Aftershock: The Next Economy and America's Future (10 page)

It should be apparent that there will be no return to “normal,” because the old normal got us into our present predicament and can’t possibly get us out. So what comes next?

In order to fix what needs fixing, we need to be clear about what broke. The underlying problem is not that financial institutions were reckless, although they were. The ultimate solution, therefore, isn’t just to make them more prudent. Nor is the central problem that consumers borrowed too much, although they did. The solution, therefore, isn’t merely to get Americans to save more and consume less.

To summarize: The fundamental problem is that Americans no longer have the purchasing power to buy what the U.S. economy is capable of producing. The reason is that a larger and larger portion of total income has been going to the top. What’s broken is the basic bargain linking pay to production. The solution is to remake the bargain.

President Obama brought the economy back from the brink. His bank rescue and stimulus packages, combined with the Fed’s low interest rates, prevented the Great Recession from turning into another Great Depression. But the nation has not recommitted itself to the basic bargain. The 2010 health reform legislation was a step in the right direction but small in relation to the overall challenge. Consequently, most Americans will continue to experience relatively high unemployment and flat or declining real wages. Economic growth will be hampered.

Growth, it should be noted, is not an end in itself. It is a means
to better lives for all, generating not only higher incomes and possibilities for more personal consumption but also making room for the consumption of public improvements that benefit all—an atmosphere less polluted by carbon, good schools, better health care. Rapid growth also smoothes the way toward the basic bargain: When the economy is growing nicely, the wealthy more easily accept a smaller share of its gains because they can still come out ahead of where they were before. Simultaneously, when everyone else enjoys a larger share, they more willingly pay taxes to support public improvements. It’s a virtuous cycle.

Slow or no growth has the reverse effect. Economic gains are so meager that the wealthy fight harder to maintain their share. The middle class, already burdened by high unemployment and flat or dropping wages, fights ever more furiously against any additional burdens, such as tax increases to support public schools or price increases resulting from regulations limiting carbon emissions. It’s a vicious cycle.

The question, then, is how to move from a vicious cycle to a virtuous one—how to restore the widespread prosperity needed for growth, and how to get the growth necessary for widespread prosperity. The challenge is both economic and political. A fundamentally new economy is required—the next stage of capitalism. But how will we get there? And what will it look like when we do?

There are essentially two paths from here. Only one will get us to where we want to be.

November 3, 2020. The newly formed Independence Party pulls enough votes away from both the Republican and Democratic candidates to give its own candidate, Margaret Jones, a plurality of votes, an electoral college victory, and the presidency. A significant number of Independence Party members have also taken seats away from Democrats and Republicans in Congress.

The platform of the Independence Party, as well as its message, is clear and uncompromising: zero tolerance of illegal immigrants; a freeze on legal immigration from Latin America, Africa, and Asia; increased tariffs on all imports; a ban on American companies moving their operations to another country or outsourcing abroad; a prohibition on foreign “sovereign wealth funds” investing in the United States. America will withdraw from the United Nations, the World Trade Organization, the World Bank, and the International Monetary Fund; end all “involvements” in foreign countries; refuse to pay any more interest on our debt to China, essentially defaulting on it; and stop trading with China unless China freely floats its currency.

Profitable companies will be prohibited from laying off workers and cutting payrolls. The federal budget must always be balanced. The Federal Reserve will be abolished.

Banks will be allowed only to take deposits and make loans. Investment banking will be prohibited. Anyone found to have engaged in insider trading, stock manipulation, or securities fraud will face imprisonment for no less than ten years.

Finally, but not least: In order for the government to balance the budget, provide for national defense, guard our borders, and pay down the national debt, all personal incomes will be capped at $500,000 per year; earnings in excess of that amount will be taxed at 100 percent. Incomes above $250,000 are to be taxed at 80 percent. The capital gains rate will be 80 percent. All net worth above $100,000 will be subject to a 2 percent annual wealth tax. Any American found to be sheltering his income in a foreign nation will be stripped of his U.S. citizenship.

In her victory speech, president-elect Jones is defiant:

Her opponents’ concession speeches are bitter. George P. Bush, the Republican candidate, is irate. “I cannot stand before you and
congratulate my opponent, who based her entire campaign on fear and resentment,” he tells his supporters.

Chelsea Clinton, the Democratic candidate, is indignant. “I would very much like to offer Margaret Jones my best wishes for the future. But I have to be honest: She and the Independence Party pose a grave danger to this nation.”

Foreign leaders try to be respectful but cannot hide their anxieties. The British prime minister issues a terse statement “wishing Americans well.” The German chancellor offers “condolences,” but the German ambassador to the United States insists the chancellor’s remark has been mistranslated and is best understood as “commiserations.” The president of China appears before news cameras and says, simply, “The United States has committed a grave error.”

The presidents of the U.S. Chamber of Commerce and the Business Roundtable issue a joint statement warning that Margaret Jones and the Independence Party “will push America into another Great Depression.” The CEOs of the four remaining giant Wall Street firms predict economic collapse.

On November 4, the day after Election Day, the Dow Jones Industrial Average drops 50 percent in an unprecedented volume of trading. The dollar plummets 30 percent against a weighted average of other currencies. Wall Street is in a panic. Banks close. Business leaders predict economic calamity. Mainstream pollsters, pundits, and political consultants fill the airwaves with expressions of shock and horror. Over and over again, they ask: How could this have happened?

