August 20, 2014
Fred Branfman on ‘The Big Short’
Posted on May 6, 2010
But the real truths revealed by the 2008 financial crisis go far deeper than this Shakespearean epic of amoral and criminal Wall Street rapacity. The simple but frightening truth is that not only Wall Streeters but CEOs and government regulators are incompetent as well as greedy. They have become obstacles to economic growth as America enters a “late capitalist” phase in which the powerful prey upon the weak—including manipulating angry mobs of the uninformed—rather than producing new and healthy growth, e.g. a Clean Energy Economic Revolution, which is America’s major hope for a strong economic future.
Greed had been around a long time, certainly in America, from the era of the “robber barons” to tobacco companies and Ivan Boesky in postwar America. But what is new—and most alarming—about our present state of affairs is the confluence of greed and incompetence; lack of conscience and the hollowing out of U.S. industry; enormous political clout enjoyed by economic moguls who contribute little to the overall wealth of society; and a shockingly politicized and nonjudicial Supreme Court which has just strengthened the corporate stranglehold on our economy by allowing corporations to directly campaign for candidates.
The greed of 19th century robber barons was no less than that exhibited by today’s Wall Street leaders. But the former also built the railroads and created the oil and automobile industries that made America the world’s leading economic power (aided by America’s rich resource base, isolation from devastating European wars and massive government assistance). And, although it took strong government regulation of and aid to the private sector, enormous sacrifices by union workers, and massive public investment in infrastructure, a rising tide of economic wealth did indeed lift enough boats to create an enormous U.S. postwar middle class. Many of today’s CEOs, Wall Street barons and government leaders, by contrast, do not build. They destroy.
What is lacking in the books about the financial crisis of the last decade, including Lewis’, is a parallel examination of the gutting of the “real” economy—manufacturing, infrastructure and high tech—as America’s political, economic, financial and business leaders ignored or actively fostered America’s internal economic decay.
During the 1980s, as research director for California Gov. Jerry Brown and Sen. Gary Hart’s think tank, and director of Rebuild America, I worked on economic policy with many of America’s top CEOs, manufacturing experts and economists. Rebuild’s advisory board included Intel co-founder Robert Noyce, current economic czar Larry Summers, Nobel laureates Robert Solow and Paul Krugman, Laura Tyson (later to chair the Council of Economic Advisers), Robert Reich (Bill Clinton’s future labor secretary), Boston Fed Chair George Hatsopoulos, and Ed Miller, president of an R&D consortium of America’s top manufacturers.
What most struck me were the contrasting opinions of the macroeconomists and many of America’s most successful high-tech CEOs, such as Intel’s Noyce and Andy Grove, National Semiconductor’s Charlie Sporck, Apple’s Steve Jobs and Hewlett-Packard’s David Packard, the latter two serving on the California Commission on Industrial Innovation, whose final report I authored.
Many high-tech leaders who actually made and built the industries that drove postwar U.S. economic growth were alarmed about the future of the U.S. economy as a whole. They called for national competitiveness strategies to maintain strong domestic industries rather than export U.S. plants and jobs abroad, emphasizing the need for low-cost capital and cooperative private-public efforts to buttress high-tech sectors targeted by the Japanese. These were not failing auto manufacturers but some of America’s most successful business leaders, and their advice needed to be taken seriously. It was not.
Numerous studies during this period debunked the canard that labor costs forced U.S. companies to locate abroad. Labor was only a modest portion of overall costs and often was offset by the advantages of having skilled workers and proximity to one’s market—as Japanese automakers demonstrated by building plants in the U.S. while U.S. automakers shifted production overseas. High-wage nations like Germany and those in Scandinavia demonstrated conclusively that it was possible to remain competitive while paying domestic workers relatively high salaries.
However, macroeconomists who knew little about the real economy, like Larry Summers, sneeringly dismissed such “micro” concerns, insisting that all that was needed was to reduce the budget deficit and get monetary policy right. Politicians, including those in Republican and Democratic White Houses, ignored or even actively opposed competitiveness strategies. Older industries, most conspicuously the auto industry, were consistently outmaneuvered by smarter and more efficient foreign competitors.
These 1980s seeds of economic decline began to grow into serious problems in the 1990s although an Internet bubble covered over America’s ongoing internal economic decay. Treasury Secretary Robert Rubin was absurdly deified, e.g. through the creation of a new school of “Rubinomics.” He made Summers his successor after his deputy led the fight to gut the Glass-Steagall Act, which divided commercial and investment banking, and to actively block regulation of shoddy Wall Street lending. Rubin then used Glass-Steagall’s collapse to enrich himself by forming the giant conglomerate Citigroup, the world’s largest until it collapsed and needed a $306 billion taxpayer bailout. Meanwhile, the Clinton administration further gutted America’s domestic industrial base by supporting NAFTA and the World Trade Organization, and standing by while China started to become an even greater industrial threat than Japan.
As director of Rebuild America I wrote in November 1988—in collaboration with Summers, Solow, Krugman, Reich, Tyson, Hatsopoulos, Lester Thurow, Pat Choate and Lawrence Chimerine—a white paper entitled “An `Investment Economics’ for the Year 2000.” We called for setting specific targets for investment in education, training, R&D, infrastructure and plant and equipment, e.g. that gross nonresidential fixed capital formation be 23 percent of GNP by the year 2000. Such thinking, however, was entirely ignored during the Clinton years.
The death of even more of our domestic industrials was ensured in the 2000s under George W. Bush as U.S. officials promoted exporting U.S. jobs abroad; Fed Chair Alan Greenspan—even more ridiculously deified than Rubin—supported the shoddy lending which led to the financial crisis; and the financial sector amassed 40 percent of overall corporate profits (up from a tiny percent when postwar American industry was actually growing and creating jobs).
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