Supercapitalism run amok

It's fun to fulminate about the folly of Wall Street CEOs who ran their firms -- and the economy -- into the ground. But clearly something larger than individual stupidity was in play.

Take Robert Rubin - plainly one of the best financial minds of our time, who did nothing to help steer Citi away from the cliff's edge. Some may find his valedictory mea culpa a bit lacking in the 'mea' and 'culpa' departments:

My great regret is that I and so many of us who have been involved in this industry for so long did not recognize the serious possibility of the extreme circumstances that the financial system faces today. Clearly, there is a great deal of work that needs to go into understanding exactly what led to this situation and what changes, regulatory and otherwise, must now be implemented to reduce systemic risk and protect consumers.

In fact I think this is a balanced statement - accepting a measure of blame for lack of foresight while focusing on the responsibility now to figure out what went wrong and fix it. As Rubin suggests, there's a complex causal chain to unravel. Links on that chain include metastasized lobbyist influence, botched regulatory reform, and skewed incentives to take on undue risk.

One potentially useful tool for the postmortem is Robert Reich's Supercapitalism (2007) -- though the market meltdown demands some modification, I think, of Reich's central premise. According to Reich, it's relentless global competition among businesses, much more than right wing policy, that has driven the erosion of middle class prosperity, security and opportunity over the past thirty-odd years. Reich portrays a kind of extreme Darwinism that leads corporations to compete as relentlessly in their lobbying efforts as they do on all other fronts:

The citizen in us has a more difficult time being heard now in Washington and other world capitals not because big business has become more powerfully monolithic but for the opposite reason -- because competition among businesses has grown more cutthroat. Companies have entered politics to gain or keep a competitive advantage over their business rivals. The result has been a clamor of competing business interests -- a cacophony so loud as to almost drown out any serious deliberation over the public good (pp 142-143).

Right-wing ideology, favoring ever more deregulation and tax cuts, is more a result of this competition than a cause of it. Lobbying produces the ideology to accommodate business interests.

What Reich might want to rethink is his assumption that what's been bad for our politics has been good for business. In Reich's telling, the business interests that have helped to erode democracy and community have served us all supremely well in our capacities as consumers and investors. Reich's admiration extends from technological innovation to financial engineering:

Capital markets--including stock exchanges, banks and other financial institutions, and money market funds -- are far more efficient than they were decades ago, though still far from perfect.

While briefly acknowledging weak points, such as Wall Street's short-term focus and money managers' conflicts of interest, he writes: "Yet for all this, investors have triumphed, just as consumers have" (p. 95).

Uh huh. What we've now learned is that the hypercompetition Reich chronicles has been maladaptive for businesses -- starting of course with financial companies -- as well as for government, citizens and workers. As Barack Obama memorably put it last March: "What was bad for Main Street was bad for Wall Street. Pain trickled up." Among the skewed incentives: pay packages that provide individuals enormous reward for short-term gain, with no personal financial risk should gain turn to loss. A market that punishes those who eschew short-term gain that comes at the price of undue risk. A regulatory regime that weakened capital requirements, refused to regulate the market for securitizations that divorced lending risk from loan origination, and turned a blind eye to blatantly fraudulent underwriting practices. And on the international stage, global trade imbalances that flooded the U.S. government, businesses and consumers with cheap money, inducing debt-fueled consumption that proved unsustainable.

While the value of evolutionary analogies to market forces is dubious, an evolutionary tale told by Stephen Jay Gould seems at least metaphorically apt. The Irish elk flourished for a brief period from about 12,000 to 11,000 years ago before abruptly becoming extinct. During this time the male's antler set evolved to enormous proportions, eventually reaching approximately 90 lbs. According to Gould, this development was driven by competitive display -- a large set signaled dominance to other males and provided access to females. Extinction followed when the climate and habitat changed abruptly.

The analogy would be more satisfying if the 90-pound headset itself doomed the elk, but Gould doesn't assert this. What does seem relevant is that natural selection can operate in a kind of cul-de-sac in which the trait that leads individuals to success does not serve the species' overall survival capability. Evolution may be no more "efficient" than markets. Our own task, at any rate, is to shape our own environment -- to align incentives with the interests of society as a whole.

