Fiddling While Rome Burns

Rome lived on its principal until ruin stared it in the face. Industry is the only true source of wealth, and there was no industry in Rome. By day the Ostia Road was crowded with carts and muleteers, carrying to the great city the silks and spices of the East, the marble of Asia Minor, the timber of the Atlas, the grain of Africa and Egypt – and the carts brought nothing out but loads of dung. That was their return cargo…. Long Beach is the Ostia of our day, the gateway to the great American market….The imports are as numerous as the sands on the nearby beach, including everything from shoes and shirts to computers, autos, advanced telecommunications gear, and photo voltaic panels for generating solar energy. The exports, though, are few, consisting mostly of scrap metal and waste paper – this millennium’s dung, you might say.

(Clyde Prestowitz, principal trade negotiator for Asia in the Reagan administration)[1]

As Congress convenes for its lame duck session, Paul Ryan is poised to become a very important man. As the likely chairman of the House Budget Committee from January,  he is determined – as he told The Financial Times immediately after the mid-term elections – to see America “turn the corner” by maintaining “a firm focus on restoring the basic foundations of growth: low taxes, sound and honest money; fair, predictable and reasonable regulations; and, of course, spending cuts and reforms.” “Mr. Obama,” he wrote,” must now move quickly to join the growing bipartisan consensus calling for at least a two year freeze on all current tax rates. He should also join us to address our shared concern with the unsustainable deficit….Our fiscal and economic problems have been decades in the making – a bad situation made much worse over the past two years [which is why the President should] enact the spending cuts proposed in House Republicans’ ‘Pledge to America’. “We face a choice,” Ryan said, “between an opportunity society with a safety net or a cradle-to-grave social welfare state.”[2] Clearly he prefers the former.

Personally, I prefer the latter – but that is of no consequence because no such choice currently awaits us. What awaits us instead is the interesting conundrum of a Republican Party cutting taxes for the rich while decrying the scale of the federal deficit. What awaits us is a House Budget Committee chaired by a man committed to resolving our current difficulties by repeating the policies that created them. And what awaits us is a Congress preoccupied with the wrong kind of debt.

We certainly have a problem of debt.

• Part of that debt problem is the gap between federal taxes and federal expenditures – a gap that opened up on the watch of a Republican President and Congress, not a Democratic one. A federal surplus inherited in 2000 was squandered well before 2008 by the tax cuts now due to expire and by the financing of a war of choice. The federal spending is larger now because of the recession triggered by a financial collapse that also occurred while the Treasury Secretary was a Republican. So it is simply untrue, and entirely disingenuous, to talk of “a bad situation made much worse over the past two years”, if by that is meant to signal that the Obama stimulus package deepened the recession. It did not. Arguably, the package should have been larger, the better to lift the economy from recession more quickly and to speed the flow of tax revenue again. Companies are slow to hire now not because they are over-taxed or over-regulated. They are not hiring now because their CEOs lack confidence in demand, and they lack confidence in demand because other companies share that same lack of confidence. With private sector confidence low, demand can only be increased by more targeted public spending rather than by less. To cut the federal deficit in the long term, the last thing sensible policy requires is its cutting now.[3]

• But the main debt problem which currently besets the U.S. economy – the debt problem that keeps internal demand low – is not primarily a debt problem at the federal level, no matter what Paul Ryan claims or implies. It is a debt problem at the level of people’s personal finance. One of the “fiscal and economic problems decades in the making” to which Paul Ryan ought properly to refer, but which he does not, is the generalized stagnation of American hourly wages in the decades since Ronald Reagan was president, the intensification of American poverty over the bulk of that period, and the stellar rise in income and wealth inequality that has accompanied poverty and the lack of wage growth. One third of all Americans currently live on incomes that are within one tranche of the poverty level for their size of family. Indeed, the median income of average Americans has actually fallen in the last decade – down 4.8% according to the latest Census Bureau figures.[4] The mass and generality of American consumers have maintained their living standards for the last quarter century not by paying “low taxes [in an economy based on] sound and honest money,” as Ryan would have it, but by working longer hours, sending more and more of their family members out to work, and by maxing out their credit cards. “Research shows that credit card debt in America has quadrupled since 1989 and increased 41 percent just since 2000. American now owes more over $1 trillion in credit card debt.”[5] Money doesn’t come much less sound and honest than that.

• The other debt problem that now besets the U.S. economy is debt at the international level. Over the last two decades we have become the global system’s consumer-of-last-resort. The U.S. began the post-war period (in 1945) as the global 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. It is American debt, not American largesse, which now helps to sustain global economic growth. Our trade relationship with China is emblematic: a U.S. deficit that was a mere $10 billion in 1990 and $83 billion in 2000 has now soared to $268 billion in 2008 and $226 billion in 2009.  In 2008, the United States main export to China was waste and scrap paper – some $7.6 billion worth – more than we exported in oilseeds and grains (but oilseeds and grains were the third largest category of goods we exported to them).[6] So here we have the United States of America sending to China, a major trading partner, agricultural produce and waste, in exchange for manufactured goods and money loans. No wonder Arianne Huffington chose to call her latest best-seller Third World America because in many ways our trading patterns are beginning to resemble those of an imperial power in decline.[7]

As we have argued before on this website,[8] since World War 2 the United States has known two sustained periods of economic growth. Both were based on different social settlements. Each has something to tell us about how, and how not, to go forward.

