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The Return of Madcap Capitalism
Originally published in ConsortiumNews.com earlier today, 14 May 2010
For much of the post-World War II era, there was a broad consensus that well-regulated capitalism – paired with an effective public sector – was the economic model that worked best, especially compared with the Soviet Union’s heavy-handed central planning or the madcap capitalism that had led to the Great Depression.
The harsh Soviet approach failed to meet basic consumer needs, and laissez-faire capitalism was too susceptible to the boom-and-bust cycles that brought on the Great Depression. President Franklin Roosevelt’s New Deal had charted a middle course that let capitalists make money producing and selling products while the government constrained capitalism’s worst excesses.
In the 1950s and 1960s, President Dwight Eisenhower’s Interstate highway system and John Kennedy’s space program also showed how smart government programs could help create an infrastructure to spur economic growth. Tax rates on the wealthy were relatively high in those days, but an expanding middle class was generating an unprecedented national prosperity.
Without doubt, there were many problems and inequities that the United States and other modern capitalist countries had to resolve, from ending America’s racial segregation to eliminating the vestiges of European colonialism.
But it was generally agreed that a mixed economy, combining the dynamism of private enterprise with democratically elected leaders representing the broader interests of society, was the way to go. In this view, capitalism was like a powerful resource that could do much good but needed public oversight to stop it from doing much harm.
Over the past several decades, however, that consensus has broken down in the United States.
Amid relentless anti-government propaganda and endless pressures for more deregulation, madcap capitalism has returned. The consequences can now be seen from the desolate factory towns in Michigan to the oil spill poisoning the Gulf of Mexico, from teacher layoffs in California to crazy market swings on Wall Street.
Yet, a major difference between the public reaction to the Great Depression of the 1930s and today’s Great Recession is that the U.S. electorate shifted toward more liberal and pro-regulatory policies after the stock market crash of 1929 while many voters now appear to be drawing the opposite conclusions from the financial meltdown of 2008.
Instead of turning to politicians who promise to use government to restrain Wall Street and hold corporations accountable, many Americans seem influenced by the anti-regulatory, anti-government messages of the Tea Party and right-wing talkers like Glenn Beck and Rush Limbaugh.
These Americans want to punish President Barack Obama and the Democrats who favor more government regulation. Heading toward the November elections, the Republicans appear poised to win more seats in Congress, maybe a majority that would block any meaningful reforms favored by Obama.
Yet, the irony of this likely outcome is that it has been primarily the Republicans and their right-wing allies who dismantled Roosevelt’s economic safeguards and demonized the concept of effective governance that Eisenhower and Kennedy championed, the old consensus that helped build and sustain America's middle class.
How the Right Has Won
For several decades now, the Right has invested heavily in think tanks and media outlets that trumpet the “magic of the market” and deride “big government.” The Republicans have relied on this same propaganda machinery to drive “wedge issues” into the American public, exploiting grievances over race and social changes.
The Right‘s propaganda system is now so advanced and dominant that it has convinced not only Tea Partiers but large segments of the U.S. population that the answer to their current economic woes is less government interference and perhaps more tax cuts benefiting the rich.
Polls suggest that the right-wingers are winning this argument despite the irrationality of their "solution" -- that the way to resolve the twin problems of out-of-control capitalism and huge federal deficits is to get government more out of the way and to cut taxes more deeply.
To understand how such a poll result is possible, one has to go back to the days of Richard Nixon who pioneered the use of “wedge issues,” like his Southern Strategy to draw angry white southerners into the Republican Party, and to the time of Ronald Reagan when Republicans denounced “welfare queens” to attract working-class whites to an anti-government “populism.”
The Right’s success in this propaganda campaign was made easier by the American Left’s failure to push back with a media buildup of its own, allowing a media asymmetry to take hold in the United States.
A key turning point came with the election of Ronald Reagan in 1980. During his First Inaugural Address, Reagan spelled out his vision, declaring: “Government isn’t the solution to our problem; government is the problem.”
Though the federal deficit was relatively small when Reagan took office – and his predecessor Jimmy Carter had actually reduced the federal debt as a percentage of the Gross Domestic Product – Reagan promised that he could generate more tax revenues by slashing taxes.
