What's really up with the US economy

Robert Reich (Secretary of State for Labour in the Clinton administration) has provided a succinct analysis of the root causes of the current crisis of the US economy:

The Mother of All Bailouts may be necessary to unfreeze our capital markets, but it won't unfreeze the American economy.

Bailout or no bailout, we're heading into deep recession. One of the first initiatives that Congress and the next administration will need to take will be an economic stimulus package. But not even this will remedy the underlying problem: The earnings of most Americans haven't kept up with the cost of living. That means there's not enough purchasing power to keep the economy going.

Adjusted for inflation, the incomes of nongovernment workers are lower today than in 2000. They're barely higher than they were in the mid-1970s. The income of a man in his 30s is now 12 percent below that of a man his age three decades ago.

Per-person productivity has grown considerably over the past three decades and has continued to rise even in the lackluster recovery of this decade.

But most Americans haven't reaped the benefits of these productivity gains. The benefits have gone largely to the top.

The top 1 percent of American earners now take home about 20 percent of total national income. In 1980, the top 1 percent took home just 8 percent. Inequality on this scale is bad for many reasons, but it is also bad for the economy.

The wealthy devote a smaller percentage of their earnings to buying things than the rest of us because, after all, they're rich and already have most of what they want. Instead of buying, the very wealthy are more likely to invest their earnings wherever around the world they can get the highest return.

The last time the top 1 percent took home 20 percent of total income was 1928. After that, the economy caved in.

The underlying earnings problem has been masked for years as middle- and lower-income Americans found means to live beyond their paychecks. The first coping mechanism was to send more women into paid work. The percentage of American working mothers with school-age children has almost doubled since 1970, to more than 70 percent. But there's a limit to how many mothers can maintain paying jobs.

So Americans turned to a second coping mechanism - working more hours. Americans have became veritable workaholics, putting in 350 more hours a year than the average European, more even than the notoriously industrious Japanese.

But there's also a limit to how many hours Americans can work. So we turned to a third way of coping. We began to borrow. With housing prices rising briskly through the 1990s and even faster this decade, we turned our homes into piggy banks.

But now, with the bursting of the housing bubble, we're reaching the end of our ability to borrow, just as lenders have reached the end of their capacity to lend.

That means there's not enough purchasing power in the economy to buy all the goods and services it's producing. We're finally reaping the whirlwind of widening inequality and ever more concentrated wealth.

The only way to keep the economy going over the long run is to increase the real earnings of middle- and lower-middle-class Americans.

The answer isn't to protect jobs through trade protection. That would only drive up the prices of everything purchased from abroad. Most routine jobs are being automated anyway.

Nor is it to give tax breaks to the very wealthy and to giant corporations in the hope they will trickle down to everyone else. We've tried that and it hasn't worked. Nothing trickled down.

The long-term answer is for America to invest in the productivity of our working people - enabling families to afford health insurance and have access to good schools and higher education, while also rebuilding our infrastructure and investing in the clean-energy technologies of the future. We must also adopt progressive taxes at the federal, state and local levels.

Call it bottom-up economics.

It would be a sad irony if the Wall Street bailout robs us of the resources we need to invest in average Americans and rebuild America from the bottom up.

John McCain and the future of the Republicans

Most attention in the U.S. Presidential elections has been given to the Democratic Party, and the wide schism revealed in its support base between supporters of Hillary Clinton (majority of women, Latinos, older voters, lower income, lower average levels of education) and Barack Obama (majority of African-Americans, younger voters, higher income, tertiary educated). It has been cast as “a standoff between the Dukes of Hazzard and the Huxtables” , but its fault lines are pretty clear. This cannot be said for the Republican Party going into the 2008 elections.

John McCain does not bring a strong hand to the election, although the ongoing saga of the Democrat nominee has helped somewhat. There is usually a change in the governing party after eight years of one President holding office. While this was not true in 1988, George Bush gained the presidency with Ronald Reagan having a personal approval rating of about 60%. George W. Bush has a personal approval rating below 30%, and sinking. Even if his approval figures were better, this would be no guarantee against change. Bill Clinton left office with personal approval ratings over 60%, but his Vice-President Al Gore could not defeat the Republicans in 2000.

