Marx may be ‘out of date’ for some folks, but it is only by absorbing Marx’s way of thinking that you can really enjoy the high comedy produced by mainstream economists in a dither. In today’s NYT, Robert Schiller uses the ‘fact’ that few predicted the housing bubble’s collapse to moan about how we need a clearer crystal ball.
Well, prediction is pretty, but it is also cheap. What I'm interested in is the tactic of shifting the onus of the argument to the issue of prediction, for what this does is help us easily and comfortably misunderstand just how rational the housing bubble was. One of the commentors in Mark Thoma’s blog, Economist’s View, has linked to a August, 2002 column by Krugman which he thinks is discrediting because in it he discerned the advice that Bush should create a housing bubble. On the contrary, Krugman’s column is an excellent analysis of the state of play of the Bush economy in 2002. What Krugman saw is that Greenspan's excuse for blessing the Bush tax cuts was threadbare and ideologically driven, and that the tax cut therapy for the recession that resulted from the tech stock crash didn't work. What he did not see was the whole rationale between combining tax cuts, deregulating the credit markets, and maintaining abysmally low interest rates.
What this all means is that the bubble was engineered, in as much as you can engineer economic events using the powers of the state. It was a solution to a problem before it was a problem to be solved. Perhaps America solved the problem of our Puritan ancestors - the problem of bearing guilt from the very creation of the world - by nurturing a cult of amnesia, which would allow us to bear no guilt at all. But amnesia in this case is killing us. We have never seriously posed the question: what problem was the housing bubble solving?
I’m not saying that the Bush administration and Greenspan decided, lets have a housing bubble. Rather, the neo-liberal rules for the economy had, by 2001, outlived their usefulness. The old rule, under Clinton, was that one could have a liberal social insurance system and a deregulated private sphere through the magic of growth. The Clinton administration added a crucial liberal element in 1993, with its tax hikes and its expanded use of EITC. And it benefited from the coming to fruition of advances in computing that were partly the result of decades of government funding, via the pentagon and various universities, and partly the result of entities in the private sphere. It also benefited, it must be said, from a semi-rational foreign policy that was not built on using the military as the multiplier of last resort (although weapons sales did boom during the Clinton years – which is not good). But by 1998, when the capital gain tax was lowered and the Clinton administration was beginning to buy its own neo-lib propaganda - memorably encoded in Thomas Friedman's The Lexus and the Olive Tree as the 'golden straightjacket" - things were starting to go wrong. The idea that the business cycle had been eliminated was being touted as a serious notion, rather than as one of the predictable hallucinations of a group intoxicated by greed. And in 2000-2001, the business cycle came back with a vengeance. If we depend on above average growth to take care of the endemic problem of inequality and less than average wage growth in the median household, then when growth is less than average, and when it plummets to negative growth, we obviously have reached the end of the neo-liberal policy paradigm.
At this point, the neo-lib synthesis shatters and the policy choice is simple. Either save the rich or save the rest. The one is conservative policy, the other is liberal policy.
Bush obviously took the first option, but to make this politically feasible, there had to be something done about the rest. Asset inflation was the perfect answer. Its anaesthetizing affect was such that the GOP actually won the 2002 midterms even as the incomes of Americans were either stagnating or being savaged. Who cared? You might make less, but you could buy a house with zero down and flip it. And though this was an extreme response, still - wealth, for most people, is measured in terms of their life styles, not in terms of the numbers they give to the IRS. If the lifestyles are big and the interest rates seem low, then they feel rich.
Well, the delusion lasted about as long as the delusion that we were 'winning' in Iraq. At this point, the 'save the rest' party came into power - supposedly. But a funny thing happened on the way to liberal utopia - it was de-liberalified. Mysteriously, liberal legislation couldn't pass, or wouldn't pass. When the malarky wealth built on asset inflation imploded, however, legislation passed awful quick to save the rich. And then of course Bush's successor, Obama, came in with a crew of old neo-libs and Bush era officials and did an amazing job os saving the rich. Fed policy in 2008-2010 is an excellent example of what a state that is determined to use welfare for the betterment of a segment of society can do. The rich have never been so coddled, so stuffed with money, so babied and made up to in the whole history of the Republic. Obama makes McKinley look like a communist.
Unfortunately, the only asset bubbles in sight at the moment are such that the rest can't benefit from them. Well, too bad - maybe the answer is to strip them of the benefits that they have enjoyed - via the power of the state - for the last 75 years. This seems to be the template in D.C. Liberalism is dead. The question is, what kind of plutocracy are we building? The kind that will strip the rest of everything, or the kind that will leave them with enough money to buy lottery tickets?
It is in this context that the questions the economists are posing themselves look, well, insane.
“I’m so bored. I hate my life.” - Britney Spears
Das Langweilige ist interessant geworden, weil das Interessante angefangen hat langweilig zu werden. – Thomas Mann
"Never for money/always for love" - The Talking Heads
"Never for money/always for love" - The Talking Heads