Muddling Towards the Next Crisis:

James Kenneth Galbraith in conversation

with The Straddler



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“Since the 1980s, the American business cycle has been based on financial and credit bubbles, and therefore on the enrichment, through the capital markets, of a very small number of people in a very few places. Truly we have become a 'trickle-down economy'—as we were not before. A rising tide may lift all boats, but recent business cycles have been more like waves, whereby certain sectors and areas ride the peaks before crashing to the shore. This is a sign, surely, not of the social evil of inequality per se but of the instability of bubble economies, closely associated with inequality of income, wealth, and power, for which we now pay a fearsome price.”

—James Kenneth Galbraith, Inequality and Instability

On Sunday, August 26th, The Straddler met with James Kenneth Galbraith at his Townshend, Vermont home.

We had previously spoken with Galbraith for the springsummer2010 issue, using his 2008 volume, The Predator State, as our point of departure. In that book, Galbraith argued that over the past thirty years there had been a transition from the sort of economy described by his father, John Kenneth Galbraith, in The New Industrial State (1965)—where conglomerates run by technocratic, mid-century organization men (the “technostructure”) were the primary driving force—to one in which large corporations had primarily come to serve the individuals who ran them (i.e., the “CEO class”).

Galbraith’s most recent book, Inequality and Instability, seeks both to provide a method by which to reliably measure inequality in the U.S. and across the world, and to point up very concrete reasons for concern about increasing inequality. Rather than focusing on questions of “comparative welfare analysis” using provocative statistical measures whose utility is limited (for example, CEO-to-janitor pay ratios or median income stagnation over time), Galbraith and his team bring a new method to the question by applying a consistent statistical measure to a more comprehensive set of world economic data.

Galbraith’s inquiry results in several interesting claims, foremost among them that the fundamental deleterious effect of income inequality is economic instability. But this instability is not a result of inequality; rather, inequality is a symptom of the shaky and, in the end, unsustainable foundations of an economy lurching from crash to crash as it maintains its reliance on credit-fueled stock or asset bubbles that provide massive rewards to select few and always changing sectors (finance being the one constant) in which select few highly remunerative jobs exist. Speaking of the nineties, for example, Galbraith writes:

The problem was not that rising economic inequality was unpleasant; on the contrary, it led to better economic outcomes for most workers. The problem was that the mechanism could never be sustained.

A corollary of this claim is that the U.S. faces a choice as to whether or not it continues to pursue an economy built on such foundations; closely tied to this question is the future fate of the social safety net’s constitutive institutions. It was an exploration of these issues that formed the basis of our conversation.

Galbraith, August 26, 2012

I think there is a tendency on the left to underestimate the success of the programs that created and sustained the middle class and the middle class mentality. There’s a tendency to focus on some statistical aspects of what’s happened to wages—median wages in particular—and to focus less on the role played by Medicaid, Medicare, Social Security, the housing programs, public education, and support for higher education, all of which gave us a population that had the attributes of a middle class society.

The story that is often told about what’s happened to factory jobs, and what’s happened to wage rates, is not a good way of getting at the threat to that existence. The typical story is that median wages peaked in 1972 and have been stagnant and falling since then. As a result, it must be the case that people who are working now are much worse off than they were ten, fifteen, twenty years ago. That’s not an accurate story—at least not up until the crisis in 2008—because over that period the labor force became younger, more female, more minority, and more immigrant. All of these groups start at relatively low wages, and they all then tend to have upward trajectories. So there’s no reason to believe that life was getting worse for members of the workforce in general. On the contrary, for most members of the workforce it was still getting better. Plus they had the benefit of technical change and improvement in the other conditions of life.

The real threat to the middle class is not there, it’s in the erosion of the programs I just mentioned. That is to say, it’s in the attack on the public schools, it’s in the squeeze on higher education, it’s in the threat to Social Security. When you look at housing, you have a very large unambiguous loss. Millions of people have been displaced, but many, many more have lost the capital value of their homes. They won’t be able to sell and retire on the proceeds.

So I think there is a threat to the middle class, but if I were talking about it in political terms, I wouldn’t be giving an abstract statistical picture of wages. This doesn’t connect to people’s experiences. If I were designing the boilerplate rhetoric of a popular movement, I would take a blue pencil to these statistical formulations. I don’t like the stagnant median wage argument—I think it obscures what actually happened. And I don’t particularly care for the “one percent” argument. I understand it has a certain power, but one can be much more precise about what it is you want to attack, and what it is you want to preserve and to build. I would cut to the chase: we need to tear down the financial sector and rebuild it from scratch in a very different way.

