Declining US Power: Standard and Poor Downgrades US Government Debt

After the American Century

The decision is a milestone on the road to decline. Standard and Poor has decided that US government debt is no longer worthy of the highest trust. It has only been downgraded slightly, but the meaning of this event is huge. The US dollar and more specjfically US government debt has been the definition of the safest place to put your money since c. 1941. No longer. A canny investor today would want to spread the risk a bit, and also would expect to be paid a bit higher interest for investing in US government securities. The AAA rating that the US has lost is retained by Germany, Norway, Denmark, Sweden, and the UK, so these currencies will be strengthened -- something that is good but not entirely a benefit, as it hurts their exports.

The American taxpayer suddenly has a much higher debt to pay back, as the interest rate will now rise accordingly. It will cost billions of dollars that might have been used to jump-start the economy or build green energy systems. The long free ride is over. The US taxpayer will have to learn, and then have to teach the Republican Party, that a nation must pay its debts. It has to look credit-worthy. It has to have a credible tax code that generates enough income to pay the bills.

Sadly, I predict that things will get worse before they get better. I fear that instead of raising enough revenue and/or cutting enough programs to be credible, the Democrats and Republicans will wrangle and point fingers and carry their discussions into the 2012 political campaign. If they do so, the credibility of US government securities will continue to decline.

Meanwhile, China has a huge surplus in trade and no such problems. The shift of global power is evident.

Obama After 18 Months

After the American Century

It has only been eighteen months since George Bush left the White House, but already the American public seems to be suffering from amnesia. The American economy is not recovering quickly from its near collapse under Bush, and this weakness is nevertheless laid at Obama’s door. His popularity has fallen below 50% for some time now. The great bank bailout has been reasonably successful, with much of the money being paid back, yet many Americans talk about the bailout as though it was not a loan but a permanent part of the national debt. The re-regulation of Wall Street has gone through Congress, yet Republicans proclaim that Obama has now hobbled the capitalist horse. (For a reality check, consider the Canadian banks which did not need a bailout because they were restrained by sensible legislation.)

And then there is the endlessly repeated, and endlessly stupid, claim that the health care bill is socialistic. This would be silly if so many did not believe it. If Obama really had created a socialistic health care system then (1) he would have  given free medical care to all citizens and permanent residents, in exchange for higher taxes, (2) he would have put all doctors and nurses in public hospitals on the government payroll, and (3) prescription medicine would be free or heavily subsidized.  This is pretty much what the health care system looks like in Denmark, England, or Germany. But the Obama plan did not do any of these things. It made health care available to all, in exchange for payment to private insurers. It left hospitals under the same management as before, and so forth. The Obama plan is an improvement, but it is not much like a European plan.

My American readers might recall that they do have socialistic elements in their government, notably the fire departments which are paid for by everyone and put out all fires regardless of where they are or whose property it is. The theory seems to be that minimizing conflagrations is a good thing for the neighborhood. Free public libraries are also rather socialistic, though this did not stop that famous capitalist Andrew Carnegie from building quite a few of them. Then there are those terribly socialistic institutions, the free public schools, and so on.

Today’s column clearly has only that most general of subjects, the instability of American public opinion, which so often is based not on logic but pavlovian  responses to key words and silly phrases. The circus entrepreneur P. T. Barnum  once said that no one ever went broke because he underestimated the American public. By November all too many Americans will be convinced that not Bush but Obama undermined the economy by over-spending the budget, letting the banks get out of control, and imposing a “socialistic health” care system. But it was Bush who cut taxes, especially for the wealthy and then overspent the budget by billions in the unfinanced wars in Iraq and Afghanistan. And it was the Bush Administration that failed to keep a watchful eye on the banks and Wall Street, until the economy was near collapse before the 2008 election even took place.

In American political culture, eighteen months is a long time, and some seem to have trouble seeing cause and effect, or separating substance form allegation. It is not easy to be President in the best of times, and far harder than in the present. On the whole, Obama has done a good job. But Americans are an impatient people, and in the off year elections the party that lost the last time usually makes at least a partial comeback. We shall see. 

After Health Care, Where To Next?

After the American Century

The Obama Administration has used far more time on the health care legislation than one might have thought possible. The victory seems to have come, at last, but many other problems await. It seems the Republicans do not want to accept that they have lost and want to keep on fighting the health care battle, which is not exactly a constructive approach.

While the battle of health care legislation has raged, legislation regulating Wall Street has been side-tracked, along with vital bills to promote green energy and move the economy toward the next energy transition. It has been sad to watch China charge ahead in this area for the last year, while Congress proved unable to multitask. 

Indeed, the Republicans seem unable to perform even a single task, having become enamored of just saying no. Being against all policy initiatives at a time when the US world position is slipping will be harshly criticized by future historians, I submit.

The US badly needs immigration reform, too, and lawmakers may have to take a look at the tax code which seems to reward companies that export jobs to offshore factories. In short, it is time for American lawmakers to find common ground on important issues and move forward. If near stalemate continues, the nation will suffer. 

The Weakening Dollar

After the American Century

For much of the twentieth century the American dollar was the benchmark currency. Whenever a crisis arose, world investors moved money into the dollar. For decades, the dollar was a good investment for anyone living in an inflation-prone economy, like those in Latin America or Africa. Likewise, because the dollar was stable, it was the preferred currency in the oil market.

The apparent rock-like stability of the dollar began to weaken already in the 1970s, when President Richard Nixon took the dollar off the gold standard. Until then, at least for very large investors, one could redeem dollars in gold. After then, the dollar was a little less rock-like, but on the whole was the preferred currency in any crisis. One could see this again in the wake of the financial collapse during the fall of 2008. Even though American banks were largely responsible for the sudden downturn, many people around the world instinctively moved money into the dollar.

Those days are over, and probably over forever. Rationally speaking, the dollar is not a smart investment at the moment. It has been declining in value for months, and has reached its lowest point in 14 years against the Japanese yen. The current interest rate on dollar savings accounts is also very low, so that even assuming the dollar's decline ends soon, nevertheless, the rate of return is better in the Euro zone.

The Chinese, meanwhile, are keeping their currency artificially weak, as a way to stimulate exports and continue building up already massive foreign reserves. In effect, the United States is letting its currency fall in value for the same reason, to stimulate exports and dampen the desire for imports. But China is way ahead in this race to the bottom, while Japan and Europe are both being hurt. Because China and to a lesser extent the United States have weak currencies, both Japanese and European goods cost more - forcing some factories to close or to move overseas where labor costs are lower. Japan and Europe have higher unemployment and fewer exports because their currency is too strong.

