Progressives have the opportunity to turn the tides in favor of the middle class, if they only have the guts to grasp it.
When we observe today’s wounded economy, we generally think of the housing bubble that burst in 2007/08 making a shambles of the financial system and precipitating a severe recession. It is natural to focus on repairing the damage caused by those events, have faith in the resilience of the American people and hope that the system will lead us to prosperity as soon as the natural healing process works its wonders.
How might economic historians in the year 2110 view current events? Their perspective will be much broader. Perhaps it will be obvious in 100 years that the Great Recession was really the logical culmination of 40 years of decline. Observers in the future might mourn the foolish reliance on totally inadequate remedies because leaders inexplicably failed to understand the depth of the problems. Worse, the urge of conservative ideologues to redistribute wealth to those with the highest incomes through tax and deficit policies might be viewed as the saddest of ironies, since it added fuel to a fire which had smoldered for half a century.
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Since 1970, the difference between the richest and poorest Americans has increased, more or less, steadily. Income disparity in the US is no longer comparable to other fully developed nations. It is currently more like Turkey and Russia. Perhaps economic historians of the future will see that this was an early sign of dangerous forces that were unleashed as the economy moved into a post-industrial epoch. They might mark 1970 as the beginning of an era in which cynicism supplanted faith in the ability of government to redress inequities, a necessary ingredient for broad-based economic growth. They might write about a structural shift toward short term transactional behavior, favoring the rich (who are able to take advantage of it) over the middle class.
After 1970, household incomes rose for 30 years. The rich just got richer faster. This masked the festering problem of income disparity, so political leaders were not incented to act. But in the last decade, household incomes stagnated and declined for everyone except the rich. There is little doubt that 9/11 and the wars in Iraq and Afghanistan burdened the economy and accelerated the decline. However, the seeds were already planted and growing.
Declining household income posed a political problem. Government’s mission is, in part, to facilitate a business and employment environment in which Americans can improve their well-being by working hard and making good decisions. Failing this mission, political leaders faced retribution from middle-income Americans. The tried and true methods and ideologies were inadequate to reverse the decline. And it was nearly impossible to perform radical surgery on the economy, largely because of rising ideological partisanship in political discourse as the internet and cable broadcasting became dominant forms of media.
Future observers may conclude that political leaders cynically chose to mislead middle income people into believing that they were not getting poorer. It was expedient to engineer a housing bubble and simultaneously open up methods for households to extract cash from their homes. That way, middle income voters did not feel the effects of declining wealth. Alan Greenspan’s philosophy of low interest rates notwithstanding, the bubble and deregulation of mortgage lending standards got the job done. Fannie Mae and Freddie Mac were inadequate to fund the new mortgage debt, given their targeted policy goals. So Wall Street was unleashed and encouraged to create vast mortgage-backed debt pools, a bottomless well of funds for “feel good” mortgages.
Credit card debt may also be seen as an opiate. Most people clung to the notion that outstanding balances should not be subtracted from their total wealth. Like addicts who think they could quit at any time, cardholders believed that they would pay off the balance, even when unsupported by objective reality. Exploiting this weakness rather than addressing it, political leaders and regulators allowed financial institutions to run riot in supplying credit card debt. How ironic that the same politicians put drug dealers in jail!
Our futuristic analysts will turn their attention to the wealthiest 1% of Americans. They will see that the enormous increase in the wealth of this group was tied to the absurd growth of the financial services sector, reaching upwards of 40% of the GDP. It will be obvious to them that growth of the financial sector is not a good thing if the rest of the economy (which adds value to goods and services and employs most people) does not grow proportionately. They will be amused that even the democratic Secretary of the Treasury continued to equate innovation in financial products with innovation in manufacturing, energy and software design, even after the economy crashed.
Perhaps they will conclude that American capital ceased being deployed to fuel economic growth during this period. As cynicism rose, government lost the power to intervene on behalf of the less powerful. It will be obvious to our economic historians that enforcement of egalitarian principles is the only way to sustain a growing economy. Unconstrained, the powerful are inclined to seize current advantages, regardless of the risks to the economy as a whole. Rationalization is easy: The future is uncertain, so get what you can today. Individual avaricious behavior cannot materially affect an uncertain future anyway.
It may be clear to future observers that the wealthiest devoted too much of their capital to hedge funds designed to increase existing asset value through derivatives, ride asset bubbles on the way up, and get out before the inevitable collapse. They may see that, if the wealthy had instead invested capital in productive businesses and infrastructure, the system could have been sustained.
The tools used in 2010 to address the array of problems may look ridiculously weak to these observers. They may conclude that leaders tragically ignored the fact that the defects were long-standing and structural, requiring decisive use of strong remedies.
Like Dante relegating traitors to the ninth ring of Hell, our economic historians may take a harsh view of conservatives. Reducing the taxes of high income Americans may be seen as an act of venal redistribution of wealth. Under current conditions, it simply increases the wealthiest’s share of a shrinking pie. Recent history should tell us that the rich are unlikely to invest newly available funds so as to grow the economy. Today’s opportunities are meager, and the wealthy get a better deal at hedge funds. The conservative deficit hawks, usually the same people as the high income tax cutters, will look in hindsight like panderers, lying to a fearful public to grasp for votes.
Progressives are unlikely to fare much better. Generally constructive principles will probably be outweighed by a sense that they lacked the courage to make a stand.
But progressives are not doomed to bear this epitaph. Like Ebenezer Scrooge, they might benefit from an image of the future. In the future, it will be clear that progressives are in a potentially powerful position. They are on the side of the vast middle class of America that, in truth, has been shortchanged for almost half a century. Future observers will be puzzled by the progressives’ failure to convert this potential into a persuasive political message, instead cowering passively in fear of offending the ghost of Ronald Reagan.
But progressives could be viewed as heroes 100 years from now if they can screw up the fortitude to advocate a real restructuring of the economy — industrial and jobs policies, energy restructuring, further limitations on Wall Street and tax policies favoring the middle class rather than redistribution to the rich. Make this case, and conservatives will appear to lack faith in American exceptionalism, eager to abandon programs like Social Security instead of relying on the strength of the middle class to bring back growth.
And even if progressives fail, at least their great-grandchildren won’t have to learn in history class that their ancestors lacked the courage to meet the challenge.
Wallace C. Turbeville is the former CEO of VMAC LLC and a former Vice President of Goldman, Sachs & Co.