The first period was that between 1948 and 1973. Abroad in those years the world was organized around a Cold War division and a nuclear stand-off. At home, prosperity was anchored in the spread of semi-automated production systems. Productivity per worker rose dramatically after 1948, as did the wages of unionized workers: north-eastern and mid-western wage militancy was crucial to the demand side of the 1950s economic equation. American manufacturing led the world, and blue-collar American living standards exceeded those of traditional middle class and professional families in Western Europe and Japan. Internal income inequality accordingly diminished: by 1970 average CEO compensation packages in Fortune 500 companies ran somewhere between 56 and 70 times higher than the median wage those companies paid. Throughout the bulk of that first growth period, the United States ran a balance of trade surplus (the world bought American goods) and a balance of payments deficit (dollars flowed out to keep global demand high), dollars distributed globally in no small measure through the placing of American military personnel abroad. It was a growth period book-ended by two wars – Korea at the outset, Vietnam at its end – military expenditure on the second of which eventually helped bring that first growth period to an end.

Twenty years later, the U.S. economy experienced a second prolonged period of growth, one that was momentarily slowed in the immediate wake of 9/11 but otherwise sustained from 1992 to 2008. There was no Cold War this time: rather initially a peace dividend and then the confrontation with Islamic fundamentalism that triggered wars in Afghanistan, Iraq and now Afghanistan again. Productivity rose at home again as it had between 1948 and 1973, this time the consequence of computerization and the spread of new information technology. But there were no rising wages through strong trade unions in this second growth period; and no U.S. balance of trade surplus. Instead there was debt – increasingly foreign debt and personal debt – and there was greater income inequality Income and wealth distribution in this second growth period moved average CEO compensation packages in large corporations into a 200-400 percent ratio to median wage, depending on the state of the stock market, and helped fuel the credit bubble which broke so dramatically and with such serious consequences in September 2008.

Paul Ryan’s “Pledge to America” proposes to take us to a third growth period by replicating the inequalities of the second. That cannot do. What this economy now needs is a scale of change far more fundamental than simply token tax cuts and the closing of federal programs. What the economy now needs is a new growth trajectory whose underpinnings more resemble the first period of post-war U.S. economic growth than they do the second. At the very least, we need somehow to scale back our global role, restore our competitive manufacturing base, and return to a lower and more functional level of social inequality. A leading Republican figure from an earlier age has recently compared the United States to Rome. Given the force of that comparison, it is hard to avoid seeing Paul Ryan, for all his new found importance, as fiddling with tax cuts for the rich while the rest of America hurts. Our economic strength is eroding and a social time bomb is ticking beneath our feet, which is why it is time to put the fiddle away and begin a proper conversation whose seriousness matches the hour.

These arguments will be developed more fully in

Making the Progressive Change: Towards a Stronger U.S. Economy,

to be published by Continuum Books in 2011

---

[1] Clyde Prestowiz, The Betrayal of American Prosperity, New York: Free Press, 2010

[2] Paul Ryan, “How the Republicans can fulfill their pledge,” The Financial Times, November 4, 2010

[3] For the argument in full, see The Poverty that Blights Us All; available at https://www.davidcoates.net/2010/08/09/the-poverty-that-blights-us-all/

and (with Don Frey) The Inmates and the Asylum: the Madness of Cutting Deficits in the Middle of a Recession, available at: https://www.davidcoates.net/2010/07/18/the-inmates-and-the-asylum-the-madness-of-cutting-deficits-in-the-depth-of-a-recession/

[4] On this, see Heidi Shierholz, A lost decade: Poverty and income trends paint a bleak picture for working families, Economic Policy Institute, September 16, 2010: available at http://www.epi.org/publications/entry/a_lost_decade_poverty_and_income_trends

[5] Quotation from the press release for the latest Demos report on credit card use, available at:

http://www.demos.org/press.cfm?currentarticleID=C1AA23D3-3FF4-6C82-5011CF28174638DB

[6] In 2008, the US exported $7.56 billion of waste and scrap to China, $7.3 billion of oilseeds and grain, $7.4 billion of semi-conductors and other electronic components, $5.5 billion of aerospace products and parts, and $3.5 billion of resin, synthetic rubber and artificial fibers and filaments. These were the major categories of U.S. exports to China in 2008. In 2009 the order switched slightly: oilseeds top, aerospace second, waste paper third.  (Source: USITC DataWeb. Top five U.S. exports to China in 2009)

[7] Arianna Huffington, Third World America, New York: Crown Publishing Group, 2010

[8] See Contemporary Poverty and the Tasks of the Left: available at https://www.davidcoates.net/2010/09/23/contemporary-poverty-and-the-tasks-of-the-left/

David Coates holds the Worrell Chair in Anglo-American Studies at Wake Forest University. He is the author of Answering Back: Liberal Responses to Conservative Arguments, New York: Continuum Books, 2010.

He writes here in a personal capacity.

This entry was posted on Sunday, November 14th, 2010 at 8:40 pm, was written by David Coates, and is filed under US Blog. You can leave a response, or trackback from your own site.