This is a dangerous game for all concerned. As President Obama pointedly told the Chinese leadership on his state visit, Asian economies need to play by the same rules as the rest of the world. Asian consumers, particularly in China, need to buy more, and their currencies should be worth more, to bring the world's economic system into balance.

For the United States, the danger is that it will soon be forced to increase interest rates in order to fund its growing national debt. This will increase the dollar's value, but it will also slow or halt economic recovery. This in turn will reduce American demand for foreign goods, as the economy stagnates.

Unfortunately, precisely this scenario (in which the US weakens) might be what China wants. For if it comes to pass, then China's massive holdings in American dollars will increase in value, while the US itself will grow slowly or not at all. The Chinese economy might then outpace US growth by 5% or more per year, until, in perhaps a decade, perhaps less, the US currency would enter a more definitive decline.

I hope this scenario is wrong. Should it prove at all accurate, then the dollar's reign as the world's reserve currency might not last longer than about 2020. Clearly this is not a happy thought for anyone with a pension or investments in the United States. Just as importantly, the relative decline of the US economy vis-a-vis the rest of the world will soon necessitate a major realignment that takes account of new players: Brazil, India, Indonesia, and most of all, China.

Obama's Success with the Economy

After the American Century

As the Obamas go on a 9 day vacation, one can look back at eight months in office. Given the enormity of the economic crisis he faced, it is remarkable that even as he takes a well eared rest, bankers around the world are announcing that the crisis seems to be easing. Mærsk, which runs one of the world's largest container ship operations, also sees clear signs that the economy has turned. And who would have imagined, back in December, that the virtually bankrupt American International Group Inc (AIG) would announce here in August that it would be able to repay its massive government loans?

It is tempting to give Obama all the credit, and certainly he deserves much of it. He boldly pressed through a large deficit spending plan, stabilizing the banks. He also made some hard choices about the American automotive industry, radically reshaping General Motors and Chrysler in the process. While unemployed has risen, this is characteristic of all such crises, and cannot be expected to fall again just yet. Overall, Obama can be given high marks for preventing a meltdown in the US economy that would have had severe repercussions around the world.

One must also recognize, however, that the structure of the world economy as a whole is shifting, and in the future it will not be quite as focused on the success or failure of the United States. Unlike Europe and the US, China and India have not suffered shrinkage in their economies, only slightly slower growth. The Economist forecasts a rather robust 8% growth for China in both 2009 and 2010, and it will maintain a large trade surplus with the rest of the world. India is growing almost as fast, at a rate of over 6%. In other words, Obama and the Democrats have stopped a slide in the American economy, which may regain the ground it lost in a year or two. But China and India are forging rapidly ahead, increasing their importance to the world economy as a whole.

In short, Obama's programs seem to be working. The American economy is reviving. But the real story, once we have some decades of perspective, will almost certainly be that the crisis of 2008 was the last time that the United States mattered so much to the world economy as a whole.

US Unemployment Benefits Running Out

After the American Century

Unemployment means something much worse in the United States than in much of western Europe. In nations like Denmark, Norway, Germany, or Holland, the unemployed receive higher benefits than in the US, and these benefits last much longer, often several years. At the same time, the European unemployed are given access to free training courses to develop the skills needed in the job market. Best of all, regardless of whether they work or are unemployed, these workers get full health coverage.

In the United States, unemployment benefits vary somewhat by state, but in normal times are for only 39 weeks. In the current crisis the Congress has extended them up to 72 weeks, or about 16 months. As a result, by the end of July "only" 100,000 Americans had exhausted their benefits. They receive nothing at all. In most cases, they have no health insurance.

The situation is about to become much worse. The financial crisis emerged rather suddenly a year ago, and accordingly the number of the unemployed who will receive no benefits at all is about to rise dramatically. It appears that already in September 500,000 people will have no benefits. By Christmas, the number could be 1.5 million. (Click here for more details.)

When that many people fall into destitution, they will lose their homes. After foreclosure, some will be able to move in with relatives, but many will be forced literally into the streets. They will overwhelm charities and public shelters. If nothing is done, Americans may see scenes reminiscent of the Great Depression. Cities and states, already struggling with deficits, and already making considerable cutbacks in services, will not be able to respond to the crisis. If unemployment benefits are not extended, the economy as a whole will also suffer, as the housing market will decline. The gap between rich and poor will widen.

At the same time, the Obama Administration is trying to pass a comprehensive health plan, amid considerable opposition from doctors and insurance companies. In short, the need for that plan will be increasing, but the ability to pay for it will be declining. Thanks to the ineptitude of the Bush years, the US may feel it is unable to afford the change it needs.

But not to worry. It appears that the banks are solvent again and giving big bonuses again.

General Electric Models the Past and Future

After the American Century

Back in 1980s I was something of an expert on the history of General Electric, having written a book about it. Since then I have casually followed the company, as part of my interest in the history of technology, but I have not done any research directly on GE itself. Nevertheless, from a historical viewpoint, GE is a fascinating study in what has happened to the American economy during the last century.

GE began as a merger in the 1890s between a number of electrical manufacturing companies, including those of Thomas Edison. It held a large clutch of valuable patents in electrical lighting, transmission, and so forth, and it was also wise enough to establish the first corporate research and development center in the United States, in 1900. It gave inventors and scientists security in return for patent rights, and managed to parlay its early dominance in the industry into a long-term dominance in most things electrical, including radio, television, and much else.

GE also bought promising small companies that made consumer goods, such as irons or toasters and developed these products. At first each kept its own brand identity, but around 1920 the company was convinced by the legendary advertising man, Bruce Barton, to consolidate all its consumer goods and sell them under the single logo of GE. For generations afterwards the GE label was an assurance of quality, and many consumers bought their refrigerators, stoves, televisions, and other large electrical purchases from GE, which remained one of the largest corporations in the United States for all of the twentieth century.

Of course GE made some mistakes, like missing the emerging computer revolution, and it was unlucky in taking a leading role in nuclear power, which became unacceptable to the American public after the Three Mile Island Accident. Still, until the last quarter of the twentieth century it remained a powerhouse, and a corporation loved by investors, because from the 1930s it just never missed a dividend, and usually paid a little more than expected. GE was the definition of a blue-chip stock.