Obamanomics II: a corporate tax cut?

The Wall Street Journal Online has a terrific interview with Obama on economics up today - wide-ranging, confrontational, moving freely between theory and policy specifics.

Unfortunately, the front-page print writeup by Bob Davis and Amy Chozicki fails to do the discussion justice. Curiously, it's only two-thirds as long as the print writeup of a March 3 economics interview with McCain -- early fruits, perhaps, of Murdoch's stated desire to make WSJ features shorter. Douglas Holtz-Eakin, McCain's chief economic advisor, gets almost half again as much ink as Obama, and much of the article is devoted to dubious parallels between Obama's plan for Federal venture capital-style investment in alternative energy and past failed Federal attempts at alternative energy investment.

The print article does not convey the subtlety, pragmatism, balance and strategic reach of the economic vision Obama expressed in the interview.*

The full discussion is a prime example of how Obama casts liberal spending and tax proposals as a restoration of balance, a return to the historical center after years of rising inequality, and a set of investments essential to competing in a global economy. Obama's bid to build a working majority for these policies consists in part of acknowledging the validity of certain conservative principles and (for a Democrat) inconvenient truths:

• "the combination of globalization and technology and automation all weaken the position of workers" (listening, David Brooks?).
  
• "You might undoubtedly get to a point where the capital gain and dividend taxes are so high that they distort investment decisions and you're weaker economically."
• "if somebody shows me we can do something better through a market mechanism, I'm happy to do it. I have no vested interest in expanding government or setting up a program just for the sake of setting one up."
  

Acknowledging these points enables Obama to present his redistributionist tax proposals and proposed investments in education, health care, infrastructure and alternative energy as pragmatic and essentially centrist. He uses history -- references to previous periods of successful public investment, and to the last thirty years' rise in income inequality -- to move the center to the left. Particularly revealing is his response to a question about taxes. Challenged as a redistributionist, Obama talks first about fairness, but then about efficiency:

Here's what I would say: I do believe the tax policies over the last eight years have been badly skewed towards the winners of the global economy. And I do think there is a function for tax policy in making sure that everybody benefits from globalization or at least the benefits and burdens are shared a little more easily. If, as some talk about, we've got a winner-take-all economy where the highly skilled, highly educated are reaping huge rewards and the unskilled or even semi-skilled are getting a much smaller share of the economy, then our tax policies can help cushion some of the blow through providing health care. So if people lose their jobs they're not losing their health care as well. That actually makes a more flexible work force that makes workers more mobile and less resistant to change.

If we've got investments in education, that will make us more competitive in the long run. We've got to pay for that like anything else. But it would be a mistake to say I view our tax code only as a distribution question. I also think that our tax code has come to distort a lot of economic decision making so I'd like to see simplification as part of an overall tax agenda. On the corporate side, for example, one of the things I've asked my folks to look at is: Are there ways we can close existing loopholes in tax havens at the same time as we're lowering overall rates? We've got this new problem: The biggest problem with our tax code when it comes to the business side is that we have one of the highest tax rates -- corporate tax rates -- on paper but our effective tax rate is one of the lowest … You know, how much you pay in taxes as a corporation a lot of times is going to depend on how good your lobbyist is, as opposed to any sound economic theories. So those distorting effects I'd like to actually remove and eliminate from our tax system, but obviously that's a complicated and difficult task. The last time we did it was in 1986. We're going to have to, I think, revisit that.

A less skilled politician, and a less subtle thinker, would use McCain's proposed cut in the corporate tax rate as a populist bludgeon -- a powerful one, at a time of heavy economic stress. Obama, instead, acknowledges that a high corporate tax rate can hurt U.S. competitiveness -- or would if it were not offset by a thousand loopholes. Obama argues fairness and efficiency and good economic outcomes are interdependent. And fairer, more rational and efficient policies depend on lobbying reform.

