Retrenchment, Not Recovery

Economists and politicians are debating whether we are in a recession or a depression, and how many months or years it will take to recover from the downturn. As I have argued on this blog and in my book, what is now happening to the economy is not typical or normal. I would call it a "retrenchment" rather than a recession. In that sense, it is a permanent correction, and will result in a substantial and long-term contraction of GDP, the standard of living and the stock market. It will take many years to return to where we were. The problem is that the U.S. government and consumer have both been living on borrowed money for a generation, so that most of the gains of that period are illusory. We were never really that wealthy, and now we have to start paying for that extravagance.

A similar argument is made in an interesting article entitled "Will There Be A Recovery?" by Paul Craig Roberts, a former Assistant Secretary of the Treasury in the Reagan administration. He also sees the current situation as different from past recessions. Recovery in the past could be stimulated by cuts in interest rates, allowing consumers to spend more against rising real wages. This would lead the economy to rebound.

Now it is different though. For one thing, for most workers, real wages have remained stagnant for almost twenty years. Consumers have maxed out their credit and can no longer borrow so freely. And interest rates are already at rock bottom levels.

"And there’s another problem," says Roberts. "Much of what American consumers purchase today is made offshore. Stimulating consumer demand in America puts factories back to work, but those factories are located elsewhere in the world." The U.S. consumed more than it produced, by borrowing from abroad. But this source of funds is also drying up now.

These are all themes that I raised in The End of the American Century. While I do not totally agree with all of Roberts' arguments, his overall point is a good one. There will not be a recovery, like recoveries in the past. The task for the U.S., and the Obama administration, is to figure out how to navigate this difficult transition, and to convince U.S. citizens that we can live a good life without all the excesses of the past.

Take a look at Roberts' essay, and offer your thoughts in the Comments section here.

Merrill Lynch's John Thain: Poster Boy for Greed and Incompetence

Last week, John Thain, the former CEO of Merrill Lynch was sacked by the CEO of Bank of America, which recently absorbed the bankrupt brokerage firm. Thain is a prime example of the mind-boggling greed, incompetence and cluelessness of the captains of the U.S. financial services sector. I called attention to Thain in my September blog on CEO pay, where I noted that Thain was the highest paid CEO in 2007, with compensation exceeding $83 million. This was a year in which Merrill Lynch lost $7.8 billion, mind you. Granted, Thain didn’t take over Merrill until November of 2007. But 2008 was even worse. Merrill’s losses of $27 billion last year was what led to its absorption by Bank of America.

But Thain’s greed and arrogance gets even worse. He apparently demanded a bonus of $30-40 million for 2008, the year he presided over the company’s bankruptcy and collapse. This was after Merrill had already received some $10 billion from U.S. taxpayers as part of the federal government’s financial bailout. Furthermore, according to a story in the Financial Times, Merrill granted some $4 billion in bonuses to other executives in the company, just before the Bank of America takeover was finalized. As the Financial Times observers, “this was money that appeared to come directly from US government funds.”

A New York Times story says that Thain spent $1.2 million to redecorate his Merrill Lynch office last year, including an $87,000 rug and a $68,000 credenza.

John Thain stands out as the worst abuser of corporate and government funds. But the problem is much wider than John Thain or Merrill Lynch, and extends across the entire corporate landscape. In my earlier post on CEO pay (and in my book), I point out that these huge CEO compensations in the U.S. are horribly inflated, both by historical standards and in comparison to other capitalist countries. In the 1980s, average CEO pay in the U.S. was about 50 times that of average worker pay. In Germany, Canada, and Japan, the ratio is less than 25 to 1. In the United States in recent years, on the other hand, that ratio has approached 500 to 1.

Thain is out, thank goodness. New York Attorney General Andrew Cuomo is investigating the bonus payments in Merrill Lynch. There is some accountability there, at least. U.S. representatives and taxpayers should make sure, though, that U.S. citizens do not subsidize the lavish lifestyles and obscene salaries of executives in companies that are receiving taxpayer money. Most of them are multimillionaires already. If they truly want to help the economy and the country (as most of them say they do), let them live on an average worker’s salary for a few years.