But last week GE was on the ropes, as it announced a big cut in its dividends. Its stock price fell to little more than $6 a share, a two-thirds drop over just a few months, and even since 2007 when it was selling for $37.

What happened? GE changed its winning strategy. Instead of focusing exclusively on being the best in the world at its core businesses, electrical power generation and electrical consumer goods, its management decided to branch out. It bought coal mines, for example, and got into medical services. This seemed to make sense, as Asian companies were making the appliances at prices so low there was little profit in it, compared to the 1950s. Most tellingly, GE made a lot of money by lending other people money. GE competed with banks, through a financial division.

For years that finance division was the most profitable part of the company. No more. In the late Bush marketplace, GE's lending was apparently no more profitable than the banks' mortgages. Depending on what rumor you believe, the debt ranges from a paltry billion (which I can easily handle) or two to maybe 40 billion. No one outside the company seems to know. And so the stock falls.

Is this not, in miniature, the history of the American economy since 1900? From blue collar jobs and heavy industry to white collar jobs in finance? From patent control and market dominance to loss of control over markets? From blue chip stocks, rock solid in value, to a faltering stock price amid uncertainties about the company?

If GE was the model company for the 20th century, can it revive to be a model for the new century? I submit that GE should get back to its roots. It still has terrific research labs, excellent consumer products, and exciting new alternative energy technologies. It could help to develop a national smart transmission grid, new mass transit, and much else. But to do so, it might need to split itself into two companies, letting the financial arm go it alone, and if necessary, fall into bankruptcy.

[Update: On June 26, 2009, GE was selling for just under $12.00 a share, and had been trading at higher prices since this piece was written, briefly even getting over $16.]

Obama's Tax Plan Would Increase Equality

After the American Century

President Obama has been forced to spend much of his first month in office dealing with Bush's mistakes, particularly economic mistakes. With the submission of a new budget proposal, however, he has begun to present his own vision. He does not want to spend all his time being a fireman putting out Republican fires. Rather, he wants to redesign the economic fabric so that the economy is stronger and more resilient.

In the short term, Obama is spending lavishly to try to escape the mess Bush created. That is the gigantic budget one reads about. But longer term Obama wants to return to the tax system of that most dangerous radical, Dwight D. Eisenhower. During Ike's presidency (1953-1961) taxes on the wealthiest Americans were high, and although adjusted they remained so during the 1960s as well.

During these years the real income of the middle class (in other words their income once adjusting for inflation), rose steadily. After the weak economy of the 1970s, however, Ronald Reagan pushed through dramatic reductions in the tax rate on the wealthy, which began a sizable redistribution of wealth that has lasted for almost thirty years. I lay out the basics of this change in Contemporary American Society (161-166). Just before Reagan lowered taxes on the wealthiest Americans, the top fifth of all US citizens received 43.7% of all income, while the bottom fifth got just 4.3%. In other words, the top fifth made ten times as much as the bottom fifth. By 2005 the poorest fifth had sunk to just 3.4%, while the top fifth received 51.3%. The top fifth made fifteen times as much as the bottom fifth.

What about the middle 60%, the second, third, and fourth fifth? During the same 25 years all of them, the entire middle class, lost out to the wealthiest fifth. In short, between 1980 and 2005, fully 80% of all Americans saw their share in the nation's wealth drop.

With the collapse of the Reagan-Bush economy and its favoritism for the rich, it is time for a new tax code. Something radical. Something that Dwight D. Eisenhower and Harry Truman each supported. That something is familiar to anyone in Scandinavia, and is called progressive taxation. The object of public policy is not to take money from the poor and middle class and give it to the rich, but to give all classes an equal chance to increase their stake in society.

Expect to hear howls of protest from the Republicans and cries of socialism and fears of big government, and the usual rhetoric of the right. For Obama wants to reverse the Reagan revolution. He wants not just to end the Bush tax cuts that threw the budget into deficit years ago, but also to raise taxes on the top fifth of society, in order to pay for the sweeping changes he wants in energy policy, education, and medical care. Over the next decade, Obama wants to get almost $1 trillion in new taxes from the wealthiest Americans. In case you want to know, they are defined as people with incomes of more than $250,000 a year. (More than 1.4oo,000 DK).

Obama is also hoping to save some money through cuts to the Defense Department, partly from winding down the engagement in Iraq and partly through cutting spending on programs that have outlived their usefulness with the end of the Cold War. I wish him luck but am not too optimistic about this phase of his plans. One would have thought that the fall of communism might have reduced defense spending drastically. Back in c. 1990 there was lots of talk of a "peace dividend." There was talk of spending more money on infrastructure, notably decaying bridges and roads. But there was not much of a peace dividend then, and Obama's first defense budget is larger, not smaller, for the two year period of 2009 & 2010, weighing in at a gigantic $1.3 trillion.

Realistically, Obama is more likely to move in the direction of fiscal responsibility via higher taxes on the rich. He will probably be accused of class warfare, but he is trying to end the pillaging of the poor that began under Ronald Reagan. Obama is rejecting "trickle down" economics. He wants the US government to take more responsibility for health and education, and to give Americans back the growth and equality they had in the prosperous 1950s and 1960s. No doubt he will be called a radical and a socialist for trying to do this. Few sensible people ever mistook Dwight D. Eisenhower a socialist.

For a Nobel Prize-winning economist's positive evaluation of the Obama budget, click here.

Exective Pay and the Angry Public

After the American Century

The average American is furious at Wall Street firms, banks, fat-cat executives, and government bailouts, which do not seem to be helping the ordinary people. But the executives themselves appear only vaguely aware of the unjust disparities between their incomes and those of most people. President Obama has proposed that firms receiving Washington bailouts must limit executive salaries to $500,000.

There is a passage in Tom Wolfe's Bonfire of the Vanities which explains how easily a salary of $1 million a year disappears in New York City. The protagonist of that novel feels he must live in a certain part of Manhattan, send his children to private school, and drive German car, which requires a protected indoor parking space, and so on. The joke is that the monthly $80,000 always disappears before payday, and at the end of the month he feels a little pinched for spending money just like anyone else.

