The collapse of the economy is the result of many different causes. There is plenty of blame to go around. For all too long, the government, under the spell of the mantra that “the government is the problem, the free market is the solution,” let much of the financial industry escape any real regulation by morphing into new forms of business that did not fall within the conventional regulatory schemes. As the Madoff and Stanford scandals show, the regulators gradually deregulated, through lack of vigorous enforcement, even in areas that are within their authority to regulate. As Judge Posner admitted recently, in that environment of rampant non-regulation, the Wall Street “Masters of the Universe” acted as he would expect, as “rational profit maximizers”: Unrestrained short term greed simply drove all good sense out of the market.<\/p>\n
For example, most of the “credit default swaps,” and it appears much of the world of “derivatives,” is in fact gambling. Neither party to the swap has any connection to any actual economic activity. They are simply betting on the outcome of the actual economic activity undertaken by others.\u00a0 In a world of rational regulation, no honest business would propose such a scheme because regulators would be expected to swoop in and determine these swaps to be what they are — unenforceable gambling contracts. Where was the accountability for those in the financial industry, the regulators and those in charge of the regulators who all acted so irresponsibly? A new structure of regulation and new regulators need to be put in place so that those with basic good sense have the reinforcement of prudent regulation.<\/p>\n
Some of the blame seems wrongheaded. <\/p>\n
Sure, some potential homeowners bid on homes way over their heads under any economic scenario. But many were induced by the mortgage marketers to do it. It is bizarrely American that some have tried to point the finger of blame at minority group members when they were specifically targeted for shabby treatment by some in the mortgage business.<\/p>\n
Why blame the auto workers for the mismanagement of their industry? Blind to the inevitable long term pressure on the supply of oil and therefore the cost of gas, the automobile executives bet their companies on a single strategy to make more profits in the short term: Build large, heavy, low-tech, clumsy, and dangerous gashogs to satisfy the atavistic desires of American consumers to have their grandpas’ Buick though in slightly disguised form. Then, as with the minivan market the American companies created earlier, they failed to stay competitive with foreign makers of SUVs. American corporate laws create incentives for enterprise to focus on short term profits, not the long term development of the enterprise. The Detroit automakers have not had a culture that made sure each new car model advanced the state-of-the-art; they have not even tried to keep up with the competition. The only thing that has mattered is the profit and loss statement for the next quarter.<\/p>\n
The mortgage crisis, the credit crisis, the banking crisis are all, I fear, symptoms of an underlying problem that has not been brought to the fore. That is that our middle class no longer earns an income sufficient to maintain a middle class life-style. The problem is not that the U.S. autoworkers make too much, it is that all too few workers earn what the UAW workers earn.<\/p>\n
Almost all of the economic gains in this country in the last thirty years have flowed to the very highest income groups. While it is easy to understand outrage at the AIG bonuses, there seems to be too much focus on the claim that those on the top get too much and not enough on the consequences of the vast majority of workers who fall far below the top and who do not earn enough.<\/p>\n
Male wages have been stagnant since the 1970s. American families nevertheless were able to cope because family income gained ground because of the tremendous influx of women into the paid workforce. But, family income, even with two wage earners, then topped out. And so, to try to maintain a middle-class lifestyle, American families turned to credit, starting with taking equity out of their homes. The financial industry was all too accommodating, throwing out all the old rules that evaluated risk on the belief that housing values would always continue to rise. But, like any bubble, it burst. So, the problem is not that the autoworkers in Detroit make too much money, it is that most American families need to be able to earn substantially more than they have been earning for a long time. For the future, what a middle-class lifestyle will mean is likely to be a lot less in terms of consumption than it has been. That is not all bad. But, what is bad, is that the implementers of the “government is the problem, the free market the solution” have left our economy and our nation very much weakened. \u00a0But they still manage to be entitled to tremendous bonuses.<\/p>\n
Historically, this country had many things going for it to become great. But, one of the best was the decision, starting with the Northwest Ordinance in 1789, to devote public lands to develop broad public education. It is our leadership in education, not our under-regulated free market system, that has underwritten the development of our economy. And, given the “free market” rhetoric that has captured public discussion for all too long and has resulted in an increasing underinvestment in education, we are falling behind other countries. Worse than losing competitive advantage, we are wasting a tremendous amount of human potential by not providing both basic and advanced educational opportunity to all of our people. It is not clear that expanding and deepening educational opportunity for all will necessarily help us recapture our past strengths: If we build a much more robust educational infrastructure, will new jobs, new opportunities be there to utilize it?\u00a0 There is a strong historical correlation between the extent of quality education and expanding economic strength. That suggests that when we produce better educated people, economic development does follow. Educational infrastructure development, unfortunately, takes a long time and so we cannot expect results tomorrow. I am sure there are other social investments that are necessary to rebuild America for this century and beyond. But betting big on education is necessary for the long run.<\/p>\n","protected":false},"excerpt":{"rendered":"
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