Is America already a failed state?
No public trust for a dysfunctional system
The main obstacle to progress is a corporate dominated political system that resists favoring broad long range public benefits over the short term profits of the few.
By Roger Baker / The Rag Blog / January 23, 2010
It is getting harder to argue that America is not already a failed state. One important reason is the fact that the public, to an alarming degree, doesn’t trust the government anymore. When the public is suffering economically and stops trusting their government to bring relief, nothing the government does is likely to bring much contentment. This is especially true where it is unlikely that the underlying problems causing the pain will get much better soon.
Broadly speaking, top political leaders including Obama and Congress are not being very honest about the poor prospects for economic recovery. The resulting political backlash is a big part of the explanation for the Democratic Party defeat in the Massachusetts senate election. Governmental distrust is now widespread, as Adam Nagourney acknowledges in The New York Times.
Public anger has elevated job creation toward the top of the political agenda. In contrast to their own economic plight, people see the bank bailouts and giant banking bonuses and naturally blame greedy unregulated banks for their economic misery. And not without good cause. In reality, however, the crisis required active cooperation between Wall Street and the politicians who ultimately regulate banking behavior, whereas the politicians involved are inclined, by nature of their job, to hide their own role.
The U.S. political system is already deeply dysfunctional, and is effectively under the bipartisan control of corporate money, a kind of domination just reinforced by the Supreme Court in its decision on corporate campaign financing. This money control normally prevents most Democrats from moving to the left.
The lobbies of greed rule America. The White House, Congress, even the federal judiciary are impotent in the face of capitalist greed. The recent Supreme Court decision permitting corporations to use shareholders’ money in corporate treasuries to influence elections increases the control that corporations have over the outcome of elections and the decisions of the government of the United States.
There is no government of the people, for the people, by the people, only the rule of private interests.
As a consequence of widespread grassroots economic pain, an irresistible political pressure is building that demands change. Here Robert Reich describes the new political dynamics behind the sudden trend for all politicians, but especially the Democrats, to blame banks. Banks make great political targets, and this explains why Obama is finally getting tough on Wall Street:
But suddenly the winds are blowing in a different direction over the Potomac. The 2010 midterms are getting closer, and the Dems are scared. Their polls are plummeting. The upsurge in mad-as-hell populism requires that Democrats become indignant on behalf of Americans, and indignation is meaningless without a target. They can’t target big government because Republicans do that one better, especially when they’re out of power. So what’s the alternative? Wall Street.
If the root problem is based on private corporate control of the whole government, it follows that trying to manage the behavior of bankers with tough-sounding rules imposed by such a government is not likely to lead to a recovery. Not until there are rules that force the banks and private money to invest in ways that they currently see as unprofitable.
The basic reason the economy can’t recover is that for it to recover there have to be new domestic jobs created by the too-big-to-fail investment banks that can get low interest loans from the Federal Reserve. But the banks, not without reason, think that American consumers lack a bright future. Since most states are broke, that leaves the federal government as the jobs creator of last resort. The Treasury is broke in a sense, but it has an unlimited ability to create more money in cooperation with the Federal Reserve. Here is a good explanation from a widely followed, independent energy economics analyst, Tom Whipple:
To support the policy of keeping federal interest rates close to zero, the U.S. Federal Reserve also has been buying up billions dollars worth of new treasury securities. Thanks to the $1 trillion plus deficit the U.S. is now running, Treasury securities are being issued in quantities that have never been seen before and as government revenues continue to plunge are likely to be issued in ever greater quantities.
Amidst the chaos of rising unemployment, spiraling foreclosures, collapsing real estate prices, amazingly enough, the U.S. equity markets have been rising steadily. Some astute observers are beginning to question just what it going on. How can tens of billions of U.S. Treasury securities be auctioned off at such low interest rates each week while many traditional foreign buyers, like China, are backing away from purchasing more U.S. debt as fast as they can without crashing the value of their holdings? How can sensible investors be buying so much stock that prices continue to rise steadily at a time when real unemployment likely is above 20 percent and the prospects for earnings growth by U.S. companies is as bad as it has been in the last 80 years?
The answer, of course is that they probably can’t, and this is why suspicions about just what is going on are starting to be raised. Close examination of available data suggests to some that traditional buyers of U.S. stocks such as retail investors, hedge and mutual funds and foreigners simply aren’t there on a scale needed to support nine months of some of the fastest growth the equity markets have ever seen.