For an up-dated, real life estimation of the costs of being an executive in New York City, an article in the New York Times by Allen Salkin explains how difficult (read impossible) it will be to get along on an annual salary of "only" $500,000 (2.8 million kroner). The assumption is that such executives must have an armed chauffeur, a second summer house that costs $4 million (more than 20 million kroner), and so forth. Reading the piece, one is not entirely certain that the reporter can see the absurdity of these "needs."

But for the record, here are a few comparative facts and figures. Salkin reports that such an executive (defined as male with a non-working spouse) has the following expenses:

Mortgage and monthly fee for a Coop $192,000
Nanny $45,000
Private School $32,000 (per child)
Garage $8400
Driver $75,000-125,00
Personal trainer (3 times a week) $12,000
Formal gowns (for "charity balls"), $35,000
etc.

It is perfectly obvious to the 99.9% of the world that does not have an income of $1 million or more a year, that this mortgage is too expensive and that all the other items on the list are unnecessary. Indeed, in New York City even a car is unnecessary, as they have a subway and taxis there the last time I checked.

Now consider the expenditures of the average American family, from the Statistical Abstract of the United States.

Annual income: $48,000 (Black families only $30,800, single mothers, $23,000)
(one tenth the cap Obama has proposed, half what the executive pays for a chauffeur)

House: 6 rooms ( in 2006 before the economy collapsed) $404,000
(one tenth the cost of the executive's summer house)

Automobiles (including monthly payments, insurance, gasoline, etc.) $8,300
(what the executive pays for parking)

Nanny? Are you kidding?
Personal Trainer? The family dog insists on walks
Formal Gowns? Get real.

The average American has every right to be angry, especially when they learn that even as the banks were failing they granted their executives billions in bonuses, paid for by the US taxpayers. But what will be the political consequences of this anger? Will it build up pressure for Obama's programs? Or will it be channeled elsewhere?

Stimulus Package, or Stimulus Interruptus?

After the American Century

Politics is the art of the possible, and a good politician can parlay one success into widened possibilities. Surely the desire to widen his consensus is what has Obama going to visit the Republicans, seeking their support for the $825 billion stimulus package. The Republicans, having learned nothing much from the failure of the Bush approach to the economy, want more tax cuts, while the Democrats point out that if you don't have a job, a tax cut is useless. The Obama plan does include tax cuts of $275 billion, so that is part of the package, but the majority of the money would be spent on projects. Since a staggering 75,000 layoffs were announced yesterday alone, the need for direct government spending, priming the pump, seems obvious, though not to Republicans, evidently. Most economists agree on this.

But where is the 800 billion going to be spent? The particular projects the Democrats support are in line with Obama's call for a greener society with a comprehensive Internet that reaches all parts of the United States. In effect, he wants to create the equivalent of a Rural Electrification program to link up all parts of the US with cyberspace. This idea has real merit, because studies have shown that better communications reduces the need for as much physical movement, increasing energy intensity. The obvious example would be the shipment of documents as email attachments rather than as special delivery or FED-EX packages. A comprehensive information system will improve productivity and put the entire nation into contact with cyberspace.

Other spending would improve the electrical transmission system, which has not been growing much at all. In fact, deregulation slowed down the building on transmission lines, for reasons that would require a long Blog - actually that required about 3,000 words in chapter five of my new book. But leaving aside the mistakes of the past, the present need is to replace old equipment and expand capacity, because the connections are simply not robust enough.

The Democratic plan does have some pork in it, however, and perhaps Obama can use the Republican complaints to cut out some of that fat. But one man's useless pork is someone else's bacon. Or, in this case, condom. For some of the stimulus plan was originally intended to go to family planning, which included purchase of large numbers of condoms. I call that recontaining the stimulus. Obama has apparently agreed to drop the condoms. (Sarah Palin and her oldest daughter could only agree). After all, a baby boom would stimulate the economy both immediately and in the long run.

Now that the condoms are off, as it were, let us hope the Republicans get more excited. Without their support, we might have a filibuster, or stimulus interruptus.

The Honeymoon

After the American Century

New presidents have a honeymoon with the public that lasts a few months in most cases. Obama certainly is having a good honeymoon, with an approval rating of 73%, with only 14% disapproving. Another way to look at this is to recall that Bush's rating fell to around 25%, with some fluctuations. So there is one quarter of the public that supported Bush no matter what he did, and presumably this same group does not like Obama much. He has probably achieved the highest rating possible in the wake of the Republican debacle.

Furthermore, the public is not equally enamoured of Congress, which therefore is in a weak position to oppose his agenda. The chance to achieve real change exists, but the opportunity will not outlast the spring - at least if history is any guide. Were these normal times, Obama could move immediately on creating a new medical system. Instead, he has to use this precious time to fix the Bush economy, and one can only hope that some innovative programs are part of the stimulus package.

Look on the right column of this Blog, and each day you can see precisely how much of Obama's first hundred days remains. That is roughly the honeymoon's length, though the term 100 days comes from Roosevelt's New Deal. FDR accomplished an incredible amount in 1933, in good part because the Depression had already lasted for more than three years, and Congress felt a great urgency to repond. This suggests that, paradoxically, Obama may benefit, in the short term,. if the economy remains weak for a few more months, forcing Congress to act.

Dramatic Collapse of the American Auto Industry

After the American Century

]Update: In 1212 I can look back and see that the Obama Administration did save GM and Chrysler. Not only that, but GMis once again the world's largest car maker. No thanks to the Republicans, however, who were ready to let Detroit die. However, this piece accurately reflects the apprehension and gloom that was widespread in the autumn of 2008.]

It is a dramatic story, the collapse of what used to be the core of American industry. A century ago the automobile industry was rapidly growing in Detroit, with many of the most dynamic companies long since forgotten. The Reo, the Hudson, and the Packard are long gone now. Yet what emerged by 1930 was not quite a monopoly but what came to be called "The Big Three" - beside which remained a few small fry another thirty years, such as Studebaker and Nash Rambler. But the Big Three seemed the stuff of industrial immortality - dominating the US market and expanding into foreign lands as well.

Curiously, the relative strength of the three is inversely related to their age. Walter Chrysler's company is the youngest, though that is not why it is now the weakest. General Motors came about as the merger of five automakers and surpassed the older Ford Motor Company (founded in 1903) to become the world's largest car company, a position it retained for decades.

This is not the place to analyze the gradual decline and fall of all three companies, which would take volumes. But none can doubt that these companies lost their technological edge, with many improvements coming from Europe and Japan. The latter particularly excelled at superior productive systems, requiring fewer workers to produce cars, and offering automobiles with far fewer production mistakes as well.

