The Great Pendulum of Economic Outrage Is About to Swing Again
The great pendulum of American economic outrage moves back and forth over time between anger at big government and anger at big business. For almost thirty years, big government has been the target - starting with Ronald Reagan's admonition that government is the problem, not the solution; through Bill Clinton's declaration that the era of big government is over; and George W. Bush's hands-off brand of free market
fundamentalism.
We deregulated much of the economy and pretty much allowed corporations to do what they wished. And for the first twenty years the result was largely good - a buoyant economy, a bullish stock market, a strong dollar.
But now we're experiencing what happens when the pendulum swings too far and big business is given so much leeway that the public is harmed and the economy jeopardized. The corporate looting scandals that began with Enron were a wakeup call. Then came the practice of post-dating executive stock options. And more recently, an epidemic of unsafe products: drugs like Vioxx, tainted foods, Heparin and lead-painted toys imported from China.
We've had defense contractors that don't deliver on their contracts, and insurance companies that won't deliver on their promises. And just this past year, the subprime loan mess, a financial meltdown on Wall Street, out-of-control hedge funds and derivatives. Perhaps manipulation of oil futures markets.
The reality is that neither big government nor big business is the problem. Both are necessary parts of a modern economy. Problems arise when they're out of balance - as they were by the 1970s, when government had grown so large it was stifling the economy, or as they have become this decade, as big business, including Wall Street, grew so irresponsible as to undermine public trust and threaten the economy.
Now the pendulum of outrage is swinging back against large corporations. America is heading toward another era of regulation. The real question is how smartly we go about it, and whether we can keep the pendulum from swinging too far.
fundamentalism.
We deregulated much of the economy and pretty much allowed corporations to do what they wished. And for the first twenty years the result was largely good - a buoyant economy, a bullish stock market, a strong dollar.
But now we're experiencing what happens when the pendulum swings too far and big business is given so much leeway that the public is harmed and the economy jeopardized. The corporate looting scandals that began with Enron were a wakeup call. Then came the practice of post-dating executive stock options. And more recently, an epidemic of unsafe products: drugs like Vioxx, tainted foods, Heparin and lead-painted toys imported from China.
We've had defense contractors that don't deliver on their contracts, and insurance companies that won't deliver on their promises. And just this past year, the subprime loan mess, a financial meltdown on Wall Street, out-of-control hedge funds and derivatives. Perhaps manipulation of oil futures markets.
The reality is that neither big government nor big business is the problem. Both are necessary parts of a modern economy. Problems arise when they're out of balance - as they were by the 1970s, when government had grown so large it was stifling the economy, or as they have become this decade, as big business, including Wall Street, grew so irresponsible as to undermine public trust and threaten the economy.
Now the pendulum of outrage is swinging back against large corporations. America is heading toward another era of regulation. The real question is how smartly we go about it, and whether we can keep the pendulum from swinging too far.
posted by Robert Reich | 11:54 AM
41 Comments:
Now would have been a great time to criticize your candidate of choice for the scandalous FISA bill...
I'm rather disappointed that you've had nothing to say on the matter.
(And considering that big telecommunications companies are the beneficiaries of this bill, it isn't even off-topic..)
The pendulum of outrage is likely to smash both parties if they both keep this up...
Robert said....
"The corporate looting scandals that began with Enron were a wakeup call".
Capitalism has gotten itself into quite a pickle this time around. The orgy of greed and deregulation will undoubtedly be muted. Sharply turning toward the center will provide an illusory salve and legitimacy to an overly harsh and unjust ideology that places profits above people. Far more difficult is the problem of how to feed the beast as resources become scarce and its monster footprint grows ever larger. Some kind of self-cannibalization seems highly likely with unclear consequences for perhaps billions of people.
Let's make explicit the implication: In a period when it's time to rebuild parts of the Executive Branch that write and administer regulations, it will be critically important to ensure that the government is not controlled by a party that continues to see government as the enemy, as something incapable of doing good. (This will, in fact, be considerably more important than fending off the handful of remaining members of the Democratic Party -- the Kucinich wing -- who have never been able to credit business with anything positive.) In this regard, it's very encouraging to see so many excellent economists (including folks like Austan Goolsbee, not to mention a certain former Secretary of Labor) on Obama's team.