How indeed. To get some insight, let’s examine what could very well occur in the decade preceding the election of Margaret Jones.

History teaches us that politics is inextricably bound up with economics. Presidents are not nearly as responsible for the economy as voters assume, but they are held accountable nonetheless. Jimmy Carter lost his bid for reelection in 1980 because the economy had been suffering double-digit inflation, mostly brought on by soaring oil prices. In order to “break the back of inflation,” as it was put, Paul Volcker, then chairman of the Fed—but obviously also no Marriner Eccles—raised interest rates so high that he also broke the back of the economy, pushing unemployment into the stratosphere. That also broke the back of the administration. Voters blamed Carter and elected Ronald Reagan.

Reagan, by contrast, won reelection handily in 1984, largely because the economy was surging by then, and voters credited him. George Bush lost his reelection bid in 1992, this time at the hands of Alan Greenspan. Greenspan raised interest rates to ward off inflation, which also raised unemployment. Voters blamed Bush and in 1992 gave Bill Clinton a plurality of votes because he promised to fix the economy. (In the words of his colorful political advisor, James Carville, “It’s the economy, stupid.”) Clinton was reelected in 1996 mainly because jobs were returning. Barack Obama won in 2008 as the economy teetered precariously on the edge of a precipice. Many blamed the bad economy on George
W. Bush, and that blame spilled over to John McCain, the Republican candidate. (It’s not
just
the economy. George W. Bush defeated Al Gore in 2000 by the narrowest of margins, even though the economy was still in fine shape and Gore had been part of the administration that was credited for it; and in 2004, Bush won reelection mainly because of the “War on Terror.” All that can be said with confidence is that jobs and the economy are almost always at the forefront of voters’ minds.)

But even accepting the powerful effect of the economy, a backlash on the scale of my hypothetical scenario would have as much to do with voters’ cumulative frustrations and pent-up anger as with specific economic conditions on Election Day. It is not difficult to foresee a plausible trajectory. For the reasons enumerated in Part I, after the stimulus ends and the Federal Reserve tightens the money supply and raises interest rates, and after businesses replenish inventories and consumers replace worn-out products, the jobs machine stalls, and economic growth slows. Over the slightly longer term, more companies decide that their American employees are overpaid relative to equally productive workers elsewhere in the world working at a fraction of American wages, or to readily available software and automated equipment. Consequently, large numbers of middle-class Americans have to accept lower pay if they want to stay employed. With their coping mechanisms in shatters, they have to face a necessity they have managed to avoid for decades: They have to make do with less.

Poor families with minimum education are especially hard-hit. The middle class adapts in various ways. More young middle-class adults choose to live with their parents and delay marriage and children. Most Americans search harder for bargains, buy more private-label groceries and generic drugs, settle for lower grades of meat at the supermarket, stay home more, and take
fewer vacations. Many give up second cars, and consequently depend more on public transportation. A significant number grow their own food, do their own home repairs, and mend their own clothes.

This permanent frugality will not come naturally. According to common stereotypes, the French draw deep satisfaction from good food and wine, the Germans from music, the English from their parks, and Americans from shopping. These facile generalizations are not entirely baseless.
Just before the Great Recession, personal consumption in America equaled almost 70 percent of the country’s gross domestic product (more than 75 percent if you include the purchases of homes). By contrast, personal consumption constituted only 65 percent of the British economy, 55 percent of Germany’s, and 52 percent of Japan’s. (
Personal consumption did not always constitute 70 percent of the American economy. During the Great Prosperity of 1947–1975, it held fairly steady at 62 percent, without noticeable concern. But the economy was different then. As I said earlier, income and wealth were far more equitably shared. And most Americans were on an upward trajectory.)

Yet frugality itself is unlikely to ignite a political firestorm. We have had to pull in our belts before. To understand why Margaret Jones and the Independence Party (or their reasonable facsimile) could take control, we need a deeper understanding of the confluence between economics, politics, and behavior.

Historically, America’s cultural obsession to consume has been tempered by the “higher virtues” of thrift and self-sufficiency. “Be industrious and frugal, and you will be rich,” advised Benjamin Franklin. The simple life has been viewed as honorable.
“Many of the so-called comforts of life, are not only not indispensable,” wrote Henry David Thoreau in 1854, “but positive hindrances to the elevation of mankind.” Even after the introduction of mass production and mass marketing, as Americans swooned over the tantalizing vision of the nation as cornucopia of consumer delight, many eschewed crass materialism.
“The people of this country need a … philosophy of living, not having; of happiness, not wealth,” noted John Ellsworth, Jr., in
The North American Review
of October 1932, in the depths of the Great Depression.

Years ago, University of Illinois psychologist Ed Diener surveyed winners of state lotteries and some of the richest Americans (identified by
Forbes
as among the wealthiest one hundred). They expressed only slightly greater happiness than did the average American, and much of their happiness proved to be temporary. People in other countries and cultures are much the same.
University of Michigan researcher Ronald Inglehart examined 256,000 people in seventeen different nations and found barely any connection between income and happiness, above a subsistence level. It turns out that what money buys has rapidly diminishing emotional returns. Once we’ve enjoyed something, the next experience of it is not quite as wonderful, and the third might even be humdrum. As long as we’re not destitute, happiness
is less about getting what we want than about appreciating what we already have.