The End of America's Disgrace

I only admitted this to my friends, but I was embarrassed about my country, and embarrassed to be an American during most of the past four years. For me, the President of the United States was particularly embarrassing and humiliating, but his cabinet and advisors were not much better. Even Congress acquiesced in Bush’s humiliation of America, and his undermining of the Constitution, and of our most fundamental values. The President authorized and advocated torture. Without apparent remorse, he violated international law and universal moral standards. He sent thousands of young Americans to their death in a useless, illegal and immoral war. He barely mentioned the tens (or hundreds?) of thousands of innocent Iraqis who lost their lives as a result of his personal crusade. The President approved the violation of habeas corpus, one of the most ancient and fundamental principles of law and human rights. He stifled freedom of speech and the press, and ridiculed his opponents, both at home and abroad. And even in seemingly trivial matters, he was an embarrassment; denying President-elect Obama and his family the use of Blair House during the transition was a final, departing, glaring example of his lack of even elementary decency and civility.

My own embarrassment even extended to my countrymen. We elected this jovial demagogue not once, but twice and even after all of this should have been clear to all. Eventually, I realized that I could not distance myself from my country—I am too much part of it. I also realized that Americans were only partly at fault for Bush. He exploited and played on our fears, and encouraged our baser instincts. This is the age-old strategy of demagogues and dictators everywhere, and it worked here too.

For me, all of this changed on January 20. Once again, I am proud to be an American, and—perhaps for the first time in my life—proud of the person we have elected as President. The November election itself was a revelation and an inspiration, but somehow it did not fully hit home until the inauguration. The two million people on the mall, many of them (like my daughter and her husband) arriving in the frigid pre-dawn hours. The poem, the music, the speech, and the benediction—all weaving together the same themes of unity, community, charity, justice, equality, freedom and faith. And especially Obama himself—a smart, hard-working, family man; an African-American; and a person who wants to help other people, especially the less fortunate.

What is perhaps most remarkable about this presidential transition is the absolutely huge difference from one man to the other. In past elections, I have been pleased with the election of some leaders (mostly Democrats, I have to admit), but I always felt that the change was incremental and marginal at best. The new guy was better than the old, but the difference was not earth shaking. This time, we have left behind the worst president in modern American history—a playboy millionaire who could barely compose a sentence—for a young man who braved amazing obstacles to rise to the top by hard work and intelligence, who has written books (on his own!), and who has dedicated much time to helping others.

Furthermore, his election has restored my faith in America, and in my fellow citizens. I actually did not believe that the U.S. could elect an African-American as President at this point in its history. But we did! Even Indiana voted for Obama (maybe because he can shoot 3-pointers!). The rest of the world, which understandably viewed Bush as a lightweight and a cowboy, is already reassessing the United States and its people. (As I document in my book, foreign publics increasingly blamed the disfunctionalism of the U.S. on its people, rather than on Bush alone). This is the first time in world history that a majority White country has elected a Black chief executive. The world has taken notice.

Obama’s election does not mean that we will soon solve all of America’s many problems. One man—no matter how talented and promising—can not do this, nor can one or two presidential terms. Over the past 20 years we have dug ourselves into a huge hole, and have squandered resources and reputation aplenty. We have lost our way and compromised our values. We have become a nation of individuals and consumers, rather than a community of citizens.

But in his inaugural address, President Obama called on us to begin rebuilding our shattered country. And he provides what any great leader does—an example for the rest of us.

This Is Not the Time To Cut Taxes

My op-ed piece, "This is not the time to cut taxes: To increase federal revenue, taxes must go up, not down," appears in the 1/13/09 issue of The Christian Science Monitor, accessed at the link above. There I write that

"talk of tax cuts may be music to the ears of American taxpayers and a nod to satisfy Republicans but they make no sense in a time of soaring budget deficits and huge new government expenditures, including the probability of $1 trillion for Obama's proposed economic stimulus plan."

I conclude the article with these thoughts:

"Obama should allow the Bush tax cuts to expire at the end of next year, for everyone except the very needy. He should also raise the marginal tax rates for the very wealthy. These rates are very low by both historical and international standards. Increased taxes will be unwelcome and painful, but the US is in a situation as unprecedented and dangerous as that of the Great Depression. Obama himself has called on Americans for sacrifice. And after two decades of bingeing, we can afford a little sacrifice."

