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8 Things That Must Happen Now to Salvage the Economy -- and the Country

The U.S. is no longer merely in crisis; it is in a state of emergency. And it will take more than re-regulating Wall Street to fix it.

Every time I read about a solution to the economic crisis these days, I invariably find an underlying assumption that once we are past all this, America will be just fine again. If we get the banks spending, if we stop the mortgage defaults, if we stimulate enough and if we reregulate the errant, greedy financial community, prosperity is sure to follow.

The economic emergency, however, is not simply the consequence of mindless, ideological deregulation and investment bubbles gone bust. It is the result of a narrowly conceived economic model and the failure of Washington's social contract with America, whose weaknesses were essentially disguised by ever more debt. To save America, that social contract has to change, and the economic model on which it is based has to be modified.

In the 1980s the nation abandoned a working social contract with its citizens that promised, and even produced, a wondrous but often cruel free-market colossus that worked justly and prosperously for most. The abandonment of that social contract was hailed as the rebirth of individualism and America's gift to the world: limited government. But it caused rising inequality and the decline and stagnation of median wages over the course of a generation. It also led to the rampant neglect of public goods vital to the citizens' welfare and the prosperity of the economy. Meantime, the nation lived off and ran through the public investment it made from the 1930s to the 1970s with little protest from politicians or mainstream economists.

Where Democrats differed from Republicans was in believing that the nation actually had a working social contract with its citizens. Workers who lost jobs or took lower wages due to rapid globalization and technological change required an enhanced safety net -- more generous unemployment insurance, job training and perhaps, in the minds of bolder social critics, guaranteed healthcare and pension benefits. Many Democrats came to believe it would be wrong to interfere with the labor or financial markets in any way that could damage the nation's productivity gains or rapid rates of economic growth. Expanding the social safety net became the order of the day.

The Democrats fostered what Barnard economist Marcellus Andrews calls a "debt-based social contract." There were many causes of the Clinton boom of the late 1990s, including the rapid fall in the cost of computer power leading to the Internet revolution. But more critical, it is clearer in retrospect, were cheap money, speculative stock and housing prices and a lot of borrowing. Debt covered up the failures of the social contract and the economic model. It did not succeed in protecting workers from rising debt payments, lost healthcare benefits, withering pensions or job turnover.

Borrowing -- and hence the cover-up -- was encouraged by a high dollar, the pride of Treasury Secretary Robert Rubin. The high dollar attracted foreign money to compensate for America's lack of savings; Americans were unable to save because they had to borrow just to keep up. It was also propped up by the deregulation of international capital flows, led by Rubin and his number-two man, eventually his successor, Lawrence Summers. The financial community then innovatively supplied the credit to the masses, partly by circumventing the banking regulations designed to restrain overlending, a constant and regular danger since the dawn of formal banking itself. Rubin, Summers and Alan Greenspan presided over this.

The Bush administration made conditions significantly worse. The economy was thriving, but hourly wages fell between 2002 and 2007 for the typical worker, even including fringe benefits, and for the first time since World War II, median family income did not rise as a result of economic recovery. Had a typical worker's earnings risen in the expansion at a normal rate, it would have meant another $2,500 to $3,000 in annual income by 2007, perhaps three or four months of mortgage payments. It is likely many would not have had to default.