Reagan called his plan “supply-side economics” but his Vice President George H.W. Bush had earlier dismissed it as “voodoo economics,” an assessment that proved prescient when the federal debt soared over the next dozen years.
Reagan implemented another novel approach for undermining government. Unable to get Congress to eliminate federal regulations on issues ranging from the environment to workplace safety, Reagan appointed bureaucrats who were hostile to the purposes of their own agencies.
These officials, such as Anne Gorsuch at the Environmental Protection Agency and James Watt at Interior, made common cause with the corporations they were supposed to regulate.
Reagan also busted unions and pushed a pro-corporate “free trade” agenda. His ideological apologists insisted that removing constraints on capitalism would, in the end, mean greater wealth for everyone. Instead, much of the U.S. industrial base disappeared and the middle class shrank.
End of the ‘Old Lions’
During this time, a generational shift was occurring among congressional Democrats. The “old lions” who had experienced the Great Depression and World War II were retiring or dying off, replaced by a new breed of Democrats who were less willing to defend the policies that had helped the country overcome the economic distress of the 1930s.
These younger (and more timid) Democrats also found themselves in a more hostile political environment. Even though Reagan’s economic policies primarily benefited the wealthy, large numbers of middle-class whites were switching from Democrat to Republican.
Many of these voters were separated from the Democratic Party by Republican “wedge issues,” which exploited unease about demographic and cultural changes. Also, as the right-wing media grew in size and influence, the word “liberal” was turned into an epithet.
Even though Bill Clinton managed to win the White House for the Democrats in 1992, the anti-government dynamic that had been set in motion by Reagan continued. Clinton’s “New Democrats” worked to restore responsible government by reining in the massive federal deficits but they still rode along with the GOP’s deregulatory gang.
Most significantly, a key reform of the Great Depression – a provision in the Glass-Steagall Act that separated Wall Street speculators from commercial banks – was repealed in 1999 by a Republican-sponsored bill that President Clinton’s senior financial advisers, Robert Rubin and Lawrence Summers, supported and that Clinton signed into law.
By the time, Republican rule was fully restored under George W. Bush in 2001, pretty much all the pieces were in place for the implementation of Reagan’s anti-government vision.
Many of Roosevelt’s New Deal safeguards had been removed; labor unions had been devastated; and a well-funded right-wing media – reaching from newspapers to talk radio to cable TV – shaped the national debate.
Besides slashing taxes again – and wiping out Clinton’s budget surplus – Bush appointed “free-marketers” to run regulatory agencies. The new watchword was “self-regulation,” suggesting that the “invisible hand of the market” would make corporations do the right thing.
However, there was so much plunder in Bush’s early days that crises resulted. For instance, Bush’s political allies at Enron manipulated the energy markets of California to create brown-outs and to jack up the cost of electricity. Enron and other corporations also cooked their financial books to deceive investors.
The scandals grew so severe that even the anti-regulators around Bush were forced to temporarily reverse course and support financial reforms in the Sarbanes-Oxley Act. Bush also replaced Harvey Pitt, his first chairman of the Securities and Exchange Commission who was viewed as too cozy with the accounting industry, with William Donaldson, an old Establishment figure.
Donaldson oversaw a period of tighter financial regulations, but his days were numbered after Bush won a second term.
Donaldson stepped down in 2005, and Bush appointed Rep. Christopher Cox, R-California, a self-described “free market” advocate whose selection signaled to corporate America that the post-Enron period of aggressive SEC enforcement was over.
During his 16 years in Congress, Cox was known mostly as a Republican hatchet man who conducted investigations that put Democrats in the worst possible light and protected GOP interests.
As the anti-regulatory fervor returned, hot-shot Wall Street operatives felt a new freedom to package and sell exotic new trading instruments that were supposed to limit risk but instead infected the world financial system with catastrophic dangers.
Cox also loosened rules for buying stocks on competing exchanges, allowing fast-computer trades to seek out the best available price, a change that some critics warned would eliminate the safeguard of human specialists who had traditionally matched buyers and sellers.
While there were efficiencies in the new approach, there also was a lack of regulatory conformity to the system, opening the possibility that a rapid decline in a stock could cascade out of control with computerized “stop-loss orders” chasing “the best-available price” to the bottom. That could end up costing investors millions of dollars.
