WORLD VIEW:Growing social inequality in the US puts the economy back at the centre of the presidential campaign, writes Paul Gillespie

IN THE 1980s Gore Vidal observed of Reagonomics: "The US government prefers that public money go not to the people but to big business. The result is a unique society in which we have free enterprise for the poor and socialism for the rich."

His epigram has been repeatedly recalled this week following the nationalisation of American International Group, the world's biggest insurer, coming shortly after the similar rescue of the Fannie Mae and Freddie Mac housing companies and of the Bear Stearns bank.

"Socialised capitalism" is Robert Reich's description.

"Gains privatised and losses socialised" was the more pointed comment by Nouriel Roubini, professor of economics at the Stern School in New York University. He is known in the economics trade as a "permabear" because of his repeated claims over the last six years that a financial system based on self-regulation, non-deposits, highly leveraged subprime housing debts and globalised derivatives trading was unsustainable and would collapse.

Now that he has been proved correct he has suddenly become known to wider circles of people desperate to get some expert perspective on these events. How does this crisis compare to previous ones? Is it a systemic failure or a conjunctural one arising from the Bush administration's deregulation policies (which continued those of the later Clinton administration)? Could it lead to another depression like the 1930s? What alternatives are there to the policies followed this week?

Roubini is unusual among economists in combining comparative, historical and mathematical analysis, giving him a broader appeal to policymakers and the mass public. In an interview with the New York Times magazine on August 18th, he described himself as more a realist than a pessimist. He argues that the AIG should have been bankrupted rather than nationalised, and the $85 billion of taxpayers' money loaned to the firm could have been used instead for debtor-in-possession financing. This would have allowed for a more fair process for allocating losses between shareholders and short-term and long-term creditors of the firm. Nationalisations like this are prejudiced in favour of those responsible for the trouble in the first place.

He is scathing about the Bush administration's actions. In his column for the online RGE Monitor, he wrote: "Fanatic zealots of any religion are always pests that cause havoc and destruction with their inflexible fanaticism; but they usually don't run the biggest economy in the world. But these laissez-faire voodoo-economics zealots in charge of the USA have now caused the biggest financial crisis since the Great Depression and the nastiest economic crisis in decades.

"So let them be shamed in public for their hypocrisy and zealotry that has caused so much financial and economic damage."

As to historical comparisons, he says "calling it socialism (even socialism for the rich, the well- connected and Wall Street) is giving a bad name even to a failed experiment like socialism; this is more akin to the creation of a corporatist state (like the Italian fascism or the German Third Reich) where private sector interests are protected (gains privatised and losses socialised), where the government is taken over by corrupt and reckless private interests."

The notion of class division based on economic interests has of course been out of fashion during these years; but the stubborn facts of growing social inequality in the US accelerated by financial deregulation bear out the differential impact of this crisis and put the economy back at the centre of the presidential campaign.

The share of aggregate income going to the highest-earning 1 per cent of Americans doubled from 8 per cent in 1980 to 19 per cent in 2004. In 2005 that figure increased to 21 per cent.

The bottom 50 per cent earned 12.8 per cent in 2005, compared to 13 per cent in 2000. In recent years more than half of students graduating from Harvard sought and got high-paid employment in the investment banks that are now collapsing. That era has come to an end.

Most lower and middle incomes stagnated during the Bush years. To that uncertainty there is added the much greater systemic one now on view. How it plays into the elections will probably determine the result, allowing an escape to policy debate from the juvenile personality discussion most prominent so far.

This presents a real opportunity for Barack Obama if he can rise to it. He has been reaching back to the more radical programme put forward in March criticising tax-cutting, trickle-down policies and deregulation, rather than to the more centrist Clintonite ones adopted more recently.

Polls indicate he is now communicating more effectively with the lower- and middle-income workers he needs; and the pacing of this crisis will match his own during the final stages of the campaign.

McCain's U-turns are more pronounced, shifting from the deregulation he advocated and supported in 1999-2001 to a call for stronger government action now and a bizarre defence of American workers' productivity.

He will find it more difficult to dissociate himself from the Bush administration, and the Palin effect may be less appealing in the face of these systemic uncertainties. Whoever wins inherits a debt of $10 trillion, which Roubini believes will now increase by at least another trillion - much of it held by China and Japan.

Despite the worldwide effects of the US financial collapse, not all capitalisms have a similar structure to the recent American model. Globalisation spread its toxic debt around the world, but varying regulatory regimes make a real difference. Commentators expect the EU to set new standards which would spread to the US and others.

Thus there has been notably less impact on the German than on the British economy. Franz Muntefering's much maligned description of Anglo-Saxon style derivatives trading as "locust capitalism" in 2005 now resonates more widely.

pgillespie@irish-times.ie