The position of the Republicans as a party is far worse than that of John McCain as its presumptive Presidential nominee. Having lost control of both the Senate and the House in the 2006 mid-term primaries, they have recently experienced three major losses in special Congressional elections. The most recent loss was in a presumed safe seat in Mississippi, where there was a 20% swing to the Democrats. Several Republican analysts have warned that the Republican ‘brand’ is ‘dog food’, and if it were a product it would be taken off the shelf.

Reasons for this are many and varied, and go well beyond commitment to the War in Iraq. Basically, the Republicans in Congress have been sinking with the Bush presidency, and the sense of malaise and policy failure that surrounds it. The question is where John McCain goes in relation to it.

McCain has some distance from Bush, and has accentuated it in recent times with a speech in New Orleans condemning how Hurricane Katrina was handled in 2005, and a recent speech (sort of) acknowledging the threat of global warming. The question, however, is not simply one of personal style and belief, but goes to the heart of where America’s conservative party wants to be over the next decade.

The question revolves around two axes. One is economic. Conservatives view the fiscal profligacy of the Bush years with horror, as it has combined large and regressive tax cuts (which they would otherwise support) with a big increase in government spending, not just on the war in Iraq, but also on a wide range of social programs. They see that as reversing the ‘Reagan doctrine’ and recreating a culture that all social problems are addressed through more government spending, throwing fiscal conservatism out the window, ad denying them any real point of differentiation from the Democrats. Moreover, the groaning fiscal and trade deficits adversely impact on foreign policy. The recent tax cuts to avert economic recession were described a “Borrowing more money from the Chinese to pay for oil bought from the Saudis.”

The other axis is cultural, or what are also termed ‘faith and values’ issues. McCain has recognized the problems that arise from the Republicans being tied to the evangelical Christian right, particularly with younger voters – he has made thirteen appearances on The Daily Show with Jon Stewart, which conservative pundits such as Bill O’Reilly would dismiss as a show for “stoned slackers”.

A move to the cultural centre would be to follow what might be termed the ‘Arnie strategy’. As Governor of California, the largest state in the U.S. in both population and economic terms, Arnold Schwarzenegger is one of the nation’s most politically successful Republicans. Schwarzenegger e governs what is otherwise now a Democrat state – even though it is the home state of Richard Nixon and Ronald Reagan – by recognizing that the social liberalism of the state and aligning this with economic conservatism and pro-business policies.

The centrist ‘Arnie strategy’ appeals to McCain, and makes a lot of sense in an election where the Republicans now have a real opportunity in capturing the vote of Hillary Clinton supporters if Barack Obama is the Democrat nominee and they can position Obama as ‘too liberal’. The catch is that the support base of the Republicans – from Christian lobby groups to influential donors to the bevy of conservative columnists, radio talk show hosts and TV pundits – have run so long and hard on a conservative ‘culture wars’ position that they will feel let down by a Republican nominee who does not align to these values and positions on their favoured ‘hot button’ issues.

The silence of all sides (McCain, Obama, Clinton) on the California Supreme Court decision to overturn the ban on same-sex marriages indicates how tricky these issues are becoming. They are much more complex for the Republicans than the Democrats, since making a big issue of such decisions in order to mobilise the conservative base has been the sine qua non of Republican politics for decades.

McCain’s dilemma, and how he addresses it, will influence the shape of conservative politics worldwide for some time to come, just as the ‘Reagan revolution’ has been a defining influence globally for the last 30 years.


PS: To get a sense of how hard it may be to retrain Republican supporters from well-established habits, see conservative talk-show host Kevin James’s responses to MSNBC’s Chris Matthews on whether talking to political enemies is the same as appeasement, which apparently ‘energized’ Hitler in 1939.