There are suspicions about the Treasury’s auctions too which are consistently oversubscribed with buyers clamoring to buy massive quantities of debt. Obviously there is only one place that all these billions can be coming from and that is the US Federal Reserve which has the capability of creating unlimited amounts of money simply by typing on a computer — you don’t even have to bother to print money anymore.
The theory of what is going on is simple — the Federal Reserve creates a trillion or so dollars and sends lots of it to the big investment banks, called primary dealers, in return for stacks of nearly worthless mortgages the banks collected during the recent housing boom. In return for letting them unload nearly a trillion dollars of worthless securities on the taxpayer, the banks oblige the government by using many of those billions to buy Treasury securities from the government at close to zero interest and to buy enough stocks to keep the market steadily rising.
Everybody is happy. The great depression has been halted in its tracks, the stock market is soaring, signaling to the unwary that all is well, and Wall Street’s multi-million dollar salaries and bonuses are preserved for yet another year.The question of the year is how long this federal effort can continue. The controlling factor will be interest rates and the length of time the government can keep interest rates close to zero as it issues trillions in new and refinanced securities. A few interest points higher and housing becomes unaffordable given the strictures on lending. A few more and the U.S. debt becomes unaffordable.
The dollar is no doubt overvalued, given the fact that the government, with the help of the private Federal Reserve, is creating so many of them, and so suddenly. It is only when spending picks up that people can discover that there are a lot more dollars than there are things to buy with them. Because of the political pressure generated by the current depression level unemployment, the government has little choice but to borrow and spend enough to try to calm the situation, and try to cause the dollar’s loss in buying power to happen gradually. For political reasons, Obama is afraid to acknowledge this reality.
What does dollar devaluation imply? Arguably, this is a prescription for stagflation as the domestic economy stagnates at the same time as the dollar depreciates in buying power, meaning commodity price inflation. It means soaring fuel and food prices for U.S. consumers before long, since these items are often freely traded global commodities, with prices set by global buyers beyond U.S. governmental control. Many economists spanning the political spectrum now see the current situation as being unsustainable.
In the following piece, David Goldman comes to many of the same conclusions, and now regards the U.S. as an ungovernable failed state. Writing under the pen name Spengler. Goldman is smart Wall street ex-banker, with a good understanding of politics. It is vital to understand politics in order to be a very good economist, or at least to understand the big picture very well.
Is America a failed state?
[….]
During December, more than 600,000 workers disappeared from the official count of the American labor force, erasing the illusion that the employment situation would recover. But the voters knew that before the economists. The most reliable index of economic sentiment is the president’s deteriorating approval rating. For a by-the-numbers explanation of why the U.S. economy will not recover, see my October 6, 2009, essay, “Obama’s permanent depression.”America is the world’s most successful state, and the one with the greatest longevity in its present constitutional form. But neither of the major parties is presently capable of governing it. The Republicans have been hoping that rage against Obama’s failed economic policies would carry the party through the November congressional elections. But it is entirely conceivable that the Obama presidency will implode as quickly as the Obama campaign metastasized during the 2008 primaries, and that the electorate will call the Republicans’ bluff.
Americans understood well enough in early 2008 that the traditional leadership of both parties had led them into a dead-end. As I wrote in January 2008 (“Obama bin lottery”) after Obama’s surprise landslide in the South Carolina Democratic primary:
People of modest means do not understand the stock market, but they are sly: they can read the panic in the eyes of their leaders. After assuring them for months that all was well, Washington last week offered an emergency interest rate cut for the first time since September 11, 2001, and an emergency economic package which will send a small check to every American family earning less than a certain
threshold. Both President George W. Bush and [Bill] Clinton proposed essentially the same program. If that is “managerial ability,” thought the voters of South Carolina, we might as well buy the lottery ticket.
Most of what Goldman says about the USA being a failed state and why seems to be on target, but the last part of his essay looks to the general public to subsidize the private sector as the price of a possible recovery.
We need to shift the tax burden, moving it away from savings and investment and toward consumption. We should replace individual and corporate income taxes with consumption-based taxes.” Americans need to be told that they will need to invest before they can consume, and that the cure will take years rather than months to take effect. It’s not a happy message, and no one in politics is willing to deliver it — if indeed anyone in politics understands it.
This amounts to saying we should change our national laws to reward investment and savings at the expense of public consumption. In effect Goldman says we need to revive the industrial engine by redistributing wealth away from consumption toward investment if we want to revive the economy. This is akin to saying that we need to gun the engine of our ship to save ourselves, but without steering it.