Yet the current malaise of the industry is also related to its poor leadership on environmental matters. Detroit executives have continually resisted pressures to raise the average miles per gallon of their fleet, and sought ways to escape legal requirements in this area altogether, notably by selling ordinary households SUVs and trucks. In the 1980s and 1990s, a time when less than 3% of all Americans are farmers, the sale of gas-guzzling trucks shot up. Meanwhile, Honda, Toyota, and other foreign producers not only produced more efficient cars, but they began to do so inside the United States.

As a result, where once American lawmakers would rally to support Detroit, today no one has much appetite for the job. Southern lawmakers often have a European or Japanese automobile plant in their state, and they also are typically keen on the idea of free market capitalism. Subsidies are not their way. Environmentalists are disgusted with Detroit's foot-dragging on pollution and car efficiency. The great middle class may be sympathetic to the plight of the workers, but they often own foreign cars themselves, and they suspect that the automobile magnates have made their own problem. Conservatives generally do not want to help the car companies unless they negotiate much less advantageous deals with labor. (In fact, the major cost of making cars is not labor, but this point is lost in most debate.)

Support for the automobile companies is strongest in the states where the jobs will disappear if they collapse entirely - Michigan, Ohio, Indiana, Illinois, and certain districts where assembly plants are located. But so far this local support has not been enough, and no clear plan has yet been developed to save the Big Three.

Worst of all, it is not easy to fix the problems these manufacturers face. It takes years to get from the blueprint of a new model to a factory producing it and a team of mechanics ready to service it. But the Big Three do not have years. GM and Chrysler are almost bankrupt now, and the billions they need will not come from banks. Ford is a little better off, and says it does not need federal money immediately. But the other two do, and even though they have closed down their plants for up a month at Christmas, their debt keeps increasing, because of all the retired autoworkers whose pensions must be paid, because corporate debt must be serviced, and because even non-productive factories have heating bills, insurance, and other fixed costs that keep running.

Meanwhile, the few consumers who are visiting automotive showrooms rightfully worry about purchasing any American car. What good is a guarantee if the company dies? Where are spare parts going to come from, if the manufacturer ceases to exist? This problem is going to get worse before it can conceivably get better. Yet with three million jobs on the line, the collapse of the car industry is just not an acceptable option for either state or national government.

The fate of the automobile companies is a close parallel to the fate of the "American century." We seem suddenly to be entering the afterlife of a once powerful economy.

Giving Pragmatism and Brains a Chance

After the American Century

The rapprochement between Hillary Clinton and Barack Obama apparently has been taking place since June. Clearly neither has such a sensitive ego that it prevents them from seeing the advantages of working together. I admit that I am surprised both that he would ask her to become his Secretary of State and that she would accept. I always thought that being a Senator, especially a high-profile Senator from a large state, was a better position than serving in the cabinet. Being Secretary of State is the most important job there, to be sure, but it is potentially only a four year run, and at best eight years. In contrast, Clinton has such a strong hold on her Senate seat that she could keep it for life.

So far, it seems that Obama's criteria for getting a post in his administration are that one has to be very smart, preferably with an Ivy League education, and not too much of an ideologue. He seems to prefer pragmatists who have Washington experience. He has drawn on many from the Clinton White House, which is not surprising, since to find other Democrats with such experience he would have to go back to 1980, the last year of Carter's administration. Most of his staff are now retired. As with all cabinets, this one almost assuredly looks better before it takes power that it likely will in four years time. But after eight years of ideologues and a less than brilliant president, surely it is time to give pragmatism and brains a chance. This will be novel for Washington lobbyists and for Fox News, not to mention any Republicans who still believe that Obama is a socialist.

As the appointment process proceeds, the contrast increases between the staggering economy and hope that the Obama will be able to turn it around. His announcement yesterday of a major economic stimulus package, ideally to be passed as soon as possible after January 20, clearly is calculated to hearten the market, and to help bridge the 8 week gap between now and the moment he assumes control. Call it "change they need to believe in." If the meltdown continues, Obama may inherit a nationwide crisis so palpable that his plans will be passed quickly. If the economy miraculously improves, he will presumably face a bit more opposition. But either way, I think we can expect passage of a stimulus package that features green energy technologies, tax cuts for the middle class, and incentives for industries to create jobs.

McCain's New Myth - Joe the Plumber

After the American Century

In case anyone missed it, John McCain has tried to make Obama look bad by emphasizing the plight of an Ohio plumber "Joe." The gist of the argument, if it can be called that, is that poor Joe (who it turns out has made racist remarks and is not in fact a licensed plumber) would be taxed by the Obama tax plan, which will raise taxes on those who make more than $250,000 a year, (more than 1.3 million Danish Kroner). Paul Krugman, who is this year's Nobel Prize winner in economics, has demolished this silly myth in a column in the New York Times that I highly recommend.

The Republican gambit, as ever, is to claim the GOP represents a silent middle class white majority. But this mythological group is getting smaller and harder to find, not least because of the Bush tax policies that have hammered the middle class. As Krugman points out, the plumbers of Ohio, on average, make less than $50,000 a year. They are not by any stretch of the imagination close to being potential victims of a tax increase. Rather, all of them have been victims of Bush's 2001 tax cuts for the rich, which McCain wants to make permanent. The plumbers of the nation in 2008 have less real income today than they did in 2001, and their dollar is worth less abroad, too. Worst of all, the middle class is now going to pay for the failed deregulation of Wall Street investment banks, which McCain also supported.

McCain is really quite shameless in lying to hard working people and pretending his policies will not continue to push them down. The Republicans engage in class warfare, but pretend to be the friends of labor. Anyone who doubts this can look at the Statistical Abstract of the United States for 2008, which documents the declining wealth of the working class and the middle class, in more detail than McCain has ever mastered. As I noted a few days ago in his space, according to the Statistical Abstract, from 2000 until 2005, the average white family lost $1,300 in annual income, in constant dollars, and it has gotten worse since then. It would be nice to have a Republican candidate, maybe in 2012, who made valid economic arguments rather than just shouting the same misinformation day after day. McCain has repeated this nonsense about Obama raising taxes for months now. Once a man of honor, he now has no shame.