In our current situation, the financial sector makes its money by destroying, not by building. When one frames the issue that way, and when you try to explain to people why that’s so, I think they have a much clearer picture of what they’re facing and what should be done. Occupy Wall Street wasn’t wrong to focus on Wall Street. That was exactly right. But talking in terms of the “one percent”—which, after all, would be about 3.1 million people—doesn’t clarify what is truly at issue. What do people care about? People care about their public services, they care about their schools, they care about the environment in which they live, they care about safety, they care about the terms of student loans, they care about health care and retirement. When one talks about those issues, I think you connect much more effectively than by addressing this in terms of “the middle class,” which is itself a very abstract term.

We are going to come to a point of decision fairly soon as to whether the core institutions of the New Deal and the Great Society survive. It is a straightforward question: do we insure the whole population against old age, disability, or the loss of their income, or not? Do we provide a decent standard of health care and long-term care for the elderly and people in the final phases of life, or not? Is this a community that provides this as a matter of common insurance, or isn’t it?

The Predator State described a world in which the institutions of collective security survived courtesy of side payments. So Medicare survives—and, in fact, is strengthened under Bush—because the pharmaceutical industry gets a side payment. The Affordable Care Act is another example of that. It expands coverage in a way that protects the interests of the insurance industry. But what we should be doing is moving in the direction of increasing the coverage and reducing the cost of providing basic collective security. We also need to remove the incubus of the financial sector; we need to reduce the fixed costs that society pays for its basic services in order to ensure that there are resources for a spectrum of economic activities that we are not presently undertaking.

But I don’t think we’re going to go in that direction. I think the basic choice will be between muddling through on the present model, which is a modified predator state model, or going in the direction of the Ayn Rand model, which is a radical attack on those core institutions—an attack, incidentally, never undertaken by Reagan. We’re seeing the political debate moving in that direction and legitimating that possibility. And the danger of muddling along on the present model is that the more people become dissatisfied with it, the more willing they may be to take a risk on a total attack.

There is enormous political appeal in the promise to “bring America back,” after all—to get America moving again, to restore the alleged optimism of the last generation. It’s also baked into the cake of every economic model and every economist’s thought process. It’s very hard to raise the question of whether it’s really possible. There are a few people who do it. It is, of course, a habit in the Marxist tradition to view stagnation as normal and growth as extraordinary. I have never been a Marxist, but I think there are a number of reasons to believe that what we have just come through is a basic turning point and that the period from 1950 to 2000 was historically exceptional, and will not be repeated in the next fifty years.

So we need to think about how we cope with a truly fundamental change in circumstances—and that’s what we’re not doing. What troubles me is that it’s practically impossible to nudge the conversation in that direction and still remain within the pale of credibility of your listeners, because they so strongly want to believe that what you’re suggesting to them can’t be so.

Look at manufacturing. Now, there are some parts of the manufacturing sector that aren’t going anywhere because they’re very closely allied to advanced technology design, and efforts to outsource them tend to work poorly. Certain parts of aircraft manufacture, for example. And there are some parts that aren’t going anywhere because it’s just not ever going to be economic to import every single assembled car that the United States consumes. We produce millions of them—there may be a lot of the components that are imported, but ultimately you do the assembly closer to the customer. So I don’t think we’re in danger of completely losing the manufacturing sector. But that said, the number of people employed in manufacturing is going to go down. There’s just no way around that. It’s going to go down because there are still components of the manufacturing sector that we will eventually lose to overseas producers. And it will go down because in the course of productivity gains you can do the same amount of work with fewer people. That’s a reality. Another reality is that at this stage the manufacturing sector is a tiny fraction of the total workforce. The last number I saw was 11 million; it might be lower than that now. Everyone can complain about the Chinese and anybody else, but you can’t make them go away. The Chinese have a form of industrial organization that turns out to be a very powerful model, one that produces a lot of very low-cost, high-quality goods that are going to be out there. And it’s not within the power of the United States to wall off the country, even if it were in our interest—which it isn’t—to do so.

