insurance for the wealthy, bandaids for the rest

Over at Crooked Timber, there is a short but clarifying post about the cause of the 2008 crash, put in the form of a reply to Brad Delong, who has maintained that what I will call the inequality view of the crash is not true - that is, it isn't true that “we are in a recession basically because of the disppearance of a huge amount of household sector wealth”.

The Crooked Timber post arms itself with an arresting statistic from, I suppose, the Census, recycled through Nate Silver's column in the NYT: "The median American’s non-household wealth declined by 14% between 2001 and 2007. So when household wealth evaporated, guess what happened?"

Although Brian doesn't go into it in depth, he does use this statistic to point out that the 'boom' in the 2000s covered a bust - the bust in income. Which should lead us to some reflection about the policies that were and are being pursued that contributed to that bust.

I have urged the view that it is wrong to view the housing bubble solely as an accident or a disaster - a point of view fatally colored by the bubble's bust. The housing bubble, far from being an accident, was a necessity – that is, if we were to pursue the remedies to the solution to the recession of 2000-2001 suggested by Bush, and that are being recycled, in a more pernicious form, by both Obama and the Republicans in this round. The tax cuts – the most important of which may well have been the cut to capital gains taxes – and the deficit financial policy that was enacted via war spending, an enormous increase in Medicare due to the new drug supplement package, are important factors here. The third leg of the political economy of the 2000s was Fed policy. Famously, the interest rate was used by the Fed not as an index reflecting the real state of the American economy, but increasingly as a tool to maintain financial security wealth - in fact, Bernanke became so obsessed with trying to maintain stock market values, as we saw in 2007, that he pursued an utterly bizarre policy, dictated solely by an attempt to keep the stock market from sliding. All three parts of this policy were responses to the long range crisis, which was squarely and simply one of wealth inequality. That is at the very basis of these crises, and that will continue to be at the basis of the crises as the Reps and the Dems do everything they can to ignore it. Unfortunately, this inequality crisis can only be solved politically – and no political player on the horizon even sees it.

Thus, to understand the recession of 2008, you have to understand the effects of the solution to the recession of 2001. I don’t think the name for the sum of those solutions is “Bush” – the Democrats made no attempt to make inequality an issue, because they had neutered themselves on that front in the 90s. Let’s call it, instead, neo-liberalism. The neo-liberal model is always going to lead, is structurally dedicated to, increasing wealth inequality – for which it uses the government as a backstop, as we saw in the Treasury-Fed program of feeding trillions of dollars to Wall Street in the form of 1 percent or below loans, and as a dispensor of band-aids, as we saw with the marginal increases in EITC.
French political scientists around Foucault liked to talk about l’etat providence – the welfare state, if you like. Neoliberalism does not, as its proponents like to say, break with l’etat providence – they simply change its focus. The state now operates as a Wallfare state – redistributing upwards.