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.
PART II
Backlash
1
The 2020 Election
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:
My fellow Americans: You have voted to reclaim America. Voted to take it back from big government, big business, and big finance. To take it back from the politicians who would rob us of our freedoms, from foreigners who rob us of our jobs, from the rich who have no loyalty to this nation, and from immigrants who live off our hard work. (Wild applause.) We are reclaiming America from the elites who have rigged the system to their benefit, from the money manipulators on Wall Street and the greed masters in corporate executive suites, from the influence peddlers and pork peddlers in Washington—from all the privileged and the powerful who have conspired against us. (Wild applause and cheers.) They will no longer sell Americans out to global money and pad their nests by taking away our jobs and livelihoods! (Wild applause, cheers.) This is our nation, now! (Wild applause and cheers that continue to build.) A nation of good jobs and good wages for anyone willing to work hard! Our nation! America for Americans! (Thunderous applause.)
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?
2
The Politics of Economics, 2010–2020
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.
3
Why Can’t We Be Content with Less?
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.
Much of what people want can’t be bought anyway. In 1943, behavioral scientist Abraham Maslow wrote “A Theory of Human Motivation,” a paper in which he posited a hierarchy of human needs. At the bottom are food, shelter, sex, and sleep (of which the first two are typically purchased, although markets also exist for the latter two). Next come safety and security (which we normally purchase as well, typically through locks on the doors and taxes that pay for police officers and a system of criminal justice). If we lack any of these basics, we’re forced to spend most of our time trying to remedy what’s missing. But once these fundamental needs are met, according to Maslow, our higher needs cannot be satisfied in the market—indeed, the very act of trying to purchase them robs them of their emotional sustenance. They include “belonging needs,” such as love, acceptance, and affiliation, and “esteem needs,” by which he meant self-respect, social status, and the approval of others. At the top of Maslow’s pyramid are “self-actualization” needs—our yearning to find meaning in our lives and to express ourselves.
By some measures, then, one could argue that with less paid work and less money to spend, people could—at least theoretically—enjoy their simpler lives. Before the Great Recession, many Americans were trying to cope with declining hourly wages by working more hours and sleeping less—by some estimates an average of one or two fewer hours each night than in the 1960s. (That deprivation created an entirely new industry. In 2007, Americans spent a whopping $23.9 billion on sleep-related products and services—everything from white-noise machines and special sleep-inducing mattresses to drugs for insomnia. That was more than double what we spent on sleep a decade before, according to Marketdata Enterprises, a research firm in Tampa, Florida.)
In mid-2009, the Archives of General Psychiatry released a study showing that one in ten Americans take antidepressants within the course of a year, making antidepressants the most prescribed medication in the nation, and by extension, in history. The number of Americans on antidepressants doubled between 1997 and 2007, even as the stock market and home values soared. Antidepressants surely help millions of people cope with stressful lives, but some of the stresses of that era came from trying to earn enough to afford everything that was considered the hallmark of a successful life.
The harder we worked to buy these things, the less time and energy we had to enjoy what we bought. American culture sent an increasingly mixed message: Work like mad but enjoy life to the fullest. Doing both proved impossible. Sociologist Daniel Bell identified this cultural contradiction years ago, but it became more pronounced in the years preceding the Great Recession. The Protestant virtues of hard work and deferred gratification were at increasing odds with a market that instructed us to fulfill our dreams instantly and indulge our every want. As those wants continuously ratcheted upward—fueled by our anxieties over aging, relative status, and personal attractiveness—we worked even harder.
The argument on behalf of hard work has always been premised on something of a lie. People are led to believe that one day they will find satisfaction, if not in the work itself, when they finally have worked hard enough to afford and accumulate what they desire. But that day never seems to arrive. There is no light at the end of the acquisitive tunnel. Even Adam Smith, the putative father of market economics, recognized the centrality of this deception. Writing in the eighteenth century (not in his Wealth of Nations but in his Theory of Moral Sentiments), he described the typical worker who “through the whole of his life … pursues the idea of a certain artificial and elegant repose which he may never arrive at, for which he sacrifices a real tranquillity.… It i
s this deception which rouses and keeps in continual motion the industry of mankind.”
A simpler life may prove to be safer as well. Almost 10 percent fewer people were killed on America’s highways in the bust year of 2009 than in the boom year of 2007, according to the National Highway Traffic Safety Administration. Some credit safer cars, but that can’t be right, because cars weren’t that much safer in 2009 than they were in 2007. In fact, they were mostly the same cars, because sales of new cars plummeted. Some hypothesize that our roads became safer, but there is no evidence of this, either. (Actually, many of them are falling apart for lack of adequate maintenance, and major bridges are still caving in.) Some think the drop in highway fatalities was due to drivers’ being more careful—buckling their seat belts, obeying traffic laws. That would be nice if it were true, but here too the evidence is weak. Seat-belt laws had been in effect in most states for years. If anything, we were less careful, chatting on cell phones, texting, fiddling with BlackBerrys and iPhones, and adjusting global positioning devices. And more of us have been driving motorcycles and scooters, accounting for a growing number of highway deaths.
The salient reason for these statistics is much simpler. When the economy slows, fewer people take to the roads. Fewer commute to work, fewer pick up and deliver, fewer drive from one client or meeting to another. And as incomes shrink, fewer people drive to malls, movies, and restaurants because they have less money to spend. Fewer people on the highways means fewer highway accidents and deaths.
The same phenomenon can be traced to the workplace, where deaths and serious injuries dropped to their lowest rates on record in 2009, according to the Department of Labor. This wasn’t because workplaces suddenly became safer, workers more careful, or inspectors more diligent. It was because employers trimmed back hours, particularly in risky professions like construction, where the fatality rate dropped 20 percent. The bursting housing bubble meant far fewer workers on roofs, under cranes, and behind electric saws, where they might be severely injured or killed.
Aftershock Page 8