents, who will magnify and disseminate every tiny difference between Obama and his challenger(s). Indeed an effective primary challenge – one pulling the President onto new radical ground – would be meat and drink to the conservative media: proof positive that Obama was (and is) a closet socialist, in thrall to extremists within Democratic ranks. No, divisions on the left in the run up to the 2012 elections will simply let in the right. This is no time for any progressive voter to go pious, and refuse to back Obama because his presidency has not lived up fully to all the hopes we placed in it. This is the time to play defense – solid, serious defense – against a conservative political formation that, were it to sweep both Houses of Congress and the White House in November 2012, would make the Bush-Cheney years look like a liberal walk in the park. This is the time to dig in and dig deep, defending liberal candidates and a liberal President. It is also time to urge that liberal President to do more to make that defense worthwhile. The question is how?

3. By making a visible and radical break from Republican framings of our contemporary needs and condition. The Obama White House needs to stop trying to bridge the unbridgeable. It needs to stop blaming Washington inertia on “Congress” as a whole.  It needs to declare its search for bipartisanship over: over not because of Democratic Party extremism but because of Tea Party intransigence. This is no time to meet Republicans half-way, by offering limited deregulation as an alternative to their full deregulation. This is no time to pretend that taxing the rich is only about the math. It is certainly no time to outflank fiscal conservatives on their right by offering even more federal spending cuts than they propose. It is time rather for Barack Obama to say to the American public that if they want effective (and sensible) government, the Tea Party pot needs to be totally emptied down the electoral drain. It is time for a return to the Obama stance of 2007-8: to an unapologetic presentation of the case for change, and for clear Presidential support for the election of progressive lawmakers willing to make the House of Representatives once more the engine of that change.

4. By matching fire with fire: meeting a conservative ideological crusade with a progressive crusade of equal (indeed of greater) weight. The 2012 election will not be an ordinary one because Tea Party Republicans are not treating it as an ordinary one. They are treating it as a moment of hegemonic change, one that will fundamentally reset the underlying social bargain in modern America for a generation. Fiscal and social conservatives in this country are currently on a crusade, and they know it.  Theirs is an ideologically informed mission against Barack Obama personally, and against everything that his administration is said to represent: what they see as big government, federal over-spending, the forced removal of people’s hard-earned money in taxation, and the destruction of America’s economic future through unwarranted interference in the workings of a free market. Progressives will not blunt that conservative crusade by pretending that it is not happening. They will blunt that crusade by meeting it on its own territory, and by revealing its many underlying flaws. They will blunt that crusade…

5. …by mounting a serious challenge to the central assertions of the conservative case. Which is why an ideologically-offensive progressive president needs to say at least the following things, and say them loudly, clearly and regularly:

(a) …that there is a positive role of government The President needs continually to put to rest the bizarre notion that private enterprise in the U.S. economy flourishes because of its distance from government, and because it is by its nature more efficient and effective than government can ever be. Both ends of that proposition are entirely false. If the financial tsunami of 2008 and the foreclosure morass of 2010 tell us anything, it is that big companies can be grotesquely inefficient and socially irresponsible unless curbed by strong regulatory frameworks. A progressive president needs to say over and over again that this recession was caused by lack by regulation, not by its overuse. He needs to insist that public spending and public policy have a crucial role to play in the creation of long-term economic prosperity, and be adamant that the right kind of spending and policy can only come from a progressive administration – namely his.

(b) …that governments do create jobs. And not just any old job: governments create jobs of value (from teachers to soldiers), and often create jobs faster than the private sector – particularly when, as now, confidence in consumer demand is low and private businesses are understandably reluctant to hire. Rick Perry might claim otherwise (he certainly did in the first Republican candidate debate), as occasionally does Rand Paul; but then they are no progressives, and Perry is not even a reliable source on job creation in his native Texas! Cutting public programs in the midst of a recession can only deepen that recession, effectively amounting to a class war on the weakest and poorest amongst us – cutting the flow of public resources to those who need them most. A progressive president must regularly defend the vital role of federal government in periods of crisis and the essential role of civilized public policy in times of calm. He must not let the Republicans get away with their regular assertion that markets work best when regulated least. That nonsense got us into this crisis, and it will not get us out.

c) …and that there is a progressive as well as a conservative narrative in American politics, one that stretches from Lincoln’s emancipation proclamation through FDR’s New Deal and LBJ’s war on poverty to the unfinished social revolution of the twenty first century. There is more American history to be told than simply the endless Republican return to the temple of Ronald Reagan. A progressive president must challenge the mythology of the Reagan years, reminding modern-day America that it was in the Reagan years that a social settlement based on strong U.S. manufacturing performance and rising blue-collar wages was replaced by a new settlement based on growing income inequality, the outsourcing of American jobs, stagnant wages and the spread of a ultimately fragile debt-based prosperity. Doing that, a progressive president will then be equipped to call the country to a new social settlement – a genuine New Deal unlike any on offer from Republicans then or now – one based on greater equality in rewards, the honoring of work and family, a return to buying only what we can pay for, and the building of a stronger safety net for the weakest and most vulnerable among us. Doing that, a progressive president will also be equipped to present that new settlement as quintessentially American – indeed as America at its very best.

We need that progressive narrative back in play – and we need it now – because, if it is not in play, the ghastly conservative narrative currently being pushed at every Republican presidential candidate debate will come to prevail by default. Barack Obama reportedly told his California audience that what we face next year “is a choice about the fundamental direction of our country.” He is right. The election in 2012 will be that important. It will be a true watershed moment when one fundamental view of America’s future prevails over another fundamental view, and leaves an indelible footprint on this country for years to come. Such moments have to be seized. Conservatives know this. That is why they are so fired up and financed.  We need to be fired up and financed too – fired up behind a president who regularly says to the wider American electorate the kinds of things he has at last begun to say to the party faithful.

We can no longer afford there to be two Obamas – the radical fundraiser one day, the Washington fixer the next. If Washington is ever to be properly fixed, the funds raised must be spent on electoral victory; and that victory will only come if the President establishes in the minds of an entire electorate clear blue water between the America that will be created by Democrats in power and the America that would be created by Republicans.  The time for fudging the difference between liberal and conservative governing philosophies is well and truly past. The campaigning Obama seems to realize that. Let us hope that realization keeps him firmly in a progressive groove.

Part 2

Part 3

Wake Forest College Democrats and the local chapter of MoveOn.org combined to launch their 2011-12 election campaign with this presentation on on the tasks before us and the arguments to be made