There are those of us who believe we will have to gun the engine and steer the ship if we want to save ourselves. Those who warn of energy problems, and to a degree the Obama administration, take the position that we need to immediately deal with our addiction to imported oil, largely through a revival of domestic investment in alternative energy. All presidents since Carter have advocated much the same thing, but without delivering.
Wise minds see that we are rapidly headed toward an energy disaster and need to steer around it. Here for example is Jeff Rubin, a Canadian banker, describing the situation.
If there is a way to avoid a wrenching energy and commodity crisis, someone in charge needs to create a targeted industrial policy, with rules that specifically reward investments in energy reform, rather than rewarding new investments in general.
The following is from “Why Obama’s Economic Plan Will Not Work–And a Better Plan” by Robert Freeman
If Obama wants to revive the American economy, he needs to adopt a much more aggressive program than has been contemplated to date. Specifically, he needs to address the chronic shortfall in workers’ incomes and the recent collapse of middle class wealth which are the root causes of the crash. The most effective way to do that is with a Manhattan Project-like program to reconfigure the way the nation uses energy.
This all amounts to saying we need a different kind of government with different kinds of rules to conserve and direct the remaining wealth of our nation. If there is a chance to revive the economy, we need new centralized rules and a coordinated industrial policy that will channel both public and private investments into areas that the private money lenders now consider unprofitable. The main obstacle to progress is a corporate dominated political system that resists favoring broad long range public benefits over the short term profits of the few.
[Roger Baker is a long time transportation-oriented environmental activist, an amateur energy-oriented economist, an amateur scientist and science writer, and a founding member of and an advisor to the Association for the Study of Peak Oil-USA. He is active in the Green Party and the ACLU, and is a director of the Save Our Springs Association and the Save Barton Creek Association. Mostly he enjoys being an irreverent policy wonk and writing irreverent wonkish articles for The Rag Blog.]
First off, to answer the question, yes.
The article says people have stopped trusting their government; but it's worse than that. More and more people are coming to the realization that government – for sure at the Federal level, and less so at the state and local levels – is our enemy.
The fascinating thing is that this is something the "left" and the
Wrong about Obama on the Supremes. He's come out and come out strong. This is from yesterday's Times.
http://www.nytimes.com/2010/01/24/us/politics/24address.html
I read it, Roger, and agree 100%. Sorry my reply is short, but I did read it and you're (as always) on the mark.
Charley
Thank you, Thorne, for the update. I’m glad he finally got around to saying something – but it also says something that the media aren’t reporting his speech very much. Google News has a graph of the number of sources covering a story, and for this one less than 1/10 as many sources covered it yesterday and today as covered the initial story of the Supreme Court Decision.
The notion of shifting taxation from income and investments to consumption-based taxes is simply too regressive to make any real sense. In effect, we’re talking sales tax vs. income or capital gains taxes. Sales taxes overtax the poor by a massively disproportional ratio, and expecting more taxes from the poor to generate more revenue is just stupid. If our government needs money, they need to get it from:
1. those who have the most to give; and
2. those who will be hurt least by it
and sales taxes do not meet these two criteria, unless we adopt a prebate system such as that espoused at fairtax.org http://www.fairtax.org/PDF/2009FairTaxPrebateSchedule.pdf
Further, “investment” is too ambiguous a term. We need to differentiate between some different types of investment.
I don’t think we need more investment in terms of buying stocks and such. If we need to subsidize investment, it would be more investment in terms of new business start-ups or expansions of existing small businesses. However, with regard to mega-multinational-conglomerate-monster-corporations, screw’em! We should be doing more to make them smaller, or force them to create subsidiaries that cannot operate outside the US (or outside a single state, with regard to financial institutions).
Stocks, or other “investments” in publicly-traded companies or any company making in excess of a million $$ per year in profits should be taxed at a relatively high rate (say 50%), while investments in smaller companies could be taxed at a relatively low rate (~ 10%?).
Roger:
Wanted to get to this earlier, but haven’t had the time. A variety of points, most having to do with conflated concepts and distinctions that are differences in your essay.
First, the joining as one of two distinct ideas, that of a ‘failed state’ and that of a ‘dysfunctional government’. These are two very different things in my opinion, and implying that they are the same, as you use them virtually interchangeably, seems to me to be an error of terminology if not concept. To show what I mean, Haiti, before the earthquake, was a failed state (now it’s simply a ‘virtual’ state that exists in title only). There are actually very few of these on the planet, and to describe the U.S. as a failed state is IMO rather hyperbolic. As to dysfunctional governments, there are many, and this leads us to a further apparent confusion of terminology in your piece.
