There is little doubt that the United States is experiencing a long-term crisis in the scarcity of gainful employment. It is, in fact, persistently difficult for many laid off workers to find jobs even at a steep pay cut. The American Recovery and Reinvestment Act did a great deal to staunch the bleeding, and has helped move the economy toward a grudging reversal in job trends, but we are still saddled with two major Bush-era policy shifts that are hampering job creation almost across the board.
The first is the unprecedented giveaway of nearly $2 trillion in tax revenues, during the years 2001-2010, to mostly the wealthiest Americans. The Bush tax cuts of 2001 and 2003 were in fact the largest single transfer of wealth in American history, a giveaway of needed government revenues to those who least required a handout. The Bush team’s thinking was trickle-down economics to the extreme: if we give more than a trillion dollars to the wealthiest Americans, they will have to pass on that wealth by “creating jobs”.
The flaw in this reasoning was that the real impact, the real incentive of the Bush handout was: if the wealthiest interests in our society can earn more than a trillion dollars without lifting a finger, why should they waste money creating jobs? This latter logic has proven to be much closer to the economic shift we experienced in the wake of those tax cuts. American businesses began moving jobs overseas at record pace, and even pressed for the further relaxation of labor laws, so job creation wouldn’t be “so costly”.
The transfer of wealth was further exaggerated when the Bush administration persuaded Congress to overhaul bankruptcy laws, making it much harder for individuals to escape crippling debt through bankruptcy protection, while making it easier for corporations to do so. Banks whose balance sheets were riddled with bad debt resulting from mathematically unsustainable and predatory lending practices could hide their exposure by taking advantage of both sides of that bankruptcy reform.
The second major economic policy shift that took place under George W. Bush was the near total deregulation of the banking sector. Pres. Clinton had signed major bank deregulation legislation in the late ’90s, but the intention was not to give major banks carte blanche to set up a fictional trading regime which no human being could track and in which the private wealth of most Americans could be made vulnerable to systemic fraud. The Bush years, however, saw a shift in regulatory infrastructure which invited (and brought) such abuse.
Allowing major banks to not only hold deposits and make loans, but to sell stock, to convert loans into securities, to gamble with pension plans, to sell insurance, some of which was designed to insure against the collapse of their other financial products, was a calamitous miscalculation. It is what invited and brought about the worst financial abuses in generations and led to the worldwide financial collapse of 2007-2008.
If banks are not accountable for the truthfulness of their wealth claims, they have every incentive to first begin, then expand, the very risky fictionalization of wealth that we saw in the years 2001-2008. With unprecedented amounts of free cash floating around in the bank accounts of the wealthiest of the wealthy, the financial sector experienced an incredible boom in dollars invested. The comprehensive deregulation of the financial sector then allowed them to use this new economic reality to vastly inflate the value of that private wealth, by investing not in productive business opportunities, but spurious and ill-designed financial “instruments”, the true value of which was simply the point-blank multiplication of wealth.
To say that wealth is fictionalized is a specific charge: the entire financial services sector embarked on a complicated re-engineering of the meaning of investment. No longer was the smartest gamble the investment of hard cash into real businesses producing actual products and services with corresponding measurable market value; now, the focus shifted to investments in securitized investments, pools of wealth claims not corresponding to any measurable, grounded economic activity.
Building “instruments” designed to expand the financial holdings of clients was the new game. Bad loans were bundled into “mortgage-backed securities”. One could buy one-tenth of 1% of a bundle of 1,000 home loans, the total cash value of which can never exceed the contracted amount plus interest over time, in hopes that other investors will throw so much money at the same security that its financial value (wholly detached from its real economic value) will escalate wildly.
If this sounds risky, your bank could secure its other holdings against the risks of mortgage-backed securities by engaging in “credit default swaps”. The simplest way to explain these is to say that two or more banks agree to shore each other up against massive credit losses, to provide baseline security to the already improbable investment values tied to the pooling of mostly risky mortgages.
These two policy shifts saw the United States government give away $2 trillion, at the beginning of a decade which would cost nearly $2 trillion in war spending, only to throw in another $1 trillion at the tail end, to pay for the clean-up, leaving major financial institutions not only intact, despite systematic abuses, but far wealthier with respect to the average American business or household than ever before. This policy shift was undertaken deliberately by the Bush administration, and to some extent, the policy goal of putting more power into the hands of a concentrated minority of the wealthiest interests was achieved.
The current administration is dealing with the aftermath of this decade of decadence; Pres. Obama has the unenviable task of wrestling with the resulting wave of unemployment, challenging deeply held assumptions about the American genius for creating wealth and reminding citizens and politicians that free as we are, most individuals have little control over their economic circumstances. Should he raise taxes? Fine the banks? Institute wage controls on investment bankers? Ban irrationally huge executive bonuses?
His critics allege he is desperate to do each of these, and yet he has never attempted even one of them, as a response to the financial crisis. The only area where taxes have been increased during Obama’s presidency, is on the wealthiest recipients of the most expensive health insurance policies. Economists of every stripe agree this will help to bring down costs and insure more people.
Pres. Obama’s approach to the financial collapse, the government’s fiscal crisis and persistent unemployment, has been to seek solutions that will allow private markets to deal better with the challenges of the day. The bluster and character assassination from his critics has been relentless, but the fact is, he has not proposed socialist fixes to the converging crises in American markets; he has, instead, sought to make it possible for individuals and businesses to fare better, while aiming to defictionalize the investment markets without prompting a sudden collapse of values in any sector of the economy.
In this sense, Obama has been largely successful. Most economic trend lines appear to be moving in the right direction, including job-creation. In 2009 and 2010, the US economy created far more jobs than during the Bush years, 2001-2008. But employment is lagging desperately behind other economic indicators. The weakness in the US jobs market can be traced directly to these two vitally ill-conceived economic policy shifts: the massive transfer of wealth the wealthy (an incentive large enough to remove all incentives) and near total free rein to the financial sector (allowing the wealthy to isolate their wealth without losing it, undermining the capitalist-democratic model whereby wealth flows throughout the society).
Financial regulatory reform, passed by the Democratic Congress and signed into law by Pres. Obama, was a significant step in the right direction, banning some of the worst abuses, targeting crucial conflicts of interest, and instituting a Consumer Financial Protection Bureau, which will, for the first time in US history, give ordinary Americans a regulatory watchdog specifically designed to protect against systemic fraud and abuse in the financial sector.
But we are still dealing with the bulk of the costs of these two key Bush-era policies, and the extension of the tax cuts for the wealthiest Americans may serve to stabilize the slow jobs recovery, but it is unlikely to accelerate it. We have to examine whether, as a democratic republic, we have any reason for giving such massive new wealth and such unconstrained privilege, to the already wealthy and privileged, without even asking anything in return.
In a free society, the rule of law should grant each of us the core democratic liberties that make us whole people, able to act freely in the public sphere, but the system should not be so easily redesigned to serve the personal or corporate interests of a limited few or to impede the flow of capital (as a percentage of overall investment) to ordinary people and small businesses. The folly of the Bush years was to pretend that an economy planned for the select few would work for everyone. An economy aligned to privilege market dynamics that elevate working families, citizens and communities, will enrich the wealthy, but not at the expense of everyone else.