Cheers,
R.M. 'Auros' Harman
CADem State Central Committee, A.D. 21
Presidio School of Management, Class of '09
The heart of the problem can be traced to the roots of our lobby system (legalized bribery) and traced to campaign debts and obligations. It all comes down to MONEY.
Our political system has WEALTH opportunity as its key motivation. Nobody runs for office for altruistic reasons. They all have religious or money motivations.
We need both campaign reform, lobby reform, and government salary reform. These effort will provide politicians with sufficient increases in wealth that would then align their civil service towards the interest of American's long term viability.
We need to get both the corporations and religious zealots out of government (not to mention the cold-war industrial war machine military types).
If you are going to pay congress critters lots of money be sure to tax them every possible way so they'll know just how it feels.
It is time for a new era- or rather an old one- We need Eisenhower style tax structure back on investments. Top Bracket 90%. Suck the liquidity out of the market and the dollar WILL be strong again- rare and hard to get, but strong.
And why stop at Eisenhower?
Surely, the thing American corporations really deserve is a good, sharp stint of communism...
Now, that could be Maoism, down the barrel of a gun, or a peaceful council communism... I'm in favor of the later, of course, but I wouldn't want to stand between people and a better life for too long...
Half-measures are for tiny problems.
The reason to stop at Eisenhower is simple- look at history. The single greatest period of growth for the middle class, in any country, in the last 1600 years, was America in the 1950s.
Not communism (though most of the communist experiments were either small or flawed by a criminal leadership). Not free-enterprise, regulation free capitalism either- America since 1980 has seen huge growths in the numbers of rich people and people below the poverty line with respect to total population, but negative growth in the middle class.
No, it was the cooperation of national interest in WWII that started Big Government and Big Corporations working together for the common good- and that continued until about 1965 or so, a few years after the Kennedy tax cuts.
I suggest that unless *forced* to be good citizens, neither politicians nor corporations can be trusted to be even patriotic enough to provide for their own families.
I'm afraid that those who are more concerned with social justice than the largest economic return.
Suppose history showed that the greatest economic growth came during fascism, or slavery? Would that then be a compelling reason to pursue either?
The simple fact that Europe was leveled, and we were rebuilding it, may have had something to do with it.
Sadly, conspicuous consumption and very heavy military spending almost certainly did too.
If you wish to always select the most successful past results and apply them to the present, you'd best hope the past resembles the present... and there is much ugliness in the past you're coloring over-- racial inequality, gender inequality, McCarthyism...
correction:
I'm afraid that those who are more concerned with social justice than the largest economic return aren't going to agree
Your pendulum analogy is exactly right. So many people seem to be at one extreme or the other. My solution is usually to vote for the opposite of what is currently in power. I'm curious whether you think Obama or McCain is more likely to come down in the center. I worry that Obama will be too anti business and McCain will assume that big corpations can do no wrong. Of course having an executive of one party and a legislature controlled by the other is another way to avoid the extremes of the pendulum swings.
You think George Bush is a free-marketer? Clearly you have no idea what a free market actually is.
seebert@aracnet.com,
Why are you saying it stopped with Kennedy's tax cuts? Lyndon B. Johnson's war on poverty saw average annual growth rates of 4% per capita. That's unmatched by any other president. Is it the ghost of Vietnam?
Earmarks, pork barrel spending, no accountability. Oh yeah, we're in good hands with the Government,
I agree with the majority of your post. But, one thing we don't need is big business. We need business but we don't need big business. Big business distorts markets with anti-competitive practices. Most importantly, anti-labor practices. It restricts the free flow of labor and stunts wages. For those who don't study history, the Great Depression was thought to be exacerbated by monopolies by a few fringe thinking economists. They were right. There was no competition in certain markets and therefore companies, not just banks, hoarded cash, fired people, refused to spend on innovation and new products and therefore created no new demand and perpetuated the slowdown.
And for the first twenty years the result was largely good - a buoyant economy, a bullish stock market, a strong dollar.
Largely good? How can you suggest that an economy where the distance between rich and poor grew so much, the number of poor grew, and families MUST have two earners to sustain a middle class lifestyle as "good".
It's been good for big business, good for GDP, good for rich peope -- but it has not been good for Americans.
More Democratic party line B.S. the old flip the coin logic from inside the beltway. First of all we need to get rid of the current two political parties and the entrenched power structure they have both created in D.C., then and only then can the country expect to generate any new thoughtful political and economic solutions.
b.dewhirst said...