You cite the fact that the ‘people’ no longer trust the government as evidence of a ‘failed state’, something that I think is a leap at both ends; i.e., do more people distrust the government in 2010 than say, 1969? (and if so, was it a ‘failed state’ in 1969 too?); and is lack of trust in government actually an element of a failed state? I think a more important question is one you tackle tangentially, that being ‘who is the state failing’? It seems to me that your comment that it is no longer a government ‘of, by and for the people’ but rather a government ‘of, by and for corporate businesses’ answers that question well, but doesn’t serve to clarify the premise, that it’s a dysfunctional government. The government is dysfunctional for the citizenry but not for the international corporations and international finance… which begs the question ‘is it in fact dysfunctional?’. Again, it seems to me that it all depends upon whom it’s serving and whom it’s not.
The third conflation/confusion of concepts in your piece is ‘Wall Street’ and ‘corporations’, as for example, this sentence: “If the root problem is based on private corporate control of the whole government, it follows that trying to manage the behavior of bankers with tough-sounding rules imposed by such a government is not likely to lead to a recovery.“ Again, from my point of view, two very different beasts: the ‘private corporations’ are entirely mercantile in nature, while ‘bankers’ are entirely financial in nature. There’s no disagreement here that they both richly deserve blame you give them, but the damage they did and continue to do to the U.S. should not be confused when we look for solutions. The financiers went on a joy ride with the Bush policy of “0/0”; 0 regulations and 0% interest, then took that money and leveraged it out 30:1 to create a house of cards which imploded in Sept. 2008.
However, incredible as it may sound, their spree (nearly collapsing the global financial structure) will be seen as comparatively short lived and mild compared to the damage the multinationals have done. The first crippled an economy, the second destroyed a nation. By supporting a ‘free trade’ agenda which allowed them to move production facilities off shore and then import finished goods to sell cheap to their ex-workers… a plan that clearly hasn’t worked out so well for the nation, the multinationals acted in their own and not in national interests, and this decade will mark the end of American economic preeminence in the world. Unfortunately, a mercantile fix is far more difficult than the financial, as the nearly three decades of unpaid wage efficiency gains of the American workers will remain unpaid forever, and to change the game now would involve the re-education of the American people to understand that cheaper isn’t always better, to accept the higher prices that come with the jobs, and to demand changes in trade policy… something that is conceptually so far away from the popular understanding of the problem that it will not be considered until it is truly too late.
Embedded in essay by Roger Baker is an excellent in depth presentation by a Canadian banker named Jeff Rubin. Listen to video to learn about realistic changes that need to be made to transition to an oil depleting economy.
Sid of course assumes that the revenue raised from unfairly taxing the rich would be used to as he says “pay the nations bills”. It wouldnt. It would simply become more more money thrown into the sinking ship of expanding federal spending. Without controlling spending, any change in tax policy is meaningless.
Conservatives resist higher taxes because we know the criminals in DC will simply dream up new reasons to waste any new tax revenue and leave the financial problems unresolved.
If responsible financial management ever appeared in DC, I think you would find rich conservatives more than happy to pay more taxes to improve the countries dismal financial condition. Until and unless, your simply digging into my pocket to piss it away on the social justice cause de jour. And to that, I offer you a big ol fook you very much.
This is in response to Sid Eschenbach I presume? I have responded to some points in your two long posts. Because of comment blog limits, it would be helpful for you to focus on a few important points. — Roger
Part 1; Focus on Banks
I don’t believe that economists have tried to define “dysfunctional government” and “failed state”, at least not precisely, so I use them as common descriptive terms. I think the government is dysfunctional in the sense that it cannot pass a health care bill, largely because of the special interests. I think that the USA is a failed state in the sense that it probably cannot revive the US domestic economy enough to match the expectations of the public for very long. Meanwhile, the discontent of the public is likely to make our problems even harder to solve. Better, IMO, to focus on concepts rather than elusive terminology. Economics is all based on politics anyhow.
Sid seems to regards banks as being primarily national in operation, and corporations as being more international. But I see both as different parts of the same global system of finance capital.
Sid says; “…Unfortunately, a mercantile fix is far more difficult than the financial…”. However, I see these two as being closely linked elements of the same global financial system. Sid anticipates “…something that is conceptually so far away from the popular understanding of the problem that it will not be considered until it is truly too late…”. This sounds to me like a description of a failed state.