The discussion is shadowed by a different kind of centrism: Clinton's. Obama is asked explicitly whether budget pressures would not force him, as they did Clinton, to put deficit reduction ahead of investment - specifically in infrastructure, but implicitly in a range of social programs. The reporters also cast this question as a choice between Clinton's Treasury Secretary Robert Rubin (deficit reduction) and Clinton's Labor Secretary Robert Reich (investment in infrastructure). Obama says explicitly that he would draw on both. But he also makes it quite clear that he expects to reverse Clinton's emphasis, and put investment first -- and that the historical moment would allow him to do so:

Well, look, the difference I would suggest is that there is a strong recognition in the public mind that we can't continue on our current energy path. It's not sustainable. Which means there's a bigger opening to bring about change....

Finally, you've got a war in Iraq that is deeply unpopular, where we've been spending billions of dollars. We're going to have to catch up on deficit reduction but I think people also recognize that if we can spend that much money rebuilding Iraq, surely we can find some money to rebuild America.

It's interesting that Obama "leans Reich" on this question, because on a different plane he's deeply influenced by Reich's thinking. That is, he's absorbed Reich's argument in Supercapitalism that widening income inequality, a large risk shift from the community to the individual, and the corruption of our political process by lobbying are all due more to the rise of global hyper-competition among businesses than to the policies of either party. Obama's position is that Republican policies -- anti-unionism, radical deregulation, tax breaks for the wealthy --have exacerbated and failed to address these problems -- but not caused them. His response to a question about the historical underpinnings of "the question of redistribution" is almost pure Reich:

...the combination of globalization and technology and automation all weaken the position of workers. I would add an anti-union climate to that list. But all weakens the position of workers, particularly blue-collar workers, in the economy, and some of it is just historical. You know after World War II, we were in this unique position where Europe was decimated, Japan was decimated. China was off the grid because of Mao. And so we didn't have a lot of competition out there, and now other countries are rising and automation has supplanted a lot of work that used to be done by middle-class workers.

We have drastically increased productivity since 1995, and there was the theory that if you increase productivity enough some of these problems of living standards would solve themselves. But what we've seen is rising productivity, rising corporate profits but flat-lining or even declining wages and incomes for the average family.

What that says is that it's going to be important for us to pay attention to not only growing the pie, which is always critical, but also some attention to how it is sliced. I do not believe that those two things -- fair distribution and robust economic growth -- are mutually exclusive.

Having argued at length that re-emphasizing shared prosperity is the deepest pragmatism, Obama is able at the end of the interview to effectively cast himself as the anti-Bush (and implictly, an anti-McCain)-- a card-carrying member of the reality-based community:

I tend to be eclectic. I do think we're in a different time in 2008 than we were in 1992. The thing I think people should feel confident in is that I'm going to make these judgments not based on some fierce ideological pre-disposition but based on what makes sense. I'm a big believer in evidence. I'm a big believer in fact. You know, if somebody shows me we can do something better through a market mechanism, I'm happy to do it. I have no vested interest in expanding government or setting up a program just for the sake of setting one up. It's too much work.

On the health-care front, for example, if I actually believed that just providing a tax cut to everybody would solve the problem of lack of health insurance and cure health-care inflation, I'd say great, that's a nice way to do it. It prevents a lot of headaches. But I've seen no evidence that the kinds of policies John McCain puts forward would actually work.

If I saw strong evidence that an additional $300 billion in tax cuts that John has proposed -- without a clear way of paying for it -- would actually boost economic growth and productivity, I'd be happy to take a look at that evidence. But I haven't seen that. It's all conjecture.

Obama is telling the country that Colbert was right. Reality has a liberal bias. Not everywhere, not at every time. But here in the U.S., after eight years of Bush.

*In fairness, it should be noted that while Davis and Chozicki seem deeply skeptical about Obama's spending and tax plans, Davis at least is an equal-opportunity skeptic. Reporting the McCain interview, he pretty much let McCain hang himself - making it clear without editorializing that McCain's proposed tax cuts would cost about $400 billion per year, to be offset only by trivial savings gained by clamping down on earmarks. Davis also reported deadpan as McCain disowned, as it were in real time, the social security plan posted on his own website.