"Now, that could be Maoism, down the barrel of a gun, or a peaceful council communism... I'm in favor of the later, of course, but I wouldn't want to stand between people and a better life for too long"...
Agreed.
Anonymous said...
"But, one thing we don't need is big business".
Amen. Corporations are legally bound to maximize profits for shareholders. We all know the ramifications of this illogic.
A first for me...I actually agree with Robert Reich. "Business" is going to get what it deserves due to the many examples of lack of responsible behavior cited. Unfortunately, the "good" may become hamstringed by regulation along with the "bad." For several reasons, including concern for increased, burdensome, counterproductive regulation, I closed my business this year. Whatever increased regulation ensues from an Obama administration, lets hope that we don't kill small and medium size businesses in the zeal to punish the big ones for the prior bad acts of some.
Doc:
Interesting premise but one wonders whether you have factored in progress.
Historically the pendulum could swing to and fro and the two major players, government and big business, went along for lack of alternatives. Globalization altered that model significantly.
Big business now has options that were previously not viable. Tighten the screws too tight and even more production and financial activity goes overseas.
I'm in your regulatory camp big time, but I keep coming back to the thought that big business, rather, huge business, has us by the "shorts".
I think you are giving too much credit to the "deregulated economy" and the anti 'big government' attitude for the spectular growth in the past quarter century. You are completely neglecting the economic impact of the US Government borrowing some 8 trillion dollars and spending it to stimulate growth. That would be like the average household racking up $35,000.00 in credit card debt over a few years. Of course they would enjoy prosperity, at least until they couldn't borrow anymore and the bills came due. One can only guess what the country, and the economy, would be like today if Uncle Sam didn't dump those 8 trillions of 'credit card' spending into the system!
Reich has missed the point again. The choice is not between big government and big business, the two go hand in hand as government regulation protects big business and stomps out competition from small business. Perfect example - government's solution to Enron, the Sarbox act that has been a huge hamper to small corporations.
To get the economy back on track we need to stop allowing politicians to tell us they have the solution to our problems while big corporations line their pockets(see http://www.nytimes.com/2008/06/23/us/politics/23ethanol.html?em&ex=1214366400&en=bf288b4414f2c278&ei=5087 and http://www.ft.com/cms/s/0/a895bf66-3cbc-11dd-b958-0000779fd2ac.html.) The solution is not big government but economic freedom.
Isn't anyone else skeptical of a government official preaching the needs of more government power over our lives?
Also - notsofast, have you ever considered the defintion of a profit? A profit is simply the value which has been added to a society, it is paying the cost at which owners value a resource and recieving a greater amount from customers who place a greater value on the output. What do you find so inherently wrong with this? Isn't it preferable to imminent domain or taxation in which government takes its resources from the owners by force?
I guess Warren Buffet and Bill Gates, to name just two folk, are a lot more of "society" than I am...
The trouble with your definition of profit is that... it has very little to do with common-english statements like "GM makes record profits this year."
Society is the beneficiary of their profits. They are making goods and services available to us that would never have been imaginable without them, using available resources we had valued less. Don't be jealous of the fact that they should get to keep the difference. Microsoft is a major reason we are even able to have this discussion, Bill Gates' extraordinary pay is certainly justified.
The definition of profit applies to all situations. If GM is fortunate enough to one day see that quote again it will be because the resources they used -the metals and the time of their workers etc.- had less oportunity cost than the value that their cars bring to custumers like me, Bill Gates and even you.
Warren Buffet doesn't make a thing.
Were those businesses run as non-profit enterprises, there would be more goods available-- with every employee making the same money, just without enriching wealthy stockholders and CEOs.
Profit gained by a company is money lost from workers and consumers.
This is all without mentioning the costs companies such as these externalize...
FD said...
"Also - notsofast, have you ever considered the defintion of a profit? A profit is simply the value which has been added to a society, it is paying the cost at which owners value a resource and recieving a greater amount from customers who place a greater value on the output. What do you find so inherently wrong with this?"
Everything. Why does someone have to profit from adding something to society? People starve because they can’t afford to pay for your “value” of food not to mention the exploitation of workers which occurs during production.
"Isn't it preferable to imminent domain or taxation in which government takes its resources from the owners by force?"
Not at all. These are far preferable to capitalist exploitation because there’s usually an element of something dedicated to the common good.