Since the banks retain their powers only through our laws, we can impose regulations like the Glass Steagell Act under FDR. Or we COULD break them up or nationalize them as an alternative to bailing them out. Or impose any regulations we wish. Bank profits are really a kind of politics in disguise.
In practice somebody, either the banks who finance industry or the government, need to do certain things the banks don’t regard as profitable. If private bank loans are not considered lucrative, the government has always funded things like schools, police, wars, etc. The US government is in fact doing a lot of “banking” now, through TIFIA, college loans, etc.
The US government is the socialist sector of the American economy. Their big pot of public tax money has now been largely captured by corrupt special interests including banks, corporations, Pentagon contractors, etc.
FDR was tough on the banks, but not so Obama. We can’t even inspect the books of the giant Wall Street investment banks that we have saved from ruin. In a less corrupt country, the people would rule the banks, and the banks can then decide whether to gamble their private money according to our rules, not theirs.
The way things are working now, we are saving the banks but they still refuse to lend to the small business that creates the domestic jobs needed for the eonomy to recover. See my recent piece in The Rag Blog:
http://theragblog.blogspot.com/2009/12/fixing-economy-like-filling-leaky.html
In reality, the biggest banks now appear to control the whole US government. Here are several good links speaking to that:
http://www.theatlantic.com/doc/200905/imf-advice
http://www.rollingstone.com/politics/story/31234647/obamas_big_sellout
http://theragblog.blogspot.com/2009/05/roger-baker-zombie-bank-syndrome.html
We are now letting the fed and Treasury generate vast phony bank profits at taxpayer expense by borrowing at near zero interest so they can buy guaranteed treasury bonds, by guaranteeing Freddie and Fanny loans, etc. But this STILL isn’t working because US consumrers are so deeply in debt that the whole US economy has become a bad credit risk so far as the banks are concerned.
To me, the worst way to fix the bank problem is to prop up the insolvent banks with so little reform that they remain too big to fail, or to regulate.
(next, Part 2 on trade).
In reply to Sid]
Part 2, Focus on Trade
Sid’s theory that our core problem is trade is interesting, but it doesn’t explain why we have banks too big to fail. Why can’t we or why don’t we fix the trade problem? Assuming that we could, what would the cost be?
We can set up any kind of trade restrictions we want, but we must remember that an unbacked dollar is the global economy’s standard reserve currency. We are printing like mad, and will soon need to roll over so much treasury debt that we have to pray that the rest of the world remains in a lending mood to cover our debt.
Is unfair or unequal competition caused by low Chinese wages something that trade policy could fix? What happens if the Chinese decide to cash in all their trillons of dollars in loans to the US?
I believe that Obama cannot shift trade policy toward protectionism without retaliation from our major lenders like China. We very much depend on China not to dump its trillions in treasuries, rather than assisting in an orderly devaluation of the dollar.
If there is overcapacity in nearly every product, as Sid maintains, how can we account for the fact that most commodity prices including oil and most metals rose so much in 2009? Maybe it is more accurate to say we have over-production of discretionary things like vacation homes, consumer durables, or cheap imported gadgets — but not an overproduction of the necessary goods like food, energy, and industrial commodities that remain in high demand in the global market, as indicated by rising price.
There is no “panacea” on the horizon, and I have never said there was one. But there are still better and worser ways to try to help relieve the situation.
I regard an industrial policy focused on energy as VITAL to our future US national well-being, and perhaps our survival.
For those able to understand the seriousness of our dependence on imported oil, I think we need to support an industrial policy that reduces our imported oil dependence ASAP. Any governmental policies that deliver that end result are likely to be less painful after the dollar shrinks so much that we can’t afford to drive very much.
If the dollar shrinks fast enough, we may at some point be able to compete in price with Chinese prices for manufactured goods, but facing reality, we now remain deep in hock to China. This means they get to call the shots, not the USA.
Obama has bailed out lots of banks but I believe only one corporation, GM, and a private insurance agency, AIG, which held a lot of the bank’s bad paper.
I think Obama is talking about seriously regulating the bank because an angry public now demands that he do so.
A nation full of really angry voting citizens is perhaps the only thing that now has the power to challenge the ruling banker-ocracy.
As Saul Alinsky used to say, there are ultimately only two sources of power: money power and people power.
Howdy all. I, for one, believe that the government needs to be reformed, big time. As we're all working towards that end, we need to come up with some forward motion on job development through the creation (with or without government involvement) of small businesses (and with them) the jobs they create. There's much to be said about this that our progressive small business friend,