After the American Century

David Nye, a Professor of American History in Denmark, is the co-author (with Thomas Johansen) of a book entitled The American Century: A Chronology and Orientation, and has a blog of his own called After the American Century. Both his book and his blog have some similar themes to The End of the American Century. The blog, especially, provides an interesting perspective on some of these issues from outside the United States.

Interview on WUSB Radio

I was interviewed about The End of the American Century on WUSB Radio (in Stonybrook, NY) by Jim Lynch on his show "Everything is Broken" (!) on December 30. You can hear the show, at least until the next one is posted, at the station's website above. On the "Weekly Schedule" grid at that site, look for the show at 1pm on Tuesday, and click on the speaker icon. The interview begins about 13 minutes into the program.

China, U.S. Debt, and the Economy

In The End of the American Century, I point to China as one of America’s new rivals, but also as a major factor in U.S. profligacy and in U.S. economic decline. To a large extent, the false U.S. affluence of the last decade has been underwritten by China, in two ways: the country has supplied American consumers with cheap toys, gadgets and clothes; and has been bailing out the federal government by purchasing U.S. debt.

The rapid growth of foreign ownership of U.S. debt is yet another dimension of the unraveling of the U.S. economy. In 1970, only 4 percent of U.S. debt was held by foreigners; now almost half is. In recent years, foreigners have financed about 80 percent of the increase in public debt. The two biggest holders of U.S. debt are Japan and China, with China alone owning about $1 trillion in U.S. debt. Senator Hillary Clinton raised concerns about foreign ownership of U.S. debt in early 2007, when she sent a letter to Secretary of the Treasury Henry Paulson and Fed Chairman Ben Bernanke. “In essence,” she observed,

"16% of our entire economy is being loaned to us by the Central Banks of other nations."

This was a major reason why both the American consumer and the federal government could spend so far beyond their means in the last twenty years, and why the U.S. economy has gotten so severely out of whack. The large-scale purchases of U.S. debt by foreigners helped keep interest rates low, encouraging consumers to borrow more than they could afford for the purchase of cars and houses and other consumer goods. It was a kind of giant international Ponzi scheme. The Chinese lent us money so we could purchase their products. But when the bottom fell out, the economies of both countries began to fall apart.

It is astonishing that so few public officials and economists recognized this enormous looming problem. It is not so surprising, perhaps, that the Bush administration missed the boat on this, because they were either oblivious or willfully ignorant on just about every major issue facing the United States, economic or otherwise. As the New York Times observes in a long and helpful overview of the situation, former Fed Chairman Alan Greenspan and the Bush administration “treated the record American trade deficit and heavy foreign borrowing as an abstract threat, not an urgent problem.”

Ben Bernanke, an esteemed economist if there ever was one, acknowledges that “a better balance of international capital flows early on could have significantly reduced the risks to the financial system.” But “this could only have been done through international cooperation, not by the United States alone.” Bernanke’s view of the problem, according to the Times, “fit the prevailing hands-off, pro-market ideology of recent years.”

This illustrates, in two ways, why the U.S. has fallen so far, so fast. The problem, as Bernanke correctly noted, required international cooperation. This has been a serious weak spot for the U.S. of course, particularly in the last eight years. The U.S. has ignored, denigrated or flouted international laws, conventions and institutions—especially during the Bush administration but before that as well. Because we did not welcome international cooperation in the past—on global warming, the Iraq War, the International Criminal Court, etc.—other countries were increasingly disinclined to look for the U.S. for leadership. This is now being played out in the international economic realm as well as the political.

The second telling aspect of the Bush/Greenspan/Bernanke approach is the “pro-market ideology of recent years.” Under Bush, the “hands off” approach to economic and social problems in the U.S. has indeed taken on the rigidity of an “ideology.” It is no longer simply a policy advocated by policy-makers, but a set of ideas promoted by ideologues. We see this in a whole array of hugely important issues facing the U.S., which have all been ignored or marginalized for eight years. The lack of regulation of financial markets is the most obvious example, but one also sees the “hands off” approach causing tremendous deterioration of U.S. schools, health care, welfare, infrastructure, and the environment, to say nothing of the elephants in the room—Social Security and Medicare.

Treasury Secretary Paulson told the Times “you don’t get dramatic change, or reform or action, unless there is a crisis.” This seems a strange way to run the ship of state. But the crisis is here, Mr. Secretary. Now what do we do?