So then the question is, what do people do? I think the answer is that almost all of the jobs of the future—certainly the new jobs—will be service jobs. The important thing will be to construct institutions that give people decently remunerative stable employment doing things that are useful, worthwhile, and that contribute something to the needs of the larger community. It’s not too hard to figure out what it is that people need other people to do. We’re obviously not going to do very much residential construction for the near future, but we’re going to do a lot of home care and a great many personal services. We could support a great deal more artistic and cultural endeavors than we in fact do, if we could figure out how to run those things.

Returning to this idea of “normal growth”—I have a hard time making myself sympathetic to President Bush, but he came in after the peak of the Internet boom, right after the crash of the NASDAQ. There had been a big turning point there, and his problem was how to make it as minimal an experience for Americans as possible. The tax cuts compensated a lot of rich people for their capital losses. Then, after September 11th, interest rates were cut to practically zero in order to encourage people to get back into the market for cars and to discourage them from hoarding cash. The war in Iraq was not fought principally for economic reasons, but it raised the growth rate by a point or so in 2003. And then in 2004, they actually quite deliberately increased public spending as much as possible—they understood that they didn’t have enough public spending to keep the economy going. And basically the President said to the Congress, “I’ll sign any appropriations bill you send me. Spend away.” And they did. And they squeaked through that election. Behind all of this was the deregulation of the real estate sector, de-supervision, which was designed to put money through the economy on whatever terms possible. That is a real wrecking of the future. It gives you growth in the short term, but everything is set to melt down in a few years. They tried, of course, to push the meltdown past the passage of power to the next administration, and they almost succeeded.

With the Obama administration there was a vast failure to look at the crisis in a realistic way—to assess what it actually was. When you look at the period of, and immediately following, the crisis, the new administration bought into the view that this was a temporary event, and that there would be—at some point—a return to the normal growth path. They didn’t assess the possibility that this wasn’t true—that we’d reached a turning point and we were not going back to that path. And therefore, they created expectations that they could not meet. What they did was vastly too small, and they treated the financial sector as though it were going to behave in the future the way it had behaved in the past—namely, making loans that support economic expansion. But in the environment that we were in—which was basically a debt-deflationary environment—the financial sector makes money not by promoting growth, but by promoting contraction: by shorting things, driving down prices, selling off assets, liquidating, and foreclosing.

So by keeping the financial sector alive, the administration basically kept alive a panoply of institutions which had at one point been constructive but were now purely destructive. And as a result, the notion that the government was going to be the saving force lost steam. It lost credibility because they didn’t take the full spectrum of measures that were required. And because they hadn’t made clear to people from the beginning what they were actually facing, they opened up the window to every quack in the business who had a magical solution—and that includes the Grover Norquists and it includes the Paul Ryans. Plus, you’re faced with large budget deficits—which people attribute more importance to than they actually have—that can easily be turned into an argument supporting cutting government.

The reality is that most operating businesses, if they could rely more on Social Security and less on their own contributions to retirement, more on public health insurance and less on employer contributions, they’d be much better off. For most of basic American business, the more you have insurance schemes handled by the public sector, the better off you are. But there are parts of the plutocracy that have always regarded this as a threat in principle to private insurance companies. It’s the threat of a good example. The government runs an insurance company—it’s basically an office building full of bureaucrats and computers. They don’t have fancy salaries or fancy perks. They’re doing this pretty well on a civil servant’s income, and without lots and lots of people to try and separate the healthy from the sick. They just enroll everybody. And guess what? It’s a very functional system. But there are some parts of the plutocracy that just don’t care what happens to the broader population, and for whom, as I say, the fact that the government runs very efficient, comprehensive insurance programs is politically offensive.

There is also an element of money-grubbing associated with opposition to government insurance programs—people who imagine they could make money running funds, or biting into the insurance market. So again we come back to the crucial issue: it’s the power and the instability associated with having the economy run by bankers and hedge fund managers that is the problem.

James K. Galbraith holds the Lloyd M. Bentsen, Jr., Chair in Government/Business Relations at the LBJ School of Public Affairs at the University of Texas, Austin. A Senior Scholar of the Levy Economics Institute, he also directs the University of Texas Inequality Project and is chair of Economists for Peace and Security, a professional association. He previously served on the staff of the U.S. Congress as executive director of the Joint Economic Committee. His books include Created Unequal, The Predator State, and Inequality and Industrial Change. A previous conversation with Galbraith appeared in our springsummer2010 issue.