Ok, I didn’t realize I was talking to pure socialists. I would be interested to hear why you believe the USSR collapsed, and why communist countries continue to stagnate while countries that give back the freedom to make economic decisions to its people prosper.
Also I wonder why we are willing to give so many of our resources to a man who doesn’t do anything?
The fact is non-profit companies would not create more goods because they are not incented to do so. But incentives aside, without profits and capitalism we have no way of knowing how goods and services are valued, the main problem with the central planning in the USSR. Do you know how much time a given worker should devote to assembling a car versus spending time with his family? The best person to make that decision is the worker, and to do that he must know how his time will be valued by society with the resources he is given back with his pay.
You both are isolating economic functions and failing to see the system play out as a whole. Remember the basic premise of economics, peoples wants are without limit but our resources are not. How does your system solve that problem?
I'd be interested to hear whether you are still beating your wife, but we can come back to that one...
Perhaps those 'socialist' countries spent too much on their militaries... (Sweden seems to be doing quite well, on the other hand...)
As for economic freedom... where can I buy an electric car again?
We don't 'willingly give' our resources who doesn't do something... his superior economic position allows him to take them. Mr. Buffet isn't that bad of a guy, all things considered (after all, he does want his own taxes raised), but he's playing by the rules society has set. Those rules are broken.
As you've returned to the USSR... when you beat your wife, do you use a rod, or your open hand?
I'm not advocating central planning.
You can read about Parecon for yourself... after you get back from beating your wife.
FD said...
"Ok, I didn’t realize I was talking to pure socialists".
Not exactly. I like many of the ideas of libertarian socialism. These ideas come from many; some of the best known are Kropotkin, Bookchin and Chomsky.
Agree with b. dewhirst that central planning by elitists is unacceptable.
You further said..."Remember the basic premise of economics, peoples wants are without limit but our resources are not."
The part about wants is capitalist ideology propaganda and nothing more.
fd:
Ok, I didn’t realize I was talking to pure socialists. I would be interested to hear why you believe the USSR collapsed, and why communist countries continue to stagnate while countries that give back the freedom to make economic decisions to its people prosper.
I'd go find some of those old USSR guys to ask but they're so hard to find nowadays.
Is it ok with you if I just talk with the Chinese government and ask them about their stagnation?
Dr. Reich,
Having observed closely our social-economic pendulum swings for over 40 years, I'm overwhelmed by how the Party who claims wisdom of its ideology in the loudest and most repetitive manner often usually dominates the political-cultural landscape for long periods ... irregardless of veracity or realism of those strong voices, arrogantly flouting superiority of their rational thinking as the ultimate cure-all to all problems.
My conclusion is our culture is caught in a caricature two-party system where each party spends most of its time trying to denigrate the other rather than thinking of exploiting, at least 50% of the time, the best of each other´s ideals/ideas in the interest of All Americans. For pure Capitalism without Prudence and a Fair Playing field is a lost basic human norm... worst still it´s destroying our community spirit as a nation.
Therefore, I've never been surprised, Dr. Reich, that for each U.S. party in power the pendulum gravitates until the party reaches its excessive limitations, thereby requiring the next winning party to come in and proceed to do the same.
We Americans revel in excess and have an inherent capabilty to find a balance between where the best ideas and where an economic model embracing a balanced mixture of consumption/investment/savings/ social safety dynamics lies ... so this insight remains dormant, victim of self-rightous `either or´ ideology with resultant divisions intensified by selfish pandering to voters.
We are out-of-balance in many things -- most of all in exercising our critical judgement and God-given facilities of
creative Common-sense and fair play for All Americans.
Indeed, in this surrealistic cultural theater, Profits do come before People and Party does come before Country. These are the deep root causes of the complex problems we are now faced with. Unless we face this reality, our childrens´ future is hardly a rosy one.
Shortly, I hope to present some historical information about our economy´s historical results that exposes the mythical demogoguery we are subjected to about the performances of Republican and Democratic administrations since President Carter... i.e., the constantly proselytized dogmatic policy vacillations between conservatives and liberals with nothing constructive and creative in between!
Please do Art. Can you ask them how great its been to watch their poverty rate fall from 53% in 1981 to 8% in 2001 since they began to liberalize the economy in 1978. While you're there why don't you stop by Vietnam and ask them how they've done since they moved to a market based economy in 1986.
