They are popping the bubbly on Wall Street. Million-dollar bonuses, the Dow at 10,000, the casino is open again. Forget President Obama, who says we can’t go back to an economy where finance pockets 40 percent of the profits. We’re already headed there.
The current-account deficit is down as Americans have cut back spending. But the deficit with China is hitting new records; companies are still shipping manufacturing jobs over there. The dollar is down, but not against the Chinese currency. Forget about Federal Reserve Chair Ben Bernanke, who warns against going back to the unsustainable trade imbalances that led us over the cliff. The old patterns are coming back.
Bernanke has announced that the recession is over, the recovery has begun. But to date, we are looking at a reversion, not a recovery. We’ve stopped the free fall, but we haven’t changed direction. There can be no recovery to the old economy that crashed when the housing bubble burst. That economy depended on Americans spending more then they earned, borrowing ever greater amounts, treating their homes like at ATM machine, while the Chinese lent us the money to keep interest rates down so we could buy the goods our companies made with the jobs they shipped over there.
Now that old economy didn’t work very well when it was growing. We lost high-wage manufacturing jobs during the supposed "recovery" under President Bush. Most Americans lost ground even while the economy was expanding. Household debts reached new highs. Inequality soared to Gilded Age extremes.
But now we can’t even get back to that performance. Americans have lost some $13 trillion in assets. They are tightening belts and trying to pay down debts, terrified as jobs are lost, hours are cut and benefits are slashed. Consumers won’t drive the U.S. economy, much less the world’s. And businesses aren’t investing because consumers are cutting back. They are increasing profits by laying off workers and cutting back expenses. States and localities are headed into severe layoffs of teachers and police. The economy isn’t going to be buoyed by soaring exports to a world in recession. The only thing holding the economy up now is the deficit-financed stimulus plan and the automatic stabilizers like food stamps and unemployment benefits.
Where will the jobs come from? Wall Street can produce another bubble, but that won’t put the 15 million without jobs to work, one-third of which have been out of work for at least six months.
Recovery requires fundamental reform of America’s economic strategy. The old shibboleths of the conservative era—shrink government, cut top-end taxes, free multinationals to move jobs abroad, deregulate finance, wage war on labor unions, declare that trade deficits don’t matter —have failed ignominiously. They must be discarded, like yesterday’s rotted fruit.
Fundamental changes are needed. Trickle-down should be supplanted by public investment-led growth—large-scale public investments in areas vital to our future such as infrastructure, research and development, education and training. These investments should be deficit-funded until the economy actually starts putting people back to work, and then sustained and paid for through progressive tax reform. Tax speculative security transactions, generating $100 billion a year in revenue to invest in a 21st-century infrastructure that would put people to work and make the economy more productive. Raise top-end taxes, reduce inequality, and invest in making college affordable and exploring the green technologies of the future.
We’ve pursued tax cuts, promising private investments would flourish. But much of the productive investment and lavish consumption went abroad. In reality, public investment would be far more effective. We have a staggering public investment deficit that must be met for a world-efficient economy. Public investment is more likely to be invested, more likely to be spent here, more likely to create good jobs here, and far more likely to generate new technologies and productive private investments.
We need to complement this with a bold manufacturing strategy to make certain that we help lead the inevitable green industrial revolution, so the new technologies will be created and made in America. Shed the notion that we’ll benefit by exporting windmills and solar cells and electric cars subsidized by China so that they are cheaper to us. We can’t exchange dependence on foreign oil with dependence on foreign-made windmills. Make the public commitment to transition, and then use our purchasing power to invite the companies with the best technology to bid on contracts so long as they make it here in America. Not simply a timid-buy America policy satisfied with the final assembly of parts and technologies made elsewhere, but moving entire supply chains so that our workers and engineers and entrepreneurs are familiar with cutting-edge technologies that our inventors can soon surpass.
Complement this with a new global trade strategy. We can’t go back to current account deficits over 6 percent of gross domestic product, financed by borrowing from abroad. China, now some three-quarters of our manufactured goods deficit, is by far the hub of the problem. The president has wisely called on the international community to adjust cooperatively, challenging the Chinese and other mercantilist nations to expand domestic demand and reduce their reliance on exports, while the U.S. exports more and buys less. But that isn’t going to happen so long as the Chinese are free to manipulate their currency, subsidize their exports, savage their workers and environment, and mandate global corporations transfer jobs and technology to them. So we’ll need to show some bite. A bold manufacturing policy around new energy will encourage companies, including Chinese companies, to make things here. But we should be debating putting a lid on our deficits, and announcing that we will move slowly to balance our trade. If all adjust, we can have more trade, not less, but we can’t go back to the old imbalances no matter what they do.
These must be complemented by financial reform that curbs the gambling and forces banks to make loans to Main Street again, and by a high-wage policy—empowering workers, lifting the minimum wage, extending the public social contract. Finally, our economic policy, both monetary and fiscal, must be targeted at sustaining full employment as a priority, without letting inflation get completely out of control.
These ideas—heresies in the old conservative times—are but the beginning towards defining a new course. They will face fierce resistance from entrenched interests. But perhaps the biggest obstacle is the encrusted hold of old, bad ideas that should already have been discarded. You can see that in the calls for balancing the budget and cutting spending while unemployment is reaching new heights. Or the Republican chorus about cutting taxes, as if they had learned nothing. Or conservative Democrats railing against limited buy-American policies. Or the administration proclaiming its opposition to industrial policy. Or conservatives railing against excessive regulation.
Inertia and interest drive us to revert, not reform. Only it won’t work. The old standards don’t play anymore. Sure, Wall Street can generate another bubble or two. But there is no recovery on that old path—only stagnation, crushing long-term unemployment, growing inequality, a devastated middle class and a social tinderbox increasingly ready to explode. Eventually, we’ll have to change our course; the only question is how much pain we have to endure before we actually learn our lessons.