But there was such trust in the “magic of the market” and in “self-regulation” that many of the hazards accumulating on Wall Street weren’t noticed. Indeed, many experts – up to the level of Fed Chairman Alan Greenspan – seemed to be wearing ideological blinders, while others simply didn’t want some grumpy government regulators spoiling the fun.
The music finally stopped in mid-2008, confronting the Bush administration with the choice of either accepting a devastating collapse of the stock market or rushing in with a multi-trillion-dollar bail-out package. Bush opted for the bail-out, a position ultimately supported by the two major party presidential candidates Barack Obama and John McCain.
The financial crisis – and McCain’s apparent cluelessness about what to do – contributed to Obama’s solid victory in November. But the cost of the financial meltdown went beyond the pricy bailout. Millions of average citizens lost their jobs, their homes and their savings.
Turning on Obama
However, unlike Franklin Roosevelt who benefited from sustained public support to take on Wall Street and fight to get Americans back to work, Obama soon faced a revived right-wing movement determined to block government efforts that might alleviate the meltdown’s worst consequences.
Obama managed to pass a $787 billion stimulus bill and extended emergency loans to save the U.S. auto industry, but the Right used its media power to rally more and more Americans against him and his supposedly “wasteful government spending.”
When Obama turned his attention to the most severe long-term budget challenge – the soaring cost of health care – congressional Republicans lined up unanimously against what they decried as “Obama-care.” Democrats were forced to defeat a bitter filibuster in the Senate and pass the final legislation amid a near riot by Tea Partiers surrounding the Capitol.
Meanwhile, other long-term consequences of the Reagan-inspired deregulation continued to play out. In April 2010, an explosion in West Virginia killed 29 miners in a mine that had been repeatedly cited for safety violations but was allowed to continue in operation.
Later that month, one of BP’s deep-sea-drilling oil rigs exploded in the Gulf of Mexico, killing 11 workers and endangering the coasts of Louisiana and other states with a massive oil spill that remained out of control three weeks later.
In a political atmosphere where Republicans had not long ago chanted “drill, baby, drill” – and President Obama had acquiesced to more offshore drilling – the rig was one of many that had been allowed to operate in deeper and deeper waters with lax regulation and without adequate safeguards.
Essentially, the Bush administration had trusted the oil industry to “self-regulate.”
On May 6, the dangers of madcap capitalism resurfaced again on Wall Street. A combination of factors, including computerized trades that flitted from exchange to exchange as prices dove, precipitated a near-1,000-point drop in the Dow. Some blue-chip stocks lost almost their entire value in a matter of minutes before humans could intervene.
Many small investors with computer-triggered “stop-loss” orders (the kind advertised by E-Trade’s talking baby who says in one ad that the techno-system saved him “a pant load” while he was away at a Las Vegas bachelor party) saw their shares sold at sharply discounted prices (costing many of those investors “a pant-load”).
New suspicions surfaced that Wall Street insiders had figured out yet one more way to game the system against the small investors.
Yet, all these examples of madcap capitalism – unnecessary deaths of workers, environmental catastrophes, dangerous stock speculation and scammed investors – have failed to generate a new national consensus for a broader government intervention in the economy.
Instead, with the right-wing and most mainstream news outlets still sniggering about the incompetence of government, the political tide continues to flow toward a likely Republican resurgence in November.
In effect, that would put back in charge the very forces that did the most to create the Great Recession and other disasters. Presumably, the nation would begin hearing new GOP demands for more deregulation, more tax cuts and less of a government role in restraining madcap capitalism.
Robert Parry broke many of the Iran-Contra stories in the 1980s for the Associated Press and Newsweek. His latest book, Neck Deep: The Disastrous Presidency of George W. Bush, was written with two of his sons, Sam and Nat, and can be ordered at neckdeepbook.com. His two previous books, Secrecy & Privilege: The Rise of the Bush Dynasty from Watergate to Iraq and Lost History: Contras, Cocaine, the Press & 'Project Truth' are also available there. Or go to Amazon.com.
This article is republished in the Baltimore Chronicle with permission of the author.
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This story was published on May 14, 2010.