24 October 2009

"Yes Sir, I Understand and Will Comply"

An essay has been festering in the bottom of my brain stem for some time now. I am finally compelled to put pen to paper by the first pages of Andrew Ross Sorkin's Too Big To Fail, in which he chronicles the Great Recession. Two points in these early pages are the motivation: he notes that by 2007 40% of corporate profits are due to financial activities (which I have written about earlier), and "...this book... is about real people, the reality behind the scenes,... and [the] minds of the handful of people who controlled the economy's fate".

This leads to my main thesis: one of the continuing antagonisms in economics is between command directed (asserted to be some authoritarian government) and laissez faire (private actors with little to no government intervention) structures. Other than died-in-the-wool Marxians, laissez faire only has proponents in the field; not many, mind you. For the last hundred years, the debate has been between moneterists (the mellowed progeny of laissez faire) and Keynesians (and the similarly emasculated Marxists). The current Great Recession brings the more extreme views back into discussions, thanks to the Russians and Chinese.

Both Russia and China, despite being embraced wholeheartedly by American capitalists seeking cowed labor, have been re-revealed to be command directed economies not capitalist dynamos of Wall Street propaganda, just as they were when they were explicitly Communist (capital C is no typo). The evidence can be seen in both country's economies far more rapid revival from the Great Recession. In the Russian case, Moscow has directed the oil industry (the principle source of foreign exchange) to increase production. In the Chinese case, Beijing has undertaken a widespread stimulus program to consume its manufacturing production domestically; in other words, unlike American capitalists who are eagerly destroying our middle class, the Chinese government is actively bolstering, and even extending the reach of, their middle class. The archetypical example is wide screen TeeVees. It happens that the display panels for virtually all LCD TeeVees are made in China; leveraging this production to TeeVees themselves is relatively simple and is happening. Widescreen LCD TeeVees here are a bit more expensive and scarcer here now that they're being sold by the truckload in China to Chinese.

Maybe command directed economies can do better, if those giving the commands have the whole country's welfare in mind, not just the oligarches. Russia's emergence from the Soviet Union was characterized by oligarch and corruption. It appears to have learned from that trauma; less so than the Chinese. The issue isn't the number or affiliation of these handfuls of decision makers. It really is only a handful, no matter what Adam Smith said, and no matter the titular description. What matters is the intent and intelligence of these decision makers. Smart, equitably minded, people make better decisions. Such people just tend to affiliate with government rather than private capital.

The argument by Right Wingnuts that only private capitalists make intelligent decisions, and that "government bureaucrats" always make stupid decisions is one of those Big Lies characteristic of a certain political movement of early 20th century Europe. I'll define Smart in this context to mean providing the greatest good to the greatest number of society. Laissez faire has a difficult time arriving at that definition; it requires a circuitous route through trickling down the waterfall and never actually arriving there. But I consider it the only definition which yields a stable long term socio-economic structure. Both the Katrina "Brownie Moment" and the actions which propelled us into the Great Recession are examples of government driven by those who's intent is make government fail the great majority of its citizens. Democratic governance, while not perfect (they are fallible humans), strives to expand the common good and often succeeds. Much to the annoyance of the Rand-ians.

Keynesians don't generally view themselves as command directed economists, but rather as interventionists in emergency, spewing by the Beck's of cable TeeVee notwithstanding. The sine qua non of stable industrial societies is a middle class that absorbs the vast majority of the national income. It is argued that democracy requires an overwhelming middle class; although which is precedent is hotly debated. One of FDR's advisors observed that with mass production, there must be mass consumption. In the years leading up to 1929, American consumer production supplied American consumption; exporting wasn't a major player. This was largely due to the fact that capital productivity had not yet been outstripped by population and capital was not yet as instantly mobile as it is now. Today, a manufacturing endeavor need not have a broad middle class supporting it, since population growth has outstripped productive capacity, while capital productivity has reduced the amount of labor needed to produce. If the only route to middle class is Wall Street, then it will be a small middle class, and equally obviously, not really a middle class.

The result is that the American (and European to a lesser extent) economy, at the hands of capitalists, has been transformed into one which is not self sufficient, production has been shifted out of country, leaving a population unable to earn and thus unable to consume the production. The shift in the top 1% taking 8% to taking 23% of national income was engineered by the financialization/deindustrialization of the economy by capitalists. The Great Recession was not the result of stupid lazy bureaucrats (carrying out directives from their government overseers), but by sly bankers. More than a few pundits have been screaming for Obama to take on the banks, much as Teddy Roosevelt did. I certainly agree. Turning the economy around without changing the structure will not be possible; the effort will only move yet more of national income back to that 1%. The recent Goldman Sachs reports only provide more proof of the proposition. Restoring to the status quo ante doesn't fix the problem.

The great mistake of trusting recovery to the likes of Geithner is that to them recovery means re-establishing the income stream which existed before the collapse, oblivious to the fact that the income stream caused the collapse. What is more difficult to do is admit that the structure of the economy has to change. Geithner, et al, have to admit that an economy which devolves 40% of profit to financial manipulation has to end, and be replaced with one which rewards real production, not legalized money laundering. It was not an anthropomorphic "oops", but a fully predictable (and so done by a few) event. In order to re-establish a stable economy, ways must be found to disperse funds such that the middle class once again receives the bulk of national output. Only then will there be a middle class in more than name only.

The final difficulty is derives from the "success" of capitalism. In the years since Reagan, growth in GDP has been so-so to great, depending. What has been constant over that period is that wages have seen little to none of that growth. The 1%-ers increase in share of national income and the pattern of growth are two sides to the single coin. Manufacturing has reached a point that it no longer needs local population growth (and thus demand for goods) to offset increasing productivity. Physical production growth need only supply a fraction of population growth in order to sustain itself. Henry Ford raised the wages of his laborers on the simple (and true at the time) proposition that if his workers could earn enough to buy a Model-T, then he would sell more Model-T's. Win-win. Now, we face a different reality: so few workers are needed to produce physical goods (and there are abundant Indians and Chinese to do so) and earn so little, that growth in production can be satisfied by an ever shrinking (in percentage terms) middle class. Consider that both India and China, separately, have four times the US population, yet each chose to market their production here rather than their own populations. Seems odd, doesn't it, to ignore 2.5 billion locals and target .3 billion 12,000 miles away.

What the Great Recession has made obvious to anyone who looks dispassionately at the events is this: the American economy in the wake of nearly 30 years of Right Wingnut control is a command directed one, but by a cadre of private actors who care nothing for the commonweal, but only for the best 1% of the 1%. This situation cannot sustain. There will be blood in the streets, just as there was in France in 1789.