Obama and the Bush Economic Legacy

After the American Century

The final debate is over, and again the American public has said in polls that Obama won. He has defeated McCain now three times, by a wider margin each time. Joe Biden also defeated Sarah Palin. If this were the World Series, then at 4 - 0 it would be all over. But there are 18 days or so left, when conceivably the Republicans can pull some improbable rabbit out of their economy-battered hat. I doubt it, however.

One thing that has become quite clear in these encounters is that Obama is not easily ruffled. Throughout the campaign, whenever McCain let off a nasty remark or a made an attack, Obama remained cool, even-tempered, often smiling. Voters clearly prefer a man who remains dignified to one who is irate, one who has specific proposals to one who mostly repeats the same generalizations over and over. (See, for example, McCain's utterly vague remarks on Social Security in the second debate.)

It also seems likely that McCain's endless claim that Obama was going to raise taxes simply did not convince anyone, even "Joe the Plumber" in Ohio, who, it now turns out, is not a plumber after all. What I do not really understand is why the Democrats have not said more often that all they want to do is go back to the tax system that worked so well in the Clinton years. No need for fancy explanations, just say the truth, that Bush lowered taxes on the rich, creating a deficit for all Americans to pay off.

While Obama seems likely to win the election on the economy, however, the financial mess he inherits is daunting. I checked the statistics today, and it is absolutely true that the average American, white or Black or Hispanic, lost real income during the Bush years, even before the current financial collapse. According to the Statistical Abstract of the United States, from 2000 until 2005, the average white family lost $1,300 in annual income, in constant dollars. It was worse for African-American families, who averaged a $2,700 loss, and they were starting from a lower income to begin with. For Hispanic Americans the loss was "only" $1000. They did a bit better, on paper, but bear in mind that the undocumented immigrants, of which there are an estimated 10 million now, are largely Hispanic, and they get the lowest wages.

These losses continued in 2006, 2007, and the present year, so that the average American quite literally has been worse off because of George W. Bush's tax policies combined with no real support for unions or for a higher minimum wage. Indeed, as many commentators have pointed out, the Bush Administration oversaw the redistribution of wealth to those who least needed it. The poorest 40% of the American population, who are largely working poor and lower middle class, collectively got more than 13% of all income in 2001 when Bush took office. By 2005, however, this hard-working group, whose health care expenses shot up far faster than inflation, were collectively much worse off, with only 12% of the total income. While they were falling, the next 40% was holding even, i.e. keeping the same share as before. The only group that was getting higher incomes after Bush were the top 20% of wage-earning Americans. This is nothing short of a disgrace, when the economy as a whole was doing well (until two months ago). But it may be hard to redress this economic injustice when the economy is in recession.

Should John McCain somehow win, of course, the unfairness will worsen, and class discrimination continue. It was quite ridiculous to hear McCain call Obama's tax plans a form of class warfare. The unfairness began in 2001, and the Republicans knew exactly what they were doing. If they were honest, they would admit that their fantasies of a deregulated economy lifting all boats led to a tsunami of bad debt.

Republicans Divided Against Themselves

After the American Century

It was the great Republican President Abraham Lincoln who famously declared that a house divided against itself could not stand. On September 29, 2008 the House of Representatives showed that it was so divided that it could not come together to back a bailout plan to save the banking system. One hopes that some new compromise will emerge, but the House has already negotiated for days with the spotlight of the world press upon it. During these negotiations banks were failing all over the world. Both candidates for the presidency as well as the incumbent agreed that the bill ought to be passed, and still a majority of the House did not vote for it. The defeat demonstrates a comprehensive collapse of leadership.

Speaker Pelosi could not get her Democrats to vote for it in sufficient numbers, though a considerable majority did favor it. George Bush, as a lame duck president in the final days of his failed presidency, could not muster the needed support. Nor could John McCain. A shocking two-thirds of the Republican minority failed to vote for it. The 122 Republican votes against the President's bailout package is the core of the problem. The Republicans bear a special responsibility for the mess the banks are in, because they insisted on deregulating the banking system a decade ago, just as they also insisted on deregulating the energy business a few years earlier.

The Bush II era began with massive fraud and corporate failure, most famously the Enron debacle. The public has not entirely forgotten. Now the Bush II era is ending with massive bank failures. These are two examples of deregulation to the point of lax oversight and sloppy governance. Yet in the midst of a collapsing economy, the Republicans have learned nothing, it seems, and cry "socialism" when their own president tries to stop the financial bloodbath before it is too late. It seems the misguided Republican members of the House cannot give up their true religion, which is deregulation.

Understandably, the Democrats are not willing to bail out Bush, and then take the blame for the massive cost. They rightly want this to be a bi-partisan effort. More than 60% of them did vote for it, even so. The Republicans are now damned if they do and damned if they don't. If they continue to play hardball and refuse to vote for a compromise bill, then they will be blamed for all the evil that follows. And if they grudgingly give in during the next few days, the voters will not forget that they put ideology before necessity, and played politics with their future.

As for John McCain, these events have shown he cannot lead the Republicans. It was his chance to rally them into unity, and show he deserves to be president. But he did not unite them. He failed miserably, and not even one representative from his home state of Arizona voted for the bill. The Republicans are divided against themselves. Such a party cannot lead the country, much less anyone else. It cannot even follow. If Lincoln is out there in the great beyond, he must be deeply disturbed to see his party so split and so lacking in leadership.

The world was expecting to see a rabbit come out of the financial hat. Instead, it got instability, uncertainty, incredulity, and knee jerk ideology. Surely some will take what is left of their investments elsewhere, if they can find safer havens less devastated by these developments. This past week has been a sad spectacle fraught with danger. Quite possibly the worst is yet to come - depending on whether this crisis can be resolved. But a recovery bill delayed may turn into a recovery denied.

Next President Weakened by Financial Crisis

After the American Century

The world stock markets have been in turmoil, falling drastically and bouncing back on the news that the US Federal Government will take over huge amounts of bad debt built up by irresponsible banks. Many of them, we now know, were lending out immensely more money than they had themselves, and often lending it to people who could not afford to meet the mortgage payments. Woody Guthrie once said that some men rob you with a six-gun, others with a fountain pen. The investment banks have robbed millions of Americans, not once but twice. First, by getting them into mortgages they could not afford, and second by dumping their mistakes on the taxpayer's doorstep. Elsewhere around the world, people and institutions who bought some of this debt were "only" robbed once.