I would argue that the excessive de-regulation begun under Reagan encouraged irresponsible corporate behavior and corresponding financial scandals long before Enron.
Anyone remember the Savings & Loan Crisis of the 1980s?
fd:
Thanks for the good questions.
While I'm at it I'll ask how they intermingle government control and management of their market economies so successfully. Something that so many Americans can't seem to comprehend.
The point being, my friend, is that is what most are arguing here. No one is suggesting pure socialism nor communism. The argument is, that laissez faire capitalism does not work either. That is if your objective is the "general welfare".
I do think if we were to employ some of the Chinese laws for greed, avarice and fraud, we might see a change of attitude among America's great corporations and their executives.
Art-
But what you are missing is that the reason these countries have seen higher growth rates is not because they have found the "magical mix" between economic liberty and government control, rather they have been more successful because they continue to move to a more market based economy. Throughout history, countries that have opened their economies up to the market have always realized higher economic growth, and moves in the opposite direction have lead to economic destruction.
My objective is general welfare, but that does not mean the same amount of goods to all people, as I recognize that goods do not equate to happiness. Once we all realize that happiness is derived not from what we have but doing the most with what we have been given I think we will all be better off.
FD, we're not interested in your religion, nor do we possess the faith to see history through your rosy lens.
Dr. Reich,
Sorry for late correction 4th paragarph:
We Americans revel in excess and have an inherent Incapability to find ....
fd:
I'll start with your closing statement because I find it as a step toward another philosophy we are familiar with.
Once we all realize that happiness is derived not from what we have but doing the most with what we have been given I think we will all be better off.
Not quite the same but sounds eerily similar to: From each according to his abilities, to each according to his needs.
I'm not missing anything. You attempt to assess a very complex process and reduce it to some simplistic, idealistic summary of Utopia.
Looking at our economic history you can see the cycles of greed and wealth, after industrialization, accruing to the few, until the government steps in and levels the playing field through a variety of regulation and social welfare programs. To Dr. Reich's point, the government can become an overzealous parent and tend to stifle economic advancement. When that happens a correction may be needed. All too often in the correction process, the change agents are just as overzealous and they reset the system to its original direction, away from the general welfare and towards the greatest good for the few rather than the many. We are there once again.
Those of you who envision the American way as the only answer overlook the vast number of inequities and wave the flag of American superiority, by comparing us to Europe or Russia or some other example of slower growing, backward or stagnating economies. The problem with that is what is magical about superior economic growth if so many are left behind? Europe, for example, has come from devastation, following WWII, to become a viable competitor with us on world markets, even with slower economic growth, while at the same time establishing far better welfare programs for those left at the bus stop. Russia, or the USSR, in 1917, was an agrarian, totally backward society, basically with an illiterate populace. Yet, they managed to beat us into outer space and neutralize us in nuclear weaponry by the 1960s. All without a market oriented economy.
Granted, the USSR, at the other end of the economic continuum, also failed to provide for all of their people and eventually that proved fatal. It might be interesting to be able to see how they would have faired if they had not directed so much of their resources to military spending.
There is no argument that market oriented societies can provide a faster, perhaps better, road to economic growth. As in any process, excessiveness, is always the heart of the problem. No doubt profits are critical to maintain growth and further innovation. At what point do profits become excessive? At what point do income disparities between executives and workers become detrimental to the whole process? Is it better to have excess profits or to provide more jobs?
There are two major fallacies with capitalism. The first is the absence of a moral value structure. A complete void regarding fairness and the general welfare, unless there is a profit to be made by attending to it. The second is that the only measure of success in capitalism is wealth accumulation. Be it a company or its owners or its executives, higher incomes drive the engine.
Few companies spend millions for the welfare of their employees unless coerced by competition or labor unions. Companies, see Exxon, etc., make outlandish, unearned profits, yet whine and wail about tax burdens or government regulation. Hedge fund operators make billions a year and then cry like babies and threaten politicians if someone dares to suggest a 15% tax rate is too little.
Ultimately, communism, socialism and free market capitalism all lead to the same point. Some isms get us there faster than others.
Fd - your poverty statistics are just flat wrong. According to the U.S. Bureau of the Census, the poverty rate was 14% in 1981, and 12.1% in 2001. Go to the U.S. Census Bureau website if you don't believe me.
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