Related posts:
Obamanomics: rebalancing the national portfolio
Obama gets down to tax brass
Obama brings it back to earth in Virginia

House on fire: Hillary opens a new front

After weeks of 'kitchen sink' attacks (and some defense) on matters of identity and character, Hillary Clinton made a strong bid today to shift the nomination battle to ground that plays to her strengths.

She delivered an economics speech that focuses almost entirely on the housing crisis -- from the homeowners' point of view. The speech isn't elegant, and may leave Hillary vulnerable on several policy points. But it may nonetheless give increased traction to her claims that she's ready with solutions to our most pressing problems.

The speech's rhetorical frame: Hillary casts the prospect of mass foreclosure as the the crisis threatening the middle class today. The Bush Administration is fiddling while home is burning, but Hillary will act as vigorously to protect Main Street as Bush has to protect Wall Street:

Last week when it became clear Wall Street was on the brink of a financial melt down, the Fed and the administration sprang into action. The Fed extended a $30 billion lifeline to prevent Bear Stearns from imploding and took unprecedented action to provide tens of billions of dollars in credit for other struggling investment banks as well. Homeowners, on the other hand, have received next to no assistance. Well, let's be clear. When families are losing their homes, that's also a financial crisis. When people’s greatest source of wealth is losing its worth, as college costs and health care costs and food and gas prices shoot up, that’s a financial crisis too. When "for sale" signs line streets across our country, when cities and towns are struggling with the costs of foreclosed properties, that is also a financial crisis.

The policy thrust is to move on multiple fronts to forestall foreclosures, guarantee loans, and create incentives and conditions under which lenders will renegotiate loans to keep people in their houses. In effect, bail out everyone: homeowners, with guaranteed renegotiated loans and/or with interest freezes; states, with money to buy foreclosed properties; mortgage companies, with protection against lawsuits by securities holders if they renegotiate loans. And of course, create another commission: an Emergency Working Group on Foreclosures, calling on Greenspan, Rubin, Volcker and presumably other ghosts of Christmas Past.

The political thrust: I've been out early and often on this issue. I've called for urgent action for a year, and I've got a comprehensive plan. I'm the one to get it done:

Now, a year ago in March 2007 I called for immediate action to address abuses in the subprime market, and I laid out detailed concrete proposals for how to do so. I warned this administration that the problems in subprime mortgages would soon spill over into regular mortgages.....I called for immediate action and laid out concrete proposals to prevent foreclosures and help states hard hit by this crisis.I also called for tighter regulation of the housing market....I also called for greater regulation of mortgage lenders...I’ve also proposed that we amend the bankruptcy code to give judges the discretion to write down the value of struggling families' homes.

Obama has not been slow on this issue, or short on proposals for easing the pressure on homeowners. But Hillary is upping the ante, putting the crisis and a web of proposed legislation to cope with it front and center. This marks a shift in the center of gravity on bread-and-butter Democratic economic issues. Obama will have to engage her in a sustained way if she keeps this up.

Mind you, there's plenty to engage. Hillary's plan can be hit from more than one direction. First, a blanket rate freeze on adjustable mortgages is a radical retroactive price control that would give a free lunch to lots of people who went into ARMS with eyes open. Second, another blue-ribbon commission will sound to some like another can kicked down the road. And to put forward Greenspan as Wise Man No. 1 is an eye-popper -- there's something like consensus, even among Greenspan admirers, that he bears considerable responsibility for blowing up the housing bubble -- by leaving interest rates too low too long, and by refusing to regulate mortgage lenders more vigorously when warned of excesses. To pair him with Rubin recalls what many Democrats regard as the Clinton Administration's excessive friendliness to business and acquiescence to Republican-driven bank deregulation.

Hillary may get caught between two stools -- advocating almost socialist price control on mortgages on one hand, and showing deference to yesterday's deregulators on the other. But Obama will have to pivot.

Related posts
McCain's economic bridge to nowhere
Obama gets down to tax brass
Obama brings it down to earth in Virginia