Just how much this will cost taxpayers is unclear, but early estimates suggest $1 trillion. The US does not have a surplus in its coffers, nor does it currently have a tax system that can cover this sudden additional debt. Both McCain and Obama have been talking about reducing taxes on the middle class, but after this week that may not be realistic.

Foreign investment in US government debt has been keeping the country functioning. In July of 2008 Japan and China each owned more than $500 billion in US Treasury bonds, bills, or notes. Investors from oil exporting nations have bought $174 billion. (Click here for a full list.) Why should Chinese, Japanese, and Saudi investors still buy American debt? Why not buy European government debt which has a higher interest rate? Indeed, will there be enough buyers for $1 trillion in new US treasury bills and bonds? Keep in mind that because the dollar has weakened considerably during the Bush years, such investments may not be profitable.

I hope that I am wrong, but in twenty years historians may see that the autumn of 2008 was the moment when the US lost its leadership of the world economy, and argue that it was the time when the hegemony of the American century ended. Of course, it seems that the US government has just stepped in and saved the world's economy, after its reckless bankers almost ruined it. But the nation cannot emerge stronger than its rivals from this crisis. China, Japan, India, Brazil, and the EU likely will gain on the US. Their economies have not suddenly been burdened with $1 trillion extra debt on top of an equally large debt created by the Iraq War. (For more on this, see Niall Ferguson's thoughtful op ed piece in the Washington Post.)

Even before this crisis the US budget was severely out of balance. The sudden increase in debt means that the future president will have less scope in foreign policy. It will be - even more decisively than before - a debtor nation, one which cannot afford to offend its creditors. And should the next president want to start a new war or underwrite a new peace, how is he going to pay for it?

The added $1 trillion debt will also make it harder for the next president to fund social programs, such as extending medical coverage to all Americans. All of a sudden, there is a whole lot less money to work with. Borrow $1 trillion at, say, 4%, and just servicing that debt will cost $40 billion a year. That money will not be available for schools, research, creating a new energy economy, or roads and bridges.

The next president will struggle to move forward dragging a $1 trillion ball and chain. The investment banks have not only robbed the public twice; they have weakened the next president and diminished the US standing in the world.

McCain's Hypocritical Attacks on Wall Street

After the American Century

The Republicans have shown themselves to be reckless and irresponsible stewards of the economy, not just this time but in the 1980s as well. In each case, they overspent and undertaxed, weakening the economy and driving up the national debt. In each case, major banking scandals arose at the end of their eight years in office. Back in the first Bush presidency, it was the Savings and Loan Scandal, as more than 700 savings and loan banks went bankrupt. They had been deregulated - does this sound familiar? - by the Republican Administration. Capitalism freed of interference from Washington would flourish. Instead, a wave of mismanagement and corruption followed, and none was more flagrant that a certain Charles Keating. A Californian investor, he cultivated relations with five members of the US Senate. One of them was John McCain.

That deregulation debacle required a Federal bailout for the banks that cost the American taxpayer more than $120 billion. Senator McCain was involved, though he escaped indictment. For some reason, he does not talk much about this episode in his career. McCain was one of "The Keating Five," who were accused of improperly using their office to advance the interests of Keating's bank. In 1991 he was investigated by his colleagues in the US Senate. Though he was not found guilty of specific crimes, the Senate Ethics Commitee determined that McCain had shown "poor judgement" by being involved. Keating was found guilty of illegal activities and went to prison for five years.

A quarter century ago McCain had an up-close-and-personal look at the damange that deregulation can cause in the banking industry. But he apparently learned nothing from it, and today he advocates the same policies he did in 1990, the year before he was investigated. Keeping this episode in mind, what does he mean when he says, as he repeated in the midst of the current crisis, that the American economy is fundamentally sound? Is he naive? An apologist for the many bankers who have contributed to his campaign? Or possibly a fool when it comes to economics? You don't need to know economics to graduate from a military academy. And he was unable to manage the economics of his bid for presidency the first time around.

On the positive side, McCain has not flip-flopped on this issue, as he has on so many others. On banking regulation, he has held the wrong position consistently. And he has been quite willing to put the taxpayers' money to work bailing out the "free market" banks when they mismanaged themselves into insolvency. McCain is hypocritical when he attacks Wall Street. He has been in bed with the bankers during his whole Senate career. He takes their contributions and when they get in trouble, he bails them out. He is a hypocritical populist as well, because the Republicans ultimately bail out the banks, not the little guy facing foreclosure.

This should not surprise anyone. Bush II gave the largest tax cuts to the wealthiest Americans. McCain criticized that policy in 2001, but then flip-flopped. Today he endorses the Bush tax code and wants to perpetuate it. If only it had been the other way around. If only he had flip-flopped on bank deregulation and maintained his 2001 position on taxes. Then McCain would have the same ideas about the economy as Obama.

The Republican Economy Needs a Federal Referee

After the American Century

Some months ago I criticized the Bush Administration's decision to give money to taxpayers across the board, rather than focus it where the real need was, in the mortgage market. It was clear to me, but apparently not clear to Republicans, that home forecloseurs threatened the whole economy. In the last week this truth has been demonstrated with frightening clarity. Two of the oldest and largest and once most respected investment houses in the United States have disappeared. Lehman Brothers has gone bankrupt and Merrill Lynch has been purchased by Bank of America. Both got into trouble because the Republicans refused to regulate investment bankers, which meant that a large part of the economy escaped scrutiny from the Federal Government. This created an uneven playing field, where regular banks played by different rules than investment houses that went into banking. A great many irresponsible mortgages were approved. A housing bubble emerged and expanded - and then popped during Bush II's second term.

Bear Stearns was the first big investment bank to collapse, and the Feds brokered a deal to sell it off for a fraction of what had been its value. Quite properly, the regulators did not bail it out. But the underlying problem of unregulated investment banks making risky loans did not go away. In fact, so many people had been encouraged to buy property that they could not afford,that the Feds soon had to rescue Fanny Mae and Freddie Mac, as the two giant mortgage companies were known. These had functioned without serious problems for generations before the Republican true believers in unfettered capitalism let the investment banks run wild. Like athletes on steroids, they bloated up rapidly and looked powerful, but a mere slowdown in the economy, not even a major recession, put them in trouble. The home owners who went into foreclosure ended up dragging down to ruin some of the (once) most respected banking houses in the world. The end is not yet in sight.

Last night the Federal regulators reluctantly came to the rescue of the American International Group, the largest insurance company in the US. A "loan" of$85 billion dollars. I call that welfare for the capitalists. If the Bush Administration followed the logic of deregulation, then it ought to let any such mismanaged company go into bankruptcy, as Lehman Brothers did. But no one dared. The economic truth is that the markets for insurance and investments and real estate are now tied together in so many intricate ways that a gigantic failure like that would start an avalanche that no later intervention could stop. It would be 1929 once again.

For the mismanaged Bush economy is by no means out of the mess that the Republicans have created, both as lawmakers against investment bank regulation and as the the party of Wall Street. If McCain were elected, one can expect more of the same mismanagement. He has never been a supporter of regulation, but rather when things go wrong he has intoned against "greed on Wall Street." Such moralism appeals to non-investors on small incomes, but it is hypocritical for McCain to pretend that the whole problem is due to a few greedy people. McCain and the Republicans generally, do not want to recognize the need for government. On the highway we need police to regulate traffic, so that reckless drivers do not cause major accidents. In the same way, Wall Street banks need some limits (try collateral) and safety controls (such as larger minimum cash reserves) so that foolish loans do not wreck the financial system. Instead, they are rushing in after the fact with an $85 billion bailout, guaranteed by the taxpayers.

McCain naively believes in "market discipline." That is like saying he expects football players not to be rough if there are no referees. Actually, McCain seems to believe in a system in which potential referees can accept payments from players. The New York Times reports that the McCain campaign has received large contributions from investment bankers, including more than $300,000 from individuals working for Merrill Lynch. His contributors are the very people he now condemns for being greedy capitalists.

Senator Obama, in contrast, back in March was calling for investment bank regulation. He has consistently done so. In the current economic meltdown, it is well to remember how well the economy was doing from 1992-200o, when the Democrats were in charge. More than one million new jobs were created each year during the Clinton Administration, and the budget was in surplus, with the national debt rapidly disappearing. In the Clinton economy almost everyone was better off. Obama is calling for a return to that tax system, which did ask wealthy people to pay more, but they ultimately also benefited from growth and a strong economy.

George W. Bush dismantled that system, which was working so well. Americans now have an economy where everyone is losing. Homes are losing value, stocks are falling, and jobs are disappearing. Bush will be remembered as a president who failed both domestically and in foreign affairs. McCain, who voted with Bush II 90% of the time, offers more of the same.

Sarah Palin's Clichéd Acceptance Speech

After the American Century

Many people felt that Huckabee was an inexperienced, right-wing, findamentalist Christian who would be completely unsuited to be President. Sarah Palin is Huckabee with less experience and wearing a skirt. But in her acceptance speech last night she downplayed her more extreme views to appeal to the mainstream. She did not say much in her 38 minutes, and indeed there was not a single idea in the first 17 minutes, as she introduced her children, her parents, and her husband, and presented herself as a typical "Hockey Mom" who got into politics at the local level.

She also presented herself as an opponent of the oil companies, who nevertheless pay most of Alaska's expenses. It is quite a good joke for the Republicans to pretend they are against big oil companies, who contribute to their campaigns. Both Bush and Cheney are former oil executives with close ties to the industry. But the current administration was erased from the speech. Were it the only document of these years to survive into some distant age, a historian would not be certain who was president or vice-president.

Palin presented herself as a fiscal conservative who kept the budget balanced. News flash: Alaska, like oil-rich Norway and Kuwait, has long had a budget surplus. She came close to claiming that the US could produce enough of its own oil and gas to avoid dependence on unstable foreign supplies. Not true, of course. As is typical of Republicans, her claim was that all the US needs to do is produce more and more power of all kinds. This failed "policy" has been the Republican mantra since Richard Nixon and Gerald Ford. Republicans always focus on enlarging the supply, forgetting about the far more easily achieved possibility of reducing wasteful demand.

Palin also attacked Obama, of course, the usual task of vice presidential nominees being to attack the other side. She said that having run a small town of 6,000 was more valuable experience than being a community organizer, because she had real responsibility. She did sink to a new low, however, in ridiculing the idea that people of accused of terrorism have legal rights. This sounds like the Bush approach to human rights. Of course she did not mention that she has at best a sketchy idea of law, having never been the law school. Obama has taught constitutional law at one of the finest law schools in the United States, the University of Chicago, and he was editor of Harvard Law Review. McCain finished in the bottom 2% of his undergraduate class and has no further education.

Palin accused the Democrats of preparing to raise taxes. She managed to avoid mentioning anything about the Bush Administration's large and unfunded reductions in taxes, most of which went to the wealthy. She managed to avoid any admission that the largest dificit in American history was created under the present Republican administration. Listening to her, it seemed that the Democrats actually were responsible for the deficit and unbalanced tax system.

In a particularly Orwellian moment, Palin presented McCain and herself and the Republicans in general as the enemies of special interests! But which candidate has accepted their contributions and filled his staff with lobbyists? Which candidate has voted with George Bush more than 90% of the time? It is absurd to pretend that McCain is an outsider who is against the establishment, against lobbyists, against Washington. His father was a 4 star admiral, he went to the Naval Academy, he has been a Senator for decades. McCain is the insider in this election, though you would not guess it from Palin's speech. And indeed, that is one of the reasons she was selected, because she is from the place farthest away from Washington. (Except Obama's Hawaii, of course.)

There was little content in Palin's 38 minute speech, often punctuated by wild cheering and sign waving, as is the custom. At the end she stood on the stage with all her children, holding her baby. The crowd loved it, and went completely wild when McCain made a surprise appearance on the stage.

Conclusion: this was a successful speech for the party faithful, but an empty Orwellian moment for anyone who thinks about it. There was not one new idea anywhere in that speech. Palin made it sound like the Republicans had not been in the White House the last eight years, and that she was running against the party in power. She scarcely mentioned the terrible state of the economy. She wrapped herself in the flag and ran against Washington. The old cliche is that when a politician has nothing else to offer, then it is time to campaign on God, the flag, family values and apple pie. That is all we got from Surah Palin.

Palin's speech illustates once again H. L. Mencken's aphorism, "No one ever went broke underestimating the intelligence of the Ameican public." Palin will appeal to many precisely because she has no new ideas, because she repeats clichés with enthusiasm and apparent conviction, and because she has five children.